This is part two of an article on the recession. Part one describes the unique aspects of this recession. This part looks at ways to successfully navigate it. This recession will create stress for some investors, but really it is an opportunity to become financially stronger. Recessions are when wise investors create their wealth.
We Have Been Here Before, With One Exception
First lesson, what we are seeing in the market is nothing new. The last two decades have seen the Global Financial Crisis which nearly crippled the economy and a global recession caused by the pandemic. Strange things happen that negatively affect the economy and investments, this is merely the latest in a long series of economic booms and busts. The one unique exception with this recession is the massive U.S. government debt, which is narrowing the government's options to counter the recession, as discussed in part one.
Your Net Worth Will Decline, Don't Panic
Second lesson, don't panic. Yes, the stock market is down and real estate prices are falling, but both declines are following years of meteoritic growth. While no investor likes to see their net worth decline, this is the cyclical nature of asset classes. There will be downturns and there will be selloffs. The goal is to weather these downturns financially and emotionally through proper preparation and keeping a level head.
Now is not the time for rash decisions with an investment portfolio. Take a breath, be patient, and tune out the political sniping or doom and gloom on the news. No one knows yet how severe this recession will be or how long it will last. There is not enough data yet to make accurate predictions. Hence, focus on the fact that we will come out of it and markets will recover, but investors who sell will miss the recovery.
Secure Your Revenue Streams
Third lesson, time to shore up revenue streams. Workers want to be ahead of the curve, not responding if the recession becomes severe. Assess the economic health of a current employer and security of a current job because unemployment is likely to rise. Workers in jobs that are at risk of being downsized should tap their networks to look for positions in more resilient sectors. This downturn is also likely to test the viability of remote working. We will soon see if those outside the office face higher risks of being let go.
In addition, investors with a side hustle may want to offer discounts to get some additional work in the pipeline. Retirees may consider part-time work to bring in extra income for a few months. Rental property owners should check in with their tenants. If a lease is expiring a minimal rent increase may prevent a vacancy during the downturn.
Fourth lesson, lower expenses to conserve cash, especially on high expense categories such as housing and transportation. Renting a room on a short term rental site or taking on a roommate is a great way to save hundreds of dollars a month. Car prices remain high due to lingering supply chain challenges. Selling a second vehicle now, could be a great way to generate cash.
Similarly if you were considering any major purchases like a car, boat, or RV it is time to shelve those plans. If there is a serious downturn, demand for these items will fall and prices will decline. Better deals will exist on these items when demand tapers off and supply chain issues are further remedied.
Stocks Are On Sale, Buy
Fifth lesson, now is the time to be buying equities. Yes, stocks may fall further, but buying through the downturn adds lower cost shares to a portfolio. Investors with significant cash reserves should put some of those funds to work in the market, especially if they are in highly stable jobs. And remember over the long term, stocks go up to the right, even if there are some rough down years. Investing is a long game, focus on winning at the end.
Be Creative with Real Estate Financing
Sixth lesson, be creative with real estate financing by securing the cash to make the next acquisition. If the recession gets significantly worse we will see two things happen. Investment properties will become cheaper, but lending will tighten. That is why it is helpful to secure financing now instead of waiting.
Owners of a primary residence can take out a Home Equity Line of Credit (HELOC) loan to buy their next investment property. A HELOC is based on the amount of equity in the property. A $500,000 primary residence that is paid off could provide a HELOC of $200,000. A HELOC also has minimal fees compared to a traditional mortgage. HELOC loans have adjustable interest rates, but many lenders will lock in the loan to a fixed rate if the borrower is concerned that interest rates will climb significantly higher.
Investors with a significant amount of equity in a rental property, may want to do a cash out refinance. Refinancing frees up the money now before real estate prices decline further. In addition, raising the capital allows an investor to make a cash offer on their next investment property, which can be an advantage when property prices are declining. Sellers may offer a further price discount knowing the buyer has the cash to close and does not have to rely on the bank in a tight lending market. If mortgage rates change course and begin to decline in the coming years, the investor can always refinance again to lock in the lower rate.
For more investing and financial independence see Nate's guest appearance on the Military to Millionaire podcast, "Achieving Financial Freedom While Living Overseas".