Surviving in a recession

Surviving in a recession

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Probably to nobody’s surprise, this month the UK officially entered a recession for the first time in 11 years, contracting by 20% in the second quarter of 2020 compared to the first.  The reason I say that it wasn’t a surprise is that the UK stockmarket actually rose over the week in which the news was released, illustrating very well that market prices reflect investors’ expectations for the future.  Since a recession was expected by just about all market participants, they had positioned themselves for that news, so when it came there was no price shock.

But while we as consumers can do very little about the big picture (beyond spending cash at businesses and thus improving their profitability), there are steps that we can take to help our own financial circumstances.

Review your cash reserve

We’ve always advised clients to maintain several months’ worth of their expenditure in liquid and easily accessible form in case of some unforeseen contingency which affects their cashflow.  For those who are working, it might be something which reduces or stops those earnings.  For those who have achieved financial independence from paid work, it might be to reduce the need to draw down on investments at a time when their value has fallen.  A recession can give rise to both situations, as businesses seek to reduce their labour costs (or fail altogether) and investors reallocate their capital and cause prices to fall.

Don’t panic about what’s happening to your investments

As highlighted at the start of this article, markets reflect investors’ expectations and those expectations are already in the quoted prices that we see for investments.  Trying to second guess not only what the news will be and how markets will react to it will make life very busy and stressful.  Unless you see investing as a hobby rather than a means to an end (a life free from the need to do paid work), let the market work for you rather than trying to fight it.

Ensure that your investments are appropriate for you

You should have carried out an exercise when you first invested and at least every couple of years subsequently to determine how much risk you are willing and able to take.  You should also know how much you would need to take to achieve your goals in your desired timeframe (which is likely to be multiple decades).  If you did, your strategy shouldn’t need changing with every short term market movement (that’s why it’s a strategy).  If you didn’t, this might be a good time to do so.

Don’t stop funding your pension scheme

It’s very tempting in times of uncertainty (although, of course, the future is always uncertain) to cut back on expenses that seem to have no immediate benefit.  However, the money that goes into your pension scheme in the early years has the longest time to grow and missing a year of contributions in your 20s or 30s can cost a lot more to make up in your 40s or 50s.

Don’t gear up your portfolio

So if you’ve avoided panic when your portfolio valuation plummeted and you recognise that dips are the opportunities to buy assets at lower prices, you should fill your boots, right?  Not necessarily. 

While you might double your money if the market moves in your favour, it might equally go the other way and leave you doubly hit as you now have more borrowings to service.  In a recession, asset prices (such as the home on which your debt might be secured) can fall, which can create more problems if, for example, you lose your job and have less income with which to make the debt repayments.

Consider whether to repay debts early

While repaying debt is generally a good idea because otherwise you are effectively borrowing to meet your day to day expenditure, be wary of using cash to reduce long term debts aggressively.

Clearly, where borrowing is expensive, getting short of it is a good idea.  However, unless you have an offset mortgage, once the cash is converted to a reduced loan, you lose access to it.  Trying to borrow it back if you need cash because you now have no other source of it is probably going to be tricky.  Therefore retaining enough accessible cash sufficient to meet both anticipated and unplanned expenditures is always a sound move.

Keep calm and carry on

In any period of great uncertainty, news (both real and fake) and rumours are everywhere.  It’s easy to let them take over your thinking.  Try writing down all the concerns that you have so that you can get them out of your head.  Then you can assess them more objectively, with the help of your financial planner if you have one.  Having a plan against which you can run various scenarios may show you that even if the things you fear happen, you will still be OK and if not, it can give you indications as to where to direct your efforts.

Shortly after the Coronavirus pandemic hit the UK, I spoke to a new client who fell into the ‘vulnerable’ category on account of her age.  She was remarkably sanguine about the whole business, recalling that she lived through a world war when people were actively trying to kill her fellow humans and pretty well everything was rationed.  Compared to that, a global pandemic in which countries were co-operating to find a cure was unlikely to be a huge deal.

We’ve been here before and we survived.