How Do People Make Money From A Recession?
A recession is a period of decline in economic performance and during the last major one the 2008 to 2009 financial crisis, we saw markets fall erasing trillions of dollars of wealth around the world.
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People looked at their investments in shock as their houses and stocks plummeted in value many scrambling to sell and save some of their money. And yet many millionaires including myself believe we owe a large part of our fortunes down to recessions.
That’s because recessions press the reset button leveling the playing field and it looks like it’s happening again. However, there are two different types of recessions and many possible ways to react.
This leaves most people paralyzed by fear uncertainty and doubt while history has proven that the people who are aware of the reset get to work.
So now we know this is the perfect opportunity to make money. How do we know when this reset button is about to be hit? To understand the whole picture, we need to look at how we got to this stage.
So we’ve been living in the golden age of investing with the top 500 US companies experiencing over a decade of continuous growth. However, just like an olympic sprinter who needs a break every now and again in order to recharge, so does our economy.
People have become soft as they haven’t experienced overall negative returns in what seems like forever. But why is the economy taking a breather now not during the pandemic?
Well, quite the opposite happened during the lockdowns. Everyone was stuck at home getting free money and they were falling in love with the idea of investing.
It became very hard to avoid the topic wherever you went as people were seeing the stock market as a magic money printer. It was also a lot easier for people to use their stimulus money to invest, as they didn’t have to work for it.
And therefore, the perceived risk was much lower. This means that all these new investors have been playing the stock market on easy mode.
However, now the free money has dried up and interest rates are increasing. It’s a lot like when you go from the apprentice to the master difficulty on star wars fallen order.
The game is still worth playing but it just might take a little longer to win. Some people will of course put down their controllers or smash up their monitors, while others will patiently improve their skills.
Just think about it, if you can master the game on hard mode once things become easy again, you’ll be so far ahead of everyone else. But the free money drying up is just the beginning.
Due to the excess of money printing, our dollars are now worth far less. This is commonly known as inflation and it’s running rampant. The consumer price index which is the price of an average basket of everyday goods and services purchased by households has found inflation to be at 8.6% in the U.S.
This is a new 40-year high. A lot of this being due to food and fuel price increases but not to worry as the fed is here to save us from this dreaded inflation by hiking its benchmark interest rate by 0.75 percentage points.
This is the biggest increase since 1994. When interest rates rise, the cost of borrowing money becomes more expensive. The idea is that if someone is spending more on their mortgage or credit card payments, they won’t have as much disposable income and must cut back on their spending.
In theory, this lowers demand and forces businesses to lower their prices and in turn lowering inflation. But wait, doesn’t that mean that businesses will be making less money, and therefore, report lower earnings and stock prices will fall?
Unfortunately, yes. The fed aren’t concerned about our stock investments only inflation. So they might not be our hero after all. Now there are two ways this could possibly end. A soft landing or a hard landing.
I’ve experienced both of these when flying airplanes and that’s actually where the term comes from. On especially stormy days, it can be
very hard to judge your land in.
And I’ve made more than one or two bumpy touchdowns in my lifetime. To say the economy is looking stormy is an understatement and the New York fed model seems to agree with me stating the probability of a soft landing is only about 10%.
So a reset is most likely coming but what does this actually mean and how can you benefit? So how do we know if we’re facing a reset or instead just the end of everything?
Well, let’s take a look at these headlines from the darkest days of the 2008 financial crisis. If you’d have read those back in the day, then you would have thought we were going into the apocalypse.
However, we’re still here right now. I know the age old saying that past performers is not indicative of future results. However, this is almost completely false.
Investment advisors aren’t allowed to say this as it can come across as misleading. However, past performance is a very strong indicator of future results.
Let me explain. If a particular investment has done poorly in recent times compared to its history, then it could be due for a boom in the future. This is an order for it to catch up with where its long-term average return is expected to be.
Therefore, the same also applies if an investment has done incredibly well compared with its average increasing the likelihood that it will have a crash to bring it back to normal levels.
Now this isn’t without exceptions and sometimes that period of adjustment happens when you least expect it but adjust it will. This is exactly what a reset is.
The pandemic accelerated the growth of most companies by at least five years. Apple sold record devices, Zoom and Netflix had record signups, and Peloton absolutely boomed.
My online businesses also experienced record sales during this time. This unsustainable growth launch companies to the moon meaning a reset is inevitable.
In an ideal world, the economic growth will be steady and consistent. However, instead it looks like this, the economy consists of a series of rapid expansions and then contractions and this current reset could be one of the biggest we see in our lifetimes.
This is because the issues we are facing that could push us into the next recession are very different from the 2008, 2009 financial crisis. Broadly speaking, economists split the causes of the recession into two categories.
First is a supply shock which is when companies are unwilling or unable to produce goods at the required rate. Second is a demand drawdown which is when households and companies want to spend less.
In recent times, we’ve experienced both of these factors. Supply chains are severely disrupted and demand has fallen from consumers due to their uncertainty about the future.
This has caused us to enter a bear market which is a downwards trend. I’ve seen over-inflated markets in my lifetime with a dot-com bubble for example.
Things almost always have to pop and reset in order for continued growth over the long term. This is the story of the world the older generation has to step aside in order for the younger generation to bring forth new ideas and innovation.
So if we’re in for a major recession and financial reset. Let me ask you this, would you rather invest at the peak when everything is at its most expensive, or as prices full so you can ride the wave all the way back up again?
So that’s what a reset is. What do you need to do in order to prepare? There are three very distinct trains of thought when it comes to benefiting.
However, the one thing they all share in common is having an emergency fund of three to five months of living expenses that you never touch unless absolutely necessary.
The first is to hold all your money in cash until the markets start to improve and we see a bounce back. This could however, leave you open to dead cat bounces.
Technically speaking, a dead cat bounce can only be identified after it happens. The bounce is the short-term price increase that is preceded and followed by decline.
The second is to spend all your money into the markets. Now while everything is cheaper than it was in the previous years, the problem with this is that if the reset is greater than expected and the markets keep falling, then it could take years to recoup your investment.
The third is to slowly invest a little bit each week in order to buy all the way down. The downside to this is you will feel like you’re just throwing your money away.
If the bear market continues, then your last week’s investments will be worth less than it was before. Even I find it’s hard to stomach when I talk about it on a daily basis.
If you have so much money you don’t need it for up to 10 years, then throwing it into the markets and not looking at it could make sense. Chances are it’ll be worth more at the end of the time frame.
Personally, I’m using a dollar cost averaging method into index funds as they have done very well for me during every pass reset. I’m still buying individual stocks in companies that I believe in long term.
However, I’m not messing with far more volatile small market cap companies. The reality is we don’t need to make risky plays when safer investments can now give us much greater future returns.
I’m not going to sugarcoat it. The next couple of years probably aren’t going to be like the bull market we’ve been experiencing for the last decade.
The days of 10x in our investments in a couple of days are well and truly behind us at least for a while. Now is the time to be focusing on positioning yourself for the future.
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