Now that I’m finally ready to start investing, everyone says a recession is coming — so I asked a financial planner what to do

PFI Disclosure 1

My Dad’s been stressing the importance of investing early to me since I was in high school, but I never listened. Then I realized that I could be worth three times as much as I am now if I had.

Once I realized that investing is the key to generating wealth, I decided to buckle down and start investing as soon as possible. I had to pay off debt first and build up an emergency fund. Now that I’ve done both, and I’ve saved up some money to get started, I’m finally ready to invest.

Of course, now that I’m ready to dive into the market, my newsfeed is buzzing with talk of how the market is ready to crash. No one can predict the next recession; even I know that. But still, all this talk of an upcoming recession has me worried about investing at the wrong time.

Scared that an impending market crash would decimate the savings I worked so hard to build if I chose to invest it, but also aware of the fact that I’ll never be able to build up an adequate retirement fund by letting my money sit around in a savings account, I decided to ask an expert.

Should I invest my money when everyone says a recession is coming?

I now have $40,000 saved up, all sitting in various savings accounts. I’ve got $5,000 sitting in a savings account that doesn’t earn interest as a cushion for my checking account, another $5,000 sitting in an Ally high-yield savings account as money to use for any self-investment opportunities that come up, and the final $30,000 in a separate high-yield savings account as a very generous emergency fund.

I could probably stand to invest at least half of that money, if not more. I’m not a homeowner, nor do I have kids, so I can’t think of many emergencies that would cost me more than a few thousand dollars. As a freelancer, my income is unstable but also diversified, so I’m not too worried about it dropping all the way to zero.

I am worried about my investments dropping all the way to zero, though.

So, I asked Kaya Ladejobi, a Certified Financial Planner (CFP) and founder of financial advisory firm Earn Into Wealth, what I should do.

As a young person in a good financial position to start investing, Ladejobi told me that the next recession shouldn’t concern me. “As a matter of fact, a decline in the stock market should spell a buying opportunity for you,” she explained. It runs counter to most people’s intuition, but when the market dips or crashes, you should invest even more money. This is because you’re essentially buying up shares at a discount, and while you might take hits in the short run, your investments will shoot back up eventually.

“I recommend that people with a long-term horizon should stick it through and continue to implement their saving and investment strategy,” Ladejobi explained. “With dollar-cost averaging, sometimes you buy high and sometimes you buy low. If you keep it up over your career, things eventually average out.” 

Historically speaking, returns on the stock market average out to 10% — 7% when adjusted for inflation. Compare this to a typical savings account, which often earns 0.01% to 0.03%, or even high-yield savings accounts, which currently earn around 2% at best, and it’s easy to see why investing for the long-run is a no-brainer. 

I love my high-yield savings account for stashing funds I might need to access in an emergency, as it currently earns a 1.80% APY. But even then, I know that by letting all of my savings sit in that account, I’m missing out. “Where people make mistakes is by delaying their entry into the market,” Ladejobi told me. That’s exactly what I’ve been doing, out of fear.

Blair duQuesnay, another financial planner and investment adviser at Ritholtz Wealth Management, agreed. “The right time to invest is always today, no matter what the market is doing or has done recently,” she said.

DuQuesnay said that investing today is even more important for someone like me with 20 or 30 more years to go until retirement. “The power of compounding returns only shows up after significant time invested in the market,” she continued, “and you can’t start participating until you invest.”

How I decided to invest my savings

It’s clear to me that I need to start investing, regardless of my worries about the economy. All I need now is a plan.

After some research, I’ve decided to leave my $5,000 checking account cushion and $5,000 self-investment fund in place and split up my $30,000 emergency fund. I’ll invest $10,000 for the long-run (retirement), which will leave me with a $20,000 emergency fund. I’ll then invest half of my emergency fund ($10,000) in an account that’s easily accessible.

For my long-term investments, I’ve decided to go with the famous three-fund portfolio, a version of the “lazy portfolio” strategy designed for people who want their investments to perform well in most markets while not requiring active management. I’ll invest with Vanguard, splitting the $10,000 up between the following three index funds:

  • Vanguard Total Stock Market Index Fund (VTSAX)
  • Vanguard Total International Stock Index Fund (VTIAX)
  • Vanguard Total Bond Market Fund (VBTLX)

My investments will lean heavily toward stocks, since retirement is still pretty far off for me.

As for the $10,000 of my emergency savings fund that I want to invest, that will be invested with an online investing app, with half of it allocated toward bonds to lower risk. I already have a high-yield savings account there, so I’ll be able to invest that money easily, and with its checking account, I can withdraw those investments quickly if I ever need extra cash.

Overall, I feel great about my decision to finally start investing. As Ladejobi says, “Investing is a muscle that you have to build, and I don’t recommend that young people sit on the sidelines for the perfect time. Just get in and start investing bit by bit.”

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