Here’s why and the hidden problems that affect you. Don’t underestimate the stress of a recession.
One hour ago, I made the most difficult financial decision I’ve ever made.
It came after talking to my mentor. He said “record unemployment, an obviously inflated stock market, and a health crisis can’t be good for your portfolio. It either stays the same or flat. But really, more record highs? The chance of that is low.”
His logic is spot on. When there is too much risk in financial markets, one of the best things you can do is take profit and sit on the sidelines for a while. You may miss some of the discounts when stocks plummet, but at least you keep your sanity.
So I hit the sell button on everything. I’m out of the markets for the foreseeable future. This current environment reeks of 2008 and the tech bubble all over again. History is never the same but it sure as hell rhymes.
So I’m sitting in cash. I’ve made 30% off the portfolio recently, and it’s time to sit back and relax for a bit.
The problem right now is multi-faceted:
- The Federal Reserve is inflating the stock market through quantitive easing and printing money. (Central banks globally are doing this.)
- The CLO (Collateralized Loan Obligation) problem is real. It’s so similar to the CDO problem from the 2008 Recession, it’s freaky. Commercial loans will default and that is likely to have a cascade effect.
- The stimulus payments from the government will end. The freeze on mortgage payments and rental evictions will end. This is likely to be a cliff that will cause many economic issues.
- The politicians are asleep at the wheel. In Australia where I live, we’ve had to go into a second lockdown. This is a reality many nations will face and it’s incredibly bad for your investments.
Make no mistake, though, it’s not the end of the world. Markets will recover and so will your investments. What is missed is this:
Investing is a mental game
Every day I wake up with extra stress I don’t need. Wearing masks outside of the home became law where I live here in Melbourne last night. The situation outside of my front door is not getting better. We’re running out of band-aids, but at least we see the crisis for what it is: a problem that needs camaraderie and a unified approach to a solution.
Thinking about investments is the last thing I need right now and you are probably in a similar situation. Despite all the hype about Tesla and stocks going to the moon, it’s false hope.
When there is too much hype, run
Take a life raft and watch the storms from a distance. Sitting in cash is the cure to investment stress.
It’s okay if selling everything makes me a weak investor. All that counts is whether you make a profit or not.
If you never take profit then you have made zero
Many investors don’t understand the markets and never make a dollar.
They get excited by the graphs and forests of green percentage numbers, not by how much profit they report on their tax return at the end of the year. I’m going to be paying the tax man this year for the profits I’ve made and that is investment success to me.
Take profit. Avoid FOMO. The markets are not going anywhere.
You can always get back into the market but getting out is difficult during a black swan event
This health crisis is a Black Swan Event — meaning it’s an event nobody could have predicted that has major ramifications.
Getting into the market is a piece of cake.
Getting out of the market when everybody is running for the exits is difficult. The decisions you make in that moment of panic will probably be terrible.
Selling before the storm, even if you sacrifice some of your profits, is a better option. Prolonged downturns in markets have happened before and this time it’s likely, based on the drop in GDP, to cause a similar situation.
What happens if you need the money?
Your main income stream could dry up tomorrow.
Your investments are not cash you can spend to buy groceries, pay your home loan/rent or put gas in your car.
Having a financial buffer during a recession is huge and you can create that for yourself when you sell out of some or all of your investments in the short-term to blow up your safety mattress.
Don’t underestimate the stress investing can cause you during a recession.
What everybody forgets…
Your investment profits can be invested in cheap assets.
The main reason I want to sit in cash is because of property. Property is likely to go down in a recession and by having cash, you get the opportunity to buy a home for a discount.
As a millennial entrepreneur still paying rent, the chance to own a home is an option I thought would be out of my reach for a long time. The recession has changed that. House prices where I live have already fallen 3.5% and are likely to fall further with mass loan defaults expected later in the year.
How you think about this recession is everything.
Is property an asset you want to buy at a discount? Cash, perhaps, could help.
Your investment portfolio is worth taking a look at right now. These are the questions to ask yourself:
- Is there a scenario where I might need cash?
- What research can I do to understand if the markets are in a bubble and prepare rationally if I believe that’s the case?
- Can record unemployment, a global health crisis, and a recession really keep the markets up this high? Or is it an illusion?
I can’t tell you the answers to these questions, only my experience. It pays to understand what is happening right now. There is a lot of hype and people going crazy on investment apps like Robinhood without understanding the basics of finance and economics.
This is not a story of doom. This a story of inspiration to help you get through the downtimes with less stress so you can thrive.
See reality for what it is; not the distorted version hyped up on the internet.
Take advantage of the recession and use it to help those you love, and your fellow human being.