The recession will make you rich, or poor, who knows

I’m going to talk about something scary today Reader. The R word.

Recession! 😮

If you watch the news, go on social media, or just leave your house (COVID is over, right), then you have heard talks of recession. Are we in one? Is one coming? If it comes, how bad? Hide your money and other such sound bytes.

Well, I’m here to say I’m not scared of a recession, and neither should you.

Recessions are actually a healthy part of the economic cycle. They are like thunderstorms. You don’t like them, but you know how to handle them and there’s no need to panic. Rain helps plants and flowers grow, well a recession makes conditions right for later economic growth.

See this lovely visual below, courtesy of Financial Edge:

To call out my bias, I am a former econ major and a daily econ nerd so I love a good line graph. So if this chart also brings back your own econ training, feel free to skip ahead as I break down the R word.

What is a recession?

“A recession is a significant, widespread, and prolonged downturn in economic activity” - Investopedia

Basically, the economy sucks, which could mean anything. The general rule of thumb is two consecutive quarters where gross domestic product (GDP) drops lower. GDP measures the output of the economy, everything a country produces.

We’ve already hit the two quarters of dropping GDP rule, but officially, we aren’t calling it a recession yet. That’s because job growth is good, inflation is up (meaning people have money to spend), and there is no unemployment. We’re missing some of the telltale “everything is bad” symptoms of a real recession.

So, we’re in a kinda-sorta recession currently.

Recessions really aren’t bad, they’re misunderstood

First, I want to acknowledge that recessions are tough. People can lose jobs, spending is cut back, people could lose their homes, and times get tough. Recessions aren’t fun to live through, I know having started my career in the last one.

However, as I said before, a recession is like a thunderstorm. And after the rain is gone, it helps the trees and flowers to grow and we even get a cute rainbow. If there was nothing but sunny days and no rain, we’d have a desert. The economy is very similar.

From all this dismay and chaos, you get the conditions ripe for new businesses, new jobs, and investment returns.

When people lose their jobs, they start companies. And with everyone being unemployed, it’s easy to find coworkers and colleagues to work for your new company. Some companies you may have heard of started in a recession: Microsoft, Airbnb, Slack, Electronic Arts, and Whatsapp.

Recession helps devalue the currency as investors leave the country, lowering demand for US dollars. This is actually good. It makes US goods more competitive and reduces the cost of imports, helping to fight inflation and increasing exports. More exports mean more money coming in through sales.

The drop in stocks, real estate, or other investable assets makes them “cheap”. Simply put, the cost of an Amazon share goes down and you can buy more for the same price. But businesses can buy other businesses for less, real estate can become cheaper, and investors looking for long-term returns find good deals. The years following a recession are an amazing time for investment returns.

Recessions are a normal part of a healthy economy. They’re not bad, just uncomfortable to live through.

My pragmatic recession preparation

I’ve been mentally preparing for this recession for five years (because I incorrectly predicted it years ago). And having lived through the 2008 recession, right after graduating college, I’ve seen some sh*.

Below are a few pragmatic things I am doing, that you can too, to feel good … even excited, about the recession and the following economic boom.

Not selling my investments!

The gut instinct of most people is to sell everything once they see the market falling. They want to “stop the bleeding”.

But history has shown this is dead wrong.

Countless backtests (simulating strategies with past stock data) show that the best consistent option is to stay in the market and wait for the recovery. Losses only become real when you sell. If you don’t have an immediate need, don’t sell anything.

Now is a great time to invest more … if you have the funds and you will stay in for the long term. You buy assets when they are losing value, so you can sell when they go up.

Storing Cash

Who knows how bad things will get. Maybe the worst is already here, or maybe it’s 10x the 2008 housing crisis. Maybe you lose your job for a month, or maybe it’s a year of unemployment.

Now is the time to look at the emergency fund and make sure it’s in a good place. Six months of living expenses, stored as cash (which can’t lose value) is the ideal target. If you have a family, like me, take this seriously.

Investing in myself for my next set of investments

I’ve been reading, watching, and studying, even more than usual. I know the next few years will probably bring a recession, which means struggle, but also opportunities.

I still think about my biggest regret from the last big recession in 2008. “I should have bought more real estate.”

Right now, I want to acquire another investment property or an existing business. Either one of these acquisitions are asking for a new set of skills with a new set of challenges, in a new set of economic conditions. I’m reading books, watching lots of youtube, and hiring a lawyer, bookkeeper and financial advisors to uplevel myself for my next big investment.

I’m thinking today about what’s going to bring me outsized wealth in five to ten years.

Knowing what I know now, and all the opportunities I was too uninformed to see in previous downturns, I will be prepared this time.

Rethinking my portfolio

Our economy, the industries driving growth, and the drivers of consumer spending are different post-COVID compared to pre-COVID. There is a war deeply impacting much of the globe, and it’s not business as usual.

I still believe in a well-diversified stock portfolio, like the one I built in M1 Finance, but things are different. I’m older and more concerned about losing money than I was 15 years ago. My risk profile is different and the industries I think will drive returns moving forward are different.

I recently decided to start working with a financial advisor. My money is complex, and I’m ready for help (and to pay for it). One reason is to get help on my portfolio allocation and re-adjust my risk profile. I’m a risk-loving guy, but this ain’t the time with a baby on the way.

It’s going to be OK, maybe even great

One of my beefs with “the media” is how they build on fears. It’s easy to sell recession news, because everyone thinks to fear them. Truth is, it’s a healthy part of the cycle and makes things ripe for growth and high returns.

Correctly navigating a recession can fast-track your wealth accumulation. So don’t squander this one.

- Damien Peters aka The Pragmatic Mr. Peters