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What is an economic recession? A recession can be defined as a significant decline in general economic activity extending over a sustained period of time. It is characterized by rising unemployment, falling levels of output and investment, reduction in retail sales, and slowing of housing and car markets. A more technical definition: A decline in economic activity in at least two consecutive quarters as reflected in the gross national product. This section caters to a general audience - specifically for an individual, not a business. For these reasons, the use of financial and technical jargon has been avoided for ease of understanding. It also represents a point of view and does not aim to provide advice on financial strategies, but provides ideas to think about. In addition, the targeted resources provided are meant to help gain more knowledge on a recession and what it means, and how to better cope with it. $$$: Save, save, save! Let’s start with an intuitive, easy (sometimes not so easy) and arguably most common method of coping better with recession. In general, if you make more money (increase revenue or income) and/or spend less money (lower costs), then you have saved more. Let’s focus on savings – what you commonly hear during a recession is people telling their families “we have to tighten our belts”. A good place to start is to look at hints and tips to help you and your household keep those costs in check: 101 Ways to Stop the Money Leak ($4.99)
It is generally important, and true to a certain extent, to have a little more than usual liquidity during a recession to tide you and your family over a tough period or unforeseeable circumstances. This is especially applicable if you have existing debts (bank, financial institution or relative might recall loan), a job with a company that has been severely affected (you might get laid off), your own business (fall in current sales, less optimistic future sales projections), and other similar financial situations. However, “cash is not king” in times of recession, as we explain in the following sections below. A good time to invest in company stocks Contrary to popular belief, cash is not king in these times. The concept of “buy low, sell high” is best exemplified in these circumstances. This makes certain investments especially attractive, for example, buying stocks. In good times, stock prices are often high (and some potentially above par value – (what the company is actually worth, if all assets are sold off today) due to 2 key factors: (1) a company’s (say Company X’s) business doing well with optimistic future sales projections; and (2) investor confidence (both institutional and individual investors) is high, creating a buoyant market or economic environment which pushes prices north of what Company X is actually worth. In less affluent times, a company’s current business might be affected, while future business (sales pipeline) is bleak or unpredictable. In addition, investor confidence will be low and market sentiments weak. This simply means that current investors pull their money out of Company X’s stock (panic selling of stock to “cut losses”, store cash or pay off other debts, pushing the stock price down), current investors do not invest more money, and/or potential new investors are now hard to come by. The combined impact results in a stock price falling to what we call par value or below par value. ======================================================================
So let’s consider a scenario: When markets are booming, more people start buying up stocks, most through a random selection much based on hearsay. The technology boom of the late 1990s is a good example, where stories of people doubling their money in a few months or getting rich overnight “investing in stocks” were rampant. Many ill-informed, inexperienced investors jump onto the “stock bandwagon” for fear of “missing out”. They start buying without any knowledge of the company and the basic fundamentals of the business (how it generates revenue, in which markets and industries it competes in, profitability projections, cost base, etc). Often they also enter the market late and “buy high”, ie, prices are already inflated. The lucky ones that buy early enough might make, say, 20% profit. For a stock of Company X that costs, say, $1 per unit at the time of purchase, it is now worth $1.20. The technology bubble burst around the year 2000 – what this triggered was panic, largely irrational selling to “cut losses”. Most people reacted by getting rid of the stock they are holding, or “sell low”. They feel relieved to have gotten rid of their “liabilities”, at a loss of, say 30%, which is “acceptable” to them. This translates to a selling price of 70 % x $.1.20, or $0.84 per unit for Company X’s stock; resulting in a realised loss of $0.16 per unit. What has essentially happened is “buying high and selling low” – contrary to why they bought stocks in the first place. The investment has resulted in a loss. We like to call this “Sheep Theory”, because a sheep’s mentality is simply to follow the lead, or do what others do. If one jumps off a cliff, the herd is likely to follow suit, regardless of whether it’s a rational decision to start with in the first place.
Now let’s consider another scenario, where you act counter-intuitively against popular belief and market sentiment. In a recession, a company’s stock is almost necessarily lower than they what they are actually worth due to a bad economy affecting business, limited access to business loans from banks, customer defaulting on payments, etc; and/or lack of confidence on the part of market investors (both institutional and individual). This is the “buy low” opportunity that we should be aiming and craving for. Using the above example, assume we buy a unit of Company X’s stock at $0.84 per unit, our notional price at recession. The world economy recovered and surged a few years later, for many companies to almost the late 1990 glory days. So let’s say Company X’s stock has now recovered back to $1.20, what it was worth when it was “at a high”. Selling at this price, we would have made a 43% return. The investment has resulted in a gain. ================================================================================ The 2 contrasting scenarios suggest that intelligent, informed investment in stock during a recession could prove to be a good strategy, especially for blue-chip stock (typically large, established, listed multinational corporations with strong basic business fundamentals that have been around for some time) which are considerably low risk. Small growth stocks are higher risk, but could yield exponential returns - this is the typical high risk, high return logic. For more on this, go to our Money Management page. It is easy to understand why Scenario 2 is difficult to do, and why so many people do not do it. It’s just not easy to look over the hill and see the green valley on the other side – you “never know whether and when the economy will recover after a recession”. Well, the fact is that the world economy has always, yes, always recovered from a recession. Take a look at the 100-year Dow Jones chart below. The green colour represents Bull (rising market), the Red represents Bear (falling market). In the past century, every Bull Market has been followed by a significant refractory period (crash) - almost generational in nature. The damage is repaired when a new crop of investors, without crash scars, finally appears.
Source: www.ritholtz.com/blog/ For more information on stock investments, read this: Rich Dad's Prophecy: Why The Biggest Stock Market Crash in History is Still Coming...and How You Can Prepare Yourself and Profit From It!
For more information on stock investments, go to our Money Management page. A good time to invest in property After going through our simple argument and example on why it’s a good time to buy stocks, suffice to say that the same theory applies, in general, to many other investment vehicles. Our intention is not to go into details about all kinds of investment vehicles – there are too many types out there and we really wanted to focus on what is the most commonly accessible to the general public and most easy to understand – stocks and residential property. Many people aspire to live in a big house; others aim to buy a large property so that they can retire comfortably. Some people focus on saving money to buy an ever-larger house; others invest in buy-to-let properties and try to make money by being or becoming landlords. In general, the investment concept should remain the same – “buy low, sell high”. In a recession, cheap and good bargains are comparatively easier to find. This is due to several reasons. Property developers usually take a medium to long term view of the economy when deciding whether to embark on residential development projects. You will see from the chart above that a bull (rising) market can continue from anywhere between 8 and 20 years. When property developers detect or expect a consistently improving economy, they start to build. Banks too become more open to lending larger amounts of money, so capital is readily available at increasingly attractive rates. Investors and speculators, as well as first-time home owners, start to come out of their shells and raise demand for residential housing, sparking a rush to increase the supply dramatically to fulfil this rising demand. An excess demand situation, according to basic economics, leads to an increase in price (buyers become willing to pay a higher price for a property they desire, further driven by easy, seemingly affordable access to mortgages). This drives the supply rush even further, as the construction industry works overtime to capture the supernormal profits available. To exacerbate the buying rush, property developers are becoming increasingly innovative, offering a multitude of schemes including no deposits required, waiver on first 2 years of mortgage, “own half an apartment”, etc. From the chart above, we see that the bear (falling market) always follows behind the bull (rising market). Recessions, most of the time, still catch property developers by surprise. Construction projects are typically long term, expensive projects; thus they cannot usually be stopped halfway, abandoned or deliver supply in a short space of time. They are therefore extremely vulnerable to economic downturns. In a recession, buyers shirk back into their shell. Investors shy away, while first time buyers adopt a “wait and see” approach, since they probably cannot get access to a necessary mortgage that the banks are now less willing to lend. Homeowners severely affected by the credit crunch start selling their investment properties and homes at lower-than-market prices, ie “fire sales”. Property developers start offering massive discounts on new project launches and existing property units as they become increasingly cash strapped as banks start withdrawing funding and loans. Supply quickly outstrips demand causing a rapid plunge in property prices. This is the time to buy! The “fire sales”, the massive discounts, the good deals – these are the ones you should look out for! These make sound investments because they are now priced at or below par value (how much the property is really worth). If you have the buying and holding power, buy low and wait out for prices to rise. In most cases, property is a good investment because the intrinsic value of the property will always be there. For example, the value of a 3-room apartment in central New York or central London might fall (possibly quite dramatically in a downturn) but will almost never be worth nothing – there will always be a basic value of, say, $500,000, as there will always be a demand for them. Although it does not provide a guarantee on your capital (the amount you invested), you would not expect to lose all your money. Compare this with a small company’s stock, for example, which could possibly plunge from $0.40 in normal business conditions to $0.05 during a recession – the investor could be left with almost nothing. Once you have bought a property, there are other money generating options besides selling it at a higher price than what you paid. Renting out the property is one example, where you become a landlord and utilise the concept of “having tenants pay your mortgage payments for you”. Another alternative is to trade up, ie sell the current property and buy a bigger, better, more expensive property. For more information on how to invest, this is our No. 1 recommended book on property investment for beginners: Rich Dad's Advisors®: The ABC's of Real Estate Investing: The Secrets of Finding Hidden Profits Most Investors Miss
For more information on property investments, go to our Money Management page. Lost your job? An opportunity to do the things that you really like or always wanted to do A group of people in society will inevitably be affected in this way, due to job cuts as companies fold, attempt to reduce labour costs, outsource work activities to lower cost countries, close down or sell off less profitable lines of businesses, reduce investment in new product development, a fall in projected future revenue, or other reasons. Often it’s not the individual’s fault – i.e. it's not performance based. From a personal improvement point of view, the worst thing to do when this happens is to lose oneself: wallow in self-pity, drown oneself in sorrow (or worse still, alcohol and/or other harmful substances), give up on life, or lose self-confidence. First of all, it’s not your fault. Secondly, worrying or giving up is not going to help. You need to look forward! If you are lacking in self-motivation, click here for help. Of course, the obvious and most common, intuitive response to this is to immediately find a new job. But a recession is probably the worst time to go job-hunting – competition is stiff (there are likely to be many others in the same industry with the same skillset that are on the market), employers now have the bargaining power and thus tend to pay less for talent (often less than what a professional is worth), a less number of jobs are available on the market due to a contracting economy, etc. So let’s pause for a moment and consider an alternative – have you ever thought of doing something different in life? Something that you always wanted to do, or wanted to learn? This is obviously a consideration for those who have no immediate financial pressures, or no existing financial burden like having to support a family, or have debts to pay off. If you do have immediate pressures, then the only right thing to do is to find a new source of income as soon as possible. If you belong to a more fortunate category and can afford to discontinue your regular stream of income for a period of time, then this is the best time to do something alternative. In a tough economic environment, educational institutions tend to give huge discounts to attract new students. Whether it’s pursuing a formal education, or just attending a course on something you like or always wanted to do, paying less is always good. Besides, your opportunity cost of not working will be lowest during this period of time, ie even if you found another job you would probably get less than before, or less than what you are worth. It’s the best time for personal development! If you decide to shift the focus of your time to yourself, then consider options to improve your health & fitness and/or lifestyle & wellness. What you personally need will depend on your state of health and fitness. Getting into shape (or back into shape) improves your health allowing you to work more effectively in your new job in future, and releases good hormones that improve your mental and psychological well-being. Looking into and getting in touch with your inner-self is also beneficial – yoga, pilates and other meditation techniques are effective and popular options. It does not always have to be improving yourself though. Taking time out to do charity & community work that benefits your community or the less fortunate is always a good thing – it will also help to remind you that losing a job is not the worse suffering on earth - there are other people out there struggling with life at an entirely different, basic level. Start your own business Why start a business during a recession? Most would advise against it, some doomsayers will even say that you are asking for trouble – these are the risk-adverse people that tend to never achieve breakthroughs in life. For those amongst them that are already successful, chances are they previously took certain risks or steps to get to where they are today but have forgotten about it themselves. We agree it’s not the most intuitive thing to do – potential customers are not willing to spend, profits will be low, payback period will be long as the economy takes time to recover, etc. But now, more than ever before, it is easier and cheaper to set up a business. Our focus here will not be on a traditional brick-and-mortar business, which indeed will tend to be a high-risk and expensive option to take. We suggest an online, “click-and-mortar” business as a superb alternative. This is in line with the “make money working from home” rage that we see on the internet at the moment. There are indeed many “make quick money” scams on the internet – we do not advocate buying “become a millionaire overnight” packages, schemes or formulas. Instead, we focus on starting a website selling products or services. Common questions at this point in time might include: I have no experience of running a business, so how can I do it? Where do I find business ideas? What should I sell and where do I source for them? Where can I find the capital to set up a business, employ staff and buy goods/pay suppliers? Well, one step at a time. Step 1: Learn more about an online business and convince yourself that it is simple, achievable and cost-effective. An excellent starting point is to read Internet riches. A fantastic, easy-to-read, concise book that provides a high level introduction to the internet and online businesses, why and how you should do it.
Step 2: Learn the specifics of how to do it, and how to do it well. Then move on to the magnificent The Ultimate Website Promotion. There are of course many details involved in making an online business work, but an investment as small as $50 today will already get you a working website from which you can start online business. In general, there are only 2 things you need do well – 1. Provide quality, differentiated online product(s) or service(s), and 2. Let people know about it!
Step 3: Sharpen your saw and continually improve till you get it right
Continue to improve range of products and services, website traffic volume, website design, customer communications, and other important aspects. Remember what we said on our homepage - improvement takes consistent hard work! Recommended resources Read extracts from some ebooks included in this comprehensive guide: and the images below are just 2 of the ebooks included in this comprehensive guide. Get these and more for just $29.99 by clicking here.
2. Liveperson.com This website gives you instant access to hundreds of experts online, with a price per minute charge. For example, you can have access to a range of professional counsellors and medical doctors for an online chat at a price of, for example, $1.79 per minute. Prices range between $1.50 and $3.00.
3. Looking for products to sell online? Can’t find suppliers? Start your own online store today! Get access to more than half a million products, shipped directly to your customers at www.webstorebestbuy.com.
5. Starting a small business (US context) 6. SBA Small Business Guide (US context) 7. Search for more books here in our PIH Bookshop! Additional resources 1. Own Your Own Corporation: Why the Rich Own Their Own Companies and Everyone Else Works for Them (Rich Dad's Advisors)
2. The new rules of Marketing and PR
Definitive guide to online marketing and PR, which is a departure from traditional marketing and PR techniques. The new online world has dawned upon us, and we must develop these new skills in order to survive. Learn how to use news releases, blogs, podcasting, viral marketing and online media to reach buyers directly 3. Advertise, Promote, and Market your Business or Website
With little or no money, this book teaches you how to use the internet to effectively let people know about your products or services. Learn to utilise search engines, automation, affiliate programs and newsletters 4. Online Marketing Success Stories
Learn from current website owners (aka the experts) who are making millions on the internet today, the insider secrets that have made them successful. A range of websites providing services, selling merchandise and retail, as well as business to business distribution are featured. It also includes explanations of basic concepts and tools 5. Browse through wide range of products in our PIH InfoMart or search for relevant books in our PIH Bookshop.
You can also find more resources and information in our "Additional Resources" page.
* Disclaimer: This section only provides a point of view and information. It does not represent or constitute professional advice on individual financial situations or strategies – if you are looking for these please seek alternative professional help through our links to professional resources provided herein, or through other means. We cannot be held accountable in any way for any loss arising from individual investments. |
