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Recession looms?
There are steps that you can take to minimise losses, maximiSe gains, and grow your assets during a recession.
News
BY GRACE G MCLEAN  
January 29, 2023

Recession looms?

RUSSIA’S invasion of the Ukraine, the effects of the COVID-19 pandemic, high-interest rates, and reduction in investments were factors cited recently by the World Bank that could lead to a global recession this year.

At the same time, central banks locally and globally have hiked interest rates to counter high inflation, which resulted from increases in fuel and food prices.

The hike in interest rates is designed to mop up liquidity in the market and keep prices down. It makes borrowing more expensive, influencing consumers to spend less.

Private sector entities’ spending power is also affected. Credit cards, variable loans, and mortgages have become more expensive. Continuous hikes in interest rates can slow economic growth and lead to a recession.

However, investors, pre-retirees, and especially retirees should not panic or become disheartened. Economic growth is projected to pick up in 2024. What should you do now? There are steps that you can take to minimise losses, maximise gains, and grow your assets during a recession.

Be self-motivated and disciplined. For working adults, a recession provides an opportunity to save and build your emergency fund. The goal is to ensure that when emergencies happen such as loss of jobs, prolonged illness, or any unforeseen significant expenditure, you are in a position to cover the cost instead of increasing debt to cover expenses. Having three to six months of living expenses in a high-interest savings account can prove very beneficial during a recession as well as after. Begin where you. Save regularly. Take baby steps, and after you have built up your emergency fund, seek to pay off debts. The less debt you have, the more funds will be available to save and invest for short-term and long-term goals. Remember that life is filled with uncertainties, so be prepared. A recession is temporary. Therefore, don’t sabotage your long-term goals due to short-term experiences. There is a tendency for some investors to panic when the stock market is in decline as they view the temporary loss as being permanent. Please remember, the loss is only on paper and can become permanent, based on the decisions you make or the action you take because you are worried about losing your money. A permanent loss is only realised when you make withdrawals or sell your shares during a market decline. Invest in the stock market when prices are low. You are accumulating assets at cheap prices for the long term A sale is on. Invest in great companies at sale prices. Keep investing during a stock market decline.

Benefit from dollar cost averaging

This term refers to investing fixed amounts on a regular basis in an investment regardless of the price. It reduces your cost of investing over time, allowing you to buy more assets or shares at lower price. Because market declines are temporary you will reap the rewards as soon as the market recovers. The years of growth will outnumber the years of poor performance. Whether you invest in stocks or bonds, a recession provides the opportunity for investors to benefit from compound interest, which is simply earning interest on interest and principal by saving regularly for the long term. Also, automatically reinvest dividends earned from your investment and stay invested for the long term.

During a recession invest in or increase investments in pooled funds or mutual funds thereby minimising risks vs investing in individual stocks. As funds are invested in different asset classes, such as stocks, and bonds, and investment is spread across various industries, market risks are minimised. Some investors and retirees have liquidated their equity accounts for the safety of bonds. Bonds perform well during a recession. In Jamaica, there has been a high demand for bonds with attractive interest rates. These bonds provide fixed income periodically. Invest in companies that are reputable. Avoid junk bonds — high-interest rate bonds issued by companies that are experiencing financial challenges. Benefit from diversification, but please note that having funds in different institutions is not complete diversification. For diversification to be meaningful investors should ensure funds are invested in different asset classes, covering different industries, such as technology, energy, finance, consumer staples, and health care that respond differently to changes in the market. Build a recession-proof portfolio.

A recession occurs when an economy experiences two consecutive quarters of low growth. It’s a temporary slowdown in economic growth and is measured by a fall in a country’s gross domestic product (GDP) within two successive quarters. Gross domestic product is a monetary measure of the total value of all goods and services produced by a country over a period of time, usually one year.

Recessions tend to occur every five to 10 years. It’s a natural feature of the economic landscape. This is one reason why investors and consumers should have long-term investments.

Grace G McLean is financial advisor at BPM Financial Limited. Contact: gmclean@bpmfinancial or visit the website: www.bpmfinancial.com. She is also a podcaster for Living Above Self. E-mail her at livingaboveself@gmail.com

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