You might as well know upfront that this article will not tell you how to beat the market in a recession. Nor will it deliver illuminating wisdom on future share price movements. The good news is that even though you might not beat the market you can beat most other investors.

That’s a bold claim so we had better back it up before going any further. We have mentioned a research firm called Dalbar before. They are an independent firm that produces research and statistics on investor behaviour, amongst other things. A comparison of two equity fund investors from 1988 to 2007, each investing $10,000 showed that the average investor return was $24,011 while the systematic investor return was $31,036 (Source: Dalbar, ‘Quantitative Analysis of Investor Behaviour 2008’. ).

In other words, just by being disciplined, the systematic investor beat the average investor. They didn’t time the market or pick winners, they just behaved sensibly. You can do this too.

So why do people try to time the market? The allure of incredible riches – and if you could really time the market you would indeed get rich. But even professional fund managers don’t get it right all the time. Some go chasing after big returns and have some amazing years of growth but are often followed by massive losses. There are not many funds that are consistently top performers.

So lesson one on how to invest in a recession is don’t time the market. This leaves a couple of options for investment timing – buy and hold or regular investments to smooth out the ups and downs of the market.

Let’s move on to picking winners. When fund managers choose individual investments to put in their fund you expect them to scrutinise the company, the management, the accounts, the markets in which they operate and so on. And they generally have teams of people to help them. Do you really know better?

A survey of American investors which asked how their own portfolio would do and how the market in general would do showed the following:

	Market	Portfolio
June 1998	13.4%	15.2%
February 2000	15.2%	16.7%
September 2001	6.3%	7.9%

(Source: Kenneth L. Fisher and Meir Statman, “Bubble Expectations,” Journal of Wealth Management, Fall 2002)

In other words, we all think we’re going to do better than average. But of course that is impossible so some of us are unrealistically optimistic about our talents.

So that was lesson two: you might not be as clever or as lucky as you think you are so don’t try to pick winners.

A final note of caution on picking winners and timing the market. Where are you getting information from? Do you really believe what you read in newspapers or see on the television? The ‘news’ does not come from some higher source with access to the future; it is written by fallible humans who need to find something to say that sells papers or attracts viewers. And of course beware of share tipsters – they are obviously making money selling their advice rather than following it themselves!

Recessions can be volatile and uncertain times. We have seen a fantastic rally in the markets so far this year (at the time of writing) despite rising unemployment and difficult economic circumstances. The future is uncertain and there are forces that you cannot predict. The government programme of quantitative easing might well have something to do with that (see below for an article on QE). Government intervention also created wonderful growth in banks that looked bankrupt not so long ago. This distortion of the markets is not predictable.

So what can you do to influence your investments?

First of all make sure that you are not timing the market and instead adopt a disciplined approach to meet your goals.

Second, don’t concentrate all your wealth into a few stocks that you have identified as likely winners. The risk of being wrong is too great to bear for most people. Instead make sure that you have a properly balanced portfolio that reflects the level of risk and return that you need to achieve your goals and are comfortable with.

Third, make sure you talk to your adviser about minimising your taxes. If you want to be philanthropic you could give money to charity where you get to choose what it is spent on.

The final lesson for successful investing in a recession is that it is no different from investing at any other time. Make a plan and stick to it with discipline.