This is also the first rule of investing but worth reaffirming. Different asset classes perform well or poorly at different times. If your portfolio is exposed to a single asset class – say, equities – its performance will follow the fortunes of only the equity market, and returns will be volatile. However, if your portfolio contains a selection of different asset classes, and is also spread across different countries and regions of the world, the different elements will perform differently – so if one is doing badly, the chances are another will do better and compensate for some of the downside.
With diversity in mind, perhaps you can start looking overseas for opportunities. A UK-focused portfolio is a sensible and conservative option for a UK-based investor. However, this strategy leaves you at the mercy of only domestic sentiment. Other areas of the world might offer a more positive outlook during this time, or could simply be better placed to help through a domestic downturn. You need to be aware of the additional risks involved with international markets but even a first step into developed, western economies could diversify some risk.
Your attitude during negative periods is as important as your portfolio’s structure. Economies cannot keep growing indefinitely - recessions are part of their nature and should be expected by investors at least every few years. Successful investors therefore tend to be pragmatic. They invest for the long term and expect that whilst there will be good times, there will also be some bad ones along the way. A short term downturn should therefore be prepared for in advance and not be seen as reason to panic.
Remember that economic data is backward looking. At the start of a slowdown, figures will continue to appear positive, perhaps contradicting our everyday experiences, as old data remains in the calculation. Similarly, once economic growth begins to recover, it will take a while to be fully reflected in the new data. Headlines that scream "worst figures for 30 years" confirm what we have just experienced but do not necessarily reflect the prospects for tomorrow. What they do, however, is fan the flames of investor uncertainty - and sell newspapers!
During a recession, it is very tempting to get out of the stock market and head for the safety of cash. However, this strategy can be risky. Stock markets are volatile so, just as they can fall quickly, they can also recover quickly, with no warning. If equities are the right asset class for you, moving out when you have already suffered a loss could mean missing out when they finally begin to recover. Moreover, inflation can impact the purchasing power of cash over time. You can be assured that you will not lose the capital value of money when invested in cash but it should not be considered entirely "risk-free"!
During recessions and stock market downturns, high quality, established companies tend to fair better than their newer or more debt laden peers. A tough environment separates the wheat from the chaff as struggling companies are forced to cut their dividends and release negative trading statements. They will not be immune to the effects but quality stocks could help you through the worst of the storm. It is also worth noting that, if everything is falling, it could actually provide an opportunity to pick up more quality stocks at relatively cheap prices.
'Recession' is commonly defined as two consecutive quarters of negative growth (in the Gross Domestic Product or GDP). Six months in the average lifetime of a portfolio is not long – and even if you take into account the negative behaviour of markets both in anticipation of and in the aftermath of such data, it is still only a short time compared with the 20 plus years over which we plan for our retirements. If your portfolio meets your personal criteria and is well diversified, a recession should not cause you to change plans: sometimes doing nothing is best.
Remember the saying 'If you can keep your head whilst all around you are losing theirs…'? Market downturns are a great example of when this applies. A fire drill is a good thing: the fire might never actually occur; however, even if the worst happens, at least you can be confident you have taken all the right precautions! The real secret is to make sure you plan your portfolio properly, with an expert, at the outset. Then, when a downturn strikes, you can stay calm and review with confidence - rather then be panicked into radical, unprofitable change.