Investing During Recessions - How Should Investors Prepare?

this video is sponsored by blinkist use the link in the description below or the QR code for a seven day free trial plus 25 off a premium membership big short investor Michael burry sounds

the recession alarm morning the US economy faces a multi-year downturn downturn is highly likely and fed projections have been horribly wrong Muhammad al-arian says this recession is

the next depression danger ahead meet Kevin whether you beat your Visa the market off of news headlines or apocalyptic financing to thumbnails a lot of people are growing concerned over

a coming recession assuming that we aren't already in one and it is easy to see where this concern is coming from after all debt levels are very high interest rates are increasing inflation

is still making things really expensive it seems like every major asset group is seeing a sell-off and it all raises a pretty important question for investors

how should we prepare well genuinely I know that this stuff can be stressful so I wanted to take some time to talk about it to offer up some tips and information and what investors should consider going

into a period of uncertainty because as you'll see what might seem like the obvious course of action when faced with a seemingly imminent downturn can actually be detrimental to your

portfolio's performance so take a deep breath and let's go over how to navigate recessions as an investor on today's plain bagel as simple as it might seem recessions

are actually quite a complicated phenomenon not only do economists still debate on how password sessions were caused but even today there's no agreed upon method globally for determining

when a recession has occurred while there is a technical definition of a recession which labels it as two consecutive quarters of GDP contraction the United States for example uses a

more opaque methodology when determining whether a recession has occurred whereby a non-profit known as the National Bureau of economic research officially declares recessions based on a multitude

of variables including unemployment regardless of the specifics most can agree that a recession involves a broad sustained decline in economic activity

often accompanied by a rise in unemployment that means stores sell fewer Goods jobs become harder to come by and the markets generally become more pessimistic now recessions are a

completely normal if not healthy part of the business cycle they can actually help reduce inflation deflate asset Bubbles and generally reallocate Capital towards more efficient and more

effective projects but for individual households they obviously suck and it's easy to see why many people don't feel all that great about what 2023 holds

between the pandemic the war in Ukraine elevated stock valuations and Rising interest rates we Face a pretty nasty cocktail of headwinds rising interest rates are especially concerning given

how high debt levels have reached over the last decade with public debt to GDP alone sitting at around 120 percent and as the stat becomes more expensive

households companies and the government will likely need to de-lever offloading assets and cutting their spending to accommodate while capital is likely to be pulled out of those more growth

speculative types of Investments a big reason behind the recent sell-off in crypto markets and tech stocks so given that many pundits and YouTubers are now sounding the alarms lighting the beacon

so to speak about the coming recession what are individual investors to do well let's go over some of the obvious options starting with the extreme example of selling everything or trying

to time the market so that you can hopefully wait out the uncertainty now this can be a very appealing approach for those who are already down quite a bit and really can't bear the thought of losing any more money

but it unfortunately does tend to be a losing strategy in truth the returns of the market are clunky with much of the performance we see being determined by just a few days in the year so the risk

of accidentally missing one of these important good days greatly outweighs the benefit of sitting out some added volatility for example if you had invested in the S P 500 over the last 15

years missing just the 10 best trading days would have cut your annual return in half when compared to what you would have seen just by buying and holding and yes your return would obviously be

better if you happen to avoid the 10 worst trading days in the market but study after study has shown just how difficult trying to perfectly time your trades really is with Charles Schwab comparing your odds of doing that

successfully to winning the lottery after all it's impossible to predict how the complex multitude of interrelated variables within the economy will affect your performance in the data points we

do collect are often published with a meaningful leg GDP figures can take months to be released meaning that by the time you hear that you're in a technical recession you're probably

already a few months into it and perhaps already on your way out such as with this year where GDP in the US saw a strong rebound the quarter after its technical recession so with timing the

market out of the way let's go over another popular idea investing in safe havens assets that earn a return while being uncorrelated to the stock market

includes things like gold treasury bills Fine Art and by some accounts Bitcoin while we like to imagine safe havens as being a sort of Island that's insulated

from the stock market they're more so in in-law suite to the stock markets Bungalow and while they do often maintain a low price correlation with stocks when times are good crash after

crash has demonstrated that when stocks go down most other Financial assets are pulled down with them even Fine Art an asset group that's seemingly well removed from the stock market saw a

sizable decline during the 2008 financial crisis now there are periods of time when certain Safe Haven assets have done well when stocks have not but it's far from a reliable relationship

and one very much challenged and contested by research reports so while there's no harm in allocating some of your portfolio towards these assets to better diversify your risk they don't

necessarily insulate you from recessions and they're far from the perfect solution that many make them up to be okay so timing the market and safe havens don't seem to be all that helpful

what about sector rotation pivoting your money from riskier sectors into more stable businesses during uncertain times well it is true that there are types of

businesses out there like utilities that are going to be more recession resistant than other types of business models like many types of tech companies but just like timing the market it can

really be tricky to try and sell out of underperforming areas and then buy into outperformers before they have underperformed and outperformed respectively while you

might expect a recession in 2023 for example Tech has already seen a drastic decline in 2022 and it's impossible to know whether next year will be a good

bad or neutral time for the area damn it Richard then what the hell are we supposed to do when a recession is on the horizon sit around and wait for impact

well yeah actually or maybe it depends but the point is that you shouldn't build your investment strategy around whether or not we will have a recession

since World War II the US economy has had a recession on average every six years with the average length of the contraction being 10 months for the average Joe that's a pretty short time

frame to be changing your whole approach to stocks and even if you knew with 100 confidence that a recession was coming next year making an investment decision

based off of that would actually be quite misguided the economy in the stock market aren't actually all that correlated in fact according to a study posted in the Journal of portfolio

management this year that looked at 15 emerging and 21 developed Equity markets over sampling periods of 32 to 120 years there is no meaningful link between GDP

growth and stock market performance a big reason for this is that the stock market and the economy simply measure different things there are roughly 4 200

listed companies on U.S stock exchanges compared to the 27 million private companies that exist within the US economy which also encompasses

government activity and foreign trade so clearly the stock market is a tiny subset of that broader thing the economy and yes recessions and bear markets have frequently been seen together in the

past but bear markets have at times preceded recessions come after the fact or not occurred at all and in fact periods of contraction have frequently been followed by a strong Market rebound

given the fact that stimulus measures are often enacted to try and boost activity during a slump which increases the stakes of trying to call the bottom and I know 2023 does seem like it has

the perfect layup for both a recession and a stock market but that seems to be the case almost every year times are always uncertain

investors always have reason to be cautious about investing over the 2010s it was high stock valuations and growing debt balances that made people nervous even though it ended up being the

longest Bull Run in U.S history so because no one knows when the next recession will come because I wouldn't even really determine how stocks would do anyway it's sort of silly to make any meaningful adjustments based solely on

that type of information still recessions are important and can challenge investors and I sense your frustration building given how much of a non-inter I've been giving so far so

here are some actual actionable tips for weathering whatever storm lies ahead the first thing being before anything else take a good look in the mirror and analyze your risk tolerance I know that

it's a boring starting point but your investments will only do as well as you're prepared to allow them the Dalmore Studies have consistently shown that Equity investors underperform the index not only because of the

shortcomings of active management but because they often sell at inopportune times so before considering where to invest you should decide whether you should be invested and to what extent

and that goes beyond simply how you feel about losing money you need to look at your financial situation and whether you are able to withstand extended periods of Market volatility such as what might

come with a recession as some general pointers the younger you are the more money you have saved the more you earn the more here your job is an important one during recessions and the longer

that you can keep your money invested without ever needing to withdraw it generally the more risk you'll be able to take on and the more money you can generally put into the stock market once you have an idea around your risk

tolerance you should also review the risk that you're currently taking on with your portfolio to see whether you're investing diligently or more so gambling if you had all your money in tech stocks over the last two years for

example I'm sorry but it's hopefully a lesson in why you shouldn't put all your eggs in one basket especially if that basket is promising that their product is going to

revolutionize the world there's only so many things that will do that outside of higher level portfolio diversification between different asset classes and sectors the items you can

look at at the individual position level include the company's track record debt position cash flow generation profitability fixed costs and more subjectively the nature of the business

and its Management in truth there are companies that will go under during difficult times which is why it's important to have a good grasp on the businesses you hold and why you think they'll have no issues surviving a

decline in activity if you don't have that confidence then you should opt for a more simple broad-based ETF or Index Fund approach that virtually eliminates that sort of

idiosyncratic risk finally once you've ensured that you're not taken on risk unnecessarily then you can actually look at taking advantage of Market volatility well it might be stressful to see the

positions you hold are falling in price if you do have faith in the underlying businesses and you have time on your side to wait out the uncertainty then you face a massive opportunity to buy

more of that company at a discounted price so whether you do this through dollar cost averaging which is a more systematic approach or through more active allocations you may find you actually benefit from the market

volatility that comes with a recession so in conclusion it's usually not a good idea to be reactive to economic headlines you're oftentimes doing more harm than good by taking that approach

the best time to prepare yourself for a downturn is before it's happened by applying a consistent approach whereby you are investing diligently you manage

your risk by owning both stable companies in addition to those more growthier positions by limiting how much you speculate and understanding what you invest in and if you weren't being

diligent before this time period Then yes maybe your approach does need some changes there are a lot of cryptos for example that will never recover to their pre-pandemic Highs but if you've been

following a diligent investment strategy you probably don't need to change all that much just because a recession a temporary recurring thing is around the

corner the stock market will recover and do well over the long term so will quality businesses and having that degree of confidence in your positions really does make going through uncertain

times a lot easier so I have no idea how the market will do next year and neither do you nor do pundits but I do know that proper risk management makes it a lot easier to

ignore the noise so as fun as screaming about the next decline really is there's a lot to be said for some peace and quiet when it comes to investing this video is sponsored by blinkist from

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a premium membership thanks for watching hope you found this video helpful if you did please do make sure to like subscribe all that good stuff it does help the channel tremendously and let me know your thoughts on the topic down below do you

think that you are well prepared for a recession do you think there might be some changes you need to make based on what we touched on in the video or do you disagree with any of the points that I've made I would still like to hear from you in the comment section down

below thanks for joining me we'll see in the next one foreign