Will we Survive a Recession?

These past couple of years have been tumultuous to say the least, and while the COVID conversation is slowly leaving the building, talk of recession is in the air. Many are wondering what this means for Australian investors. While it is not certain whether Australia will experience an official recession, it is common knowledge that recessions are a natural occurrence and part of a normal business cycle that eventually needs to run its course.

A recession may in fact happen for Australia, as the RBA will need to keep raising interest rates, in an effort to keep up with other countries doing so, bringing us into a potential recession. While recession is a scary word for some, recessions themselves actually make up a series of minor blips in our financial history. So what is your role as an investor, during talks of a recession? Let’s talk about what you can do in order to come out on the other side of a financial “blip” unscathed.

Recessions are painful, but expansions have been powerful

Sources: Capital Group, National Bureau of Economic Research, Refinitiv Datastream. Chart data is latest available as of 31/08/22 and shown on a logarithmic scale. The expansion that began in 2020 is still considered current as of 31/08/22 and is not included in the average expansion summary statistics. Since NBER announces recession start and end months, rather than exact dates, we have used month-end dates as a proxy for calculations of jobs added. Nearest quarter-end values used for GDP growth rates.

Keep Your Eyes on the Big Picture

Seasoned long-term investors know that investing requires solid research and data and a sense of calm and focus on the long game. Not only do recessions not last that long (historically speaking, from 2-18 months), at the end of the full length of a contraction in the market, returns can even come up positive, as strong shares can often rally the best during the latter stages of a recession. ^[1] You may have already heard the phrase “time in the market, not timing the market”. It is incredibly hard to pinpoint the start or end of a recession, thus reducing your chance at getting rich quick during times like these, through buying and selling at just the right time. All that to say, keeping calm and staying in the market throughout a recession and beyond will generally leave you financially strong and prospering as a result. This is not all to say that recessions are easy to live through, especially if you own your own business or have unstable employment. But knowing more about the nature of a recession will equip you to stay calm throughout unsteady financial times. Speaking with your financial planner to ensure that your budget is in order, your debt is under control and you have the best home loan to suit your situation, all count towards helping you weather a financial storm. Check in regularly with your financial advisor. In fact, now could be a good time to take a good look at your portfolio with your advisor, to ensure you have a mix of investments, like shares, property, and term deposits, to reduce any risks and maximise your returns during and towards the end of a recession. It is always great to have a solid plan at the beginning of your investment journey, so that when a recession does hit, you can revisit your plan with your advisor and ensure you are on the right track and get some perspective, in order for you to stay the course and come out strong.

Equities have typically peaked months before a recession, but can bounce back quickly

Past results are not a guarantee of future results. Investors cannot invest directly in an index. For illustrative purposes.

Sources: Capital Group, Federal Reserve Board, Haver Analytics, National Bureau of Economic Research, Standard & Poor’s. Data reflects the average of completed cycles from 1950 to 2021,
indexed to 100 at each cycle peak.

Practical Ways to Protect Your Finances During a Recession

For those of us who like to have practical steps in place to ensure we have cash set aside in time for a recession, you could start by working out how much you require to live off each month, then save about 2-3 months worth and put it in an interest earning savings account. This is a great way to have a safety fund ready for when you really need it. Once you have a safety net like this in place, speak to your financial planner to ascertain whether you are in a good position and time to begin investing. You can always pull out investment funds during a recession and put it back into your savings if you see an imminent recession, but if a recession has already occurred and you have investments in place, speak to your advisor and work out what you need to do to stay the course. It is also wise to check in with your superannuation fund to see what it is invested in. You might be able to adjust what your super is invested in, if a certain share is likely to crash during a recession. Check through your budget and your bank account, to see if there are some regular spendings, luxuries and subscriptions you can cut down on, to keep your financial life simple and your finances solid.

The economy is always moving in cycles and it is always vital to have a financial backup plan and a reasonable budget. If you are equipped with the right information and a good plan, you will leave yourself free to ride through a recession with hopefully not a lot of stress or collateral damage. To have a financial plan in place and some peace of mind during uncertain times, make an appointment to speak with a financial advisor at Elliot Watson on (02) 4038 1623.

The information within, including tax, does not consider your personal circumstances and is general advice only. It has been prepared without taking into account any of your individual objectives, financial solutions or needs. Before acting on this information you should consider its appropriateness, having regard to your own objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser.

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^[1] https://www.capitalgroup.com/advisor/insights/articles/guide-to-recessions.html