by Simon Wright

Created on: May 23, 2008

The basic principles of investing during a recession are the same as they are when investing at any other time. You need to be confident that you can afford to tie money up in shares and make a judgement that the probable reward exceeds the return that you would expect to get from other forms of financial instruments, such as savings accounts or fixed rate bonds. And, of course, you need to determine which stock or bundle of stocks you wish to invest in.

However, whilst it is true to say that the basic investment principles remain the same, it would be foolish to say that the economic backdrop doesn't introduce some specific factors for investors to consider. This article looks at those factors and how the private investor can best safeguard his interests during a period of economic strife.

Factors to consider:

1. Risk of redundancy or being defaulting on your mortgage:
One unfortunate but almost inevitable consequence of recessions (especially if it's a deep recession) is that some people lose their jobs and have difficulty keeping up their mortgage payments.

It is always important for people to maintain a rainy day' savings pot to deal with any arrows that fate shoots at us. This necessity to keep back a reasonable sized reserve of instant access savings increases during a recession, unless you are 100% confident that your job and monetary welfare isn't going to be affected by the recession.

He question, then, is whether you still have disposable funds left over that you can afford to invest in shares.

2. Increased difficulty in spotting winners':
When we buy into individual companies we are doing so on the basis that we believe that the company has good prospects over a certain time-frame. This belief should have been informed through careful research but even with the most detailed analysis it is sometimes difficult to pick the best prospects from the long list of available companies.

This task of picking winners' becomes even more difficult during a recession. Firstly, there's the increased risk of a company going bust which could see you lose all your hard-earned money. We've even seen some extremely well established banks getting into difficulty recently so it's not just small start ups that suffer when the going gets tough.

What this means is that you have to be even more sure than normal that the company you're buying into has some competitive advantages or strengths that are going to cause it to weather the economic recession better than many of the other listed

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