5 Principles to Help Investors Survive an Economic Recession
Marissa Mah, B.Comm., LL.B., LL.M. - May 01, 2023
By staying calm, diversifying, investing in quality companies, keeping cash on hand, and seeking professional advice, investors are much better positioned to survive a recession, and potentially emerge with even greater wealth.
If you follow the news, it is no surprise to hear that we are currently facing numerous sources of uncertainty in our global economy. And when uncertainties begin to rise, fears of economic slowing usually follow. It is certainly understandable, then, that many financial experts and observers are warning of the possibility of an impending economic recession.
As an investor, it is incredibly important to understand this feature of the economic cycle before making decisions about your money… because failing to do so can lead to devastating financial outcomes.
Let’s take a closer look at this topic and review a few important principles that can help investors survive an economic recession.
What is an economic recession?
An economic recession is a period of economic decline that lasts for at least two consecutive quarters (i.e., six months). During this time, businesses and consumers cut back on spending, leading to a reduction in economic activity that often causes widespread job losses, a decline in consumer confidence, and a decrease in stock prices. Recessions are a normal part of the economic cycle and are thought to typically occur every 5-10 years.
There are many factors that can influence the start of an economic recession, including:
- Financial crises, such as the failure of major banking institutions
- Disruptions to business supply chains (think: factories being forced to close due to public health concerns, in a country known for its manufacturing exports)
- Rising inflation that forces central banks to increase interest rates, in an attempt to reignin the costs of living and doing business
- Destabilizing world events, such as war and geopolitical conflict
… Sound familiar?
Although there have been many recessions in the past – and there will be many more in the future – these periods are often challenging for investors to navigate. When the wider economy slows, markets react to this, often leading to significant fluctuations in the value of certain investments. However, if investors are able to keep a few key principles in mind, they can not only survive but thrive during a recession.
Principle #1: Stay Calm and Avoid Emotional Decisions
During a recession, it's easy to get caught up in the panic and make emotional decisions. However, it's important to stay calm and avoid acting impulsively. Remember: the stock market is volatile, and it's normal for prices to fluctuate. Building wealth is a slow and steady process, so investors are wise to stay focused on their long-term financial goals and avoid making short-term decisions based on market movements.
Principle #2: Diversify
Diversification is a key strategy for managing risk during a recession. By having investments across different asset classes, industries, and geographies, the impact of market fluctuations may be lessened. Experts often recommend investing in a mix of stocks, bonds, and other asset classes that align with an individual investor’s risk tolerance and investment goals.
Principle #3: Invest in Quality Companies
During a recession, it is more important than ever to invest in quality companies that have strong fundamentals and a solid track record of performance. These are the types of companies that can be expected to continue providing valuable products and services regardless of the wider economic conditions. Such companies usually have a strong balance sheet, generate consistent cash flow, and have a history of paying dividends. Quality companies are the most likely to weather a recession and emerge stronger on the other side.
Principles #4: Keep Cash on Hand
Having extra cash on hand during a recession can allow an investor to take advantage of investment opportunities that may arise during the chaos, such as buying stock in quality companies that may be temporarily undervalued. In other words: having cash can allow an investor to buy valuable assets while they are ‘on discount’, with the expectation that those investments will probably increase in value once the economy rebounds.
Principle #5: Seek Professional Advice
When it comes to any crisis in a person’s life – whether it be a health problem, a legal matter, or even our car unexpectedly breaking down – seeking the help of a trusted professional is rarely bad advice. The same is, of course, true for economic crises: working with an investment advisor during a recession can mean the difference between making devastating financial decisions and emerging from the economic downturn with even more wealth. Experienced investment advisors have often helped their clients survive and thrive during multiple recessions in the past, so they are well-positioned to provide guidance during future times of uncertainty.
The key to success
Whether an economic recession is on the horizon is anyone’s guess, but bracing for and weathering one can be challenging for investors. By staying calm, diversifying, investing in quality companies, keeping cash on hand, and seeking professional advice, investors are much better positioned to survive a recession, and potentially emerge with even greater wealth. Overall, investing is a long-term game, and the key to success is discipline, patience, and a well-thought-out plan.
If you want to learn more about investing during a recession – or at any other time in the economic cycle – we would love to talk to you.