Recessions. We hate ‘em. The mere thought of one makes us squirm. We think it symbolises economic doomsday and the crumbling valuation of every single one of our assets. Not to mention job losses and all the rest of it.
But if you boil it down, a recession is simply two consecutive quarters (so half a year) of negative economic growth. It’s a period where our economy is getting smaller, not bigger. Sure, recessions normally last longer but that’s the textbook definition of a recession. Not so scary, after all?!
Of course, all that nasty stuff mentioned above can totally happen (and be magnified) because when in a recession, everyone tightens their belts though it’s sort of a catch-22 since that’s what often causes them in the first place, but we’ll get to that jam later.
But there’s actually a very good reason why we needn’t be so freaked out by recessions.
Breaks are fuel for further growth
Like everything in life, we can’t keep going at full speed till infinity. Something’s gotta give because in order to speed up we have to slow down. At some point. Burnout comes about from taking on too much too soon and is often the by-product of us being busy bodies giving ourselves little to no rest.
Much as we’d like to think, wish and act like our bodies are machines… They need fuel to function and that comes about from resting, from slowing down and lightening our load.
Our economies are no different. And just like us, they can’t keep churning growth year after year after year with no rest in between. Rest is fuel. Neglect it and you could be looking at an ultra-high growth economy (yay) but one which is unsustainable (nay). And if there’s one thing we hate more than low growth, it’s unsustainable growth.
Such lofty levels of growth set our expectations too high. Fooling us into thinking that the good times will keep on going. Which often causes us to pile into certain assets right before they peak. All good things must come to an end. It’s healthy, normal and part and parcel of life! Nothing to be scared of.
Just look at what our economy has been through in these past two years alone to see why a breather is long overdue. In March 2020, we nosedived into what we thought would be the The Great Depression numero deux but turned out to be nothing more than a blip in the system. When looking back, of course! Hindsight is 20-20.
Thanks to central bankers who really pulled out all the stops through low interest rates and money creation (quantitative easing). The result: assets from stocks to houses to art to cars were on fire. We felt good, so we spent. And spent some more. It wasn’t only us lot who were out spending. Businesses did too. 2021 was the year of the M&A bonanza. Bear in mind, this was all during a once-in-a-lifetime pandemic!
Times are changing. Don’t get left behind.
According to the World Bank, recessions tend to occur periodically and if you’re prepared for one, you won’t be so surprised. Because there is nothing that our portfolios dislike more than being caught off-guard by a nasty surprise.
This doesn’t mean to say you should be living in fear, being a constant bear, but you should be realistic and pragmatic. Hope for the best but be prepared for the worst.
And you can prepare for a recession in many ways. The first is to build a cash buffer: this is to ensure you’re able to take advantage of any market lows that come your way.
While you can never really time markets and I believe by investing a little each month you get compounding and growth on your side, still, when markets take a major dip, it could be a good idea to top up on your holdings that have fallen in value but represent good value and thus look cheap.
Don’t buy stuff simply because they’re cheap, rather buy when the damage (or no damage) has been overestimated!
Another way to prepare yourself is to start building additional sources of income so that if the worst happens like being laid off, you’ll have something to fall back on. This is something we should all be doing whether or not a recession is looming as it provides a level of security that money can’t buy but especially when recessions loom!
So have a look under the bonnet of your portfolio. Check to see whether you’re diversified enough and that you have enough cash on hand.
Nothing says preparedness quite like a robust portfolio filled with everything from commodities to income stocks to growth to defensives and all in between.
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