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Some investment experts suggest that during times of recession, it can be best to withdraw your money from the stock markets altogether, and invest it elsewhere until the markets pick up again. This makes sense when stock market returns drop below interest rates – your money would grow faster sitting in the bank, at lower risk.

Shouldn’t investors just “stick it out”?

Though you might be tempted to just leave your share investments alone and wait for better days, a more active approach can see your money grow even during economic lows. If you’re more of a long-term investor and feel a resistance towards anything resembling trading, try not to be put off by the idea of moving your money in and out of the market. Due to the length of economic cycles, you’ll most likely only be required to take action about every 2 years.

That said, perhaps it is time for a new investment philosophy altogether. Jeff Siegel, Editor of Energy and Capital believes that “the days of “hands-off” investing and just overall financial complacency are over — at least, for anyone who has any intention of not living like a pauper for the next ten years. These days, it’s all about being proactive and nimble. It’s about taking profits any way you can, protecting every asset you own, and insulating yourself from the proverbial poop storm that’s hovering over us at this very moment.”

Is recession looming for South African markets?

PowerStocks’ SUPERmodel is currently giving signals that a South African recession is likely, though its probability and estimated time of arrival (vitally important information for any investor interested in protecting his or her capital) is only available to subscribers. Common sense agrees with the model’s signals, given the recession that is currently being experienced across much of Europe. Even if the recession takes longer to be felt on South African shores, it is good to be prepared and have a response plan in mind.

When to move your money out of the market

Perhaps the biggest key to success is knowing when to move your money out of the market. The earliest signals are given by technical analysis programmes, which use repeating historical economic cycles to predict future market upturns and downturns. Alternatively, you can subscribe to a financial research house such as PowerStocks Research and be included in their email updates, which will alert you when it is time to act. However, if you wait for the media to announce recession, you’ll most likely have already suffered significant losses, as well as lost opportunities.

Where to invest

There are three types of investment you can make with the money you have withdrawn from the markets: paying off your debt, keeping cash or investing in cash equivalents, and investing in government bonds. These options will most often provide better returns than simply holding the shares you have, while allowing a fair amount of liquidity so that you are easily able to get back into the market when things take a turn for the better.

Personal debt

This is not an option that readily springs to mind when thinking of investing, but paying off your debt is one place where returns are 100% guaranteed and there is no risk. Consider what you’ll save on paying that monthly interest. Paying money into your access bond on your home loan will allow you to save the interest until market conditions improve. For more on this topic, check out Nicholas van der Meer’s articles What would you do if we had another Great Depression? and Why being debt-free is the best investment you can make.

Cash or cash equivalents

• The bank

In a recession, interest rates are usually (but not always) higher than normal to put a brake on consumer spending. If this is the case, take advantage of the higher rates by investing your extra cash in an interest-bearing account. Investigate fixed deposits offered by your bank (e.g. a 32-day account), where your guaranteed returns increase as the term of the account lengthens. Usually you can choose between terms of anything from a few days to a few years.

• Foreign currencies

In a national recession, the value of the local currency is likely to decrease. Astute investors can avoid making a loss by purchasing higher value foreign currency.

Government bonds

Fixed-income investments are usually much lower in risk than investments in individual shares, and can be useful in times of recession. Investors wanting to shift out of the share market can buy bond-tracked exchange traded funds (ETFs), such as the local ZGOVI ETF. Like the index funds that track the share market (such as the SATRIX 40), these ETFs allow you to track the bond market without investing in it directly. They are very liquid, accessible even without large amounts of cash, and pay regular dividends. However, if you still want to hold the bonds directly, they are available through your broker – or even from the Post Office.

Proportions: how much should you put where?

Diversification or “not putting all your eggs in one basket” is a golden rule of investing, as it protects you from losing all your assets should disaster strike. Diversification doesn’t only apply to building a resilient share portfolio; it also applies to your assets in general.

Here are some handy guidelines to help you allocate the money you have withdrawn from the markets:

• Put a greater proportion into cash or cash equivalents if you think you might need access to a significant portion of your money in the near future, and if you don’t mind lower returns on your investment.
• Put a greater proportion of your money into bonds if you want to preserve your assets and are a mid- to long-term investor. Bonds are also good if you can cope with a little fluctuation in asset values, and if you require an income stream from your investments.

When to move your money back into the market

During recession, it is good to keep your eyes on the market for bargains even while you’ve cashed out. If you had R50 000 to invest in Anglo American PLC for example, wouldn’t you want purchase shares at R180 per share rather than R260 per share? Don’t lose out on potential gains out of fear, and make sure that not all of your cash is tied up elsewhere, so that you will be able to quickly take advantage of any good deals.
Once again, the best and earliest signals for re-entry into the stock market come from technical analysis programmes, or from investment research houses such as Powerstocks Research (who have designed their own technical analysis programmes). Their tips can put you well ahead of the game, and are more than worth the small monthly subscription fee.

Conclusion

If you plan ahead, listen to market signals from reliable sources, and allocate wisely, recessions can be the best investment opportunities of your lifetime.

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