Boris Johnson’s desire to scrap the Irish backstop — something the European Union deems essential to any agreement — has renewed fears from economists that the UK could leave the EU on October 31 with no deal and subsequently fall into recession.
Whether you believe this will happen or not (data from the Office for Budget Responsibility suggested the economy “flatlined at best” in Q2), I think it’s prudent to at least prepare for every eventuality. Here are a few suggestions.
Have a cash safety net
Thanks to the eroding power of inflation, having too much of your wealth in cash for too long is a bad idea. Nevertheless, it’s important to have some kind of buffer to fall back on in the event of an unexpected expense or sudden redundancy — even more so during a period of recession.
Aim for three to six months’ worth of expenses or, quite simply, whatever will allow you to sleep at night.
Get out of debt
If you fear for UK plc then it’s more important than ever to tackle any lingering debts you may have (mortgage aside).
If completely eradicating your credit card balance over a few months looks impossible, consider transferring the debt to another provider. The fact that many offer 0% interest deals for periods as long as a couple of years ensures the debt won’t get any bigger.
Having made a plan to sort your existing debt, it’s vital that you don’t then add to it. Draw up a budget and stick to it. Now is not the time to splurge.
Develop a second income stream
Generating additional sources of income that can then be used to pay for a few treats when times are good, or keep the wolf from the door when things are less certain, is never a bad idea. The latter is particularly relevant if a recession is looming.
Think about your hobbies and skills. Can you tutor someone else in your free time? What about selling stuff on eBay? Can you find a way of monetising your interest in, say, photography?
Check your asset allocation
If you fear a downturn is on the way, it’s never a bad idea to check whether you’re still comfortable with your exposure to different assets. This is particularly prudent if you have plans to quit work in the near future. While all things recover in time, having a large proportion of your portfolio in volatile small-cap shares, for example, could endanger your retirement plans if markets head south.
And if you’re happy with your portfolio as it is, simply consider looking at it less as we head towards our October departure. A sea of red, temporary as it might be, can be very demotivating and might lead you to take actions that actually impede growing your money over the long term.
Stay diversified
Recessions can be hard work for investors but they’re particularly troubling if your portfolio is concentrated in only a few (cyclical) industries. If just one of those experiences problems, the impact on your wealth could be huge.
This is why it always makes sense to check that your holdings are sufficiently diversified across geography, size and sector when warnings of an economic slowdown abound.
This won’t necessarily stop your portfolio falling in value, but it will allow you to sleep at night.
