Nobody knows if the UK will enter a recession in 2022. Yet if it does, how can you ensure that your investments are protected? Some argue that the best safeguard is to invest in “actively managed” funds; i.e. those which employ a professional manager to “time the market” for you (aiming to sell shares before a crash, and buying others before they rise). However, this approach to investing rarely works. Over the last 10 years, for instance, only 17% of actively managed funds have beaten the S&P 500 benchmark. So, how can you invest in a possible recession (which usually, but not always, accompanies a “bear market”)?
#1 Continue contributing
There are two main ways to view a stock market crash. Firstly, you could see it as a disaster to avoid at all costs. Alternatively, you could see it as an opportunity to buy more investments “on the cheap” (due to falling share prices). This latter approach is helpful to show why continuing your contributions – e.g. to your pension – on a monthly basis is usually the best approach for individual investors. By drip-feeding your money, you limit the temptation to try and time the market and increase the likelihood that, over the long term, your portfolio will follow the market in its upward trajectory.
#2 Keep calm
During volatile markets, one of the worst things you can do is panic and sell investments out of knee-jerk reaction to bad news. Almost inevitably this only serves to crystallise your losses and potentially miss out on the (eventual) market recovery. Stay focused on your long-term goals and remember that you expected volatility along the journey when you originally crafted your strategy with your financial planner.
#3 Ensure diversification
One of the difficulties of staying true to your investment strategy during a volatile market is that your mixture of assets can veer off course. For instance, suppose you started a portfolio one year ago with a 60:40 split of equities to bonds. 12 months later, the market crashes and leads your equities (shares) to comprise a smaller part of your portfolio – such as 45:55. Eventually, it may be necessary to rebalance everything (e.g. by selling bonds and buying more shares) so you stay on track. However, when should you do this and which assets should you sell? Here, a financial planner can help ensure that you choose the right approach and avoid concentrating too much of your portfolio in a single asset, market or company.
#4 Remember your plan
Before you built your portfolio with your financial adviser, you should have addressed a set of crucial questions that would help you know how to navigate a possible future recession or bear market. One of these is: when will you need the money? If you were looking to use the money within the next 5 years, for instance, then you likely will have “de-risked” your portfolio by moving more of it into “safer” assets – e.g. dividend-paying stocks and bonds – in case a crash occurred before your withdrawal date. However, if you knew that you had 30+ years to invest before needing to withdraw it, then you could decide to take more risks. After all, if a crash does occur in that timeframe (and history strongly suggests that at least one will), then you have plenty of time for your portfolio to recover. Remembering your original investment plan, therefore, can help bring clarity regarding the best way forwards if the UK enters a recession.
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This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).
