Basics     Money Myths

"You should stay liquid during a recession."

POSTED ON JANUARY 20, 2023    

The myth

A recession is a scary time for everyone, investors included. After all, nobody really knows what could happen, and how low the markets will go before things start to improve.

 

In this uncertainty, having a lot of liquid assets in your portfolio has its advantages. This can let you respond quickly to opportunities while also being ready to react to changing market conditions.

 

That’s why many people believe that you should stay liquid during a recession.

 

The reality

Possibly the biggest advantage of having liquid assets is how they can be quickly and easily converted to cash without losing value. Other asset types, on the other hand, may take more time or be more difficult to do the same.

 

In exchange, liquid assets have modest growth potential when compared to alternatives. This may not be a deal-breaker if you’re trying to preserve the value of your money. However, you should consider the opportunity cost on your money goal before increasing your portfolio’s allocation of liquid assets.

 

Such a decision would also disrupt any investing strategy that you’ve been following so far, and so it isn’t something that should be done lightly. Remember to increase the chances of future success, avoiding emotional investing and sticking to your strategy is vital.

 

Historically, economies have recovered from recessions and depressions, and so the lower returns that you may see in your portfolio could improve if you give the situation enough time.

 

The verdict: It depends.

While the uncertainty of a recession may make you think of shifting your portfolio’s holdings to liquid assets, this can make it much harder for you to reach your money goal. So, you should do the math to find out the possible effects before you make your decision.

 

One option for you is to place the cash component of your portfolio in liquid assets. That way, they can grow a bit while remaining accessible in case you need money for some purpose.

 

Remember that if you’re investing for the long term, you may find that continuing your strategy may yield better results in the future. After all, putting money in when prices are low means that you’ll be getting more than you would when prices are high.

 

Plus, there’s a chance that you’ll see that reflected in your portfolio’s value when the recession is over.

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