Investing during a recession might look scary but it’s often a prudent strategy. I’ll explain how you could make a million by buying UK shares during a recession.
Recession is looming
The unemployment rate in the UK has increased in the three months to July. This is despite the fact that many restrictions have been lifted. So, even if the Covid-19 pandemic were finally over, it looks like the macroeconomic consequences will be long lasting. But will the pandemic end tomorrow? I don’t think so. The World Health Organisation has just reported a record one-day rise in coronavirus cases. This might force governments all over the world to take additional measures to fight the spread of the virus.
But, unfortunately, the coronavirus isn’t the only challenge we are facing. Brexit is around the corner too. The big question now is if it will be a ‘deal’ or a ‘no-deal’ one. If it’s the latter, then, I am afraid there’ll be another market crash. What’s more, ‘hard’ Brexit will probably make the recession last longer.
UK investors should also consider international challenges. Among them are US-China trade relations and the upcoming presidential elections in the US. All these factors create plenty of uncertainty. That’s because most Footsie shares are issued by international companies. Think of BP, Unilever, and Diageo, for example. They all depend on currency fluctuations and international demand.
All that sounds grim but it doesn’t mean we shouldn’t invest. But the question is how.
Investing in UK shares
My colleagues have written about pound-cost averaging. It means investing a small fixed amount of money regularly, say, once per month. It’s a good investment approach. However, there is another quicker path to making a million, I think. It involves buying more UK shares during recessions or straight after a market crash. But when the stock market is near all-time highs, it’s much better to set aside some cash and wait for prices to plunge. After the crash it would be the best to stockpile ‘good’ UK shares.
What do I mean by this? Well, to start with, companies issuing such shares must be quite large. They should also have long operational histories. Of course, they should also have high credit ratings. This reflects financial soundness, including healthy balance sheets and cash flow positions.
What’s more, good companies should have an economic moat. It’s one of Warren Buffett’s most important criteria. It simply means a strong competitive advantage. For example, it could be a strong brand image. But economies of scale are also important because they mean lower prices for customers.
Then, I’d also prefer investing in undervalued companies. This means they have to have low price-to-earnings (P/E) and price-to-book (P/B) ratios.
Finally, ‘great’ companies should also pay dividends. These dividends can be reinvested. So, you could be growing your portfolio at a much quicker pace. It’s called the power of compounding. Hopefully, if you adopt this investment strategy, you should end up with a million or more over time.
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Anna Sokolidou has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.