Lately, I have found myself thinking about how prepared I would be for the next recession. We are currently still experiencing a decade long bull run in the stock market and it has been showing signs of slowing down.
With the slowing of growth in the global economy we have been trading sideways for sometime with a few dips here and there but what if we went into a full blown recession? I mean a contraction in the business cycle is bound to happen sooner or later.
First let’s look at what is a recession.
A recession is a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.
Currently, the majority of my net worth is correlated with the stock market. Here on More Dividends I list my individual dividend stocks but I also retain assets in a Roth401k, ESPP and HSA.
If you remember back to the article that I published called “What Numbers I Pay Attention To“, I do actually track my net worth despite the fact that I don’t list it here on the blog.
I will note that I don’t list my collections, crypto or gold and silver in my networth calculations but if I did that would help defend against the volatility of the stock market.
Since I am so vulnerable to the stock market I have been working over the past couple of months to start deploying some alternative strategies to prepare for the next recession and I thought that I would share some of these strategies with you here.
None of these strategies are fool proof or guaranteed to work. They are simply strategies that I have begun deploying.
High Yield CDs
When the stock market goes into the next recession I want to have some capital so that I can buy stocks at cheap prices. For me though, I don’t want to just have my money sitting in an account not earning anything at all.
Originally, I was projecting the next recession would be at least a year out so to combat this dilemma, I have started opening a new CD account every month. The particular accounts that I have been opening are high yield 12 month CDs from Ally Financial. The accounts that I have opened so far have been at 2.7% interest.
Some may argue that there is an opporunity cost because I am putting my money into CDs instead of dividend stocks so I am losing out on the compounding factor. Jason is in this game for the long term though. I may miss out on a few dividend payments but I think it will prove to be worth it once the next recession happens.
Also, if the next recession is more than 12 months out, I am going to build in a compounding factor into this strategy.
So it will work something like this. In January, I open a CD account at 2.7% interest with $500. If the recession happens before January, when January comes around and the CD matures, I will take the money and buy some dividend paying stocks. If the recession doesn’t happen until after January, once the CD matures (earning approx. $13.50 in interest) I will take the money and open a new 12-month CD with the principal, plus interest and then I will double the principal amount. So in this example, I would open the new CD with $1,013.50.
With this strategy, I will continue to have a new CD maturing every month after the initial 12 month period. In doing this, I am able to still collect interest on that money and possibly compound the money while I wait for the next recession to happen.
Increase Credit Limits
I bet you didn’t see this strategy coming. With a proven track record of being able to manage credit, I currently have an excellent credit score. In preparation for the next recession though I have been reaching out to all of my creditors to request an increase in my lines of credit.
Now this is not to say that I plan on running up a bunch of debit when the recession does happen but it does feel a bit comforting to have this access to some capital if I need it.
When the situation arises I will have to analyze my options based on the interest rates of my lines of credit to see if I think it is a good idea to utilize this strategy.
Let’s look at some examples of this strategy.
If I have a line of credit that comes with 5% interest but I am able to find an investment that offers a total return of say 12% then it would be worth carrying the debt. My profit would be the spread between the 12% and the 5% so I would stand to profit 7%.
This same strategy could even be deployed on a larger scale. Let’s say you have $150K in available credit and the recession also brings a huge drop in the housing market. You could possibly even access say $50K to acquire some real estate that could potential bring you a greater return than the interest that you are paying on the debit.
I know that this is a risky strategy but if there is no risk than there is no reward. The investment would have to be very very enticing for me to employ this strategy but I am increasing my current credit limits so that I would at least have the option if I wanted to use it.
High Yield Savings Account
If you have been following the blog a while then you may remember an article I wrote called “My Compounding Money Strategy“. In that article, I spoke about how I had money going into a savings account every week even before I get my paycheck.
I have continued this practise since then. So I do have a nest egg built up in this savings account that would allow me access to some liquid capital if I needed it.
If I tapped my available credit, I could then pull capital from this savings account to invest.
Initially this savings account was setup to act as an emergency fund but I personally have no problem with adapting my strategies to maximize my return in a given situation.
Gold & Silver
During times of recession, a lot of investors will be looking for safe havens to be able to store their money. If they decide to store that value in gold & silver it will drive the price of these commodities up.
Luckily for me, periodically since the 2007 recession, I have been selectively acquiring physical gold and silver bullion.
Depending on how high the price of these commodities go, I could always look into selling some of the bullion at spot price and then taking that money and buying stocks with it.
While I have been buying the bullion and using it as a preservation of value, I would have no problem selling it as an investment if I think that I could get a good return out of the investment.
When Bitcoin started moving upwards from $3k I began to acquire it again. I have not been doing any trading in this space but I have been using my Coinbase account to acquire Bitcoin to hold.
Despite me seeing a lot of potential in Bitcoin if a recession were to happen I would have no problem with selling the Bitcoin to raise capital to invest it somewhere else.
Of course, something to keep in mind is that cryptocurrency is still relatively new so we do not fully understand how it will react to a recession in other markets.
If there is anything that I have learned in life it is that the more options you have the better.
I am not set in stone with any of these strategies. They are simply options that I have given myself to be able to access capital in case there is a recession.
I have tried to structure them in such a way that I could access the capital at anytime if I wanted to. Rather it was tomorrow or if it was two years from now.
Before any final decision are made I would weight the risk and reward of each situation. Then, I would choose the strategy that would seem to produce the greatest rate of return with the least amount of risk!
Do you have any strategies that you have been preparing in case of a recession? If so, I would love to hear about them in the comments down below.
As always I look forward to reading all of your comments and questions, until then….. happy investing!
-Jason from MoreDividends.com
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