Recession, recession , recession … me oh my. If you are reading this between the years of 2019 – 2021 you may be experiencing a global recession or have heard rumours of a recession ( I am writing this in 2018, sorry if this article did not get out in time). The first thing that I would like to say is that do not panic, lets look at this systematically and take the necessary decisions based on information and not emotion.
What is a recession?
Recessions coincide or more so introduce a bear market. A recession simply put is a significant decline in economic activities, and results in a down (bear economy), because of the lack of economic activity. The decline in economic activity creates high unemployment rates and also a recession tightens peoples budgets. People are usually stressed in bear markets because its hard to make money in a bear market , also a bear market is usually characterised with high interest rates that make the cost of getting credit (getting a loan) more expensive.
Why everyone is afraid of a recession?
Recessions create a negative cash flow loop in the economy that seems very hard to exit. Let me paint a clearer picture. A lack of economic activity , which is a result of many factors such as monetary policy , creates an economy where people have less opportunities to earn money. A persons options can be even further restricted if they become unemployed. Therefore, because households have less money coming in they spend their money more conservatively , only on the most essential goods. This then means companies make less profits, because the company makes less money and as a result they cant afford to have more employees and in some cases they have to retrench some of their employees to reduce the cost and increase profits. This creates even more people in the economy that have limited funds to spend. Usually in normal (bull) circumstances people will compensate there low funds with a loan. However, in a bear market they often cannot afford to get a loan because the interest rates are too high. When interest rates are too high it makes it too expensive to take out loans. Therefore, usually the common remedy to bring about economic relief is to lower the interest rates. When the interest rates are low, businesses and people can afford to take out loans , which they will use to spend into the economy and this will re-stimulate economic activity.
Why investors love recessions?
Recessions are short and intense. Depending on the circumstances recessions do not last for very long periods , they usually range between 10 months to 36 months. So that is the good news. You wont be trapped in a 10 year recession, it just would not be sustainable, the market would crash , burn and turn into ash. Recessions also come in different intensities, and therefore not all recessions lead to the GREAT DEPRESSION, and even if it did it would not be such a bad thing. I am not trying to minimise the social impacts and how economic recessions disproportionally effect people , but there are two sides to every story, and as heartbreaking a recession can be it is also a great time to invest. When a recession hits the markets, the price of stocks drop, and they offer an opportunity for investors to get stocks at a discount. As I write this article (25.11.2018) I can see that the market is way over priced , and I, like several other investors are waiting for a recession, which will give investors a cheaper entry into the market.
It is not only the market in terms of the exchange that you should scope for good deals, the property market also can take significant hits that offer good opportunities for investors. In a recession what you are capitalizing is off peoples fear, people are scared and do not think the economy will recover (it will) so they are quick to sell at any price. This aggressive selling is what makes assets undervalued. Which is good news for you. Also you can note, this means you should not sub come to the panic. Do not under value or try to sell your assets (stocks, property, commodities etc..) during a recession – DO NOT DO IT, PLEASE. The recession will end. You will have to be strong and HODL(Hold On for Deal Life). To learn more about the principle of HODL follow the link (). To benefit from the opportunities provided for during recession you need to be well prepared.
What is a correction? In the market is considered as a drop in the asset price , of about 10% of the recent high. This is a reaction to the market being overpriced. To learn more about corrections in the market follow the link ().
How to prepare for a recession?
If you are reading this and the recession has already come and passed, do not worry another one is on its way , that is how the economy is structured. If you want to learn more about economic cycles follow the link ().
Here are some tips on how to prepare for a recession :
- Have a lot, a lot , a lot of savings
- Learn how to live within and below your means.
- Do not try to time the market, because you wont be able to pin point the exact time and dates that demarcate a bear and bull market. Timing the market will just get you into a frenzy, because you are guaranteed to be off. You may be months or years off – no one can time the market.
- Do not have any debts on your books, remember as we discussed they are going to be expensive to pay back when a recession hits. You can opt to have a fixed interest on your existing credit so it does not spike during a recession.
- Consult with a professional before closing some of the investment positions you do have opened and are exposed to the volatile high risk markets, but if you have the stamina – HODL!