File image: IOL
File image: IOL

An investment strategy for a recession

By Supplied Time of article published Sep 18, 2018

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JOHANNESBURG - South Africa plunged into a recession with an unexpected 0.7percent contraction in the second quarter of the year.

This despite expectations from many economists that it would narrowly miss a recession. But what does the recession mean for investors?

Here is a simple investment strategy from Lance Solms, the managing director of Itransact Investment Platform, to prepare you for the recession:

* Do not panic or make knee-jerk decisions. Speak to your financial adviser first.

* Maintain your debit orders on your investment accounts. This powerful strategy will result in you acquiring additional units at much cheaper prices (because of the falling market) and profiting when the units/shares rise in value again.

* Do not sell your investments if you don't have too. Once you sell, you realise an actual loss. If you stay invested during a recession you effectively only suffer a “paper loss” during the time it takes to recover. 

If you are worried about the fund/s you are in, you can switch to alternative funds that may perform better during a recession. 

There are three switch strategies you may consider:

1.Switch to dividend-paying exchange traded funds (ETFs). If you are going to hold ETFs during a recession, the best ones to own are from established, large-cap companies with strong balance sheets and cash flows. Not only do these companies do much better during economic downturns than companies carrying a lot of debt with poor cash flows, but they are also more likely to pay dividends. For investors, dividends serve a few purposes. First, if a company has a long history of paying and increasing dividends, you can have more peace of mind that it is financially sound and can weather any economic environment. Second, dividends provide a return cushion. Even as share prices decline, you still receive a return on your investment. It is for these reasons that dividend ETFs tend to outperform non-dividend ETFs during market downturns.

2.Switch to consumer staples, such as industrial ETFs that own food, pharmaceutical, telephone, health and hygiene and tobacco.

3.Switch to international ETFs - this counteracts the expected poor returns from domestic markets and poor currency.

The best way to be prepared for any downturn (and upturn, for that matter) is to be fully diversified across all the major asset classes at all times. This ensures that your portfolio is always positioned to deal with rising and falling markets. The best way to achieve this is to own a multi-asset index-tracking fund. 

- Supplied


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