Prep for weathering a recession

Prep for weathering a recession
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#1

Last recession I was in grad school so it was somewhat ideal to not have to worry about my job etc…

The next recession I will have the same reality as others, potential layoff, worrying about my home, etc…

For more experienced members, what tips do you have to weather a recession or even come out better?

A few things I noticed during the last recession:
-great hot deals as companies offloaded their large inventories from their balance sheets and attempted to get people back in stores
-home prices were fantastic
-huge opportunities to buy low on stocks if you had cash available (I.e., buying with Buffett)
-vacation rentals and rental cars in vacation areas like Hawaii were super cheap due to no demand and high supply

Any other tips or ideas?


#2

The best thing I did during the last big one was absolutely nothing. Had sufficient cash reserves to cover 3-4 years so I wouldn’t be forced to sell anything at the worst time. Ignored conventional advice and stopped opening my financial statements for almost a year after balances dropped over 30% and I was falling into the “I better sell before it’s all gone!” mentality. Not looking was hard, but it stopped me from freaking out about it every month.

Quite simply, I stayed the course and am far better for it. Those who sold locked in their losses and are likely still recovering.


#3

Own enough bonds that the drawdown won’t be that painful?

One positive side effect of a recession is that travel plummets and it’s much easier to get award flights, and airlines run more promotions.


#4

If you haven’t already, get your HELOC, PLOCs, CCs (know which ones have no fee BT, or 0% APR) before SHTF.


#5

Best prep IMO would be getting a recession-resistant job. As long as income is steady, it’s easier to weather a recession since you won’t have to sell low. In your line of work, look at which jobs are likely to become non-essential first. As far as companies are concerned, which have revenues most tied to consumer spending which typically nosedives during recessions. And boost the networking now, not when you’re desperate to find another job down the line.

To lessen the impact of potential layoff, build up an emergency fund that would be used to cover your expenses while unemployed. If you gradually reduce lifestyle now to boost savings, it won’t be as huge a step down in case you become unemployed. Plus having liquidity during recessions is the secret to be able to jump on opportunities. I think especially in real estate that’s always gonna be a relatively easy win if you have cash to buy properties at depressed prices and position yourself to get all of the rebound in prices later.

Investment-wise, theoretically you could move away from equities and into bonds/gold/cash which are more resistant to recessions. The well-documented issue with such market timing is that you have to be right twice in a row for this to work out. If you jump off the bull run too early, you miss out on returns, if you jump off too late, you may already be selling low. Then if you jump back in too late after the recession is over, you’ll miss out on the best earnings. So unless you’ve got a better crystal ball than the relatively efficient market, in practice, this is pretty hard to get right consistently. You can however use dollar cost averaging. And if you have savings, during the recession put some extra into that dollar cost average investing.


#6

Maintain liquidity

  • max cash
  • max credit lines
  • refinance debt to push out term
  • modify investment portfolio to things that can be more easily convertible into cash
  • sell unnecessary items while values are still high
  • reduce fixed costs
  • Look for other sources of income: rent a room, sell items on ebay, etc.

Educate yourself

  • Learn about investments that perform better during a recession (bonds, commodities, defensive stocks)
  • Learn about historical cycles in different asset classes so you can understand when they bottom out and when to invest
  • Have a list of things you want to invest in before they get cheap

Work

  • Think about whether it makes sense to be the first to get laid off / take a package or not (I’ve seen cases where being laid off first is a good thing because they found the best jobs first)
  • Try to get good work reviews or switch to job that’s closer to the revenue generation side of the business so you don’t get laid off first (if that’s what you want)
  • Max out on tax advantaged investment accounts. If you get laid off, you may not be able to contribute for full year or get matching.
  • Make sure you have the insurance you want and is optimized.

#7

Liquidity is definitely key, Nothing is more painful during a downturn than watching Mr, Buffet telling investors that he loves downturns because he can average down, then realizing you’re fully invested and reply “With what?”


#8

Bonds and cash are definitely much less risky than stocks, so regardless of the merits of your timing, if your goal is to reduce your risk because you’re worried about a recession, selling stocks and buying bonds/cash instead is a good way to do that. Now the economists have predicted something like 7 of the last 2 recessions, so it’s hard to guess when to switch if your goal is just making more money (ie it’s easy to miss out on stock market gains this way), but having an appropriate portfolio for your risk tolerance is a good thing and will go a long way towards you not freaking out and selling at the bottom of the next big market drop.


#10

Yeah, When I say bonds, I mean BND or the us 10 year. Not individual corporates. Good point.


#11

My point was more along the line of market timing.

I agree that a portfolio balanced for the volatility you’re willing to bear to get higher returns long term is the key but in that sense, there’s really not a whole lot to do in that strategy to prepare for a recession except sticking to your plan.

The only thing I can think of is to monitor your asset allocation to make sure it still matches your strategy. Let’s say you want 60% equities/30 bonds/10% cash mix, after a long bull market like we’ve had, that may look more like 75%/20%/5%. In which case, you should rebalance your portfolio back to your desired asset mix via either a change in new contributions or exchanges between asset classes.


#12

I’ve been playing with a strategy to hedge against a recession by investing in bank deposit bonuses.

Currently I’ve got 20k locked away in the Discover Savings because of the $200 for 20k bonus, if it takes 3 months to get it, I’m estimating 0.04% return + 0.0115% savings rate. If I get it earlier great. Immediately afterwards I would do the AAA savings and then I’ve got a few local banks lined up.

Of course this doesn’t really work if your investments are in the millions+, but it does allow you to earn great rates while staying outside the market.

The few ~5% for 5k deposit accounts seems interesting too, but the amount of management those need each month have been off putting.


#14

When does everyone think the next recession is coming and how bad do we think it’s going to be?


#15

Not particularly soon if you asked me, but my opinion is worth all of what you paid for it and not much more. Between the interest rates sounding like they might stay low-ish for a while and the corporate tax cuts queuing up in DC, it seems like the market isn’t too worried. Even the Rocket Man over in North Korea seems to be losing his impact.


#17

Most people who live paycheck to paycheck fear a recession. There is a chance they will lose their job and potentially more if they are forced to sell or liquidate during a down market. The best thing I think you can do to weather a recession is to prepare for one that might happen at any time. That means be in a position to take advantage of it, and have the mindset that you will not only weather it, but be in a position to profit from it.

Adopting a firm buy and hold strategy for your retirement investments means you don’t sell your positions. Period. Of course, you will want to rebalance your portfolio quarterly or annually (I prefer annually). The adage of do the opposite of what everyone else is doing is a good rule of thumb here too. When everyone else is selling, that is the time to buy. During down markets is the best time to buy in, whether into the market or into real estate. Many rental property owners with enough liquidity to purchase rental properties at a discount did very well during the housing market crash when they could buy houses for cheap and watch the housing market rise during the last few years.

Oh, and one of the best pieces of advice I’ve heard over and over – don’t try to time the market. This is especially true during turbulent times such as recessions when lots of people tend to make impulse decisions based on fear and uncertainty.


#18

The Used higher-end car market was ripe last recession. Used Corvettes, just a few years old were in abundance and people just had to unload them.

Recessions crush people who live paycheck to paycheck and the second car goes on fire sale quick.


#19

I’m kind of the same mind that IF things proceed normally, I would not expect a recession in very short term. Market is likely to remain optimistic as long as corporate tax cut + tax reform actually happens (you never know) and a general climate of business deregulation. Those should somewhat lower P/Es making equities appear more of a bargain than currently and thus continue to support solid demand and price growth.

But depending on economic and political outlook in late 2018, that could all change. And with the many months of sustained growth, it’s not like some kind of correction would surprise anyone.

My personal prediction - which is worth exactly how much you paid for it, aka nothing - is mid 2019. By then, I’m expecting the impact of tax cuts to have disappointed and/or have reached their full extent and equities starting to look expensive compared to their earnings. That could coincide with slightly higher interest rates caused by economy heated up by increased spending (from liquidity afforded by tax cuts). Also real estate prices have been a bit out of whack, at least around here so at some point a bunch of markets will start to look way overpriced. That may be regional only so YMMV. Couple that with potential changes in Congress (mid-term elections are usually not favorable to the ruling party) making it even less functional than currently. Why mid year? Mainly because sell in May and go away is statistically not a terrible strategy and all that incompetence in DC takes time to kick in. Anyway, not gonna change my strategy much in advance except rebalancing and keeping a bit more in liquidity.


#21

It’s totally the wrong mentality to have. You should prep for the good times. Recessions are just the good times taking a break. Everyone needs a breather, only to come back stronger.

In any time period, you need money. Focus on earning money. Have a plan to earn, save, and invest - all the time - and execute on your plan.