Investing during a recession starts with protecting your cash flow, not with picking what to buy. Make sure you have about three to six months’ income in an emergency fund, so a job loss does not force you to sell investments at low prices. Then follow rules you set in advance, such as investing a fixed sum each month and rebalancing to your target mix, instead of reacting to headlines.
Investing can lose money, and in a recession losses can be large and last for some time. This guide explains how to think about a downturn. It does not predict markets or recommend any investment.
What a Recession Can Do to Your Money
A recession hits households in two ways at once:
- Income risk. Jobs and bonuses become less certain.
- Investment risk. Company profits come under pressure, share and REIT prices can fall, and payouts may be cut.
MoneySense notes that companies may not have enough profit to pay dividends, and that REIT distributions depend on rents and occupancy. Bond funds behave differently again, depending on interest rates and credit quality.
The two risks collide when you lose income and need to sell investments that have fallen. That is the situation to plan against.
Step 1: Secure the Cash Before Anything Else
MoneySense recommends emergency cash of about three to six months’ income before investing at all. In an uncertain economy, the higher end gives more room. Our emergency fund calculator works out a figure from your own spending.
Where to hold it:
- Bank deposits. Singapore-dollar deposits are insured by SDIC up to $100,000 per depositor per bank.
- Singapore Savings Bonds. MAS says they can always be redeemed for the amount invested, with proceeds by the second business day of the following month. See our Savings Bonds guide.
Neither will grow much, but that is not their job.
Step 2: Check Your Time Frame
MoneySense’s life-stage guidance makes the point with numbers: a 30-year-old who sees a 40% market crash has two or three decades for the portfolio to recover, while a 65-year-old may already be drawing on it.
Ask of each pot of money: when will I need it? Money for a goal five or more years away can usually ride out a downturn. Money needed within a year or two may belong in lower-risk options, whatever the market is doing. MoneySense’s portfolio guidance says the same: if you need money in the near term, choose low-risk products that are easy to cash in.
Step 3: Use Rules, Not Reactions
MoneySense’s behavioural finance guide lists the biases that do most damage in a downturn:
- Loss aversion: a loss feels roughly twice as painful as an equal gain feels good, which pushes people to sell at the bottom or freeze.
- Herd behaviour: following what everyone else is doing.
- Salience: overweighting dramatic news.
Its suggested guardrails: write down your plan, including when you would sell; automate regular contributions; check your portfolio quarterly or half-yearly rather than daily; and pause before any big change.
Worked example: regular investing through a fall
Illustration with our own numbers, not a forecast. You invest S$500 a month into a fund whose price falls and recovers over five months.
| Month | Price per unit | Units bought |
|---|---|---|
| 1 | $2.00 | 250 |
| 2 | $1.60 | 312.5 |
| 3 | $1.25 | 400 |
| 4 | $1.60 | 312.5 |
| 5 | $2.00 | 250 |
| Total | 1,525 units for $2,500 |
Your average cost is about $1.64 a unit. When the price returns to $2.00, the holding is worth about $3,050. This is how dollar-cost averaging works: the same sum buys more units when prices are low.
It is not a guarantee. If prices keep falling, or take years to recover, the holding stays below what you put in. MoneySense describes the approach as removing the risk of timing the market wrongly, not as removing risk. Test longer time frames in our compound interest calculator.
The short version: secure your cash first, match each investment to when you need the money, and decide in advance what you will do when prices fall, so you are not deciding in a panic.
Step 4: Rebalance if Your Mix Has Drifted
If shares fall sharply, they become a smaller part of your portfolio than you intended. MoneySense recommends reviewing and rebalancing regularly so your mix stays in line with your goals. Rebalancing means trimming what has held up and adding to what has fallen, which can feel uncomfortable in a recession. Robo-advisers do this automatically; see robo-advisors explained.
Review your plan at life changes too, such as a new job, a child or approaching retirement.
What to Avoid When Investing During a Recession
- Borrowing to invest. Margin and leveraged products magnify losses, and a margin call can force a sale at the worst time.
- Concentrating on “bargains”. A share that has fallen 50% can fall further. MoneySense’s diversification advice applies more, not less, in a downturn.
- Promises of safety and high returns. MoneySense warns that offers of high returns at low or no risk are a common sign of scams.
- Stopping and starting. Selling after a fall and waiting for “certainty” often means buying back at higher prices.
Recession and Your CPF
Your CPF savings keep earning their guaranteed rates whatever markets do. The Ordinary Account pays 2.5% a year. If you have invested OA money under the CPF Investment Scheme, your CPFIS holdings move with the market. Our CPF OA vs invest calculator shows the return an investment needs to beat the OA, and our CPFIS explainer covers the rules.
What To Do Next
- Check your emergency fund covers at least three to six months’ income.
- Write a one-page plan: your goals, target mix, and when you would sell.
- Set up or keep a standing instruction for regular investing, if that fits your plan.
- Read our guide to investing vs trading on the cost of frequent buying and selling.
