Playing Through an Economic Downturn

Investing during an economic downturn can be like playing baseball for a team that's in a slump: your teammates worry, hecklers yell distracting comments, and your record of wins and losses moves in the wrong direction.

You may even question whether playing baseball is really what you want to be doing. Before you accept the idea that "The future ain't what it used to be,"¹ consider the history of economic downturns in the United States and the opportunities they create.

Downturns are a normal part of the business cycle

The American economy has grown in fits and starts throughout its history.We experience periods of expansion and economic growth that are followed by periods of contraction. Economists call this the Business Cycle. The relationship between business cycles and the performance of financial markets is complex.

During periods of expansion, corporate profits rise and often drive stock markets higher. As the expansion matures and growth opportunities are more difficult to find, companies begin to acquire or merge with other companies to sustain their growth. This also can drive markets higher. Toward the peak of an expansion, stock markets may reach overvalued levels, inflation may increase, and the Federal Reserve often tightens interest rates, making it more expensive for businesses to borrow.

Contractions, or recessionary periods, follow expansions. They are periods of slower growth when corporate profits languish, stagnate or decline. While past performance is no guarantee of future outcomes, historically, stock markets have lost value during the early stages of a contraction and often rebounded before the contraction has ended. As a result, during seven of the last 11 recessions, the S&P 500 Index has gained value.²

Contractions create opportunities

Contractions are an important part of the business cycle. They help eliminate excess investor exuberance and establish more reasonable valuations in the marketplace, creating opportunities for investors who keep their eyes on the ball. These opportunities may include chances to:

• Invest in sound companies at attractive prices. Concerns about slower growth often drive companies' stock prices lower, creating buying opportunities for savvy investors and professional money managers.
  
  
• Lower an investor's average cost per share. Dollar-cost averaging³ can help you make the most of the market's ups and downs. When you invest the same amount on a regular basis, you buy more shares when the market is down and prices are lower and fewer shares when the market is up and prices are higher.
  
  
• Reevaluate risk tolerance. If fluctuations in the value of your portfolio have made you uncomfortable during the past few months, you may need to reevaluate your risk tolerance. Your financial representative can help you decide on the best course of action.
  
  

Keep a long-term perspective

The most important thing to remember during any economic downturn is that you have long-term financial goals. Whether you're saving for the future, investing for income or pursuing another goal, your financial representative has helped you build a portfolio that's designed to meet your goals — through diverse market conditions.

It's likely that the economy will cycle through more expansions and contractions in coming years. Each time the market turns south, it will be important to remember that slumps, whether in baseball or the American economy, don't last forever. In fact, they may create opportunities that have long-term benefits. Talk with your Lincoln Investment financial representative about ways to make the most of the opportunities created by an economic downturn. You'll be glad you did.

¹ Yogi Berra
²Mark Hulbert, Sell the rumor, buy the news, MarketWatch, September 14, 2007
³A plan of regular investing does not assure a profit or protect against loss in a declining market. You should consider your financial ability to continue your purchase through periods of fluctuating price levels.