Several factors have put economies around the world at risk of entering a recession. As an investor, you may worry about what it’ll mean for your portfolio, but it may not have the negative effect that you think, particularly over the long term.
The long-term effects of Covid-19 and related lockdowns, the war in Ukraine, and the effects of high inflation mean that many experts predict an economic downturn in the UK. Some go as far as to say the UK could face a recession in 2023.
KPMG predicts the UK economy will shrink by 1.3% in 2023 in a “relatively shallow but protracted recession”. This will be followed by a partial recovery in 2024, which could see GDP rise by 0.2%, according to the audit firm.
It’s not just the UK that’s facing these challenges either. Economies around the world face similar situations.
During a recession, household spending and business profits usually fall. Unsurprisingly then, a recession, or even just the prediction of one, can lead to volatility in the investment markets. So, as an investor, keeping these five things in mind could help calm your nerves.
1. The markets and the economy don’t always reflect each other
While the investment market is undoubtedly linked to economic performance, the two don’t always move in tandem.
At the start of a recession, markets will often fall sharply. However, historically, they’ve usually recovered much quicker and bounced back before a recession ends. As a result, trying to time the market consistently is impossible as it’ll often move before economic data is released based on speculation.
If you’re tempted to make any changes to your investment portfolio, keep this in mind. Reacting to volatility could mean you miss out on potential gains in the future.
2. Remember markets often react to uncertainty
If there’s one thing markets don’t like, it’s uncertainty. And this can lead to overreactions in the market before all the information is available. So, volatility is to be expected when some experts predict that a recession is around the corner. Indeed, you often find that the worst and best performing days are relatively close together due to this.
Being prepared for volatility in the months ahead can help you stick to your long-term plan. Remember, when you created your investment strategy, it should have considered the ups and downs of the market.
3. Markets have historically recovered from downturns
You can’t guarantee investment returns and past performance is not a reliable indicator of future performance.
However, historically, markets have recovered following downturns. So, while you may be tempted to sell investments if they’ve fallen in value, sticking to their long-term plan makes sense for most investors. That’s because selling means your losses are realised and you lose the opportunity to potentially benefit from markets bouncing back.
4. A diversified portfolio could reduce the amount of volatility you experience
While headlines may state markets have fallen sharply, this doesn’t mean your portfolio will fall by the same amount.
Your portfolio should be diversified. This means it should hold a range of investment assets that cover different industries, locations, and risk profiles. While one part of your portfolio may suffer a sharp fall, gains or stability in another part can help balance this out. As a result, your investments may not be as negatively affected as you first think.
5. Downturns are part of investing
Downturns are nothing new for investors. Over the years, you’ve likely been affected by previous recessions or other outside factors that have influenced markets, and they will continue to do so in the future.
Remembering that volatility is something every investor experiences can help you stick to your long-term plan.
Do you have questions about your investments?
If you have questions about what the upcoming economic challenges could mean for your investments and whether your portfolio still suits your needs, please contact us.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.
Past performance is not a guide to future performance and should not be relied upon.
Approved by The Openwork Partnership on 14/02/2023.
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