What to Know about Investing during Global Uncertainty

24 November 2022 By Sara Ventiera
illustration of inflation - money floating away
iStock/Cemile Bingol

Sara Ventiera is a contributing writer and former stewardess who covers food, travel, and other topics. Her work has appeared in a wide range of publications, including the New York Times, Food & Wine, NPR, Eating Well, and BBC Travel.

There are general rules to investing. Invest early and often. Don’t invest money you’ll need to access soon. Stash six months of expenses in an accessible account. Don’t invest in anything you don’t understand. And the most common advice: diversify, diversify, diversify.

After more than a decade of economic growth, the world’s economy has started to slow. Inflation has grown at the fastest pace in more than 40 years with the consumer price index in the U.S. soaring 9.1 percent from this time last year, outpacing the Dow Jones estimate of 8.8 percent. Stocks have crashed with the S&P 500 posting its worst first half in more than 50 years. The Nasdaq Composite dropped 22.4 percent for the second quarter — its worst quarterly performance since 2008.

So, what does this record-high inflation mean for retail investors seeking to create an effective retirement plan during such economic uncertainty?

Let’s start with the basics. Inflation is the difference between the value of money and what it offers us in terms of purchasing power. “Basically, it means that things cost more as we lose affordability — the price of goods increases faster than the money we earn,” says James Maxwell, Wealth Adviser, United Advisers Marine. Over the last few decades, inflation has remained relatively low. Cost of living has increased 1 to 3 percent yearly, which has fueled economic growth. But COVID-19 threw a wrench in the worldwide economy. As central banks pumped money to stave off a potentially devastating recession, demand for goods smashed into supply chain shortages brought on by the pandemic. Starting in 2021, a shortage of workers, changes in consumer purchasing behaviors, and clogs in manufacturing and logistics were some of the main factors.

iStock/Cemile Bingol

“This period of inflation growth is primarily due to the impact of the pandemic, when governments across the globe were forced to pump money into their economies through loans and furlough schemes, as well as testing and treating,” says Maxwell. “Add in the conflict in Ukraine, and the subsequent impact on fuel and food prices, and inflation is growing at a rate not seen since the early 90s.” Yet, wages have remained the same. In the euro area, inflation rates are right around 8.6 percent, and 9.1 percent in the UK and U.S. Economies are showing signs of slowing down, fueling concerns about a potential recession.

Retail sales are down, as is consumer confidence. This summer, the University of Michigan’s survey of consumer sentiment reached its lowest level in its 70-year history, with nearly 50 percent of respondents claiming inflation is eroding their standard of living.

Yet, through all of this, wages have remained the same.

Demand for real estate has declined, while new home construction has slowed. Many expect the trends to continue as rising interest rates make it harder for potential homebuyers to afford those increased monthly mortgage payments.

Start-up funding has begun to dry up. Investments in the sector have declined to their lowest level since 2019. Crude oil prices have skyrocketed, partly due to supply constraints resulting from Russia’s invasion of Ukraine, but they have recently started to shift down due to investor concerns. And the bond market has changed significantly. Long-term interest rates in government bonds have fallen below short-term rates, a rare phenomenon referred to as a yield-curve inversion — which suggests that bond investors are expecting the economy to slow down even more.

Heading for Recession?

While all these signs are pointing to an upcoming recession — if we’re not already experiencing one — most financial experts don’t expect a repeat of 2008. “The word ‘recession’ is often used as a political football,” says Maxwell. “We are overdue for an economic adjustment — markets have been ‘running hot’ for a long period of time and equities have been overblown. Things need to settle and stabilize in order to re-establish the status quo.”


So, how should that affect one’s investment strategy — especially in yachting, which is notoriously affected by greater economic sentiment?

“We always say to our clients that you can’t put your life or future on hold to wait out current economic conditions,” says Maxwell. “In periods of market volatility, it’s important to make sure that your investments are spread across a series of sensible, long-term investments — gold and sovereign risk funds are historically good ‘safe haven’ investments, and buy-to-let property in certain markets will usually retain value and  offer a good return, whilst other assets may dip.”

Economic cycles come and go, typically resetting every 7 to 12 years. But the impact of the 2008 recession threw off that pattern. “We’ve experienced a longer period of growth this time around because of measures like Quantitative Easing and are therefore due a period of adjustment,” Maxwell says, adding that any downturn is followed by growth.

While recessionary fears have been dominating headlines, whether we’ll officially enter one remains to be seen. The mainstream recession definition is characterized by two consecutive quarters of declining gross domestic product (GDP), while the National Bureau of Economic Research (NBER) defines it as, “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” The last recession on record in the U.S. started in February 2020 and ended in April 2020, so it would not have met the mainstream definition and barely reached the standard for NBER.

iStock/Elena Lukyanova

Reacting to Recession

Whether or not the economy officially slides into a recession, it’s part of the natural business cycle.

Since 1964, recessionary periods have lasted an average of 10 months, while periods of economic expansion have lasted around five years. And it’s how investors react during those downturns that’s critical for wealth accumulation. “Focusing on the long game is far more beneficial than the here and now,” says Chad Warrick, co-president and CEO of Florida-based Summit Wealth Partners.

That being said, during times of higher inflation, Warrick prefers to focus on dividends. “By and large equity, as a whole, has historically been a hedge against inflation,” he says. “I would focus on dividends primarily during inflation because you have cash-flow stream and appreciation potential — dividend-paying companies have always been a sound area for inflation protection.” When a corporation earns a profit or surplus, it’s able to pay a proportion as dividends to shareholders.

Investors who want to limit volatility will often look toward companies with a proven history of increasing dividends over a 5-, 10-, or 25-year period. It’s a style of investing referred to as dividend aristocrat strategy. These so-called dividend aristocrats are listed in the S&P 500 index that consistently pay a dividend to shareholders, and also annually increases payout size. A company earns the title by raising its dividends consistently for at least the past 25 years. They tend to be large, established companies that no longer rake in record-shattering profits, but they’re largely recession-proof with steady earnings and dividends throughout good times and bad.

iStock/Mykyta Dolmatov

But many preferring to reduce risk even further seek out exchange-traded funds (ETFs), a type of pooled investment security that operates like a mutual fund. These low-cost investments hold a basket of stocks or other securities, often tracking a particular index, sector, commodity, or other asset, increasing diversification. But, unlike mutual funds, ETFs can be purchased or sold on a stock exchange like any regular stock.

Investing is complex so get professional advice. Although the market has been volatile this year, the environment is much more favorable for everyday investors now than it was even in the beginning of this year, making it an ideal time to start. “Slowly accumulate wealth: You can start putting money in on a bi-monthly basis, which will help with volatility,” says Warrick.

A well-thought-out financial plan is the best way to weather strange economic times. “You need growth in order to combat inflation,” says Warrick. “The nice thing is if you look to the last five years, our assets have been growing well over and above any inflationary environment.”

This feature originally ran in the September 2022 issue of Dockwalk.


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