What to do if a prolonged recession is inevitable

Early last year, I forwarded a macro paper from BoA regarding the major trends for the future. One of them was about the coming high volatility, which was largely subdued for many years due to historically long lasting mega bull run since 2009. I told you to take this call seriously and read this paper not just once but regularly. I’m pretty sure such kind of call will usually fall into a deaf ear and not many will pay any attention to it. For those who did, the Oct-Dec crash last year would not be a big surprise to them and hopefully they were much bettered prepared! It is still not too late to read this paper if you haven’t done so (see here).  
 

If you have followed my blogs for some time, it should not be any surprise to you that I think a painful recession is coming and probably a lot sooner than expected. More importantly the upcoming recession will likely be a gigantic one that may last for many years, not just a passing-by event. Right now it seems unthinkable when the US economy is quite robust, thanks to the very successful pro-business policies by the Trump administration. Yes, this momentum may continue for a while but it does not change my long term bearish view at all due to one critical factor: the mounting pressure from the decades long accumulation of all kinds of debts! It is just a matter of time, not if, that the final reckoning day will come. Be prepared, folks, if you are still happily and blindly chasing stocks around. This is a very risky market environment for investors and traders. Protecting yourself from the downside risk is far more important than making money actually! Whatever you do, make sure you won’t fall off a cliff without preparation. Just think about what the market had done to you during the 2008-09 period and multiply it by a few times for the pain. This is how I’m seeing it. So the natural question is how to be prepared for such a dire prospect. Well, there is no magic and panacea and everyone will do something differently in coping with risks. By no means I’m telling you what’s the best thing to do. But since I have got quite a few similar questions in the past, let me at least share with you what I’m doing. I’m not recommending anything to anyone here but just an info sharing. Three major approaches I’m taking for the inevitable prolonged recession:

-- Setting up my own business. You may laugh for the idea as this dose not sound like something most of people can do. Well actually this is something everyone can do EASILY as long as they are willing to. I’m not talking about create a company and produce or sell something yourself. On the contrary, you don’t need to change anything from your daily working life but at the same time you can easily transform yourself into a businessman for solid businesses. It is just a matter of mindset change: buying and holding stocks for solid businesses that are treating you well with increasing dividends. This is how simple it is! I have talked about DRIP idea many times here and you can refer to this and this as examples. The point I want to make now is that you are automatically becoming a businessman for the business that you are holding the stock. As a stockholder, you are really the business owner (in fraction of course) and you should think like a businessman. Ask yourself, if you own a business, should you really worry much about the fluctuations of the stock prices if you know the underlying business is doing well and will continue to do so? I don’t think a restaurant owner will outcry simply because the daily customer volume is changing every day, as long as he dose not see any deterioration trend for this customer base and revenue/profit margin! This is how you should treat your long-term quality dividend stocks as a business owner and should actually be happy to see lower stock prices for long term gains. In other words, the prolonged recession period is actually benefiting you much more in the long run as long as these businesses have no fundamental issues. If you want to see a mathematical proof on this point, just read this again.

-- Setting up an ironclad End-of-World insurance. While I don’t think we will see an end of the world any time soon as opposed to what AOC has warned you, there are too many things that may make our life off-tracked with unexpected crises. The last thing I want to see for me and my wife is to face a dire situation that we lose virtually everything at our late stage of life. I’m certainly not expecting for this but I just want to be 100% prepared for a black swan event in our life. This world has too many unknown risks and we should never take anything for granted! So I’m a big believer for a cost-effective Whole Life (WL) strategy which meets all my needs for potential crises. I posted a very long blog on this topic and won’t repeat it here. Just read it again if interested.  However, I can share with you two real life examples how great this strategy is working for us. For one, as you may know, my son is doing his MBA at INSEAD right now, which costs him a fortunate relative to his earnings in the past few years, not a small amount! After all, the global top MBA program makes sense to charge big money just as you can expect from other similar top class programs like Harvard or Wharton, right?  A few years ago, I helped him to set up his own WL policy and now he is using his CV (cash value) easily to pay for his high tuition. No any hassle whatsoever in the process without any pressure if he would otherwise have to deal with a commercial loan. Then we decided to close out a mortgage for our 2^nd (vacation) home, which again is not a small amount. We did that by using our available CV from our policy without any issues: no question, no pressure and no nothing! We basically made a loan for ourselves and manage it in our own terms and pace. No credit checking and no payment schedule to deal with. It is so easy to manage just like a saving account. So we have a great protection in place with the very liquid fund available for whatever usage we may want to use down the road. As I have explained in detail in my blog, it is just like a high yield saving account with life long protection. If nothing bad happens (and I do hope so), it is simply generating great tax-free compounding gains for us, which is super safe and legally protected! In case we do face a prolonged recession as I’m expecting, I can freely use my accumulated CV to buy more great dividend stocks at fire sale prices. Think about what it would mean to you if you had sizable free money to buy buy buy in Mar 2009! I could be wrong and such a moment may never come again but I won’t count on it and actually I’m looking forward to the moment to come again in the next few years simply because I’m well prepared with this unique ironclad safe strategy that will provide me with the needed “free” money in a large sum if necessary! This is actually goes beyond the traditional stock buying. There is another huge opportunity when the next devastating crisis hits: the distressed debt investment. I will write more as this is not something many people know of but a fantastic low risk investment opportunity for the savvy bond investors. I have learnt a lot over years on this and will be eager to take the opportunity when it presents itself in the next few years! It is coming, not if but just when.

-- Last but not least, buying and holding some real assets that could be recession proof. Although I’m not a big fan for real estate investment that involves rental property management, we do hold a few. What I really think important is to hold some precious metals in a proportion that may have significant impact during financial crisis. I cannot say what is the best proportion but 5-10% of your total asset may be a good one to start. I also treat it as an insurance in the sense that the capital gain from it is not the primary goal although I do expect we may see run-away inflation and/or deep deflation at some point in the future, which should be great for precious metals in terms of their real value. This is especially important in a world that is full of black swans politically and financially! The gold/silver rush in the past two months or so should have already given you a taste what it can do in much deep and big crises we will almost surely see in the future.

-- Not yet in reality and will be another topic for future, we are entering into a tokenization era in the foreseeable future, thanks to the revolutionary new technology, Blockchain. What it means is that virtually all the assets can be digitized and tradable easily in the future via tokenization. Just think about a time when you can buy and hold a piece of the da Vinci master painting Mona Lisa, or own a fraction of the NY Empire State Building! Sounds like a fiction for now but the time will come very soon in just a few years time. So be prepared to have the money that can be used to buy such real assets when you can. You may buy for collection or trade them just like general stocks! In other words, auction of master pieces of anything will not just be a game for super riches only but will be part of our daily life for virtually all the ordinary people like you and me!!                   

This is how I’m dealing with our financial matters, which is making me sleep well at night regardless how the world is going that is far beyond what I can control! Hope this short writing can also provide some food for thought for you. While I cannot predict anything, one thing I’m pretty confident to say is that this world is not as safe as you’d like to think and it is full of unknown risks that can easily derail our life. Be prepared with something you are comfortable with!