You guys! I have this awesome superpower: I can predict the future. Thankfully for you, I’m not going to be selfish with this amazing power. Here’s something this power told me: a recession is coming.
You see, markets tend to be cyclical in nature. After a bull run – when the markets perform well and everyone’s feeling happy – there typically comes a recession. And boy, have we had a long bull run already of nearly 9 years.
What goes up, must come down, as they say. That’s true of a baseball (unless you can throw it at escape velocity of 25,020 miles per hour in which case you might have a more badass super power than I do) and it’s true of markets as well.
But it’s not all doom and gloom. Recessions last a few months to a few years, but historically after a recession comes another bull run. This is when the market realizes “oh yeah! We can do stuff other than just go down.” and investors are all happy again.
And that means that recessions, for savvy, tough-willed individuals, can be great opportunities to buy at a discount.
When Is The Next Recession Coming?
For all of the market experts who claim to be able to predict when a recession is going to come, not many are actually very accurate. Some say it’s coming this year or next. Others have already had their dates come and go with no recession. But it doesn’t matter.
Here’s the downside of my amazing superpower. While I can see certain things in the future, it doesn’t let me pick out a specific point in time. It’s like I am seeing all of time at once. My super power unfortunately doesn’t let me see WHEN something is going to happen, just that at some point, it will. So it’s pointless to try to predict when a recession is coming.
No big deal: folks who try to time the market actually do worse than those who just dollar cost average. If you’re unfamiliar, dollar cost averaging is simply pumping a specific amount of money into investments on a periodic basis.
When stock prices are up you’ll buy fewer shares; when they are lower, you’ll buy more. But you’re consistently putting in the same dollar amount each month or week.
How To Prepare
So how do you prepare when you don’t know when something is going to happen? Simple: you set up systems and ignore everything else.
What systems? Quite simply, continue to contribute to your 401(k)’s and IRA‘s each month. Set up automatic transfers into your brokerage accounts, too. And if you aren’t maxing your 401(k) yet, inch your way there.
If you’ve done your job and set up good systems, you can weather the storm. When markets are down, your dollar buys more shares. Buying more shares means when they go back up, you’re in a better position than you would have been if you cut back.
Once those are in place, ignore what the talking heads on TV and the media say. Disregard what your friends and neighbors are telling you about selling now before the bottom drops out.
Don’t Make Paper Losses Real Losses
Do you know who benefited during The Great Recession? Those who continued to invest. Guess what happened to the folks who panicked?
They turned their paper losses into real losses. If you stick with something simple like index funds, you won’t run the risk of losing your entire investment. If you pick individual stocks that could be a very real concern, however.
Separating your emotions from your behavior can be challenging, especially when people in the media and maybe in your own life are telling you to do what your emotions want you to. By selling, though, you realize your paper losses and turn them into real losses.
That can be detrimental not just in the situation, but it could also leave a bad taste about investing as a whole.
Have Some Cash On Hand
Unfortunately recessions also typically come with other issues such as job cuts. Between the end of 2008 and beginning of 2010 – The Great Recession – an estimated 8.8 million jobs were lost.
This can have a real, significant impact if you aren’t fully prepared. And being fully prepared means having at least some cash on hand to deal with potentially getting laid off.
Even if you think your job is fine and stable, it could be a good idea to bulk up your emergency fund. You never know what’s going to happen. Living within your means and avoiding lifestyle inflation now will help stretch your dollars as well.
It’s Coming, So Be Prepared
No matter what your opinions are on the timing of a recession, the fact of the matter is there WILL be one at some point in the future. You can be prepared to handle it – both emotionally and systematically – or you can succumb to your emotions and let the down-turn get the best of you.
Sticking through a recession isn’t easy, but those who do come out ahead on the other side.
What are you doing to prepare for the next recession?