I have lived through seven different recessions, and I have seen a few people I know become financially insolvent and lose everything they own. I have also seen some people profit tremendously from a recession by leveraging the changing economic landscape. Great opportunities always present themselves in chaos.
Tip #1: Hang On!
Recessions are not uncharted territory. Past experience tells us, on average, recessions last 17 months before the economy shifts into recovery. The National Bureau of Economic Research (NBR.org) counts 35 official recessions since 1945. Typically, by the time the wonks at the U.S. Department of Commerce tell us we are in an official recession, our economy is close to recovery, as economic data lags behind the conditions we experience on the ground.
Tip #2: Buy Investments That Are On Sale.
If you are able to hang on to your job (or had the foresight to have multiple jobs or income streams) and have low debt, you can become a recession winner! As others become financially strapped, they are forced to unload assets at bargain prices. This creates bargains for those in a position to buy them.
Study after study show that investors get nervous during economic downturns and sell their stocks, their small businesses and other investments as money tightens. Essentially, they are buying high and selling low. This is the exact opposite of what we should be doing.
If you are in a position to buy these assets, you can profit nicely when things turn around later. My wife and I did just that during the last couple of recessions. After suffering through the dot-com crash, we resolved to do things differently. In the economic downturns since, we bought stocks and other investments and profited from taking those risks.
Now, we are seeing yet another stock downturn. At the time of this writing, stocks are down in value. Take a look at these stock indexes to get an idea of our current landscape YTD:
Our current landscape YTD:
S&P 500: -23% NASDAQ Composite: -31% DOW Jones Industrials: -18% DOW Jones Total Stock Market Index: -22%
Lisa and I are still not jumping “all in.” We are using a cautious approach of “cost averaging” over time. We are certainly not the only ones to look for new opportunities. In fact, buying when the market is in distress is the standard advice given by those who are “in the know.”
“Be fearful when others are greedy and greedy when others are fearful.” —Warrant Buffett
“If this bear market/recession is not making you the happiest person in the world, then you still don’t understand investing.” —Elon Musk
Buffet, true to form, has purchased $41.5 billion in stock since the first of the year and Elon Musk is still on track to purchase Twitter for billions.
Tip #3: Running For Safety May Not Be So Safe.
I hear so many people say they have abandoned their portfolio of mixed investments and moved all their money to fixed interest-paying accounts in an attempt to preserve their precious capital. This might feel emotionally safer, but the damage is still occurring. If the inflation rate exceeds the interest rate they are earning on their money, their cash is losing value.
The Consumer Price Index (CPI) is determined by the U.S. Bureau of Labor Statics and gives the approximate rate of inflation. Compare the CPI with your interest-generating bank/bond account. The All-Items CPI increased 8% for the 12 months ending in May 2022, which was the largest 12-month increase since December 1981. Likely, your fixed accounts are not earning anywhere near this amount.
Instead of a fixed interest-paying account, consider a short-term bond ladder to limit your interest-rate risk, buying Treasurer-Inflation Protected Securities, or buying real estate, which typically does well during inflationary periods. None of these solutions, however, are a perfect strategy to preserve your capital in the short term. They still may not keep up with inflation, and despite the hype to the contrary, real estate goes up and down in value like everything else (in the short term).
Tip #4: Focus On Your Future.
In each recession, our family’s net worth definitively dropped. Remember, however, today isn’t the end of your money game. The game continues day after day as long as we live and beyond if we need to care for loved ones left behind like a spouse and/or children. What will next year or the year after bring? Even if you are older, you have a future, and you should focus on positioning yourself to make your future better. Think long term no matter your age. Remember, recessions are temporary rough patches on a very long road.
I offer these educational tips to help you profit as we have done from past economic downturns. We took advantage of these opportunities in the past and profited handsomely. There’s no reason you should not as well. Of course, history is not required to repeat itself, and past performance in no way guarantees future success.