We’re probably in a recession, we’re definitely in a bear market, and the wider economy will get worse before it gets better.
Now that the good news is out of the way…just kidding.
If you’re having a rough go in the markets, you’re not alone.
Most people are seeing red in their portfolios. Doubly so if riskier assets were bought at their height, like individual tech stocks and cryptos. It’s not helping that inflation is at all time highs either
I always try to imagine my portfolio as 50% of it’s value at any time—especially when times are good. This is because I invest in volatile assets like stocks, and even more volatile – cryptocurrency.
Well, that day has come. Outside of my retirement accounts (which are mostly indexes that have held up better than individual stock picks), much of my investments about half their value compared to last year. My cryptos have fallen back to 2018 prices.
Ever notice how NOISY the financial markets are when thing are going well? Influencers abound, as do promises of quick riches. In a bear market, the same influencers get quiet.
Nobody likes to talk about losing money. But I think it’s extremely important to normalize conversations about temporary WHILE maintaining a long term view.
I’ll start with the eleprhant in the room…the big R word.
What is a recession? How long do recessions last?
If you’re not sure exactly what a recession is, you’re also not alone. It’s arbitrarily defined by the National Bureau of Economic Research (NBER). Specifically, it’s a group of nerds inside from NBER called the Business Cycle Dating Committee* who have the fun job of defining a recession. Drumroll please…
Recession: “A significant decline in economic activity that is spread across the economy and lasts more than a few months.”
*In an alternate universe, the committee holds speed dating events for business professionals who bike to work.
The most tangible effects of a recession is what happens in the job market. More layoffs and less jobs. The wider markets suffer and people tend to lose money on their investments.
When things feel like doom and gloom, it helps to zoom…out. Here’s some recession data:
- On average, recessions in the U.S. last 11 months.
- Recessions happen about once ever 6 years.
- “The Great Recession” of 2008 lasted 18 months, while 2020’s pandemic recession lasted just about 3 months.
So we know that recessions happen regularly, and how long they typically persist.
This won’t be your first recession rodeo, and it won’t be the last. So how do you make the most of it?
Don’t let a bear market go to waste
“Hard times create strong men, strong men create good times, good times create weak men, and weak men create hard times.” —G. Michael Hopf
We study for tests before we take them. We don’t arrive at the exam, then decide to study – kinda too late. In the same sense, the time to learn and invest is now, in the bear market, when prices are down. You don’t want to react and only invest when prices have already recovered and gone back up.
It’s common sense to buy low and sell high, but rising prices suck attention and incentivizes investors to FOMO in and do exactly the opposite. If you feel called out, I’m writing this only because I’ve committed just about every investing mistake there is.
We can use this recession to harden our skills by:
- Educating ourselves about the stocks, crypto, and general investing
- Reading books, blogs and articles to build conviction on certain asset classes
- Connecting with others about finance & investing so we don’t feel alone in this journey
There’s perhaps no better practice than getting skin in the game and actually investing. If you’ve ever sat on the sidelines and thought: “The stock market seems too high” or “Bitcoin is too expensive,” then the time to check back in on those assumptions is now.
How I’m investing in this recession
One of the questions I’ve been fielding from friends is Should I invest right now? What should I buy?
Based on average recession lengths, I’ll assume this recession will last for at least a year. Using this not-so-scientifically derived prediction, that means there’s at least another year of financial activity and decisions to make.
Here’s how I’m investing, which is not to be construed as financial advice.
- Max out my 401K and IRA, buying stock market index funds within those retirement accounts
- Buy Bitcoin and Ethereum weekly with the 50/50 strategy. I have used the recently dips to buy more than my scheduled weekly purchases.
- Transfer funds from newer crypto platforms to safer options. E.g. moving some USDC off of Midas to publicly-traded exchanges like Voyager and transferring money off-exchange to my own crypto wallets.
- Allocating some more money towards real estate index funds like VNQ.
- Putting more money into cash savings.
The summary: I’m continuing to DCA – buy consistently over time – the assets I’ve always been investing in. It’s boring and it works.
Across the board, the 4 assets I feel comfortable buying are stock market index funds (VOO, VTI), the two biggest cryptos (Bitcoin and Ethereum), and getting more real estate exposure (VNQ). I try to automate all of these with recurring buys, but will occasionally do one-off “buy the dip” purchases.
Don’t just do what I’m doing. The big caveat is that what you buy now can still go down in value. We don’t know the depths of this recession yet. You have to invest according to your own risk tolerance and beliefs about any given asset.
Apply the psychology of everyday shopping to investing
If you already know you value a certain item and are likely to keep buying it, then you might be more incentivized to buy more of it when it’s at a steep discount.
Just as I know I’ll always buy ground beef (sorry vegans), I feel comfortable buying the 4 assets listed earlier.
On the other hand, it’s not a good idea to buy something just because it’s on sale. We’ve all been there.
Even though I’m a big proponent of buying the stock market dip right now, I wouldn’t suggest that to someone who doesn’t know what an index fund is. If they get scared holding something like VOO and then the index drops, they might sell low, confirm their beliefs that investing is gambling, then blame me. Not on my watch ;)
You may be making the right moves already
If you’re already maxing out your retirement accounts and are buying stock market index funds in those accounts, then you are effectively buying the stock market at a discount right now.
You can stick to this boring and automated strategy, stop checking short term price movements, and go on living the rest of your beautiful life. This is what other fair-minded resources also suggest.
If you decide to make bigger investment decisions, then I suggest anchoring to a higher-level framework as I suggest in the beginner’s guide to investing and Maslov’s hierarchy of financial needs.
(The tl;dr take care of your most important financial needs first, don’t invest more than you can afford to lose, and automate/invest the rest.)
The Silver Lining and Optimism
Optimism is the only way to survive as a long term investor. If you don’t think you’ll ever make money investing, then it’s better to keep all your cash under a mattress.
In financially dark times, I still choose to remain optimistic and see the silver lining. Here’s how I’m framing the bear market and recession.
- You haven’t lost money unless you sell.
- You can also sell at a loss offset any potential gains on your taxes this year.
- Things are at massive discount, or more fairly valued now. Presenting a great buying opportunity.
- There’s less noise and more signal in the market.
- It might actually be easier to identify solid investments, the ones that’ll this downturn and have not been wiped out. Just as an example, Bitcoin has “died” over 400 times according to big media.
Perhaps the biggest reframing of all is to accept recessions as a normal part of cycles, and that it could even be a gift.
The gift is that we gain experience from this recession and toughen up as investors. Because there will be another recession, when that time comes, 2022 can act as a financial reference point.
Well, in 2022 my portfolio cratered, but I kept buying my favorite investments at a discount. I didn’t freak out, and we’ll maybe it out of this recession as well.You, in a future recession
If your takeaway is something close to that, then I’ve done my job in this writing.
To your wealth!
Random personal thought about the recession…
The idea of the Fed raising interest rates is to reduce consumer demand to “cool” the economy and maybe that’ll decrease inflation. To intentionally slow down the economy (and induce a recession) is normally seen as a bad thing…
But thought experiment: what if huge swaths of people decide to be more minimalist and buy less stuff…permanently? While increasing their wellbeing living in a less consumerist culture, this behavior also decreases demand for products, sales, and slows down “the economy.”
Is that necessarily a bad thing? If all we’re optimizing for “growth” as a society, and that generally just means buying more and more stuff…is that a good thing? Our environment – and thus we – will be the ultimate victims of a growth-at-all-costs culture.