How to prosper in the current stock market climate...

In the current climate, it would be easy to take a pessimistic view of the stock market but as history has shown us, now may be the time to pick up a bargain, ride out the storm and cash in on the returns once the market picks up.

Andrew Gains, our pensions and investments specialist, writes that the key to identifying where to invest in an economic downturn is by looking into the history books. Whenever there has been a decline in the past, the market has always picked up the other side of the dip and exceeded previous expectations for growth. This should help to reassure those that think the World is ending because of the recent falls could be an opportunity to exploit the situation and ultimately benefit.

Excavate the past and reveal the future
So, what can past experience tell us about possible future trends? There are a number of key lessons that we can learn from previous recessions to help us stay afloat and even benefit during this one:

1. Don’t panic!

Despite media scare stories, this is not likely to be equal to the 1930s. Recessions are a fact of economic life and the important thing to remember is that after each set back, the economy heals itself and eventually grows again.

Some economists are comparing the credit crunch to previous recessions in the 1980’s, 70’s and whilst this may be true on some levels, every recession is different and should be treated differently.

The state of the World economy at this point is nowhere near where it was during the Great Depression. However, even if it were on the same scale, there is an important point to remember from history; even in that bleak time for the economy UK equities only actually fell for two years.

If you already own shares then selling them now would probably merely crystalise losses, but if you can ride out the storm then your investments are likely to regain their value and grow. Panic selling is never wise so try to take a long term view on your investments in order to reap future rewards.

2. Look to the future

The stock market is forward looking and so traditionally, when the country is in the midst of a recession the stock market rises as people begin to buy cheap stocks in preparation for the eventual upturn.

If you invest just before the market is at its lowest then you should benefit from the early growth that follows a recession and increase your investment dramatically over a relatively short space of time. However, if you leave it too late and invest after the initial period of growth then you may have to wait for a longer period of time before your investment can really pay off.

As with all investments, looking at the stock market as a long term plan is the best way to profit. If you can invest just before it hits rock bottom and leave your money alone until it has recovered you could make a serious return on your investment.

At the end of the day timing is very difficult. An old investment adage states 'Its time in the market not timing the market' that counts.

3. Invest in the best

There are some sectors that have proven to be more resilient to past recessions and that tend to recover quicker after a downturn. Corporate debt bonds are usually a safer bet as these tend to have a greater element of risk priced into them to begin with.

The sectors that normally fall the hardest in a downturn are consumer durables, materials, industrials and the information and financial markets although these are also the quickest to recover. These could represent an area to pick up a bargain and receive some relatively good rewards when the economy begins to grow again.

If you look for companies that traditionally have strong balance sheets and a history of bouncing back or alternatively those that could benefit from a downturn such as budget consumer goods companies then you are more likely to see a healthy return on your investment, although every investment in the stock market does of course carry an element of risk.

Gold is often seen to be an indicator of confidence and purchases always tend to increase as economic fear grows because it represents a safe haven in times of stock, debt and currency market turmoil.

How to jump on the investment band wagon
If you decide that you would like to dabble in the stock market then there are a number of options available to you. Andrew Gains, our investment specialist advises that investors could benefit from an equity ISA.

You can self select individual shares or use a unit trust based vehicle. With a unit trust based ISA you can choose from thousands of different funds and we have chosen a number of providers that offer a proven track record in effective management to give you peace of mind that your investment will be taken care of. This way you benefit from a spread of investment risk by not investing in a small number of individual shares.

No one manager is strongest across the board so it is important to be able to choose good funds from across many providers all within the wrapper of a single ISA.

If youre not happy with the notion of your money being fully exposed to the vagaries of the stock market Sterling  (part of Zurich) have an equity based ISAs that benefits from a degree of stock market growth but that carries a level of protection for the underlying fund value. This allows you to benefit from some measure of the potential growth of equities without taking on as much of the risk.

ISAs allow Contractors to benefit from significant tax breaks as you can invest up to £7,200 per year tax free. You can invest up to this amount in a lump sum or can add monthly contributions which avoid the end of tax year rush and help to avoid the greater risk associated with investing on a single day in the year.

As Independent Financial Advisors, we can search the whole of the market to find the best ISA for you and we will help manage the investment of your money from initial advice through to liasing with the wrapper provider, making your stock market experience as hassle free as possible.

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