How To Survive A Recession
Much has been made in the news over the last few weeks and months regarding an impending recession in the U.S. economy. Talking heads spend hours and hours telling us what impact the recession will have on the global economy, but the average citizen in mainstream America just wants to know the impact on his personal economy. With that in mind I offer the following tips for surviving a recession.
Increase your cash position. Entering a recession proves to be a good time to increase your cash position. Not only does a healthy emergency fund help pave over short-term bumps in your household finances, it also allows you the opportunity to find some excellent deals in the investment and real estate markets. Institutional investors make a lot of money buying on the way down, and the same rules apply to the individual investor. If you are fully invested, or fully leveraged, you probably lack the cash to take advantage of these deals.
Consider allocating more investments to international markets. If the U.S. recession deepens it will have an impact on other markets because we are in a global economy. However, the losses may not be as severe, and other external factors may help international markets continue to grow even in a U.S. downturn. To hedge against deep domestic losses it’s always advisable to keep a percentage of your investments in foreign stocks. Entering a recession it might make sense to boost that allocation percentage in an international fund and reduce domestic investments, in the short term.
Get smart - learn a new skill or add to your current skills set to make yourself more “layoff proof.” True recessions are usually accompanied by massive layoffs. In this particular recession, the financial services industry could be hardest hit. Now would be a good time to consider taking that online class or pursuing some cross-training to make yourself more valuable to your organization. It might make the difference between getting a pink slip or getting a raise.
No Chicken Little, the sky isn’t falling, but just in case. Recessions tend to bring out a lot of doom-and-gloom commentary. I personally have faith in the U.S. economy and do not think we are headed into another depression. Still, it is a good idea to review your family’s emergency plan. Stock up on basic necessities, including non-perishable foods and a few gallons of water. Instead of running out and buying these things all at once, just pick up a few items along with your normal, weekly grocery trip and over time add to your stockpile. In our current environment this is something we should already have in place in the event of a disaster (natural or otherwise), and news of a recession serves as a reminder.
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This is good advice. I’d add be ready to be humbled to the list. If you’re laid off, you might have to temporarily take a job that you feel “better than.”
But I do need do encourage caution to anyone considering point two. Every’s stock assets should be diversified beyond their nations borders, however right now is not the time to make that decision. At least in the context of market timing.
“Entering a recession it might make sense to boost that allocation percentage in an international fund and reduce domestic investments, in the short term. “
If someone does not currently hold any foreign stock, it would be a good idea to go through the process of establishing a reasonable asset allocation for your nest egg. However, this is always a good idea and should not be treated as a solution or reaction to a recession.
Aaron - you make an excellent point. I should have included that clarification regarding international stocks in the original post. Thanks for making the point for me here.
Hey, two posts in one day?
Good points. I even like the re-allocation point. And that’s coming from an MBA who graduated with a 3.8 from a top school (ranked by US News & World Report). Everyone is down on market timing, everyone except Warren Buffet and Phil Town. Buffet laments getting too big and being “unable to dance in and out of the markets.” I don’t necessarily think everyone needs to attempt market timing, but if you have the time to watch the markets and you feel comfortable doing it, it’s YOUR money.
When everyone agrees on a point, that’s usually a good indication to do the opposite.
I always bear in mind that chimps throwing darts at a copy of the stock pages consistently outperform most of the professional financial advisers, including the highly vaunted mutual fund managers that are way overpaid!
I’m not saying to ignore solid financial advice. What I am saying is that investing is a highly personal decision and there are no broad based rules that apply in every situation.
I agree. Most news outlets report the “doom & gloom” just to get ratings. That’s totally irresponsible.
The U.S. economy isn’t headed for a recession.
Good post.
Great post! I was just thinking about writing about preparing for a possible recession as well.
I think it’s better to be decently prepared for a possibility than to not prepare at all and have it happen. We’ve been buying a few extra cans of fruits and veggies at the grocery store - it will help, if nothing else, because the food prices continue to rise.
[...] uno de los blogs de finanzas personales que ahora leo, The Frugal Dad, ofreció algunos consejos sobre cómo prepararse para la posible recesión. Por si acaso, sería bueno buscar más lecturas [...]
[...] the briefer posts inspired some of the proactive posts that offer advice on minimizing your exposure to recessions and hedging your bets just encase you become collateral [...]
with a high national debt, high CPI, a crippled banking system which drives most businesses, a rising unemployment rate and a housing bubble(the core of most people’s assets) and a society with declining educational standards- How and why would we not go into a recession or better a depression. I am not an economist nor an MBA, but maybe someone can teach me something here. Which part of our economy will lead us out of this mess.
You have high lighted some very important points. But, not to be a contrarian, I would strongly recommend not reallocating funds to an over seas portfolio.
The simple fact of the matter is that there are a lot of really good US companies whose stock can be bought at bargain basement prices. If you have the money to invest and do NOT expect an immediate return on your funds then there is a lot of money to be made right now in US firms.
Another reason I would keep funds invested in the US is that the recession here in the US ripples out to the other world economies. We feel it here first but they will feel it worse.
There are a lot of industries located in other countries that depend solely on exporting goods to the US. Americans are purchasing less, and buying goods made in the US more often than before.
Expect the recession in the US to hit foreign firms harder than US firms. Investing overseas is a much riskier prospect.
That’s just my opinion. What happens in the US will be mirrored and intensified over seas.