How to make millions in a recession

A recession can be a painful time, but it can be a time where you can make a lot of money in the long-term if you're able to.

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There are lots of great stories out there where people were able to invest heavily during the GFC and then they made a lot of money as the market recovered in the following years.

Obviously you need to take care of yourself during this period first. The coronavirus is having a terrible effect across the world and Australia's infection numbers are growing. The US government and Australian government are now expecting that a recession will happen this year.

The S&P/ASX 200 Index (ASX: XJO) is down 33% since 21 February 2020 before this week's movements, so it's a lot cheaper.

If you're able to take advantage of these lower prices then you can make a huge difference to your long-term wealth.

People who keep their income during this period will have a good chance to keep investing at these low prices. If you have a large cash balance you can also make a lot of money.

A practical example

Just look at iShares S&P 500 ETF (ASX: IVV) which is available on the ASX. Over the past 10 years to February 2020 (which included falls near the end of the month), the US-focused exchanged-traded fund (ETF) returned 16.25% per annum. Yet since inception in May 2000 it has returned just under 5% per annum. The time you buy can make a big difference if you invest a lump sum. 

That's a difference of 11.25% per annum!

Imagine if you invested $25,000 for 20 years and it returned 5% per annum. You'd end up with $66,332 after two decades. Not bad.

If you invested that same $25,000 for 20 years and it returned 16.25% per annum you'd end up with $508,000. So, if you invested $50,000 you'd end up with $1 million. If you could invest more, you could make millions.

Foolish takeaway

Obviously I've just made up these numbers. It's quite unlikely that the share market will return 16.25% per annum for the next 20 years. Maybe it can for a decade when this is over, just like the S&P 500 did.

The point is that you don't need to invest hundreds of thousands dollars during times like this for it to compound into very large sums. It's much better to invest large sums during large market falls like this, than it is when prices are high.

Firstly, make sure you have enough cash in an emergency fund to see through this period. And then try to invest something. Even if you can only invest $500 during this period in a good investment, that will make a difference for your future wealth. The more you can invest the more you'll help your future self.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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