Monday, May 24, 2010

7 Ways of Recession-Proofing Your Life (Part 2)

4. Invest and exploit poor market conditions.

Perhaps the best way to turn a situation as shitty as a recession into gold is to exploit it. A recession provides enterprising investors with a rare opportunity to beef up their investment portfolio: remember that stock prices fall to all-time lows during market crashes. So if you take the stock investment mantra, “buy low, sell high,” to heart, you should realize that a recession is the perfect time to buy stocks. The problem is that buying stocks whose prices have fallen considerably and while everyone else is desperately selling is counter-intuitive; doing something that’s the exact opposite of what the rest of the herd is doing simply goes against basic human nature.

One of the keys to being a successful investor is to have enough will and testicular fortitude (figuratively, of course) to go against the tide and buy when everyone else is selling (and in other situations, sell when everybody else is buying). A lot of people have lost money during the financial crisis of 2008 precisely because they buckled under the pressure of “cutting their losses” and subsequently sold their stocks at prices way below the purchase price; you need to understand that this is the only way you’ll actually lose money during a market crash and that the second best way of dealing with the situation (the best being to buy more shares) is to do nothing at all and just incur “paper losses” that really don’t mean anything and that will go away once the market eventually gets back on its feet.

5. Diversify.

The thing about a recession is that it affects various industries or firms differently: some are less negatively affected than others, while some even thrive during economic downturns (see “Join a recession-proof industry” in #6). The challenge lies in identifying which stocks will perform better than others in a recession, a task best left in the hands of so-called professional fund managers

For us mortals, the best way to go would be to diversify and spread our investment across various firms, industries, and securities that behave differently to minimize risk and possible losses from a downturn. Diversification does not just involve investing in different stocks: for diversification to be more effective, you’ll have to put your money in various asset classes as well. For example, investing in real estate and savings deposits will ensure that a part of your holdings will remain intact during a recession, even when you lose some value with your other investments.

6. Join a recession-proof industry.

As we discussed in #5, some industries are less affected by a recession than others, and others, more. To protect your earning power, your best move would be to enter and pursue a career in an industry that is not (completely) susceptible to the negative effects of a market crash. Think about products and services that are considered essential and which are not entirely dependent on the spending power of individuals: industries like education, energy and utilities, telecommunications, and health care would come to mind, just to name a few.

During the crisis two years ago, applications to the university I’m working for has continued to grow, showing that parents don’t skimp on their children’s education even when they are forced to cut back spending and proving that education is, indeed, a recession-proof industry.

7. Cut back on the mochas.

Mochas taste good, especially if you buy them from Seattle’s Best or Coffee Bean and Tea Leaf. But at 150 pesos a cup, too many mochas will cost you an arm and a leg in the long run (see #22 of this list), money that could have gone to your emergency instead. But it’s not really just about coffee, it’s about living within your means and leaning more towards saving than consuming. That cup of Joe is just the tip of the iceberg: you start with not caring enough to pay 150 pesos for a cup of coffee and soon enough you’ll see yourself max out your credit card for a new high-tech gadget that you don’t need. Cutting back on the mochas means avoiding the credit pit-trap and getting into a frame of mind where every peso matters; because during a recession, every peso does matter, even to those of us who think it doesn’t.

So will it happen? Will the stock market crash this year? I’m not really sure; I guess no one can ever really be sure. The best thing for us to do in the face of all the uncertainty is to brace ourselves and be as prepared as we possibly can. This list should hopefully serve as an adequate first step to becoming recession-proof; the next step is all up to you.

Click here for Part 1. 
Related Posts Plugin for WordPress, Blogger...