How to Counter Recession

Recession might be a bad thing for most people, but it doesn’t have to be a bad thing for you. Most people don’t even know what recession means. That being the case, how can they possibly prepare for and possibly profit from it?

The technical definition of a recession is two consecutive quarters of negative GDP growth. In other words, the economy is recessing opposed to growing. However, many economists will argue that recession is better defined by rising unemployment. And a few well-recognized economists feel that recession is really about pessimism and a weak consumer. However you define recession, it’s painfully clear that we’re in one at the moment. GDP growth is down to only 1.6%, but since it was better than expected, the stock market advanced, which keeps the economy afloat. 1.6% is still on the plus side, but it might have to do with government stimulus more than anything else. Unemployment is at 9.6%. Once again, this is a number that has been getting worse in recent months, but since it was better than expected, it didn’t rattle anyone’s nerves to the core. Pessimism is rampant and consumers aren’t spending. With all these circumstances, how is it even remotely possible to keep even or make money from a recession?

Let’s begin with how to keep even during a recession. By keeping even, we’re referring to keeping what you have and weathering the storm. The number one way to do this is to keep your job. If it requires some kissing up, go ahead and do it. Being able to feed your family is more important than your pride. Another important step is to transfer your retirement money to an ultra-conservative portfolio. This means you will own all blue chip stocks and other safe investments. Since deflation is a realistic possibility, which would lead to a depression, not a recession, the stock market could fall by as much 50% again. By owning blue chips, you might get a little hurt, but it’s something you will have a chance to rebound from when the smoke clears. Most blue chips pay dividends, which means you will get paid on a quarterly basis regardless of what the stock does. Add the fact that you can use up to $3,000 for a tax loss and you should be able to get through a tough time without getting hurt.

If you want to profit from a recession, there are several ways to do it. The first thing to remind yourself of is that this is not a garden variety recession. In other words, things might get worse before they get better. Look at the stock market crash of 1929. That might have been a rough time, but it wasn’t until 1932 that the stock market really crashed. What happened in-between? The stock market rallied and stayed flat the majority of the time, offering false hope. If you want to profit from the current recession, buy a short ETF. This means you will make money when the stock market goes down. The best approach here is to use it as a hedge (don’t go 100% short). Another option is to move all your money to cash. If the market holds its own, you won’t lose anything. If the market crashes, you will have an opportunity to buy stocks at dirt cheap prices, which will give you the opportunity of a lifetime – the stock market is the easiest way to get rich and you always make more money on the way up. Believe it or not, consider selling your house. The same idea applies. Take the proceeds from your sale and rent a home or apartment for the next two years. At that time, real estate will have gone down at least another 20%. This will allow you to buy another home for an extremely low price.

Which approach you take should depend on your personality. If you like to play it close to the vest, go with the former approach. If you’re a risk-taker, go with the latter.