How are you recession-proofing?
September 17, 2018
The anniversary of the Lehman Brother’s collapse is coming up. I keep hearing about the ten year recession cycle and that anniversary is symbolically looming large in my mind.
That was my first recession as an adult and I didn’t really know anything about recession cycles or how the market functions – nothing! All I knew was the financial world had come crashing down, my favorite bank (WAMU) had been eaten, the banks were dropping like flies, and that I didn’t know enough about stocks to make smart picks during the tumult. I did know enough to buy BRK-B at the first buying opportunity but I had so little money at that time I bought less than ten shares. Still I bought them and they’ve doubled in value so that was one good decision made in near total ignorance.
I’ve been thinking a lot about how to “recession proof” our lives and our portfolios. This time around, we’re incredibly lucky to have been able to build up a solid foundation already. I’ve still got a bit to learn but the basic outlines are relatively clear to me. We’re personally at least a decade or more away from FIRE even with a bull market so overall we need to stay aggressively invested to build up our wealth. We added some bond funds for stability recently but I’m still thinking about how much we need in bonds to endure a bear market in good health.
Several scenarios come to mind:
(A) a recession with an extended bear market but no job loss,
(B) a bear market + recession + 1 job loss,
and (C) a bear market + recession + both jobs lost.
In scenario A, in theory, I want to have cash on hand to buy more stocks / stock funds as their prices drop. This is assuming that we’re still making decent incomes and expenses stay the same – our savings would remain intact and we’d have cash flow to invest with.
In practice, I need to think about where my purchases should be made (individual stocks that bear dividends vs stock funds) ahead of time so when the prices are dropping during a stressful time, I won’t be irrational and go ostrich. With a buying plan, I’ll actually buy. Without one, I’d hunker down and miss out on good pricing.
Jonathan’s stress test, as a person looking to live off his portfolio for another 40 years, is also a useful thought process though he is far more heavily invested in bonds since he’s further along the process.
In scenario B, we would have to stop saving and investing to make up for the lost cash flow. Mind, we’d have lost half our income (at least) so we’d only be diverting savings from the remaining income. In any case, no cash flow would be available for buying but I could make an argument for diverting a bit of money to buy at low prices. Depending on which of us loses our job, we could also lose childcare which is linked to a job so that reduces one large expense in addition to creating a bit of logistical difficulty job hunting and minding JB at the same time. I’m not factoring in unemployment income specifically because I don’t know how much we could draw and how long it would last. It would simply be plugged in to cover non optional expenses if it does exist.
In scenario C, we start drawing down our savings to cover expenses and slash any optional expenses until we have a new job. We have 1 year in cash and CDs and 6 months in bond funds. Naturally, we would have to make cuts to variable / disposable income type expenses but we don’t have a ton of those. If we lost both our jobs, I would hope that 18 months would let us weather being between jobs but there’s part of me that still worries it’s not enough. I remember how long it took to get another job last time and it’s infinitely more stressful with two adults job hunting and swapping childcare. I’d still be able to do some mini gigs, probably, but that’s really minor income stacked against our expenses.
If we were in a different (better) place financially, I would take a job loss as an opportunity to take a real sabbatical but we’re not in that place yet. I keep looking at our circumstances to find ways we can do better and get to that place but we won’t be there in the next two years.
:: What are your plans for weathering a recession?
I keep flipping back on forth on whether we should start stockpiling more cash to prepare for a downturn. Right now we have enough between emergency funds and checking to cover 6-12 months expenses. If we both lost our jobs, between cash savings and unemployment benefits, we could probably last around two years, which should be enough, right? I could probably find freelance work but am kind of haunted by fiance’s previous year-long struggle with underemployment (and that was during the upswing!).
If I saw a downswing and was still working, I think I’d stop all brokerage investments starting at 3-4 months into downswing, retirement investments continuing as normal. I would build up cash and wait until 9-12 months into bear market to start investing again. Worst case scenario, the market would rally and I’d lose some gains I guess. Not the worst thing considering the potential downside of the alternative.
Same – we have 12 full months of expenses and I don’t factor in unemployment benefits so it’ll be a little longer than that but I still have the instinct to stockpile cash despite my recent change of heart on that.
That’s a good reasonable plan!
I can’t be fired absent of criminal malfeasance (and a few other unlikely events), so basically we try to keep our spending to something that could support DH’s jobloss with minimal sacrifice. We also have an overlarge emergency fund (as we discuss in our post today).
That’s lovely job security. It’s also amazing that you can afford to do the overlarge emergency fund and be mortgage free.
Mostly just keeping cash and also watching for future “unexpected” expenses. The biggest thing we’ve worked on was building a lifestyle that can be supported on a single income – we weren’t always there due to housing, but we are now.
Adding a baby to the family seems decidedly NOT recession proofing….
Adding to the family generally doesn’t feel very recession-proof but we did spend less in our first three months than usual so … yay?
I’m seriously considering living in Thailand for a few years. That’ll lower our COL and enable us to skip the bad times in the US. We probably can ride it out in the US, but it’ll be much easier in Asia. Anyway, we’ll see how it goes. Good luck to us all.
What would you do about school for RBJr?
I kind of prepared a possible recession coming soon by moving some money over to bonds earlier this year. I’ll also have more cash in hand by putting more into high-yield savings account and maybe a CD account. When/if the recession hits a whole year and realize that the market has hit close to rock bottom then I will slowly start buying more stocks.
There’s my current dilemma too – we have some unknown period of time before the recession hits. Do I feel more comfortable continuing to invest so that I’m not market timing or hoarding that cash for the unknown time the crash happens so we have some buffer to buy when stocks are lower?
We are fortunate because my husband’s job is unlikely to be at risk in a recession. Last time all we had to do was keep our lifestyle frugal enough to cope with the lack of COL raises. So now we are mostly just emotionally bracing for the impact on family and friends. Though I admit, one of the many reasons I’m looking forward to (hopefully) buying a house this winter is having the gardening space to grow a bit of our own food. I know it will only make a tiny dent in our grocery budget, but it will still feel incredible!
That is fortunate indeed! I hope that we’ll be in a position to help any family and friends who are less fortunate than we during the next one, and that we won’t be the ones needing help.
Good luck with buying the house and gardening!