Recession can create a sense of uncertainty and financial instability, causing many to hesitate to invest their hard-earned money during this time.
However, investing during a recession can be an advantageous move that can make your portfolio more robust and lucrative.
In this article, you’ll learn how why it’s beneficial to invest during a recession can and how to do it.
What’s a Recession?
Simply put, a recession occurs when there’s a significant decline in a country’s Gross Domestic Product (GDP). When this happens, unemployment rates spike while a consumer spending, and business activity plummets.
Various factors often cause recessions. These include:
- Imbalances in supply and demand
- Excessive debt
- Inflated asset prices
- Significant disruptions in the financial sector, such as banking crises or stock market crashes
- Events such as the COVID-19 pandemic
Why Should You Continue to Invest During a Recession?
Lower Asset Valuations and Increased Affordability
As economic uncertainty prevails, asset prices tend to decline, allowing investors to acquire assets at more favourable prices.
By capitalising on these lower valuations, you position yourself and your investment portfolio a head start to gain a profit when the economy recovers.
Attractive Dividend Yields
Dividends can serve as a valuable source of passive income, contributing to your overall financial stability, especially during economic uncertainty.
During a recession, startups and established companies within industries resilient to recessions continue to pay dividends. These dividend yields become more attractive as stock prices of businesses in other sectors continue to decline.
Capitalise on Undervalued Companies
Recessions often lead to the emergence of undervalued companies. These businesses may be experiencing temporary setbacks due to the economic downturn but have the potential for significant recovery once things get better.
Additionally, identifying undervalued companies with solid fundamentals allows you to position yourself to benefit from their potential future growth.
Access to Government Incentives and Support Programs For Investors
Government programs like the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) are designed to encourage investors to fund early-stage startups and small businesses by offering attractive incentives.
For example, you can claim income tax relief of up to 30% on the amount invested in an EIS-certified startup. That means if you invest £10,000, you could get a tax deduction of £3,000.
Also, any profit you make from selling EIS-qualifying shares after three years are exempt from capital gains tax (CGT). This exemption can be particularly advantageous during a recession because you can protect your profits while potentially achieving tax-free returns.
More importantly, losses incurred from EIS investments can be offset against other gains or income, providing a potential buffer against adverse outcomes.
Conversely, the SEIS targets early-stage startups and offers more attractive tax benefits.
You can claim up to 50% tax relief on your investments for as long as it’s not above £100,000. This provides a substantial incentive for investors willing to support startups during challenging economic times.
Supporting Economic Recovery and Job Creation
Investing in early-stage startups during a recession benefits you as an investor and contributes to the overall economic recovery.
By providing capital to these ventures, you’re directly supporting the growth of new businesses, fostering job creation, and stimulating economic activity. This, in turn, can positively impact the local community and the broader economy.
Tips for Investing During a Recession
Diversify Your Investment Portfolio
By spreading your investments across different assets, sectors, and geographies, you reduce the impact of any single investment’s performance on your overall portfolio.
Diversification also helps to mitigate risks and increase the likelihood of capturing positive returns. Additionally, regularly assessing and managing your portfolio’s risk exposure allows you to adjust your investments in line with changing market conditions and protect your capital during turbulent times.
It’s important to note that when you invest during a recession, especially in early-stage startups, carries inherent risks, so conducting proper due diligence is crucial.
By carefully selecting and diversifying your portfolio of early-stage investments, you can position yourself for long-term success while contributing to the growth and resilience of the UK startup ecosystem.
Invest in Sectors and Industries Resilient to Economic Downturns
Not all industry sectors are negatively affected by a recession. In fact, several sectors thrive and even grow despite the challenging economic climate.
Startups and established businesses involved in pharmaceuticals, medical devices, and healthcare services have shown resilience during recessions. Many launched and scaled during the height of the COVID-19 pandemic as shortcomings and limitations in this sector were exposed.
One example is Longlive. This early-stage startup aims to provide holistic monitoring and coaching solution to those suffering from chronic illness through their app.
GLOW is another startup in this sector worth considering. This early-stage startup aims to help improve people’s overall mental health and well-being, which was significantly affected during the height of the pandemic.
Consumer Staples Industry
This industry includes startups and businesses that produce and distributes what we call “essential items” – food, beverages, household products, and personal care items.
Examples of such early-stage startups include Amino, GreenBay, and The Other Saint. These startups offer consistent revenue streams, as people and businesses rely on their services regardless of the economic climate.
The utility sector is known for its stability during economic downturns. Companies producing and distributing water, electricity, and gas often provide essential services that are not easily replaceable.
Take Advantage of Market Cycles
Market cycles typically consist of periods of expansion, peak, contraction, and trough.
Investing during the contraction and trough phases can offer attractive entry points for long-term investors.
By studying historical market cycles, economic indicators, and market trends, you can make informed decisions and potentially capitalise on undervalued assets.
We have recently published a report on the trends that would significantly affect the UK economy, particularly that provides more insight on this.
Focus on Long-term Investments and Compounding Returns
During a recession, it’s essential to adopt a long-term investment mindset.
Short-term market fluctuations and volatility can be unsettling, but focusing on long-term investment goals allows you to ride out temporary downturns and capture the potential growth over time.
Reinvest dividends and allow your investments to grow over an extended period. Doing this will enable you to benefit from the compounding effect, leading to exponential investment portfolio growth.
Control Your Emotions
Emotions are natural, but when it comes to investing, they can cloud judgment and lead to suboptimal outcomes. That’s why controlling your emotions is crucial to make rational and well-informed decisions.
Making impulsive investment decisions based on these emotions can lead to poor outcomes. That’s because emotionally driven decisions may lead to selling investments at a loss or missing out on potential growth opportunities.
At the same time, market volatility and uncertainty can trigger emotional responses like fear and panic. These emotions can cause you to overlook or shy away from potentially lucrative investment opportunities.
Controlling your emotions empowers you to resist the urge to make hasty decisions and instead take a measured approach. This lets you stay focused on your long-term investment goals and have the patience to ride out the market downturns.
More importantly, keeping a cool head during a recession positions you to take advantage of market dislocations and acquire assets at attractive prices, potentially reaping substantial rewards in the long run.
Investing during a recession in the UK offers many benefits and opportunities for savvy investors like yourself. That’s because when you invest during a recession, you get the chance to acquire quality assets at discounted prices and capitalise on government incentives and support programs that enhance investment returns and reduce risks.
Of course, investing during a recession has a higher risk than investing when the economy’s okay.
That’s why it’s crucial to maintain a long-term investment mindset when navigating through a recession. These short-term market fluctuations and economic uncertainties may test your patience. But as long as you stay focused on your long-term goals, you can weather the storm and position yourself for potential growth.
Evaluate your financial goals, assess your risk tolerance, and leverage a recession’s unique advantages.
Remember, successful investing requires diligence, patience, and adaptability. Stay informed, seek professional advice, and continuously reassess your investment portfolio. You can achieve financial growth and secure a brighter future by seizing opportunities during a recession.
Take the first step towards a prosperous investment journey today. Start exploring investment opportunities, diversify your portfolio, and embrace the possibilities that investing during a recession can offer.
And if you need assistance finding promising opportunities to invest in during a recession, schedule a call with us. We’ll be more than happy to help you out.