When a recession hits, it affects many people and industries across the world. Even if you think that your industry is not affected, your company can still be hit due to knock-on effects. Revenue becomes harder if your clients are affected or if they realign their budgets. If this persists for several months, it can result to layoffs and furloughs.
Protect your income
It is with this increased risk that we should protect our sources of income as much as possible. If you run a business, then this is the time to optimize operations and reduce unnecessary expenses. Look into each recurring expense and determine whether it is critical for your business. You may be surprised to know that some of them can be eliminated without affecting your operations.
As an employee, make it your goal not to be a candidate for being laid off. While this is not entirely predictable, you can greatly reduce your chances of being laid off by being indispensable. Make sure that you work hard and smart and try to help the business survive. Now is not the time to slack off.
Back in 2008, I resigned from my first job. After spending three years in the company, I felt that I was not really growing professionally and so I quit. Perhaps due to arrogance or stupidity, I didn’t have a next job lined up. Little did I know that I picked the worst time to leave my job. In the coming months the whole world experienced the effects of the Great Recession. At that time it was difficult to find a job that I was satisfied with. I ended up being unemployed for five months.
The importance of an Emergency Fund
When I got my first job after graduating from college, I was excited to finally earn my own money. I still remember getting my first paycheck and surprised at how big it was! It was not that big in reality, but from a college student’s eyes it looked like a fortune. I had no idea what to do with the money. And so, like most people, I spent it all on family and myself.
Thankfully after a few months I realized that spending it all is not a good idea. I decided to open my first savings account. In the building where I worked, there was a bank and from there I got a passbook account (with no ATM). I decided against having an account with an ATM so I will not be tempted to withdraw from it.
Saving money became like second habit from then on. I felt satisfied whenever I see my savings account grow modestly over time. My savings rate isn’t really high, but I was happy with the amount I saved.
When I left my first job back in 2008, I used my savings to pay my bills and to survive. Due to the recession, I was not able to replace my income immediately. My entire savings were depleted after 5 months of unemployment. Once I got my new job, I was able to replenish it again. In the future I managed to wipe it again but that’s for another story.
This experience taught me the value of an emergency fund. Without my savings account, I would have resorted to borrowing money to pay for expenses. I would have ended up in a lower-paying job just to sustain my costs of living. My modest savings gave me a much needed buffer to search for and land a job that I am satisfied with. Later on I learned that the rule of thumb for an emergency fund is 3 to 6 months of expenses. However, any amount you can spare is good enough to keep you afloat during tough times.
Take advantage of opportunities
Recessions are tough for most people. Companies are not doing great which means that jobs are always in danger. Many people are laid off or furloughed as the economy shrinks. I personally felt the effects of the last Great Recession as our company (my second job) struggled for revenue. Our salaries were delayed and bonuses are not paid out. Still, we were lucky that we kept our jobs and we stuck together as a team during the crisis.
This does not mean that everything is doom and gloom. Recessions also present unique opportunities for investment and career growth, if you know where to look for them.
The Stock Market
When a recession hits, the stock market goes down. In economic downturns, people normally flock to more stable assets such as cash or gold. Thus, part of their strategy is to reduce exposure into equities which then causes stock prices to fall. If you believe the future will look better than today and think that the recession is part of a long-term market cycle, then you can benefit from it.
For a value investor, this can be a great opportunity to increase their stock holdings. If you are already eyeing companies that have a good track record and good management, this can be the time to purchase their shares at a discount. Back in 2008-2009, I just left my job and so I didn’t have enough money. However, I started learning about investing and had holdings in equity mutual funds. My coworkers at the time panicked and started selling their stocks and mutual funds as they didn’t want to watch their portfolio drop lower each month.
As for me, whether due to sheer ignorance or brilliance, held on to my holdings. It was not until after the recession ended that I realized the value of not panicking. Instead of losing your head, you add more to your portfolio during massive stock downturns. I made a promise to myself that in the next recession, I will have enough money to invest. And after waiting for a decade, I finally got the opportunity.
Index investing for the long term is my philosophy, but I also have individual stocks in my portfolio. I invest only in companies that I recognize and whose products and services I use regularly. Given this, this economic downturn gave me an opportunity to further increase my holdings in index funds and companies that I believe in.
Just a note of warning: this is not a guaranteed plan. No one knows how long a recession will last and what the long-term effects are. I am not certain that the stock market will recover to the level it was before the start of the recession. For example, Japan has what is called a Lost Decade, where their economy stagnated after a market collapse. However, I experienced first-hand a decade ago that a recession creates various opportunities. Whenever I see my friends selling in panic as “this time it is different”, I see it as a signal to buy more.
Hunting for Bargains
In hard times, people will sometimes let go of their assets even at a discount in order to convert them into cash or other stores of value. We have seen this in the previous section where investors sell their shares even at a loss in order to avoid further reductions in their portfolio. This also applies to other asset types as well.
In previous recessions we have seen real estate prices drop. As people were laid off because of the bad economy, they were not able to sustain their mortgage payments. Because of this, more properties became available in the market which drove the prices down. The same thing happens for businesses. Some business owners opt to liquidate their physical assets such as equipment in order to increase their cash reserves.
Whenever there are lots of sellers, it becomes a buyer’s market. You can acquire properties, equipment and other assets at a discount if you have the money available to purchase them. These assets can then be used to fuel your own business or to grow your overall investment portfolio.
Is it morally wrong to purchase assets from people who had no choice but to sell during tough situations? I don’t know. Is it better for them if no one wanted to buy and so they are left with no cash to survive? I don’t think so. While we all need to check our own worldview on this matter, we cannot deny that recessions present opportunities to acquire assets at a discount.
Don’t get caught with your pants down
Recessions have a way of “cleansing” the economy in a way.
Only when the tide goes out do you discover who’s been swimming naked.
Warren Buffet
This means that in times of economic trouble, companies who are strong will survive and those who are not will perish. In periods of prosperity, money flows around easily. Companies sometimes fool themselves that they are successful even though in reality, they are not profitable and are just burning their investor’s money. When a recession hits, investors no longer offer money like usual, customers become more picky, and eventually it results in a sales and revenue crunch. Only those who have a valuable product, a strong market, and a resilient team will survive a recession.
The same thing also applies to individuals. When times are good, you notice people buying stuff like new cars, new gadgets, and being generally easy with money. However, when a recession hits and their income is disrupted, some of those same people can barely survive and often resort to getting loans or selling their stuff just to get by. Getting a loan in a bad situation makes it worse as you are entering the transaction from a position of weakness. You have no choice but to accept the loan even though it has onerous terms.
If however, you are prudent with handling your money and saved an emergency fund, you will be able to handle the recession better. When the tide (of money) comes down, you will not be caught skinny-dipping. By having enough money to survive for months, you will be able to manage the bad situation much better and come out of it in a better position than if you do not have that money saved in the first place.
The time to save money is before you need it, not when you are in the midst of needing it.
Skills become more important
Preparing for a recession does not always involve money. Skills are also a very valuable asset that can save you in times of crisis.
One way to use your skills to your advantage is to protect your income, as discussed in the first part of the article. If you are skillful at what you are doing in your job, then it is very unlikely that you will be a candidate for being laid off. If you are valuable to the company, then your boss will do everything in his/her power to keep you employed.
Another way that skills are important in a recession is that recessions can open up better career options for you. Due to the “cleansing” effect of economic downturns, strong companies who survive will also need strong employees in order to grow. If you have a skill that is valued in the marketplace, then this is an opportunity to have more impact in your work instead of being just one cog in a big machine.
Don’t bet the farm!
As we look for opportunities, this does not mean that we need to use up our cash and just invest and buy assets at a discount. During times of economic downturns, this is also the time to be prepared. It would be foolish to convert your cash reserves into illiquid (real estate, businesses) or volatile assets (equities). If you lose your job and have no emergency fund, then you will have no choice but to sell your own assets at a loss.
The best time to prepare is when you don’t need to prepare. You cannot save money and prepare an emergency fund right in the middle of the emergency. By then it will be too late. As I highlighted in the importance of having an emergency fund, you will need to build that first when times are good. Once that is set up, additional money can be put into a “future investment” basket, ready to be used when opportunities present themselves. Then, when that opportunity comes, grab it!