Preparing for the next recession

[EdithKeeler]

I’ve read a few things lately forecasting the next recession, and a couple of guys are pointing to 2020 for a variety of reasons.

The last recession didn’t hurt me much at all, to be honest. It caused me to stick it out in a job that I probably would otherwise have changed, and rent my house out rather than sell because the value had decreased (actually that’s ultimately worked out really well), but other than that, it didn’t affect me much.

But I’ll be at a different point if it hits in 2 years: early retired or close to it, may or may not still need to give my mom financial help, etc.

So what steps to prep for the next recession? Pay all debts. Hoard cash (if I’d had more last go ‘round I would’ve bought that beach house!!).

I really can’t see anything different to do other than the things we talk about here all time anyway.

Thoughts?

[IlliniDave]

I suppose it depends on the nature of the recession. I think people like to consider "bucket" approaches to resource allocation for such consideration, something like keeping ~5 years expenses in cash of very short-term gov't securities to draw on in hopes of outlasting the downturn, backed by maybe another 5-ish years maybe in intermediate-term gov't bonds. There are a lot of permutations of that. The idea is giving yourself a buffer of time before having to rely on assets that might take somewhat of a swoon during a recession.

Being debt-free helps of course, and having some fallback options for belt-tightening in general (can stretch the buffer resources). I don't know what you can do wrt potential or ongoing family obligations except include them in your planning, consider combining households (not always a great option), etc.

[Farm_or]

I fared pretty well too, during 2007. Reasons for that is some of what you said. Paid down all debt except my mortgage at that point. Conservative investment choices and just buckled down at the job, hoping for things to improve in the future.

I think that cycles happen and will continue to happen. It impacts people with sound life strategy less than it does the mainstream. If you've ever paddled a kayak up river, you make much better progress out of the middle of the current.

Independent thinking, reading the obvious clues, conservative investing, and apply some hedging ideas so you can still make slow progress when the current changes direction forcefully. What goes up must come down, but the inverse is true too.

I think greed often gets people strung out because they are impatient with slow incremental progress. They see others rushing ahead in the middle of the strong current, but they forget about how far behind they fall trying to struggle against it when it changes because they simply always do what they've always done.

[jacob]

If you want/need a side-job, it's best to get it before the recession, even it's just getting your foot in the door.

If you want to sell, sell now ... because during the recession more people will be selling and fewer can afford to buy.

Recessions are great times to buy big stuff, that is, anything bigger than a bicycle. Of course, this presumes you have money and that you don't need to get that money from selling the same depreciated assets that others are selling.

Those assets that have been bought with debt and appreciated the most will tend to drop more because people need to sell them to cover the debts and those overperformers are the only ones people still have equity in.

Cash is king here. People will begin to think of dollars as an asset in and of itself rather than just a way to valuing other assets.

Many consumers will be in trouble. Some may lose their jobs. Expect many to take no pro-active and little reactive action until they get squeezed. This will probably be a source of frustration. You might spend your $3000 in cash to get a new used car that would normally cost $5000. They might spend it to keep their $300/month cable package for another year. This will be hard to watch. Better figure out where you stand in terms of authority and responsibility, when it comes to solving other people's problems, because it's different between a recession and boom times.

For investments, I've made sure that my payout% are low as well as reducing my portfolio beta. Last time I only did the latter and saw my portfolio dividend income decline as some companies decided to cut. This is mainly relevant for those who live off dividend income. Total return strats tend to use bigger cash funds to smooth things out but keep in mind that doing this is either [recession-]timing or a change in overall allocation strategy.

[Jason]

There are certain realities of a recession that may be unavoidable i.e job loss, investment declines and they can have serious impact. But for many (I would say most), havoc and crisis ensue because the external storm hits an internal storm that they were not aware of until the external storm hits, thus creating the perfect shit storm of catastrophe. Crisis always seem to be "x meets y." If x is the recession and y is high household debt, well then its going to be no paddle time. But if x is the recession and y is basic ERE tenets, you should have a paddle. It's kind of serenity prayer tripe in being able to distinguish that which you can control from that which you can't and its' best to have a handle on what you can control when conditions are great to normal as opposed normal to FUBAR.

Of course, those ahead of the curve can be in a position to thrive during a recession.

[cmonkey]

I'll be hitting FI in 2020 and this is on my mind. Given high valuations and all the political uncertainty these days (and likely going to get worse) I think a more conservative target is definitely in the cards. Something under 3%, perhaps 2.5% or lower.

From an investment perspective, if you position well before hand, the effect of a recession should be negligible (other than the wild ride), perhaps just a couple dividend cuts. Lower payout ratios are a good strategy, something under 50% and make sure to have good diversity. I have a few that are 70%+ and they are on the chopping block for sometime over the next couple years. All my buys over the past year have been sub-50%. Also, certain sectors will do better even with a high payout ratio (utilities and healthcare being good examples), so try to put more weight into them.

Buying low-debt companies is also a good strategy because rates are rising and will squeeze high-debt companies.

Likely the best thing you can do is just cut out all non-essential spending, regardless of what's going on with investments/jobs.

[Sclass]

I saw some great deals on antiques, jewelry, fancy vehicles and homes Last recession. I was too scared to grab anything. Given I don’t need that stuff I’m fine not having done so.

So preparing for a recession. I think most people here have what it takes. You need to have the margin to pull back on your expenses. As long as you aren’t riding on the hairy edge of survival you can make small changes and survive. If you have big financial obligations, make sure they’re of the type that can be jettisoned without complications.

Ok, maybe you’re saving a lot of income now. Bad times roll in and you may not be saving as much. You will just be living. You had margin and you use it to survive. Those who don’t have margin will fail. We’ve seen this before up close in the last recession. A couple of my spendy friends lost their homes. They were riding too close to the edge and they went over.

The ERE lifestyle keeps you far off the edge. Things get bad and you lose your obscene savings rate boo hoo, you’re still eating. You’ll get back to business when things improve. A debt ridden lifestyler cannot do this.

I have the confidence that I can live on a shoestring budget because I have at times in my life. And I’m not too afraid of it because I know I have the skills and toughness to cut back.

[vezkor]

I think Sclass said it beautifully.

[Astra]

In terms of assets, I've been selling off my high-riding tech stocks over the past half-year and moving money into
1. Gold and Silver (tend to do the opposite of the stock market in a crash)
2. Consumer-goods index fonds (no matter how bad things get, people will still buy toilet paper and laundry detergent)
3. High-dividend index fonds (not speculating on growth, but buying to hold)
4. cash (some for liquidity, some for grabbing those bargain stocks when they hit rock bottom)
Keep only the stocks you can see surviving a recession, and you can hold for 5+ years
Spread out the risk over various regions and currencies (very easily done with index investing)
And don't pay attention to the news at any point!

[EdithKeeler]

Could you share some of these sources of information. I'm quite interested in reading them. Thanks.

https://www.usatoday.com/story/money/20 ... 686177002/

https://www.prnewswire.com/news-release ... 52321.html

https://www.wsj.com/articles/economists ... 1525961127

There was also a piece on the radio this morning--not sure what show (public radio), but they were talking about inverted yield curve as a predictor of recession as well. Might have been Planet Money (I wasn't on my usual schedule this morning!).
https://www.bloomberg.com/news/articles ... sion-alert

Point of the story was that it's a pretty reliable predictor, and headed in that direction.

[Sclass]

There have been a number of stories like this recently.

http://time.com/money/5023038/millionai ... tes-world/

1 in 20 American households has at least $1,000,000 in assets. $1,000,000 net worth is the new middle class.

https://www.cnbc.com/2017/03/03/self-ma ... class.html

It’s really interesting to see a large number of people believe they are now rich. It kind of defeats the meaning of rich but that doesn’t discourage the participants one bit. Maybe it’s time for a shearing.

This video is enlightening.

https://m.youtube.com/watch?v=T3imSKAvgmY

[IlliniDave]

There have been a number of stories like this recently.

http://time.com/money/5023038/millionai ... tes-world/

Interesting that the time.com article starts with a statement that X new millionaires were created in 2017. I don't think I would have used the passive voice in reporting that.

Recessions seem a lot like market crashes in that saying, "we're headed for a recession" is always true. Best to be prepared for one at all times because it's been my experience that they rarely announce themselves publicly ahead of time (though are often obvious with 20/20 hindsight). Fortunately the road to ER and the reliance on accumulating assets while moderating outflow tends to put one in a position to better withstand recession.

[Farm_or]

The big picture is the unprecedented, world wide, and long term phenomenon of quanitive monetary easing. Never before has there been so much loose money available.

The consequences have not been predictable. The corresponding growth of inflation has been too slow and that has puzzled a lot of people. It is always explained in clear detail after the abrupt change occurs.

[Seppia]

"we're headed for a recession" is always true. Best to be prepared for one at all times because it's been my experience that they rarely announce themselves publicly ahead of time (though are often obvious with 20/20 hindsight). Fortunately the road to ER and the reliance on accumulating assets while moderating outflow tends to put one in a position to better withstand recession.

Exactly.
Unfortunately when recessions and / or huge bear markets happen, there is little one can do to avoid them*
We** are among the most prepared, so while there will be little to cheer for most of humanity when it happens, we will not be in a bad spot relatively speaking.


*Yes one can always short/go all cash/etc, but the fact that markets often stay irrational makes it very difficult to time

**sorry if I simplify, but I mean "most here on this board"

[prognastat]

In the end I think the best preparation for recession is managing to live on much less than your income.

This will minimize the impact of the recession and also give you the ability to weather it and even take advantage of it. This puts you ahead of the vast majority of people.

[jennypenny]

Have your excuses prepared for why you're not in a position to loan money to friends/family.

Second part of that would be don't tell people how prepared you are, and commiserate with them during the recession instead of talking about how well you're doing. It will help you avoid the need for excuses.

[prognastat]

Have your excuses prepared for why you're not in a position to loan money to friends/family.

Second part of that would be don't tell people how prepared you are, and commiserate with them during the recession instead of talking about how well you're doing. It will help you avoid the need for excuses.

Thankfully unless you bring it up, when you don't appear to be spending a lot people just kind of assume you don't make a lot/are poor.

When you aren't wearing fancy clothes and bringing your homemade lunches to work they just assume you don't make a lot or that you have a lot of debt you are paying off and just can't afford to live the way they do.

[oldbeyond]

In general FIRE is quite robust against recessions, and ERE even more so. The worst place to be in is to have the recession hit early in the process while having obligations(a family etc), but even then there's likely a(few) year(s) of expenses available in assets, which in addition to public safety nets gives quite a bit of room to maneuver. The beauty of not living on the edge. Quite a bit of my expenses are related to social/fun stuff which would be easy to forgo in a mood of depression - no one will be asking me to go to concerts anyway and there'll be potlucks instead of fancy dinners. And were I laid off cost cutting would become my main focus. My tactics are somewhat loose so I have a bit of fat to cut in areas like groceries and procurement of stuff, where I currently trade some money for time/convenience.