Is a recession coming?
Maybe.
We know recessions are inevitable. And when they’re here… the scary news is blasting on cable 24/7. Your friends, neighbors, and colleagues might be panicking once they see their portfolios dropping.
To make matters worse, it’s unlikely that the next recession will look like the last one, so how do you know what to expect?
But to the savvy (and well-prepared) investor, a recession can be a financial gift.
They allow prices to pull back and bubbles to deflate. Smart investors have the chance to buy on sale and take advantage of bargains when others are panic selling because they weren’t prepared.
The market bottom of the last pre-pandemic recession (2007-2009) was March 9, 2009.1 But no one knew that at the time. For all investors knew, the market had farther to fall. We only know that was the bottom in hindsight.
It's not likely to be high-flying dot-com stocks or the financial sector that take the economy down next time. Nor will it be subprime mortgages and the bankers who love them. What will it be? No one knows for sure, but whatever it is, it’s coming.
The good news in all the uncertainty is something wealthy individuals have long known: there are juicy opportunities hiding in the dips. Easy enough to say, but what about when the next recession arrives?
The trick is to keep your head level and stay alert. You can find out how to pop open your own “escape hatch” from all the confusion and rescue yourself (and your portfolio) from expensive fear-induced errors.
When you have the right tools, it’s possible to seize opportunities to make money and avoid the ugly mistakes that average investors tend to make during hard times.
This no-nonsense guide is designed for savvy investors just like you, who need a personal strategy to seize the opportunities hiding in the next recession. You’ll learn about the levers you can pull for your own escape hatch.
You may already be asking yourself questions such as:
If any of these resonate with you, keep reading…
Escape Lever #1:
How exposed are you?
Where are you in your own life’s timeline?
If you’re early in your working career and all of your investments are designated for retirement, you’re able to ride out the inevitable recession with a portfolio that’s entirely invested for growth. You just have to avoid panicking and selling out.
In this case, you’re a couple of decades away from needing the money. Staying invested, even through a nasty experience like the Great Recession, can potentially lead to a much larger portfolio later when markets recover.
On the other hand, if you’re closer to retirement, you can’t afford for your entire portfolio to drop right when you need to start withdrawing money. That means having some money in other assets like cash and bonds.
Either way, be realistic about the risks you face.
Cash is not riskless. It can potentially help protect you from stock market drops, but it doesn’t protect you from inflation. In 2022, U.S. inflation reached highs not seen for decades.2
Bonds and other fixed-income investments can also potentially help protect you from stock market drops, but not from interest rate hikes. Keep in mind that you’ll still need investments to help your portfolio’s potential growth over time.
Consider all your risks. Don’t forget that your own human capital is an asset. If your family relies on your income, you may need to look into ways to protect your family should something happen to you.
Key questions to ask yourself include:
Escape Lever #2:
Flex your flexibility
When it comes to buying cars, clothes, or even vacations, what are the three magic words all purchasers love to hear? “It’s on sale.” Yet too many investors start pushing the panic button and selling when the stock market goes on sale.
The Roaring Twenties may be over soon. In the last century they ended with a severe recession, and there’s no reason to think we’ll get out of this century’s current decade unscathed. But there’s no reason for them to end so badly for you.
Stock dips (and yes, crashes) are the time to scoop up some potential bargains. To paraphrase Warren Buffett, be greedy when others are fearful and fearful when others are greedy.
Just make sure that you’ve still got your cushions against the freefall of the market. Don’t deplete your protection against stock market dips (escape lever #1) or your income generators (escape lever #3) to snatch up sale items. Keep your hedges intact and your income flowing.
Key questions to ask yourself include:
Escape Lever #3:
Batten down the hatches with diversification
You may have heard of the bucket strategy, with “slices” of your portfolio “pie” invested in several buckets of assets. If you will need some money from your portfolio in less than five to ten years, 100% stocks won’t work.
Money in cash covers the expenses you expect in the next year or so. Another bucket is for bonds, which generate income for you and are designed for the next few years. You’ll also need a stock bucket to hedge against inflation in the long term.
Having the right blend of assets can help you breathe easier and sleep at night when the recession hits, knowing you have enough cash and interest income to keep you going.
That way you don’t have to dip into your long-term investments and potentially sell at a loss. At the same time, you’re not giving up all the growth potential in your portfolio.
Key questions to ask yourself include:
Ugly Mistake #1:
Investing with your heart and not your head
Contrary to popular belief, acting like an ostrich and sticking your head in the sand may not be a bad way to deal with a recession! It helps to ignore the financial news because it's going to be full of gloom and doom in a recession.
Riding your stocks all the way down to the bottom without selling them can help prevent you from making losses real.
As long as you stay invested, the decrease in portfolio value is only a paper loss. “Buy low, sell high” is a simple concept. But it’s not always easy when your friends, colleagues, and the news anchors are all running around screaming that the sky is falling.
Investing rules help, too. Such as, “I will buy a stock (or mutual fund) that interests me when its price drops 10% below its average price.” Or “I will only sell when the price of my asset is at least 10% higher than it was when I bought it.” Having rules helps you take the emotion out of investing.
It’s very easy to get greedy when prices are rising and fearful when prices are falling. But smart investors find ways to stay out of the fray so they can focus on building wealth for themselves.
Key questions to ask yourself include:
Ugly Mistake #2:
Going it alone
When recessions arrive, things can get real ugly real quick. It’s hard to tell even when the recession has arrived, since the economic data takes a while. Market drops don't always predict one, either. Is a one-day market drop just the start of a massive plummet to the bottom — or is it just a blip?
With so much information available, it’s hard to separate the noise from the signal. Everyone has an opinion about what stock to buy that will last past the recession, which sectors to avoid, how much of your portfolio should immediately be sold into bonds and/or cash, and so on.
Doing it yourself looks fine when prices are on the upswing, because a rising tide lifts all boats. But when the seas get rough, your portfolio may be threatening to overturn during the onslaught. Experienced deckhands can help keep you afloat.
You may notice that wealthy investors ask for help all the time! They have dedicated financial professionals to help them navigate when the economy gets choppy. They’re not trying to figure out everything by themselves, because they recognize when they don’t know what they don’t know.
Key questions to ask yourself include:
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