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What is Recession?
Recession is a normal thing for any business cycle.
What? Are you kidding? Recession is normal? You will ask!
Yes, the Recession is a part of the normal business cycle.
What actually it is? Well recession occurs ” WHEN FOR 2 CONSECUTIVE QUARTERS GDP OF ANY COUNTRY GOES NEGATIVE”
GDP – means Gross Domestic Product (briefly speaking indicator of the financial health of a country).
In every healthy business cycle recession comes every 20-30 years. A recession generally lasts for 6 to 18 months. Interest rates usually fall in recessionary times to stimulate the economy by offering cheap rates at which to borrow money.
The average recession lasts for 11 months. The most significant recession was THE GREAT DEPRESSION – 1929 in the USA lasted for 43 months.
TROUGH is the stage of the economy’s business cycle that marks the end of a period of declining business activity and the transition to expansion.
5 Stages of Business Cycle and Recession:
The 5 stages of the business cycle are,
- Growth (Expansion)
- Peak
- Recession (Contraction)
- Trough
- Recovery
At one time, business cycles were thought to be extremely regular, with predictable durations, but today they are widely believed to be irregular, varying in frequency, magnitude, and duration.
During the recovery phase first the graph will achieve the previous peak and after that, the last peak is overtaken.
So after the recession, the new growth will break the previous peak.
How to Take Advantage of a Recession as an Investor?
1) Recession is a normal thing for a business cycle. How to get rich during a recession? So, it is the opportunity to buy assets at a low price. It is not the time to exit but it is time to enter at the lowest level.
Is it wise to invest during a recession? You are so lucky that you have an opportunity to invest in a recession, it means that there is a discount in the market and a 100 Rs. product is selling at Rs. 50 only.
2) Principles of wealth building are the same and unchanged even during the recession.
3) If your Real estate broker says to you that “Don’t buy Real Estate right now” because of the recession. Don’t listen to him. This is an opportunity to buy a cheap property and remember these types of opportunities come every 25-30 years or maybe only once in a lifetime. So, a recession is not something to beware of but it’s an opportunity.
4) If your stock broker says that don’t buy stocks or mutual funds or PMS or AIF because the market is volatile. Don’t listen to him. Just buy stocks of fundamentally strong companies or good mutual funds, PMS, and AIF as much as possible. It’s a discount in the market.
5) Will a recession affect mutual funds? Should you invest in mutual funds during a recession?
Don’t Discontinue your SIP of equity mutual funds Instead Increase the SIP amount if possible. It’s a SALE in the market that very few people get in their whole life. It’s a good time to weed out poor equity funds and stocks and move into better ones.
Irrespective of market conditions, always continue your SIPs and whenever your financial situation permits, make it a point to increase the monthly commitment. You would definitely be very happy about your decision in the long run.
6) Where to invest during the recession in India? Don’t listen to business channels. Just read between the lines. Just think that if the company is really doing a genuine business and its stock is selling at a discounted price than the company’s real valuation then I must buy it.
7) How to invest in a recession? Don’t get scared of recession. Be Aggressive, it’s nothing but a sale in the economy. Buy good investments as much as possible at a discounted price. It is quite possible that you don’t get another discount (Recession) in your whole Life!
Have you Recession-Proofed Your Investments?
Have you protected your investments from the recession?
There is no meaning in rushing to buy an umbrella when it already rains. You should have bought it well in advance before the rainy season.
Similarly, you need to recession-proof your investments, before the sign of recession.
Like rain, recession can come at any time. Have you recession-proofed your investments?
Recession-proof your investments NOW:
Just like the setting of the sun, economic hiccups too are an inevitable activity. It is a temporary yet bound-to-occur activity. Nevertheless, experiencing a recession does not at all signify that we have to participate and get affected by its harmful effects. You can recession-proof your investments.
Planning beforehand can surely help to keep your finances on track during times of economic slowdown. If we make careful preparations when the economy is pretty stable, we can surely assure ourselves a financial life that is essentially recession-proof.
In times of economic plunge, implementing some everyday habits can void your fears and help recession-proof your investments.
Let us learn a few significant steps that you can take Today, to lessen the aftermaths of recession by recession-proofing your investments. How to recession-proof your financial life?
1. Maintain an emergency fund:
This is the first and foremost important step in making your investments recession-proof. To prepare yourself for a potential recession, you should build an easily accessible emergency fund worth at least three to six months of your expenses.
By not preparing during the usual times, you are actually setting yourself up for more expenses than required during the tough times. Therefore, it is much easier to build up an emergency fund than to recover from clearing your past expenses.
If the emergency fund is not created, how does it affect your investments during the recession?
During the recession, your income may be less; you may not get loans. So when you need money for some urgency, you may need to withdraw from your long-term investments. Because of the recession, long-term investment may be quoted at lower prices.
If you withdraw your long-term investments, you may be forced to sell at a lower rate and the notional loss in these investments may become an actual loss if we sell them during the recession.
By creating an emergency fund, you can avoid this situation. Creating an emergency fund does its part to recession-proof your investments.
2. Create additional income sources:
How to recession-proof your finances?
This is the second significant step in making your investments recession-proof. Always remember the thumb rule that says – ‘your job or paycheck is NOT certain forever.
Even if you are happy with your great-going full-time job, it is never a bad idea to have an extra income source. This can be accomplished either by doing some consulting work or selling archives online.
With job security becoming non-existent these days, having an additional income source will be a great help, especially in times of downturn.
It is very obvious and evident that having additional income sources will recession-proof your investments.
3. Investment Diversification:
How to recession-proof your investment portfolio?
How to create a recession-resistant investment portfolio?
It is significant to build diversity in your investments to make your investments recession-proof. Try to create an investment portfolio in pairs that are not so strongly correlated. This implies that the two investments made balance out each other in case of inconsistency in the economy.
Diversification may sound like a very simple strategy. But it is a very powerful investment strategy in making your investments recession-proof.
4. Reduce Costs and Increase Savings:
Make it a regular (each and every day) practice to live within your means. By doing this, you will be less likely to go into debt during a price rise.
Stop wasting your hard-earned money on extra and unnecessary things. Rather, concentrate on additional investments in mutual fund SIPs. Furthermore, clear any of your existing debts , organize your accounts, and build up your retirement savings. These will help you to concentrate on growing your income.
Spending smartly and investing more will help you prove your investments against recession.
5. Think long-term:
Keep a long-term mindset with making your investments. For a long-term strategy, it is important you keep your investments protected from the impact of the recession.
Rather than putting all your money in the stock market, do some serious investments in high-quality low-expense mutual funds. This will also make way for a diverse allocation of your investments and take advantage of the same.
A recession is a short-term event. If you have long-term investment time horizons, the effect will be removed when the economy recovers. Thinking long term investments are one of the good ways in keeping your investments recession-proof.
When we get our long-term perspective right, we wouldn’t be bothered by short-term noises. Going by both fundamentals and economics of demand and supply; owning equities makes a lot of sense. After ensuring adequate risk coverage, an emergency fund, and setting aside money for near- and medium-term requirements, equities would be the best way to build one’s assets in our country.
All you need to do is to stay the course ignoring both pessimism and euphoria.
John Bogle Says:
“Stay the course. No matter what happens, stick to your program. I’ve said ‘Stay the course’ a thousand times, and I meant it every time. It is the most important single piece of investment wisdom I can give to you.”
Bottomline:
Remember, you can’t recession-proof your investments once the recession has arrived.
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