What Investors Should Do Now With a Recession Looming

The Current Economic Climate’s Uncertainty

At this point in history, we must be attentive to the economic indicators and take significant actions to position ourselves defensively. 

The million-dollar questions we need to consider: Are we on the brink of a definitive recession? Who gets to decide if we’re in a recession? And why does it feel like we’re already in one, with many people already struggling?

An example of this struggle comes from a friend who decided to buy a house at the end of 2021, with plans to renovate and flip it for profit, boosting their retirement fund. 

Unfortunately, they purchased at the top of the market, and by the time they were ready to sell, the market had corrected, leading to a financial loss.

Sadly, this story is becoming more and more common. 

People are overextending themselves, buying properties at the height of the market during the COVID years, only to face triple mortgage repayments without the safety cushion that more experienced investors might have.

Recession Red Flags: How to Spot an Economic Crisis

Understanding whether we are in a recession might seem straightforward, but it’s a bit more complex. 

A recession signifies a significant decline in economic activity, but the challenge lies in its measurement. 

A recession is a lagging indicator, meaning we’re often knee-deep before the data is collected, analysed, and published.

Economists currently offer conflicting opinions, discussing the relationship between jobs, wages, inflation, and unemployment. 

Consequently, we may have to wait a few more months to definitively state whether we’re in an economic downturn.

Recession doesn’t just mean numbers on a page – it’s about the real-world impact on businesses, industries, and individuals. 

Right now, we’re witnessing construction and building companies going bankrupt, leaving home projects unfinished and real estate valuations falling. 

Lenders are starting to face the reality of increased foreclosures. Anecdotes from personal experiences highlight this ripple effect. 

For instance, a recent visit from a business banker, unusual under normal circumstances, indicated the banks’ growing concern about the financial viability of their clients. 

Both experienced, and novice developers who miscalculated market timing are finding themselves underwater on their deals.

The Uncertain Art of Recession Prediction

Identifying a recession officially can be a complex task. 

In the US, the National Bureau of Economic Research (NBER) is responsible for declaring the beginning and end of a recession. However, many countries, including Australia, lack an equivalent body.

The process of declaring a recession often lies in the hands of regulators, leading to debates about the metrics and data included or excluded from consideration. 

Even measuring Gross Domestic Product (GDP), an important economic indicator, can be a minefield due to the vast amount of data to consider.

Currently, there are strong predictions of a consumer recession in 2023 

Deloitte Access Economics forecasts that areas like New South Wales and Victoria in Australia will be hardest hit. 

While these predictions paint a grim picture, we must understand that we may not yet have an accurate depiction of our current economic state.

The Cycle of Market Emotions 

Our emotional reactions to market fluctuations often follow a predictable cycle.  

It starts with optimism, escalating through excitement and thrills to reach a peak of euphoria.  

But as the market begins to wobble, that euphoria gives way to anxiety, denial, and fear. 

Right now, we appear to be transitioning from desperation into the early stages of panic.

How do we know this? Look at the real estate market. 

Distressed sellers – people who can no longer afford their investment property or luxury home—are rising. This trend suggests we’re moving towards a market with increasingly apparent panic.

Following the panic, the cycle moves through capitulation, despair, and depression before settling into relief and returning to optimism. 

Understanding that the cycle of market emotions is a tangible phenomenon can help us make better financial decisions. 

While remaining detached from these emotions can be challenging, knowing them allows us to position ourselves advantageously.

Looking back at my own decisions during the 2021-22 property boom, I opted for restraint and a focus on cash flow over aggressive property acquisition.  

This choice served me well, and it’s a lesson worth considering for those currently navigating choppy economic waters.  

I’m sharing this with you because it’s vital to approach economic forecasts with a healthy dose of scepticism, especially when things seem too rosy. 

Seven Key Strategies for Weathering the Economic Storm

So today, I want to share some vital insights that could help you prepare for the dark economic clouds looming. 

In a world where recessions are more a question of “when” than “if,” these are the steps you should consider taking to safeguard your wealth.

According to the Reserve Bank of Australia (RBA), inflation rates are predicted to worsen before they improve from our current position in 2023. This forecast presents a stark reality and a signal that we should begin considering how to navigate this economic storm.

To equip you better for the impending economic downturn, I’ve assembled seven key points based on experiences shared across various podcasts.

Strategy #1 – Keep Cash Reserves

Many investors tend to “redline” their finances to propel themselves to the next level of wealth. This behaviour often results in a constant search for the next investment opportunity. 

But my experience during the initial stages of the COVID-19 pandemic underscored the importance of maintaining substantial cash reserves. 

Forget the rule of thumb recommending keeping three months’ living expenses as cash reserves. 

Instead, strive to keep cash reserves that can carry you through an extended period of poor or disastrous performance.

Strategy #2 – Avoid Speculative Assets

High-net-worth families rarely speculate and often wait years for the right investments. 

To weather periods of uncertainty, avoid chance investments.  

Be aware of speculative activities such as buying an asset in the hope that its value will grow shortly or buying discounted shares in the hope that they will rise.

Strategy #3 – Reduce High Leverage

Nobody wants to sell a valuable asset just because times are tough. But there is a delicate balance between your peace of mind and greed. 

You must understand that you’re better off accepting a lower price on the sale of an asset to de-risk your situation than being leveraged up and hoping to survive the storm ahead.

Strategy #4 – Offload Non-performing Investments

The Sunk Cost Fallacy often traps investors. They resist taking a loss and continue pouring money into poorly performing investments. 

Accepting that loss is part of the game could improve your peace of mind and reduce your overall risk.

Strategy #5 – Don’t Rely on Capital Growth

Many investors rely on capital growth to increase their net worth. In times of economic downturn, evaluate your strategy under a worst-case scenario. 

You may be frustrated or devastated if your entire strategy relies on a growing market.

Strategy #6 – Increasing Cash Flow:  

In a turbulent economy, focus on increasing your cash flow. Whether in business or investments, look for opportunities to generate more cash.  

Creating more breathing space and peace of mind should be a top priority.

Strategy #7 – Clear Short-Term Debt 

Clear any short-term debt you can to alleviate stress.  

From credit cards to furniture purchases, eliminating these debts should be considered before looking to grow your wealth through more assets.

Final Words

In conclusion, think defensively as an investor. During a downturn or recession, these strategies can help you navigate the rough waters and emerge stronger on the other side. 

Remember, it’s not just about protecting your wealth; it’s also about making intelligent decisions to ensure you weather the storm with minimal damage.  

As we face the future, a critical review of your portfolio and necessary action can help prepare you for whatever comes next.