Taking Stock: How to help recession-proof your financial plans


The trajectory of financial markets is never smooth. But how concerned should we be about the continued economic uncertainty caused by Covid-19 and the impact this could have on our wealth plans? 

The trajectory of financial markets is never smooth. But how concerned should we be about the continued economic uncertainty caused by Covid-19 and the impact this could have on our wealth plans? 

The key to riding out economic turbulence is to make sure your risk profile matches your risk tolerance. This means investing in a way that seeks to achieve a financial goal by using a methodical plan. One way to do this is by allocating your savings to a range of assets over say a minimum of five years, according to Fahad Kamal, Chief Investment Officer at Kleinwort Hambros.

“We live in a world where we have to take calculated risks,” he says. “That’s the reality of markets and of life.

“You have to take a risk if you want good returns. But, equally, you need to make sure those risks are balanced and palatable to you.”

The economic disconnect

It’s easy to assume that wealth planning during a recession involves hunkering down and taking on little risk. But Kamal says that basing investments only on economic data is unwise and that an economic recession need not necessarily spell doom.

“It is very interesting that when most people talk about markets, their first instinct is to discuss how the economy is doing. There is seemingly some connection,” he says. “But in the short run there is no connection at all.”

In 2020, for example, he says, the UK had the “worst economic news since the Great Depression” but the market recovered strongly after its dip.

“How do you square that circle?  The easy answer is that there is a lot more to investment values than just the economy.”

Assets riding high

The real issue today, he says, is that assets are already valued so high that there is little space for growth. 
“The return on all assets is likely to be much lower in future because we are starting from a much more expensive point.”

The market is already pricing in recovery, rather than wallowing in the effects of lockdown

“When investing, we at Kleinwort Hambros are concerned about where we are in the economic cycle. Right now, although it may sound counterintuitive, we are in the ‘recovery and expansion phase’. We’ve had our huge trough; our enormous disastrous fall and the expectation is that we will go back to some degree of normality in the months ahead.

“Markets have reacted to this expectation – not to the reality on the ground.”

A balancing act

This combination of uncertain news and high asset prices makes it difficult to put together portfolios that will both grow and also show resilience in the face of sudden shocks.

In particular, this is down to the current high price of government bonds, which traditionally make up 40 per cent of many portfolios, with the other 60 per cent in equities, Kamal says.

While equities must still make up the bulk of most portfolios, more “creativity at the edges” is required in the non-equity part of the portfolio to seek and achieve growth.

“Government bonds used to provide income and protection – currently they give neither. Instead, we have to think outside the box, investing across a much wider panoply of assets, including gold and hedge funds.”

Age matters

In these volatile times, Kamal says, it is important to consider individual needs and goals when putting together a portfolio.

For younger people, he says, short-term rises and falls in equity markets should not make a difference to strategy.

“Equities are really volatile but over time usually bounce back. If you are young, this is the time to look for higher risk-reward returns. You should be all forward looking – it doesn’t matter if markets rise and fall. 

“If you are 60 though, you don’t want to end up in a position where markets are down, and you need the money. Your time horizon is critical to how your portfolio is structured.”

Revisiting is vital

In these difficult times, your portfolio also needs regular reviews to ensure you are still on track. “Markets have shifted, and expectations from asset classes may change too,” Kamal says.

As well as reviewing things in line with the economic situation, you should do so every time your life plans change, he says.

The importance of expertise

When the economy is uncertain, financial expertise really shows its mettle. Kleinwort Hambros uses computer modelling combined with research expertise and an individual understanding of each client to produce the right portfolio for them and for the economic climate.

Every case is different, and every financial plan is made with great understanding of the individual.

“You need to understand how much risk you are comfortable with. At the end of the day, it’s your money,” Kamal says.