Are You Prepared for the Next Recession?

With fears of a coming recession in the US on many people's minds these days (longest expansion in US history - see chart below), I thought it would be good to look back to the last recession for ideas on how we might be better prepared for the next one.  Of course, we all hope that the next recession is not as severe, but you can never tell for sure and should always be prepared for the worst.  The level of volatility in stock and bond markets would suggest the next recession could be as bad as the Great Recession or possibly even worse.  The other thing to remember is that the business cycle is just that - a cycle.  After the recession, there is always a recovery and sometimes being patient with good long term investments is the best strategy instead of selling everything.  Timing the market is also virtually impossible for most investors.  Being patient is hard, however, especially with today's constant media barrage and easy access to check the balances in your accounts on your phone or online. 

In my book, Building a Financial Fortress:  Lessons Learned From the Great Recession which I wrote during the Great Recession, when it seemed like the entire financial system was collapsing, I laid out my basic philosophy of the Financial Fortress.  The essence of the Financial Fortress is that as savers and investors, we need to first have a strong defense before we can have a strong offense.  As volatility in the markets continues to worsen each year and seem to become exponentially worse with each recession / recovery, preservation of capital is paramount but so is finding opportunities to leverage what you have in order to grow your wealth. 

In my book, I outline various investing strategies, asset types and their behavior and other related topics that help support building your Fortress, most of which I have tried at one time or another to test my theories.  During the recession, I was successful in capitalizing on the dramatic real estate downturn by buying a few condos that I held for some time and eventually sold for a nice profit.  I also capitalized on volatility in silver (which again seems to be on the move lately - SLV), borrowing some money at a very low interest rate to buy, hold and ultimately sell silver coins for a tidy profit. 

Being able to recognize opportunities in the midst of the chaos and developing and implementing a plan to take advantage of those opportunities is key, but only the "base" of your Fortress is strong.  The base is cash and cash equivalents and may include investment debt (so long as that debt is covered by the cash flow of the investment it was used to purchase, such as a rental property).  The chart below outlines the Financial Fortress graphically:

During the Great Recession and in the many years since that time, I have learned that the keys to success include:

• Financial Education - read books, research investing strategies and take classes to improve your financial education

• Contrarian Thinking - don't "follow the herd" or financial advisers; make your own decisions

• Flexibility - as Bruce Lee once said "Take things as they are.  Punch when you have to punch.  Kick when you have to kick."

• Don't Quit - if you put your mind to something and really want to do it, you'll find a way to get it done.

I hope you find this post useful as you chart your personal financial course and Build a Financial Fortress this year.  If you're interested, I wrote a post on 20 Things You Can Do to Weather the Next Big Financial Crisis, which is also featured in my book.
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