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As a potential global economic recession looms what can you do to secure yourself in times of economic downturn?
Firstly lets begin with what an economic recession is and what the potential pitfalls are on this type of event. A recession occurs when there are two consecutive quarters of negative economic output. Generally economic recessions can last between two and eighteen months, whilst most average out at ten months.
During a recession we generally see a term known as a ”bear market” , which is a market cycle where a market falls by more than 20%. Most investment markets decline frightening investors of investing and thus fleeing to safe-haven investment assets such as cash which is generally deemed incredibly safe. Often during recession interest rates rise to help combat inflation, this in turn provides a cash investor with a higher interest return on their money, this however effects those with debt in a negative way meaning debtors pay more interest to service their debt.
The last significant recession was in 2008 which was caused by dramatic excess debt in the property market, while the 2001 recession was caused by an asset bubble in tech stocks. Therefore if we consider the past few years, an unexpected shock such as the COVID-19 pandemic, widespread enough to damage corporate profits and trigger job cuts, also can be responsible and this is the main reason for an upcoming economic recession in 2023.
When it comes to a recession and a bear market, it is vital to take a long term approach to your investments and to avoid being emotional when investments are down. Whilst there is never an exact moment to enter the market during these times, making use of cost-average investing via monthly deposits is key to make the most of these downturns in the market.
“It is critical to consult with your financial advisor and to make calculated decisions to not only create wealth but also to protect your financial wellbeing, to avoid bad debt and to ensure you are adequately prepared for various elements that could worsen the effect of a recession on your personal financial situation” says Pierre Van der Merwe, a financial advisor from South Africa.