22 June 2022

Worried about a looming recession? Here’s how successful investors cope.

With inflation rampant and central banks raising interest rates, there is talk of an impending recession. Staying focused on some key principles can help to ease your concerns, Chartered Financial Planner Liam Kerr explains.

Recessions are normal

Recessions, defined as periods of temporary economic decline identified by two consecutive quarters of falling economic output (GDP), are a fundamental part of the economic cycle. Generally, they follow periods of economic expansion and causes can vary from sudden economic shocks to uncontrolled inflation or asset bubbles.

Chart 1

We’ve been through them before

Since the end of World War 1, there have been nine recessions in the UK with the most notable including the Great Depression 1930-31, the Global Financial Crisis in 2008-09, and the most recent Covid-19 Recession in 2020. Prior to 2020, the global economy had experienced a record expansion that lasted over a decade. Given the periodic nature of economic contractions, investors should be prepared to experience a number of them during an investing lifetime.

They don’t last forever

The longest UK recession was three years, following WW1 and shortest lasted just 6 months. Both of these should be considered short-term blips for investors focussed on decades rather than months. If you have readily accessible cash for short-term needs, you should rest easy knowing a broadly diversified investment portfolio can weather a recession.

Stock markets can rise during recessions

During a recession, stock markets are expected to fall because when economic activity slows, spending declines and company profits are reduced. Markets are forward looking, meaning that even before a recession, stock markets can be impacted as investor expectations are reflected in current asset prices. The opposite is also true as stock markets can and often do recover before a recession has officially ended. Some of the best days in stock market history have come in the midst of recessions, and, given how quickly and randomly they occur, the only way to benefit from those is to remain invested throughout.

Financial media will take full advantage

Type recession and stock market into a search engine and be prepared for a barrage of investment “advice” on what stocks you should own and predictions of when a recession will hit and how much the market will fall by. Sadly, the motivation for publishing such material is to maximise clicks and website visits, rather than achieving the best outcome for investors. In reality, it’s impossible (without a high degree of luck) to determine the start and end point of a recession in advance, or it’s severity.

Keep calm and carry on

As is always the case when it comes to investing, provided your portfolio is widely diversified with an appropriate level of investment risk, and you have accessible cash for your short-term needs, long-term investors are in good shape to weather periods of economic contraction as and when they occur.

Still feeling nervous? Speak to a financial planner who can put your mind at ease and keep you on the right track.

The value of investments and the income derived from them can fall as well as rise. You may not get back what you invest. This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice. You are recommended to seek competent professional advice before taking any action. Tax and Estate Planning Services are not regulated by the Financial Conduct Authority.

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