We’re into our second month of the nationwide lockdown, and most of us are feeling the financial stress of these uncertain times. But, rather than panicking, writer Angelique Ruzicka suggests 10 ways you can strategically invest during a recession. When it comes to your savings, it’s important to stay calm and get the best advice possible.
We hear from these experts:
- Anet Ahern, CEO, PSG Asset Management
- Cornette van Zyl, investment analyst and assistant portfolio manager, ABSA Asset Management
- Carmen Mpelwane, investment analyst at ABSA Asset Management
- Rita Cool, financial planner at Alexander Forbes
How can you invest safely during a recession?
1. Be stocks and shares savvy
If you already have investments, never sell at the bottom of the market, unless you really have to. And try not to panic – the markets should recover over time.
“Even in a recession there are going to be companies that still make money and you invest in shares not because they are the flavour of the month but because they will give you growth over time,” says Rita.
2. Want to invest during a recession?
A recession or downturn in markets may present an opportunity. It’s a bit like buying shares in a sale. So, it is actually a better time to buy than during a bull market (when the value of shares goes up) when shares are at their peak. Typically, stock markets are forward looking (about 12-18 months ahead of the economy), so share prices are likely to start to rise before the recession is over.
3. Invest via a fund
Unit trusts are always a good option. This is because they spread the risk over a range of shares – rather than you trying to pick individual shares yourself which can take time and because it takes a lot of research.
4. Go to an independent financial advisor
If you’re not feeling confident about your choice of fund or savings account, it’s always best to go to a financial advisor who will tell you whether you’re on track with your savings goals. They will either take a commission or you can pay an upfront charge.
“A professional financial advisor will consider your specific risk profile and your personal needs to help you choose a sustainable financial solution. I always use the following analogy: if you need heart surgery, you would go and see a heart surgeon. Why do people treat their finances any different?” points out Cornette.
Find an advisor through the Financial Planning Institute.
5. Don’t make any rash decisions
Avoid anything you don’t understand and always seek advice. Remember, it’s hard to second guess what is going to happen to shares in the future. So, don’t try to wait for shares to hit a low point – nobody knows when that will be.
It’s better to invest in a recession than be paralysed by indecision and then not benefit from the upturn when it happens.
6. Don’t rely solely on past performance
Tracker funds (which rise or fall in line with a stock market index such as the JSE Ltd) are relatively cheap and can be useful. But if you want to try and beat an index over time, opt for an actively managed fund as the fund manager will pick companies that are expected to do well rather than just following the market.
7. Drip feed your cash into the fund
You can put away R500 a month with a regular savings plan, e.g. a unit trust, or put in R5 000 or R10 000 lump sums over the course of three or six months.
“The decision depends on the availability of cash to invest. It would be prudent to ensure that investing occurs on a continuous basis especially where tax benefits can be derived from investing,” says Carmen.
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8. Be careful of funds that offer protection
Offering protection on your money may not in itself be a bad thing, especially if markets are volatile (they go up and down unpredictably). But what does it cost to get this type of protection? Although they can be useful, protection costs can really eat into your returns.
9. Diversifying is your ‘free lunch’ to investing
Diversifying essentially means you should invest in different things. In other words, don’t put your eggs all in one basket. “Investment portfolios should be well diversified in terms of the blend of assets in which they are invested, the range of companies they are exposed to, the sectors in which such companies operate and also the geographies to which the investor is exposed. A well-diversified investment portfolio should be able to withstand downward trends in local markets or unexpected corporate failures,” says Anet.
10. Times of panic give rise to opportunities
During a recession or downturn, many companies become undervalued due to the negative investor sentiment. Basically, people tend to panic and put their money elsewhere. This is where you should seize the moment and buy what people are throwing away.
“The thing to keep in mind about quality assets is that trading prices will usually return to ‘pre-panic’ levels eventually, so buying good companies and other assets when prices are depressed can lead to considerable success further down the line. It’s about sticking to your strategy, avoiding getting caught up in emotion, and remaining focused on your long-term goal,” says Anet.
Compiled by Features Editor Stephanie van der Plank