- Go for Defensive stocks
One of the prudent ways to beat a recession is to change the nature of our investments in market and the right approach will be to stay defensive. Those are the companies that deliver stable earnings during the various phases of a business cycle. For this reason, they tend to perform well in a recessionary environment and are considered to be low beta stocks as their volatility is very low. Utilities as well as Tobacco companies are example of defensive stocks.
- Increase the bond allocation
Bonds are fixed income instruments used to raise a loan, the most common issuers of bonds being governments and corporates. The highest credit rating given to bonds is AAA and they are considered to be highly safe. Debt papers issued by sovereign governments are also considered to be highly secure, the safest one being US treasury bonds. One of the ways to beat a recession is to increase exposure to highly rated bond paper.
- Gold will shine
From time immemorial, Gold has been a store of value for mankind and even today people flock to it in times of uncertainty. One advantage of gold being it does not have the risk of being worthless unlike a fiat currency which carries credit risk. Investors view the yellow metal favorably as it cannot be printed like a currency and it generally acts as a hedge against systemic risk. Also to be noted is Gold’s out performance when compared to other assets in an inflationary environment.
- In currencies, JPY is the king
Japanese Yen (JPY) is another safe asset which tends to outperform in times of market turbulence. What gives Japanese Yen stability is the huge current account surplus of Japanese economy which helps it protect from volatile FX flows. Another important point worth noting is that almost 95 percent of Japanese Government Bonds (JGBs) is held by Japanese institutions and individuals who are more confident about their own sovereign paper.
- Invest only what you can afford to lose
This is a generic advice applicable to every individual. In times of exuberance, individuals might be tempted to take a large exposure; this can back fire badly as on many occasions this irrational exuberance ends up in tears. So keep in mind the fact that investing is not saving and invest only an amount which you can afford to lose.
- Look for Large caps
It is not only important to be in defensive stocks but also care must be taken to ensure money lies in companies capable of withstanding economic tumult. Large caps or companies with huge market capitalization can survive these circumstances better than midcaps or small caps. Ideally whatever investment you have in markets should be in these kinds of companies. Stocks with market capitalization more than $10 billion are categorized as Large caps.
- Be with the dividend aristocrats
Dividend aristocrats are those companies that have typically raised dividends for 25 consecutive years. These companies are rare in number and they can be counted upon to pay even in times of recession. It is good to have a part of your portfolio in these types of companies since they give the investor some income during adverse economic circumstances. Dividend aristocrats as an asset class have outperformed SPX 500 over the long term. Coca Cola, AT & T and Abbot Laboratories are examples of some companies from SPX 500.
- Consider Inverse ETF
Before getting into the details, we would like to put a disclaimer in the beginning itself. Global markets over a long time period have always grown. Now Inverse ETF’s are specialized products which gain when the markets go down, akin to shorting or selling a market. These are for highly knowledgeable investors and market timing is very important. By their very nature, they are short term in nature. Inverse ETF’s are appropriate for investors with capability to take high risk and who want to make gains when the markets go down or hedge their long aka buy positions.
- Be greedy when others are fearful
This is an adage popularized by renowned investment guru Warren Buffet and more suited for people who have spare capital to invest in the market. At the end of the day, we know all recessions end and market downturns are also opportunities to pick up some great companies at cheap prices. Investors should set aside a part of the portfolio to be invested at predefined limits. For example, if a particular stock falls by 20 percent, a certain number of stocks can be bought and if it falls by another ten percent more can be added. Once a disciplined approach is taken, recession can be converted into a golden opportunity for building future gains.
- Don’t change jobs
In a recessionary environment, companies will be having a soft corner towards their tried and trusted employees. There is a good probability that new employees will be at the risk of losing jobs, if the company decides to cut the payrolls. So, it would be advisable for individuals to not shift their jobs. Certainly, there is no guarantee that this will save the job, but it might improve the odds of you surviving. Also, it helps to be more committed.
- Ensure your income
Employment insurance helps in protecting against loss of income when a person loses job in a bad economic environment. If the job is not lost because of one’s own fault, the person is eligible for benefits. Having an employment insurance helps women avail of maternity benefits and helps an individual if he or she has some sickness that prevents them from attending work.
- Staying in outskirts is not a bad idea
These are the days when quality of life will have to take a backseat. If you are staying in a two-bedroom apartment near the heart of the city, it would be advisable to move out to a two-bedroom apartment outside the city. The savings can be humongous when we are residing in big cities. Of course, we need to consider the transportation costs as well. Nothing is easy, but we must cut down our variable costs in such an environment.
- Improve your skills
Staying in a job for a long time can sometimes make you rustic. Nevertheless, it is imperative that a person can multi-task when the business environment sours. Fortunately, in today’s world many online courses and videos from reputed universities as well as Instructors are available free of cost or at a very low fee. We should take advantage of such facilities and try to be more versatile. Don’t forget the proverb, “Where there is a will, there is a way”.
- Discuss with your bank
If there is a debt or mortgage to be serviced and if you have suddenly lost your job, don’t try to run away or be incommunicable. Doing so can only make the situation worse. Try to speak with the bank and ask for a rescheduling of debt or a moratorium on principal payment. Even better, try to pay off your debt in good times.
- Stick to a budget
This is a period of adjustment and a time when some of the hardest decisions are taken. Vacations might have to be postponed and your children who are still not aware of harsh financial realities must be educated about money management. The living expenses of the family should not be more than 80 percent of your income or at least 20 percent of the income should be saved.
- Debit is better than credit
Debit cards are less risky than a credit card in recession. When using a credit card we are actually using money we don’t have in our account. Not exactly a great idea, even if we are not in a recession. When having a credit card, we tend to rack up bills or end up doing purchases we really don’t want. Always better to limit the use of a card and care should be taken to ensure that limits are not reached.
- Get a side job
One of the things to do in a recession is to create additional streams of income. Taking a side job, even if it doesn’t give you a big number can be very helpful in managing finances. They are a big deal when the going is tough and gives the individual a sense of security. Those jobs can vary from giving tuitions, doing data entry to some online business.
- Save for a Rainy day
The importance of having an emergency fund cannot be overstated. Not having an emergency fund is like having a prayer to God to save you from catastrophe. This is not the right approach; indeed, this is a very stressful way to live life. When we have an emergency fund it is less painful to face the hardships that one may come across. Saving is not easy but that is the right way.
- Keep calm
Stay calm and carry on. Unnecessary anguish and anxiety is only going to affect your physical and mental health. They are not going to change the realities around you. Practice meditation and concentrate your mind on the immediate tasks. No point in worrying about the economy as these things are not in our control. Concentrate only on variables that you can control.