Hold on to your hats people, an economic recession is coming. Unemployment will rise. House prices will fall. Stock markets will decline.
The results of an economic recession can be devastating. Especially to those who have yet to experience one. The last one was in 2007-08.
That means there are a whole lot of people under the age of 35 that may have not experienced a recession in their working (earning income) lifetime.
What this means is that there is a lot of complacency. Everyone says, “I will continue to invest through thick and thin”. “I can handle anything the market throws at me”.
For some people this will be true. They understand their long-term goals and have the uncanny ability to ignore all the noise. But a lot of people will be found eating their words. Human emotion will take over. People will fear more losses and will look to sell stocks at a loss to prevent even further falls. The scary thing is people don’t realise this is them until it happens.
You don’t know how you will react until you have been in one.
What is a recession?
It is commonly referred to a negative GDP (Gross Domestic Product) for a period of 6 months. GDP is basically the value of all the goods and services that we buy and sell and it is a critical figure in determining the health of the country.
If GDP is down it means that we are spending less. This is typically a result of losses in income relative to inflation.
In New Zealand we have had 9 recessions post 1945:
1947-48 (12 months)
1950-52 (18 months)
1966-67 (12 months)
1976-78 (21 months)
1982-83 (9 months)
1987-88 (12 months)
1990-91 (4 months)
1997-98 (9 months)
2007-09 (18 months)
From this we can conclude that the average duration has been 13 months. Minimum of just 4 months in 1990-91, and a maximum of 21 months in 1976-78.
13% of time since 1947 we have been in a recession, so it is not that uncommon.
Although 2007-09 was the second longest, it was just the fourth most severe due to lower GDP losses. So, not only is the length of the recession important in determining severity, but so too is the depth of the recession, in terms of GDP drops. A long recession with only small drops in GDP is probably better than a shorter recession with a severe drop in GDP.
Either way, we should be prepared for any eventuality. And as per the grasshopper and the ant fable, it’s best to prepare from a position of strength when the sun is shining.
When is the recession coming?
Everyone loves a clickbait title, right? You would notice that I only said a recession was coming. I didn’t say when. Recessions are as sure as night and day.
As the previous data shows, recessions occur frequently. 9 in the last 72 years. That is an average of one every 8 years.
This current period of expansion from 2009 to 2019 has lasted over 10 years now. 2 years longer than the average. Only beaten by the period of 14 and a half years between 1952 and 1966.
Some have been as little as 2 - 4 years apart.
The current expansion could end tomorrow. It could go for another year, two years, even 10 years. No one knows.
The key point is to always be ready though, because it will happen, and the signs are that will be sooner, rather than later.
How can I prepare for the upcoming recession?
In a recession, the first thing companies tend to look at is their costs. And what is the biggest cost for most companies? Labour.
Unemployment will rise.
That means you and I are on the chopping block.
It is much easier for companies to fire workers than it is to increase income quickly or move office.
Just like our own personal budgets, companies look for the quickest and biggest wins. For them, that is often labour.
You are going to have to stand out from the crowd if you are to remain in your job. Your co-workers are your competition. You need to be better than them. If you have been cruising along then that may work for a while, especially in a thriving economy, but as soon as the spotlight comes on spending, you will be gone.
You need to be the first name your employers want to keep on their “do not fire” list.
For you to stay you need to provide more value to the company than the cost of your service. Ideally, you can provide proof of this. Keep records and make this known to your employer.
Ask your boss what they want from you and deliver it.
Ask your boss what she wants the company to achieve and achieve it.
Ask your boss if there is any work that they don’t like doing and see if you can do it for them.
Make it as hard as possible for them to fire you.
Not only is it in your best interest to do well for yourself, it should also be in your best interest for your company to do well. Companies that perform the best will be leaders in the industry. They will be the companies that come out the other end of the recession in the best shape. That serves you well if your company is performing.
So not only do you need to look out for yourself, you need others around you to perform too. Maybe just not quite as well as you!
That is not too difficult though. In my experience, most employees waste at least 2 hours a day through smoking, surfing the internet, idle chit chat or just window gazing or general absence. By just working your full 8 hours you are already ahead of the game. That extra 2 hours more work than your co workers you do each day adds up to 500 extra hours per year. Based on your co workers 6 hours of productive work, you are achieving almost 17 more weeks extra worth of work than your peers. Just by working the full day with no time wastage.
There is no substitute for hard work and your employer will see that.
I’d also recommend networking. Even something as simple as remembering the names of all your co workers and the names of their family goes a long way. Buying a round of drinks. Basically, being a nice person that people want to be around. Being more like able makes it much harder to be fired and you will find unlikely allies.
Highly paid employees are often the first target. Because of this, older workers tend to often be a casualty of layoffs due to the length of time they have been employed. Their pay rates tend to be higher. It is especially important in this case to be more than the office furniture. You need to justify your income.
If, despite all this, it looks likely you will be losing your job, then maybe consider a reduced pay or working part time and propose that to your employer in a last-ditch effort.
Lower pay is better than no pay.
2/. Emergency fund
Ensure you have an adequately sized emergency fund.
The last thing you want if you are fired is to be struggling to pay for your day to day expenses.
It will be so much easier to find a new job if you are not immediately stressed about where your next dollar is going to come from.
Cash is king during these periods of under performance and uncertainty.
3/. Look at your expenses
Analyse your spending, and see if there are any areas that can be reduced if necessary.
Create as large a savings gap as you can, and think about even further cuts you could make if you really had to during a recession.
This will mean you can live off a lower monthly income should you lose your job. Your money can then be stretched out for much longer.
4/. Look for other sources of income
If I lost my job I would be upset, but I will be better than I may have been, thanks to a second job.
My financial advisory business is starting to earn some money so that would cover a good chunk of my expenses.
I understand that not everyone has the time, but if you do, then starting a second job or learning a new skill while you still have a full-time job, will have you greatly on the front foot should you lose your main job.
5/. Check your insurance cover
You don’t know how important insurance is until you need it.
Income protection insurance is one of the most neglected insurances in New Zealand. A lot of people don’t have it.
If you lose your job, then how confident are you in finding another job quickly in a recession, or can you cover your expenses for 6 months to a year?
If you have high expenses or a high paying job, suddenly not having that income could prove extremely difficult. It can even lead to defaulting on your mortgage payments and losing your house.
Sometimes hoping for the best is not the best idea.
Protection for the worst may be worth looking in to.
6/. Restructure debt
It is much easier to restructure your debts when you have a job, than when you have no income.
Negotiate hard for low interest rates now while you have negotiating power.
7/. Appropriately balanced portfolio
There are a lot of people with portfolios at the moment that are far too aggressive.
The last 10 years of growth has been such a long period of expansion, that people have forgotten what it is like to lose money. Overconfidence is at all-time highs.
When a crash occurs, overconfidence turns in to irrational selling decisions because it is unexpected.
Your portfolio should reflect a balance between growth and defensive assets that allows you to sleep at night during significant downturns. You may not be too happy about it, but at least you can continue with your investment plan without doing anything stupid.
If your current portfolio experienced a large drop and causes you to do something silly like sell at a loss when you didn’t plan for that, then you are investing too aggressively.
Stop trying to time the market and have an all-weather portfolio allocation that matches your investment goals, time horizon, and tolerance for risk.
In other words, don’t hold more stocks in a bull market than you would be comfortable holding during a bear market.
8/. Have cash ready for opportunities
Since selling my apartment last year, I have kept a bit of cash on the sidelines.
I wasn’t comfortable investing all the proceeds into growth assets as I plan to reduce my work hours in the next few years. This meant my investment philosophy had changed from one of growth to one of being a bit more conservative.
Sure, I’ve missed out on some gains over the last year but I’m happy with the decision as it aligns with my investment philosophy and risk tolerance, and allows me to sleep at night.
However, if an opportunity were to arise where I can purchase a cheap house or stocks then I will have cash on the ready to take advantage of any opportunity.
I’d be more comfortable investing in growth assets if they were much cheaper than today’s prices.
It is never too soon to prepare for a recession. It is also important not to fear a recession.
Embrace the inevitability.
Start thinking about how you would react or how well you would be placed to some of the scenarios outlined in this article.
If you are not happy with your findings, then start doing something about it now.
Sure, by having a large emergency fund, or cash on the sidelines, you may miss out on some gains if the market continues to rise.
If that’s the case, then at least there hasn’t been a recession!
Your worst-case scenario will still be a good scenario.
Whereas, the worst-case scenario for someone who isn’t prepared, may be very unpleasant.
The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here.