Investing during a recession

4 min read

While the COVID-19 pandemic has impacted financial markets, there are still ways your investments can work hard. Read our four strategies for smart investing during a recession.

In times of uncertainty, when share markets and interest rates are falling, along with declines in consumer and business confidence, investors often question if their money is safe and if it’s still going to meet their long-term investment goals.

But whether it’s a period of sustained volatility due to a global financial crisis, a medical pandemic, or a recession, the basic rules of investing hold true.

  • Don't panic!
  • Set long-term investment goals
  • Keep investing (if you can)
  • Don't try and time the market
  • Spread your risk through diversification
  • Don't panic!

Keep a level head

It’s almost thirty years since Australia last experienced a recession, so for many investors where to put money during a recession isn’t something they’ve had to think about before.

We understand you’re probably concerned about your investments and wondering what to invest in if Australia does enter a recession. Volatility isn’t something investors enjoy. The pain of losing is significantly more powerful than the pleasure of gaining, which makes us more likely to overreact during market downturns than when the market is booming.

To help your investments continue to work hard for you, we’ve outlined four simple strategies you could consider.

1. Invest for the long term

If you’re a long-term investor (with a time horizon of 10+ years), don’t let emotion get in the way of sensible decision making. Selling out of your investments and moving to cash may seem like a safe option, but you’ll potentially be crystallising your losses and missing out on any opportunities that could arise when the market rebounds.

A good investor is a patient investor. Just like you need to save money for an overseas trip or wait another year for your favourite movie sequel to be released, investing is a long-term activity.

We recommend you seek good advice at the start, so you have a plan to realise your investment dreams, leaving you to get on with enjoying your life. You’re not a professional investor, it’s not what you do for a living, so there’s no need to fear every daily movement in the share market.

2. Try to invest regularly

Volatility doesn’t necessarily result in poor investment outcomes. It can present opportunities. The principle of investing regularly, regardless of whether the market is rising or falling, allows you to buy more of an asset when prices are low and buy less when prices are high.

Known as “dollar cost averaging”, not only will this average out over the long term, resulting in a better average price for the assets, but you’ll also potentially hold more of an asset, which will be beneficial when prices rise again.

Those superannuation members who are making regular contributions and don’t yet need to withdraw from their super, and investors who have a regular contribution plan set up as part of their investment strategy, are already making the most of this approach.

3. Be sensible and leave the decisions to the professionals

Market timing is an investment strategy used to try and ‘beat’ the share market by predicting its movements and buying and selling accordingly. It’s the exact opposite of the long term ‘buy-and-hold’ strategy, where an investor buys shares or assets and holds them for a long time, designed to ride out periods of market volatility1.

According to Morningstar, investors would need to be correct 70% of the time to get any benefit from an active market timing strategy. This is almost impossible to achieve, even for market professionals.

You’re more likely to miss some of the best days of the market rather than picking them correctly. And as research from global fund manager Fidelity shows, a $10,000 investment that missed the 10 best days in the Australian share market during the period October 2003 to April 2020 would have cost you $13,523 in lost earnings2.

4. Allow diversification to spread your risk

Not only is it difficult to time the market correctly, but it’s also hard to predict which asset class will perform best in any given year. Last year’s best performing asset class can easily become next year’s worst, or vice versa.

Many investors choose to manage this by diversifying their investments across different asset classes (shares, bonds, cash etc.) and create a portfolio that’s based on their risk tolerance, time horizon and investment goals.

However, it’s important to understand that diversification doesn’t mean you’ll avoid market volatility completely. Even with a well-diversified portfolio, your investments could still potentially experience periods of what you’d probably deem underperformance.

For example, when the Australian share market is rising, it may feel like your investments are lagging if the share market rises by more than your investment does. But be assured, when that same share market falls by 5% and your investment’s value is relatively unaffected, the benefits of diversification will become much clearer3.

Staying positive during market downturns

The most important thing you can do during market downturns is not panic.

Stay emotionally strong and ensure your investments remain aligned to your investment goals.

 

1 Investopedia  https://www.investopedia.com/terms/m/markettiming.asp.
2 Fidelity International https://www.bt.com.au/insights/strategies/2019/03/dealing-with-market-volatility.html The chart shows how a notional $10,000 investment would have been affected if the 10 best days were missed. Uses daily returns of the ASX/S&P 200 Accumulation index (Source: Datastream) for the calculations, from 31 Oct 2003 to 06 Apr 2020.
3 Vimal Gor, Pendal’s Head of Bonds, Income & Defensive Strategies https://www.fidelity.com.au/learning-hub/understanding-markets/timing-the-market/.

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This article was prepared by BT, a part of Westpac Banking Corporation ABN 33 007 457 141, AFSL and Australian Credit Licence 233714. This information is current as at 13 May 2020. This article provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. It does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to these factors before acting on it. This information may contain material provided by third parties derived from sources believed to be accurate at its issue date. These projections are predictive in character. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be affected by inaccurate assumptions or may not take into account known or unknown risks and uncertainties. The actual results actually achieved may differ materially from these projections. No company in the Westpac Group accepts any responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material.