Recession fear busters
SEVEN GOLDEN RULES FOR INVESTING IN A DOWNTURN
Recession fears are flaring up across the globe, and are burning investment portfolios everywhere. The prospect of economies in the US, Britain, Europe, Australia and elsewhere shrinking in 2023 is impacting asset values as stock markets sink and property prices tumble, although rising interest rates are arguably a bigger factor right now.
If a recession does eventuate, interest rates are likely to head lower again but that relief would be offset by financial hardship in households and businesses as jobs are lost and sales slump.
Markets analyst Azeem Sheriff from CMC Markets says recessions “crumble demand” for goods and services because people have less money to spend.
“Property prices tend to come down,” he says.
For investors, there are some key rules to remember about investing during recessions.
1 DO NOT PANIC SELL
Sinking investment values often create a herd mentality, as investors copy others and sell.
“It’s a domino effect – you follow because you think they are doing the right thing,” Sheriff says.
“The main reason they do that is they don’t have the confidence in their investments or are not well versed enough in investments.
“When in doubt, zoom out. If you look at the bigger picture, you will almost always see a trend that tends to be ascending.”
Stockspot chief executive Chris Brycki says controlling your emotions is important.
2 DIVERSIFY YOUR ASSETS
Brycki says it is difficult to know when a recession might start and end, and his firm’s advice to clients is to “always stay diversified”.
“Staying diversified – from Australian shares, emerging market shares, international shares, gold, and bonds – reduces your risk significantly compared to stock picking at random,” he says.
“All these can easily be bought on the ASX via an ETF (exchange traded fund).
“Taking gold as an example, it was up during the last three US recessions: the dotcom bubble (up 5 per cent), the global financial crisis (up 100 per cent), and the Covid-19 pandemic (up 11 per cent).”
3 USE DOLLAR-COST AVERAGING
This is when you buy into investments gradually, injecting money every month or three months. This can be done with shares, real estate investment trusts, investment funds and other assets to smooth out your financial returns.
“Dollar-cost averaging is the smart way to take advantage of falling markets,” Brycki says.
“It allows you to progressively buy into the market, taking away the guesswork of when markets will bottom out.”
4 LOOK LONG-TERM
“Remember investing is for the long-term,” Brycki says.
“Sticking to your plan and not panicking when the inevitable falls do happen is the best way to improve your returns.”
William Buck Wealth Advisory director Adrian Frinsdorf says investors who can ride out market lows will be in a good position to achieve portfolio growth.
“A long-term approach to investing offers the best chance of seeing positive returns thanks to one key influence – time,” he says.
“The biggest mistake that investors can make is waiting to invest once the market improves because the best returns typically come after purchasing undervalued stock during a recession or bear market.”
5 CHASE QUALITY
Frinsdorf says quality rises to the top, and people should seek stocks with a track record of recovering from market lows.
“Blue-chip Australian stocks tend to offer stable returns for investors over the long-term and have historically recovered from an economic downturn, as do the food and retail sectors,” he says.
“Shares in well-established companies may be less risky than investing in speculative or volatile sectors such as technology and commodities.”
6 HUNT OPPORTUNITIES
“In a recession, we’re more likely to see market sell-offs where stock values drop suddenly as investors sell large volumes of holdings in quick succession,” Frinsdorf says.
“Investors who hold sufficient cash at call are able to swiftly capitalise on stock availability and fallen values.”
7 DO NOT TRY TO PREDICT THE BOTTOM
Sheriff echoes billionaire investor Warren Buffett’s popular quote that “time in the market is more important than timing the market”. “People want to predict the lowest point of the economic cycle so they can buy in, but no one can predict what will happen,” he says.
“If they could, they would be sitting on an island sipping cocktails and be super-rich. “People want to get in at the best possible price, but investing is not about obtaining the cheapest stock – it’s about obtaining the most valuable stock.”