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How to manage your finances in a recession – a financial adviser’s view

With talks of a recession hitting headlines, here's a financial adviser’s view on how to manage your finances in a recession.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

Part of being a financial adviser is breaking down the headlines into plain English. So, we’ve asked Senior Investment Adviser, Didi Ager, to explain what a recession is, what it means for you, and how to keep calm when it comes to your personal finances.

This article isn’t personal advice though. If you’re not sure whether an investment is right for you, ask for financial advice.

What is a recession?

A recession is when economic growth is negative over a three-month period, twice in a row.

Much like investments and stock markets in general, economies don’t always move upwards in straight lines. They go up and down over time. Downturns happen, as do expansions and recoveries.

What causes a recession?

There’s no playbook that says exactly what causes a recession, how long it will last, or how deep it will be. Thinking about the recessions I’ve experienced in my lifetime, causes have included oil price shocks, financial panic, rapid changes in economic expectations, a health crisis, tight labour markets and wage-price spirals.

The cause of each recession will differ, but the outcome has always been the same – recovery.

Should I worry about a recession?

Recessions don’t come out of nowhere. If you think back to that definition, there will be economic slowdown for months before a recession. So, it’s something we’ve already experienced before now.

My question is, if we coped in the months before we started labelling it a recession, should we start to worry now we see it hitting the headlines?

Psychologically, as soon as we see the word ‘recession’, emotions get in the way. Investors start to worry, and their behaviour is swayed, in part, by the headlines.

The real change lately has been people’s attitude towards the economy. And this in turn could cause things to spiral even more.

Investing – a test of mind over matter

Should I worry about my investments?

It can be hard to tune out all the negative headlines and not be spooked, particularly if it coincides with seeing investment values fall. But relying solely on the media to inform your investment decisions isn’t often a recipe for success.

Good businesses rarely become bad overnight, and some businesses thrive in recessions – it can be a good time to pick up companies that are undervalued if you’re happy with the risks.

3 shares that could thrive in a recession

Lots of investors like leaving their money in the hands of expert fund managers instead of having to pick the shares themselves. Fund managers have seen recessions before, and they manage the underlying investments for you. They’ll make the day-to-day decisions and can find opportunities that you might miss if you weren’t invested.

History has shown us that through the various challenges that come along – war, recession, and political uncertainty – investing has been one of the best ways to grow your money and help shelter it from inflation.

Think in decades, not days. Markets have always got through recessions and volatility but also be mindful past performance is not a guide to the future.

Keep in mind that investments and any income they produce can go up and down in value, and there are no guarantees. You could get back less than you put in.

What can I do?

What’s right for you depends on your situation and circumstances.

However, here are some top tips for managing your investments, and financial worries, during turbulent times.

  • Focus on what you can control – fixating on what you can’t control can make you feel helpless and despondent.
  • Resist the urge to check your portfolio every five minutes – it only reinforces your worries and doesn’t do much good. Check it every week or month instead.
  • Look beyond the scary headlines – try to avoid devouring every article that says the same thing. Instead, get a balance and focus on new information when it comes to light.
  • Resist making emotional decisions in the heat of the moment – decisions made based on negative feelings of stress, anxiety and fear can be very different to those based on an informed consideration of the big picture.
  • Remember solid investing principles – the benefits of pound cost averaging, sticking to your time horizons and goals, and investing for the long term can still serve you well.

Compounding – your most powerful investing tool

How a financial adviser can help in uncertain times

It’s not all about global issues and economies. It’s about you and your own money.

Part of what I do as an adviser is look at my client’s financial situation in the context of their goals and obligations. Telling my clients to ‘stay invested and wait it out’ isn’t entirely helpful when they need money for things like school fees.

That’s why I try to understand my clients’ cash flow needs, and where there are pressure points. We can then work together and build a financial plan that can help them achieve their various goals.

There might be a trade-off, but I let my clients know all their options so they can make well-informed decisions.

It all starts with a call to our helpdesk

If you need the reassurance of a financial adviser, the first step is to book a call back with our advisory helpdesk.

They’ll talk you through how advice works, and the charges involved. Then if you want to take advice, they can put you in touch with an adviser.

Our advisory helpdesk aren't advisers. We can only provide advice to UK residents. If you’re resident overseas, unfortunately we’re unable to advise you.

What did you think of this article?

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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