Investing for growth isn’t always plain sailing. But when times are tough, shying away from risk is not necessarily the right answer. In fact, some of the best returns often come from investments made when things look difficult.
Right now, recession is a possibility in Europe within the next twelve months, and potentially in the US as well. You may not have anticipated it, but your investments have. If you’re invested already, or are considering investing during a recession, what should you do?
Here are five lessons to bear in mind when it comes to investing your money in the current environment.
Markets anticipate the real economy
When you invest your money, you’re buying the right to future returns from an asset. So investment markets spend their time trying to anticipate the future. For example, if you’re worried about inflation affecting the value of your investments, markets have been baking that into the price of assets for more than half a year now.
At the moment, investment prices are pricing plenty of risk. In fact, valuation levels are much more closely in line with historic averages than, say, at the start of this year. That suggest that there is scope for meaningful returns for those investing now, who are patient and prepared to tolerate ups and downs in the short term.
Of course there are plenty of risks that haven’t accounted for that could throw things off course – and that leads us to lesson number two…
Don’t fight the last war
Many of us have a habit of over-emphasising the importance of risks and opportunities in the last cycle. And we undervalue trends that will drive future investor returns. For example, while Bill Gates was warning in 2015 about the risk of a global pandemic, most investors were focused on the European debt crisis.
Or, to give a more positive example, by the time the current bout of inflation is well and truly behind us, the growth spurt that will come from conquering it will be built into investment prices.
Truth is, the risks and opportunities we have already identified are probably not the ones to worry about most. They are priced in. But what can you do to plan for as-yet unidentified factors?
It’s about how and what you invest in
There are several steps you can take when investing during a recession to position your investments to take advantage of the recovery when it comes.
Firstly, be diversified. Investors who ploughed too much of their money into a single asset or sector are at greatest risk when there is a change in sentiment. For example it’s true the US and in particular the technology sector have led investment returns over the last decade.
It’s less obvious that that will be the case for the next ten years. Perhaps the rise of Asian consumers, the regulation of technology, and the dislocation of global supply chains will make other regions and asset classes a more profitable place to be in the years to come.
Secondly, for the inflationary times we’re in, consider investments based on identifiable assets (rather than future promises), and those that deliver cashflow today. For example, while UK politics may be making life harder for people living there, the value of a global but British brand like Burberry can’t be damaged that quickly. In fact, its share price is flat for the year-to-date.
Similarly, infrastructure-backed cashflows – think of electricity utilities, for example – have the potential to repay investors with regular cash dividends and boring, long-term predictable contracts. Smart investors can grab a diverse bundle of such exposures through the right investment funds.
Lastly, you can drip-feed your money. No-one can call the exact timing of a recovery, except in retrospect. And then it’s too late. The solution is to drip-feed your money over time – whether that’s as a monthly direct debit, or a lump sum, invested over 90 days or longer.
Don’t overthink it; don’t overtrade it
In the era of online dashboards and real-time data, it’s tempting to try to micromanage your investments every day. Don’t. At best you’ll have a stressful time of it, with daily ups and downs causing you to doubt yourself. Worse, you’ll make short-term decisions and waste energy and money on trading costs.
Make a plan, and stick to it, with periodic reviews.
Time is your friend
Lastly, remember that your greatest ally when you’re investing money is time. If you’re looking to make a short-term profit – well, you’re not really investing, just hoping to get lucky.
But over five or ten years, there’s data going back decades to suggest that investing your money offers the best prospect for meaningful returns. Despite all that’s changed in 2022, that remains true.