Kiwis are becoming a nation of investors. Yep, the majority of us invest now even though a large number of us may not necessarily think of ourselves as investors. According to the FMA Investor Confidence Survey, in 2022, 82% of Kiwis aged 18 or over had at least one investment, the most common one at the time being KiwiSaver (64%). 

We seem pretty happy to set ‘n’ forget our KiwiSaver, hoping it builds meaningful wealth towards living our best life at retirement, or the deposit for a first home. Yet when it comes to how to invest during a recession, many of us are scratching our heads. 

Let’s look at things to consider if you’re thinking about investing during a recession, and some commonly used long-term investing strategies.

Dig into the definition of recession here

Investing during a recession

Stats NZ announced in June 2023 that New Zealand is in a recession. And if you’re asking ‘should I invest during a recession?’, if you have money invested in KiwiSaver, you possibly already are. So for many of us, the best way forward may be to keep calm and invest on. This is because recessions are likely to follow us throughout our lifetime, occurring every five or 10 years as a normal part of the economic cycle.

If you joined KiwiSaver when it launched in July 2007, you’ve already had money invested through New Zealand and US recessions. But if you joined the large numbers of new investors who embraced online investing platforms to access share markets (like Hatch!) and started building an investment portfolio during the pandemic, it’s possible you’ve never invested outside of KiwiSaver through a recession before. 

It’s important to note here, that if you invest in the US share markets, at the time of writing this article the US is currently not in a recession.

Advantages of investing through a recession

If you’re an investor, or are thinking about getting started, when a recession lands it can be an opportunity to understand investing basics and know your personal investing goals. And the first rung on that ladder may be thinking about investing for the long term. 

Some of the advantages of investing through a recession are taking a long term view of your investments and the potential benefits of compounding returns. Looking far into the future may seem overwhelming, so we break down simple long term investing strategies below to help guide you towards new habits.

The benefits of compounding returns

When you adopt a buy and hold mentality to investing, aka the ‘lazy smart’ way to invest, you could be setting yourself up to benefit from what Einstein called the ‘eighth wonder of the world’: compounding growth or compounding returns. 

How do compounding returns work?

When you invest in share markets, your money starts to grow over time like a snowball rolling down the mountain collecting more snow as it rolls. Zooming out, based on the historical average return for the US share markets since the 1950s of 10% a year, whatever your initial investment, that money had the potential to grow 10% on average each year even while experiencing normal cyclical economic retractions and rebounds along the way.  

For example: If you’d invested $1,000 in 2013 in the S&P 500 and didn’t touch it for 10 years, it would have been worth around $3,229 in 2022 - that’s a return of $2,229 - more than triple your initial $1,000 investment! And that money on the S&P 500 grew over those 10 years in spite of events like the February 2020 stock market crash that had the three worst point drops in US history (which was followed swiftly in April 2020 by a market-wide rebound). See our compounding growth chart here.

But isn’t investing risky?

Share markets go through market cycles and are naturally volatile, so all investment carries risk with or without recessions. And while at the time of writing this the US has so far avoided a recession, some US share market-listed companies are working hard to be prepared for economic slowdown (some are even labour hoarding). 

But just like we swap our gumboots for jandals when the seasons change from winter to spring, historically, share market lows eventually give way to business optimism. Challenges get addressed, issues get fixed. New jobs get created and many companies return to profit. And according to a Stanford and MIT study, the ramping up of AI may even be contributing to a boost in business productivity.

How should I invest during a recession?

Many popular investing strategies remain the same whatever ups or downs global economies and share markets are facing. So it may be better to school up on long term investment strategies that can help get you through any economic cycle. 

Forbes Advisor suggests that investors should ‘plan ahead’ and be prepared ‘for an economic downturn, even if in the US the next recession is forecast to be mild’. Forbes speaks with analysts and covers strategies, from looking into dividend-paying stocks to actively managed funds.

Common investing strategies during a recession 

Long term investing strategies during a recession can help you ride out any market bumps along the way. Some of them include:

Auto-investing

If you’re paid regularly - weekly, fortnightly, monthly - an effective way to grow a portfolio slowly over time may be to auto-invest a fixed amount every time you’re paid. Auto-investing is setting a recurring deposit from your bank account into your investment account timed to go out after each pay day, and creating a regular market order to buy shares in companies and/or exchange traded funds. Auto-investing can be an effective set and forget way to get over the ‘when do I start investing?’ hurdle too, and thinking that you need a lump sum to start. It is a popular investing strategy in a recession that can help you squirrel away a small amount each pay day, create a new behaviour, and potentially take advantage of compounding returns. 

Dollar-cost averaging

Not even share market traders with their fine-tuned ability to read a company’s earnings and access to fancy-schmancy data can predict the future of shares. So when it comes to timing the market vs time in the market, for regular investors dollar-cost averaging requires very little effort and can take the pressure off having to follow share prices and guess the best time to invest. Dollar-cost averaging is investing the same dollar amount in a company or fund at regular intervals over a long period of time. The benefit of dollar-cost averaging over time removes any emotion from investing, can lower risks from being overexposed to market volatility and can lower the average cost per share. 

Diversification

Historically, over years and years, share markets have gone up. But not every company or industry has gone up alongside. Plenty have dropped in value as well.  Diversification is a popular investing strategy that can help investors spread their investments (and risk!) across a range of companies, ETFs, index funds and industries. The theory being that while businesses and industries come and go (Berkshire Hathaway began life as a textile manufacturing company), all of them plummeting all at once is very unlikely. 

Research, research, research!

Investing GOAT Warren Buffett once said ‘Never invest in a business you cannot understand’. At Hatch, we believe one of the most valuable assets you have is your ability to learn how to research shares, and this can start with understanding a few basic investing metrics, from your EPS to your p/e ratios. And while some investors have been swept away by hype, when you do your research into the companies behind the stock ticker, you could avoid this investing mistake! 

Avoid emotional investing

At the Berkshire Hathaway AGM in May, 2023, long time investor Warren Buffett told investors, ‘you definitely want to be a no-emotion person when making an investment or business decision’. According to Barclays, it’s natural for investors to cycle through emotions, such as ‘optimism, excitement, denial, fear and apathy’. We delve into how to avoid emotional investing here, because when it comes to our relationship with money, it’s complicated! Probably the best thing you can do to support your well being through turbulent economic times is to return to your original reason for investing, don’t panic, think long term, and let compounding growth do its work.

What can you do when share markets dip?

What to invest in during a recession?

As for where to put your money during a recession, a smart way to start could be taking a leaf from Warren Buffett’s playbook and look into businesses that are more likely to come out on top through a recession - those that have quality brands with strong competitive advantages, plenty of cash reserves, strong balance sheets and sustained revenue, a leadership team that delivers on a vision and knows how to streamline costs during economic headwinds. 

What are ‘repression proof’ stocks?

Because no one can predict the future, a more logical way to think about choosing companies or stocks to invest in during the tough times, is asking ‘what do people buy during a recession?’ which may include healthcare, utilities and consumer staples. MoneyHub’s list of recession-proof industries also includes household ‘essentials’ like telcos, takeaways and precious metals.

Forbes’ plan for ‘how to invest during a recession’ highlights that investors could even emerge from recession ‘stronger’, saying: ‘For investors who buy in at a discount, that means your future profit potential goes through the roof. When everyone else is selling out of fear, you have an opportunity to invest now and cash out later.’

What happens if you don’t invest during a recession?

Not everyone is in a position to invest during a recession. Fortunately there is plenty you can do to feel empowered as you wait out any turbulence. Recession could be time to take stock of your budget (and switch off a few of those creeping streaming subscriptions services you no longer watch!), and a solid place to start may be Sorted’s 6 steps to get your money sorted. It might also be an opportunity to learn more about investing using popular investing resources, or learn investing basics in our free Getting Started Course. Then, when the economic winds change, you’re perfectly positioned to make fresh decisions for your money.

You’re probably a better investor than you think!

A golden rule for investors during any market or economic cycle is steady your ship and keep cool. If you’re an investor already, focus on why you started investing in the first place and your long term goals. Even if things feel wobbly right now, history shows us that economies have rebounded before, and everything you experience and learn today will help you become a more confident investor (or first time investor!) in the years to come.

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