The UK’s economy has had its fair share of weathering economic downturns.
Despite this, many UK investors continued to earn healthy returns from their investment portfolio.
These successful investors have a strategy they implement when choosing which investment opportunity to capitalise on, when to invest in these, and how much they’ll invest.
In this article, you’ll learn some of these investing strategies and how to implement them to ensure your investment portfolio remains resilient to the economic uncertainty we’re all facing.
How an Economic Recession Impacts Your Investment Portfolio
Before we learn the different investment strategies to use during an economic recession, you’ll need to understand how it affects your investment portfolio.
When word gets out about a country’s economy going into recession, people hold on to their money for dear life. As a result, they spend less money than they used to.
When consumer spending declines, businesses hardly make a profit. In some cases, companies’ financial losses are so significant that they have to lay off people, resulting in a rising unemployment rate.
As this vicious cycle continues, the share value of these companies starts to plummet. If you invest in shares from these companies, the overall value of your investment portfolio declines.
Investing Strategies to Implement During an Economic Recession
1. Value Investing
Value investing is an investment strategy that identifies undervalued stocks or market assets.
The key concept here is to buy shares while the share values are still low because of the economic recession.
One benefit of implementing this investment strategy is that if the price continues to go down, the loss you’ll experience is still lower than what others will be experiencing.
Another benefit of using the value investing strategy is that you start experiencing a return on your investment as soon as the economy improves.
If you want to apply this investment strategy, here are some tips to do this right:
- Look for companies that have a long-standing history of positive cash flows. These companies will likely bounce back faster than others when the economy improves.
- Evaluate the share’s Price-to-Earnings (P/E) ratio. This financial metric is used to assess the relative value of a company’s share to its earnings and is calculated by dividing the stock’s market price by its earnings per share or EPS.
- Consider early-stage startups from recession-resilient sectors. Early-stage startups within the healthcare, technology, and finance sectors have a huge potential to increase in value even during an economic recession since they provide products and services that are essential to everyday life.
Diversification is more than an investment strategy. It’s a fundamental investing principle since this encourages you to include different types of investments in your portfolio. Doing this ensures that each investment’s risk is spread out and reduced.
When diversifying your investment portfolio, one thing to remember is to always conduct proper due diligence when choosing which investments to include. This ensures that the investments you make will reap the returns you’re expecting.
Here are some actionable tips to help you use this investment strategy:
- Allocate across different asset classes. Consider diversifying your investments across asset classes like stocks, bonds, real estate, and commodities. This can reduce the impact of any asset’s performance on your overall portfolio.
- Spread investments across sectors and industries. Different sectors perform differently during a recession. Investing in startups and companies in multiple sectors can balance the potential risks and opportunities.
- Include international investments. Investing in companies and markets outside the UK can provide exposure to different economies, currencies, and regulatory environments.
- Assess correlation. Ideally, you want assets that have a lower correlation since they can help offset losses and provide better diversification benefits.
- Regularly review and rebalance your investment portfolio. Make it a habit to monitor your investment portfolio’s performance regularly. That way, you can immediately adjust the allocation and rebalance it so that your portfolio remains aligned with your investment objectives.
3. Dividend Investing
As the name suggests, this recession investment strategy involves investing in companies and startups with a good track record of regularly paying dividends to their investors despite the economic climate.
That’s because these companies continue to receive a steady positive cash flow. As such, they’ll be able to help you compensate for any losses you incur from your other investments during these times of economic uncertainty.
Here are some actionable tips to help you effectively implement this strategy:
- Take time to do your research. Sites like the Companies House and ICAEW Library can provide you with annual reports, financial documents, and other information about the companies whose shares you’re considering investing in. Review all these to ensure the company or startup you’re considering has a solid history of sustainable earnings and a stable dividend payout ratio.
- Check the dividend yield. This annual dividend payment is divided by the stock price, expressed as a percentage. The higher the dividend yield, the better.
- Decide whether you want to reinvest dividends or receive regular income. Reinvesting dividends allows you to compound your investment returns over time, while the regular income option means receiving dividends as cash payments.
4. Contrarian Investing
Contrarian investing simply means doing something that everyone else isn’t. That means when everyone is selling, you’re buying and vice-versa.
When implementing the contrarian investing strategy in the UK, conduct careful research and evaluate the negative sentiment surrounding a particular asset or sector. Then validate these by cross-referencing reliable news and industry sources. This is crucial as fake news is prevalent and can cause significant damage.
5. Pound Cost Averaging
Pound-cost averaging is an investment strategy that involves regularly investing a fixed amount of money at predetermined intervals, regardless of the current market conditions.
This strategy allows you to benefit from market fluctuations by purchasing more shares when prices are lower, potentially increasing your overall returns in the long run. It also eliminates the need to time the market.
More importantly, pound-cost averaging can help you take advantage of the power of compounding, as your investments have more time to grow.
To implement pound-cost averaging, start by determining how much you’re comfortable investing and how often you’ll invest.
Consider also setting up an auto-debit on your account for this. Not only will this ensure that you’re consistently investing as you intend. Setting up an auto-debit also eliminates you from making emotional-based investment decisions based on what you hear about the country’s economic situation.
Successful investing is not merely a matter of luck. It requires a thoughtful and disciplined approach.
The investing strategies shared in this article have stood the test of time and offer a roadmap to navigate the uncertainties of recessions. Implementing these investment strategies can enhance your chances of achieving sustainable returns and mitigating risks.
By incorporating these investing strategies, you can position yourself for potential success, even if the UK economy is going through some tough times.
Remember, each strategy has its unique benefits and considerations. So, aligning these investing strategies with your financial goals, risk tolerance, and investment timeframe is essential.
More importantly, economic downturns are part of the market cycle. Maintaining a long-term perspective and avoiding reactionary decisions based on short-term market fluctuations, you can ride the storm and potentially benefit from the eventual market upswing.