Recession lessons

Last week, Liz Truss announced energy bill support for consumers and businesses. She said that the energy price cap will be fixed at £2,500 a year from 1 October 2022. The Prime Minister confirmed an equivalent guarantee for businesses for six months but there's some doubt as to when this starts. This is better news for consumers and businesses, but the future is still uncertain and it looks like a tough winter ahead. 

In August, the Bank of England predicted that Britain will enter a recession in the fourth quarter of 2022. This is unlikely to be over by Christmas because the Bank added: “Output is projected to fall in each quarter from 2022 Q4 to 2023 Q4 and growth thereafter is very weak by historical standards, reflecting the significant adverse impact of sharp rises in global energy prices on UK household real incomes.”

How can investors hope to survive the storm ahead? While the past is not necessarily a guide to the future, it is only fair to point out that many of us have coped with several stock market shocks which seemed terrible at the time and even, believe it or not, prospered despite these dismal experiences.

The first crash I remember as a City reporter came on Black Monday, October 19, 1987, when the FTSE 100 fell by about 10% and then by another 10% the next day. The bursting of the technology, media and telecommunications (TMT) bubble at the start of this millennium hurt me more, because I had more invested. The financial crisis that became global when Lehman Brothers went bust in 2008 was another bruising experience. Most recently, coronavirus lockdowns temporarily closed swathes of the economy and caused share prices to crash in 2020.

Without wishing to sound smug, it is only fair to say that while many people panicked during these stock market shocks, I was one of the few commentators to point out that the only certainty of selling after share prices have fallen is that you will turn paper losses into real ones.

I didn’t sell into any of the setbacks listed above and, instead, continued to accumulate shares on the principle that the first step toward making a profit is often to buy low.

That wasn’t as difficult as it sounds because I have never been a short-term speculator and, instead, I have always been a long-term investor with clear-cut objectives that included buying my house in London, my beloved old wooden boat and the cottage on the coast I am sitting in now. Nor is there anything exceptional about my experience of stock market investment.

Every year, the Barclays Equity Gilt Study reviews returns from various assets since 1899 and shows how risky short-term speculation is, compared to long-term wealth accumulation. Specifically, anyone who bought shares reflecting the changing composition of the London Stock Exchange during that century and more but could only hold them for two consecutive years had a one-in-three probability of doing worse than if they kept the money in cash.

However, if they held on for any period of five consecutive years, there was a three-in-four probability of shares beating cash. If investors held for a full decade, the probability of shareholders doing best was nearer nine-in-ten.

Those odds always seem good enough to me - and presumably do for most pension funds, too, because very few hold most of their assets in cash. Another explanation for equities’ tendency to outperform is that shareholders own most of the businesses who sell goods and services to create long-term economic growth, despite short-term setbacks.

Even so, the risk of capital loss is real and a tried-and-tested way to reduce that is to avoid having too many eggs in one basket. Investment companies offer a convenient and cost-effective way to diminish risk by diversification and several have done so for more than a century. I currently own shares in 20 of them.

Investment companies focussed overseas enable me to gain exposure to economies and markets that trade while I am asleep, such as my first ten-bagger, JPMorgan Indian (stock market ticker: JII), Vietnam Enterprise Investments (VEIL) and BlackRock Latin American (BRLA).

Specialist investment companies give me professionally-managed exposure to sectors where I know next to nothing, such as Worldwide Healthcare (WWH) - one of my top 10 holdings by value - or Polar Capital Technology (PCT), currently just outside my top 10.

All the above aim primarily for capital growth but investment companies can also sustain shareholders’ income when other equities cut or cancel dividends. For example, while 52% of Britain’s biggest businesses listed in the FTSE 100 index cut payouts during the Covid crisis of 2020, only 15% of equity-based investment trusts reduced shareholders’ income that year.

This unique feature is increasingly important to me, as paying for retirement becomes a more imminent prospect. My investment companies that pay decent dividends include Canadian General Investments (CGI), European Assets Trust (EAT), Ecofin Global Utilities & Infrastructure (EGL), Gore Street Energy Storage (GSF), Gulf Investment Fund (GIF), Hipgnosis Songs (SONG), International Biotechnology (IBT) and US Solar Fund (USFP) among others.

Without wishing to brag, it is a matter of fact that I am wealthier than the young man who worried about where it would all end on Black Monday, or during the dotcom crash and the global financial crisis. The explanation is that I tried to keep calm and continued investing.

Looking forward, if I had to summarise a strategy to survive the recession ahead, I would say: don’t panic, do diversify and keep focussed on your own individual investment objectives.