When the economy is falling, it can be difficult to know how to protect your capital. Therefore, we have comprised an article to help with exactly that.
The term ‘recession’ can be defined as a prolonged period of economic decline, usually when a country’s GDP (gross domestic product) consistently declines for over two quarters. Economic output, employment, and consumer spending can all be seriously affected by a recession. Interest rates are also highly likely to decline as benchmark rates are cut by the central bank to support the economy.
Psychologically, as soon as we see the word ‘recession’, emotions get in the way. Investors start to worry, and their behaviour is swayed by the headlines. Often, it is this panic which worsens the impact of the recession. Alongside the psychology, it is important to resist the urge to check your portfolio every five minutes – it only reinforces your worries and doesn’t do much good.
There are many ways to protect your wealth from the effects of a recession, some are everyday habits that you can implement to protect yourself ahead of time and some are for when it’s just too late to prepare, here’s our top tips:
Have an Emergency Fund
If you have plenty of cash lying around in a high-interest account, not only will your money retain its full value in times of market turmoil, excluding the effects of inflation, but it also will be extremely liquid, allowing easy access to funds if you lose your job or are forced to take a pay cut.
Also, if you have your own cash, you will be less dependent on borrowing to cover unexpected costs or the loss of a job. Credit availability tends to dry up quickly when a recession hits.
Live Within Your Means
If you make it a habit to live within your means each and every day during the good times, you are less likely to go into debt when gas or food prices go up and more likely to adjust your spending in other areas to compensate.
Invest for the Long Term
So what if a drop in the market brings your investments down 15%? If you don’t sell, you won’t lose anything. The market is cyclical, and in the long run, you’ll have plenty of opportunities to sell high. In fact, if you buy when the market’s down, you most probably will be thanking yourself later.
That being said, as you near retirement age, you should make sure that you have enough money in low-risk investments like bonds, to retire on time and give the stock portion of your portfolio time to recover. Remember, you don’t need all of your retirement money at the day you decide to retire —just enough to provide the income you require to meet your day to day needs.
Be Real About Risk Tolerance
Investments are supposed to provide you with a sense of financial security, not a sense of panic.
If you have extra cash available and want to adjust your asset allocation while the market is down, you may even be able to profit from infusing money into temporarily low-priced stocks with long-term value. Buy low so that you can sell stocks high later or hold on to them for the long run.
Be careful not to overestimate your risk tolerance, as that will cause you to make poor investment decisions. Even if you’re at an age where you’re “supposed to” have 80% in stocks and 20% in bonds, you’ll never see the returns that investment advisors intend if you sell when the market is down. These asset allocation suggestions are meant for people who can hang on for the ride and not make knee-jerk decisions.
Diversify Your Investments
If you don’t have all of your money in one place, your paper losses should be mitigated, making it less difficult emotionally to ride out the dips in the market. If you own a home and have a savings account, you already have a start: You have some money in real estate and some money in cash.
In particular, try to build a portfolio of investment pairs that aren’t strongly correlated, meaning that when one is up, the other is down, and vice versa (like stocks and bonds). This also means that you should consider asset classes and stocks in businesses that are unrelated to your primary occupation or income stream.
Keep Your Credit Score High
When credit markets tighten, if anyone is going to get approved for a mortgage, a credit card, or another type of loan, it will be those with excellent credit. Things like paying your bills on time, keeping your oldest credit cards open, and keeping your ratio of debt to available credit low will help keep your credit score high.
How a Wealth Manager Can Help
It’s less about the global economic backdrop and more about your own investment strategy.
A good Wealth Manager will assess a client’s financial situation and make adjustments as and when required based on their individual goals and circumstances. Some clients will be focused on capital growth, whereas others may require cash flow to meet expenditure needs. You and your Wealth Manager should work together to ensure your financial plan is on track and suitable for your goals – whatever the weather.
The most important thing is that clients have all the information to make well informed decisions. If you need help, reassurance, or simply need to talk through things, the most important step is to reach out.