Posted on
September 07, 2010 by
admin
Just a quick search via Google, and the term “double dip recession” returns 1.8 million results. The topic is hot, and many people, if not the majority, believe that a double dip recession is on its way. Many articles speak of fear of a double dip, and try to anticipate whether and when a double dip might hit us.
Although such discussions are highly interesting, I tend to focus more on how to handle such a recession for now; because if it hits us, there will be nothing we can do to stop it, no matter whether we fear it or not. The question I ask myself is how I handle it, and even more importantly what I can do to stay out of trouble when it hits.
My first concern is securing my income. I am not yet in a position in which I run my own company, or where I can live off my savings for years. So, having a job is important. Where I live, in Germany, it is very difficult to fire employees. However, if a recession hits, even those employees doing a good job may be fired if else the existence of the company is in danger. Since I am male, single, and have no children, I would the first person gone. I would receive 70% of my last salary for nearly a year, but what about after that?
I took an insurance a while ago, which aims specifically at unemployment through no fault of one’s own. This insurance ensures that I receive up to a specific amount. I have calculated my minimum living standards, and added a buffer, which is the minimum amount I need to live off. If for some reason my living expenses go up (e.g. I bought a car, or rent increased), I can adjust the insurance to a new payout level.
Secondly, I continuously keep increasing my cash assets. This is my emergency fund, which I can use for unexpected expenses, either in or outside a recession. Having cash readily available gives me a more secure feeling.
On the long run I am investing in mutual funds. The amount is still small, but as soon as I sell these shares I will need to pay taxes. Therefore, I tend to keep the funds in my portfolio, but I will stop investing more money into them until the recession is bottoming out. This allows me to not unnecessarily increase my losses. Additionally, I might buy put options on one or more indexes, as a form of insurance. As the mutual funds (or stocks) are losing value, the put options are gaining value and are balancing out the losses, either completely or partially. However, I will monitor economic developments closely, and not judge too soon. The technical analysis functions help me to make an estimation of whether we are simply having volatile markets, or whether a recession is in the making.
When it comes to stocks, I tend to follow cyclical movements. I am not a big fan of the notorious buy-and-hold strategy, since these strategies were largely developed in the last millennium, where markets were not as volatile as today, and steadily increasing. When I buy stocks, I will look at undervalued or high-potential companies, but I will consider their cyclical movements. This means that I will set a stop-loss at all times, and in the event of a recession the stock will be sold automatically. Following the recession movement, it allows me to re-enter the market at lower prices.
During a recession, my expense policy changes slightly. I watch more closely not to buy items I do not necessarily need, and I am very keen on building my cash emergency assets. I might use the car less and take public transportation, and use each and every opportunity to save a bit of money. Also, I find a recession a great opportunity to visit friends at their homes, or invite people over, and just stay home and have a fun evening.
Surely I hope the double dip will not come… but a next recession will come for sure. Just as a fact: by the end of 2012, another batch of mortgage contracts will phase out, and there is a real estate bubble in China in the making, which is 5 times as large as in the US in 2008/2009. This is another reason why I prefer to stay out of any mutual funds or stocks with a real estate focus.
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Stock market sure have been on a roller coaster ride lately. First the terrible unfortunate events in Japan and the Middle East caused markets to rapidly decline, after which they recovered for the most part. At a later point, concerns over Greece took over, and stock market took a dive starting in April.
