How to protect your investments ahead of a possible recession

    26 August 2020

    Depression or ‘V’ shaped recovery? Be brave and buy, or sell up and get prepped for the collapse of civilisation? As ever, there are as many arguments on one side as there are on the other, as many reasons for investors to be bullish as there are to be bearish.

    In retrospect it will all seem so obvious: yes, of course, the beginning of the autumn of 2020 heralded …. But what? The trouble is there are no genuine clairvoyants, and if there were it would be the best-paying profession on Earth. A few years ago I undertook an paper exercise: I worked out how rich I would be had I started with £1000 and managed to pick out and invest that  in what turned out to be the best-performing share the following day, reinvesting all proceeds, and to repeat that for a month. The result was unthinkable wealth.

    It is possible sometimes to be right – on one of those 31 days I did indeed succeed, for real, in picking out the best-performing share of the following day.   But it was only one day. After a month my personal selection of shares had managed to shrink my original £1000 into £800 (and this was ignoring dealing costs). We can’t even get it right with macro-trends. It is possible to get it right some of the time – but then, like Neil Woodford, start to get things hopelessly wrong. Even if you had read the signs early that Covid 19 could devastate the global economy, would you have guess that stock markets would have bottomed out after just a month and then turned around in one of the strongest rebounds in history, even as Covid 19 was raging?

    So, does a vaccine neutralise Covid 19 as an economic threat and markets rebound even further, or does a deadly second wave throw us back into the depths of economic despair? Alternatively, does a vaccine kill off Covid 19 yet markets crash for some other reason, or a second deadly wave happen but still fail to halt the exuberance in tech stocks? No-one knows.

    There is really only one certain way to avoid disaster in the current climate – indeed in any climate — and that is, as always, to spread your risk. If you had a bit of everything at the beginning of 2020 your gains on US tech stocks would have made up for your losses on airlines, travel companies and many retailers. Your gains in gold would have made up for your losses in banks. Your cash would have remained steady and nothing too nasty would have happened to your property – unless it was on a floodplain in the Wye or Severn valleys.

    The way I think of investing is of a large roulette wheel – but one where the odds are stacked in your favour rather than against you.  Cover your bets in the casino and ultimately the casino will end up taking your money. Do the same on the stockmarket, on the other hand, and over the long term economic growth should deliver you the profit: more companies should grow than shrink, the world will get richer and some of that wealth should flow into your pockets.

    That does pre-suppose, however, that the global economy continues to grow. I would like to think that human societies have a natural tendency towards economic growth – that, apart from eco-extremists, we all aspire to a better life, that we are all inclined to work towards it. I have to say that the way that governments have suspended their economies in recent months, and the ease with which the public has accepted this, has led me to question this assumption. Even so, I suspect that in the longer term economies will resume their tendency towards growth and that investors – assuming they have spread their risk – will be reasonably guaranteed to get rich slowly.