Managing a recession is going to be a new concept for a lot of people, maybe you too.
No doubt by now, you are probably coming to the realisation that times have changed. There is a new normal, adjustments are going to be made to life as you knew it.
So, what does that mean for you and your investments? Let’s look at some of the things you should be contemplating as you manage your money over the coming weeks and months.
What is a Recession?
There is going to be a whole bunch of headlines in the coming weeks about a recession.
Once the mainstream media interest moves on from case numbers, flattened curves, second waves and isolation, the next topic will be the economy and how you can be managing a recession. Trust me, the media is not where you want to take advice.
As you know, I recommend that you avoid mainstream media as much as possible. The hyperbole and hysteria they perpetuate will do no good for your mental state, especially now…
…and recession headlines are going to be the next hot topic.
So, what is a recession? Well, as usual, there are multiple definitions just to make it confusing. However, the generally accepted definition is two consecutive quarters of negative economic growth.
A good chance that is going to occur given how close most economies were prior to the pandemic.
The one potential saving grace is all the money being poured into the economies by Governments. If that money can generate reasonable spending, it might avoid the r-word, although I doubt it.
For now, understand that this is going to dominate headlines and attempt to continue the fear dialogue for some time.
The Impact of a Recession
Now that you understand what a recession is, next we need to know what it means practically and how managing a recession can lead to gains, not fear.
One thing I believe is that no matter whether we do or do not go into a recession, these times are going to be different. It’s the new normal thing.
Normally a recession means there is fewer jobs, less investment in infrastructure and less economic activity, meaning more unemployment, more bankruptcies and things are just harder.
Like I have mentioned already, there has been a stack of Government money being poured into economies, and this could continue since no Government wants a recession. Unemployment in double digits hurts Government re-election aims and normally leads to higher interest rates, another thing that hurts re-election. Expect Governments around the world to do as much as they can to get economies back to new normal as quickly as possible.
When it comes to the financial markets, it is normal to expect that stock markets stagnate. There is no business growth or profits to drive prices up, and there is no positive sentiment either.
Property markets, which also rely heavily on human emotion and confidence will also stagnate or fall.
Which leaves cash-based investing, like Gold and Silver, Bonds and Term Deposits. Normally Bonds and Term Deposits would benefit from increasing interest rates, however, it is less likely we will see that this time.
The precious metals could be the market that out-performs all the rest. A flight to safety in uncertain times. For as long as markets have been around, precious metals have been the safety investment. Since they are backed by physical gold or silver, investors believe there is more security. Now I’m not going to get into the merits of that argument, just acknowledge that this is what normally occurs and is starting to be reflected in prices now.
Managing a Recession and Investing
The big question then is what your strategy should be in a recession environment. Obviously, your circumstances will depend on what you do, however, I want to start with the foundation of our strategy.
The foundation is to accumulate quality investment-grade assets on a consistent basis. The aim is to utilise the cash flows from these assets to first meet the investment costs, and then to meet your living expenses.
So, what changes in a recession environment? NOTHING!
That’s right, your aim continues to be to accumulate investment-grade assets.
Sure, some markets are not going to be growing at rates you have seen for the last 10 or 20 years. However, quality assets are still going to be available, and quite possibly at much better prices than they were just a few months ago.
The most important part of this strategy is that they need to be investment-grade assets. Unlike the last 10 to 20 years where almost everything was going up in value, the next phase will require more prudent analysis.
Warren Buffett often uses the quote about when the tide goes out you can see who has been swimming naked. This is what is happening in markets now, hello airlines. So some consideration for the type of businesses that will do well in the new era is crucial to your success.
Potential for Life Defining Gains
I have mentioned a lot recently, on socials and in my programs, that these are the times when the wealthy tend to make some of their greatest returns.
While most people retreat and get caught up in the fear, the wealthy are active. They are accumulating as much as they can.
What they know, is that when the markets turn, they will turn at a rapid rate and so they are buying at a discount to lock in huge gains over coming years.
Maintaining our strategy of accumulation will enable you to join the fun as well.
As I mentioned, stock markets and property may be stagnated for a while, so start out looking at precious metals to take advantage of the flight to safety. Then, once you are comfortable with your allocation across the asset classes, you can start to accumulate stocks and property to take advantage of the discounts on offer.
In time you will be glad you did, and the hype about a recession will be just that, hype. You will have positioned yourself for great gains and potentially life-changing results.