Don’t be scared of recessions, take advantage of them.
The stock market can be a scary place for most people. What if I lose everything? When do I know to pull my money out? What if a recession hits? Right now, the thought of a recession is pretty prominent amongst the financial community and it has been getting a lot of media attention in the recent months. Im here to tell you that you should not be scared of a recession hitting, you should be embracing it.
What is a recession exactly? While we may think of a recession as everyone losing their jobs, unemployment rates going up, and families struggling to pay bills, it has a much more technical definition behind it. A recession is where there is negative GDP (Gross Domestic Product) growth for two consecutive quarters. This means that the economy has declined for a total of six months.
While this may seem like a bad thing it is a great opportunity for you to make money. How could that be? I’d like you to think of a recession like a big sale at your local store. Imagine that your local store, where you do most of your shopping, is offering a sale on all of their products at 20% off. What would you do if this happened? You would probably stock up on a lot of the common items you usually buy because you haven’t seen a sale like this in a long time and have no idea when one may happen again.
This is essentially what is happening when a recession hits. While we all equate negative feelings with recessions, we have to understand that it is a normal part of how the market works and there is going to be ups and downs, it’s just simple economics. Now, if you put yourself in a position where you’re saving money on a monthly basis and then a recession hits, what should you do?
Do not let a recession scare you off. Instead, continue to put the money that you are already investing in the market and if you have some extra cash lying around invest that too. Seize this opportunity to buy investments at a low (on sale) price so that it will grow in the future. Luckily, since your reading this blog you have already aquired the discipline to think about your investments in the long term. What you purchase in investments today will compound and benefit you later on in life. This long term thinking is also why you do not want to try to time the market.
What is timing the market?
When you attempt to time the market you are gambling that the stock market or real estate market are going to go up or down at a specific time. About two years ago, I thought that I was smart enough to do this and luckily, I came to my senses. Two years ago I believed that there was no way the stock market was going to continue to grow. It had been growing for approximately 7 years, at that time, and this was somewhat unprecedented. I wanted to stop investing money and hold onto it so that when the market dropped I would have a ton of cash to buy stocks at a low price. Now, it’s two years later, and the stock market is still growing and I would have missed out on about 20% growth. This would’ve caused me to lose thousands of dollars. Lesson learned.
Recessions are not only opportunities to buy stock on sale.
The good thing is that recessions don’t just mean you have to buy stock. Recessions are a great time to get involved in other fields such as real estate investing and even buying that used car you need. Recessions open up the doors to those who are financially stable to make worthwhile purchases that may become a solid investment. So if you are thinking about becoming a real estate investor try to take advantage of the low home prices that a recession generally brings with it.
Don’t listen to the media.
As a reminder, do not let society instill the fear of a recession into your mind. Find excitement in this opportunity and figure out how lower stock prices and real estate prices may benefit you on your path to FI. Take advantage when you can and feel good about the possibility of gaining off of something that so many people experience as gigantic negative experience. Instead, invest. This is apparent when you look at those who stayed the course during the 2008 financial crisis. Yes, they lost 30-40% of their money initially, but by keeping their money invested it would have now more than doubled.
Finally, be ready for the recession because it is coming. Unfortunately no one knows exactly when. Regardless, if you look at this as an opportunity, you’ll set yourself to reap the rewards when the economy bounces back.