How to Invest in Stocks During a Recession

Recently Warren Buffett announced that amidst the economic crisis he is still buying stocks and buying big. As dismal as the stock market currently looks, history shows that it will rebound and with stocks as beaten down as they currently are, now might be a good time for some bargain hunting. While most of us don't have millions of dollars to invest like Mr. Buffett, if we act wisely we can still get in, stay in, and reap the benefits when the market turns around. Read on.

Instructions

1. 

   Invest in a business. Before you dive in to the market, sit down and pick 5 or 10 companies that interest you. When you buy a stock, you are buying a piece of a business so look for companies in which you have a vested interest in the product or service.

2. 

   Do your research. Recession or no recession, always evaluate the health of the company before investing in it's stock. Rule #1 by Phil Town is the best book I've read that explains how to research a company's stock value by looking at such factors as return on investment, sales, cash flow, debt, EPS, and P/E ratio (his website is www.philtown.com). Don't forget to evaluate the stock's industry. If the overall industry is healthy that is a good sign. If your stocks appear healthy, put them on a watch list as stocks to buy when the time is right.

3. 

   Use charting tools. Good charting tools that show the history of the stock's movement, current trends of money going in and out of the stock, and the health of the stock's industry will make your investment in the stock more successful. My favorite is Investools (www.investools.com) but there are other tools out there so do your research and find a tool that works for you.

4. 

   Assess your risk tolerability. Even as low as stocks are currently trading we still don't know if we've bottomed out or if the worst is still yet to come. If you can stomach some potential downward volatility, you might start to slowly buy some of your watch list stocks. If you lay awake at night worrying about the value of your portfolio, you might want to hold off a few months and reassess the market at a later time. Some experts are suggesting that the stock market typically begins to rebound approximately 3 months prior to the end of a recession so read everything you can and start to look for signs that the economy is recovering.

5. 

   Be cautious. This isn't the time to jump into a stock that you hear about around the water cooler, at least not without doing the research on the stock, the company, and the industry.

6. 

   Think long term. Although there are short term gains to be made within the volatility of today's market, even the experts can't perfectly predict when to get in and out to capture them. Do your research, use your charts, get in at the right time, and wait it out. Think retirement.

7. 

   Don't be tempted by "cheap" stocks. Just because a stock is cheap doesn't mean it's a good buy. A cheap stock in a worthless company is most likely worthless. A cheap stock in a company that has shown historical growth, has future growth potential, and passes your research criteria in step 2, above, is most likely a winner over the long run.

8. 

   Continue to invest in your IRAs, 401s, and 529s. As appealing as it seems to pull out and sit in cash to wait out the storm, the best thing to do is stay in and keep contributing. The value lost over the past few months will most definitely come back when the market rebounds and money that you continue to contribute is purchasing shares at a much lower price which will pay off over time.