The stock market may seem like a volatile place, but it could be the best place to invest when times get tough. A recession may cause a lot of worry for some people. But I'm going to tell you why I believe investors should still invest in the stock market.
It's normal for the stock market to go up and down. Not only are there different buyers and sellers using the ASX each day, but there are various headlines affecting investor confidence as well.
I like to think that the stock market is largely a positive place apart from the occasional bout of fear. The prospect of a recession is not ideal, and not surprising considering how far interest rates have been ramped up over the past year to slow inflation.
However, recessions don't have to be scary for a few different reasons.
The ASX represents the strongest businesses
When we talk about "the economy", that's including every business, big and small. But the stock market isn't about the local shops, local businesses or other segments like that. It's reflective of the strongest businesses in the country (or the world).
We're talking about the biggest banks, miners, technology companies, leading retailers and so on.
A recession isn't necessarily going to hit ASX shares as hard as the wider economy.
During times of wider economic weakness, that could be the perfect opportunity for the listed businesses to snap up a weaker competitor that's struggling. This boosts the profit and scale of the ASX share, while also removing some of the competition.
Times of weakness seem like the best time to invest
When I'm looking to invest, I want to pick up shares on the stock market for the lowest price. Share prices don't usually fall for no reason, there's normally something negative happening.
While a recession or a stock market crash may seem worrying, it can be a great opportunity to invest, if we have spare cash to utilise. Look at the below chart for the iShares S&P 500 ETF (ASX: IVV) since 2013 – the best times to invest have been when the stock market has gone down.
As Warren Buffett once said about investing during market downturns:
If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?
Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall.
Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.
Think long-term
I think investing should be a long-term pursuit. Whatever happens in one month or one year shouldn't necessarily change whether we're going to stay invested or start investing.
With my investment portfolio, I don't have a specific end-point in mind, but I expect I'm going to be invested for many decades to come, so any volatility in 2023 doesn't change my desire to own shares to 2050 or even longer.
We've moved on from all the past recessions, such as the GFC in 2008, and I'd hope the next recession will be relatively short-lived.
