Should I change my IRA investment strategy during a market downturn?

If you have an individual retirement account (IRA), you might feel nervous about the trajectory of its value during a recession. As most IRA holdings are in funds and stocks, this makes sense. Although stock market declines are not always the cause or result of a recession, they are often interconnected.

Your concerns might lead you to wonder:

With this in mind, how should you manage your IRA in a recession? Read on for some ideas.

First things first: Is an IRA safe during a recession?

Like other investments, the value of your IRA may decrease during a recession. However, these decreases may only happen for a short period. From 1945 to 2020, recessions lasted only 10.3 months on average. The average expansion, defined as the time when the economy is not in a recession, was 64.2 months.

Case in point: When the 2008 financial crisis hit, the market took a sharp dive, prompting many investors to sell their assets in a panic. But by March 2009, the market had reached its lowest point and began to climb – eventually surpassing its previous highs. Those who sold missed the rebound, while investors who stayed the course saw their portfolios recover and grow over time.

How should you manage your IRA in a recession?

The strategy for managing your IRA in a recession is the same as when the economy is thriving. Following the fundamentals of investing – including diversification of assets, shifting assets depending on your investment timeline and keeping an emergency fund – can help make your retirement portfolio more resistant to economic downturns.

It can also be advantageous to continue investing in your IRA during a recession to take advantage of buying opportunities, compounding and tax benefits.

How to hedge an IRA against a recession

To help protect an IRA from a recession, consider these foundational investment strategies before a recession hits:

Prioritize diversification

Not putting all your eggs in one basket is a cornerstone of a sound investing strategy. Investments work in different ways. Some increase in value when the stock market goes up, and some do the opposite. Investment performance can also be influenced by industry dynamics, economic policy changes and what’s happening in a certain part of the country or the world. What’s more, some investments are more volatile than others.

As you develop a strategy to balance risk and reward in your IRA, there are a few diversification concepts you probably want to keep in mind:

Consider your time horizon

Your time horizon is the length of time you expect to keep your money invested before you need to use it.

Knowing your time horizon is an important consideration in choosing your investments, especially within your IRAs.

Some investments are more volatile than others; on top of that, it’s impossible to predict when the stock market will be up or down. But retirement investments are generally long-term investments, and the general investment strategy is to invest for growth.

If you want to retire in a few years, though, you may want to choose more conservative investments in case you need to rely on them for income.

We often take a “set it and forget it” approach to retirement savings, but a recession can jolt you into thinking about your time horizon. It’s wise to revisit your investment choices periodically as your investment timeline changes.

Have an emergency fund ready

While we can plan for some major expenses, others may happen unexpectedly. An air conditioner that needs to be replaced, a car that needs a major repair or a tooth that gets broken eating a piece of candy can cost thousands of dollars.

It can be tempting to pull out a chunk of money from an IRA, but withdrawals often come with penalties. If you’re younger than 59½, you may need to report your withdrawal amount as income on your taxes, and you may also be subject to paying an additional 10% tax penalty.

Instead, consider keeping cash on hand in an emergency fund – a tenet of smart investing. Consider keeping three to six months’ worth of living expenses in a high-yield savings or money market account.

Invest in an IRA during a recession

You may believe that it’s better to hold off investing in your IRA during a recession, but there may be some valid reasons to continue investing in an IRA.

First, you may be able to take advantage of lower asset prices. Investing at these lower valuations means you're buying more shares for the same amount of money, which can boost future returns when the market recovers.

Next, you continue to benefit from long-term compounding. Even small contributions made during a downturn can grow significantly over time due to compounding, especially due to the tax advantages of an IRA.

Investing in an IRA during a recession can help you stay on track with your saving and retirement goals.

Along with any workplace retirement options, you may be able to contribute up to $7,000  to your traditional or Roth IRA (or any combination of the two) for 2025. If you are aged 50 or older, you may be able to contribute an additional $1,000, or $8,000 in total.

The bottom line

Don’t panic. Focus on investing fundamentals and pivot accordingly. Last but not least, remember that staying invested for the long term is often one of the soundest moves you can make as an investor.

View Disclosures