Recession-Proof Your Portfolio--By Wading Into Stocks

By Bill Bergman

History informs decisions with future consequences. Looking backward to anticipate the future can seem like a contradiction, but we're all human, and history is one the tools we have.

OK, if we are in a recession today, what does history tell us about the wisdom of buying stocks during a recession?

History says it's time to load up.

If you had put a dollar into the S&P 500 every month since 1950, those 703 dollars would be worth about $9,300 today. But if you had been lucky, smart, and disciplined enough to only invest in each of the nine months that the NBER Business Cycle Dating Committee has deemed as the onset of the nine recessions we've had since 1950--in other words, investing equal chunks of the 703 dollars ($78.11) in each of those nine months--you would have $11,600 today, or 24% more than the amount you would have had by buying into the S&P 500 every month.

Correlation is not causation, but there's some common sense behind this. The S&P 500 is in the index of leading economic indicators because it tends to go down before recessions start and rise before recessions are over. Recessions are to be feared, to be sure, but fear sparks bravery and productivity, and our business arrangements tend to evolve for the better when the cold splash of recession arrives.

Granted, calling recessions ahead of time is no mean feat. But if you had broken those 703 dollars not into nine equal pieces, but into 93 equal pieces of about $7.55 apiece--for each of the 93 months in which the NBER has deemed the U.S. economy to be in a recession since 1950--you would have an even higher return than you would have if you had been investing only at the onsets of recessions. Conversely, if you only bought into the S&P 500 in each of the nine months in which our nine recessions ended, you would have less money today than if you had bought at the onsets of or during those recessions.

Recession investing has beaten continuous investing in either nominal or real terms, to the extent that the consumer price index is to be trusted as an inflation measure.

This brings us to another qualifier lately. Inflation has been on the rise, but that's history, not the future. History suggests that we don't let our monetary authorities pull the rug out from under us for long. We shouldn't let them get away with it now, and we probably won't. Some would say that we bear some resemblances to the latter stages of the Roman Empire, and it wasn't a good time to be buying into that program back then either! But for all the worthy cynicism, the bottom line is that there are just too many good people--and good companies--to lose faith in our basic productivity.

Ring the bell! Discretion is the better part of valor, of course, but the time is ripe to seek out great companies at good prices--and wade into them.