Are you ready for another recession? After 11 Fed rate hikes, a record-long inverted yield curve, and increasing layoffs, it seems inevitable another recession is just around the corner. Don't wait until it's too late to prepare.
There may be more regional bank failures lurking. If so, mass layoffs will spread across multiple industries, not just tech and finance. And the stock market could return to a bear market, as it saw in 2022.
The worst bear market in our lifetime was from October 9, 2007, through March 9, 2009, when the S&P 500 fell by 57%. It took roughly five years after the beginning of the 2008-2009 Global Financial Crisis to get back to even.
I don't think we're going to match the magnitudes of the last bear market given lending standards are much tighter and balances sheets are stronger. However, we could certainly experience half the magnitude, especially since the Fed now seems behind the curve in cutting rates.
Losing time due to financial loss is disheartening, and what I fear the most. Imagine losing five years of savings thanks to another recession. I would be furious because time is so precious.
Things To Do To Survive A Recession
Here are ten things to help better prepare you for an upcoming recession. Heck, you could be experiencing a personal silent recession right now, which requires even more preparation before an overall recession occurs.
When times are good is exactly when we need to prepare for a recession the most!
1) Have 6-12 months of living expenses in cash
Since 1980, the three bear markets have lasted between 3 months and 2.1 years. Therefore, I'd shoot to have 6-12 months' worth of cash if you believe a recession is imminent. The goal is to have enough cash to prevent you from selling assets at depressed prices because you lost your job or were over-leveraged.
Money market funds are yielding 5% while some Treasury bonds are yielding around 4.5% (was over 5.2%). So holding cash should feel good while you wait a potential recession to come.
As I wrote in my weekly updated post, How I'd Invest $250,000 Today, I'd invest 40% of my cash in Treasury bonds, with the rest to risk assets. But I'm a relatively conservative investor with two kids and a wife who doesn't have a day job.
2) Match your asset allocation with your risk tolerance
If you have a public stock and bond portfolio, you should understand what the historical returns are for various portfolio compositions and be OK with the potential downside. If not, you should adjust your asset allocation accordingly.
Most investors overestimate their true risk tolerance because it's been a bull market for so long. But the price of investing in being OK with losing 20% – 50% of your portfolio during recessions.
One way to quantify your risk tolerance is through Financial SEER. Financial SEER converts financial loss to time loss. Given time is the most precious asset, you need to be more careful of losing your time the older you get.
3) Write out your investment objectives.
With each investment objective comes an investment time horizon. Once you clearly understand your time horizon, you can better match your risk tolerance. It's important to always be aware of WHY you are saving, investing, and working, especially when hard times return.
For example, if you're investing for your child's college education 12 years away, you can afford to be more aggressive with your investments. However, if you're planning on purchasing a home within the next six months, then you should likely be more conservative.
Have clear purposes for your money. If you do, you will be much more motivated to stay the course. My goal is to earn single-digit returns with low volatility so both my wife and I don't have to be forced to go back to work.
While you're writing out your investment objectives, also write out your investment thesis. An investment thesis forces you to answer the question of why you're investing in a particular asset class. It helps you think about the future as well. When it comes to your finances, you must be intentional with where you allocate your money.
4) Build strong work relationships
The people who get fired first during a recession are those who are most disliked, followed by those who are the worst performers. If you do not have a wide and strong safety net of support, then try and deepen those relationships now before a recession comes.
Take colleagues out for lunch or coffee. Check in over video for 15 minutes if you are working remotely. If you're back in the office, get a beer after work! People have a much harder time letting people go who the like.
I was a manager during the last years working in finance. My boss simply asked me to put on a list who I thought should be let go during a couple rounds of layoffs. The ones with big egos or who had prickly personalities came to mind first.
Alternatively, you may want to take advantage of impending layoffs by volunteering yourself to get laid off. This way, you save your manager the difficult decision to choose whom to layoff. In return, you can negotiate a severance package and break free from a job you no longer enjoy.
This is exactly what I did in 2012, and I wrote the bestselling book, How To Engineer Your Layoff, to teach you how to negotiate a severance package as well. Use the code “saveten” at checkout to save $10. It's been updated six times to incorporate the best severance negotiation strategies for the times.
5) Diversify your income streams
The more income streams beyond your day job you have, the better you can withstand a recession. With employee loyalty at all-time lows, anybody can get laid off for almost any reason nowadays. If you rely 100% on your day job income, you are putting your well-being at risk.
Having at least one side hustle is a must. Everybody has some valuable skill they can offer that will make them extra income.
Ideally, you have your day job, one or more side hustles, and several forms of passive investment income. The idea is that if one income engine sputters, your other engines will keep you in the air.
Personally, if a recession strikes, I'll look to coach tennis and pickleball for $120-$140/hour. Back when I was teaching tennis on occasion in 2015, I was charging just $60 an hour. I was shocked to hear what people are charging today! After doing some physical coaching, then I might do more personal finance consulting, which I don't advertise.
6) Collect as much outstanding debt as possible.
During a recession, more people stop paying back what they owe. Therefore, if you have any outstanding private personal loans, you should try and ask for your money back ASAP. Lending money or borrowing money from friends and family can get dicey, so try not to unless absolutely necessary.
On the other hand, you may want to invest in venture debt funds and real estate credit funds, which take advantage of higher rates. Many funds and investors with cash are lending money to quality companies, sponsors, and developers at 13% – 16% rates nowadays, up from 7% – 8% before rates started increasing.
Banks have throttled their lending, so private funds are filling the demand. Of course, there are no guarantees on investment returns. If the recession turns out to be shorter and shallower, in general, your returns will be better. But if the recession drags on, then returns will be lower.
7) Touch base with your tenants to see how they're doing.
If you own rental properties, it's a good idea to check in on your tenants. Maybe they've lost a job or found a new boyfriend and plan to move out in three months. Or maybe they got a massive promotion and plan to upgrade. The more information you can get about how they're feeling about living in your rental property, the better you can plan for the future.
In a high interest rate environment, there may be more rental demand at the margin as potential homebuyers get priced out. If the recession is particularly bad, where the unemployment rate doubles or triples within a year, then you might have to adjust rent down to hold onto your tenants.
Your goal as a landlord is to keep your tenants happy and the cash flow flowing during a recession. A small gesture such as gifting your tenants a bottle of wine or a box of cookies just might keep them for another year.
As a landlord since 2005, the better you treat your tenants, the longer they will want to stay. Moving is costly and a pain. So the more in tune you are with the market and your tenant's situation, the better.
8) Adjust your safe withdrawal rate down
If you are already retired, see if you can reduce your withdrawal rate and still live a comfortable lifestyle.
For example, if you've been regularly drawing down 4% of your portfolio, see if you can live off a 3% or 2% instead. Maybe try living off just your Social Security payments for the next six months.
Or, you can simply follow my dynamic safe withdrawal rate formula of 80% X 10-year Treasury bond yield. You will automatically lower your withdrawal rate if we're in a recession because the 10-year bond yield will likely trend lower.
I remember still living like a college student for two years after getting a job at Goldman Sachs in New York City. Although sharing a studio apartment crimped the love life, it forced me to work harder and go out more. The money I was able to contribute to my 401(k) has more than 5Xed since.
Enlarge your financial buffer to better withstand a decline in asset values. Lower your safe withdrawal rate while adding supplemental retirement income through side hustles is a great combination.
Make living on as little as possible a fun challenge!
Here's the Sahm Rule, which states that when the indicator is above 0.5%, the unemployment rate is rising fast enough to warn that a recession is coming, or has already started. See the gray vertical bar charts that highlight a recession.
9) Consider retiring during a recession
If a recession happens, you have an opportunity to change your life for the better. A recession means the opportunity cost of not working is lower. You don't have to fear missing out on big raises and promotions because more people are getting laid off.
If you can retire during a recession, it means your finances are strong enough to handle difficult times. When conditions eventually improve, so will your returns and investment income.
I experienced this firsthand when I retired in 2012, not far from the bottom reached in July 2009. Even though I left a lot of income on the table, my investments rose as the economy recovered. Hence, a lot of wealth gained felt like gravy because I had calculated my lifestyle based off 2012 prices.
During a recession, the return on work effort is also much lower. You could work 80+ hours a week, but if your company is facing macro headwinds, your company's share price may still go down. With company profits dwindling, so will your chances of getting a raise and a promotion.
You could consider quiet quitting if you're OK with the increased chance of getting laid off. In fact, if you want to move on, doing the minimum to get by during a recession just might be enough to earn you a severance package.
If you want to escape work, I encourage you to read How To Engineer Your Layoff. It will help you be much more strategic in negotiating a severance. I credit a severance with giving me the courage to break free from a life I no longer enjoyed in 2012.
10) Find a new job before your company sinks or lays you off.
If you're still actively building your wealth, you must be aware of your company's performance. You can find this out easily by looking at your company's share price or listening in on quarterly earnings calls.
If you work at a private company, however, then you must pay attention to the share price performance of public companies in your company's space.
Pretend you are an investor or venture capitalist who is considering investing in your company. If you wouldn't, then you probably shouldn't be working there either!
It's much harder to find a new job when you're unemployed than when you're still employed. During a stock market crash, companies conduct hiring freezes. Hence, I'd be actively looking to join a stronger competitor before a recession hits.
Recessions Are Only Temporary
Isn't it interesting how things can be so good one year and then so bad the next year? Constant change is why we should never try to get too high or low on ourselves. Change is an inevitability.
According to the National Bureau of Economic Research (NBER), the average length of recessions since World War II has been approximately 11 months. So if you can survive for 11-24 months without a job, you'll probably be fine.
The key is to survive the dark grey bar charts in the graph below.
Taking Advantage Of Investment Deals In A Recession
If you have the cash, look at recessions as an opportunity to invest in your favorite risk assets at more reasonable prices.
Maybe your favorite company's stock is trading at a two standard deviation valuation discount to its historical average. Perhaps it's time to buy. For example, Nike and Disney, both at 5-year lows seem quite attractive if they can turn their operations around. These are iconic brands which will be around long after we're gone.
Maybe you found a midlife crisis dream house that's 10% cheaper than last year. Perhaps it's time to submit an offer! You could get a better price by waiting. But maybe the dream house won't be there when you finally think the time is right.
Maybe your city's prime office buildings are now trading at fire-sale prices, despite people steadily going back to work. Perhaps it's time to invest in a real estate fund that's gobbling up such deals. Fundrise has invested over $700 million since the end of 2022, to take advantage of depressed commercial real estate deals.
Commercial real estate prices have declined almost as much as they did during the 2008 Global Financial Crisis, yet the economy and household balance sheets are much stronger. As a result, I believe there is a great opportunity to invest when prices are low for the potential recovery. Of course, there are no guarantees, but the risk / reward ration looks attractive.
Or maybe you should invest in private growth companies that have seen their valuations get cut in half. Personally, I'm building up a $500,000 position in various private growth funds that have artificial intelligence exposure. Fundrise's venture capital product is one of them, where I've invested $160,000.
In 20 years, I don't want my young children to ask me why I didn't invest in artificial intelligence companies near the beginning. Investing in a basket of AI companies now is my way of hedging against a difficult future for them.
In The Future, You'll Be Happy You Invested Today
In 5-10 years, you'll probably be glad you bought some risk assets during a recession. The only problem is, we eventually run out of time. Hence, if you can't wait for years to enjoy positive returns, there's another move to make during a recession.
Spend more money on things and experiences! During a recession, most things get cheaper. So you might as well take advantage and live a little.
Reader Questions And Suggestions
With all the problems in the economy right now, do you think another recession is right around the corner? If so, how are you preparing for a recession? I'd love to add to my recession preparation checklist with your help.
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#11) If you think your company will lay off during a recession, consider finding a job with the US Government now before the election, because if Trump wins, there will likely be a hiring freeze. Tenured US Government jobs are recession-proof.
Can you clarify what you mean by “cash” (#1)? You don’t mean $100 bills under the mattress, but what else counts as cash? How are Treasury Bonds considered “cash” when it takes days to get access to the money? What about CDs? And, talking about cash under the mattress, I call that my “crisis fund” (vice “emergency fund” which is 6 months in a high-interest savings account). You know, the kind of cash you want to have on hand if you’re being evacuated from the top of the Embassy roof in Saigon. No one anywhere talks about a crisis fund (except for me), but they certainly come in handy when the power is out and life becomes cash only, like during evacuations and hurricanes. I keep multiple hundreds in a safe place that everyone in my household knows about, but I always wonder if maybe I should hide smaller bills and/or if maybe it’s not enough.
I think I would stash $20, $10, or $5 bills rather than $100. Granted, $100 bills are easier to carry and take up less space, but how much change would someone be prepared to give you back from your $100 bill, assuming your purchased (or bartered?) amount is way less than $100?
Very well-thought-out as usual, but one thing really caught my eye.
If a recession forces you to “coach tennis and pickleball for $120-$140/hour,” wouldn’t you have trouble finding students able to pay?
Maybe! Maybe there will be more people in Florida who want to spend time learning something new. Pickleball exploded during the pandemic.
But maybe I’ll have to reduce my wage to $100 an hour instead or do a group lessons to earn $300 an hour.
Hey Sam,
Great post. I was wondering why you have your money in U.S. Treasuries instead of California Muni Bonds? I assume some of the Treasuries are in your taxable accounts but that may not be true. I need to move more of my mothers assets into no-risk investments. We live in SC, not a high tax state (7%). Making sure state muni’s are a good option.
I love pickleball but it kills my hips!
I’ve bought both. When my income is high, I will gravitate towards munis. When my income is lower, I’ll buy more Treasuries. Just have to calculate the after tax yield.
What’s your thought on dollar-cost averaging during this volatile period? Would you lean toward keep on investing in the stock market to benefit from the dip or switching to less risky investments such as treasury bonds as suggested in your other post?
What about existing stock investments? It’s always interesting to me how some people advise staying the course as the stock market would trend upward in the long term, but if a stock investment drops 10% one day it will need to go up 11.1% to get back to the original price, so why not sell and repurchase at the bottom? Understood it may be hard to time the market but wouldn’t you want to limit your loss?
Every month I’m dollar-cost averaging.
I have different buckets for different purposes in my life. For my tax advantage, retirement accounts, I am always contributing the maximum amounts.
For my taxable portfolio, I’m more conservative and I’m looking for yield because I use the money to pay for life now.
The 4% withdrawal rate as stated above has been quoted as the maximum rate of withdrawal to to ensure principle preservation during retirement. Does include exclude management fees. For example, my management fees are .08%. So would my net withdrawal rate be 3.2% for a total of 4.0% or a net rate of 4.0% but a total withdrawal rate of 4.8%.
Thank you
I find this a very confusing time. First, all the CNBC pundits called for a recession by end of 2022, then by first quarter 2023, then by summer 2023, then in fourth quarter 2023. Now its “early 2024”. I mean, eventually somebody will be right – but as a whole, none of us knows. AND none of us knows what having a recession actually means for us monetarily. By the time GDP data actually shows a recession, the stock market often has already started to recover (and likely will this time since that is when fed will start cutting rates). We are still about 20% off alltime highs in the market. I think SPY 4000-4200 marks the low even with a recession. And didn’t we just have a bear market in 2022 that turned to a bull market in 2023? Wasn’t that bear market brought on by a looming recession that has yet to come? If the recession finally comes, I do not see us riding that wave back down to 3,500. That is too expected, which rarely happens.
Meanwhile, the strong companies in the S&P continue to post massive earnings and raise guidance. My engineering firm, with offices up and down the east coast, STILL can not find enough good workers and we have again poised for record earnings and profits. And our homebuilder clients STILL are as busy as ever scooping up land and building new houses.
Personally I have also reached my financial goals and keep 5 years of expenses in treasuries and MM. But if I was in my 20s-40s I wouldn’t be overly concerned. Any stock market selloff below 4000 would be a huge gift and I would just keep sticking with whatever your overall strategy is. Don’t try and time the market. Nobody know what the next 2 years or so will bring. Personally, I think the market will be at new highs by mid 2024. The earnings are still solid and with election year next year expect alot of pressure on Fed to ease starting mid 2024. But we are all just guessing.
Yes, essentially were are all guessing. But perhaps we can say “forecasting” to sound more sophisticated.
It’ll be fantastic if the market is at new highs by mid-2024. If we can couple that with interest rates 1% – 2% lower, even better. But that combo is unlikely.
4). I have one direct report who’s not a self starter like I am or my other who’s a beast master. Given economic conditions, I need to soon have a more explicit talk with him. Nice guy, maybe on the autism spectrum (my son is). Talented where he is, but needs major direction which falls back on me as a supervisor.
Deep OOM puts – u have insurance for everything in life. No reason not to pay for a little insurance on your NW at all.
Another recession item you can do is call your vendors and cancel things you don’t need or negotiate down prices. Anybody spending full price on something now is wasting their money.
Will be interesting to see if the Fed hikes again this year.
The ADP jobs data was weaker than expected.
“ Sept #ADP “is the lowest since January 2021, but there is zero statistical justification for changing our 175K private payroll forecast for Friday. .. ADP is both an unreliable indicator of the official private payroll numbers and essentially unforecastable ..””
And the government revised down three years of GDP forecasts today too!
I.E. economy wasn’t as strong as initial data suggested.
Revisions happen all the time, but not sure I’ve seen essentially 3 years get whacked at the same time.
Thoughts?
By the time a recession is finally declared, most of the damage will be done. 2022 and 2023 have not been good in my industry. Hopeful that things will look better in 2024.
I am not doing anything different other than I’m not letting myself check my personal capital account as obsessively as usual.
Unlike the last recession, I don’t plan to buy more real estate primarily because I’d need leverage, and rates are so high right now. I may look into debt funds like you suggested.
What industry are you in? Are they doing large rounds of layoffs yet?
Lots of “quiet” layoffs in tech right now. Tech and Finance are usually leading indicators. Unemployment numbers aren’t showing it yet, but it is coming. Hope I am wrong…
I’m a transactional attorney, and deal volume has been down significantly. 2021 was my best year, and 2022 was my worst. We’re not laying anyone off because we’re a lean firm, but we are not paying out much beyond base salaries. It is possible that 2024 will be worse, but I remain hopeful that things will turn around.
Hi Sam,
Question about Adjusting Safe Withdrawal down. Are you talking about 4% above the Required Minimum Distribution? We have to take the RMD every year so cannot control that, correct?
Thank you very much
Sabine
I took some stock gains this year and shifted some of my portfolio into treasuries and low-risk investments. If we fall into a recession, I know I’ll lose some money on my remaining equity exposure, but I feel I’m at a more balanced allocation. Nevertheless it’s still painful to lose money on any investment. I hope the recession is short if we do have one, but I’ll do my best to ride out the storm even if it’s long. I try and make myself feel better by looking to the horizon and for buying opportunities when the markets are down.
I’m definitely going to be increasing my savings for the next six months. Maybe the consumer is spending strongly know, but the lag effect should take affect as companies button down the hatches.
Or maybe people will just YOLO forever! Investors know pain is coming in the economy.
Given this is the most anticipated recession in a long time, I think those people who are well healed, will be able to buy a lot of assets on sale.
Those who don’t have enough funds, or who are in with her financial position will likely fall further behind.
The fed governors notice as they prevent the millennial generation, and the younger generation from buying homes. So we are going to have a widening wealth gap overtime.
Wait a minute … you do personal finance consulting? I’d love to read an article going into a case study on one of your clients. I’d even be open to being the subject of such article!
Yes, but one client a month or two. It takes a lot of work and I don’t have the bandwidth, so you can’t find the sign up page unless you Google it. But I’m pretty sure I could do 5 a week if I decided to. The demand is overwhelming.