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

If you have an individual retirement account (IRA), you might feel nervous about its value during a recession. Since many IRAs hold funds and stocks, that reaction is understandable. Although stock market declines are not always the cause or the result of a recession, the two often move together.

Your concerns might lead you to wonder:

With that in mind, how should you manage your IRA in a recession? Here are a few ideas.

First things first: How might a recession affect your IRA?

Like other investments, the value of your IRA may decrease during a recession. However, these downturns have often been shorter than expansions. 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.

How should you manage your IRA in a recession?

In many cases, the fundamentals of managing your IRA are similar whether markets are up or down. 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 resilient in 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 help protect your IRA during a recession

To help protect an IRA during a recession or market downturn, consider these foundational strategies:

Prioritize diversification

Not putting all your eggs in one basket is a cornerstone of a sound investing strategy. Different investments can perform differently under the same market conditions. 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 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 an IRA.

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 may be wise to revisit your investment choices periodically as your investment timeline changes.

Maintain an emergency fund

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, some IRA withdrawals may be taxed as income and may be subject to an additional 10% tax penalty, depending on the IRA type and your situation.

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.

Continue investing 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 given an IRA’s potential tax advantages. 

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 $7,500 to your traditional or Roth IRA (or any combination of the two) for 2026. If you’re 50 or older, you may be able to contribute an additional $1,100, or $8,600 in total.

The bottom line

Don’t panic. Focus on investing fundamentals, and adjust only if your goals, time horizon or risk tolerance has changed. 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.

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