Sensible investing principles and 3 top tips to help protect your money

In 2023, a third of the global economy will be in recession, the International Monetary Fund (IMF) has warned.

With the US, EU and China seeing their economies slow, this year is expected to be "tougher" than 2022.

There are multiple challenges weighing on the global economy. This includes the war in Ukraine, rising prices, higher interest rates, and the continuing spread of Covid in China.

Even for those countries not in recession, the BBC reports that the IMF has warned that 2023 could "feel like recession for hundreds of millions of people".

69% of wealthy people are worried about the current economic climate

With FTAdviser reporting that 69% of under-55s with more than £500,000 in investable assets were worried about the current economic environment, and over-55s also feeling concerned, you may be wondering how best to protect your finances in 2023 and beyond.

Recession risks are undoubtedly rising but it’s worth remembering a few basic investing principles.

You will experience many market downturns over a lifetime

If you look back in history, you'll find that large market downturns, or “bear markets”, tend to be both uncommon and temporary. 

On average, bear markets are shorter than bull markets – when markets are rising or expect to rise. This means that any “losses” you may incur in a down market tend to have far less effect on your long-term portfolio performance.

The chart below shows the effect of bull and bear markets on a portfolio over 35 years.

Source: Vanguard, based on data from Bloomberg using the MSCI All-Country World Index from 31 December 1987 to 30 June 2022. Percentage monthly data on a total-return basis, with dividends reinvested, GBP terms.

Don't be fooled into thinking that recessions and stock markets move in tandem

Because financial markets are quick to price in events, the beginning of a recession can cause sharp falls in share prices. This means that stock markets usually fall in advance of an actual recession. The good news is they also generally recover quickly – often before a recession is over.

Stay calm and remain invested

While it can be nerve-wracking to watch markets fall, staying put and keeping your money invested should help reduce the chance of losing money. 

Reacting to bad news and making rash decisions with your money can end up costing you dearly. If you decide to sell your investment in a downturn, you will actually realise the market loss and miss out on the chance of making gains when the market recovers.

Read more: Why time in the market, not timing the market matters for your wealth

Taking a disciplined approach to your investments is always wise, but not always easy. Focusing on these investing principles should help you to remain calm and avoid reacting to unhelpful media noise and headlines.

To help you focus on what you can control when it comes to your personal finances, here are three practical things that could help protect you in the coming year.

Pay off expensive debt and live within your means

Most people have debt. Whether a mortgage, credit cards, loans, or a bank overdraft, meeting repayments when times are good may not be a problem, but during a recession there's an increased risk of redundancy.

If you're maintaining expensive debt – especially on credit cards or loans – try to pay this off as quickly as you can.

Depending on your circumstances, you may be able to make savings by consolidating your debt. For example, if you have credit card debts over several different cards, you might be able to transfer all the debt to one card with a generous interest-free window.

Be careful to check that the transfer fee doesn't outweigh the benefits. but if consolidation is right for you, this single move could give you enough breathing space to get on top of the debt and back in control sooner.

Hold an emergency fund

With the risk of redundancy rising and household bills increasing, it's good practice to keep an emergency fund in an easy access savings account.

Typically, you should hold enough cash to cover between three and six months of normal expenditure.

Advance preparation to with stand an expensive incident, without having to take on more debt to cover the bills, will provide a financial “safety net” and valuable peace of mind.

An emergency fund is also a helpful buffer in the event of having to pay expensive costs to replace a boiler, fix your car, or repair a damaged roof.

Protect your pension

When money becomes tight, people often prioritise present costs at the expense of their pension. 

In 2022, Standard Life revealed the financial harm that could be caused by pausing pension contributions. The table below reveals the losses that a worker beginning with a salary of £25,000 a year and paying 3% monthly contributions into a workplace pension at the age of 22 might incur.

Source: Standard Life

Wherever possible, try to maintain regular contributions to your pension. Being tax-free, your pension is not only a great way to save, but is also hugely important for your future financial wellbeing.

Get in touch

Our advisers provide specialist advice to British expats and international employees living around the world. We put your long-term goals at the centre of the financial plan we put in place for you, helping you to make your dreams a reality.

If you’d like help reviewing your finances in light of the current economic climate or to talk about how to make your money work harder amid high inflation rates, please get in touch.

Email us at enquiries@alexanderpeter.com or give us a call on +44 1689 493455.

‍

Please note:

The content of this newsletter is offered only for general informational and educational purposes. It is not offered as and does not constitute financial advice.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.

‍