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Recession: Time for investors to go their own way?

Recession: Time for investors to go their own way?

8 October 2020|Investing, Latest Posts

Recession: Time for investors to go their own way?
Recession: Time for investors to go their own way?

The uncertainty of Covid-19 has sent shockwaves through many industries, leading to heightened job insecurity and crippling investor confidence. Instead of accepting near-negligible returns from Government bonds and other standard savings accounts, however, some investors are showing that they are willing to go their own way. 

News that the UK entered the deepest recession on record in August hasdented investor confidence; this has been compounded by the realisation that the furlough scheme, which has protected so many people’s incomes during the pandemic, can’t continue forever. In an uncertain climate, with economic output shrinking and growing stock market volatility, people are unsure how to invest their money for the best. Should they bet on cheap FTSE 100 stocks or put their money in a fixed-rate savings account? 

Up until recently, the conventional strategy when it comes to investing has always been to spread risk by maintaining a diversified portfolio. However, with the yield on some Government bonds hitting an all-time low and National Savings & Investments slashing rates, investors are more willing to improvise their own solutions.  

With interest rates likely to remain low in the short to medium term, some are showing an interest in actively managing their investments, choosing products that match their own needs by offering the right balance of risk and reward. Investing in commodities, including precious metals, has become an attractive prospect for some of these go-it-alone investors – offering an opportunity to invest in ‘safe haven’ asset classes, which have been delivering healthy returns over a sustained period of time. As a result, demand for gold investments has increased strongly in 2020. 

While the general consensus is to avoid high-risk stocks and shares during times of economic uncertainty, there has been a push from some popular trading apps to promote the ‘opportunity during a crisis’ theme to individual investors. This time-bound message can be dangerous, however, positioning investment as a form of gambling and encouraging casual investors to go beyond their comfort zone, which could have worrying financial consequences. It is essential for both new and experienced investors to avoid using platforms that promote ‘winning’ through investment, rather than trading a methodical and tested system. 

Overall, stocks are considered to be a riskier investment than bonds, therefore, a market where stocks are outperforming bonds is said to be a ‘risk-on’ environment. Alternatively, when stocks become volatile and preservation is more important than growth, investors tend to seek out safe-havens in bonds or gold, where the environment is said to be ‘risk-off’.  

Recently, there has been a seismic shift in attitudes to investment security. More people are choosing to place their trust in commodities, such as gold, in order to preserve their wealth and de-risk their portfolios as far as possible. For those with liquid funds, there are opportunities to transfer funds into wealth preservation instruments such as gold, silver, property and, more recently, bitcoin. Instead of simply looking for exposure to gold by investment in ETFs, a growing number of investors are considering physical gold, as it sits in physical form outside the current monetary system and is consequently protected against counter-party risk.  

Regardless of an individual’s preferred investment approach, comparative research into past trends is crucial and can provide useful data of how certain markets and industries performed during earlier economic recessions. It is also sensible to consult an independent adviser before making important investment decisions. Even if investments fall in value, investors shouldn’t panic as history suggests that they will be restored over time so a long-term approach should be taken. Following a recession there is often a recovery phase, which means maintaining some element of liquidity would be wise and could enable investors to move quickly when the time is right.  

Despite current levels of uncertainty, there is an opportunity for new and existing investors to invest in gold, whilst still taking account of their own individual risk sensibilities. However, it is more important than ever for investors to consider all their investment options carefully, based on a clear understanding of the whole marketplace, to meet their long-term goals.   

By Shahid Munir, co-founder of Minted, an investment platform which allows individuals to buy and sell gold bullion.