How To Play The Economy In Your Favor

The Great Recession.  Scary sounding eh?  I’m guessing it is the little brother of The Great Depression.  I’m curious as to how much has been written about The Great Recession.  Google tells me it’s a lot.  Were you impacted by The Great Recession?  Negatively or positively?  Is the latter even possible? I’m here to convince you it is…Please don’t think I’m belittling the effect the last few years have had on many people around the world.  I know it’s been rough on many, the many being those who were unprepared.  Recessions sound like scary things until you realize that they’ve been around for a while.  Indeed, they are weaved into the very fabric of our economy.   It’s easy to think of recessions as something second only to the monsters under our beds or in our closet, but it doesn’t have to be that way especially if you come to embrace the idea that you can take advantage of a trend that is ever-present in the workings of our economy.  I hope you’re sitting down for this, but I think recessions can increase your wealth.  Crazy I know.

Creation and Destruction: aka The Business Cycle

Recession are nothing more than the unpleasurable side-effect of a (relatively) free-market.  In our economy there are periods of expansion and retraction.  Everyone loves an expansion because jobs are plentiful, incomes are rising, and credit runs like water.  For a consumer entrenched citizen nothing beats a good expansion, you can have almost anything you want and humans have shown over and over there is no shortage of “want”.  Sadly, the party has to end and when it does we are greeted by what is termed so unlovingly as a Recession.

Recessions are nasty because people aren’t prepared.  When things are going great we lose sight that the boom/bust cycle is a part of our economic lives.  It occurs more frequently than you may realize.  Take a look at the following chart:

chart

Courtesy of Business Insider  

I like this chart because it shows the stock market performance as well as the number of recessions in the same time period.  Folks, recessions are a part of life, you can either prepare for them and take advantages of opportunities or you can be fearful of how the next one might ruin your life.  I’m going with the former.

How To Make The Next Recession Work For You

If you agree with me that recessions are part of our economic reality then perhaps you are ready to set yourself up to increase your wealth the next time a recession visits a town near you.  During the up trend of the cycle, the “boom” times, people allow themselves many pleasures.  Credit is easily flowing, jobs are plentiful, incomes are rising and people are living like it will never end.  Guess what?  It will end, just a matter of when not if.  If you’re living on the edge of economic responsibility then it isn’t going to take much to push you over the edge.  The shit gets serious when you realize that taking on all that debt to finance an exuberant lifestyle is now about to cause many sleepless nights.  Why?  Because maybe hours are being reduced at work or even worse you are laid off limiting your ability to continue making payments on a lifestyle you couldn’t afford to begin with.  Trust me I know because I’ve been on both sides of the personal finance tracks.  I’ve been more reckless with my finances than you can possibly imagine and I’ve been responsible with them to a point I’m not sure I was really in control of my actions.

Now, the way you game the system is to live like every day is Great Recession day.  You follow the tips from The Mustachians, guys like Dividend Mantra, and Jacob and you create a nice little cash pile.  If you can find an occasional deal on some investment vehicles then by all means do it, but don’t feel like you need to be fully invested all of the time and don’t feel like your cash is sitting around doing nothing because that is only one way of looking at it.  The other way to look at it is that your cash is in training, waiting for the day of the next down turn in the economy when people are going bat shit in the streets running around screaming, “THE SKY IS FALLING THE SKY IS FALLING!!”  While this chaos is spreading from person to person like wildfire you are the calm  before the storm.  None of this phases you because you knew this day was coming, you lived well, but not lavishly and as a result you have cash reserves lined up and waiting, waiting for this moment and you deploy them like Rapid Response Teams and you buy, buy, buy!! Any asset that is valuable and disgarded out of fear.  The economy is on sale and everyday is like Black Friday during this time.  Your mantra now is shop, shop, shop!  You find deep discounts on things like mutual funds, real estate, and stocks at ridiculous prices.  When people finally realize that the world is not ending, at least not today, they will come back and decide to buy the same assets they sold and as prices rise you will be rewarded for your fortitude.  It may sound like I’m advocating market timing here, but I’m not.  I’m merely suggesting you consider taking advantage of a fairly predictable human habit when acting out of fear.  You build an empire kind of like this guy is doing.

There you have it.  It’s not rocket science, but it isn’t easy either.  You are basically trying to overcome human nature when faced with two very different situations.  If you can  train your mind to respond in the opposite manner it would prefer you will likely be rewarded for your effort.

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7 thoughts on “How To Play The Economy In Your Favor

  1. Very interesting approach! I’ve kinda been thinking along a similar vein. Actually, during this current economic boom, I’ve been working my butt off to de-leverage by paying off my rental real estate mortgages. I have paid off 4 of 6 rental houses and of course my personal residence. I’m approaching the payoff of rental house #5 and should have that paid off by January or February at the latest. It feels great and although not a popular goal at the moment it is a bit contrarian. I could’ve been investing the last 80k in the market, but I think the more restful nights might come from knowing that I have nearly eliminated all debt and produced a retirement income as a result.

    I especially appreciate the post because we are considering buying an office or possibly land on which to build an office/shop for our Janitorial Business. I might just wait and build up cash reserves and see what kind of lower land/property prices the next recession brings. The combination of paying off properties and increasing income and savings might just work out to be an ingenious move on our part.

    Nice to see a post from you. You outdid yourself with this one!

    • Curtis,

      Thanks for stopping by!

      I think too often we lose site of the fact that these ups and downs are “normal” and we buy into the emotional stream of the moment, whether it’s during the up swing when everyone is investing and happy with rising asset values or when things go the other direction and everyone is selling. I’m using “everyone” rather broadly here, but I understand such blanket statement don’t really apply.

      I think your approach looks solid. Deleveraging is never a bad thing and that may be one of the great lessons many of us have learned from this past recession. It’s tempting to “feel” like we should be invested in the market especially when you look at it’s performance over the past couple of years. Personally, I wouldn’t invest new capital at today’s market levels, but I would certainly jump on another real estate investment.

      “The combination of paying off properties and increasing income and savings might just work out to be an ingenious move on our part.”

      I think you are right. I don’t know what your area is like, but there are still plenty of land deals to be found in many places around the country. Have you ever considered commercial real estate? Would you be able build a multiunit structure for you business and lease out the other spaces? Might potentially offset the cost your own space especially if you find a great deal on land.

      Either way sounds like you guys are doing great. You will have plenty of reserves available to deploy when the next recession hits.

  2. Great reminder. In these times where theres market exuberance and everyone thinks they are a genius for making money, they have to remember that they could have picked any company in the last 5 years and they would have come out with a good profit. The next bear market/correction/recession will bring the same stocks down. Keeping cash on hand is the best one can do to take advantage of such situations.

    regards
    R2R

    • R2R thanks for stopping by!

      I agree with you completely. An investor reaching blindly into a basket of stocks and picking a few would have likely done well over the last few years.

      I think I’m biased in my approach. I have no problem with dollar-cost-averaging, but I learned my investing style during 2010-2011. Volatility was high and stocks were still bruised and battered. I was making great money while working overseas and put that money to good use by paying off debt and investing in mostly dividend paying stocks. Those same stock prices are in my mind excessively high today. I’ll wait on the sidelines…

  3. I’m starting to wait for the best deals possible before I invest my money. It takes me longer to get into the market these days because lots of things are at all time highs and they don’t want to come down. In a way I’m also hoping for the next recession. I did pretty well dumping my money in during the last one, unfortunately I didn’t have a lot to pump in at the time.

    I feel like we’re due for a correction, but at the same time I’m not going to just sit on the sidelines and wait. People have been saying that same line for the past two years and they missed out on a lot. I think the key is simply looking for whatever deals you can and consistently adding to your holdings.

    • I think fair values are available if you do a lot of searching.

      For me I see it as buying stocks or real estate, etc. during a recession and then watching them bloom as the economy begins its upward turn. I see nothing wrong with taking some of the gains and then preparing for the next down turn. Again, it’s going to happen, just a matter of when…

      Thanks for stopping by!!

  4. Pingback: Why I’m Not Investing In Today’s Stock Market | The Stoic Investor

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