Saturday, July 14, 2018

How to prepare for the next recession? Hunkering down for the long, dark night!

Step 1: Build Safety Net
If you are working in highly-cyclical industries which tend to retrench workers during a deep economic downturn, you need to have more emergency funds saved up. 6-month to 1-year worth of expenses should be sufficient. Of course, it goes without saying that you should try your best to stay in your bosses’ good books. Avoid taking too many MCs & work a little extra hard. LOL!

Step 2: Build Investment Warchest
Once your emergency fund target is met, you can start saving up a warchest for deployment during a bear market. The amount for this warchest would vary from person to person. A 20% warchest for a guy with a $500k portfolio would be adequate since it allows him to fire a few big shots. However, a 20% warchest for a guy with a $50k portfolio would be lacking since he can only fire 1 or 2 small shots. He is going to run out of money to carry out DCA during a prolonged bear market.

Step 3: Get Defensive
Reduce your portfolio’s exposure to highly-leveraged companies or volatile small caps. Switch to bigger companies with proven earnings track records in defensive & recession-resistant industries. Examples of such industries are healthcare, utilities and consumer staples.  You can also park some funds in bonds.