How to Prepare for a Recession

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March 9, 2020

In economics, a recession is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending.

Talk of a global recession is on the rise.

This is not a curveball nor is it a positive distraction. December 2018 saw American economist Nouriel Roubini (branded Dr Doom) for being the predictor of the 2007 housing bubble crash. He stated that conditions will be ripe for a global recession in 2020. 

But messages from the powers can be conflicting.

Regardless of where you look, we have been here before, recessions are  significant throughout the UK’s history. In 2008 until 2009, we saw the UK’s greatest recession since World War two. It lasted for five quarters, which led to a 7% decline in manufacturing output for the entire country.  

The Great Recession stemmed from the collapse of the United States real estate market in relation to the financial crisis of 2007–08 and the subprime mortgage crisis, though policies of other nations contributed as well.

Whilst we aren’t currently looking at the same cliff edge as witnessed in the late 2000’s, we are still in a time of uncertainty. The housing market in the UK has slowed down, spending has dropped and significant social movements have affected the confidence of the wider populous. 

Although it sounds like it, recessions  are not all doom and gloom. They are actually  quite the opposite. Recessions can allow for the largest opportunities and investment.. 

Simple, yet effective, we have some steps that  will prepare you to transition through the upcoming recession and come out on the other end in a significantly better financial position.

In this blog post, we will be covering

  • Build an emergency fund 
  • Explore markets abroad
  • Maintain regular investments 
  • Identify areas of opportunity 

Build an emergency fund 

An emergency fund is exactly as it sounds.

It's a bank account with money set aside to cover large, unexpected expenses.

Depending on how much safeguarding you want to be doing, we recommend looking to save around 50% of your current yearly expenditure. This allows you to have a comfortable sum of money to land on in the most severe of emergencies. 

However, we know this isn’t always realistic, especially if you are looking to explore further investments (we talk a little bit about how to invest further down). 

An emergency saving is there only in case you need it's in times of less market fluidity or for financial opportunity. The minimum you should be looking to save is 10% of your current annual expenses. 

When the time comes, this emergency saving can be utilised for aggressive investment opportunities. 

After taking into account a buffer for emergencies, it will be time to start exploring markets and investment opportunities outside of your localised, recession hit, market. 

Explore markets abroad

Recessions are usually isolated to localized markets and are rarely a global phenomena. 

Billions of pounds of financial investments flow into and out of the UK each year, whether it be a foreign business acquiring a UK company, a fund manager investing in foreign stock markets, or someone setting up a savings account with an overseas bank.

Your investment and cash values will be decreasing within a localised recession. 

Whilst there are markets on the global scale which will retain their strength and demonstrate opportunity for growth.

Investors may value the perceived security of an economy and its currency above rate of return. If an economy is stable and seen as a safe place to invest, it may be more attractive to investors than somewhere perceived as riskier, albeit with higher expected returns.

Utilising your research, or the helpful hand of your wealth manager, you should look to maintain regular investments in a foreign market or localised market. 

Maintain regular investments 

The common misconception of a recession is that we should all stop spending and investing. 

One of the fundamental principles of investing is to put your money to work as soon as possible. An investment needs time to grow, so the longer your money is in the market, the more chance you have of reaching your goals.

Financial markets rarely move in a straight line. Prices move up and down, sometimes on an hourly basis. By drip feeding your money into an investment over a period of time, you will have the opportunity to invest across a range of prices. 

You effectively pay the average price over a fixed period, which can help smooth out the market volatility.

An excellent way of pacing your investments is by a regular investment of say £25, £50 or £100 a month into an index tracker.

Whilst there may be levels of increased risk, there are also areas of significant opportunity.

Identify areas of opportunity

A recession is the executioner of poorly managed companies. Consumers and businesses look to become more stringent on their spending and make more logical choices. 

Investment strategies are no different.

A poorly managed investment strategy will instantly fall victim to recessions. Investing in the wrong companies and the incorrect resources leave your portfolio highly exposed and at risk of significant devaluation. 

A better recession strategy is to invest in well-managed companies that have low debt, good cash flow, and strong balance sheets. 

Counter-cyclical stocks do well in a recession and experience price appreciation despite the prevailing economic headwinds.

Here at Ai Investment group, we specialise in helping you develop and improve your investment portfolio. We can help prevent you from falling risk to economic changes such as a recession and aid you in taking it as an opportunity for you to grow financially. If you want more information or require advice when it comes to managing your wealth, you can contact us now.