In a recent post, I talked about the potential causes of an economic recession, while I hate these sort of predictions and doom and gloom stories, (even though I wrote about it anyway like the fucking hypocrite I am) the economy runs in cycles, it goes up, and it goes down, it's inevitable. However, I briefly went over on how you can prepare for it and the benefits behind it, it's really not the most elaborative piece of writing I've ever written.
So I've decided to make up for my poor efforts in explaining what to do or how to prepare for the "horrendous crash we'll experience."
1. Businesses are going out of business
Now you're probably there saying to yourself "Jimmy, that's a shitty thing to say, the failure of a business and the increase in unemployment is no benefit" Calm yourself! Okay! If you're a business owner yourself, then seeing your competitor suddenly leave, is beneficial to you as their consumers would have no other choice but to start shopping at your place, you thin out the competition. If not, then you have a better chance at starting a business and triumphing through the bad times. As the consumer, if you aren't or don't want to be a business owner, you now have an alternative to receive your goods or services elsewhere. The new location where you're going is potentially far better than the one that went out of business, let's face it, it was not meant to last or take on such downturn. It could not adapt to the current economic environment, forcing itself to close its doors. Not entirely a sound business if it can't adapt.
2. Taxes are lowered
More people become unemployed, businesses lose profit, in order for the business to continue having their employees on their payroll and for employees to continue purchasing goods and services, slowly stimulating the economy, income, and corporate tax decreases, you keep a lot of your net income, the net income can go towards investing aggressively in cheap assets.
3. Prices on goods and real estate fall
The best time to purchase a home? During a recession, why? No one is buying houses when folks are holding on tight to the little income they're receiving. House prices fall, there isn't anything wrong with the property, the demand suddenly diminishes, straining the housing market, and forcing it to cut the prices on the property to something more cheaper to what buyers can afford. Interest rates are lowered, the federal reserve/central bank purposely manipulates interest rates to incentivize borrowers to pull out loans to stimulate the economy, as well as bring back consumer confidence in purchases. In hindsight, you'll be paying your mortgage at a smaller interest rate and for a property at, technically, a large discount. It's not only just in real estate, the prices of goods fall as well as businesses still want to make a profit in the products they're selling, forcing them to cut their prices on items to adjust with the income their consumers are receiving.
4. Stocks and security prices fall
"Jimmy why is this a good thing? I'm losing money by investing in the stock market." That is incorrect my good sir/madam, you only lose money when you sell out on a down position. Look at it this way, let's say you had $1,000,000 in the market on October 2007, just right before the market went to hell, it fell and bottomed on March 2009, a 50% down. Your portfolio would be worth only $500,000 (scary, I know, but wait) had you held onto your portfolio for dear life and into the following 8 years to today after the market bottomed, your portfolio would be worth $1,650,000 or roughly a 65% increase using the S&P 500 returns. IF, you were a savvier investor, you would have taken advantage of the pullback and bought shares in companies at a discount. Potentially having a portfolio worth more than just $1.65 million.
Apple was at ~$26 a share before the market crashed and was worth ~$11 once it bottomed out. American Express was at ~$65 a share before the market crashed and was worth only $10 once it bottomed out. These companies never changed their fundamentals or the way they run their business, Apple will continue selling iPhones into the future and American Express will continue handing out credit cards with high interest rates. They just so happen to fall victim to the massive sell-off the stock market is having. Buying shares of those companies at those prices would have been a BLESSING today. Apple shares are worth $171 and American Express is worth $93.
However, it's easier said than done. You see, humans have a herd mentality, if we see numerous people leave the markets, then you'll be tempted to leave the markets as well. It gets worse as you're slowly and painfully watching your portfolio lose value Monday - Friday from 9:30 A.M till 4 P.M, loss aversion will kick in, your brain will tell you to sell your assets NOW to lessen your losses when you should have been buying more shares. Like I said, the fundamentals of companies have not changed, they just ran into bad times, they're bound to bounce back really soon.
While shit hits the fan, try to remain cool, don't listen to any of your peers on selling your assets at a loss, ESPECIALLY IF THEY SAY THE MARKETS WILL GO TO 0, SEND ME AN EMAIL IF YOU HAVE ANY FRIENDS LIKE THAT AND I'LL BE SURE TO KNOCK SOME SENSE INTO THEM. If you have been saving money for a downpayment on a home and coincidentally, the economy becomes poopy, then, by all means, pull that mortgage. The saying "in adversity, there lies an opportunity" is COMPLETELY TRUE! Stocks, goods, and homes at a cheaper price? Count me in! I want to buy. Keep in mind a few things, though:
- Have enough cash JUST in case you get laid off as it's common for companies to short staff
- The markets bounce back in value and once they do, they come back in a ferocious upside
- Invest heavily during this time
- Sell your bonds, as bonds move in the opposite direction from stocks, therefore, your bonds are worth more during a recession
- Budget and adjust to your current situation
I leave you with a quote from the Oracle of Omaha himself, Warren Buffett
Be fearful when others are greedy and be greedy when others are fearful