📉What Causes Recessions; Why You Don’t Need To Be So Afraid Of Them & How You Can Take Advantage When They Come Around!

Recessions. We hate ‘em. The mere thought of one makes us squirm. We think it symbolises economic doomsday and the crumbling valuation of every single one of our assets. Not to mention job losses and all the rest of it. But if you boil it down, a recession is simply two consecutive quarters (so half a year) of negative economic growth. It’s a period where our economy is getting smaller, not bigger. Sure, recessions normally last longer but that’s the textbook definition of a recession. Not so scary, after all?! 

Of course, all that nasty stuff mentioned above can totally happen (and be magnified in really nasty times) because when in a recession, everyone tightens their belts though it’s sort of a catch-22 since that’s what often causes them in the first place, but we’ll get to that jam later.

But there’s actually a very good reason why we needn’t be so freaked out by recessions.

We can’t keep going unless we take a break. Breaks are fuel for further growth

Like everything in life, we can’t keep going on full speed till infinity. Something’s gotta give because in order to speed up we have to slow down. At some point. Burnout (that thing that causes our bodies to shut down entirely) comes about from taking on too much too soon and is often the by-product of us being busy bodies giving ourselves little to no rest.

Much as we’d like to think, wish and act like our bodies are machines, I hate to break it to ya, they’re not! They need fuel to function and that comes about from resting, from slowing down and lightening our load. 

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Our economies are no different. And just like us, they can’t keep churning growth year after year after year with no rest in between. Rest is fuel. Neglect it and you could be looking at an ultra-high growth economy (yay) but one which is, crucially, unsustainable (nay). And if there’s one thing we hate more than low growth, it’s unsustainable growth.

Such lofty levels of growth sets our expectations high. Too high. Thinking that the good times will keep on going. Which often causes us to pile into certain assets right before they peak. All good things must come to an end. It’s healthy, normal and part and parcel of life! Nothing to be scared of.

A recession is simply our economy’s way of saying ‘I need to slow down’, ‘I need to take a break’. That’s all it is. Sure, some recessions are way, way more sinister. Ahem, ‘08! And possibly the one we may or may not be about to enter. One where high inflation (almost 10% now) comes head-to-head with low growth, a war and all other such horrible things. But these sort of events don’t tend to occur all that often. And all at once! 

Just look at what our economy has been through in these past two years alone to see why a breather is long overdue. In March 2020, we nosedived into what we thought would be the The Great Depression numero deux but turned out to be nothing more than a blip in the system. When looking back, of course! Hindsight is 20-20.

Thanks to central bankers who really pulled out all the stops. The result: assets from stocks to houses to art to cars were on fire. We felt good, so we spent. And spent some more. Read here what people really spent their money on during the pandemic. It wasn’t only us lot who were out spending. Businesses did too. 2021 was the year of the M&A bonanza. Bear in mind, this was all during a once-in-a-lifetime pandemic! 

Times are changing. Don’t get left behind.

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But now the tide is changing. Inflation’s gotten us all freaked out (read here what you can do to build your investment resilience) as has this war in the East that doesn’t seem to end. It’s no wonder then that we’re all tightening our purse strings. And this is precisely how recessions get triggered, since our spending makes up the majority of GDP, ~70%. 

This means that spending and growth are two sides of the same coin. High spending = high growth and vice versa. But now we’ve got many reasons to believe that our spending is grounding to a halt or at least slowing down. Read here why your car prices may be coming down with them. 

You may have met the ‘inverted yield curve’ – the classic alarm bell, warning us a recession is on the way. Put simply, what it tells us is that long-term interest rates are lower than current short-term rates. Meaning that the markets suspect economies will slump, causing the Fed to prop up spending by lowering long-term rates or, in our case, cancelling some of their upcoming rate hikes!

Recessions tend to naturally occur every 5-7 years and if you’re prepared for one, you won’t be so surprised. Because nothing that us and our portfolios dislike more than being caught off-guard by a nasty surprise. 

This doesn’t mean to say you should be living in fear, being a constant bear, but you should be realistic and pragmatic. Hope for the best but be prepared for the worst. 

How you can prepare for the inevitable!

And you can prepare for a recession in many ways. The first is to build a cash buffer: this is to ensure you’re able to take advantage of any market lows that come your way.

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While you can never really time markets and I believe by investing a little each month you get compounding on your side, still, when markets take a major dip, it could be a good idea to top up on your holdings that have fallen in value but represent good value and thus look cheap.

Don’t buy stuff simply because they’re cheap rather buy when the damage (or no damage) has been overestimated!

Another way to prepare yourself is to start building additional sources of income so that if the worse happens like being laid off, you’ll have something to fall back on. This is something we should all be doing whether or not a recession is looming as it provides a level of security that money can’t buy but especially when recessions loom! 

So have a look under the bonnet of your portfolio. Check to see whether you’re diversified enough and that you have enough cash on hand.

Nothing says preparedness quite like a robust portfolio filed with everything from commodities to income stocks to growth to defensives and all in between.

Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment


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