With a current cost of living crisis and recession imminent, those in a fortunate enough position to have some disposable income to invest, will be wondering how to go about investing sensibly. You may be considering if it’s a good time to pile up cash or buy as many investments as possible, hopefully this post will help you decide on what works for you. Also feel free to read about why I quite like market crashes here.
Real vs fixed investments
One thing to consider is the type of asset to invest in. Fixed investments are things like bonds, which pay a fixed percentage each year, until they mature. Real investments tend to increase with inflation. They tend to be investments with more utility, such as a stock (providing a product / service) or property.
So invest in real assets, right?
It’s easy to say that we should invest in real assets during a recession with high inflation – however, another factor to consider here is interest rates. The central bank (Bank of England in the UK and the Federal Reserve in the US) has control of interest rates, with inflation being a key target for them. The common goal is often to keep inflation at a steady 2%. Generally, as they increase interest rates, this will decrease inflation, making them inversely correlated.
The complication here is, when interest rates rise, the cost of borrowing for the companies on the stock market (that very often have debt) increases. This squeezes profit margins and may therefore make them appear a less attractive investment, reducing their price.
We can see a similar effect on the property market, as interest rates rise, mortgage affordability decreases, meaning the average earner can’t afford the same property they could prior to the change in rates. This leads to a decrease in demand for property, and thus a decrease in prices.
For those that are homeowners with mortgages, the increased borrowing costs may lead to having to downsize their property / rent instead, and them listing the property for sale. This can increase the supply side, also reducing prices.
If everything is likely to go down – where should I invest my money, and how?
Property markets have started to slow, and stocks are down from their all-time highs. However, one thing to remember is that these are real assets. Therefore, over time, they will increase with inflation. The mistake a lot of people make is trying to time the market.
One strategy I like to use is to set up regular buys each month for the same amount, with this being the minimum I’d want to invest. Then – if prices are down significantly, I top this figure up. This gets me in the habit of buying when prices are low. One caveat to this method is when there has been a fundamental change in the stock that you’re buying (which is why it works best with broad market indices).
If things are just going down, why invest?
We find that following a market crash, prices tend to recover and bounce back quite quickly. By leaving your money uninvested, you’re relying on timing the market once more, which doesn’t seem to work out well in the long-run. A Forbes article reads:
‘In the last 40 years, for example, the best 10 days (out of more than 10,000) accounted for almost two-thirds of the stock market return for the entire period. In the last 20 years, the best 10 days accounted for 75%. You should always be invested because missing those days means that your returns will be much lower.’
The other thing to consider here is the value erosion of your legal tender to inflation, which I write about here.
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