Stock markets in freefall: here are five clever ways to invest during a recession

Markets fell this week as share prices in London declined by 3pc and American stocks were not far behind. Investors started to sell as various signs pointed to another recession.

The latest fears stemmed from a bond market phenomenon known as “yield curve inversion”, where the yield on the British and American governments’ 10-year bonds falls below that on their two-year bonds. This is typically a sign of a recession in the near future.

The market falls should not come as a surprise given the length of the stock market bull run. None the less, no investor need simply accept the value of their savings going in reverse. Telegraph Money takes you through the best ways to get ahead of the change in markets.

Gains made by British stocks since the day before Lehman Brothers collapsed in 2008

An investor’s first instinct, this has its merits but there are disadvantages. It’s hard to tell a prolonged market fall from a stock market blip and selling out too early can be a mistake. Holding cash means you are not invested when the bear market ends; the subsequent rise is often the most lucrative.

Staying invested through downturns may seem illogical, but had you invested in British stocks the day before Lehman Brothers collapsed, often cited as the start of the 2008 financial crisis, by today your investment would still have risen by 48pc.

Sell shares that have done well and are most susceptible to price falls and buy “defensive” companies. These stocks, generally producers of consumer staples, outperform the wider market during recessions as they are better placed to sustain profits. Guinness maker Diageo, for example, is a classic defensive stock but it trades at a premium to the wider London market. There are funds designed to be defensive and protect the value of your savings when markets get rough. These portfolios have built in a significant degree of protection against the ups and downs of the markets, but investors must sacrifice some long-term growth potential in return. Ruffer Investment Company proved its mettle during the financial crisis, posting significant gains when the market was in freefall.

Falling markets offer the opportunity to buy assets at a lower price than their true worth. Investors willing to hold cash and take risks can drip-feed money into markets, picking up cheaper stocks along the way. This strategy will reap its rewards when once-fearful investors pile back in, pushing up share prices.

Often the best decision is to sit tight. Markets naturally rise and fall and even a 40pc fall in one month will be insignificant over a 20-year period. If you are investing for the long term and have no current need for your money, ignore the noise. If you invested in global stock markets before the crisis you would have more than made your money back by now.

Lauren Davidson

Head of Personal Finance

Sam Brodbeck

Personal Finance Editor

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