My Stocks and Shares ISA allows me to reap the rewards of investing in the stock market tax-free. But lately, this hasn’t exactly been going all that well.
With inflation and interest rates on the rise, fears of a recession are mounting. And just earlier this week, a new report showed that the UK economy shrank by 0.3% in August.
On the one hand, it suggests that we’re winning the battle against inflation. On the other, it could be an early indicator of over-aggressive monetary policy that could land the United Kingdom into a painful recession.
While this is far from guaranteed, it’s always good to be prepared for the worst. So what’s the best way to invest £20k in an ISA during a recession?
Setting up my Stocks and Shares ISA for success
Needless to say, a recession is bad news for every business. Reduced consumer spending makes growth notoriously difficult, let alone maintaining existing cash flows. And throwing inflation into the mix only exacerbates the problem.
So how can investors protect against volatility and beat the stock market simultaneously in a recessionary environment? It’s actually far simpler than many people believe. Just keep investing in top-tier, well-run, high-quality businesses as before.
During periods of heightened volatility, even the best companies in the world get caught in the panic-selling crossfire. This creates rare and potentially lucrative buying opportunities for patient long-term investors.
After all, beating a recession with a Stocks and Shares ISA isn’t about buying the businesses that will do well in the next couple of months. Instead, the trick is to focus on the companies capable of enduring the storm before thriving for years, or even decades, to come.
These are the companies with proven business models, wide competitive moats, and strong balance sheets.
Investing has its risks
With most investors fleeing toward defensive assets like gold, buying shares in now-unpopular companies may seem a bit ludicrous. Let’s not forget that stock prices are driven by mood and momentum in the short term. Therefore, even if I start buying top-notch companies today, the shares could continue to tumble. And not by a small amount.
This risk requires careful consideration. And further emphasizes the importance of only investing money that’s not needed for at least three to five years.
Fortunately, it can be partially mitigated. By diversifying my Stocks and Shares ISA across multiple high-quality businesses in different industries, my portfolio becomes better defended against volatility.
Furthermore, in my experience, it’s wise to spread buying activity over several months rather than all in one go. Why? Because if stock prices continue to drop after my initial investment, I now have the capital flexibility to buy more at an even better price, bringing my average cost basis down.
This investing style can seem a bit insane in the short term, especially when prices are in free fall. But as history has shown countless times, buying when the stock market is low can generate enormous long-term returns. Don’t forget, fortunes are made in bear markets.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.