6 dos and don'ts when investing in a recession

Following last week’s news that the UK economy fell into a recession at the end of 2023, Which? explores what you can do to help stave off losses when investing in a tough financial climate.

While Bank of England (BoE) governor Andrew Bailey has signalled the recession is likely to be brief,  investors may be spooked about companies weathering the storm.

Follow our advice on what you should do – plus what to avoid.

Please note: the content contained in this article is for information purposes only and does not constitute financial or investment advice.

Do: diversify your investments

Your investment portfolio will be hit especially hard by a UK recession if everything you’ve invested in is based in the UK.

Investing part of your money across the world will soften the impact of a slow economy at home – although it’s worth being aware of how other countries’ economies are faring.

Some sectors will be hit harder by recession than others. Generally speaking, companies providing essential services are less susceptible to declines in consumer spending than companies that rely on consumers having more disposable income, such as fashion retailers.

The challenge is to find the sweet spot between having a broad range of investments that lessen your vulnerability to individual shocks, and not investing so broadly that you can’t keep track of where your money is.

• Find out more: how to balance your investment portfolio 

Don’t: panic sell

Knowing that companies are likely to take a hit if they’re operating during a recession, your instinct might be to take all of your money out of the UK.

But, if you take your money out at the wrong time, you risk losing more.

Ed Monk, associate director at Fidelity International, said: ‘For investors, it’s probably best to tune out the noise on whether we’re in recession or not. 

‘History shows short-term economic ups and downs have little to do with performance in the stock market. Markets tend to be forward looking and investors will already be seeing past data on recent economic performance.’

That being said, it’s a good idea to keep an eye on the performance of your investments and make a decision yourself about when is the best time to hold your nerve, and when it's best to cut your losses and sell.

Do: consider dividends

When growth in your investments doesn’t feel like such a safe bet, reliable dividends can become a lot more appealing.

Dividend payments are the distribution of a company’s profits, usually paid out twice a year.

You're more likely to receive dividends from bigger and long-established companies – the more profitable the company, the larger the dividend payout could be.

Laith Khalaf, head of investment analysis at AJ Bell, said: ‘When growth is thin on the ground, dividends can keep your investment scoreboard ticking over. 

‘Poor economic conditions aren’t great for profits and hence dividends, but many UK companies have international income streams and are still making profits from UK operations despite weak economic growth.’

Sometimes companies boost dividends to increase their share prices. For example, earlier this week Santander raised its dividend by 50%. However, it’s important to look at a company’s performance overall when deciding whether to invest.

• Find out more: investing directly in shares 

Don’t: forget about the future

It can be easy to get so wrapped up in the crisis of the moment that you forget economic conditions change – and they can change quickly.

Bank of England governor Andrew Bailey told MPs on Tuesday that he considered the economy was already showing ‘distinct signs of an upturn’.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, also said: ‘The FTSE 100 has shrugged off Britain’s recession woes, with fresh optimism from Wall Street rippling through markets. 

‘Investors are looking forward, with a slightly better scenario expected to emerge for the UK later this year.’

One way of easing back into investing, if you’re nervous about parting with a larger sum of money, is through a practice called ‘drip feeding’.

This simply means investing small amounts of money more gradually over time. If the stock market performs well, your shares will likely be more expensive. But, if the market is struggling, shares will be cheaper. So if you spread out your purchases every month, the cost should average out over time.

Do: make the most of your tax-free allowances

When returns are far from guaranteed, you’ll no doubt be keen to hold on to what you've gained.

In the new tax year, starting on 6 April, allowances for both capital gains tax and dividend tax will be reduced to £3,000 and £500, respectively. 

While many investors won’t make this scale of gains, those who do will benefit massively from the shelter of a tax-free stocks and shares Isa. 

You can invest up to  £20,000 in a stocks and shares Isa in 2023-24, and any gains you make within this wrapper remain free of tax.

• Find out more: best stocks and shares Isas

Don't: forget about the fees

Unlike taxes, fees from funds and investment platforms alike will apply, whether your investments do well or not. 

So it’s important to check if the fees you’re paying are reasonable.

Reducing the sum you pay your platform is one of the few 'guaranteed' ways to improve your returns.

• Find out more: compare investment platform fees and charges