If you have been paying any attention to the news then you have heard strong predictions that the United States is about to enter a recession. Although most people fear these warnings, very few people actually know what a recession is or how to insulate themselves from the negative affects of a recession and even how to profit as a result of a recession. In macroeconomics, a recession is defined as a decline in a country’s gross domestic product, or negative real economic growth, for two or more successive quarters of a year. This still does not give the average person a picture of what a recession is or how it can affect the day to day existence of those that are not prepared for it. A recession may involve simultaneous declines in economic activity such as employment, investment, and corporate profits. Recessions may also be associated with falling prices (such as in real estate prices), or, alternatively, sharply rising prices (such as oil prices) in a process known as stagflation. A severe or long recession is referred to as an economic depression, such as occurred in the US from 1929 to 1941.
History, however, has shown us that not only can you survive a recession; you can actually thrive during one if you take certain steps.
The normal response to a recession is fear which causes people to “Freeze” and “Hoard.” The freeze affect is manifested by a sudden and sharp decrease in consumer spending. People tend to stop spending, stop investing, and begin to hold their cash “for a rainy day.” This is the exact opposite of what you should be doing during a recession. During a recession their will be inflation which means that the value of your dollar will decrease during the recession. Everyday that you hold onto your dollars they decrease in value unless they are sitting in a vehicle that is earning significant interest (interest greater than the inflation rate). The other way to increase the value of your cash is to spend less for more value.
Cut Costs Not Lifestyle
A recession can provide a great opportunity for you to increase your revenues if you change your mindset to reflect that of the wealthy elite. Let’s examine some habits that are common amongst the wealthiest people in America. Wealthy people do not expect to pay full price for anything. My friends tease me about my ability to find high quality items at discount prices. I refuse to pay top dollar when I know I can get it at a lower price. According to Thomas J. Stanley, PhD in his ground breaking book “The Millionaire Mind”, most people are shocked when they learn that many millionaires cut the operating costs of their households with the following practices:
- Having furniture refinished instead of buying new
- Switching long-distance phone companies
- Never buying from telephone solicitations
- Having shoes resoled or otherwise repaired
- Using discount coupons when shopping
- Buying household supplies in bulk
You should always be seeking to cut costs while maintaining a comfortable standard of living. Reevaluate your spending habits and see if you are able to reduce your spending while marinating your lifestyle. Get into the habit of haggling with sales people. During a recession it is harder for companies to make a sale especially on items that are not needed everyday like electronics, cars, etc. Insist on a lower price and threaten to go to a competitor. In most cases, you will find that the price can be lowered significantly.
Think Global
We truly live today in a borderless economy. To maximize your dollars, outsource like the big companies do. For small jobs that you need such as the building of a website or other work that does not need to be done on location, you can find service providers in other countries that provide less expensive labor. A great resource to check out to find such low cost service providers is www.elance.com. You can also search the internet for low cost products and goods that can be shipped inexpensively.
Another way to think global is to sell your skills in the open market to people in other countries, especially in Europe, that will be glad to pay you above average US wages because it will be less expensive than hiring someone in Europe. Consulting, marketing, writing, technical skills all can easily be marketed online to foreign markets. You can set up your own account on www.elance.com.
Invest in Tangible Assets
The US dollar continues to decline in value. In order to fight the loss, you should take your paper money and purchase assets that increase in value so that if you choose to or are forced to liquidate the asset, you will have more paper money than you originally paid for the asset. One great asset that has stood the test of time is gold. The price of gold has reached over $1,000 per ounce and shows no sign of stalling in growth. Silver has also hit a high mark. Precious metals have always been great ways to fight the decline of paper money. Bullion coins have a proven ability to protect wealth and preserve one’s purchasing power, and gold coins offer divisible size and are universally acceptable in a recognizable form. This makes the purchase of gold coins and the selling of gold coins convenient through reputable coin dealers. Buying gold coins is a convenient method for wealth protection and profit potential that doesn’t require large amounts of cash to invest or good credit. Check with a numismatic company online to get the best prices for gold coins.
Real Estate is still a valuable tangible asset that can provide good long term wealth. The tricky part is figuring out how to take advantage of the changing market. Two issues are significant. First, it has become increasingly more difficult to gain financing from banks. The second is the slew of properties on the market including those in foreclosure. The first issue presents a disadvantage. The second issue provides great opportunity. Let’s address the first issue. If you are very creditworthy, and have employment history, and can show heavy assets, then you can still get a mortgage from the bank. If you have issues in any one of those areas, you will have to get creative to finance your investment purchase. One great strategy is to offer a seller to do a lease with the option to buy. With sellers desperate to generate some income from a property, this can be easily negotiated. You lock into today’s low prices and have the opportunity to purchase the property over a period of time. Try to negotiate a 2-4 year lease-option. This gives you a longer time to purchase the property and to make yourself creditworthy. The way to maximize this opportunity is to include the right to sublet the property and have the tenants cover your costs. This could potentially provide monthly cash flow as well as the ability to acquire a property with little money out-of-pocket.
The second issue, which is the huge surplus of properties on the market including record numbers of foreclosures, allows you to negotiate to buy properties that had little or no equity at a significant discount. Banks are desperate to unload properties in the foreclosure process because they know they have little chance of selling most seized properties at the auction because they have no equity due to the overpricing and over leveraging loans that occurred over the past few years. You have an opportunity to negotiate what is called a short sale; meaning that the bank agrees to accept less than what the seller owes on the mortgage. Sometimes you can get the bank to accept up to 50% less than the amount owed on the mortgage. Although the seller is not able to receive any money from the short sale, it allows the seller to walk away without owing the bank and without having a foreclosure on their credit report which can be devastating when trying to start over.
Choose the Right Stocks and Bonds
Stocks
When investing in stocks during a recession, the relatively safest places to invest are in high-quality companies with long business histories since these companies are more likely to be able to handle prolonged periods of weakness in the market. Companies that have long term economic value with strong balance sheets, including those with little debt and strong positive cash flow, tend to do much better than companies with heavy operating debt and poor cash flow. A company with a strong balance sheet and good cash flow is better able to handle an economic downturn and should still be able to fund its operations as it moves through the weak economic times. Alternatively, a company with a lot of debt may find itself in trouble if it can’t handle its debt payments and the costs associated with its continuing operations.
Also, traditionally, one of the safest places in the market is investing in consumer staples. These are typically the last products to be removed from a budget such as toiletries, food, and other basics. In contrast, electronic retailers and other consumer discretionary companies can suffer as consumers hold off on these higher end purchases.
For this next recommendation, you’ll have to check your own comfortableness. History has shown us that “sin stocks” tend to do well during a recession. Hard times won’t stop gamblers from betting, partygoers from drinking and smokers from puffing. In fact, economic turbulence might give them even more reason to indulge. That makes so-called sin stocks, or shares of alcohol, gaming and tobacco companies, a safe bet as the U.S. economy slows. During the 2000-02 downturn, Standard & Poor’s Casinos and Gaming index gained 115%, while the S&P Shares of tobacco giant Altria (then known as Philip Morris) more than doubled, and the stock of Anheuser-Busch, the largest U.S. brewer, advanced 87%. A cigarette costs about 1.25 cents to manufacture. A single serving of liquor, including packaging expenses, costs 3 cents. An average casino slot machine keeps 12 cents for every dollar fed into the device.
Also, the mushrooming middle classes in developing nations such as China and India are boosting demand for alcohol, casinos and cigarettes. Although tobacco consumption in the U.S. and Europe has declined for decades, it continues to grow modestly in emerging markets. The prospect of expansion to Asia has been a key factor driving up casino stocks. Beverage and food companies are grabbing up small town brewers and distillers in fast-growing foreign locales.
Commodities
Another area of investing you want to consider in the context of a recession is commodity markets. Generally, these are basic resources and agricultural products such as iron ore, crude oil, coal, ethanol, sugar, soybeans, aluminum, rice, wheat, gold and silver. The general rule to understand about these investments is to keep in mind that growing economies need natural resources. As economies grow, the need for natural resources grows, and the prices for those resources rise.
During a recession, the demand for commodities usually slows and prices go down. Often, if investors believe a recession is inevitable, they will sell commodities, driving prices lower. However, commodities are traded on a global basis, and U.S. economic activity is not the sole driver of demand for resources such as oil, gas, steel, etc. So don’t necessarily expect a recession in the U.S. to have a direct impact on commodity prices, at least not as strong of an effect as we have seen in the past. At some point in time, the world’s various economies will separate from the U.S., creating a demand for resources that is increasingly less sensitive to U.S. economic health.
Bonds (also known as the debt, credit, or fixed income market)
As investors become more concerned about risk, they tend to shy away from fixed income markets. Practically speaking, this means investors steer clear of credit risk, meaning all corporate bonds (especially high yield bonds) and mortgage backed securities because these investments have higher default rates than government securities. As the economy weakens, businesses have a more difficult time generating revenues and earnings, which can make debt repayment more difficult and could lead to bankruptcy as a worst case scenario.
As investors sell these assets, they seek safety and move into US Treasury Bonds. In other words, the prices of risky bonds go down as people sell (or the yields increase) and the prices on Treasury bonds go up (or the yields decrease).
During a recession, structuring your portfolio is simple. Shift assets away from equities, especially the riskiest equities like small stocks. You should also move away from credit risk in fixed-income markets and invest in Treasuries. A portfolio invested 60% in stocks and 40% in bonds fell 16% during the bear market that followed the pop of the tech bubble in 2000. That compares with a loss of 48% for an all-stock portfolio.
Start a Business
Now more than ever you might be forced to start a business. This could be due to inflated prices that cannot be accommodated with your current salary or in the worst case scenario, you could get laid off and have a significant loss of income. Although a recession would in most people’s mind seem like a terrible time to start a business, success is totally dependent upon doing your research and understanding what the market will continue to spend money on and how you can provide it relatively inexpensively.
Internet Based Business
If we continue to follow the premise that emerging middle class markets in foreign countries with a strong currency are thirsting for goods formally consumed in US markets, then it becomes an easy choice for you to tap into that market via the internet. Foreign currency has tremendous purchasing power. If you provide those goods that can easily be shipped quickly around the globe, you can profit despite a local recession. Do your research and determine what is in high demand. Find out how you can get the product from a manufacturer and have them do the order fulfillment. You simply become a middle person and get paid for each transaction.
Travel and Tourism
Visit any tourist attraction in America and you will notice that there are a lot more Europeans visiting than last year. The reason is simple, Euros buy a lot more of our American stuff than they buy back home. Find out how you can tap into the travel and tourism industry. Explore the tour guide industry, vacation lodging, restaurants in certain areas, entertainment, souvenirs and any other area that would be attractive to foreign travelers.
Predicting the End
Trying to predict how long a recession will last has proved disastrous for many in the past. There is no way to predict the length of a recession, however historically the suggestions that I have offered above have allowed the wealthy elite to not only insulate themselves from the negative affects of a recession, but have allowed them to emerge from recessions more wealthy than they were when the recession started. If you follow the above suggestions, the length of the recession will not matter because you will profit whether the recession is short or long lasting.
