With a lengthy recession likely ahead of us, how should the economic situation affect the way you invest?
It’s no secret that we are heading into some real economic difficulties. In fact, we are already in a sticky position, though things are likely to become even more challenging.
Many analysts believe it's all but inevitable that the UK is to enter into a by the end of the year, but the length of that recession is now likely to be lengthy according to the Bank of England.
Its latest forecasts suggest that the recession will last throughout 2023 ‒ this isn’t going to be a short period of problems.
While a recession is never welcome, it’s important to recognise that it will present some opportunities too.
Investing is one of the best things you can do for your long-term financial health, but the way you go about doing so may change when the economy is shrinking. So how do you go about investing in a recession?
Spread the risk
Diversification is a smart strategy for investors at all times, but it’s all the more crucial during difficult times. Investing across different assets and regions can help you mitigate against any areas that particularly struggle during the recession.
For example, while much of the world is going through economic challenges, not all countries will suffer to the same degree ‒ investing beyond the UK alone can help you guard against losses if the recession is worse here than elsewhere.
Similarly, it’s a good idea to avoid putting all of your eggs into a single type of asset.
eToro's Smart Portfolios help spread your risk across a variety of investments
Look for dividends
Investment firm AJ Bell suggests that it’s a good idea to focus on stocks that pay dividends, suggesting that the pandemic had put such payments through a “trial by fire”, meaning that they were now more resilient than before Covid-19.
Not only are they now more affordable for firms to pay, but they also deliver an income to investors.
Gamble on smaller companies
An economic downturn is difficult for all businesses, but can be particularly challenging for smaller firms.
Coupled with the fact that the average UK smaller companies fund has dropped by over 20% this year already, investing in such businesses may seem counterintuitive.
However, AJ Bell argues that those price drops present investors with the opportunity to build a decent position in a more affordable way.
And should those businesses then grow in the years ahead, then you will have got in at a cheap level.
Invest in your favourite companies with eToro: buy shares commission-free
Where will people spend money?
An important consideration when picking individual stocks will be identifying businesses where people will still spend money, irrespective of the overall economic situation.
Firms that are relatively immune to the economic cycle, like supermarkets, represent a more stable option than stocks which may be more at risk from the ongoing turmoil.
Have you got safety nets in place?
It’s also a good time to consider whether you have enough money tied up in ‘safe haven’ assets.
There are certain investments, like corporate bonds and gold, which are generally viewed as representing a safe choice during difficult times.
It means that even if the stock markets endure a torrid time, you will still have money in assets which are doing ok.
Stay calm
It’s easy to panic when things get a little tough.
It’s not uncommon for a recession to result in a more volatile stock market, meaning prices can drop just as quickly as they rise. And when that happens, there will be the temptation to sell up and get out.
However, this isn’t always a helpful attitude to have.
If the stock has the right fundamentals, then it should be well placed to ride out the short-term problems and deliver long-term results.
Keep an eye on fees
The costs of investing can vary sharply based on what you are putting your money into, and how you do so. After all, different platforms will have different fee structures in place.
Understanding the costs of your investing is important at all times, but becomes even more vital during a recession. You may be able to invest in exactly the same funds and assets more cheaply by switching platform, for example.
Read our guide to investment fees and charges
The information included in this article does not constitute regulated financial advice. You should seek out independent, professional financial advice before making any investment decision.
*This article contains affiliate links, which means we may receive a commission on any sales of products or services we write about. This article was written completely independently.