When a recession begins, there are a few things we should all bear in mind.
Take a deep breath and exhale slowly. When a recession strikes, everyone is full of doom and gloom: your portfolio will suffer, you will lose money, and your job may be jeopardized.
These fears are exploited by the media. They are well aware that fear sells. You’ll want more information as soon as you read or hear that a calamity is approaching. More doom and gloom stories will be broadcast in the media, feeding into your fears. You can bet on it 100 percent.
But it is precisely what you must avoid. Instead, devise a strategy for moving forward, regardless of the state of the economy.
“Too much time is spent thinking about dread of the next recession,” warns Tom Diem of Fort Wayne, Indiana-based Diem Wealth Management. “Think plenty instead. When you want to advance in your job, especially if you are in a managerial position, this is the time to do it. You’ll have your rsum out there and have established positive contacts with at least a few new hiring managers by the time fear is at its peak.”
It’s all about long-term thinking. I’m primarily concerned with the investment ramifications of a recession in this article. It’s all about having the long view when it comes to investing. In recessions, we must do the same thing we do in bull markets.
“If you are contemplating about owning a stock for 10 years, you should not think about it for 10 minutes,” Warren Buffett said.
Recessions will inevitably occur, and they will be brief. They should have no bearing on your long-term strategy.
“The greatest approach to prepare for a recession is to prepare for a roaring bull market, or any other economic or market scenario,” says Russ Thornton, an Atlanta-based fee-only financial planner who specializes in helping women plan for their retirement. “You should establish and stick to a personal financial strategy.” Sure, as your life unfolds and provides you with decisions to make, you may need to make some alterations to your plan. However, the majority of those adjustments will be attributable to changes in your own circumstances. “Neither your financial strategy nor your financial actions should be influenced by current events, whether they are related to the recession or not.”
Recessions will occur, and there is little we can do to prevent them. However, the most important takeaway is that we must be prepared. Is it possible to make your job and finances recession-proof? And, assuming that’s the case, how do you go about doing it?
1. Pay off all of your debts
Even when the economy is prospering, debt is an issue. It’s an even bigger concern during recessions, when you may be facing the prospect of losing your job or seeing the value of your investments plummet.
Whether it’s credit cards, student loans, medical obligations, or any other form of debt, the more you can pay off, the less you’ll have to pay. That will make dealing with the loss of your work a lot easier, especially if you’ve been unemployed for a long time.
Pay off or pay off as many of your debts as you can if you can’t pay off all of them. If your personal financial condition begins to look fragile, the more you can pay, the stronger your financial position will be.
2. Money is King
There are two key reasons to stockpile cash ahead of a recession, both of which are critical.
The first is to be ready in case of an emergency. Emergencies can occur in growing economies, although they are more common during recessions. The greatest method to prepare in advance is to have a well-stocked emergency fund. It’s one of the most effective ways for preventing little financial issues from becoming major ones.
This is a severe issue in the United States. According to a survey conducted by GoBankingRates in late 2019, 69 percent of Americans had less than $1,000 in savings. This includes 45 percent of people who say they have no savings at all. Even tiny unexpected expenses can develop into financial disasters if you have little or no cash.
The problem also affects retirement funds. According to a study conducted by Northwestern Mutual, 22% of Americans have less than $5,000 saved for retirement, while 15% have no retirement savings at all. This equates to 37% of the adult population.
If you’ve never been able to save much money in the past, there are various options available to you. Stop buying things. Start selling the things you don’t use. Cancel any subscriptions or services that you are no longer using. Also, make sure you put the money you save from all of your efforts into your emergency fund.
The second reason to stockpile cash is to prepare for the next recession…
3. Continue to invest
People panic when the financial markets get wobbly. In my financial planning firm, I used to see and hear a lot of folks wanting to sell everything and go into cash. That’s the worst technique, and I spent a lot of time trying to talk people down from it.
When you’re retired, it’s natural to want to go to cash. If you’re still working and contributing to a 401(k) plan, though, you should continue to invest for the long term.
“A person’s employment retirement account is most likely their largest asset for retirement,” says Matthew Jackson, President of Solid Wealth Advisors, LLC in Fort Collins, Colorado, and author of “The Retirement Dreammaker,” the #1 Best-Selling Book. “Getting regular help rebalancing the asset allocation of a workplace retirement account based on current market conditions and individual risk tolerance is critical. There is no such thing as a one-size-fits-all plan when it comes to investing. Also, keep an eye out for funding with a goal date. Their asset allocations may be based solely on a person’s age, rather than current market conditions or personal risk tolerances.”
This ties together with the “cash is king” notion. If you’ve been saving money, you’ll have enough money to invest in the market. This is more crucial than ever during a recession, because you may acquire equities at bargain prices.
That strategy is supported by the facts. Since 1926, the average stock market loss during bear markets which often coincide with recessions has been 38% over an average of 1.3 years. However, the bull markets that followed those terrible markets returned an average of 339 percent over 6.6 years. That’s a rally you don’t want to miss out on because of a short-term market drop.
For example, after losing 36% in 2008, the S&P 500 gained 26% in 2009. Although it is impossible to time the market, if you had invested during the 2008 slump, you would have been well-positioned to benefit from large profits in 2009 and subsequent years.
In hindsight which no one had at the time 2008 was the best year for stock purchases in decades.
4. Create your “IA’s” Intellectual Property (IP)
It’s all about honing your abilities and credentials. If a recession is on the horizon, one of the best ways to stay relevant in the workplace is to upgrade your skills. Obtaining an advanced degree may be necessary. It could also entail taking online courses or earning a valuable credential – anything that will help you advance in your job.
In a nutshell, you’ll do whatever it takes to increase your job market value.
You may be preparing for a new job, or possibly a new career, during this time. In either case, planning ahead is the greatest approach to prevent being caught off guard by a job loss during a recession.
5. Start a side business
The term “side hustle” is commonly used, but I like to refer to it as a side business. It’s the type of business that, in the best-case scenario, will provide you with additional revenue while you’re doing other things, such as working at your normal job.
It could be an online or offline business, but you’ll start it as a way to supplement your income and diversify your sources of revenue.
It’s possible that you’re only generating a few hundred bucks each month at first. However, as time goes on, you’ll be able to earn up to $1,000 per month. If you lose your employment, your side hustle will be a valuable source of income. Other sources of income, such as severance pay or unemployment benefits, will be supplemented.
However, if you can create a side hustle to the point where you’re earning at least $1,000 per month while still working full-time, losing that job may provide you with the extra time you need to turn that side hustle into something more substantial. It could even become your major occupation in the future.
If a recession is on the way, now is not the time to freak out. Instead, put your time, effort, and energy into doing what you need to do to succeed, even if the economy tanks.
The next recession, in the end, will merely be a blip on the radar. You can decide right now to take steps to put yourself in a position to succeed when it’s over.
When you consider what has transpired in the stock market since the last crash in 2008, it’s clear that the efforts you take now to prepare will pay off handsomely later. Ignore the news and plan ahead!
What kind of occupations withstand a downturn?
8 industries with the best job security during a downturn
- Health-care services. People get sick and require medical care regardless of the state of the economy, thus the demand for health-care occupations is fairly stable, even during a downturn.
In a downturn, how do you make money?
During a recession, you might be tempted to sell all of your investments, but experts advise against doing so. When the rest of the economy is fragile, there are usually a few sectors that continue to grow and provide investors with consistent returns.
Consider investing in the healthcare, utilities, and consumer goods sectors if you wish to protect yourself in part with equities during a recession. Regardless of the health of the economy, people will continue to spend money on medical care, household items, electricity, and food. As a result, during busts, these stocks tend to fare well (and underperform during booms).
How can I get ready for the next economic downturn?
Let’s clarify what an economic collapse is before we develop your economic collapse readiness checklist. Everyone’s definition is different, and what you should do about it is influenced by your definition.
What would life be like if the stock market plummeted 50%? What would be the reason behind this? How long would the economic downturn last? During this situation, where would you live, work, and send your children to school?
Equities of all kinds took a pounding during the Great Recession of 2008. I had been dollar-cost averaging a portion of my monthly company income into US mutual funds up until that point, assuming it was all I needed to succeed.
During the recession, I discovered that US mutual funds alone do not provide adequate diversification. Real estate values were also falling at the time, so there was nowhere to hide.
While many markets were hit hard by the recession, frontier markets like Cambodia actually grew. As the economy rebounded, precious metals skyrocketed, and foreign currencies outperformed the US dollar for years to come.
Your financial crisis action plan is determined by your unique demands, such as monthly bills, debt levels, and where you intend to reside.
Here are some ideas that any successful entrepreneur or investor may use to help avoid the next financial disaster.
In a downturn, who benefits?
Question from the audience: Identify and explain economic variables that may be positively affected by the economic slowdown.
A recession is a time in which the economy grows at a negative rate. It’s a time of rising unemployment, lower salaries, and increased government debt. It usually results in financial costs.
- Companies that provide low-cost entertainment. Bookmakers and publicans are thought to do well during a recession because individuals want to ‘drink their sorrows away’ with little bets and becoming intoxicated. (However, research suggest that life expectancy increases during recessions, contradicting this old wives tale.) Demand for online-streaming and online entertainment is projected to increase during the 2020 Coronavirus recession.
- Companies that are suffering with bankruptcies and income loss. Pawnbrokers and companies that sell pay day loans, for example people in need of money turn to loan sharks.
- Companies that sell substandard goods. (items whose demand increases as income decreases) e.g. value goods, second-hand retailers, etc. Some businesses, such as supermarkets, will be unaffected by the recession. People will reduce their spending on luxuries, but not on food.
- Longer-term efficiency gains Some economists suggest that a recession can help the economy become more productive in the long run. A recession is a shock, and inefficient businesses may go out of business, but it also allows for the emergence of new businesses. It’s what Joseph Schumpeter dubbed “creative destruction” the idea that when some enterprises fail, new inventive businesses can emerge and develop.
- It’s worth noting that in a downturn, solid, efficient businesses can be put out of business due to cash difficulties and a temporary decline in revenue. It is not true that all businesses that close down are inefficient. Furthermore, the loss of enterprises entails the loss of experience and knowledge.
- Falling asset values can make purchasing a home more affordable. For first-time purchasers, this is a good option. It has the potential to aid in the reduction of wealth disparities.
- It is possible that one’s life expectancy will increase. According to studies from the Great Depression, life expectancy increased in areas where unemployment increased. This may seem counterintuitive, but the idea is that unemployed people will spend less money on alcohol and drugs, resulting in improved health. They may do fewer car trips and hence have a lower risk of being involved in fatal car accidents. NPR
The rate of inflation tends to reduce during a recession. Because unemployment rises, wage inflation is moderated. Firms also respond to decreased demand by lowering prices.
Those on fixed incomes or who have cash savings may profit from the decrease in inflation. It may also aid in the reduction of long-term inflationary pressures. For example, the 1980/81 recession helped to bring inflation down from 1970s highs.
After the Lawson boom and double-digit inflation, the 1991 Recession struck.
Efficiency increase?
It has been suggested that a recession encourages businesses to become more efficient or go out of business. A recession might hasten the ‘creative destruction’ process. Where inefficient businesses fail, efficient businesses thrive.
Covid Recession 2020
The Covid-19 epidemic was to blame for the terrible recession of 2020. Some industries were particularly heavily damaged by the recession (leisure, travel, tourism, bingo halls). However, several businesses benefited greatly from the Covid-recession. We shifted to online delivery when consumers stopped going to the high street and shopping malls. Online behemoths like Amazon saw a big boost in sales. For example, Amazon’s market capitalisation increased by $570 billion in the first seven months of 2020, owing to strong sales growth (Forbes).
Profitability hasn’t kept pace with Amazon’s surge in sales. Because necessities like toilet paper have a low profit margin, profit growth has been restrained. Amazon has taken the uncommon step of reducing demand at times. They also experienced additional costs as a result of Covid, such as paying for overtime and dealing with Covid outbreaks in their warehouses. However, due to increased demand for online streaming, Amazon saw fast development in its cloud computing networks. These are the more profitable areas of the business.
Apple, Google, and Facebook all had significant revenue and profit growth during an era when companies with a strong online presence benefited.
The current recession is unique in that there are more huge winners and losers than ever before. It all depends on how the virus’s dynamics effect the firm as well as aggregate demand.
What should you buy in advance of a recession?
Take a look at the suggestions we’ve made below.
- Protein. These dietary items are high in protein and can be stored for a long time.
During a recession, who suffers the most?
The groups who lost the most jobs during the Great Recession were the same ones that lost jobs throughout the 1980s recessions.
Hoynes, Miller, and Schaller use demographic survey and national time-series data to conclude that the Great Recession has harmed males more than women in terms of job losses. However, their research reveals that men have faced more cyclical labor market outcomes in earlier recessions and recoveries. This is partly due to the fact that men are more likely to work in industries that are very cyclical, such as construction and manufacturing. Women are more likely to work in industries that are less cyclical, such as services and government administration. While the pattern of labor market effects across subgroups in the 2007-9 recession appears to be comparable to that of the two early 1980s recessions, it did have a little bigger impact on women’s employment, while the effects on women were smaller in this recession than in previous recessions. The effects of the recent recession were felt most acutely by the youngest and oldest workers. Hoynes, Miller, and Schaller also discover that, in comparison to the 1980s recovery, the current recovery is affecting males more than women, owing to a decrease in the cyclicality of women’s employment during this period.
The researchers find that the general image of demographic patterns of responsiveness to the business cycle through time is one of stability. Which groups suffered the most job losses during the Great Recession? The same groups that suffered losses during the 1980s recessions, and who continue to have poor labor market outcomes even in good times. As a result, the authors conclude that the Great Recession’s labor market consequences were distinct in size and length from those of past business cycles, but not in type.
Which industry is immune to the downturn?
A recession-proof business can be extremely profitable for people in both good and bad times. Whatever the state of the economy or the stock market, certain company concepts, such as those listed below, have a good possibility of succeeding despite the rest of the financial doom and gloom.
Many well-known or historically successful enterprises were founded during economic downturns. The Walt Disney Company was created in the late 1920s, at the commencement of the Great Depression, and the Hewlett and Packard electronics company was founded in the late 1930s, during the second recession.
Rising interest rates and shifting GDP pose far less of a threat to the finest recession-proof enterprises mentioned below than they do to most other businesses, with many of them having the ability to do even more business than usual.
Food and Beverage Business
Because everyone still needs food and drinks to live, the food and beverage business is one of the most recession-proof industries. Because it is not a luxury that can be put aside in difficult times, enterprises in this area can thrive even in a downturn.
Is cash useful during a downturn?
In today’s economy, where stock market circumstances are unpredictably volatile, knowledgeable investors are looking for more reliable assets to avoid losing money. While our economy appears to be improving, recent events have had a significant impact on the stock market. History has demonstrated the importance of having assets that can withstand a downturn. When it came to how to protect wealth amid a slump, the Great Depression was one of the finest teachers the world has ever seen.
Gold And Cash
During a market meltdown or downturn, gold and cash are two of the most crucial items to have on hand. Gold’s value has typically remained stable or only increased during depressions. If the market is falling and you want to protect your investment portfolio, it’s in your best interests to invest in and safely store gold or cash in a secure private vault.
As a general rule, your emergency fund should be at least three months’ worth of living expenditures.
While banks may appear to be a secure place to store money, safety deposit boxes are neither insured nor legally accountable if something goes stolen.
Furthermore, the Federal Deposit Insurance Corporation (FDIC) will not always be able to cover your money in banks.
Investing in physical assets such as gold, silver, coins, and other hard assets is preferable.
Real Estate
During a slump, real estate is also a smart strategy to secure wealth. Another investment possibility that often retains its value and appreciates is debt-free real estate ownership. Of course, the location is a big consideration. Near colleges is an area of interest for wise investors because these locations tend to weather depressions better. However, the long-term viability of this wealth-protection strategy is contingent on the soundness of the local economy.
Domestic Bonds, Treasury Bills, & Notes
During a depression, mutual funds and equities are considered high-risk investments. Treasury bonds, banknotes, and notes, on the other hand, are more secure assets. The United States government issues these things. When they mature, they pay the buyer a fixed rate of interest.
You can choose short-term bills that mature in as little as a few days depending on your demands.
If you’re searching for a longer-term investment, there are notes available that mature in as little as two years.
Foreign Bonds
Many experts in the past would have suggested foreign bonds as a depression-resistant investment option. Recent events have demonstrated that this is not always a safe bet. Pandemics and other market instability around the world have rendered this a risky investment, as all countries’ economies are affected.