Fluctuations in the economy could influence the value of your investments and it’s easy to panic during times of hardship.

You might be especially concerned as the Guardian reports that the UK fell into a technical recession after Gross Domestic Product (GDP) fell by 0.3% in the last quarter of 2023.

This followed a fall of 0.1% in the third quarter of the year, meaning that the economy shrank in two successive quarters and the country fell into a recession.

Fortunately, the Office for National Statistics (ONS) estimates that the economy grew by 0.2% in January 2024, so the recession was short-lived.

Still, an economic downturn could affect your investment portfolio and you might need to take steps to protect your wealth while the economy recovers. It could be useful to prepare for future recessions too.

Read on to learn some important dos and don’ts of investing during a recession.

Don’t: Panic sell

When the economy is in recession, you may see the value of your investments fall. Some investors panic and may decide to sell their investments to avoid further losses.

However, panic-selling could mean that you turn a theoretical loss into a real one. Additionally, you wouldn’t give your investments time to recover in the future if and when the markets bounce back, as is often the case.

Take the 2008 financial crash, for example. According to the London Stock Exchange (LSE), the FTSE 100 fell by 35.5% between 6 April 2008 and 6 April 2009.

If you had panicked and sold your investments during this period, you may have seen significant losses.

Yet, if you took a long-term approach and held investments until the markets recovered, you would likely have seen overall growth.

Indeed, the LSE reports that by 6 April 2013, the markets had recovered and the FTSE 100 showed growth of 5.33% since 6 April 2008. By 6 April 2018, that increased to 15.92%.

These figures demonstrate that, while a recession may cause a temporary dip in the value of your investments, the markets still usually grow in the long term. This is true even after a large financial upset such as the 2008 financial crisis.

The current recession is far less severe than it was in 2008, so it’s important to avoid letting panic guide your decisions. Instead, it may be more beneficial to stick to your current financial plan and wait for the markets to recover.

Do: Diversify your investments

Your investment portfolio may be especially vulnerable to a recession if you hold most of your investments in UK markets.

Typically, a recession hits some industries, sectors, or areas worse than others. As a result, certain countries or regions might be more affected if their economy relies more heavily on those industries.

For example, China was less affected by the 2008 financial crisis as their financial sector didn’t trade in derivatives to the extent that the US and European economies did. As a result, they didn’t experience a “credit crunch” like western economies.

However, the most recent UK recession was primarily caused by a slowdown in consumer spending during the cost of living crisis. Consequently, most areas of the economy were likely to be affected. This could mean that any UK investments, regardless of the type of company, might fall in value.

That’s why it may be important to diversify your portfolio and invest in different countries.

Distinct economies may also see periods of growth and contraction depending on global market trends. For example, emerging economies might grow faster than established ones.

Figures from the International Monetary Fund (IMF) show that the real GDP – that is, the increase in output adjusted for inflation – of the US economy increased by 2.5% in 2023 and Spain saw growth of 2.4%.

Yet, in the same year, the UK economy only grew by 0.5% and the German economy shrank by 0.3%.

Meanwhile, India – an emerging economy – grew by 6.7%.

So, if most of your investments were concentrated in UK markets, you may have seen relatively low growth. However, if you held some of your wealth in the US or India, this might’ve increased your returns.

More importantly, during a recession, gains from economies that are performing well could help you offset losses from elsewhere.

If you are concerned that your portfolio isn’t well diversified, you may want to consider making some changes.

Don’t: Try to time the market

Some investors may see a recession as an opportunity to time the market. It may be tempting to hold off new investments and attempt to predict when the markets will reach their bottom. The hope is that investing right before the markets bounce back will maximise returns.

Yet, according to CNBC, the market’s best days tend to follow closely after its worst. Consequently, if you refrain from investing when markets are falling, you could miss out on the recovery when the economy turns around, unless you time the market perfectly.

This is incredibly unlikely as nobody can see the future and your chances of accurately predicting the movements of the economy and the stock market are very slim.

That’s why it may be better to continue investing as you normally would and trust in your long-term financial plan.

Do: Leverage the power of dividends

Dividends are a company’s profits, divided up and paid to shareholders. These dividend payments can provide a regular income from your investments, or you could reinvest them and purchase more shares.

During a period of recession when your investments may be less likely to increase in value, reinvesting dividends could help you generate compound returns and grow your portfolio.

Dividends could also give you some protection against falling prices.

For instance, according to Barclays, if you purchased a share for £50 that pays a £3 dividend in the first year that you then reinvest, and the value of the share then decreased by 5%, your investment would be worth £50.50.

So, even though the price of the share itself has fallen, your overall investment hasn’t dropped in value because of the dividend payment.

Bear in mind that your investments could still fall in value if the markets drop significantly, but regular dividend payments may help to dampen this effect.

That said, it’s important to choose your investments carefully as a slow economy may harm the profits of many companies and dividends could be low and even entirely suspended as a result. Fortunately, larger companies with international revenue streams could still pay healthy dividends.

We can give you guidance if you want to explore dividend-paying investment options.

Get in touch

If you are concerned about how a recession might affect your investment portfolio, we can help.

Please contact us by emailing hello@ardentuk.com or calling 01904 655 330.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.