Some younger millennials won’t have yet gone through a recession – the last one was more than ten years ago when they were about to start secondary school and were thinking more about making new friends, pop stars and homework than the fact that unemployment was rising and stock markets were in free-fall.
Older millennials on the other hand will have felt the pinch more as they were just entering the [contracting] job market or were suddenly faced with the reality that they could be made redundant.
A decade on and recession fears are starting to grace headlines again. We don’t actually know when the next one will be, but certain factors indicate it could be coming. It’s always best to be prepared, so this week we’re talking about what a recession could mean for your money.
“As sure as the spring will follow the winter, prosperity and economic growth will follow recession.” – Bo Bennett, US entrepreneur
What does a recession mean?
A recession is a period of general economic decline, usually defined as a contraction in a country’s GDP for six months (two consecutive quarters) or longer. This can mean that the job market won’t be as friendly. In a weakened economy, we as consumers typically spend less money. This is bad for business. It can result in redundancy and stagnant wages. It’s not typically a good time to be job hunting or looking for a raise.
It also means that invested assets often decrease as well: when consumers stop spending, business revenues, profits and therefore the money they’re able to offer as dividends, can also decrease. Commonly this means that recessions are compounded with falling stock markets.
So if you have an ISA or other investment accounts, you might see your balance drop. If you don’t need your money for a while, try not to panic: a stock market fall is not a given and even if they do fall, stock markets generally recover within a year or two.
How can I prepare for a recession?
The effects of a recession are felt differently, depending on personal situations, But there are a few things to consider:
- Now’s a good time to pay extra attention to your emergency fund. A general rule of thumb is to have at least three months’ worth of wages put aside. Then if your salary is cut or you do face redundancy, you have something to fall back on.
- Pay down any high interest debt, or consolidate, as banks tend to reduce their lending activity during a recession. And cut down on non-essential spending – those Instagrammable holidays for example.
- Once you’ve done all that, it’s also a great time to save money and start good money habits. That way, if money does get tight, you won’t be forced to take on more debt or sell investments.
How should I invest during a recession?
When investors are worried, the knee-jerk reaction can be to move all their money into cash. But this can often be a mistake. Timing stock markets and indeed a recession near-on is impossible and while they may miss some days of market falls, they could also miss some profitable bounce-backs.
Going on the defense
Another option is to move your investment into more defensive stocks. According to Morgan Stanley, whose Global Brands fund has just received an Elite Rating, healthcare, consumer staples, utilities and telecoms sectors tend to be the most robust in a downturn – but you still have to be selective.
Alternatively, you could shift to a more defensive fund like Church House Tenax Absolute Return Strategies, or TwentyFour Absolute Return Credit – both of which aim to preserve capital.
Then there are funds like Liontrust Special Situations and Lazard Global Equity Franchise, which invest in companies that should prosper no matter what is going on in the economy. The Liontrust fund targets businesses that can grow their earnings, independently of the wider economy, while the Lazard fund tends to avoid more cyclical stocks and subsequently has historically outperformed in falling markets.
Interestingly, the UK housing market has also been surprisingly resilient during recessions, as Alan Collett, manager of TM home investor, explained in his recent podcast.
Going on the attack
Another option that can work well for brave investors is to buy on market dips. Stock market volatility isn’t necessarily a bad thing and any falls can allow you to add to existing holdings at cheaper prices. After all, if you were willing to buy into an investment at £1, why would you not buy more if its price fell to 90p? If the investment case still stands, you are getting a bargain.
Often, however, the best course of action is to do nothing. Millennial investors may not have much money to save, but they do have the luxury of time: they can sit out the ups and downs of the stock market, ignoring the mayhem around them, as they are investing for a time far into the future.