My Superpower: I Can Predict The Future – And It Says RECESSION

A recession will happen at some point. Be prepared.

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.

Seriously.

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.

Question:

What are you doing to prepare for the next recession?

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20 Comments

  1. I love your opening line “You guys! I have this awesome superpower: I can predict the future. ” But yes, you are 100% right – a recession is coming. The thing is that usually recessions happen because of missallocation of capital or over-tightening at the Fed. Neither of these seems to be happening. However, they will… it’s just a matter of time, we humans just can’t be happy with enough and that causes our cycle seesaw. But as some famous French people said during one of their revolutions – the money is made when there is chaos on the streets. Stay strong my fellow FI enthusiasts!

  2. You’re bang on with this one Dave. Kinda, sorta, maybe. That’s the way these predictions work. One of the biggest mistakes I’ve made as an investor was getting out after the markets bounce back in 2013. I thought they were high then. We’re in a Red/Blue stock market right now. All the Red money that was on the sidelines for all those years, is really flooding back into the market now. I would be surprised to see a 2 or 3K point drop in the DOW. I’m hedging by buying the volatility index (VIX) and for the big drops will be getting back into things I love for the long term.

  3. Well said my friend, well said. This is where passive investors like myself shine. I “set it and forget” with automatic contributions monthly no matter what, and check on them, oh, maybe once a year? I don’t care at all what the TV says or what the market is doing in general, I just have faith in the long-term results. Build good systems, and then Trust the system.

    1. Yep! Thing is unless you’re heavily invested in an individual company that could potentially fail, chances are your index funds will bounce back and then some. That’s been the case after every recession so far anyway…

  4. Let me put my Nostradamus hat on….. here’s my predictions…

    “One day, a great leader will be assassinated”
    “In the future some studies will say coffee is bad for you, and some will say it’s good for you”
    “In the future there will be turmoil in the Middle East”
    this one’s personal…
    “You will face a significant challenge in your life in the relatively near future.

    Hold me to these. See, I can predict the future too.

    Great post!

  5. Yes, you are right! I think in this case, one of those Investment Contracts to yourself is really helpful. For me, dollar cost averaging is helpful as well. Helps me stop myself from timing the markets.

    1. Trying to time the markets can make people hold off on investing too which really sucks, because you lose out on all that up-side potential in the meantime. I mean yeah maybe you put your money in on Monday and then on Tuesday the market drops 20%. But if you’re in it for the long haul, chances are PRETTY dang good that it’ll recoup more than that drop in a few months or years.

      If you’re not on a long time horizon, that simply means you should shift around what you’re investing in to avoid that sort of volatility πŸ™‚

    1. We have a hybrid emergency fund approach. We essentially keep a few months in a Money Market account and then have investments which are basically earmarked for emergencies only. After David’s comment I may reconsider how we structure this and do something like:

      – 2+ Months in Money Market (to hit minimums for Capital One)
      – 2 Months in CD Ladder
      – 2 Months in bond fund

      That’d round us out about 6 months, give or take.

      See: https://www.marriedwithmoney.com/hybrid-emergency-fund/

      What’s interesting is the number of people I’ve seen as of late start to totally get rid of their cash emergency fund and instead just use their Roth IRA since you can withdraw principal at any time.

      1. To me nothing is a better sign of a bull market top than when people start saying things like that. Putting your emergency fund into the stock market is crazy and shows either that you don’t understand the point of the emergency fund or you are caught up in bull market mania. For young people many probably started investing post 2008 and have never seen the market go down and have been stuck with 0% cash interest for a long time. So they get fooled into thinking the market is safe and sitting on cash is wasting money. But neither of these conditions are normal and they will end. The whole reason you have 6 months expenses in an emergency fund is to sustain you if an emergency happens and you lose your job. That is more likely to coincide with a recession and a stock market decline. Now when you need it most your 6 month emergency fund is a 4 month emergency fund because the market dropped 30%. Or if it’s 1999/2000 again you now have a 6 week emergency fund…

        1. Yep, that’s why I would never put the full amount there. It’s all about your risk tolerance. I’m not sure if the ‘crazy’ comment was directed at our approach or the total Roth approach, so I’ll just defend mine:

          I’m comfortable with a certain amount of my emergency fund sitting in the market, because quite frankly if it loses all of its value we’re screwed for other reasons anyway.

          Here’s what I like about the MM/CD/Bond approach…Based on our portfolio, discretionary expenses, and lines of work, I want a 3-4 month EF. I am comfortable with that amount in cash. I figure we can get through 2-3 months in cash and at that time, we’ll be able to scrape together money to get us by in MOST cases. Therefore I switch to slightly less liquid CD’s after 2-3 months from draining the Money Market. The CD’s may lose a tiny bit in an early withdrawal penalty to the tune of 3-6 months of interest, but big deal. If I ladder them reasonably I can negate the impact of that. After that I switch to bonds which tend to be less volatile and more difficult to access, but still round out the plan. After that I still have Roth accounts I can access which could get us by for several years if we absolutely had to.

          As far as total Roth, I agree that’s too risky for my blood.

          At the end of the day it boils down to risk tolerance. I feel fine that we could make it work within 6ish months, and having 4-5 months of risk-free, 100% non-volatile funds accessible to us seems reasonable.

  6. Very good Dave. For me working primarily as a real estate investor the term “recession” is a little scary. That’s primarily because I sell to end buyers who seem to flow back and forth with the market. BUT, property is CHEAP CHEAP CHEAP in a recession. Part of me is very excited because during a recession is when it’ll be time to pick up rentals for next to nothing.

    Thanks for sharing!

    1. Quite welcome! Yeah I’d imagine that’d be a stressful time indeed with so much of your livelihood tied to market performance. Time to bulk up your EF!

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