The One Rule You Must Follow When Facing a Potential Recession

Key Points

• Investor sentiment is turning increasingly negative about market prospects
• Historical patterns offer hope even during economic downturns
• Your investment strategy can make or break your portfolio in turbulent times

While we haven’t officially entered recession territory, anxiety is clearly building among investors.

The latest weekly survey from the American Association of Individual Investors shows a concerning shift in sentiment - 43% of investors now feel “bearish” about the next six months, while only 33% maintain a “bullish” outlook. This represents a notable deterioration from the previous week’s figures of 39% and 35%, respectively.

Federal Reserve Chair Powell recently acknowledged that despite persistent inflation, the weakening job market might necessitate multiple interest rate cuts. This doesn’t guarantee a 2025 recession, of course. Economic conditions remain fluid, and even economic experts can’t predict the exact timing of the next downturn with certainty.

But here’s the crucial rule I’ve learned to follow: You only lose money in the market when you sell at a loss.

Protecting Your Wealth During Market Turbulence

Market downturns inevitably reduce your portfolio’s value on paper. During recessions, stock prices often plummet dramatically, making your investments appear less valuable than when purchased.

However, these are only paper losses until you actually sell. No matter how far prices fall, holding your investments through the storm dramatically increases your chances of avoiding permanent losses.

Consider this simple example: You purchase a stock at $100 per share. If it drops to $70, you’re looking at a 30% paper loss. Selling at this point locks in that $30 loss permanently. But if you hold through the downturn until it recovers to $100, you’ve lost nothing but time and peace of mind.

Even the strongest companies see their stocks decline during broad market selloffs. Watching your account balance shrink can be psychologically painful. But remember - you only truly lose when you sell at those depressed prices.

What History Tells Us About Market Recoveries

While past performance doesn’t guarantee future results, examining historical patterns can provide perspective during uncertain times.

Some downturns drag on for years, and full recovery to new highs can take even longer. The silver lining? The market has ultimately recovered from every single downturn in history. With patience and a long-term mindset, positive returns become almost inevitable.

Take the Great Recession - America’s most devastating economic crisis since World War II, lasting from late 2007 to mid-2009. The S&P 500 collapsed by over 50%, crushing investor portfolios and confidence alike.

Yet between October 2007 and October 2017, that same index surged 63%. Today, it stands a remarkable 315% higher than before the crisis began.

Had you panic-sold after the 2008 crash, you’d have cemented substantial losses. But investors who stayed the course for a decade have generated significant wealth despite that horrific volatility.

Ensuring Your Portfolio Survives the Storm

Market crashes mercilessly expose weak companies. During bull markets, even mediocre businesses with poor management or weak competitive positions can appear successful as rising tides lift all boats. These same companies often struggle to recover when economic conditions deteriorate.

I’ve found that building a diversified portfolio of fundamentally sound companies dramatically improves your odds of weathering any downturn. By spreading investments across 25-30 quality stocks in various industries, even if a few investments fail to recover, your overall portfolio should remain resilient.

No one knows precisely when the next recession will strike or how severe it might be. But the market’s perfect record of eventual recovery provides real confidence. By selecting quality investments and holding them through inevitable rough patches, you position yourself to emerge financially stronger on the other side.