Respected investors and leaders are warning about a potential recession in 2022 or 2023 and stock market crash, so I’ve got a recession checklist as to how we can be prepared in the event this situation happens!
After the stock market had monster returns from 2019 through 2021, Wall Street is now expecting average returns of only 4% in 2022.
Are you sitting on a stockpile of savings or spending down what you socked away in the last 2 years? Or YOLOing your gains in the markets? Either way, it may be time to re-up your cash hoard because if you thought the prospect of a recession is gone, think again. But not to fear because I’ve got some suggestions on how you can stay prepared no matter what curve balls the markets may throw at you. I believe we can be financial fortresses and not only survive the next recession, but thrive.
You might be lulled into a sense of complacency with Fed Chair Jerome Powell saying the economy is so strong, that the economy no longer needs aggressive stimulus, and there’s no need for a long delay between tapering and raising rates with inflation flaring up at 7% or more.
But it’s like the calm before the storm.
Even though Michael Burry has turned into the boy who cried wolf with all of his “mother of all crashes is coming” warnings, others like Elon Musk are staying cautious for a potential recession in either 2022 or 2023. A Forbes author thinks it is more likely to happen in 2023, and Harry Dent believes the crash is coming in early 2022.
Jeremy Grantham’s bubble and superbubble warnings in 2021 and 2022 remain as relevant today than ever, and check out my video summarizing how Jeremy said we are in the vampire phase of the bull market.
There’s also David Hunter, chief strategist at Contrarian Macro Advisors, who thinks the S&P 500 goes to 5300 then declines by 80%. So nobody can predict when or if markets will crash or whether the economy and the stock market continues to do well or take a turn for the worse. But I use these recession preparation tips in my everyday life, and I think they can help you too.
The following recession checklist tips include building up an emergency fund, checking your relationship with debt, evaluating your spending habits, learning how to invest, having a wish list of stocks you would like to buy when they are on sale, using your human potential to hustle and generate more cash flow, and knowing yourself and your investing temperament when and if a market meltdown happens.
Tip 1: Emergency Fund
Build up an emergency fund that is ideally 6-12 months’ worth to cover your living expenses and bare necessities. With stimulus payments winding down or done already, this is the time to make sure you have enough to survive on your own without needing anyone’s assistance. During 2008, people were unemployed for an average of 8-9 months and generally unemployment claims get people about 60% of their weekly wages. While there are not many types of assets that can stand up against inflation at 7% right now, I would keep my reserved cash in a highly liquid and high interest bearing account, like a high yield savings or checking account, getting 1%. And while my cash is currently losing 6% to inflation, at least I have the peace of mind knowing I have ready firepower to deploy no matter what calamity happens in the economy or markets.
Tip 2: Relationship With Debt
You should understand how inflation reduces your purchasing power, so the more we have inflation running at 7% or more, the less we can buy. But this is also a great time if you can handle any low interest debt, like a mortgage, and not be in a rush to pay off low interest debt because you are currently sort of “being paid to borrow money.” If your mortgage interest rate is at 3% and inflation is at 7%, you are essentially making 4% right now! So take your sweet time paying off the mortgage. But do pay off any high interest credit card debt because the high interest rate is like a double penalty. Your money is already worth 7% less, and then if you have a high credit card interest rate of 18% (for example), when you combine that with inflation’s effects it’s like insult to injury on how much more you are paying on the credit card balances you keep carrying. if you’ve been consistently paying on time, call your credit card provider to see if they will lower your interest rates (APR).
Tip 3: Evaluate Your Spending Habits
All of the stimulus and money printing that we have had is designed to get you to spend and borrow money, but what if you lose your job? Are you prepared to resume your student loan payments starting on May 1, 2022, or cover your bills, credit card, rent, and/or mortgage payments in a worse case scenario? Right now the labor market is tight which means workers have stronger negotiating power to get higher wages in an increasingly inflationary environment. But what if the tables turn on you? Ask what you would do.
There was a lot pent up demand we had from lockdowns that was going to take hold in 2021 to help the economy grow by 5% vs 2020’s -3.5%. But will the momentum in demand continue to be as strong in 2022? How many more computers, cars, and smartphones do we need until demand is satiated enough for now? If demand falls enough, a recession could become a self-fulfilling prophecy. I would do the opposite of spending and save like there is no tomorrow. Check out my minimalist habits I use to save money!
Tip 4: Learn How To Invest
Gain knowledge and understanding of what happens during inflationary times and recessions. This is the best time to start learning how to invest, or to improve on your existing knowledge and level up. Feel free to check out my video to learn how I analyze and pick stocks.
Right now, I keep in mind what Buffett said, “Be Fearful When Others Are Greedy and Be Greedy When Others Are Fearful.” I like studying Warren Buffett and Charlie Munger, so I’m trying to understand how they invested during past highly inflationary settings.
But more practically, you should start putting together a wish list of your favorite companies. Ideally these are wonderful companies with managements that have integrity and talent and that the company has a durable, competitive advantage known as its moat. You also want to invest in wonderful companies that will not only survive during a recession, but thrive in it. Some of the 2020 winners included Costco, and big tech in general. Think about how a company can continue to grow its free cash flows and expand its business moat even when there are challenging economic headwinds.
Tip 5: Allocate Capital Wisely
And then you should start figuring out what is a good price to pay for the stocks of these companies when they go on sale. You have to decide what you are comfortable with how much you want to be invested right know, knowing markets across stocks and real estate are at all time highs. What are the odds that asset prices continue to remain high, and how are you going to get your expected rate of return? Even when many assets are not bargains right now, there could be some assets that are undervalued and which you may want to invest in. So you should evaluate how much cash you think is appropriate for your needs to have on the side, waiting for a great opportunity to buy stocks on sale — whenever that happens, whether it’s during a recession or not.
Tip 6: Hustle Til You Make It!
Other than preparing to invest, think about how can you generate higher cash flows in the short term? Do you have certain skills you can freelance or would you like to start a business? If you have done everything you can to prepare yourself and tried to game plan what you would do during certain economic conditions, now may be the best time to invest in yourself to hone your skills and/or start a business. If you don’t have much to lose, why not try?
Tip 7: Know Yourself And Your Investing Temperament
Before a market meltdown does happen, you should mentally prepare so you know what actions you will or will not take. Be honest with yourself and ask what is your investing temperament based on how you have been investing or trading? Are you the type of person who likes to quit while they are ahead and take some profits off the table, or do you realistically believe you can HODL no matter what? If you think you would sell when the market is panicking and your portfolio is down 50%, you might not have as high conviction if you are in agony over the stock prices in your portfolio. But if you have done your homework and have high conviction in your picks, then a 50-80% drawdown will not phase you and you will have nerves of steel just holding until your wonderful companies recover, and so will the stock prices someday.
The good news is that usually recessions and bear markets don’t last as long as bull markets historically do, but the bad news is when they do they feel like they are lasting for an eternity. However, be mentally prepared in the event that it could take the markets more than 25 years to recover. This happened last after the 1929 crash and the Dow Jones Industrial Index took about 25-26 years to exceed its previous 1929 peak.
I have hope for the Millennial and Gen Z generations that as long as we prepare, we will not only survive, but thrive when the next recession comes. This could be a generational opportunity of a lifetime to invest and create wealth out of the stock market wreckage. With that I wish you well on your journey to being the best investor you can be, no matter what curve balls the markets might throw at us!
If you’re interested in learning how to take control of your finances and start becoming an investor like Warren Buffett, check out my free PDF guide.
I look forward to making more investor friends! Add me on Instagram: michellemarki