Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

I was asked recently to provide some thoughts about how to invest your money during a recession - something which unfortunately now looks likely.

My immediate thought was of that old joke: a tourist looking for the nearest town pulls over to ask a local man (insert regional stereotype) for directions. The local responds: ‘Well, if I were you, I wouldn’t start from here.’

Unfortunately, when investing during a downturn, it’s often the case that ‘I wouldn’t start from here’.

Altering investments now, once a recession seems inevitable, means doing so after the market has already priced in a big reduction in economic activity, with the assets and companies that are set up to do best in a downturn already expensive.

So, what can you do? The first job for every investor is to understand what you want to achieve during the coming period, which is likely to be difficult for businesses. It’s highly likely that you are already sitting on significant paper losses.

The key question is: do you want to simply preserve what you have left, or are you willing to take risk in the hope that you can benefit from the recovery as and when it comes?

Taking the cautious path

The ultimate ‘safety first’ approach would be a full retreat to cash, but that means locking in those losses for good. If you were invested with a time horizon that means you can weather short terms losses - as you should be - then selling out completely is unlikely to have been part of the plan.

Indeed, any wholesale shifts in your investments is tantamount to an attempt to time the market and comes with considerable extra risk. Any action taken now is best done in moderation and in stages.

‘Safe haven’ assets are so-called because they have historically provided shelter when riskier assets have struggled. This makes them a tempting prospect right now, in theory at least. Government bonds and gold are perhaps the two most commonly held. As you might guess, however, the prices of these safe haven assets are elevated and buying now means buying high.

Nevertheless, we are still at the start of this crisis, from an economic point of view at least, and being well diversified and holding assets uncorrelated with the stock market still makes sense. That’s particularly true if you have found the ups and down of the past month tough to handle and want a smoother ride in the period ahead.

Our contributor Graham Smith has written about how different safe haven assets have performed in the crisis so far, with the conclusion that prices in some cases have been kept lower than you might expect despite the extra demand that comes from a slump on the stock market.

If you want to increase exposure to bonds the Royal London UK Government Bond Fund is highly rated by our analysts and concentrates on the bonds issued by the UK government. For a more world-wide option, Colchester Global Bond performs a similar job across global bond issuers.

Gold is only likely to be a marginal holding for most investors, but a relatively small holding can act as a counterweight in periods of extreme market stress. Further setbacks in the fight against Coronavirus are clearly very possible and it could pay to hold gold. Investec Global Gold buys share in primarily gold mining companies so its performance reflects movements in the gold price, but it also offers exposure to other precious metals.

Looking beyond the crisis for growth

Many investors won’t like the idea of buying safer assets now, given their high price, and will see the sense in buying growth assets like shares because prices have fallen. Stock markets are likely to remain very volatile as the crisis unfolds, but it’s also true that exposure to shares in the long term will probably be necessary if you want to avoid an overall loss during this period.

Rathbone Global Opportunities has fared better than most in the turmoil so far and includes a number of tech-focused companies that could emerge as long-term winners from changes to working practices after the crisis - including Amazon, Adobe and Paypal. If the pandemic leads to lasting social changes, the fund could benefit.

True optimists may even want to look at assets that have been most heavily sold off in the crash so far, in the hope that a swift economic recovery will see their price bounce back. With the country in lockdown, domestic UK small and medium-sized companies have been among the hardest hit, and those unloved by the market already even more so.

These are the speciality of Fidelity Special Situations, managed by Alex Wright. The fund has been hit in the early stages of the health emergency but that at least creates an attractive entry point for one of the most highly-rated value funds around.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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