How to reduce the pain of investing through a recession
It always hurts to see the value of my portfolio continue to drop as a recession gets worse and worse. Sadly I can think of at least 3 times that the value of my portfolio has dropped significantly and I have to work my way back out of the hole.
There are a few things to keep in keep in mind when you are investing into any market.
Cash is king. Always keep an emergency fund with enough cash to last you several months, I keep a years worth of expenses in cash. Because there have been times when I lost my job and I needed the money for a while before I landed my next job.
Paychecks. Increase your income as much as possible during the bull market times. When the bear market comes and your paycheck takes a hit, it will not be as bad, because you have already increased your income higher than it was years before. This is harder said than done. There have been plenty of times I have tried to increase my income and my boss said flat out NO. That is when you have to get creative and work on your skills, network, creavity and income streams.
Recessions are all about income. I did well throughout the pandemic, because one of my income streams is in the tech sector and my sector never slowed down as the world economy was shutting down.
There are plenty of sectors that do not stop when the economy retracts. Find those market provide products/services to them. A few of them:
- Oil/gas
- Utilities
- Certain kinds of technology
- Healthcare
- Grocery stores
- Education
The first time I went through a recession was devastating. I was laid off and it was hard to find another job. I also was not investing to take advantage of the recession. And I did not have the creative skills to get me out of my slump. Which means that I was not practicing ideas every day. I was not doing my daily practice to make sure my brain, mind, body and spirit were taken care of.
Instead I was focused on how shitty my life was and all the things that were not happening.
It does not have to be that way.
Now I look at recessions/depressions a lot different. I never wish for a recession to happen, but I investors need a few recessions to propel their investment portfolio to the next level.
Here are the ideas that I use to reduce the pain of a recession.
1. Change your thoughts
There is always opportunity during turbulent times. Your daily practice becomes even more important during the bad times. During the bad times, people will focus on all of the bad things going on. They will not focus on ideas and creativity. They will try and protect what they already have. They will not be thinking about what they can create.
Change that. Be creative no matter what.
How can you create value when the world is shutting down?
There are a lot of people that will not be prepared for a recession. Lots of people think the good times will last forever. If you are prepared for the upcoming bad times then you will have the resources to buy depressed assets. Increase your revenue stream. Help people that need help. Make new contacts.
As difficult as it can be, try to see the glass half full and the opportunities that are still there during hard times.
Also, do not stop the daily practice. As long as you can keep being creative then you can still be successful.
2. Diversify your paychecks
Easier said than done. But income is king. Some sectors get hit harder than others in a recession. If you can have multiple streams of income, you have more protection. A few examples
- A job
- Dividend stocks
- Bonds
- Bank interest
- An online product
- Customers
- Rental income
In good times and in bad times always be working on 2 things: increasing your number of income streams and increasing the amount of income from each stream.
3. Diversify your investments
Honestly, I am do not love ETFs. I do own a few, because they give a person a solid foundation. Most investment advice today says that a person should just own a low cost index fund and forget about everything else.
But I think there is still a place for choosing the things you invest into.
Index funds invest in a lot of businesses that I do not want to be invested into.
And I think you can diversify better by choosing your own investments.
First diversify your investment accounts:
- 401k, HSA, Roth IRA, Stock brokerage account, Crypto
For each account you have to invest a little bit different. Think of each of these accounts as emergency funds
Next diversify your holdings:
- Dividend stocks
- Growth stocks
- Bonds
- Gold
- Crpyto
- Reits
Within each of buckets listed invest in a few different assets and this will give you maximum protection. Your overall balance may still decrease, but not as bad as the overall market.
4. Break your portfolio into 2
Cash V. Growth
Growth stocks are hit the hardest during a recession. These businesses are smaller and trying to grow faster than established ones like Walmart.
Keep adding money to both portfolio during a recession, but just know that your growth portfolio is going to be hit hard and you should scoop up as many shares as possible during this time so that when the market comes back you can take advantage of the next run.
5. Focus on your cash flow
This is my favorite. Honestly, this will also reduce the pain of investing into a recession the most.
Stock price will definitely take a hit during a recession. The value of your portfolio will be hit hard. But what about those dividends?
This is why I split my portfolio into 2. One for growth, one for cash.
Most of the time the dividends will not suffer much. There are a lot of businesses that have a history of paying a steady amount and they do not want to lose investors so they keep paying. Forget the airlines, those are trash. But the staples: JNJ, KO, JPM. The high quality, long lasting business will continue to pay money quarterly.
Pick up as many shares as possible during this time, because you are aiming for cash flow. You want to increase your dividend income as much as possible during a recession. Even though the value of your portfolio will go down, you dividend checks will often go up.
Choose carefully. You want high quality businesses that are here to last. Not oil/gas stocks that payout and then go bankrupt.
The more income you have coming in the less you will notice the recession around you.
6. Have several emergency funds
I just recently had my appendix removed.
It was a full blown hospital visit will surgery and an anesthesiologist. You cannot go to your local clinic to solve the problem, you have to go to the hospital.
I am lucky, I have health insurance through my employer. But I knew it was going to be expensive. From start to finish I probably met about 25 different hospital employees.
But I was not worried. Because I had an emergency fund for this. Every single person needs a health care emergency fund. Mine is in an HSA account. I have been saving and investing in that account for about 4 years and maxing it out: $3,600 each year.
It is no where close to $100,000. But it was enough to cover a surgery, CT scan and 3 day hospital visit.
Having enough money to cover: rent, health, food and transportation will at least give some cushion in case you lose your job to the recession.
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