I purchased my first stock in 2008. Right before the recession started. Yes, I saw the fall. But I did not know what the heck was going on, or Who that guy Lehman was, why was too big to fail, etc. All I did was,
I purchased beaten-down bank stocks, Trust me, it was not something I am proud of. Although I doubled my money quickly. But I did not understand what stocks meant. I sold all those stocks. But I learned from my mistake of selling good businesses that recession is a great time to buy good business.
Ever since recovering from that 2008-09 crisis, all I heard that we’re headed for a recession. Why? Many believe the US Fed printed money to inflate asset prices and it was not a real recovery.
The FED had to cut rates last week when the economy is supposedly doing well. But the president is not happy and there are loads of trade war going on. CNBC is a gloomy channel nowadays. Where every expert is predicting that prolong trade war is going to bring in recession.
There have been multiple inverted treasury yield curves, and unemployment levels have been bottoming out there at a 10-year low right now. And I think that they can only go up from here. With all the gloom and doom predictions big organizations are actually preparing for a recession by cutting costs and laying off employees.
I wanted to talk about my personal strategies that you can follow too. These defensive strategies that will help you prepare for the next market crash and the offensive strategies will help you prepare for the next market crash. Remember one thing, during the recession you can buy gold for the price of silver, as asset prices drop you can pick up everything for cheap.
If you do not want to read the whole article here is what you need to know –
- Pay off debt
- Create an emergency fund if you do not have one already. Make sure you have 6 months worth of expenses saved up there. Put it in a saving account,
- Do not panic sell your portfolio, get rid of any derivative instruments that you have
- Prepare a war chest with cash saved up. I have kept my 401L in the treasury, so that when the panic hits I can gradually move to stocks. I am saving cash in Betterment Savings which is giving me more than 2% APY, you can check that out too.
- Prepare your resume, in case you lose your job, that will come handy.
You’ve seen these headlines before in 2013 that recession is coming, in 2014 recession is coming, in 2015 recession the next housing bubbles gonna crash in 2016 as well. Well, here we are in the middle of 2019 and none of that stuff has happened yet.
As the inverted yield curve predicted the much-anticipated recession might finally show up in late 2019 early-to-mid 2020. We will start to see the economy slowing down. As the trade wars intensify and countries become more protectionist, world economic growth is bound to slow down.
The 10 year US bond yield is lower than the 2 years US bond yield. That shows that the bond market thinks that in near term US market will face turmoil. Besides US all other major first wor economies actually have negative-yielding bonds. Nobody actually knows what that means for the future of the country. Looking at Japan, I think Europe is turning into another Japan.
Companies like GM and Ford and all those other companies, they’re basically cutting about 10 to 15 percent of their Workforce overseas and also domestically. The auto industry is cyclical like any other consumer discretionary industry. And people usually buy a new car when they feel really optimistic about the future and when they are not so optimistic, they do not buy cars. That is one indication we have that people are not so optimistic and they are not buying as many cars.
It’s not going to be like the housing bubble which we saw in 2007-08. If you have not watched the BIG SHORT, I suggest you watch the movie. It gave great detail about what was going on. My point is nothing is going to explode. The US Fed has been pumping in artificial money into the economy for about five or six years now. Remember the word QE 1, QE 2, etc. QE means quantitive easing which is basically printing money.
I want to start with my defensive strategy for everyone first. Okay. The best offense is a good defense and most championships are won because the team is very good at defense. Okay. So the first one and a lot of these are going to sound like common sense, but common sense is not always not common.
- The first defensive strategy I have is to pay off your debts. If you lose your job in a low and slow recession, so it’s going to be kind of like death by a Thousand Cuts. You’re gonna have the house, the car, the furniture that you finance the thing you put on the credit card, you know, all the stupid things that you didn’t need but you purchased anyway. Consumer Electronics, the big TV, the appliances all that stuff the little $50 a month payment here and a little interest payment there. PAy off your debt first.
- Number two. Create a 3 to a 6-month worth emergency fund. You should have this anyway, regardless of the good economy or bad economy or recession or not. You need a 3 to a 6-month emergency fund. Because you may get laid off during this time period a lot of people and a lot of companies are cutting their Workforce and you may be one of them. If you get laid off this will save you.
- Number 3: This is about not selling your portfolio of stocks and bonds. Now if you own stocks and bonds, the value might drop when the recession comes. And watching your portfolio drop is going to be painful. You’re thinking. Holy crap. Let me get rid of this falling knife, right? No, do not panic sell. If you look at historical charts, you will see that even in O7 and 081 most of the stock market was losing 40 percent of its value all those companies pretty much doubled overtime over the next 10 years.
I did panic sell and regretted later. Like Warren Buffet says, the right time to sell a business is never. It is impossible to time the market. Know this. So do not even try it. Say you sell all your holdings, you would not know when the market bottoms, so when the stocks rebound, you might miss out. Mostly because you will be scared to get in.
- Here is the 4th tip, do not buy options, especially you do not know what you are doing. Derivatives can be dangerous in case market witnesses wild swings.
So now let’s talk about the offensive strategies. So once you’ve done all of the defensive strategies that I’ve talked about in terms of building your emergency fund and making sure not to panic sell. You need to go on the offensive. Okay, so you can’t win. If you’re not playing good offense. So basically you need to start building your War chest.
This is the money that you’re going to use to invest and this is the money that’s going to grow for you. Most fortunes are made during a recession. If you picked up a bunch of rental properties and 2007 -2008. They’ve pretty much doubled in value if not tripled in value at this point and you’ve also been making a nice cash flow this whole time.
Okay, that’s just one example. Look at stocks. A lot of stocks have doubled or tripled since the last recession. But last recession happened because of a very big bubble and all Like a once-in-a-lifetime opportunity, but any correction is a time for buying more assets.
So you need to save as much money as possible to use to invest and you need to grow that war chest. Okay. So once you’ve grown that war chest you need to do number two. So you need to systematically. Invest. So you need to automate your savings in your investing. In financial terms, this is dollar-cost averaging down.
- You need to buy at regular intervals. Whether it’s one that once a month once a week once a quarter, I’m probably going to invest in the same basket of stocks or ETF probably once a month. So with all this being said you’re going to dollar cost average and end up somewhere in the middle of all these prices and then when the market goes back up you’re going to be somewhere above the average price.
And then finally, this one has nothing to do with investing but is being on the offensive. So that’s why I put it in the offensive category. Well you need to start doing and I know this sounds scary to some of you and this is number three is update your resume. Update your resume and start networking your butt off. Go on LinkedIn and get LinkedIn premium started going to all the networking events in your area.
- Because if you do lose your job, you’re already one step ahead and either the hiring process at a new company or you’re already making connections that could save you during a layoff. So now this only applies that if you think you’re actually going to get laid off if you own your own business, obviously you don’t need to do this.
But if you’re a W-2 employee or an office worker or just someone that’s looking for a new job. You absolutely need to update your resume and put yourself out there and know the people who can help you out when you would need it most.