How To Prepare For A Recession
Are We In An Economic Downturn?
We’re hearing a lot of news and noise about an economic recession on the horizon. The media has been repeating this mantra for the past month or so now. Partially because of President Trump’s ongoing trade negotiations with China and his battle with the Federal Reserve. But there are deeper more fundamental economic problems that tell the whole story. We’re nearing the normal 12-year stock market and economic cycle when there is usually a recession, crash, depression, or major correction. However this time, there seems to be a culmination of factors arriving at the same place at the same time.
The consumer confidence index is down. People are less likely to spend money on consumer goods. At the same time though people are not saving money. Actual inflation is high. A clear signal of an economic downturn is continued quantitative easing. Cash injections into the economy normally evoke a response from the economy. However this time, it seems that it’s not working as effectively.
The economy can only be propped up and stimulated so much before the fundamental economic weaknesses show. This is where we are right now.
I project the economy to downturn the most from December 2019 to about January 2021. All the signs seem to be there. So what can be done?
What Is Inflation In Economics?
Inflation is the weakening of buying power in a nutshell. The cost of goods goes up because the central banks stimulate the economy by creating more money and increasing the supply. This is the hidden tax and economic burden that politicians don’t talk about. Real inflation has increased steadily on most staple goods. TVs and electronics are one of the few goods that have been able to fight off inflation fairly well.
So when you save money in the bank, you’re losing money in actuality. The interest the bank pays you doesn’t keep up with the cost of living increases. Neither to CD’s or bonds. There are really only 2-3 things that can beat or keep up with inflation. I will speak on them later.
The extreme effects of inflation are pictured below in two different instances. Wheelbarrows of money just to buy basic items like bread and milk.
This happens during an economic crash and the only people who stay above water are those who have limited resources like precious metals. These are extreme cases, but they’ve happened before and history often rhymes.
Recessions form when the economy cannot be boosted anymore and markets are overbought.
How To Prepare For A Recession
Do What The Government Doesn’t Do…Cut Spending
Getting your house in order will be vital. If you have a car or credit card debt… pay it off a.s.a.p. What you do not want is debt hanging over your head, especially for a vehicle. If you’re thinking about buying a car now, delayed gratification will pay dividends. The used car markets will be flooded with newer model cars that won’t move.
More people are using Uber and Lyft, E-bikes and Electric scooters for commuting. The auto loan market is probably the 3rd largest bubble behind the stock market and housing. It’s one that is rarely discussed. So patience and discipline will pay off here.
Bread and circuses. The bread and circus aspects of our lives should be reduced drastically. Liquor, TV subscriptions, eating out. Many of these areas are where waste occurs. With ala carte’ subscription services from Disney and other companies popping up…you really have to be judicious. Being nickel and dimed by subscribing to a slew of different services can really drain your bank account.
Grow Your Food
In Why You Should Start Your Own Garden I explain why it’s important for people to grow their own food. I understand many people live in cities or apartments and don’t have access to land. But the amazing thing about growing food is you can do it almost anywhere. So for that simple fact, this is a way to save a lot of money and increase your health as well.
Monetize Your Skills
Monetize your existing skills. Check out Why You Need To Start An Online Business. It’s important to make as much money as you can during this time. This article will help you do that.
If you have skills that are marketable you can make money on your own..job or not. Creating a supplementary income will be really advantageous. You can create your own recession-proof or recession-resistant business.
Get On A Budget
People poopoo and ignore budgeting but once you start doing it, you will be amazed by how much money you’re wasting. Apps like my budget book and others will crystalize how much money that is going in and out, so you can adjust your spending as necessary.
Become A Minimalist Person
This is a part of all the previous ideas like reduction in spending and so on. But there’s a deeper spiritual and philosophical component to it. The excess of consumer goods you possess, ask yourself if they bring you joy and if you notice when they’re not there. If the answer to both questions is no, then get rid of it. You don’t need it and you won’t miss it. Economic recessions tend to force people to embrace some form of minimalism anyway.
Money And Investing: Recession Proof Stocks And More
Some of the greatest fortunes have been built during recessions and depressions. Because investor psychology is much different than the average person’s psychology. One of Warren Buffet’s most famous quotes is:
Be fearful when others are greedy and be greedy when others are fearful
Recessions are wrought with fear and anxiety. The average investor becomes scared and trades or sells at the worst possible times. While the smart and savvy see an abundance of opportunity.
See there are recession-proof stocks and other investments that can be made during a recession or crash that will set you on a path to wealth.
The great recession of 2008’s stock market losses were totally recouped by 2012 : Bear Recovery 2012
Meaning that if you sold when the telltale signs appeared, bought at the bottom, you would have made massive profits. Many people did that. Others employed other strategies such as DCA (dollar cost average). If you have a larger portfolio, managing losses via a 15-20% stop loss then buying at the bottom would probably be best. If you’re just starting investing or reading this because you’re looking for strategies to fight the recession. DCA is for you.
DCA is simply buying the same type of investment asset in the same amount in a consistent time period.
For example, If I take $250 out of every paycheck biweekly, and invest it consistently, regardless of how the market is doing… that would be DCA.
So as a layman, someone who doesn’t really invest or has little experience, how can you profit during a recession? I’m going to show you how.
Set It And Forget It Investment Strategies
Simple Round-Up Investing For Beginners
Acorns is a round-up stock investing app that rounds to the nearest dollar amount and takes the difference and invests it in the portfolio of your choosing. It connects to your bank account and each transaction on your bank account will be rounded off. So over time, you accumulate a stock portfolio on auto-pilot.
Acorns also has a debit card available.
Now the strategy here is to choose a portfolio that is a mixture of recession proof stocks and aggressive stocks. So there’s a moderate setting that is very balanced. This way you can DCA your way through the recession and in the future recovery, you will see profits that your friends and others do not see because they decided to stay on the sidelines and not take action.
Bitcoin is the future. There is a strong correlation between gold prices and Bitcoin. Gold prices increase during recessions because it’s a hedge against inflation and the stock market. Bitcoin is similar. Just recently, central bankers from all over the world met in Jackson Hole, Wyoming to discuss the financial markets. Digital currencies were discussed there and their future role in the economy. The Bank of England head even suggested a global dollar alternate cryptocurrency.
Bitcoin fits that bill nicely. So what Coinbits does is use the same philosophy of rounding up to buy Bitcoin. Each bank transaction is rounded up and Bitcoin is purchased. When you want to withdraw, Coinbits sells the Bitcoin at its current price and you get USD in your bank account. Very simple. There is also a round-up multiplier to increase the rate of investment.
In a recession, buying Bitcoin as a store of value and potentially extraordinary profits is a solid move. So this way now you have stocks and also Bitcoin hedging against inflation and a recession.
A More Advanced Finance Solution : M1 Finance
If you want a more advanced alternative to Acorns and one I personally use now instead of Acorns…try M1 Finance. M1 Finance is absolutely amazing. With M1 Finance you can create a very comprehensive and customized portfolio and really be strategic with your investing. There are many funds, stocks, and ETFs available specifically for hedging against a recession.
In addition to being a more comprehensive investment vehicle, you can also borrow against your holdings at .25% interest if you have more than $10,000 inside your portfolio.
In the near future, M1 Finance is coming out with a debit card with 1% cashback earnings and a 1.5% APY interest rate. Direct deposit, bill pay features as well. The cashback earned and interest earned can be set to automatically invest in your portfolio at no cost. Personally, when this releases I’m closing my primary bank account to use this. This extra feature does have an annual fee of $100. But well worth it depending on the size of your portfolio.
There are also taxless and tax deferring accounts that you can open next to your investment account. Trusts, Roth IRAs, IRAs, and much more are available.
M1 Finance does not feature round-up investing. But you can set up automatic deposits.
I’d use any combination of Acorns + Coinbits or M1 Finance + Coinbits. I stay away from apps like Digit because I’m not interested in losing money by saving. Stash is a round-up investment app too, but their high fees, especially for small accounts don’t allow me to recommend them.
Note: Acorns is only available in the U.S. and Australia. Coinbits and M1 Finance are only available in the U.S. Outside the U.S. for Bitcoin there are apps like Skraps, which are yet to be released.
Money Tips: Group Economics/Sou-Sou’s
If you want to compound your investments much faster, each one has the ability to create joint accounts or connect to a joint bank account. Over the past 50 years, Americans have been brainwashed into green and narcissism. As a result the “every man for themselves” mentality is pervasive.
But in recessions and economic downturns, there isn’t any kind of advantage to that mindset. The truth is we need each other. These apps all allow multiple people to pool resources to increase the upside of their investment and grow it faster.
If you have a joint bank account with multiple people, Coinbits allows round-ups for every account number tied to that bank account and you can disable whichever accounts you do not want to contribute. M1 Finance allows joint accounts. Acorns also allow multiple accounts.
So if you have a joint account with 3 or 4 people. You can create a recession strategy using Coinbits, Acorns, or M1 Finance. Round-ups will come at a much faster rate because you have 3 or 4 people spending money.
Make a plan with your family or friends, how long you want to contribute, how much can be withdrawn and when. This should be something that’s in a total set it and forget it category throughout the course of the recession.
Recessions and downturns are a fact of this banking system we live in. So they come in cycles and there are two types of people: Those that profit during a recession and those that get wiped out. These strategies will help you get to the winning side of the recession.
Questions? Leave them in the comments section.