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The do’s and don’ts of investing when economy slows and recession looms

The Singapore economy struggled in the second quarter and the outlook has been downgraded.

The do’s and don’ts of investing when economy slows and recession looms
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The Singapore economy struggled in the second quarter and the outlook has been downgraded.

While the stock market has remained somewhat resilient, a recession could tip it further downwards.

Investors can benefit from preparing for a slowing economy or even a recession.

THE ECONOMIC OUTLOOK

The big news has indeed been that Singapore’s GDP shrank by 3.3 per cent from the first quarter to the second quarter this year, with year-on-year growth of 1.1 per cent the slowest in a decade.

Growth in the construction and services sectors have been especially hard-hit, suggesting that businesses and consumers are both becoming more cautious.

The decade-low growth has led to concerns that Singapore may fall into a recession.

Moreover, securities firm Maybank Kim Eng noted that the Singapore market (STI) fell 5.9 per cent in August, as investors fled risky assets amid an escalation in the US-China trade war and an inversion in the US yield curve, which has been a reliable predictor of recessions.

While the STI is still up more than 1 per cent for the year, including dividends, the risk of further declines is significant.    

HOW TO RESPOND

While recessions happen periodically and are not unusual, investment advisory firm Motley Fool said that the individual impacts of a recession can be longer-lasting and may cause permanent financial damage to individuals who are not prepared for the short-term implications or cannot quickly get back on their feet.

The two things that will have the biggest impact on consumers’ ability to emerge unscathed are to build up emergency savings and pay off high-interest debt.

From an investment perspective, financial management firm Vanguard Australia suggests that investors focus on saving more, spending less and controlling investment costs.

Investors should also adhere to “time-tested principles” such as maintaining a long-term focus, having a disciplined asset allocation and conducting periodic portfolio rebalances.

By ensuring that their assets are allocated across a variety of sectors, including both stocks and bonds, investors can take a somewhat more conservative stance and still benefit when the market moves up.

What investors should not do is to sell low and buy high.

A key risk, Motley Fool says, is to panic and sell stocks or mutual funds.

While stock markets have lost as much as 30 per cent in recent recessions, investors need to realise that large drops are completely normal.

Selling stocks rarely results in savvy "buying at the bottom" for most people — and the stock market starts to recover before people are ready to reinvest, so they miss out on the market's recovery.

By taking a "buy and hold" approach rather than selling, investors can avoid the mistake of selling at the worst time and missing out on the market's recovery.

Portfolio management firm Betterment said that during every stock market drop, you will hear explanations about why the market sold off and how you can protect yourself from losses. “If you put that advice to work, you’re likely to do more harm than good by locking in losses. Making decisions in the heat of the moment rarely goes well. Instead, write out a downturn plan, and stick to it.”

THE RIGHT PORTFOLIO

Your investment strategy should be one that has been proven to stand the test of time and economic cycles, Singapore personal finance website Dollars and Sense suggests.

During a downturn, long-term investors can benefit from a well-diversified portfolio spread across asset classes, sectors and regions.

Index funds tied to the United States S&P 500 or the Dow Jones indices, for instance, have survived economic downturns.

“Diversify your portfolio across cash, CPF, bonds, shares and properties,” Dollars and Sense advises.

Again, though, experts warn that timing the market so that you sell before shares drop and buy back in at the right time is nearly impossible.

Instead, reassess whether you are still comfortable with your investments, particularly in riskier areas of the market that you may have moved into recently to increase returns, and decide whether you need to reallocate for the longer term.

The asset allocation may vary depending on your stage in life and risk profile.

If you’re comfortable taking more risk or are younger and can take a longer-term perspective for your investments, for example, you may prefer a portfolio with a higher percentage of share from different sectors.

If you are risk-averse or close to retirement, on the other hand, a lower-risk asset allocation that also generates income may be preferable.

More conservative investors may want to consider putting a portion of their portfolio in low-volatility investments such as bonds. While bonds may be a low-return asset in the longer term, they can be more stable during a downturn

Investors may also use market crashes to pick up good assets at low prices.

By setting aside cash in your investing account, you can take advantage of low prices when the market drops.

To avoid missing out by not having enough cash available, consider reducing extravagances and spending only on things you need rather than extras, so you can build up cash.

Risk-taking investors who buy shares when prices plunge and hold them until the market recovers can sell them at a profit. 

While what will happen with investments is uncertain, preparing for a slowdown or recession can position your investment portfolio well for the future.

Related topics

economy recession stock market investors

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