An average person is bound to go through a couple of financial recessions in their lifetime, with one happening almost every 7-10 years.
History Repeats Itself
This is normal because it is part of the economic cycle, where the global economy goes through a period of “boom” and growth, to “stagnation”, “bust” and finally repeats itself all over again.
The important thing is for us to learn from all the previous recessions so we are well-prepared for the next one, or even be in a position to take advantage of it.
#1 Be Optimistic In The Long Run
Once we understand how the economy works and how recessions are just part of an economic cycle, we would also know that the economy would almost always find a way to recover unless the recession was due to an apocalyptic event that resulted in the end of civilization as we know it or the end of a country.
Hence, we should always take an optimistic view for the long run, and certainly not think of doing foolish things like ending your life when recession hits, because things will get better.
#2 Be Fearful When Everyone Is Greedy
From previous recessions, we will also find that no one really knows exactly when a recession would hit. The mood surrounding the economy would usually be good or normal prior to a trigger event that causes the economy to plunge into a downward spiral.
Hence, when it has been some time since the last recession, stocks are overvalued, and people are still overly bullish on the stock market even though not much growth is happening anymore, it is time to be fearful and take a more cautious approach to our investments and portfolio.
#3 Pay Attention To Your Surroundings
Sometimes, it pays to be observant.
A recession is not something that happens suddenly overnight, it is actually a build-up of a wide range of events that all culminate at a single unfortunate trigger event, like the bankruptcy of Lehman Brothers in 2008.
As a result, signs would usually start to show some time before a recession hits. If we are observant enough, we might be able to spot an increase in “for sale” listings for luxury bungalows and properties, businesses owners starting to complain that they aren’t making as much as they used to, friends not being able to get bank loans or an increasing number of clients trying to delay and defer payment for goods or services.
They are all signs that points to a slowing economy and an over-inflated market that might come tumbling down any time when the conditions are right.
#4 Always Have Cash On Hand
When recession hits, only those with sufficient cash on hand will be able to survive the down period comfortably and take advantage of the numerous investment opportunities and good deals that only surface during a recession.
Hence, it is always a good idea to have a sizeable amount of cash on hand in preparation for the next recession.
#5 Don’t Over-Leverage
If we over-leverage by taking on too many loans to finance our property investments, businesses or purchase of goods, we would be in deep trouble when a recession hits.
This is because our sources of income would likely drop and we might face difficulties financing our commitments. The worst case scenario would be going bankrupt. We would also not have enough spare cash to take advantage of the various investment opportunities and below-market-rate deals that only pop up during a recession due to our heavy financial commitments.
#6 Be Brave When Others Are Fearful
At the peak of the recession, the market will be full of panic. Most people will not have cash and the economy will be bad. It is also during that time that fundamentally strong stocks and asset prices are at their lowest.
When that happens, don’t be afraid to be the first to get back into the market before everyone else recovers and gets back into the market. Taking a page out of Warren Buffet’s playbook, be brave when others are fearful and we might be able to make a handsome profit from a recession.
#7 Know When And Where To Place Your Wealth
Ultimately, surviving and making the best out of a recession is all about knowing when and where to place your wealth. When the market is in the early boom stage, it might be wise to put our capital in high-yielding investments like stocks and high-growth businesses.
When the market is starting to stagnate, it might then be wise to shift our capital to more stable and liquid investments so we would have sufficient cash to ride out the recession or take advantage of the good deals and investment opportunities that might come along.
DollarsAndSense is a website that aims to help people make better financial decisions, one interesting bite-sized article at a time. Like us on Facebook to stay in touch with our latest article.
DollarsAndSense Malaysia is a website that aims to help people make better financial decisions, one interesting, bite-sized article at a time. Like us on Facebook to stay in touch with our latest articles.