‘Inverted yield curve’ is a term which has been bandied around a lot in the media recently. That’s because the US is experiencing one right now and inversions of the yield curve are often viewed as an indicator that a recession is imminent. Every US recession since the 1950s has been preceded by an inverted yield curve although that doesn’t mean that recession is inevitable when one occurs.
If you don’t know what one is (and you won’t be alone in that), Investopedia defines an inverted yield curve as ‘an interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality.’ Put more simply, it means that it becomes cheaper for governments to borrow money for 10 years rather than two, which is not the usual way of things. It’s all pretty technical but if you want to read up on the inverted yield curves in more detail, take a look here.
Why has this all blown up now? Well in large part the risk of recession has been elevated by the ongoing trade war between China and the US which is sending economic shockwaves throughout the world. A recession is most often defined as two consecutive quarters of negative economic growth i.e. falling GDP for six months or more. It can play havoc with economies – people stop spending, businesses cut capital expenditure and stop hiring, unemployment rises, markets slump, house prices can tumble – and obviously all these have a knock-on effect on individuals and their nest eggs.
How should you deal with the fact that an impending recession could impact your financial planning? Well, here at Infinity we believe that for the vast majority of investors building and conserving wealth is about a considered approach over the long term. That means that, recession or no, the fundamental principles of investing remain the same. Here’s a reminder of what they are:
1. Careful asset allocation
That means selecting a portfolio which is diversified across different companies, industries, regions and asset classes. Often this can best be achieved by selecting a multi-asset portfolio where the hard work has already been done for you by professional investment managers who have access to in-depth research and who spend all day every day assessing the markets.
2. Invest according to your risk profile
Your tolerance to risk will depend on a number of factors including your personality type, your investment timeframe (often how close you are to retirement), your risk capital i.e. how much you can afford to lose and your investment objectives. At Infinity we take this point VERY seriously and use state-of-the-art tools to help ascertain each client’s level of risk tolerance so that their investments can be selected accordingly.
3. Periodic rebalancing
Of course you need to keep an eye on performance but that is best done periodically rather than on a day to day basis. It’s advisable to cut out all the media chatter about the hottest investments and stick to reviewing your portfolio a few times a year at most, as well as after major life events such as marriage, divorce or having a child. Periodically it may be necessary to rebalance your portfolio but too much tinkering is never a good thing (see point 4).
4. Don’t try to play the markets
‘Buy Low, sell high’ is an investment mantra which is very easy to understand but fiendishly difficult to achieve. One problem is that while it seems logical to follow the herd and start offloading shares which are falling in value because everyone else is selling, or buying the hottest stock which everyone is talking about, but by the time cues have filtered down to the mainstream media the horse has most likely already bolted and there’s a high chance of mis-timing. Warren Buffet advised going against the herd when he said ‘Be fearful when others are greedy and greedy when others are fearful’.
In addition, market timers risk becoming so hung up on finding the perfect moment to buy or sell that their investment decisions are dictated to by emotions leading to poor short-termist investment decisions which lose site of long term objectives. As well as being ill-vised, this is a very stressful approach and won’t do anything for your mental health.
And then there is the very real danger of missing out on any bounceback after shares have hit rock bottom. Markets are cyclical and troughs are frequently followed by peaks, which you are highly likely to miss out on when trying to time the markets. Another reason why buy and hold is often the best strategy.
5. Save regularly over the long term
Dollar cost averaging, which simply means purchasing a fixed amount of an asset on a regular basis, works as a strategy. It can be a particularly effective one during a recession as it means acquiring stocks while prices are low.
If thrills and excitement are what you are after from your investments then by all means chase fast returns. If, on the other hand, you are looking at building and creating wealth over the long term, following the rules above is a much safer strategy.
It can be hard to stick with a strategy such as this when everything seems to be going pear-shaped in a recession and during those times the support of a financial adviser can be invaluable in keeping you on the right track.
If you’d like support in implementing or sticking to a financial plan, our financial advisers throughout Asia would be delighted to help. Contact us so we can put you in touch with an experienced professional who is local to you.
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