How I’m preparing for a global recession
“Everybody has a plan until they get punched in the mouth.”
-Mike Tyson, former heavyweight boxing champion.
I mean, how is that for a quote?
I love it personally.
This quote is useful for this time (really any time in our lives), because I think it speaks to the universal truth about risk. It’s something you can plan for but you cannot control. That means while plans in general are very good and we should keep making them, they can and will likely change.
But there is power in planning
Now, unlike our troubled Mr. Tyson, hopefully you never find yourself striving to recover from bankruptcy, incarceration or other tragedies, let alone all three.
With your uncertain future now framed, I feel there is some power in planning to provide some ability and agility to react when then time comes.
Leveraging my post earlier this year about our 2020 financial goals, and what our best-laid plans were at the time, today’s post will highlight how I’m trying to accommodate during this current market turmoil, including what I’m learning from it for any pending global recession. Or, maybe we’re there already…
- Ultimately, health is wealth.
Money comes and goes but ultimately health is wealth, for you, your loved ones and dear friends. Health and happiness are far more important than any amount of money. Even though I’ve written about this in the past, including a few months ago, it couldn’t be truer now.
As any pending recession comes our way, I’m going to try and continue to mature my physical and mental health. This should help me become more resilient with time, including times of extreme change. In doing so, I feel it will be an important set of muscles that should serve me well in the financial future.
- While some debt is good, lots of debt can be crippling
Airbnb hosts looking for bailouts due to over leverage. Various companies drastically cutting their dividend and slashing spending plans.
With any pending global recession, there will be losers on the way down and winners coming out on the other side. The ability to manage debt will be key to these success stories and to our own.
When it comes to our debt-load, I’ve always been a bit cautious. I’ve believed taking on some debt for wealth-building is generally fine and a necessary evil. Taking on lots of debt just always seemed downright foolish to me. Best to manage debt before it manages you.
Our debt load is manageable for now. We’ve worked hard to reduce it over the years and we’ll continue to do so during any global recession while working. With recent interest rate cuts, our mortgage borrowing costs are now near a paltry 1.5%. That would be considered unthinkable by me years ago. Again, life happens and things change.
Should anything catastrophic happen to both of our jobs, for an extended period of time, I know we have enough saved up in our non-registered account to clear all debt. Now, that would certainly be far from ideal to liquidate that account. But drastic financial times do sometimes call for drastic measures.
In liquidating our non-registered portfolio, that would mean giving up years of passive income building but it would be something we could do and eventually recover from.
- Watching and lower your expenses is always a good option
It likely goes without saying that cutting unnecessary expenses are a great way to keep more of your hard-earning money – but I just wrote that anyhow!!
With lower operating costs in your household, you should have less to worry about to make any ends meet.
While some of our fixed expenses will never go away as long as we live here (fees, property taxes and condo utilities to name a few), we will do (and have recently done) other things to reduce our expenses in any prolonged crisis:
- Be more selective with grocery shopping and discretionary purchases.
- Cut back on dining out or take out food.
- Reduce our car use. (Actually, I haven’t filled up my gas tank in six weeks; it remains near full).
- Walk or bike to amenities as much as possible (doing this now, see above to avoid the car).
If we had to, we’d reduce our mortgage payments back to the basic amount (removing our prepayment payments).
I also think it goes without saying during any financial catastrophe we wouldn’t be setting aside any savings for our financial future either – we’d focus on the here-and-now only. All contributions to registered accounts (i.e., TFSAs, RRSPs) would stop immediately.
I would think for anyone striving to reduce their expenses, it would be essential to look at your housing and transportation costs as your primary saving areas first. If you get those two expenses right-sized in your life, as much as possible, your financial health will benefit.
I’ve made money mistakes with housing and transportation in the past. I’m certainly not perfect.
- Remain invested as much as I can
While a high savings rate can act as a tremendous margin of safety, it does very little if you cannot save money at all.
Right now, 100% of my portfolio beyond cash is in stocks (when you exclude any future workplace pension on the books). My investment approach over the last decade or so, can be distilled into the following:
- Owning 30-40 Canadian and U.S. dividend paying stocks for income and growth.
- Owning more, with time, U.S. listed ETFs in registered accounts for diversification. Examples include low-cost dividend ETF VYM and iShares ETF ITOT.
While it remains my hope to keep a modest savings rate for investment purposes while working, there are no guarantees. This means should a massive global recession occur, I will do what I can to remain invested and live off any dividends or distributions as they come in. There are no guarantees with dividends of course. And this is another reminder that a dollar of dividends paid is the same as a dollar earned in capital gains by investors. A dollar is a dollar.
By investing the way I do though, I don’t care as much about looking at portfolio values. In fact, although I always have a rough idea of what my stocks are trading at, I must say I don’t monitor them much.
What’s always been important to me as an investor is how much my portfolio can generate meaningful income.
To keep that cash flowing in from my portfolio and growing over time, I must remain invested in good times and in recessions.
Should I continue to be employed during any catastrophic global recession, I’ll be ready to “back up the truck” per se. That means buying equities where I can afford it, when they’ve been crushed for the strong belief that, eventually, this too shall pass. Stock prices will return at some point…
Every few generations, there seems to be a handful of massive market declines. Knowing when they occur is rather unpredictable. Knowing markets will eventually recover at some point is very predictable.
This means as a long-term investor, not only do I hope to remain invested during any global economic crisis, I hope to be a purchaser of equities.
I hope to own more of the following companies in these sectors in particular, for the following reasons:
- Utility companies – because people will always want to heat and cool their homes, enjoy electricity, use the internet and technology, and enjoy clean water.
- Healthcare companies – because people will always strive for (or least want to have) health.
How you can prepare for a global recession
In many respects, I can’t offer lots of financial advice to you.
What I mean is, I won’t be saying anything new.
But I still think it’s important to highlight some considerations, at least for me, as reminders about what’s worked to date in my financial life and reminders for my future self. So, here they are:
Why I will continue to strive for financial independence, and largely forget early retirement.
The most important financial decisions you and I can make are the next ones. Whatever your income level is or whatever your financial situation might be, I hope a significant, prolonged global recession does not occur. I’ll still plan for one anyhow.
Thoughts? How might you plan for a global recession? Got ideas for me? Fire away in the comments section. I read every one.
Please stay well and safe,