How to prepare for a recession

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How to prepare for a recession

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A reader asks:

What are the moves you are making to prepare for the recession?

There seems to be a growing consensus among smart people that I follow right now:

  • Inflation was already high and will only get worse because of the war. We could easily see a 10% inflation print this year.
  • The war will cause massive food shortages over the next year as so many agricultural products come from Ukraine and Russia.
  • The shocks to the offer were already severe and will only get worse. Face the Covid epidemic in China which is closing entire cities and the supply chain is in trouble again.
  • Therefore, a recession is now inevitable.

Last week I even jumped on this bandwagon showing how a recession is the only way we have seen a drop in high inflation in the past.

I believe the likelihood of a recession is higher now than it was a month ago.

However, when dealing with probabilities, you need to consider both sides of the argument. Nothing is 100% certain in the markets or the economy.

Let’s take a look at the other side of this topic to show what could keep us out of a recession for a little while longer.

There is a lot of pent-up demand.

Delta’s CEO said the airline just had its two busiest days in history in terms of sales. Travel expenses are booming right now.

I was at Disney last month. The parks were full every single day. My Disney insiders tell me they think March could see the busiest week ever for their theme parks. And I know from experience: Disney isn’t cheap. Inflation is not holding back spending in parks.

The housing market remains hot, even in the face of rising mortgage rates. Logan Motashami posted this photo of people lining up on the street waiting to see a new ad in California last weekend:

This isn’t exactly recessive behavior.

To be honest, these are just anecdotes. How about some data?

Each quarter, the Federal Reserve publishes a report on household wealth. Last year saw the biggest increase in household net worth ever:

US household equity increased nearly $ 19 trillion in 2021. Real estate alone accounted for over $ 5 trillion in earnings.

Families have never been richer.

Thus, on the one hand, rising prices could lead consumers to curb spending on certain products and services.

On the other hand, inflation has only been above trend since last April. Consumers have been saving and paying off debt for two years. It is certainly possible for American households to complain about inflation but then go into debt and spend their savings to offset the higher prices.

This could certainly extend the expansion.

Both arguments have their merits.

So we could go into recession this year or next year or four years from now.

I honestly have no idea.

All I know is that at some point we will have a recession.

Since World War II, we have had 13 recessions in the United States:

This means that for the past 80 years or so, a recession has occurred on average once every 5.9 years.

Now, recessions don’t happen based on a train schedule. Sometimes they occur in quick succession (like in the 1950s or early 1980s) and sometimes they are few and far between (like in the 1990s or 2010s).

The way I look at it is that you are not preparing for the recession but for a recession. There’s a difference.

Peter Lynch once said: “Investors preparing for corrections or seeking to anticipate corrections have lost far more money than was lost in the corrections themselves.”

The same goes for recessions.

How do you prepare for one? The same way you prepare your finances for anything else.

Instead of tweaking your portfolio because you think a recession is coming, create an investment plan that is durable enough to withstand a wide range of environments (one of which includes economic downturns).

Give yourself a safety margin with a high savings rate and an emergency fund not because it will help you survive a recession, but because it will help you survive any number of obstacles that life will inevitably throw at you.

Pay your bills on time and create a good credit score not because it will help you during a recession, but because it will help you whenever you need to borrow money.

Recessions tend to evoke thoughts of financial crisis and this is definitely something to be aware of as an investor.

But you could just as easily have your own personal recession occurring outside of a contraction in GDP.

Maybe you lose your job. Maybe your local economy is being squeezed. Maybe get divorced. Maybe you have a big unexpected expense. Or you could simply make a bad investment decision that sees you losing a load of money even when the markets are doing well.

The point here is that you don’t prepare for a recession by trying to figure out the exact start and end dates of the next GDP slowdown. Not only is it impossible to do it consistently, but it probably doesn’t help you that much either.

You should incorporate the inevitability of recessions into your financial plan with the understanding that they are a natural extension of the capitalist system in which we operate even if you don’t know when they will occur.

We discussed this question in the latest edition of Portfolio Rescue:

I also had Bill Artzerounian on the show to answer questions about the benefits of working with a tax advisor and the tax implications of selling a huge loser in your wallet.

Further reading:
Are we heading towards a recession?

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