Back in 2008 – 2009 when the recession hit, I lost a big chunk of my net worth, about 35%, in just six months. I definitely don’t want to go through that again. So, with the Fed raising rates and money getting tight, it feels like we could be heading into another downturn already. In 2022, the S&P 500 wiped out all its 2021 gains, but it managed to bounce back by 24% in 2023 and is looking good in 2024. I don’t see a housing market crash coming due to high demand and falling mortgage rates in late 2024 and beyond. But with home prices climbing, who knows what could happen. If you’re eyeing making money in the next downturn, real estate is a solid bet. It’s less volatile, generates income, and offers utility. Real estate did really well after the 2000 downturn.
Realistically, my goal during a recession is to break even – no gains, no losses. This is like the first rule of being financially independent. But, hey, who wouldn’t love to make tons of money during a downturn, right? So, here’s my plan on how to make money when the next downturn hits. It looks like another recession might be looming with high stock market valuations and the Fed hiking rates like crazy since 2022.
- Be prepared to not make money. The key to making money in the next downturn is being mentally ready to accept not making money when things are going well. It’s all about mental strength when it comes to investing. Missing out on gains hurts, but it’s better than losing money. The goal is to adjust your investments to have less risk exposure before things turn sour. The tricky part is predicting when that downturn will hit.
To gauge where we are in the economic cycle, it helps to study history and make an educated guess. Bull markets usually last about 8 years and see a 440-point gain in the S&P 500, while bear markets stick around for about 1.5 years with a 40% loss in value. With the Fed tightening up, sky-high valuations, and slower earnings growth, making money in stocks is going to get tougher.
In a bear market, be ready to earn less from your businesses and jobs too. Accepting this reality will ease the stress on your mental well-being.
- Stay neutral as the cycle shifts. Even if you shift to 100% cash or CDs, you’re still likely to earn around 2% annually based on today’s risk-free rate. It’s a trade-off between that guaranteed return versus the chance of missing out on potential gains or losing money.
For instance, if your stock returns have been massive since 2010, earning a modest 1% yearly might be more appealing than risking a 10-15% loss for an 8% return. Holding onto cash, bonds, and CDs is more about preserving capital than chasing big profits.
If your property’s equity has surged by 500% since 2012, consider whether it’s worth holding on if there’s a possibility prices might plateau or fall.
- Embrace some risk and go "net short." To make significant gains in a downturn, you’ve got to take on some risk. This means you might lose money if the downturn doesn’t happen. Central bankers are usually keen on safeguarding the economy, even if it means crushing it a bit to control inflation.
One way to hedge risks is by purchasing an ETF that gains when the market it tracks goes down. You can also short individual stocks, especially those high-risk ones with shaky financial standings and no earnings. In a downturn, businesses without solid financial footing may crumble.
Companies with strong balance sheets and hefty cash reserves tend to fare better during downturns. Think of stalwarts in utility and consumer staples like AT&T or Proctor & Gamble. These firms not only rake in profits but also have enough cash to weather rough times, which makes them safer bets for investors.
Considering that the average recession lasts only about 18 months, many investors play it safe by investing in utility or consumer staple stocks during uncertain times.
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Invest in volatility. Buying a volatility ETF like VXX can be a smart move during market sell-offs. Just be aware that holding onto volatility for the long term is risky due to price decay.
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Turn to US Treasuries. When things get shaky, investors often find solace in US Treasury bonds. ETFs like IEF and TLT are popular choices that can provide decent returns. Remember, TLT has seen significant growth during past crises, making it a safe haven for investors.
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Consider gold. Gold tends to perform well when the economy takes a hit. Although it doesn’t yield earnings or dividends, it’s a tradable commodity that gains value during tough times. Investing in gold for the long haul involves understanding market dynamics and US dollar trends, as gold prices are pegged to the dollar.
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Invest in yourself by honing new skills. In uncertain times, those who are indispensable to their companies are more likely to keep their jobs. So, work on expanding your skills, building strong client relationships, and earning the trust of your organization. Investing in education can pay off in the long run.
Ultimately, remember to continue investing for the long term while staying prudent with your financial decisions. Keeping an eye on your investments and staying informed about financial strategies can help you ride out market turbulence. And above all, take charge of your finances and leverage your skills and knowledge to secure a stable financial future.
