When the economy slows down it is inevitable that share prices will take a hit. But there shouldn’t be any need to panic – it’s actually a good opportunity to review your portfolio.
Making sensible, incremental changes that provide some additional strength will help to fight off the worst effects of these difficult times. Here are our 10 top tips for ensuring that your portfolio is robust enough to withstand an economic downturn and to help you weather the storm:
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Diversify
The number one rule of investing. If your portfolio contains a varied selection of asset classes and is spread across a number of countries and regions of the world, each element can perform differently at different times. So, if one is doing badly, another may well be performing well and so could help to compensate.
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Look beyond the home market
A UK-focused portfolio might seem a sensible option for a UK-based investor. However, other areas of the world may offer a more positive outlook at this time or could simply be better placed to help you through any domestic downturn. Financial advice to help understand international markets is essential.
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Take the rough with the smooth
Your attitude during negative periods is as important as your portfolio’s structure. Economies simply cannot keep growing indefinitely and recessions are likely to happen. Successful investors tend to be pragmatic and realistic – they invest for the long term and expect that, while there will be good times, there will also be some bad ones. A short-term downturn should not be seen as a reason to panic.
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Look beyond the economic data
Economic data releases are backward-looking. At the start of a slowdown, figures will continue to appear positive, often contradicting our everyday experiences, as old numbers remain in the calculation. Similarly, as economic growth begins to recover, it takes a while to be fully reflected in the new data. Headlines stating “worst figures for 30 years” confirm what we have just been through. But they don’t reflect the prospects for tomorrow.
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Cash is not always king
During a recession, it can be tempting to get out of the stock market and opt for the perceived safety of cash. However, inflation can erode the purchasing power of cash over time. So, while you will not lose the face value of money when invested in cash, it is not a “risk-free” option. Stock markets can fall and recover very quickly; moving out of them when you have already suffered a loss could mean missing out when they finally begin to recover.
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Go for quality
During recessions and stock market downturns, high-quality, established companies tend to bear up better. A tough environment forces struggling companies to cut their dividends or release negative trading statements. Investing in quality stocks, therefore, could help you ride out some of the storm. It is also worth noting that, if the equity market is falling across the board, this provides a great opportunity to pick up quality stocks at relatively cheap prices.
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Assess exposure to smaller companies
Historically, smaller companies have been the worst affected during a recession. When things are going well, they can offer the possibility of greater gains for investing than their larger peers. But when things go badly, the losses can also be much greater. If volatility makes you nervous or if your portfolio is relatively small, you could consider reducing your exposure to smaller companies and perhaps reinvest into some less adventurous choices.
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Check for over-exposure
During an economic slowdown, it is worth holding on to high-quality companies in industries where demand is less sensitive to disposable income, such as food retailing, pharmaceuticals and utilities. This is because, regardless of any short-term hitches, they tend to fare better in tough times. Other industries, such as leisure and house builders suffer much more. This might be a good time for you to ensure you are not overexposed to any one sector or region.
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Think long term
A recession is commonly defined as two consecutive quarters of negative growth, but six months in the average life of a portfolio is hardly any time at all. If your portfolio meets your personal criteria and is well diversified, a recession should not cause you to change plans. Sometimes doing nothing can be the best course of action.
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Take precautions when investing
Making sure that you plan your investment portfolios properly at the outset, with the help of an expert, is by far the best way to prepare for tough times. Then, when a downturn strikes, you can stay calm and review your situation sensibly and with confidence, rather than be panicked into any radical and potentially unprofitable changes.
Get in touch
If you are concerned about investing in tough times or you’d like some assistance to review your investment portfolio, please get in touch with the team at George Square Financial Management.
Speak to one of our independent financial advisers or 0115 947 5545 or send us a message here.