Since we haven’t had a real one for a while, let’s look at the definition of a recession:
“A significant decline in economic activity spread across the market, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”
As I’m writing this (March 2022), there’s a lot of conversation around whether we are headed for a recession or not.
Most people look at real GDP (adjusted for inflation) to determine whether we’re in a recession. It makes sense in hindsight, but I don’t find that a useful measure to detect a recession. GDP is simply the market value of all the goods and services produced in a specific time period by countries.
It says very little about what you and I feel like when we’re managing our finances and spending.
Real income is the most important aspect of our economy.
Employment matters too. But real income is what creates and ends recessions (and the Federal Reserve of course). If you have more money to spend, you’ll feel more confident, and you’ll spend it. The opposite is what’s happening right now.
I see it everywhere around me. If you want to spot recessions, don’t look at the news. Look around you. What do you hear?
- “These petrol prices are killing me!”
- “Wait, what? I paid about half for these groceries last year!”
- “Did my electricity bill just triple?!!”
- “House prices are how high? Screw buying a new house.”
It just goes on and on. Consumer sentiment is bad because of inflation. Ben Carlson, author A Wealth of Commonsense, and portfolio manager at Ritholz Wealth Management explained the relationship between inflation and recessions best on his blog:
“Inflationary spikes don’t cause every recession but every inflationary spike has only been alleviated by a recession.”
Since the probability of a recession this year is getting higher, I’d rather expect it. That helps me to do well when it happens. And if it doesn’t happen, I will still do well. Preparing for a recession is a no-lose situation.
As the Stoic philosopher Seneca said:
“Fortune falls heavily on those for whom she’s unexpected. The one always on the lookout easily endures.”
Here’s how you can stay on the lookout for a recession.
Keep investing in the market on the way down
Let’s take a look at what many people think was the scariest time for stocks: The 1930s. Many doomsday thinkers love to “warn” the world for another major crash like that.
Sure, it was a bad crash. But not for people who didn’t take many risks. One of the major reasons the market crashed in 1929 was the immense amount of debt in the system. People who borrowed massively to buy stocks were all wiped out.
But the people who kept investing during the 1930s were winning in the long term. It was a time of deflation, which meant your money had more purchasing power, so you needed less cash anyway.
If you kept investing on the way down, you would experience the complete recovery of the stock market. And in the history of the stock market, it has always recovered.
That’s why I’ve been putting more in the S&P500 index as it’s going down this year. I don’t rely on that money. In a few years, we’ll be higher than where we started the year. It’s really the best way to create wealth as the market goes down.
Invest in yourself
During the last recession, which started in 2008, my mother suspected she would soon be out of a job. She worked at a movie production studio.
The market got crushed, and the company started to cut costs. My mother was a general manager, so she was the one who had to do the firing at first. But she knew that after everything was said and done, she probably had to go too.
So she took the time to learn about starting her own business. She learned from her friend who was a lifelong entrepreneur. By 2011, I finished university and joined my mother to start our own business in the same industry. Instead of opening a studio, we supplied filming equipment.
It was hard at first because business was still slow. But when things started to recover in 2012, we were there to experience the recovery from the beginning.
If my mother stayed complacent and didn’t invest in herself, she wouldn’t be where she is today: Still a business owner. And we recently acquired another company in our industry.
A recession is an ideal time to make a change. It could be switching careers, learning new skills, starting a new business, or moving to another division inside the company you work. What matters is that you stay alert and don’t let the recession happen to you.
Create a second income stream
When there’s a recession, there’s more chance of losing income. If you own a business, you might generate less revenue. If you have a job, you probably won’t get a raise. In worst-case scenarios, people lose their jobs or businesses.
Having multiple income streams helps you to soften the blow. It’s something we all want, but not everyone actually spends the time and energy to create an extra income.
You could create a digital business, rent out a room, buy a property, start buying and selling used products, and so forth.
People love to use excuses like, “I don’t have so much money to start a business.” Sure. But you do have time, right? Use that to be more resourceful.
In our economy, value means money. If you can create value, you will earn. But you have to be willing to give up Netflix, gaming, partying, etc.
Keep living below your means
Moderation is one of the greatest virtues in life. Epictetus said it best:
“If one oversteps the bounds of moderation, the greatest pleasures cease to please.”
Contrary to popular belief, life is not about living to the fullest. Life is about understanding the fullest. When you know what you’re capable of, you don’t have to use it.
It’s like the martial artist who never picks a fight.
You never want to use up all your wealth because it’s not an honorable thing to do. You don’t want to lose your restraint. Stay in control of your finances.
And the best way to express that in daily life is to live below your means. Save money, get rid of unnecessary expenses, live simply. There’s much more satisfaction and honor in living a virtuous life than a life of excess.
You feel much better about yourself. And if the economy goes down or you have to make a career change, you will handle it without fear. That’s the key.
It’s probable we don’t get a recession. But it really doesn’t matter to the person who’s ready for anything.
All the best!