What does the term “Recession” actually mean for you? by Kyle Bishop

By August 26, 2020October 15th, 2020ELEVATION BLOG

We are all aware of the daunting term “Recession”, but what does it actually mean for you?

What exactly is a Recession?

In normal times a country’s economy grows, people on average become slightly richer as the value of goods and services it produces increase (in a perfect world). Economies typically go through cycles of four different states. One of these states is known as a recession and typically follows on from an economic boom. A Recession is the length of a time that a country, region or the world is shrinking as opposed to growing. Between April and June, the UK Economy reportedly shrunk by 20.40% compared to the first three months of the year. The GDP (Gross Domestic Product, i.e. the total value of goods and services produced in the country) has dropped to levels not seen since 2003.

The Bank of England have said that the UK economic slump will be less severe than expected, but the recovery will take longer. The Office of National Statistics (ONS) has reportedthat the economy grew in June by 8.70% which may suggest a rapid rebound – for now.

How have the markets reacted in previous recessions?

Below is a table from Vanguard, which highlights in previous years what has caused previous recessions. This also gives us an insight on how the markets have bounced back after a recession. It is particularly interesting to note that the sustained periods of positive markets/growing economies (in red) are far more extended than those downturns/recessions (in black).

Why does Volatility = Opportunity?

As Warren Buffett once quoted, “The true investor welcomes volatility”.

Volatility simply put is the measure of how much an asset increases or decreases in value. For example, cash does not suffer much from volatility whereas stocks and shares are highly volatile and sensitive to economic movements.

When volatility sets in it is important to focus on the bright side to help overcome your investment fears. During Volatile times, stocks and shares are usually higher or lower than their ‘typical’ average and, if you are an optimist, you may potentially see this as a good time to buy when the prices drop substantially. This will mean more units/shares for a given price. It is also important to avoid herd mentality during uncertain times. In behavioural finance, it is common investors will follow and copy what other investors are doing thinking that, because everyone else is doing it, it must be correct. A prime example of this was a long continuous run of people buying tech shares leading up to the turn of the millennium. As it turned out they were vastly overvalued and the bubble soon burst sending the Nasdaq stock exchange tumbling by 78%.

How can an IFA help you in a recession?

While a recession is a cause for concern, working with a financial adviser can help you plan ahead and play a vital role when it comes to achieving your financial objectives. During a recession your Investments and Retirement Accounts will be the most talked about, we would recommend making proactive changes rather than reactive changes. There is no way to “ Recession-Proof” your assets when a recession hits. A key part of this is saving/making money when times are good and avoiding losses where possible when times are bad. Asset Allocation plays a key part of how well your investments are performing by reducing risk through investment diversification.

An IFA can help you position your portfolio risk adequately in order to make optimum returns in good markets and protect on the downside during the tougher times. Rebalancing your portfolio at the right times will ensure you are in the best possible investment position as the markets move. Working with a Financial Adviser will give you piece of mind knowing that future market volatility should not affect your ability to achieve your financial goals.

Recessions are part of the economic cycle and whilst they bring plenty of negatives with them, should not be seen as your investment enemy but more a time to recalibrate your financial planning and refresh your investment allocations.

Now that we are in a recession, why not take advantage of a review with one of our advisers.
Get in touch with us to find out more.