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?