Have No Fear – Surviving And Thriving In A Recession

Thriving in a recession

As recently as two weeks ago, the prevailing macro view was that while the impact of Covid will be severe, the recovery will be V-shaped.

That is, a sharp decline would be followed by an equally strong rebound in economic activity and asset prices.

Fast forward to today and the likelihood of a V-shaped recession is close to zero.  The situation is clearly far more complex and precarious – and thus the recovery is likely going to take much longer to play out.

Bring on the feared r-word.

Unfortunately, recessions are a fact of life.  Starting with the Great Depression in 1929, the US has had 14 recessions, with Covid highly likely to cause the 15th.  That works out to roughly one recession every six years.

History of US recessions

Yes, recessions – and the stock market corrections that accompany them – are disruptive and unpleasant.

They are often accompanied by a deluge of bad news and catastrophic predictions, especially in the current 24/7 news cycle.  And it is fair to say that things are getting hairy out there.

But the bottom line is that recessions are inevitable.  So unless you are willing to spend 20% of your life in a state of permanent stress, you need to find a way to deal with them.

Control What You Can, Forget The Rest

We like to think we are masters of our destiny.  The reality, however, is that the notion of control is an illusion.  The current pandemic is a great example.

No, you cannot control the spread of the disease, the behaviour of other people, the governments’ policy actions – or the stock market reactions.

I am not suggesting that you ignore reality altogether.  However, stressing out over everything you read in the news these days is unhelpful at best and highly detrimental at worst.

It will only leave you feeling frustrated, powerless, and even more worried than you already are.

Thankfully, there is one thing you have 100% control over.

Your own behaviour.

First and foremost, that means taking care of your health.  Eating well.  Getting enough sleep and exercise.  Taking up meditation and staying positive.

No matter how bad things get, staying healthy and energetic means you will be well-prepared to handle whatever challenges life throws at you.

You are also in full control of how you relate to other people.

Doing your absolute best when it comes to social distancing.  Focusing on your family.  Being kind to others.  And yes, being good at your job.

Finally, don’t make the mistake of equating your net worth to self-worth.

The financial independence community can be very numbers-driven.  But at the end of the day, the value of your investment account is just one component of a happy, fulfilling life.

Don’t let a temporary dip in the markets affect your outlook on life.

Imagine you are the captain of an ocean yacht navigating a nasty storm.  Land is hundreds of miles away and you have absolutely zero control over the weather conditions.

Cursing the waves coming your way won’t do any good.  A single-minded focus on steering your ship to port will.

Take your cue.

Finding Gratitude

Gratitude is one of the most underrated building blocks of happiness.  No matter how bad the situation gets, there’s always something to be thankful for.

The Covid crisis is no exception.

As the stock markets went on a relentless march upwards over the past decade, many people have complained about missing the chance to invest immediately post the financial crisis.

“Ah, investing back in 2009 was such a no-brainer”

“Lucky you to have gotten into the market way back when”

 “If only I was around ten years ago”

Well, at the time of this writing, the S&P 500 stands at 2017 levels.

US small-cap stocks (which by the way represent a big chunk of my portfolio) have given up almost seven years of gains.

Small Cap Index Performance

The FTSE 100 hasn’t traded this low since 2011.  Talk about a lost decade.

FTSE 100 Index Performance

Banking stocks have taken an absolute battering.  The value of deferred compensation I worked up over 5+ years has dropped by over $100k in just two weeks.

Is this the absolute lowest point?  I have absolutely no idea.

Things could well get much worse before they get better.

However, what I do know is that an opportunity to buy stocks at 2011, 2013 or 2017 prices doesn’t come up very often.  And given we haven’t yet invented time travel, you probably won’t get a chance to rewind the clock until the next crisis.

Facing Your Fears

The issue with investing is that hindsight is always 20/20.

It’s very easy to put money to work when the economy is humming along nicely, your job is safe, and your portfolio is going up all the time.

But when the tide turns, your risk profile inevitably changes as well – and suddenly investing isn’t such a sure thing anymore.

I made my first big foray into the stock market back in 2011.  The S&P 500 was at roughly 1,300.

I took whatever savings I had, maxed out my student loans and plonked everything into an index tracker.

Three weeks later, the US government debt was downgraded and markets dropped 7% in one day.

Saddled with a $100k+ student loan, I was crapping my pants – and it’s not like I was investing at the depths of the financial crisis.  By 2011, the markets have pretty much doubled since their March 2009 lows.

The point here is that it will always be scary.

Now, I am not suggesting that you take whatever extra money you have and dump it in the stock market today.

But at the same time, I see far too many people who are now on the verge of capitulating and “salvaging whatever is left” by cashing out.

Please don’t. 

Unless you have a drastic near-term liquidity need that cannot be covered by your emergency fund or other means, do not sell.  You will come to regret it.

You should also keep up whatever regular contributions you have been making.

When stocks rebound (as they inevitably will), you will consider holding your nerve as one the best money moves you’ve ever made.  Conversely, selling today will likely be amongst your worst.

Because the one thing that always holds true about recessions is that they all have an end.  So will this one – and the only thing that will separate the winners from the losers is their ability to stay in the game.

About Banker On FIRE

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Banker On FIRE is a London-based M&A (mergers and acquisitions) investment banker.  I am passionate about capital markets, behavioural economics, financial independence and living the best life possible.

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4 Comments

  1. I agree that no matter how good a “buying opportunity” this seems it’s still hard to make the decision.

    Back in the 2008/9 crash the future was just as uncertain and I had just escaped from a very costly and near bankrupting property deal and was mega cash rich.

    No way did I have the nuts to buy in at that time….a mistake that would have created a retirement size pot now.

    I feel your anguish in investing back then.

    Scroll on 12 years and the situation is similar. In My gut sense I’m saying buy buy buy With the massive money printing ongoing the Equities and gold will have to raise fast. (Excepting and 28 days later style disaster movie!)

    but I’m already invested and not sure I will dive in much more.

    The only reason for selling some now is to trigger some losses to offset CGT this year.

    Nice article. Thanks

    S

    • Thanks Steve.

      Interesting you say that – because it’s a similar situation I find myself in now. As a result of my well-documented struggle to beef up my real estate portfolio, I am actually sitting on a very decent chunk of cash. I was lined up to close on a relatively big property this week – have pushed back for the time being but will likely walk out of, leaving cash to invest.

      My gut sense is that Covid will take a bit of time to play out but I am getting ready to put more money to work, starting with the new ISA allowance in April. It’s unnerving but the numbers don’t lie:
      http://bankeronfire.com/making-money-in-times-of-crisis-lessons-from-past-recessions

  2. I am still working on the investing learning curve. I have a roboinvestor and a couple retirement accounts but would like to dabble more in the world of stocks and dividends. Probably not the ideal time to learn but do you have any articles for beginning investors like me?

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