Concerned that a looming recession could shake up your investment strategy game? You’re in good company. Even small dips in the market can make seasoned and new investors alike a little uneasy. Nothing tests your commitment to an investment strategy like fear of a recession and many believe we’re looking at a once-in-a-generation upheaval. On the other hand, investors now have more diverse investment options than ever. To use these investment options effectively, you don’t need to be an expert. Even if you’re new to investing, you can learn the basics of how to adjust your portfolio for a recession.
What is an economic recession, and how does it impact investment decisions?
An economic recession is a prolonged period where job opportunities, income, spending, and production all slow down and stop growing. Recessions eventually pass, but only after creating a negative spiral that’s hard to break. During that time, investors become extremely risk-averse, turning to protective investment strategies and a mindset of “losing less.” It’s also a time of panic selling when investor reactions can do more harm than the downturn itself.
The chances of a recession significantly rise after six months of negative consumer demand and production. Up to now, Australia has managed to dodge the small downturns that could lead to a full-blown recession. Even with our historically robust market, we have to ask the question: How could a full-blown recession affect Australians?
Only time will tell, but it’s clear that investors who focus on their financial planning now will do better than most. Some may even thrive by finding investment opportunities that are only available during a recession.
Four approaches to your recession investment strategy
1. Stem the risks
Recessions can offer more chances to succeed, but only if you keep your investments focused on long-term stability. First, look at how risky your investments are. Keep an eye out for companies that have a lot of debt and rely heavily on credit; these could struggle during a downturn.
Before a recession is also not the time for speculation unless there’s proof of serious long-term investor commitment. Even so, it’s hard to predict what investors will do with a risky stock if things start to go south. During a major recession, even previously stable, though non-essential, investments could seem like dead weight or even risks. A simple guideline is that stocks that follow the economy’s ups and downs will likely lose value in a recession. So, keep an eye out for opportunities to remove these “seasonal” stocks that could drop quickly if the economy struggles. Think luxury items or services you can live without.
Other such non-priorities include travel, dining, entertainment, and leisure. They aren’t essential to household operations and are the first things to go when budgets get tight. If you wouldn’t purchase something when cash is tight, others won’t either. You can only play defence for a while, though. Make sure to learn what investments to steer clear of, but also save some time to figure out which ones you should go after.
2. Seek (different) opportunities
Seasoned investors know recessions can be good for stable industries with a proven history of weathering recessions. Ask yourself: Which goods and services would you depend on no matter how tight your budget became? These are the major brands on everyone’s monthly bills and in most people’s cupboards.
Utility providers, staple commodities, and high-volume retail are recession-resistant industries. Companies that sell daily necessities often have stocks that behave differently than the overall economy. These counter-cyclical stocks can actually go up in value during a recession. Simply being in an industry shouldn’t be an automatic pass, however. Take the time to investigate financial reports and ensure the company is making consistent revenue gains. No matter how promising an opportunity might seem, send each possible investment through the strictest possible filtering.
Other industries that often perform well during recessions may surprise you. While it’s common to think that luxury items won’t sell, small indulgences can actually be popular. For example:
- Cosmetics
- Lower-priced alcohol
- Cheaper entertainment options
3. Avoid panic-selling
Once the gears start grinding, it’s essential to stay calm. So calm that your investor friends think you either aren’t paying attention or have some trick up your sleeve. If you’ve already cleaned out your portfolio, this is easier to do, but it’s always nerve-wracking.
When it comes to counter-cyclical stocks, keep in mind that their prices might drop too, just like other stocks. What sets them apart is that they’re more likely to:
- Drop less than everything else;
and, - Bounce back much faster.
Most investors think all profits are the same, but that’s not always true. How a stock performs can depend on what’s happening in the market and whether the stock usually follows or goes against market trends. When the market is acting unusually, stock performance can be unpredictable too.
If your portfolio starts buckling, but you’ve followed the previous two strategies diligently, you’ll have much less to lose by holding on and committing. If you haven’t already, now is the time to set aside emergency funds for at least several months. It really helps boost your confidence when stock prices go down.
4. Pounce on the recovery
After a recession ends, people start to take more risks with their investments again. Investors usually feel a mix of caution and excitement when they think the tough times are over. Eventually, some of these riskier moves will pay off. The big question is, which ones will? Let’s just say that when you see once-valuable stocks or properties selling for low prices, it highlights the need for a solid plan during economic downturns. This should also help ease concerns for those looking to find opportunities in tough times.
How to protect Superannuation contributions during a recession?
Even the best recession investment strategy won’t matter much if you lose the long game. Just as you might consider each stock investment more strictly during a recession, your retirement funds will be more recession-proof by following suit with your Super.
Of course, Self-Managed Super Funds are a minority, but are they necessary in a recession? And what’s preventing you from evaluating, let alone knowing, what your Fund Manager is doing?
Most Superannuation funds would suffer during a recession. The question is: Does your portfolio trigger any of the red flags discussed above? If so, it may be time to modify your Super contributions and consider a more custom-tailored approach.
Reach Out for a Tailored Recession Investment Strategy
Contact us for help assessing your portfolio and fine-tuning your recession investment strategy for maximum success rather than “less failure.” Contact Super Network’s financial advisors today to help secure your financial future.
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