The Covid19 hit the world in 2020 hard. Lots of people lost their job, home, savings, but most importantly – many lost their lives. 6 months after the world stood still, people locked themselves at home and life wasn’t anywhere near normal, things…remain fairly unchanged today. Despite that, a lot of people from the northern hemisphere think that since it’s summer already, the virus will spare them and their economy. According to official data, Germany is entering a recession. “Nothing major” you might say, but Germany is the 4th largest economy in the world in terms of GDP and #1 in Europe. I’m not saying that we should all panic, I’m saying that if this is the situation with the 4th largest economy, there is a chance the rest may follow. So, are you ready for the next recession?
The shortest bear market started after the market plunged down late March. On August 19 the market officially erased all losses and closed on a record high, meaning we’re officially in a new bull market. Despite that this is good news, it’s a bit concerning the fact that this was the shortest bear market in history. Still, the fact that some countries are entering a recession, might be a red flag that it’s not all good.
How to get ready for the next recession?
If you used some portion of your emergency fund lately, now is the time to refill it. Your emergency fund might be the tool that could keep you above the water in case you lose your job. Lots of people lost their jobs in the past 6 months. The company I work for also cut jobs and my already former colleagues were not happy at all. Some of them dedicated more than 20 years to that company, so don’t think that you could be spared. If your management decides to cut jobs, allegiance doesn’t matter. To be ready for the next recession, I’d recommend having an emergency fund that could cover at least 6-9 months of your base expenses.
In case you own rental properties or other assets that could require additional funds for maintenance, my suggestion would be to enlarge your emergency fund. Lots of rental owners woke up with tenants that couldn’t pay their rent because they lost their job. Please, support these people, it’s not their fault. Keeping them in will earn you more ROI than leaving them behind. Your rental might stay empty for a long time in case the economy goes down, but if you negotiate with your tenants to pay you 50% less, they will still pay you 50% more than nothing.
Having a diverse portfolio will protect your investments in case the market goes down. According to Benjamin Graham (I’m currently reading “The Intelligent Investor”), a diverse portfolio will hold 10 to 30 different issues. That would mean not only different stock tickers, but they also need to be in different industries. Not that you want to aim for 30 industries, but if 50% of your portfolio is in only 1 industry, that might cost you. In ideal conditions, you would need to hold 25% bonds and 75% stocks. Or vice versa, if that’s what suits you best. I’m not the biggest fan of that idea myself, but if you like it – you would hardly go wrong.
Reduce high-interest debt
High-interest debt might be that one thing that could drive you crazy in time of a recession. If you want to be ready for the next recession, you should definitely consider reducing it. In case your income goes down and you need to reduce the payments of your debt, the high interest will hit you hard. The emergency fund might kick-in here if you have one, but still, having less to no debt in such cases will help you sleep better at night. Otherwise, if you look at your financial statement at the end of the year, you would wish to go back in time.
Cut down unnecessary expenses
During bull markets, we tend to spend money on things that don’t hold their value well in time. Sometimes we even spend on service subscriptions that we don’t use that frequently. All of these things, even though they are not that expensive in the grand scheme of things, cost a lot. If you track your expenses monthly, just look at the past 6-12 months and think which of those things you actually benefitted. When was the last time you went to the gym or watched Netflix? If you need more than 5 seconds to answer to that, I’m almost certain you don’t need these subscriptions. Getting ready for the next recession might mean to cut down those unnecessary expenses.
Improve your skillset
If you’re not a Fortune 500 C-level officer, then you probably need to think about what you might offer to your next employer. Working on your skillset and certificates might be time-consuming, but it always pays off. During the lockdown, my partner got 3 new certifications and future-proofed her abilities to withstand a potential decline in her current business. I didn’t get any certificates myself, but started blogging for finance and fitness and launched my dividend portfolio. All we did, is something that could help us during the next recession, regardless if it’s this year or next.