With talk about the potential for a recession ramping up in Australia and around the world, would-be investors today have cause for concern.
As an investor, you don’t want to make a mistake you later regret, and this fear can be paralysing.
But at the same time, there’s a huge amount of opportunity out there.
Downturns make millionaires, and if you can find a way to invest smart today, you can position yourself strongly to come through this period of disruption in a stronger position than you went into it.
So what do you need to know to make smart investment moves that will make you money today, and cover you if we do end up in recession?
Expect the down, hope for the up
Over the long term, the sharemarket trends up.
It’s been doing this since the sharemarket began, which is why most people invest in the first place.
But also since markets began, there have been periods where the value of the sharemarket declines. This is all completely natural and to be expected.
Where investors (particularly newer investors) go wrong is that they’re surprised by a downturn period and react in the wrong way.
It’s never good to see the value of your investments go down, but you only ever lose money on an investment when you sell – if you have good investments and you hold them through and beyond a downturn, they will recover.
If you freak when markets are down and sell your investments, you’ll be selling at the worst possible time and will pay the price.
Any time you invest, you have to expect that markets will go through downward trends at some point. This is completely normal and is part of the market cycle.
You should set your expectations that there will be periods of decline through your time investing – this way, when it does happen, you won’t be surprised and make reactive decisions. And if markets don’t go down, this can be a pleasant surprise and is never going to create trouble for you.
Don’t be forced to sell
If you’re forced to sell investments at any point in time, your risk drastically increases – because if you’re forced to sell when markets are down, you could be exiting investments when they’re sitting at a loss position and lose money as a result.
This should be front of mind for anyone investing today, when the risk of a market decline is slightly higher.
But keep in mind that the only reason you’d be forced to sell investments was if you needed the money for something else going on in your life. The implication is that you can make sure you’re never forced to sell investments by ensuring you have enough money to cover any spending you need to do.
Take the time to think through both your day-to-day and any lumping spending that’s coming up for you, and put the money aside so it’s there when you need it. This way, you can invest any money that’s left over, knowing that you can leave the money to ‘ride’ in investment markets until you get the results you’re looking for.
Buy premium
Big, quality companies are more likely to be able to ride out a potential recession and continue to turn a profit while the economy is struggling.
Smaller companies, on the other hand, may perform well, but history and the statistics show us they’re more likely to struggle.
When you invest, stick to premium companies and you’ll be rewarded over time.
You’ll also avoid a lot of the risk and ups and downs investments in smaller companies are known for.
Sticking to premium investments should also give you more peace of mind to hold tight if the economy deteriorates further.
Income is good
In Australia, larger companies consistently pay out a chunk of their profits to shareholders in the form of dividends – even during periods where markets are down.
One of the key drivers of this is the large numbers of retirees and super funds that rely on share market dividends, and the fact that these investors tend to ‘vote with their feet’ and exit shares in companies that cut or reduce their dividends.
As an investor during a potential recession, consistent dividends deliver another income stream you can use to invest more while markets are potentially down, or just keep up with the cost of living.
Almost all big companies in Australia pay a healthy dividend income, meaning that if income is important to you when you invest, all you need to do is to stick to the bigger players.
These also tend to fall into the ‘premium’ investment category, so you’re effectively covering the point above and killing two birds with one stone here.
The wrap
Investing can be scary at any time, but particularly when markets are wobbly and the talk of recession is heightened, pushing through the fear and making smart choices can be even more difficult.
But the reality is that if you want to get ahead, you need to be investing.
When you get this right, there’s serious money to be made.
The execution can get complicated, but the principles of success are simple – take the time to nail it and your future self will thank you for it.
Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.
Ben Nash is a finance expert commentator, financial adviser and founder of Pivot Wealth, the creator of the Smart Money Accelerator, author of Replace Your Salary by Investing and host of the Mo Money podcast. He runs regular free online money education event which you can book here.