We all want to know how to survive a recession. It helps to have a long term outlook. Here are some helpful steps to make when an economic downturn hits.
How do we know when we’re in a recession? Interestingly, we’ll only know in hindsight. We won’t know whether we’re in the throes of one until the economic numbers are in, telling us what we already know and feel. During the “memorable” recession of 2008 we heard what some of the more bearish economists said:
David Rosenberg of Merrill Lynch expects home prices will decline 15 percent in 2008 and 10 percent more in 2009. He predicts that unemployment — which jumped to 5 percent in December from 4.7 percent in November — will hit 5.75 percent by year end and 6 percent by early 2009.
I’ve also got a friend who constantly sends me “chicken little” messages on a daily basis, where he ruminates over the next financial institution collapse, or ponders over yet another town that folds under foreclosure.
While he’s excited over the prospect of scooping up some bargains in real estate when the property market bottoms out, my spouse on the other hand is quite a bit worked up over the news he reads in The Economist, about how the overall macro economic situation we’re facing isn’t boding too good for our investments.
I remind him though that this is expected to be a short term situation. It’s short term in the whole scheme of things. I usually succeed in appeasing his concerns by reminding him that we’re fairly well diversified with an asset allocation that suits our age, goals and basic risk profile.
I just go back to some well-worn advice I’ve read and followed whenever these rough times come upon us. As an investor who has lived through a couple of recessions (wow, that dates me!) and economic cycles, and who continues to further my financial learning, I found that there are things we can do to help us ride through a tough market cycle.
Here, I’ve collected some tips, facts and reminders that I found to be valuable and assuring during times like these:
How To Survive a Recession
#1 Spread your risk, be diversified.
Investing across the board is way more important during bear markets, when your assets can really get hammered by volatility. Make sure you’ve managed your risk with a diversified, well-balanced portfolio.
#2 Think long term. Recessions are usually short.
Eight out of the ten recessions we’ve experienced over the last 60 years have lasted under a year. The two most recent recessions we’ve had — in 1990 and 2001 — lasted only 8 months each. Though you won’t be able to avoid temporary losses during a downturn, the long term has been much kinder to investments, with returns averaging 10%.
#3 Act conservatively.
Make cautious, conservative financial decisions. Some examples:
- Think of renting until you feel that the property market has bottomed — and it may be a while before it does!
- If you’re buying a house now, apply for a fixed rate mortgage.
- Don’t take on additional debt; pay with cash to avoid the temptation of overspending.
- Make your emergency fund a priority over spending for big items or taking on investments.
- Live within your means.
- Get a full employer match through retirement fund contributions.
#4 Be patient and stay the course.
Lots of people are tempted to bail out on their poorly performing investments when things go south. But they may be jumping the gun by unloading assets that could very well recover nicely once the markets improve. I’ve been whipsawed in the past, and I’m not about to fall into that trap again! Avoid tinkering with your portfolio and acting on emotion.
#5 Consider being a contrarian.
The recession will pave the way for lower stock prices and cheaper purchases everywhere! Why not buy low?
#6 Look into future trends.
You might feel better about the stock market when you realize that it is a forward indicator and tends to track ahead of the economy. So even as we’re steeped in the gloom of the economy, the market itself may already be picking up and recovering. Conventional wisdom states that the market recovers around 6 months before the economy itself does.
#7 Look at valuation.
Recognize that stocks have already deflated. Well-priced stocks won’t have far to fall despite recessionary conditions. The stock market has already gone through some beatings, which makes it less likely to fall significantly further.
#8 Recognize that bad news is already priced in the markets.
With all the unpleasant news that’s been released, a lot of the bad mojo has already been absorbed by the markets. Could it get any worse? Only if the news is significantly unfavorable.
#9 Realize that the markets and the economy have support.
Whether or not you agree that the Fed should step in and “bail out” failing institutions and other financial channels, the Fed’s strategies have worked in the past to turn things around. Also, the economy finds support in the fact that it functions in a global environment.
#10 Don’t fight the Fed.
The actions of the Fed will have ramifications later on. It would be foolish to go against expected trends.
#11 Evaluate your job situation.
If you’re worried about your job, be proactive and look into other options before anything happens. Other tips:
- Beef up your skills, keep your resume updated, explore career changes before the axe falls. Keeping one step ahead of possible eventualities is a good thing but avoid charging ahead and acting without a plan.
- If you do happen to get laid off, file for unemployment benefits right away by visiting this site for more information. You can also review your health care options (such as COBRA or other coverage).
Sometimes, talking to others about our financial outlook can become depressing, when people bring up issues such as the falling dollar, the massive spending we’re making towards a seemingly endless war, the threat of foreclosure looming over certain neighborhoods, the choppy markets, and once mighty financial institutions now struggling. But if history is our teacher, staying the course and looking out long term have served investors well. Just don’t let your patience run out or your emotions get the better of you.
Created March 25, 2008. Updated March 25, 2008. Copyright © 2008 The Digerati Life. All Rights Reserved.