Skip to main content

Making better investment decisions during a recession

Date: 26 July 2022

With the cost of living rising, changes in the economy have been hard to ignore.

Some experts are even quoted as saying that certain developed market economies may soon enter a recession – meaning “a period of declining economic performance across an economy that lasts for several months”.

It all sounds pretty gloomy; so, what can investors do?

Good news to guide investors through

For those who remember previous periods of economic decline, David Henry, investment manager at Quilter Cheviot, offers some hope.

“A lot of scars remain from the Great Recession from the financial crisis nearly 15 years ago, but the regulations that came into place over subsequent years forcing banks to hold more capital leave us less likely to see a similar scene repeat,” Henry says. “The financial system looks to be in a better place to weather the next slowdown.”

When things seem bad, they’re probably already getting better

It's also important to note that lessons from previous recessions help investors make better decisions this time around. As the table below shows, Henry points out that pain in the stock market historically ends before a recession does. In addition, we don’t always know we are in a recession until months after the fact (and, even then, economic figures are often revised later). This means that investors who cash in their investments or try to ‘time the market’ can quite often miss out on the best days in the stock market – whereas successful investors, who weather the decline and recovery, may enjoy better growth over the long term (typically 5 to 10 years or more).

“The market represents an amalgamation of global investors’ views about the future – not what is happening today. If you wait for the end of a recession before switching back to stocks, you have tended to miss out on a substantial chunk of the market’s recovery.”

End date of previous recessions

Date of equity market bottom

















Equity Market Performance is MSCI World in USD terms

Recessions are US Recessions

Source: Quilter Cheviot

There are opportunities too – but proceed with caution

When market prices dip, we also see investment opportunities, but investors should be cautious about trying to pick stocks themselves, without the advice and guidance of a professional.

Henry acknowledges that, although bonds tend to do better than stocks during a recession, understanding when to buy (through the benefit of considerable investment knowledge and experience) is crucial, and easy to get wrong.

It may also make sense to try to prioritise investing in companies which sell the goods and services that people desperately want or need. However, he notes that this is a tough job because it has been too long since we have been through a prolonged economic slowdown to test what consumers actually prioritise.

“Companies have a real balance to strike at the moment. To what extent can they pass on rising costs to their consumers without seeing a fall in sales? Looking at my own monthly outgoings and the shift to spending on subscription type services is obvious. We are about to find out how sticky these subscriptions are, both at the consumer and corporate level. During the next twelve months or so it will become obvious which companies actually have a competitive advantage, and which were being swept along by an era of cheap money.”

The bottom line

For investors, trying to time the market, pick investment opportunities, or move their money into cash could lead to less favourable results over the long term.

Placing your investments in the hands of an expert – and leaving your money invested over the long term, if you are able to – could be the wisest decision to make at this time.

As with all investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not get back all the capital originally invested.