Recession Proof Investing for 2020
How to not lose your shirt when everyone else is losing their shit.
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Author's note: After 8+ years in the investment industry and having everything I said or wrote vetted by compliance, I relish my freedom to share more of my opinions with readers than I could with my clients. I try to share as much information as I think helpful, much of it based on my own personal experiences. That also means that there are opportunities included in this article that I have used previously, am using currently, or that I may use in the future.
2020 started off so well. Winter was mild and uneventful, the economy was doing well, unemployment was at historic lows (ok, well—that might be debatable), and stocks were pressing all-time highs.
And now, here we are, four months later, and the world looks totally different.
Since the yuletide, stocks have fallen by 30% or more, the majority of the U.S. economy has been shut down for eight weeks or more, and more than 30 million people have filed for unemployment. The unemployment rate has more than tripled in less than three months.
Ask any economist and they will say that the U.S. is almost definitely in a recession.
Why “almost definitely?”
The textbook definition of a recession is two consecutive quarters of negative economic growth. That’s significant because technically you don’t know if you’re in a recession until you see growth numbers for today, and you won’t see growth numbers for today until about three weeks after the end of the quarter we’re in.
So, to know if you’re in a recession in April, you have to wait until July.
6 key strategies I’m using to keep investing in a recession
This spring has highlighted innumerable risks that most investors never consider. And yet, when one of them comes to pass, investors are thrown for a loop. Many don’t know how to react.
The stress inherent in a recession also means people are far more likely to rush into decisions, overthink, or second-guess due to stress.
So, here are some strategies to help you keep your wits and recession-proof your investments:
1. Don’t focus on the here and now
When the music stops and not everyone has a seat, it’s always easy to get down on the here and now. Stocks are down, real estate is down, credit is harder to get. Almost everyone will see their net worth decline on paper; many will encounter more significant obstacles like lay-offs.
During these times, it’s best to keep your focus on the long-term. This isn’t just to say “keep your chin up.” Rather, invest for the long-term. Think strategically about your investments, your career, etc. Recessions present big opportunities for those who can ignore short-term volatility and make informed decisions for the future.
2. Reassess your risk tolerance
Most recessions aren’t short-term events. Markets don’t decline and immediately recover. Instead, investors can expect a 4- to 10-year period of depressed asset prices and a limp-along economy.
During this time, interest rates will be down on loans but also on investments. Many investments will also have numerous short-term ups and downs. Investors need to decide whether they’ll be able to hang in, or if they need to just sell some investments and would feel better with the cash.
There’s nothing wrong with either choice, but investors who prefer to sit out the market’s fits and starts need to accept that they’ll miss out on some gains. Those who prefer to cash in on big windfalls when the market recovers need to be willing to tolerate plenty of volatility upfront.
3. Know your cash needs
The last thing that any investor wants to do during a recession is to be forced to sell assets at distressed prices so they can meet living expenses. But, you also don’t want to find yourself in credit trouble or unable to pay your bills.
So what’s the answer? Whatever makes you comfortable. If it would help set your mind at least to liquidate some investments and hold the cash in case you need it for expenses, then do that. If you want to cut expenses and accumulate cash over 8 to 12 weeks so you have a rainy-day-fund, great!
If you already have an 8-figure portfolio and enough cash to cover your living expenses for the next 5 years, then this isn’t for you. Go over to YachtWorld and stimulate the economy, why don’t ya?
4. Keep the shop lights on
You have to be able to pay your personal expenses through a recession, but you also have to be able to meet whatever carrying costs you have for investments, businesses, and side hustles.
If you have a lawn care business on the weekends, this means keep your insurance current, your taxes paid, and gas in the tank. If you have rental properties, make sure your mortgages, insurance, and taxes are all paid.
Granted, your carrying costs are probably zero if you invest in traded securities like stocks, bonds, mutual funds, ETFs. But, carrying costs or “cash calls” can be significant if you’re investing in real estate or private companies. (Cash calls are when your company requires you to come up with cash to cover current expenses.)
5. Limit your information intake to solutions, not problems
We saw this already when the coronavirus outbreak started in earnest in the United States. Everywhere you looked were negative headlines. Feelings ranged from indignant or depressed to apoplectic. And prolonged poor economic news will have the same effect.
With so much news coming at us, it’s easy to think there’s something we should do in response to headlines. But, the fact is, once something’s in the news, it’s probably too late to help you anyway.
So, while it’s important for investors to stay current, staying glued to financial news increases the likelihood of overreacting or making bad decisions. Carve out a little time each week to check in on your portfolio and digest the relevant headlines. Get the news you need, then get back to doing anything else.
6. Set it and forget it
Perhaps the most important thing for you to recession-proof your investments is to decide early on and stick with it. Figure out early how much cash you need, what types of assets you’re willing to invest in and how much, understand how much risk you’re willing to tolerate, then take your hand off the wheel.
Instead of dwelling on your finances, go back to focusing on what makes you money. After all, if you stop and get laid off, it’s going to be hard to find another job in a recession.
Generally speaking, once you’ve put your strategy in place, you should maybe reassess every 6 to 12 weeks if there are systemic changes in the market or economy and you think adjustments need to be made. Otherwise, try to avoid change for change’s sake. To do so is to confuse action for progress.
The case for sticking to big names
One of the more prescient moves that many risk-averse investors take is to consolidate their investments among a small list of “safe” names. These may be well-diversified mutual funds or ETFs or individual companies that are considered bedrock institutions.
This allows them to reduce their risk of loss while also staying invested so they can still profit when the market recovers.
The case for mutual funds and ETFs is relatively straightforward. These funds are diversified. They allow you to shotgun your investment out over hundreds or thousands of individual companies. Even if one or two of them go broke, you won’t get hurt too bad.
The downside, though, is that there’s less potential upside when the market starts back up, because funds will inevitably be held back by some of the losers.
The case for individual stocks is a little tougher to make—typically this only makes sense for folks who are less risk-averse and willing to ride out short-term volatility. But, even still, it’s best to stick with big names—the companies that come to mind when you hear the words “too big to fail.” These are the companies that the government literally won’t let go broke.
So, if super-risky investments like private companies and real estate are too risky for you in this climate, you may decide you just want to stick to highly-liquid stocks/bonds/ETFs that may be a little less volatile, or at least let you cash in if you want to get off the ride.
Funds to consider
|Funds to consider|
|Fund||What it is|
||The ultimate FI/RE fund. A Vanguard equity fund designed to follow the entire stock market, at super low cost.|
|VVIAX||Another low-cost index funds, but this one focuses specifically on value stocks that are selling for less than they’re worth.|
|VOOV||A Vanguard ETF designed to track the S&P 500 Value Index.|
|VOO||Vanguard’s ETF that tracks the entire S&P 500.|
|VBTLX||A bond fund. You probably shouldn’t bother with bonds because the yields are too low to be worth the risk. But, if bonds are your thing, this is a good one.|
Top blue-chip stocks
|Top blue-chip stocks|
|Company||Why it’s safe (# of employees, balance sheet, time in business, etc)|
|Bank of America (BAC)||The biggest bank in the U.S. by deposits, and it has over 200,000 employees.|
|JP Morgan Chase (JPM)||The 2nd biggest U.S. bank by deposits; the largest by assets.|
|Boeing||The 2nd biggest government contractor in the U.S., with over 150,000 employees.|
|General Motors||One of the biggest automakers by sales and the largest by production, with over 180,000 direct employees.|
|Ford||The second-largest automaker by production, a position it’s held for over 50 years.|
|General Electric||At one time the largest company in the U.S. GE is eliminating 25% of its workforce, but it’s one of the world’s biggest government contractors and it makes everything from lightbulbs to jet engines.|
|American Express||A 170-year old company with over 50,000 employees and the largest global payments network in the world.|
|Wells Fargo||The 4th largest American bank by assets, with over 250,000 employees, Wells Fargo is in the top 30 of the Fortune’s list of the 500 largest companies by revenue.|
Other ways to invest in a recession
We’ve covered the steps you can take to recession-proof your portfolio, but those aren’t the only investments that you can make during an economic downturn. Here are a few things that you might not think of as ways to take advantage of a recession.
1. Invest in yourself
When I got laid off back in November and went back to freelancing full-time, I found a cost-effective online Master’s program that I can use in any number of ways. You don’t need to lose your job to do the same.
If a formal degree isn’t your thing, consider taking courses online through a platform like Skillshare, or enroll in professional development courses at a local university or community college. Take advantage of the downturn to invest in yourself and develop your knowledge and skills. These investments will pay serious dividends later.
2. Pay down debt
If you’re able to lower or trim back your monthly expenses (and you should be able to, with so much of the economy shut down), consider using some cash to pay down credit card debt or pay off smaller student loans. This reduces how much you have to make each month by eliminating debt payments; so, if you do get laid off or see your earnings drop, it won’t be quite so painful.
3. Real estate
Most of this article focused on traditional stock and mutual fund investing, but real estate can be a great investment during a recession. Rental property is still usually in demand. You could also go the crowdfunding route, but that can be much riskier—especially in a recession. Even in a downturn, people need someplace to live.
Editor’s note (from Melissa): You may see 2020 housing prices continue to climb at a marginal rate. I am NOT an econ expert but I’d be willing to bet these prices will fall (at least a little bit). I hope it’s not the case but the foreclosure rate may spike in the next 6 months to a year stimulating the market for buyers—especially rental investors.
Recessions are no fun, but they’re also tremendous opportunities. They help us reassess what’s important in our lives—reconsider the choices that we never even think about when times are good.
Plus, they’re excellent buying opportunities. If you’re careful and do your homework, you can make some shrewd investments that can really boost your net worth over time. Just be sure to keep your head about you, stay patient, don’t overreact, and focus on the things you can control. That’s how you make it through a recession.
Disclosure: The author owns shares in some of the investments included in this article.