Since the horrors experienced in the last recession, much of the world has lived fearing a re-do that has scared them out of investing. Type the word “recession” into Google and there are about 111 million search results. That’s an increase of about 40 million in the last few weeks. Limit that to the last 24 hours and there are still 15 pages of articles and news bulletins on the subject. So, what are they saying? And, should we be listening?
What’s Causing the Panic?
Unsurprisingly, the focus at the moment seems to be the potential effects of the coronavirus. We’re being told that the virus could cost the world £760bn of lost income and take the world into recession. Have we seen this before? Of course, countless times. Most recently Ebola and SARS caused the same fears, but the markets traded up after both of these health scares and the MSCI World Index shows that markets have typically turned positive just a month after the outbreak.
But even before coronavirus, we heard headlines like “Is now the worst ever time to invest?” And “World’s biggest economies are heading for a recession”. And then there are the climate change fears: “If the market doesn’t do a better job of accounting for climate, we could have a recession — the likes of which we’ve never seen before”.
With all this, you’d be forgiven for steering clear of investing. But the truth is, rumours of the next recession have been swirling in the mainstream media since, well, the last recession was barely over. The stock market recovered from the 2008 recession in 2013 and yet the scare tactics started as early as 2012. So, what were they saying? How wrong were they? And what could you have missed out on by listening?
- September 2012: “The Coming Obama ‘Recession’ of 2013”
- June 2015: “6 Factors that Point to a Global Recession in 2016”
- September 2015: “Global recession in next two years is ‘most likely’ scenario, says economist”
Their fears may have been fair, but were they right? Nope. And if you had listened and avoided investing you would have lost on major gains, as the graph shows. In fact, since the last recession, we have seen the longest sustained gains in history.
What If They Get It Right?
Even if a recession does occur, investing just before the market turns downwards isn’t always a bad thing. We have already seen in our previous article how investing in the S&P 500 just prior to the last recession could have seen you more than double your money, assuming you had stayed invested for 10 years.
So will the media get it right this time? Well, we can’t say for sure, but here are some things to consider if the worst does happen:
Economic Recessions Don’t Last as Long as Economic Expansions.
Since 1990, the average recession has lasted 15 months. The average expansion, however, lasted 48 months. Essentially, the pain is short term and every downturn in history has resulted in an upturn. Want even better news for your investments? The stock market tends to see a much more dramatic expansion than the economy. Take the time between 2009 and 2019. The economy expanded by 20% but the markets grew by a whopping 300%.
Buy When Everyone Else Is Selling
As Warren Buffet said, be “fearful when others are greedy and greedy when others are fearful”. What does this mean? Tough economic times are huge buying opportunities aka, your investments are on sale, and who doesn’t love a sale?!
The truth is, “almost nobody gets timing right, and missing upturns is as risky as avoiding falls.” And, as history has shown us, a market upturn is always around the corner. Even more good news… markets often reach higher highs than they did before the recession. Just take a look at the image below showing how stock portfolios performed after some of the major stock market crashes of the last 30+ years:
Start Now, Hold Long and Diversify
No matter when you start investing, a few simple rules will always apply. Diversify your investments, hold them for the long term and avoid high charges that can eat away at your gains.
At the end of the day, time in the market is more important than timing the market. Investing regularly and keeping a long-term mindset will prevent you from making rash decisions every time you see a negative headline and will mean that you gain from lower prices during market dips. Meanwhile, spreading your investments across asset classes will mean that you can benefit from the markets going up while also protecting yourself if they move downward.
So, What Should I Do?
Ignore your instincts. It’s human nature to follow the crowd but you’re often in for the bigger win if you do just the opposite, at least as far as the markets are concerned. The trick is to be logical and base your decisions on facts, not ‘what if’ scenarios.
Your chances of a positive return, in the long run, are much higher if you follow the fundamental rules of investing:
- Don’t try to time the market
- Buy when the market is down, it may feel counterintuitive, but just remember “It’s on sale!”
- Have a long-term mindset.
- Diversify your investments: Investing in assets that don’t always move in the same direction in the same circumstances means that you’re less likely to feel harsh dips when they occur.
As for when to start investing? Clear your debts and build yourself an emergency fund. Done both of those? Great, then the answer is now. Spikes and dips will happen, but investing is a long-term game and history shows us that markets always move up in the long-term. Get started, your future self won’t regret it.
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When investing your capital is at risk. ikigai is not a bank.
The value of your portfolio with ikigai can go down as well as up and you may get back less than you invested. Returns are not guaranteed and any historical returns, expected returns , or probability projections referenced on our website may not reflect actual future performances. You should seek financial advice if you are unsure about investing.
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