Investing during a recession
In times of uncertainty, when share markets and interest rates are falling, along with declines in consumer and business confidence, investors often question if their money is safe and if it’s still going to meet their long-term investment goals.
But whether it’s a period of sustained volatility due to a global financial crisis, a medical pandemic, or a recession, the basic rules of investing hold true.
- Set long-term investment goals
- Keep investing (if you can)
- Don’t try and time the market
- Spread your risk through diversification
- Don’t panic
Keep a level head
It’s almost thirty years since Australia last experienced a recession, so for many investors where to put money during a recession isn’t something they’ve had to think about before.
We understand you’re probably concerned about your investments and wondering what to invest in if Australia does enter a recession. Volatility isn’t something investors enjoy. The pain of losing is significantly more powerful than the pleasure of gaining, which makes us more likely to overreact during market downturns than when the market is booming.
To help your investments continue to work hard for you, we’ve outlined four simple strategies you could consider.
1. Invest for the long term
If you’re a long-term investor (with a time horizon of 10+ years), don’t let emotion get in the way of sensible decision making. Selling out of your investments and moving to cash may seem like a safe option, but you’ll potentially be crystallising your losses and missing out on any opportunities that could arise when the market rebounds.
We recommend you seek good advice at the start, so you have a plan to realise your investment dreams, leaving you to get on with enjoying your life. You’re not a professional investor, it’s not what you do for a living, so there’s no need to fear every daily movement in the share market.
2. Try to invest regularly
Volatility doesn’t necessarily result in poor investment outcomes. It can present opportunities. The principle of investing regularly, regardless of whether the market is rising or falling, allows you to buy more of an asset when prices are low and buy less when prices are high.
Known as “dollar cost averaging”, not only will this average out over the long term, resulting in a better average price for the assets, but you’ll also potentially hold more of an asset, which will be beneficial when prices rise again.
3. Be sensible and leave the decisions to the professionals
Market timing is an investment strategy used to try and ‘beat’ the share market by predicting its movements and buying and selling accordingly. It’s the exact opposite of the long term ‘buy-and-hold’ strategy, where an investor buys shares or assets and holds them for a long time, designed to ride out periods of market volatility.
According to Morningstar, investors would need to be correct 70% of the time to get any benefit from an active market timing strategy. This is almost impossible to achieve, even for market professionals. You’re more likely to miss some of the best days of the market rather than picking them correctly.
4. Allow diversification to spread your risk
Not only is it difficult to time the market correctly, but it’s also hard to predict which asset class will perform best in any given year. Last year’s best performing asset class can easily become next year’s worst, or vice versa.
Many investors choose to manage this by diversifying their investments across different asset classes (shares, bonds, cash etc.) and create a portfolio that’s based on their risk tolerance, time horizon and investment goals.
However, it’s important to understand that diversification doesn’t mean you’ll avoid market volatility completely. Even with a well-diversified portfolio, your investments could still potentially experience periods of what you’d probably deem underperformance.
Staying positive during market downturns
The most important thing you can do during market downturns is not panic.
Stay emotionally strong and ensure your investments remain aligned to your investment goals.