Due to rising inflation, global economic and political uncertainties, the US stock market has been declining since the end of 2021. The market crash accelerated in recent weeks due to an increasing fear of a recession. Let’s have a look at 3 things you can do to take advantage of a recession.
KEY TAKEAWAYS
- Looking after your income streams
- Pay attention to how much you spend and how much you save
- How to approach investing in a bearish market condition
Secure your income streams
The first 1 thing you should do during a recessionary period is to secure your income source. During a recession, the economy is going to slow down, companies will have a harder time making money, and naturally they will start looking for ways to cut costs. Unfortunately cutting jobs and reducing head-counts is a direct way for companies to save on costs. In fact, Uber, Amazon and Facebook (Meta) have announced hiring slowdowns in recent weeks, even though we are not yet in a recession. So if you work for someone, it’s a good idea to keep your knowledge and skills relevant and up to date, make yourself competitive and indispensable.
Securing income sources during a recessionary period is also important for business owners and entrepreneurs. As the economy slows down, consumers will spend less, they will also be more selective when spending. This will make the business environment more challenging and competitive. Business owners and entrepreneurs will want to ring-fence their business, find ways to adapt to a different market environment, understand the consumer behavior shifts to stay ahead and stay competitive.
Maximize savings and accumulate capital
The second thing you should do during a recessionary period is to maximize your savings and preserve capital. This is because during a recession, money is relatively harder to come by whether you work for others, run your own business or invest. Cutting down non essential expenses, opt-in cheaper alternatives and shopping around for deals will help control your expenses. Making regular deposits, paying yourself first before spending will boost your savings account.
Having enough reserves not only provides a safety net for unexpected events such as job loss, slowing business or stock market crash, it will also put you in a great position for tip number 3!
Look for good investment opportunities
The third thing you should do to take advantage of a recession, is to look for good investment opportunities in the stock market and start nibbling. This is where you put the savings and capitals you accumulated in step #2 to work.
During the previous US recessions like the dot-com bubble era in early 2000 and the great recession in 2008, 2009, the US stock market plunged significantly, with Nasdaq dropping a whopping 84% and 55% respectively from peak to trough. Sure it was devastating to see portfolio evaporate just like that (on paper), but if you just exited the stock market during that period, you would’ve missed some of the best opportunities in history to build wealth.
If you invested in the stock market through the bottom of the doc-com bubble era, or the 2008 great recession, today your investment would have ballooned 13 times and 10 times respectively, even with the current stock market decline.
One way to approach a market condition like this is to be very selective about the investment. Make a watchlist of quality growth stocks if you are a growth investor, look for companies you believe in, those with moat, pricing power, great balance sheets, a lot of cash and low debt. Or make a watchlist of dividend aristocrats in sectors such as healthcare and consumer staples for income generation, or look into major index funds, and start very slowly dollar cost averaging, just start nibbling.
The great Warren Buffett has a famous quote: Be fearful when others are greedy and greedy when others are fearful”. In fact, his company Berkshire Hathaway just poured $51B into stocks during Q1 2022 after hoarding cash for almost 2 years.
Indeed, the current market is on a down trend, and can be volatile for a period of time, but no one can time the bottom of a stock market no matter what they say. History has proven that no matter what the market does, those who stay invested in quality businesses and keeping a long term view will always come on top eventually. It’s all about time in the market instead of timing the market.