How to protect your finances from a double-dip recession

There had been glimmers of hope, of a V-shaped recovery, of corners of UK industries that were bouncing back with abandon.  

On the ground, those whose jobs survived the first Covid hit would have been forgiven, with personal savings levels reaching record highs, for feeling they were on an unexpectedly solid footing too.

The latest data suggests UK savers have put £88bn into cash since the start of the pandemic.

But under the bonnet, the impact of the rising R number and fears over the removal of state support were beginning to show through after figures released in August confirmed we had already chalked up the worst drop into negative GDP on record thanks to lockdown round one.  

And now we’re going again.  

“The new lockdown restrictions can only set back economic recovery, especially at a time when some indicators have suggested there has already been a loss of momentum,” confirms Ruth Lea, economic adviser to Arbuthnot Banking Group.  

“This inevitably increases the risk of a double-dip recession. It would not be surprising if GDP fell back in November and, possibly, December too.”  

There is no doubt the economy will shrink in the fourth quarter of the year, but the depth of a double dip will largely depend on the chances of enforced distancing measures continuing after Christmas. And if the rumours circulating are true, those chances are quite high.

We know all about the standard advice – pay down your debts as fast as you can, most expensive first.  

If you don’t have the cash to do that right now, try to shift borrowing onto cheaper alternatives. There are still some out there.  

Then build up an emergency fund worth between three and six months’ worth of vital monthly outgoings.  

And if you’re struggling with repayments don’t wait for things to clear up by themselves – speak to your lender to find a way through, and get support and expert debt advice from impartial information services and debt charities. That’s what they’re there for.

But if you’ve got those things in place and you do have a bit of cash available or you’ve got a few investments behind you, what can you next do to reduce the impact on your money?

“The UK stock market has already shifted downwards to reflect weaker forecasts, and that means investors are left looking at much lower valuations than this time last year, notes Laith Khalaf, a financial analyst at investment platform AJ Bell.

“As difficult as it might sound, this is a time to be putting long-term savings to work in the market rather than pulling them out. There may be further falls to come, as the pandemic and its trail of economic damage continue to unfold. A disputed US election result could also unsettle global markets considerably.”

But the old saying that it’s time in the market, not timing the market, that’s important really comes into its own at times like these.  

Because there’s no way to catch the bottom of markets with any precision, drip-feeding money in every month, even if you have a lump sum, has to be the way to go for long-term investors who can afford to ignore short- or medium-term volatility.  

Despite the recent sharp falls in the UK stock market and the ongoing shadow cast by Brexit negotiations, that market has still turned £100 into £154 over the last 10 years, for example.

“There are conservative funds available for those investors who want some market exposure but wish to dial down the risk,” Khalaf adds.

“Those with high levels of cash holdings should consider whether some might be better off in the market, particularly as cash is yielding next to nothing right now.”

And while tinkering with an investment portfolio for the sake of it is often counterproductive, it’s worth taking the opportunity to review it, if only to check you haven’t become overexposed to one area because market movements have skewed your portfolio.  

For instance, a portfolio that was split 50 per cent in US and 50 per cent in UK stock markets 10 years ago would now be 72 per cent invested in the US because the S&P 500 has significantly outperformed the FTSE All Share.

“The same thing can occur with individual funds and stocks that are heads and shoulders above the rest of the pack too,” adds Khalaf.  

“It’s clearly positive if they have achieved significant outperformance, but you still need to ensure that you aren’t too heavily reliant on the prospects of one company or fund manager.”

Finally, it makes sense to wrap investments in an ISA where possible – as ever.  

We won’t find out exactly how the chancellor is going to start paying down the massive bills he has racked up this year until he has a better line of sight on the damage, but dividends and capital gains could certainly be in the firing line when that time comes.