The recession that may or may not be coming for us all this year is the most anticipated recession. Ever. Everyone is saying how it’s gonna happen. I need so many hands (and toes) to count how many times the R word has come up. Nothing is ever 100% guaranteed, not in economics and definitely not in life! But that’s the prediction for ya.
The thing is, during recessions some pretty ugly things can happen like layoffs, which have already spread through the tech sector (read about that here & what it means for you), home repossessions and a general feeling of economic sluggishness at the very least. Of course the severity of these depends on how deep, and how long, recessions last.
On average, recessions last for 11 months. But after ‘08 which was one of the most severe recessions (triggered by a financial crisis) it took the US economy 6 years to return to pre-2008 employment levels. In other words, the pain was felt for a lot longer. Let’s hope this recession won’t be nearly as painful as that but you gotta know what you’re up against, right?!
What does a recession actually mean for your wealth?
Recessions are when the economy shrinks for 6 months straight. The classic symptoms are low demand and high(er) unemployment. We’ve definitely got signs of the first one but we’ve still got a red-hot labour market. Read here whether that can actually continue and read here if the great hire could become the great fire. As always, keen to your thoughts!
The stock market moves quicker than the economy and is usually around 6 months ahead of it. Which is why stocks usually bottom before earnings do. This is something to keep at the back of your head and why timing markets is 99.99% impossible and a waste of money. Though that won’t stop people!
Instead, make sure you’re invested in the markets and take advantage of market sales when they come around. This year we’ve had plenty of those and a bunch of stocks (and indices) have even found themselves on the clearance rack! So keep your eyes peeled.
Making money during recessions is simple but no one said it was easy
The best time to grow your net worth is when prices are cheap(er) relative to their fundamentals. I.e when you buy stocks that are on sale as opposed to full price! Buying at the top of the market is a risk you’ve gotta factor in. The risk is that the company has gotta outperform for who-knows-how-long for its share price to rise (since earnings drive stock prices not the other way round!) is something you’ve gotta ask yourself.
Can they keep on delivering? If the answer is yes, then that’s no problemo. But often, the stocks that have risen the most are the ones that everyone was betting on. And this drives the price up and up and up so you end up paying over-the-odds for this company (and its future profits, obvs).
But snapping up unloved, and hence undervalued, assets could pay off. When the tide turns, you’d already be invested. While the rest will most likely end up buying it once prices start going up. That’s human psychology!
But making money during recessions and by extension bear markets is easier said than done. It’s simple, sure but easy? No way. Luckily, if you understand what makes it hard you’ll be able to reverse-engineer that to use recession to your advantage.
“Be fearful when others are greedy and greedy when others are fearful”
What makes investing during recessions difficult is down to emotions. Psychologically, we all wanna invest in something when it’s popular. It’s downright uncomfortable to go against the crowd. There’s comfort in numbers, right? We feel safe when everyone’s doing it too. But that’s not where the money’s at.
Take oil. The whopper trade was back in March 2020 when the price of a barrel of oil went to less than 0! This was the contrarian trade. The one that would’ve blown up your net worth. Sure, I bet it was scary as hell to load up on oil since literally no one wanted it; in fact you had to pay the suppliers to take it off their hands but that would’ve made you money. Not buying it a couple months’ later when oil (and gas) had already shot up.
Back in ‘08, the investment was real estate. Prices fell by as much as 40-50% in some regions! No one wanted the properties! In some cities you could bag houses for under $2K. This is no joke! I found this crazy (and old!) article how a house in Detroit fell to $1,250 in 2008 – have a read https://www.theguardian.com/business/2008/oct/24/subprime-crisis-usa-housing-detroit.
But fast forward to 2020-21 and suddenly everyone wanted real estate. It was so snazzy. WFH meant that people wanted more space so they upgraded and thanks to record-low interest rates in 2021 you were able to scoop up a 30-year mortgage for 2.65%! For some context, this has gone up to 6.65%! Anyway, folks who bought in 2021 paid a premium. Property priced in the US went up by 18% in 2021 alone.
Do the research and be willing to put in the work
Figure out which assets are at record lows. See where everyone is running from. Then, you’ve gotta have nerves of steel to buy. To leave your comfort zone and fight analysis paralysis! Don’t be afraid to take action. Going against the crowd is really hard but it has a habit of paying off.
Learn history. Learn what happened in previous recessions. While the assets that did best in each recession will usually be different, the underlying principle remains the same: go where no one wants to go. In ‘08 it was real estate and in 2020 it was oil.
But, this 2023 recession might very well not show up! Here’s hoping it won’t. There are so many wild cards for this year, with China’s reopening that could literally shift the entire dynamic, after all a population of 1.4 billion people has gotta count for something, right?!
So keep your eyes peeled and don’t be afraid to pounce when you’re ready. Then the hard bit is holding onto it for the very long-term. Let compounding do its thing. Don’t be rude and interrupt it!
Either way, make sure you’re dollar-cost averaging. Recession or no recession, keep building your net worth.
But if recession shows, you’ll know just what to do.
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.
Knead Your Dough 