One writer shows us how we can make money when others are frightened and panicking.
I saw the headline Seven Reasons To Be Pessimistic here on The Fool and it depressed me too much to read it.* I'm sure they were all good points, but it shows how gloomy things have been over the past year if The Motley Fool has become negative.
We've changed from being Shakespeare's bouncy jester to Batman's troubled Joker. It's not just us. All the newspapers and money websites have raided the cinema villain's head for dark thoughts, which they have exposed to recession data before filling their financial pages with the sinister results.
There is little doubt we're heading for a difficult few years, but my natural tendency is to look for ways to gain from any situation, so I'm hugely more upbeat than the average writer. Over the next few months I'd like to counter these other views with my much more positive attitude and, more importantly, by offering you some useful suggestions.
I'm going to start with the big one:
Making lots of money with a recession
We're heading into a difficult period and the cause is a quadruple-hit from over-borrowing, the credit crunch, the banking crisis, and the recession. It's got to be one of the worst crises in living memory. The essay question is: `Is our economic system beyond repair this time?' I intend to answer that question now:
No, it's not. In fact, it doesn't need repairing.
That answer might not impress the examiner, but thankfully my days of adding another 4,991 words to answer a simple question are long gone.
Still, let me give you some more reassurance: this time, the downturn is not different. In my view, this crisis has not changed how the world works, and it won't destroy the world.
- We will still buy and sell stuff, which is how our economies work.
- Companies will still exist to employ people and make profits.
- Everyone remains greedy, which is presumably why my headline interested you.
Maybe the global recession will one day be seen as the real beginning to the USA's decline as the sole superpower. Maybe some other country or countries will become the biggest greedy fish that bullies all the others. But that's not important. Our little country still won't be a superpower and it will still function. We'll be buying stuff, selling stuff, employing people and being greedy. Capitalism in action; business as usual.
Now that I've set the background, I'll get to the point. For the stock market, the next ten years are likely to be much better than the past ten, and in twenty years the last 12 months will be just an unpleasant memory (and, with lots of luck, the lessons we learn won't be forgotten, for a change).
Right now, everyone else is being pessimistic about shares which means they're selling like crazy. It's logical that share prices should fall in a recession; companies aren't making as much money, so they're not worth as much. But markets aren't that rational. People sell in fear, which means they sell too much and prices fall too low. And there's no doubt that people have been selling not just because of a recession, but also in sheer panic.
That's why I see this as a great time to invest. I don't know if the market's reached the bottom yet. It's probably near one bottom, and we'll see a few more before things get better. But the great thing is, it doesn't matter precisely! As the great investor Warren Buffet says, it's better to be approximately right than totally wrong. Here's how you can benefit from that wisdom: start investing now, but don't invest all your money at once.
If you have spare cash, start dripping it into the stock market. I recommend splitting it into 24 equal instalments and putting it in the market over that time. If your pot is quite small then six or 12 months is perfectly acceptable, too. No doubt some readers will comment on the timeframe they intend to use below, but provided it's over a decent period of at least six months to 24 months then you should be buying largely during a low period.
Doing this, you won't buy all your shares when they are at the cheapest, but on average it's likely you'll be buying many shares at real bargain prices.
What to buy? Well, if you need to ask that question then All-Share index trackers are exactly the thing to get you started. Normal guidance is that you should not invest unless you can do so for at least five years. I've always written that I prefer a minimum ten-year investment timeframe, and I'm certain that many other financial writers will be frightened into saying the same after this year. That's one more benefit to come out of the recession.
Please don't buy shares if your financial situation is precarious. Everyone should keep a decent safety net in a savings account or cash ISA at all times, not just during a recession.
If you don't have the money to invest, don't worry. I have plenty more tips for people of all situations coming up...
> Many savings accounts still pay more than 6%. That means an extra £240pa for you on a £5,000 savings pot if you're a basic-rate taxpayer, and £180 for higher-rate payers. Take a look.
* Editor's note: If Neil had forced himself to read the article, he would have discovered the conclusion to the article was actually optimistic!