3 of the best tips for weathering a recession
Depending on who you speak or listen to, South Africa is in a technical recession. There’s really nothing technical about a recession and investors should stick to the basics to protect their investment impetus and ability to generate wealth in these difficult times.
Recessions are unfortunately something we need to learn to live with and we need to structure and manage our investments accordingly. To cope with the inevitable volatility, regardless whether recession or boom, that characterises investment markets from me to me, you should always be appropriately diversified across asset classes, investment strategies and mandates so as to smooth the investment journey as much as possible.
A technical recession simply means that the SA economy has shrunk in size for two quarters in a row. This implies that companies are likely to make less profit from the South African economy and hence local share prices generally reflect this. While this most certainly negatively impacts certain assets, it also creates potentially lucrative opportunities for savvy investors to take advantage of during a recession.
Here are 3 of the best tips for weathering a recession:
1. Understand how asset classes perform during a recession.
Due to the diminished buying power in the economy, it is likely that there will also be less demand-driven price pressures in the economy, which tends to benefit fixed-income assets like cash and bonds. Growth assets like locally-oriented equities or property generally suffer in a recession. This is the beauty of having diversified exposure to a wide range of asset classes in your portfolio.
2. Diversify with off-shore asset exposure
From a timing perspective, the best me to invest offshore is actually when the rand is strong, and not weak – which is when many investors tend to panic and look offshore. That said, if you don’t have sufficient offshore exposure, now is as good a time as any to diversify portfolios internationally. Who knows where the Rand will be in 6 months!
3. Moenie panic!
A recession will affect almost everyone’s investment in some form or another, but the negative impact will be far more for those who panic and make short-term, rushed decisions. As human beings, dealing with uncertainty and volatility is never easy. However, the prudent investor response would be to acknowledge that volatility is part and parcel of the behaviour of investment markets and to accept volatility as part of the DNA of investing. Remain focused on the long-term investment goals and most importantly, don’t panic or behave irrationally, and stay invested.