Categories
Savings and Investments

Five tips for investing during a recession

About a month ago I took the leap and made my first investment. Investing during a recession is difficult at the best of times. It’s even harder now because the recession has been caused by a global pandemic, which is unprecedented, and no one knows how it is going to play out in the long run.

When I opened my account, I thought I was already behind and should’ve started years ago, particularly as I spend so much time writing about finance! But, having spoken to friends since then and reminded myself I’m still in my early (ish!) twenties, I’ve realised I’m not actually behind where I ‘should’ be and just getting started is the important thing.

While there is no set age where you ‘should’ be investing, time in the market is your greatest strength. Even the best investment managers struggle to compete with the wonders of compound interest. Therefore, it’s nearly always better to get started earlier rather than later.

Having started myself very recently, I thought I’d share my five top tips for investing during these unprecedented times.

This post will cover:

  • The wider economic situation
  • Exploring your options
  • The benefits of dividends
  • Avoiding day trading
  • Having fun!

It’s important to note that this does not constitute personal advice and if you’re not sure whether an investment or savings account is right for you please seek professional financial advice.

Don’t fixate on the macro-economic situation

Markets have cycles and will go through good and bad periods over the years, whether you’re investing during a recession or not. In a perfect world, the stock market would continually move upwards in value, but in reality, it fluctuates greatly.

Because of this, there is no ‘right’ time to start investing, so don’t be put off by the current economic situation. Instead, consider whether it is the right time for you personally – everyone’s circumstances are different. Like all financial decisions, you shouldn’t feel pressured just because someone else is doing it.

If you decide now is a good time for you to get started, you should be prepared to accept that your investments may fall in value before they grow again. It’s likely the market hasn’t bottomed out yet. This is ok, because you’re looking to hold investments for the medium to long term, so in the end it will balance out.

While the market is suffering, there is a strong argument to say it is a really good time to start investing. Stocks are cheaper and you’ll be able to buy more shares with the same amount of money, increasing your potential for future returns.

Explore your options

There are so many different accounts and types of investment vehicles available. While it can be good to start simply, as you grow in confidence , you can look at other options.

As I mentioned in my previous post, most high street banks offer some form of investing option. This can be a good starting point, but the choices are somewhat limited, especially when you’re investing relatively small sums.

There are so many different options out there if you’re looking to invest. Currently, robo advisers like Nutmeg and Wealthify are soaring in popularity in the UK. These platforms are designed to be straightforward and user friendly. Their fees are also a lot lower than a lot of traditional banks or investment firms because of their lower costs and lack of human advice. 

These are definitely worth looking into if you want a lower cost option. However, they’re relatively new and untested, so do your research before committing large sums of money. Researching different types of investment vehicles will also be beneficial, but I will cover this in more detail in a future post.

Focus on dividends

Whichever way you look at it, returns are likely to be lower, if not negative at the moment. When investing during a recession, you can make up for this in dividends.

If you’re not aware, dividends are a distribution of a corporation’s profits to its shareholders. Logically, if a firm’s share price falls their profits may have fallen too. But this doesn’t mean there won’t be a dividend payment. In fact, a lot of firms are scared to cut their dividend payments as this could signal the firm is struggling and cause investors to sell their shares.

When looking for dividend stocks, you must do your research. Not all firms pay dividends in the same way and some payments are minimal. Additionally, at the start of the crisis a lot of major banks came under pressure to cut dividend payments and most obliged – presumably trying to garner greater public sympathy than they did during the 2007 Global Financial Crisis.

Check which firms are paying dividends to avoid being disappointed when the cheque never arrives.

Don’t get sucked into day trading

You may hear people talk about red and green days – in simple terms this refers to whether the market has overall lost value (red) or gained value (green).

Now more than ever, when the markets are extremely volatile and you’re investing during a recession, there will be large fluctuations day to day and there will be plenty of red days. Understandably, this can make people panic and many will want to sell at the first sign of a drop.

Please don’t do this. Trading day to day will just consume significant amounts of your time and probably leave you worse off.

Remember, investments are designed to be held for the long term, so focus on your bigger goals and ride the waves of a volatile stock market. If possible, try to avoid looking at your account every day. Trust the process and wait for your monthly or quarterly statements.

Have fun with it

There’s a lot of information to take in and it can feel pretty overwhelming at times. It does need to be taken seriously – after all it’s your hard-earned cash that’s at risk. But, it can also be an enjoyable experience.

There will be good and bad months, but hopefully you’ll always be making progress. Having a clear goal can help you stay focused on the bigger picture. That said, there’s no harm in celebrating your wins, however big or small. Perhaps have something in your wish list you’ll treat yourself to when you receive your first dividend payment or hit your target returns.

Avoid investing more than you can afford to lose. This will remove a lot of the stress from the process and make it a much more enjoyable process. You’re in it for the long haul, so there’s no rush to invest as much as possible in one go. Start with even £20 a month and let compound interest work its magic. In 10 years you’ll be amazed with the value of this small investment.

If you found this post interesting, please like it and share across social media or send it to your friends. I’d also love to hear your thoughts and experiences about investing, so please do leave a comment! What are your thoughts on investing during a recession?

By The Twenty Percent

Hi I'm Katie and I use my blog to help young people take control of their personal finances.

37 replies on “Five tips for investing during a recession”

I think that it’s great you’ve started investing in your early twenties! It’s more important to start sooner even if it’s with smaller amounts than later with larger amounts… you have the wonder of compound interest working in your favor.

I totally agree with you about not getting sucked into day trading. There is a difference between investing and trading (gambling). Unfortunately many don’t distinguish between the two and chase after the “quick buck” rather than slowly building up a wealth portfolio over the long run and end up getting burnt as a result.

I like that you ended the post with have fun with it. Investing when done correctly should be a pleasant experience and individuals who invest should always be self educating so that they can make informed decisions that best benefits their investment goals.

The most important thing is that you finally got started. One of the advantages of starting early is that you have time to ride out the eventual ups and downs of market volatility and take advantage market fluctuations on down trends to pick up your favorite stocks on sale…;)

Hi Katie. What a great post!

I think now is (probably, he quickly adds!) a good time to invest. As the great Warren Buffet says “Be fearful when others are greedy .., and be greedy when others are fearful.” – there are a lot of fearful investors about at the moment.

As others have said, I fully agree with avoiding the Day Trading scene. And combining that with your compounding point let’s me wheel out another cliche “It’s not timing the market that is important – it’s time in the market.”

Well done for starting your pension now – you’ll be so glad that you did when you approach retirement.

Congrats on your first investment! Don’t worry about starting “late”, I think all of us in the personal finance community feels that way. I started investing in my early 20’s and wish I had started in my teens haha

Thanks for sharing other robots investors! I’m based out of the US, so this is my first time hearing about Nutmeg and Wealthify. Something to look into for sure! Have you heard of Acorns? That one is pretty popular out here!

Thanks for sharing Katie!

Small amounts is a great way to get started and use compound interest in your favor. The myth of needing a lot of money to start investing needs to be eradicated. In the modern fintech age, anyone can invest…:)

This is a great post… I’ve been really thinking about getting into investing recently to try make the most out of my savings, but have no clue how to start. This has really helped 🙂 xx

I haven’t started investing yet but I would really love to start soon! I just retweeted this so I can reference for when I start. Thank you for sharing xxx

Congratulations on your first investment. You’re right, markets have cycles and the main element of investing is long-term commitment before you see rewards. If it’s any comfort, I made my first investment (property) right in the heat of the financial crisis! That little house is still climbing up in value. If I’d let all the doom-and-gloomers stop me from investing, I’d probably still be in debt and asset-less now. All the best!

This was super useful to read especially with the pandemic going on. I kind of wish I invested in stocks earlier too but I’ve got to think less of the past and more on what I can do now. I defs will have a look at company dividend payments though.

thesydneysider.com

Some great tips here. I’m currently studying a Business Management degree with investment as part of the modules so looking forward to start utilising these tips to aid my experience!

Paige // Paige Eades

I am so excited that for the first time since I’ve been a SAHM (2.5 yrs) I am able to make monthly contributions to my Roth IRA! It’s only $50 a month, but it’s $50 more than I’ve been doing!

“When I opened my account, I thought I was already behind and should’ve started years ago, particularly as I spend so much time writing about finance!”

Reminds me of this proverb:

“The best time to plant a tree was 20 years ago. The second best time is now.”

What’d you actually wind up investing in? Hopefully a widely diversified index fund. 🙂

Cheers to getting started!

I don’t have the privilege of doing full on investing, but I do have a micro investing app that I use. I can’t add to the balance right now but I made sure to not panic during all of this and I’ve let things settle down. I’m now just receiving dividends on occasion and waiting for my unemployment to come to an end so I can keep adding to my balance.

XO Steph
shortstuffblog.com

I love micro investment apps! Fintech is eliminating the old school ideology that you need a lot of money to start investing. Just adding a few bucks here and there to your portfolio will add up over time.

Since you’re currently unemployed, if you don’t need the dividends to live off of, consider reinvesting them. Just keep positive, your situation will improve.

Congrats on starting your investing journey!

Definitely some good pearls of information in this post!

My favorite tip is the part about having fun. I have also seen people get the dear-in-the headlights look due to being overwhelmed when first learning about investing. A simple change in mindset would allow more people to take part in the biggest wealth building tool there is!

Looking forward to more great content 🙂

Excellent tips. The point about day trading is a good one. If professional money managers don’t try to time the market, why would the average person be able to do it? The best thing to do is align your strategy with your goals and stay the course. If your goals haven’t changed, there’s no need to revisit your investments during volatile markets.

Lots of a good advice in here. Avoiding day trading is a wise statement. In the US, the capital gains tax can eat up your profit margin.

It’s interesting to learn about UK robo-advisors. Acorns is popular in the US, but their fee is pretty high if you compare to just making you own investments. I’d be interested in the fee schedules of the UK robo-advisors.

You’ve got some great tips here Katie! You’re definitely right that there’s never a good time to invest – and if you ever have to announce the ‘best’ time, it’s 5 years ago.

I think that you’ve made a good point by telling people not to get sucked into day trading (I don’t dare guess the market) and to enjoy it.

Really, you can only learn by practicing so it’s best to get involved!

Great post!

A good way to learn among friends or other young adults might be starting an Investment Club.

And the Dividend Yield is a great stat when looking to buy dividend stocks, comparing the dividend paid to the actual stock price. It’ll tell you how much dividends you can buy per dollar or pound and then compare that stat to other dividend stock yields.

Leave a Reply