Managing cash flow during a serious downturn.

Given that we know there will be recessions in the future how do we as investment advisers help our clients cope with the drastic swings in company share valuations bought about by a recession?

I have been through four or five downturns in my time and so have a number of our clients. In the event of a recession, here is how you cope:

  1. Design an investment strategy that will moderate some of the worst swings in share market valuation. This will include an allocation to good quality bonds that will go up in value when shares fall in value. It will also include a wide exposure to 30 or 40 different countries and their currencies. Not all countries will be affected equally. High risk countries like New Zealand will likely experience a fall in their currencies and if this happens offshore investments go up in value in New Zealand dollars.
  2. Hold emergency funds outside your investment portfolio that you can rely upon during a recession so that the cash generated by your investments can be re-invested into your share investments that just got cheaper.
  3. Realise that a 'fire sale' in shares is a huge buying opportunity, especially if you have some cash you can invest. All recessions are followed by an expansion so if you can buy shares near the bottom you are very lucky. Sometimes it will be sound practice to borrow while interest rates are low and buy shares at the bottom. That takes guts, but it has worked for some over the years. There is an obvious problem with this approach that I must mention. One never knows when one is at the bottom of a share market plunge. All one knows at the time is that prices are lower than they were last month. The strategy here is to wait and be prepared to miss the bottom to make sure that the recovery is underway. Easier said than done, of course.
  4. Reduce your spending, if possible. If you are living off your investments now is the time to tap into your emergency funds and delay those big purchases or overseas trips. Don't bail out your children's businesses when times are tough. They need to learn their own lessons. You are not a bank.

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