Last update: 2019-10-08

The true outcome of a recession


A lot of analysts are predicting a coming recession. If you look at the various economic indicators, they may well be right. Many people have accepted that this will happen sooner or later, yet a lot of people aren't ready for it, even if you think you are. The old adage says that anyone investing for the long term will be fine and the economy will recover pretty quickly. If you look at the S&P 500, it's true that it took about 3 years to recover. If you invested in a broad array of stocks before the recession, and you didn't panic sell, you were likely back up within a few years. But not everyone ended up riding the waves.

Lack of diversification

A lot of companies that were considered "sure bets" before the recession took a major hit. This is how Citigroup fared:

Their stock price went back over 20 years, to pre-1990 levels, and they are still nowhere close to their peak, going from $544 to $15 per share within months. It's doubtful they will ever be back at their peak level, even if you wait another decade. If you were heavy in banks and financial stocks, chances are you were hit hard. These days, investors tend to be more cautious and diversify more, but there's still a high concentration of funds in certain ETFs and REITs are getting extremely popular as well. This could end up being a problem if the next recession is focused on that sector.

Lack of sufficient savings

With the death of the retirement funds and social security having an uncertain future, people these days tend to focus more on retirement savings (401k in the US, RRSP in Canada), and home ownership is also a very important part of your financial security, but having enough liquidity is also crucial. In fact the 2008 crisis was in large part because of a lack of liquidity in the banking sector, yet for individual people this can prove to be a critical shortcoming as well. If you lose your job and have no income for 12 months, you may not be able to get some of those retirement savings out, which could lead to you being unable to pay your bills, and end up foreclosed by the bank, even if you have a large amount of equity.

Side hustles are becoming very popular, which is one way to ensure a steady income, and a lot of people are adopting more sustainable living arrangements, from #vanlife to tiny houses. These are often people who lived through the crisis and decided to take a different approach, and it's a good way to hedge against risk.

My view on diversity

I wrote already about how I like to diversify my investment portfolio, but I also try to diversify my savings into more than just stocks. Part of it goes to home equity and part of it goes to other investments. I stay clear of things that tie up your money for a long amount of time however, such as long term CDs. Having savings is no good if you can't access them. And on the income side, that's also something you can diversify. Multiple sources of income is key, whether that's with completely passive sources like dividend investing, or side hustles.

Being recession proof is possible, but it's not something that comes naturally or easily.


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© 2007-2019 Patrick Lambert - All resources on this site are provided under the MIT License - You can contact me at: contact@dendory.net