Recession or not, here's how to invest in uncertain times, in seven charts
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Recession or not, here's how to invest in uncertain times, in seven charts

8 Aug
19 Jul
  • In uncertain times like these, it’s important not to overreact or make emotional decisions about your investments. 
  • Exiting the market just as stock prices are starting to rebound might mean missing out on even better days. Moreover, cash is unlikely to beat inflation.
  • It’s tough to time the market perfectly. History shows that it’s better to stay invested in a balanced portfolio over the long term. 
  • To get started with Endowus, click here. Learn more about the Endowus model portfolios in this article. To customise your own portfolio with single funds, explore Fund Smart.

Economists are divided on the odds that the US economy will tip into a recession. Goldman Sachs in July lowered its projection of a recession in the next 12 months to a 20% chance, from 35% in March. This is as signs from the labour market point to some stability, while inflation is on a deceleration path — albeit still about the 2% target.

PIMCO, on the other hand, is preparing for a harder landing in the US economy. In a July article in The Financial Times, its CIO noted that “the market may still be too confident in the quality of central bank decisions and their ability to engineer positive outcomes”.

Such uncertainty comes as stocks have rallied, with the S&P 500 in particular gaining more than 20% from its last lows.  

So how should investors position themselves in the markets? Here are some charts to look at when thinking about how to invest during a recession.

Stay invested, or risk missing the best market returns 

History shows that it’s better to stay invested in a balanced portfolio over the long term. The chart below shows how tough it is to time the market perfectly. While it is true that the returns can be substantial if you manage to avoid the worst month in a year, it is especially painful if you miss out on the best month. Therefore, even if you exclude the lowest monthly return each year, but still miss out on the highest monthly return, your overall returns will still be roughly the same as someone who is not timing the market. Essentially, you’re better off staying invested without any market timing. The chart below, based on US stocks and bonds performance, makes this clear.

The reality is that it is incredibly difficult to time the market and enter at the absolute lowest point. Even so-called experts have been proven to be bad at it.

‍Invest to capture the good days of market recovery 

The financial markets — especially equities — are still up year-to-date in 2023 (as of 19 July 2023), having bounced back from a disappointing 2022. This is even as global growth is slowing and the risk of recession is increasing. 

Some investors may therefore be tempted to sell their investments for profit-taking. But exiting the market just as stock prices are starting to rebound might mean missing out on even better days.

The chart below illustrates the power of staying invested. In a hypothetical scenario, an investor sold off US stocks during the 2008-2009 downturn, and then tried to time the market by jumping back in again when he spotted signs of improvement.

If he had remained invested from 2010 to 2019, a US$1,000 investment in the S&P 500 stocks would have grown to US$2,897, excluding dividends, at the end of the period. 

Missing even the 10 best days of market recovery would shave 33% off the value. The more missed “good” days, the greater his loss.

Chart: Missing out while timing the market. Value of a US$1,000 investment in the S&P 500 from 1 Jan 2010 to 31 Dec 2019

Beat inflation with a balanced 60/40 portfolio

Furthermore, over a longer period of time, staying invested in a 60/40 portfolio — made up of 60% stocks and 40% bonds — tends to beat both cash and inflation.

The following chart illustrates that holding onto cash, be it over a 1-year, 3-year, 5-year or 10-year period, leads to a higher chance of negative total returns after adjusting for inflation. On the other hand, a balanced 60/40 portfolio is more likely to offer inflation protection over time.

Chart: Cash is unlikely to offer inflation protection. The chart shows the frequency of negative real total returns, from a US 60/40 portfolio, S&P 500, US 10-year bond, and cash. Monthly returns data since 1900. Source: Haver Analytics, Goldman Sachs Global Investment Research

With investing, it pays to wait it out

During a recession, it’s not uncommon for investors to lose sight of the bigger picture as pessimism dominates news headlines and companies’ growth or earnings slow. Fortunately, the typical recession lasts for only about a year — investors who are able to ride out the storm and wait for a recovery tend to see their patience pay off. 

US stocks have generally been up 17.7% in the year after a recession, going by the S&P 500 average return since 1929. The following chart shows how equity markets perform before, during, and after a recession.

Chart: What happens to equity markets in a typical recession. Average return of S&P 500 between the Great Depression (1929) and Covid-19 (2020)

During an economic downturn, it’s no surprise that markets will react negatively to a slowdown in companies’ growth and earnings. The market typically falls from a peak to trough of around 30% in a typical recession. We saw this in 2020 during the Covid-19 crisis (-34%) and again in 2022 (-26%). 

But after a recession, markets typically rebound and continue to rise. So even if you were able to correctly forecast a recession, the best thing to do through a recession is to just stay invested. 

Imagine sleeping through a recession. If you did, you would have saved the emotional rollercoaster ride of seeing the markets fall and then rebound. One year after a recession, you would be up around 18%. After three years, you would be up about 35%. And after five years, you would be up some 52%.

Extend the investing time horizon to reduce volatility

Markets are, by definition, volatile. When we talk about risk in investing or financial markets, it means that we are taking that risk of volatility and are expecting to be compensated over the long term by higher returns. Risk and return always are positively correlated. 

However, we know that there are things we can do to improve the risk-reward in our favour. In particular, extending your time in the market helps to reduce that volatility. The monthly return is less volatile than the weekly return, and the annual return is likely to be less volatile than monthly returns. 

If we invest for 10 years, then the volatility again is significantly reduced from the annual returns. We take market risk, but over the long term, there is a way to harvest good positive returns without the emotional rollercoaster ride.

Chart: Long-term investment horizon is key to improve the chances of success. Best and worst outcomes - global equity and fixed income market - for the 1-year to 20-year periods. Source: Endowus Research, Morningstar.

Source: Endowus Research, Morningstar

Even the worst investor can win if you don’t try to time the market

Historical returns show that it is very difficult to compare the market movements and track it directly to economic growth, so trying to trade the recession is an impossible thing to do as an investor. This is because recessions are normally called after the recession has occurred, due to the lagging nature of economic data. 

Therefore, trying to time the market or investing based on macroeconomic data is a hugely problematic thing to do when the data is always lagging and often revised from its original numbers. 

It’s also worth noting that the recent equity rally could be driven by portfolio repositioning, the artificial intelligence frenzy, and optimism that inflation might be cooling down. It is impossible to predict how long this rally will last, and to ascertain whether such optimism is misplaced

Remember that markets, by their nature, will experience ups and downs. Even the worst market timer in the world who bought at the peak of each decade would still perform better than the average investor, as this chart illustrates.

Chart: Time in the markets, NOT timing the market. The worst investor in the world bought the top of the market of each decade and still fared pretty well. The chart shows the growth of the MSCI World Index from Jan 1970 to March 2023. Source: Endowus Research, Bloomberg.

Diversify away investing risks and stay exposed to growth

Diversification is also known as “the only free lunch in finance”. Holding a portfolio of investments that are not perfectly correlated — by spreading your investments across geographies and asset classes – can help lower risk without sacrificing expected returns. With the benefits of diversification, even if a single stock blows up on you, it doesn’t blow up your whole portfolio. 

As the chart below illustrates with a trio of hypothetical portfolios, diversification can come in handy in both up and down markets.

It helped contain overall portfolio losses during the 2008-2009 financial crisis, when many types of investments were declining in value. And when the market later recovered, diversification also helped the portfolio achieve gains.

Chart: The long-term value of diversification. Diversifying assets helped limit losses and capture gains after the market bottomed out. Source: Strategic Advisers, Fidelity.

Through the six-year period from 2008 to 2014, the diversified growth portfolio — made up of US stocks, international stocks, bonds, and short-term investments — provided a significant percentage of the all-stock portfolio’s returns, but with smaller price swings. Like the all-stock portfolio, it also easily outpaced returns from the all-cash portfolio.

At Endowus, we advocate staying globally diversified in a variety of assets including equities and bonds, and also diversifying your portfolio within each type of investment.

Read more: The power of diversification in investing

Work your cash harder with daily liquidity

As economic growth slows and layoffs increase, investors may wish to maintain or beef up their cash reserves, in case of a sudden job loss or unexpected expenses. However, given rising interest rates and mounting inflation, the opportunity cost of leaving cash in low-yielding savings accounts is now greater than ever.

Investors want higher yields relative to the low risk that they want to take on these savings; they also want to get easy and flexible access to the money should they need to withdraw the cash for more immediate needs.

Investors might consider putting a portion of your rainy-day savings on cash markets and liquidity funds based on your risk tolerance and actual standard of living — though it should be clearly noted that these products are not capital-guaranteed.

If you’re interested in advised portfolios, our Cash Management solutions allow you to grow your cash with higher yields, tailored to your risk tolerance, and with lock-ups and no penalties on redemptions.

Each type of cash product comes with its pros and cons. The table below shows key details about Hong Kong time deposits, government bonds, certificate of deposits and cash management unit trusts on the Endowus Fund Smart platform. To learn more about building an emergency fund, refer to this article.

Riding out the uncertainty of a recession

We’re navigating a period of heightened economic uncertainty and market volatility. Even if a recession is imminent, no one can actually predict with certainty how long the downturn will last and to what extent it will impact the financial markets.

In fact, studies show that there is virtually no predictability in economic data on the financial markets. There is a reason why the financial markets are seen as leading indicators of the economy — the financial markets are much more efficient in pricing all available information and data.

In uncertain times like these, it’s important not to overreact or make emotional decisions about your investments. Often, the best way to reduce risk as well as ride out the volatility and uncertainty of recessions, is to stay invested, remain focused on your financial goals, and possibly dollar-cost averaging (DCA) through an economic downturn.

The routine of DCA also encourages you to adopt a passive investment strategy, which removes any emotional connection and minimises timing risk. As such, you're less likely to make impulsive, speculative decisions based on personal opinions or market conditions. This makes dollar-cost averaging a good strategy for those with a low-risk tolerance.

Importantly, bear in mind that it’s impossible to predict with certainty how long any recession or market downturn is going to last. Therefore, there is a chance that investors could face a long investment period before they are able to fully ride out any downward movements in the financial markets. As a result, before investing their money, investors should always ensure that they have sufficient liquidity for their living expenses and an adequate emergency fund for unforeseen circumstances, and also be mentally prepared to invest for the long term.

To get started with Endowus, click here. Learn more about our professionally curated model portfolios covering different themes to meet investor’s preferences and needs and help them invest better to live better. To customise your own portfolio with single funds, explore Fund Smart.

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Risk Warnings

Investment involves risk. Past performance is not an indicator nor a guarantee of future performance. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. 


Whilst Endowus HK Limited (“Endowus”) has tried to provide accurate and timely information, there may be inadvertent delays, omissions, technical or factual inaccuracies or typographical errors.

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