You know how Batman is a superhero without any superpowers? How he’s just a smart dude with loads of money?

Well he probably earned a chunk of that money through pound-cost averaging – the superpower for smart dudes.

Okay, work with me here…

You may not be feeling like much of a hero right now. The stock market has been smashed, and the global pandemic is unfolding like the first act of a horror movie.

There’s some whispered talk about this being a buying opportunity.

But it’s hard to buy when you’re frozen with fear.

An average winner

However there’s a simple technique that turns you into a buying badass without lifting a finger.

If you’re already investing then you’re probably doing it already. You just gotta keep doing it during the meltdown.

Yes, it’s pound-cost averaging and it will work just so long these aren’t the End Times*.

Picture the scene. The markets are convulsed with panic. Equities go down 20% in a flash. They keep sinking like a submarine with a hole in its hull. They hit bottom 50% down from the peak. That’s up there with the worst crashes in history.

Eventually though, dawn breaks. The world overreacted. Optimism returns. The market climbs. It keeps climbing.

Here’s the story told through the medium of pound-cost averaging:

You’re up 30% on your new money! £10,000 in cash contributions turns into £13,000.

Anything you had in before the crash is back to evens.

If you stopped investing dead at £10 per share then no profit for you. You’ll only break even when the market returns to £10 per share.

If you sold during the market swan-dive then you’re likely still under water.

But if you pound-cost average through the crisis then your portfolio breaks even sooner. Your new money registers a profit just as soon as share prices rise above your average buying price  – £7.69 a share in the example above.

Buying on sale

If you don’t believe the end of the world is nigh and your emergency fund is in order, then keep calm and carry on investing.

We don’t need to do anything clever here. We don’t need to guess when the market’s hit bottom. We simply admit that we don’t have an edge.

Just keep drip-feeding the cash in by monthly direct debit. Buy your usual investments. Wait for the market to recover. Do not sell.

Recovery period

How long might it take for the market to get back to where it was?

• Peak to trough to recovery takes a little over three years on average, according to a Vanguard review of global equity bear markets.

• Hold up! More like five to seven years, according to a deeper analysis by Early Retirement Now that factors inflation into the equation.

Both studies assume you don’t move a financial muscle – that you’re paralysed like a poor church mouse in the face of the crisis cobra.

But recovery needn’t take quite so long if you pound-cost average through the crisis. It’s the auto-pilot program that makes you look like a daredevil.

Take it steady,

The Accumulator

* Pound-cost averaging doesn’t work if the market never recovers. If this is the end of capitalism as we know it then all bets are off. I don’t believe that it is. Do you?

This is a testing time for everyone. As we begin to isolate ourselves and the economy is put into a coma to try to save the patient, it may seem like an existential threat.

So I understand why at Monevator we’ve received such a diverse range of feedback on our articles over the past few weeks.

As recently as mid-February, some readers ostentatiously shrugged and said “what crisis?” when I wrote about the virus threat to their portfolios.

But soon enough, as the scale of the challenge was realized, others complained it was not the time to talk about money.

I was several times accused of not caring about people – only about my portfolio.

This despite clearly stating in my articles that I understood that anyone dying was a tragedy for all concerned.

It’s hard to write that statement in less than a few  hundred words without sounding ridiculously glib. That’s because it really goes without saying.

My own mother is well over 70, and we got her isolating early. Time will tell.

Other readers have said they have a vulnerable daughter, or a son risking daily exposure as a doctor, or that they themselves have some kind of extra-susceptibility to the disease.

They have often coupled this with questions or opinions asking why – at a time like this – we are writing about the likely economic hit from the virus or the lockdown, or why we’re discussing whether to sell your shares or to buy more.

Don’t we understand people are going to die?

Yes, we do.

Resistance

As I said, I understand it’s a tough time. You can’t argue against people’s feelings, and I don’t blame anyone for being fearful or single-minded.

But let me be clear.

Monevator is an investing blog. We are here to help people manage and grow their personal wealth. We’ll do that through booms and busts, bull markets and bear markets.

This doesn’t stop because people are getting ill or dying. It doesn’t stop because we’re all hunkering down and fearing for our jobs. It doesn’t stop because our retirement portfolios have dropped by a quarter in the space of four weeks.

On the contrary, for exactly those reasons and others we will continue to talk about money, investing, and the economy.

And continue and continue.

Bluntly: however many people die.

Because that is what this site does. Doing what we do will be our tiny contribution to the bigger picture of keeping the world turning and getting through this horror show.

What else do people expect? For the Monevator home page to redirect to the World Health Organization? Should that also apply to the BBC’s weather pages?

Is it frivolous that people are watching movies in self-quarantine when they could be reading about the daily misery unfolding in Italy and potentially on our doorstep?

Of course not.

Whether you’re feeling anxious about your portfolio or your pension or you couldn’t give two hoots about it is up to you.

I’m not here to say what should matter to you.

If you think it’s distasteful to write, as I did a few weeks ago, of the likely unintended consequences of shutting down the economy – including plenty of bad non-virus related health outcomes, incidentally – and you’d prefer to read another social media post demanding someone do something, anything, then by all means go read those instead.

We’ll still be here when you get back.

That’s the whole point.

Recovery

Monevator will keep writing about personal finance, investing, and the economy in the weeks and months ahead. This will be our overwhelming focus.

If you think that’s wrong and our site should be turned over to a daily roll call of the dead then please do take a break for a while.

I honestly wouldn’t blame you. There are many things far more important than money, and your loved ones are top of the list.

By all means ignore the financial aspect of your life for the next six months. If you can afford to do so then it may well be the best thing for you. There’s more than enough else to worry about.

But discussing personal finances, investing, and the economy is what we do.

We’re just a couple of guys working on this website in our spare time, and 99.99% of the world couldn’t care less what we write about even in the good times.

But some people have generously told us over the years that we’ve made a difference to their financial lives. That matters to us.

I don’t think a reader fretting about their finances and turning up at Monevator to find our last post was a ‘Good Night and God Bless’ from February on account of the virus would do anybody any good.

Quite the contrary.

So we’ll keep on doing what we do, writing about money and investing, for anyone who wants or needs our site, for whenever you’re ready to read us.

Note: This article on recession preparation has been updated in light of the COVID-19 virus pandemic.

The coronavirus is upon the West. Stock markets are in free-fall.

Almost all measures that can slow the virus down and save lives will hit economic activity.

This challenge could persist until we see a vaccine or until as a species we develop some resistance to the virus.

I don’t say a recession is a certainty. Nobody can. Central banks are taking extraordinary measures, and politicians are belatedly following. Perhaps – cross everything – the virus threat will abate as the weather warms up in Europe.

But it seems beyond doubt that the hospitality sector – pubs, restaurants, event companies, hotels, and many more – are going to be hit for six by any lockdown.

And this will have knock-on consequences throughout the economy.

Winter is coming

Unfortunately, things could get a loss worse.

The latest figures from China show how its measures crushed economic growth.

China’s disruption happened at a time when the rest of the world was pretty much untouched by the virus. Major economies like the US, Germany, and Japan were bouncing back from the US-China trade war. Britain had its Brexit folly, but that had already slowed us and negotiations seemed likely to drag on indefinitely so it wasn’t an immediate threat.

Today things are very different. Workers in countries everywhere are downing tools and staying indoors. Videoconferencing suppliers may be booming – Netflix shares rallied in the early weeks of the crash as a stay-at-home trade – but airlines and cruise operators will probably go under without state bailouts.

On balance I think some sort of sharp slowdown is very likely. At the least a technical recession seems probable¹. But we can’t rule out something much worse.

At the least: The range of potential outcomes has increased, and greater uncertainty means greater risk.

Things may well turn out to be less bleak than feared – especially as there’s enough fear around at the moment to push even the sunniest disposition towards catastrophic thinking. Maybe the market is overreacting.

But when the potential downsides have magnified, then I believe it’s only logical to get more defensive with your personal finances – and perhaps with your investments – until we have a clearer sense of what’s going on.

And hey – there’s very rarely a personal disadvantage to saving more money.

How to prepare for a recession

Most of us have lived through one or more recessions. How they affect you really depends on the severity of the recession, and your circumstances at the time.

• Someone who keeps their job and sees their mortgage costs fall might not even notice.

• Somebody who has overstretched themselves financially, loses work, and has nothing to fall back on could be scarred for life.

We have a safety net in the UK. Our taxes fund a decent welfare system and a free-to-use health service, so we see fewer of those middle-class to middle-of-the-highway stories you read about in the US.

But there are less dramatic ways to suffer from a recession – especially if you’ve got dependents – and they’re all best avoided.

How? Act early, reduce risk, shore up your position, and revisit every expense.

Act early

Get started with this before a recession is obviously upon us.

Some will say this is scaremongering, or that if everyone acts this way then we’ll talk ourselves into a recession.

I say: Not my problem!

Just as I thought the bank runs of 2008 were perfectly rational, I’m not interested in whistling past a potential graveyard in order to take one for the team.

Besides only a tiny minority of the UK population reads Monevator.

Inexplicable I know, but our readers are unlikely to trigger financial Armageddon on their own.

Reduce risk

It’s not the pension portfolio that you don’t need to touch for 30 years that kills you in a recession.

It’s that you stretched to borrow for a second car, or a financially shaky buy-to-let, or a dubious business venture that goes wrong. It’s the personal loan you never paid off.

“It’s only when the tide goes out that you learn who has been swimming naked,” says Warren Buffett, gazillionaire.

Make sure you’re covered.

Shore up your position

What do you take for granted now that could look precarious a year into a deep recession?

Your job? Those tenants who are always two weeks late with the rent? Your depleted emergency fund?

Think doubly hard if you’re a small business owner or contractor.

To mix my metaphors – show some love to your golden geese, and throw out any rotten apples.

Revisit every expense

Zero-based budgeting is all the rage in boardrooms. It entails going through every expense a company has at the start of each period, and justifying its continued existence.

Just like companies acquire bloated payrolls or costly perks in the good times, so our own household finances might be carrying a lot hangers-on – from a rarely-used gym membership to £100 a month you’ve been subbing to your eldest son for beer money at Uni without telling your partner.

Purge! Purge it all!

Some ideas to get you started

This kind of household right-sizing is obviously down to you as an individual. You know how much you earn, what you’ve got invested, where you’re wasting money, and what you can’t do without.

You need to work out what matters most to you.

Here’s some ideas to get you thinking.

Act early

• Take responsibility.
• Set aside a weekend to do a statement of affairs. Are you solvent?
• Many people find creating a budget is helpful to learn where their money is really going.
• Begin a conversation with your partner. You don’t want to shock them in six months when that cottage in Devon is, um, sold.
• If you have a financial advisor you trust, now might be a good time to visit them.
• Back up your earnings. Consider looking for additional work, ideally separate to your main employer. Even just a couple of evenings a week. If you’re made of fancier stuff, could you add some consultancy or similar to your roster?
• If your employer says they may need to let people go if things don’t get better, quietly consider yourself fired TODAY and go into survival mode with respect to budgeting and saving. Better sooner than later. (Perhaps look for a new job, depending on your circumstances. But certainly save all you can).
• Be prepared. Will you be offered a redundancy package? What happened at your company in the last recession? What are your rights?
• Read your contract.
• Run your own business? You’ve got to balance taking evasive action now (and doing the sort of things I’m discussing here on steroids) with potentially missing out if things turn out alright yet you’ve reduced your capacity too severely. Still, the first cut is often the cheapest.

Reduce risk

• Get out of debt.
• Seriously – if you’ve got anything but mortgage debt, then start figuring a way to pay it off as your top priority. Work evenings. Sell furniture. Eat healthy and ultra-cheap.
• Repair or enhance your emergency fund.
• Reevaluate your racier investments. Thinking of getting into buy-to-let? Perhaps give it six months. Own five flats already? Maybe sell the weakest one. Can you really risk owning that quarter-paid-for holiday home? (Perhaps – as I say this isn’t one-size fits all. My point is you should look objectively at your situation).
• If you’re a passive investor, make sure your asset allocation is good for all-weathers. Don’t be reactive, but if you were cutting corners with diversification in the first place for no good reason, it’s time to get sensible.
• If you’re an active investor, make sure you’re not invested in crazy blue sky story stocks at the expense of sensible investing. Now is probably not be the best time for ‘fun punts’.
• Are you over-invested in equities? Shares are jolly when the market is going up. Not so much if they halve. If you’re on track to hit your number at a lower level of risk, why are you taking on more?
• Make sure any essential insurance – vehicle, home insurance, life insurance if you have dependents – is in place.
• Consider additional insurance if you’re very concerned, but do your research and get advice if required. (Insurance to cover vital payments or potential redundancy sounds great, but not if it costs you a fortune, impoverishes you, and doesn’t pay out when you need it. I’m no expert on this, but the advice is out there).
• Peer-to-peer lending could be tested in a downturn, especially the more exotic offerings. Don’t be greedy. Our longstanding suggestion is 1-5% max of your wealth – in total – across the strongest of these platforms.
• Favour liquidity. Remember cash is king in bad times, and triply so if you lose your job.
• Personally I’d consider holding on to cash rather than making over-payments on a mortgage at today’s low rates if you’re short of non-property assets. Again, cash is king – provided you can trust yourself not to spend it. Ideally you’d do this with an offset mortgage. But even keeping an extra £5,000 to £20,000 in a current account that pays a percent or two of interest – rather than overpaying your mortgage, and hence locking up your money – will give you more flexibility.

Shore up your position

• If you’re like most people, your salary is your most precious income stream. Look after it!
• Try to be a profit center, not a cost to carry.
• Use the same techniques you’d apply to getting a raise to make yourself less dispensable in a downturn.
• Do all this before anyone else is thinking about it.
• If you’re a freelance or a contractor, you could be culled first. At the least be likeable, dependable, and add value.
• Get more clients.
• Get new clients.
• Try to make sure all clients are good to pay. Chase late payers!
• Consider getting an extra job, or some other way to earn extra money.
• Send a sit-at-home partner off to work too for a bit, every week. Even £50-200 a week can be very helpful if things get tough, depending on your household’s burn rate.
• Can you increase your monthly contributions into your emergency fund?
• Can you build a bigger cash buffer some other way? (Sell something!)
• If you’ve got a lot of cash saved beyond your emergency fund that you don’t need to access, it might pay to lock it up for a year or two before the best fixed rate savings offers are withdrawn. (Ideally choose one with some sort of emergency early access).
• Consider remortgaging your home to secure a longer-term low-cost fixed rate. It may work out more expensive, but it could be worth it for the security. Decide what matters most to you.
• I’d try to keep investing new money, even a small token amount each month. (If you have found this website and you’ve read this far then there’s almost certainly something else you can cut to maintain your investing habit.) Unless you realize you’ve really misjudged your asset allocation and risk tolerance, you’ll almost certainly do better not to sell long-term investments but rather to sit it out. Market timing is incredibly difficult.

Revisit every expense

• Stop smoking.
• Seriously, stop smoking.
• Do you really need gym membership? Use the stairs and do press-ups.
• Do you really need Sky and Amazon Prime?
• Do you really need Sky and Amazon Prime and Netflix?
• Etc.
• Look at all your household bills. Switch suppliers to save £25 off gas, £15 off electricity and £5 off water a month and you’re banking an extra £500 a year.
• Can you reduce bills further by paying by direct debit and so qualifying for a discount?
• If you pay taxes on dividends or interest and you’ve got an unused ISA allowance, you’re an idiot. Taxes eat your wealth.
• Sell your expensive car or get out of your lease contract, and get something cheaper. Maybe a bike or in London a public transport fetish.
• Could your family take a holiday closer to home so you can sock away an extra wodge for a rainy day?
• Choose to rent somewhere a bit cheaper if you’re currently looking. If we do enter a recession then haggle even harder to reduce your monthly rent.
• Own your own home? Is your house a 90%-mortgage backed indulgence that you can only really afford if both of you keep your jobs and all your bonuses come in on-target, just like in the good times? Really? Might want to rethink that.
• Watch out for frivolity-creep like daily lattes or e-books you never read or the odd Deliveroo blowout that’s become a three-times-a-week staple.
• Have you been supporting family members, or direct debiting into a niece’s Junior ISA? Good for you, but if your numbers are looking tight you may need to stop it. You have to fit your own oxygen mask first, if you’re to be around to help others!
• Sell your super-yacht if you’re rich. Skim through these 101 money saving tips if you’re not.

Also see my co-blogger’s excellent article on saving tips for a more motivational pep-talk. He went from a big spender to a master saver through the judicious use of a budget.

More ideas? Please add them in the comments below.

Stay alert for surprises

Because so much is now potentially in flux, it could pay to be even more engaged with your finances than usual.

I’m not talking about swapping passive investing for twitchy day-trading.

If you’re a passive investor with a proper asset allocation, leave it be. (You’ll probably do better for it).

However with your personal finances – or any active investing you engage in when The Accumulator isn’t looking – this is not the time for complacency.

Surprises could be positive or negative. Future policy responses might soften or delay the blow – at least for a while.

We’ve already seen the Bank of England cut Bank Rate to 0.25% and introduce a range of other emergency measures. It could well cut rates to zero.

It’s all bad news for savers with cash languishing in terrible savings accounts (and for banks for that matter). But it could be positive for some other kinds of investments, especially government bonds.

I also expect various government actions to do more to try to revive animal spirits – or even just to directly inject cash into the economy.

Besides approving infrastructure projects or similar, this could involve things like cutting corporation or capital gains tax, a stamp duty holiday, and perhaps even dramatic measures like the financial crisis’ temporary cut in VAT.

A pandemic is an unusual sort of economic meteor, however. Cutting rates and taxes to encourage us to go out and spend more conflicts with medical guidance to stay indoors. Perhaps more direct support to stop previously viable businesses going bankrupt before better times return will need to be considered.

The State’s strained finances will certainly be weakened by any recession, so we can expect tax rises down the line.

Hope for the best, but prepare for the worst

Even if you’re confident you’ll retain your earnings power in a recession, being nimble might help you retain your wealth.

If you’ve got a globally diversified portfolio then it should have already cushioned some of the existential pain at home by boosting the value of foreign assets in sterling terms – as well as the share prices of companies that earn most of their money overseas, like the bulk of the FTSE 100.

However at the time of writing this looks like being a global retrenchment. We’re all in it together – and that includes our stock markets – so unlike the Brexit hit in 2016, foreign markets are not going to offset the pain. Owning top-quality bonds and having a chunky cash allocation has been the only real safety cushion to-date.

In the medium-term, the virus should pass. I don’t think the world is ending.

However there’s a danger we get into a self-reinforcing downward spiral – or that civil unrest or other kinds of unforeseen disruption such as a credit crisis make matters worse.

Let’s be careful out there.

Please note: Earlier comments on this article may refer to previous recession scares – I’ve left them in for historical interest. Other suggestions as to how readers can take personal finance related action ahead of any recession are welcome.

1. A technical recession is two quarters of negative growth. Like British summers they don’t amount to much and can be easily missed. [↩]