The word that every
politician is afraid to say. A recession is
a prolonged downturn in economic activity, usually associated with falling
retail sales, lower industrial production, declining wages,
and higher unemployment. Doesn't sound too good. However,
downturns also provide opportunities for regular people to build wealth. Welcome to Insight Booth –
your home of insights that inspire forever. Here are some recession money rules to boost your
chances of surviving an economic downturn that the rich use to
become even richer. 1. Cash Is King During a Recession "In economic downturns,
cash is king," says Michelle Griffith, wealth advisor
at Citi Global Wealth. When companies cut back,
and job losses mount, "it's better to be safe than sorry and beef up cash
reserves during times of high employment." Forming an emergency fund
before hitting a recession is a great idea. But selling investments to get cash
when waiting for a recession is risky – you might sell too soon
and get trapped in cash as markets rise.
A better strategy is to shift
into well-positioned investments to weather a recession. That is why keeping a particular part
of your portfolio in cash or highly liquid securities like a money market mutual fund. 2. Invest At The Bottom Of A Crash
And Wait For The Economy To Bounce Back Warren Buffet said, "I will tell you the
secret to getting rich on Wall Street.
You try to be greedy
when others are fearful. And you try
to be fearful when others are greedy." Let's do a mental
exercise together. Imagine a scenario where
a company's stock price falls to $100. Then, imagine that a billionaire invests
$50 million in that company's stock. If the value
of that stock rose from $100 to $200 during an
economic recovery after the recession, the billionaire would
double their money and make $100 million
from that trade alone. That happens all the time
during recessions and economic collapses. Investors wait until they
believe the market has reached a bottom. Then,
they invest a few million dollars and wait a few
months or years for the economy to rebound. Quoting an article
published by Forbes: "A market crash creates opportunities,
especially for savvy investors.
You may be able
to splurge on stocks and funds you've
had your eyes on at steep discounts — or you can continue buying
shares on your regular investing schedule." Millionaires and billionaires are
almost guaranteed to make a lot of money if they buy stocks during a recession
and sell them for a higher price later. They can rinse and repeat the same
strategy whenever a market crashes. They've done it before, and many will
continue doing it for as long as possible. 3. What Can Be Better Than Stocks? Buy low,
sell high – we all want that.
A stock market downturn during
a recession might be your best opportunity. Try to focus on companies that can thrive
during a recession – Warren Buffett, my favorite guru, loaded up on shares of food giant Kraft
Foods during the Great Recession of 2008. Great news – you don't need too much cash,
for starters. Some investing apps even allow
you to buy fractions of shares. Just make sure to
do your own research.
4. Defensive Stocks We all know about stocks,
but let's dive deeper. First things first
– avoid growth stocks. Profitless companies tied to high growth
prospects worsen during recessions. You can take a risk and enter
the consumer discretionary stocks niche because they tend to see
substantial gains when the economy grows. These stocks
are called cyclical stocks since gains and losses in this group depend
on the rise and fall of economic cycles and consumer confidence. But if you're not a market guru and cannot say for
sure when the market will hit bottom, consider non-cyclical sectors like utility
stocks and consumer staples stocks – they are more
defended from those ups and downs. During a recession, defensive
stocks will protect your portfolio. Focus on companies
that sell essential services and goods – food, electricity, and shelter. Sales of consumer staples like food,
beverages, and household products are relatively recession-proof because no
matter how poorly the economy is doing, people still need to
eat and use toilet paper.
As CNBC's Jim Cramer said: "You want to own companies that
make real things and do real stuff and turn a profit in
the process…. Food stocks can
become recession-proof safe havens." Some of his favorites are General Mills,
Kellogg, and Campbell Soup. Also, the healthcare
sector is stable across the business cycle. Healthcare employment increases when counties experience more severe
economic downturns.
Nothing can beat dividend stocks. They provide a cushion for
your portfolio during recessions. Even if a company's stock price falls,
they keep paying you dividends. Finally,
look for negative correlations. Diversify your portfolio
by buying asset classes with low or negative
correlations in pairs. This can help minimize the
amount of money you lose in the short term if stocks continue to dip because one asset class will tend to
go up in value while the other goes down.
Try to keep your hand on your pulse
during the recession. Focusing on top-quality companies in
turbulent times becomes more critical, but, for the most part, you should approach
investing in a recession the same way you
would approach investing any other time. Buy high-quality companies or funds and hold on to
them for as long as they stay that way. 5. Quality Assets Finding quality across
asset classes is vital. Avoid companies
with high debt loads, as they could have trouble servicing their
debt if revenues and cash flows decline. They could also have difficulty refinancing
debt at maturity if credit conditions
and lending standards tighten. 6. Actively Managed Funds If you're a fund investor, consider shifting to more
actively managed funds during a recession.
Studies say that most
actively managed funds outperformed their peers by 4.5%
to 6.1% per year in down markets after adjusting
for risk and expenses. 7. Bonds and Uncorrelated Assets Bonds also tend to
do well during recessions but guard against rising defaults
by sticking to investment-grade bonds. Lastly, uncorrelated asset classes, such as royalties, insurance-linked
securities, and carbon credits, may do relatively well when
traditional asset classes exhibit weakness.
8. Real estate Real estate offers
a lucrative opportunity during a recession. A recession doesn't necessarily mean
we will see a drop in property prices, but one specific factor could deter the
upward momentum in the real estate market – interest rates. The Fed raises its benchmark interest rates
aggressively to tame spiking inflation. Higher interest rates
are bad news for real estate. When the cost of borrowing is high, it makes people think twice
about getting a loan to purchase a home or investment property. Some lucky shots
use it for their good. For example, in 1973,
when the economy fell into a recession, the real estate
market tumbled as many loans defaulted.
Real estate mogul Sam Zell made a
fortune from buying high-quality properties when no one else wanted to. A recession-driven price pullback might provide a
good entry point into the real estate game. 9. Start your own business We cannot be all businessmen. But we cannot hide from the truth,
either. According to The Economist,
47% of millionaires are business owners. Being an entrepreneur is complex, and building a business in a recession
can seem daunting when other
companies might be shutting down.
But going
against the herd has its advantages. As Charles Gaudet, CEO of business consultant and
coaching agency Predictable Profits, says: "Recession is the
time to take advantage of an open field. Your competitors are pulling back — spending less
money on marketing and advertising. Some started laying off employees. Others are content to sit tight and hope
for the best." When there's less competition,
you can better establish a market position. Of course, do not quit your job
and go all-in on a business idea just yet – think about starting
a "side hustle" first.
9. Side Hustle Rules One of the most significant risks consumers
face during a recession is loss of income. Pad that risk by taking
on an additional job. You can find
a second hourly job with flexible hours. Or you can start a side hustle through gig apps like Uber,
TaskRabbit, Instacart, or Rover. Renting out your property,
or even a vacant room in your home, to a tenant or a vacation agency is another
way to make a predictable income stream. 11. Short The Market
And Wait For The Price To Go Down Shorting might be your golden ticket if
you know enough about how the market works. According to Investopedia. "Short selling is an
investment or trading strategy that speculates on the decline in a stock
or other security's price.
Short-sellers bet on and profit
from a drop in a security's price. This can be contrasted with long
investors who want the price to go up." That is precisely what Michael Burry did
leading up to the Financial Crisis of 2008. He spotted a macroeconomic trend and believed
subprime mortgages would lose value. So,
he shorted the real estate market by purchasing credit default swaps against
subprime deals he saw as vulnerable. Eventually,
Michael Burry's prediction came true. When the housing market collapsed, he made more
than $700 million for his hedge fund and a personal
profit of $100 million.
The mayhem of the housing market collapse
extended across the finance industry by the summer of 2008. Many prominent businesses,
such as Bear Stearns and Lehman Brothers, were forced to close their doors. It's also worth noting that the
bankruptcy of Lehman Brothers frightened the stock market,
causing it to plummet rapidly. Many billionaires
and wealthy investors short the market whenever they think
a bubble is about to pop. Even if millions of people lose
their jobs and homes during a recession, they'll be happy as
long as their portfolio balance grows. Of course, there's no magic
formula to profit from a recession. Whether investing in stocks,
real estate, or starting your own business, it's essential to research and
evaluate your financial situation first.
But what do you consider
the best way to profit from a recession? Let me know in the comment section! Don't forget to like, share,
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