Recession-Proof Your “Stuff”
How do we protect our assets from these dastardly recessions? In response to this question, I’m inclined to bring up my PDQ Principles of investing –Patience, Diversification and Quality.
We’re hearing a lot of chatter these days about a looming recession. They do happen, and you will experience one or two… or more… along the way.
So what the deuce is a recession, you ask? Well, it can mean different things to different people, but common traits are a decline in consumer confidence (experience-based or rumor-based) due perhaps to job loss and reduced or stagnant wages that encourages folks to change their shopping habits. When those things occur, the natural result is moderated shopping and a decline in business investment activity. In short, the economy shrinks, and the Gross National Product (GNP), the broad measure of a country’s economy, goes negative.
There’s no approximate period for how long recessions lasts, but they often linger for more than 6 months. The average duration of the 11 recessions between 1945 and 2001 was 10 months, compared to 18 months for recessions between 1919 and 1945, a period that included the Great Depression (Source: NBER Business Cycle Expansions and Contractions). The early 1990s recession lasted 8 months causing a GNP deterioration of 1.4%. Ten years later, the early 2000s slump lasted 8 months resulting in a GNP decline of 0.3%. Six years later, the mortgage crisis-inspired Great Recession reared its ugly head, driving the GNP down 5.1%. That recession ended 10 years ago.
So, if you feel a recession coming on, what do you do? I’m guessing you already have a plan, but if not, make one and stick with it. Here are some tips based on my own experience.
Protect Your Assets
So how do we protect our assets from these dastardly recessions? In response to this question, I’m inclined to bring up my PDQ Principles of investing –Patience, Diversification and Quality. Hopefully, as an investor, you already practice some or all three of these principles as part of your plan. But allow me to elaborate beginning with patience. Patience is such an important personal trait to exercise during a recession. It manifests itself in several ways. Stay calm. Follow your plan. Don’t let surging emotions take over, which often lead to irrational and impulsive decisions. Just remember, if you’ve made quality investment choices, once the economy begins to recover – and it always does – those wise, diversified investments you made prior to the recession will also recover.
But what if I need my money very soon, you mutter? I would answer, do you need it all right now? If not, don’t be impulsive and sell everything if you need only some smaller portion of your investment dollars. Just remember, in a declining market your fear of loss is stronger than usual, and impulsive decisions can lead to a much greater financial setback than the situation might warrant.
As to that diversification principle, particularly in an economic downturn, it helps limit losses and often creates opportunities for a quicker recovery. I’m inclined to favor broad market index funds for young investors. But as an individual matures and is financially able to afford a broader scope of investing, a diversified portfolio might also include – in addition to stock funds – bonds, real estate (usually a young investor’s home), even some small-scale exposure to other real estate and… mmm… commodities. And, of course, whether young or old, six months to a year or more of rainy day funds (cash) will come in very handy – possibly enabling you to avoid selling any of your investments to meet unexpected short-term needs and/or emergencies.
If you’re not inclined to go the fund route to achieve diversification, at least try to identify investment-grade bonds and/or companies with quality assets, little debt, and good cash flow. And in that same vein, look inward because the same rules apply to your own household. Your chances of outlasting a recession are much more likely if you have that rainy day fund, a small debt load, and steady employment (cash flow) to cover those dastardly bills that keep on coming.
Keep it Quality
Trust your judgment. If you’ve saved that important rainy day fund (cash or near-cash), and if you stick with your quality investments, you can ride the usual recession back to prosperity. And please keep in mind, bailing out of your investments in the face of a downturn can lock in untimely gains, triggering taxes, or real losses – or both.
If you trust that “quality” portfolio, and if you exercise patience, those “paper losses” are most likely to be temporary in nature. And ask yourself this question. If I do decide to sell, when do I buy back in? During the inevitable recovery, most of the folks who do get back in, often do so late in the recovery cycle, suffering what I call “opportunity losses” as well as those real ones incurred by selling during the downturn. Timing your way in and out of a market is a losing game. Don’t fall victim to it unless uncontrollable circumstances force the issue.
Don’t Sell, Buy
If you feel a recession coming on, consider making small, frequent automatic investments – perhaps in your 401(k) or 403(b) retirement plan at work. And keep doing it throughout the recession and beyond. It’s called dollar-cost averaging, a system that buys you more shares when prices are lower. And keep reinvesting any surplus earnings (like dividends) for the same reason… lower share prices. Remember, if you’re either anticipating or experiencing a recession, don’t join the thundering herd and become a seller. Recessions create buying opportunities. Don’t miss out by selling out.