Posted on: 17th August 2016
Last week brought about confirmation that the Bank of England would make its biggest cut to interest rates so far – down to just 0.25% from the prior 0.50%. This alone isn’t a definite indication of a recession, but it’s definitely a case of thin ice.
As far as the National Institute of Economic and Social Research is concerned, the likelihood of the British economy facing recession again can be called on a coin-flip – they see it as a 50/50 chance. Not only could recession become a reality by the end of 2017, but between now and then they’re also predicting severe economic slowdown.
The question being asked by investors therefore – what to do? Is the best advice to start selling shares like mad as seems to be the trend right now? Perhaps not, as while the outlook may be rather bleak, it’s worth remembering that recessions don’t stick around forever. Which in turn means that if you’re investing with the long-term in mind, it’s important not to view a recession as an end-of- days scenario.
Quite to the contrary in fact – what better opportunity to snap up shares for a comparatively low price?
Consider for a moment the banking crash in 2008, which triggered the last recession. The FTSE slump was painful to say the least, but just over a year later, shares were once again performing strongly as they were prior to the crash. Which in turn means that instead of selling shares in a blind panic like most did, savvy investors picked up depressed shares by the boatload and made huge profits by the end of 2009.
It may have taken until 2013 for the peak of 2007 to be reached once again, but during this time those that held the fort (so to speak) enjoyed a tasty 3% dividend income annually, while keeping their capital nice and safe. By contrast, ripping the cash out and putting it in a savings account to keep it ‘safe’ wouldn’t have proved nearly as profitable.
What Does It All Mean?
Incredible as it may be, the simple fact of the matter is that proactive investors who completely ignored the last recession and carried on as normal came out far better off than they would have been, had there never been a stock market crash or recession. Or to put it another way, long-term investors with their eye on the future can actually benefit from recessions…which they have, and will continue to do so.
Analysts don’t see the recession following Brexit being quite as influential or significant as the last one, even if it takes a decade for economic growth to get back on track. Which in turn means the turbulence won’t be quite as bad, which further emphasises the point of not making any rash decisions on the spur of the moment.
The advice? It’s simple really – try not to panic, carry on as normal and be sure to keep both eyes peeled for the kinds of bargain buys you really should be snapping up. If you do, there’s a good chance you’ll look back ten years from now with a totally different view on recessions than the masses in general.