Worried about recession? How NOT to invest during high inflation and high-interest rates

If you have been investing in stocks, equities, Exchange Traded Funds (ETFs) or even bonds, your investment might be losing money right now.

For many of us, our investment portfolios are currently in the red.

The prolonged drop in market prices is influenced by the current global fear of a recession.

This fear stems from global hyperinflation and increased interest rates all over the world.

How much have you lost from your investments?

But is losing money an indicator to pull out of your investments?

As some investors say, bull markets make you money, but bear markets make you rich.

During this time, we have seen some grave mistakes made by friends and other investors, and we want to share with you some of these costly mistakes – so you know how to strategise your investments to avoid losing money in the long run.

At The Money Folks, we help our clients invest and build multiple income streams that potentially enable them to retire with more than $1 million. Reach out to us for a financial assessment call (by application approval only).

Disclaimer: This post represents our personal views and opinions and is neither associated with any organisation nor reflect the position of any organisation. This content is also only for informative purposes and should not be construed as financial advice. Past performance does not necessarily equate to future performance. Please seek advice from a Financial Adviser Representative before making any investment decisions.

Mistake #1: Not investing in assets that can help you preserve wealth during high inflation

Not all industries have the same performance during high inflation

High inflation will lead to higher costs in businesses so you can expect some stock price drop in any industry. Consequently, investors may prefer to invest in other assets besides the stock market or ETFs to reduce their risk from the uncertainties caused by inflation. These are generally what drive the stock market lower in such a climate.

However, not all investments may experience huge losses during this time. There are some industries that fare better than the other.

For comparison, check out these two industries — Consumer Staples and Consumer Discretionary.

The graphs below show the performance of iShares US Consumer Staples ETF and iShares US Consumer Discretionary ETF.

For illustration purposes only. Source: Finviz.com

For illustration purposes only. Source: Finviz.com

During the period from the beginning of 2022 till July 2022, the Consumer Staples ETF experienced -3.5% despite the turbulent market. On the other hand, the Consumer Discretionary ETF dropped -26.4%!

Investing in businesses that are in the consumer staples industry can be one of the ways to potentially reduce losses in a high inflation environment.

This is because essentials such as food and hygiene products will stay in demand despite the price hike, as opposed to non-essential businesses such as apparel and leisure.

Those have more elastic demand and are likely to be more sensitive to market changes.

So from here, you can see that knowing the right industry to invest in plays a very important role to preserve your money despite market challenges.

In such market conditions where there is so much turmoil and uncertainty, sometimes it could be wiser to minimise losses rather than chasing after an invincible asset that may not exist.

Can gold really preserve your wealth during high inflation?

You have to be careful with your intention in gold investments.

As concluded in a study by Erb, Claude B. and Harvey, Campbell R., gold is found to have no direct correlation with inflation.

However, if the high inflation and high-interest rate combination results in a recession, gold has been proven in the past to generally fare well in financial crises:

For illustration purposes only. Source: Finviz.com

However, do note that investing in gold will not generate income in the form of dividends.

Instead, it is a potential avenue for investors to preserve their wealth and avoid losing too much money in a crisis.

Don’t limit your investments to just a few instruments

Besides that, you can also hedge your risks by investing in investment vehicles such as endowments, annuities or short-term bonds on top of your investments in unit trusts, Exchange Traded Funds, equities and many more.

Such a combination of investments may help you preserve your wealth by minimising losses during market uncertainty.

Some of these assets may provide you with passive income as well.

You will need to understand the economic cycles and how macroeconomic factors influences the market.

This is something we regularly study and advise our clients on.

If you need any help, feel free to reach out to us for a personalised recession-resilient investment strategy.

Mistake #2: Investing in underperforming assets in a high-interest rate environment

As the economy is recovering from the pandemic, we are facing high inflation due to pent-up demand from lockdown, coupled with supply chain disruptions due to geopolitical wars and trade wars.

This results in hyperinflation.

And in order to curb inflation, central banks need to raise interest rates to cool down price hikes. But when interest rates are raised, it is difficult for the economy to grow due to the increased financing costs.

This high-interest rate environment can take a toll on the performance of some assets.

A prime example is the performance of bonds in general.

Bonds are generally popular for its stability as compared to equities, but in a high-interest rate environment, bonds may not fare well.

Below is a bond fund that invests in investment-grade US corporate bonds, the Fidelity Corporate Bond ETF.

For illustration purposes only. Source: Finviz.com

As you can see, the graph shows a decreasing trend from early 2022 – the same period when central banks globally took the initiative to increase interest rates.

If you are investing in bonds, you may be experiencing the price drop right now.

Why is this so?

Newer bonds would be issued at higher yields to match the prevailing high-interest rate environment.

This would increase the demand for newer bonds.

Older existing bonds would appear less attractive, resulting in a drop in price.

Also, although interest rates are high right now, you might also need to consider this – will the returns from the increased interest rate be high enough to at least beat inflation?

If you are investing in bonds, how can you avoid losing too much money due to high interest rates and high inflation?

First, you may need to think about why you are investing in bonds in the first place.

If your intention is to preserve wealth, it may minimise your losses as compared to investing in equities, even though your purchasing power may still be eroded due to high inflation.

Or are you investing in bonds for the sole purpose of earning passive income for retirement?

It can be a cushion for your retirement portfolio due to its relatively stable nature compared to equities – but it may be more sustainable to diversify your assets strategically so you can get sustainable dividend income in the long term.

Mistake #3: Trying to time the market but doing it wrong

Many of us overestimate our capability to stomach losses until we face them.

A recession might cause you to lose money due to the slump in economic growth and fear in the market.

You might be tempted to cash out and cut your losses as soon as possible.

But before you cash out, ask yourself these questions:

• Where will the money go after you cash out — will they end up in cash savings or be spent?

• If you are considering re-entering the market again — do you know when to re-enter the market at a value price?

Timing the market so you can invest at the lowest price and reap maximum profits is a difficult task to execute.

You might be losing money if you don’t know how to re-enter the market at a value price.

Here we investigate a case study where you might be losing out if you time the market incorrectly.

There’s Investor A and Investor B over the course of 1988-2021.

The difference between Investor A and B were:

• Investor A saved $1,000/month and timed the market. During the course of Investor A’s investment, he tried to time the market during these periods:

• 

  For illustration purposes only. Investor A timed the market and entered the market in 1990, 2000, 2007, 2018 and 2019. He cashed out in 1998 and 2018.

• The green arrows indicate investing his monthly savings and any capital gains. The red arrows indicate cashing out all his capital and earnings.

• Investor B invested $1,000/month regularly from 1988 up until 2021. He did not time the market.

Does Investor A actually gain or lose money in the long run by doing this?

Take a look at the gains of Investor A (in blue) versus that of Investor B (in green) in the illustration below.

For illustration purposes only.

During the above period of time, if you don’t know how to time the market well, you might be losing out on a stunning $2 million!

Although Investor A’s money grew from when he started, he could have gained so much more if he had stayed invested.

But of course, this analysis was done in retrospect. Everything is clearer in hindsight.

Do note that executing market timing well in real-time requires in-depth market knowledge and experience in investing for retirement.

The average retail investor might spend too much time trying to identify the right time and the right assets to invest in due to limited resources and market insights.

This may cause investors to miss the best days in the market and miss out on the rewards of compounding.

If you need more market insights and strategy, consider taking advantage of our professional resources, knowledge and experience to help you invest easier and retire earlier.

Do you struggle with investing in this uncertain period?

If you have made some of the above mistakes, it’s okay.

In such a challenging environment, it is easy to be depressed and lose the motivation to invest.

Don’t be disheartened. Recessions are a natural phase of the economic cycle.

We hope you don’t despair from this situation because this too, shall pass.

We need to recognise that in every market downturn, there are opportunities. We just need to know how and when to capitalise on these opportunities.

This is possible if you have a thorough and deep understanding of how the financial markets work.

For some investors, there might also be changes to their risk profile during this time.

Instead of investing with a growth-focused portfolio, some people might prefer to do wealth preservation instead.

But most importantly, don’t forget why you started investing in the first place – such as the long-term goal of having a comfortable retirement, retiring earlier, or simply generating multiple income streams to support your family expenses.

Most of our team members are also recognised as the top 5% of financial adviser representatives worldwide, and we are committed to helping you potentially getting your retirement planning on track.