The 2022 Recession: How To Prepare For The Next Market Crash

So over the past few years, we've been through a lot of hardship. No doubt it's been pretty tough, so tough that the Federal Reserve has stepped in to wind up that money printer to help individuals and businesses get through such an uncertain and interrupted time. Now, don't get me wrong, a lot of people definitely needed this economic support, and I'm glad they got it. But as Warren Buffett would say, when it comes to economics, you can't just do one thing; you have to ask, "And then what?"

The unfortunate reality is that the huge expansion in money supply in the U.S. and keeping interest rates at zero is leading to a fair bit of inflation. But it's not just making a carton of milk or a loaf of bread more expensive. This inflation is also seen in asset prices, like real estate and also in these stock markets. The median house price in the U.S. has risen 16 percent in the last year, and the S&P 500 has risen about 36 percent.

But here's the thing: if inflation runs too hot, the Federal Reserve will step in and raise interest rates. This essentially puts the brakes on the economy. It makes loan repayments more expensive; it makes newly issued bonds more enticing for big investors, and overall it would bring asset prices like real estate and stocks back down to earth. Now, the Federal Reserve knows that this is coming; they've actually admitted that rates are going to start climbing, projected to be in 2024 according to their timeline. But of course, if inflation gets a lot worse, then that timeline just gets thrown out the window, and rates go up immediately.

Now, I'm not foolish enough to try and predict the exact timing of the next recession, but you know the indicators are there. And hey, it doesn't hurt to at least be prepared. So with that said, let's look at some common sense ways you can prepare for a potential recession in the next year or two.

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So the first step, at a basic level, is to ensure your own financial situation won't be heavily impacted by a recession. Ultimately, you want to be able to use a recession as an opportunity; you don't want to be at the mercy of its effects. So I won't harp on too much about these things, but three smart things you can do to prepare yourself for a recession: Firstly, eliminate high-interest debt, you know, like credit card debt. Secondly, try to set up a little emergency fund, you know, five to ten thousand dollars. And then finally, make sure you have some diversity in your income streams.

I mean, just think about how 2020 played out for a lot of people. I mean, a lot of people lost their jobs, so it's a smart exercise to force yourself into that mindset that your job actually isn't secure, even if it is. You know, think: How would I get by if I lost my primary income source right now? Then start to build those pillars that would help you get through.

You know, if I lost my job, I would want another way to make money—multiple income streams. I would want a stash of cash that I could access immediately to help me pay rent and groceries—okay, emergency fund. Then lastly, I would hate to have credit card debt that I couldn't pay, and it starts spiraling out of control, right? Better eliminate high-interest debt while I can. You know, if you can think in that way and act now, when a recession comes along, you won't have to scramble to stay afloat; you'll be able to get through just fine, and you might even be able to use it to your advantage.

So what do I mean by that? Well, in a recession, asset prices will come down. You know, stocks will fall, real estate will fall, and that presents opportunities for investors, no doubt about it. So what are some tips to ensure that, as an investor, you're prepared for an upcoming recession?

Well, step one is to avoid being a hundred percent invested during a crazy speculative market—kind of asking for it. Now, don't be confused; you definitely want most of your money invested most of the time. As they say, time in the market beats timing the market. Being invested is the best place to be, but think about this: all of the world's best investors right now have sizable amounts of cash sitting on the sidelines. Why do they do that? Well, it's because, as Warren Buffett says, if it starts raining gold, you want to be out there with a wash tub, not a thimble.

The worst situation to be stuck in when the stock market crashes is to have no cash lying around to take advantage of all the deals. And the thing is, stock market crashes are rare events, but exploiting that opportunity when it arises can set you up for much higher long-term returns. I mean, stock market crashes are the kind of opportunities that literally do help people retire sooner, but the window of opportunity is very small. I mean, usually, markets bounce back quite quickly after a stock market crash. Have a look at this: on the left, we see big negative events in the market—you know, wars, terrorist attacks, the GFC. Then look at the S&P 500 gains one year after the market events, you know, 20, 30, 40, 50 percent gains.

Hopefully, that shows you that stock market crashes are events that you don't want to miss. As an investor, it's very important to prepare by having some money ready on the sidelines, ready to go, ready to invest. Then in terms of preparation, what else can you do to get ready for, you know, a potential recession?

Well, besides having some cash on the sidelines ready to deploy, I think the single biggest thing you can do is have a watch list prepared and ready to go. You know, know what you want to buy before the opportunity to buy presents itself, because recessions and crashes, as we're talking about, they are temporary. You don't have infinite time to dawdle. You know, take the crash last year in March. After the 23rd of March, when the Fed announced it would support the market, you had about two or three weeks before the market had recovered 50 percent of what it lost.

I mean, if you ask me, that is not enough time to thoroughly research a company, understand it, understand whether it has a moat, understand, you know, whether the management team is working well, what the future growth drivers look like, you know, its position in the competitive landscape in its industry, what the intrinsic value is. It's just not enough time to really understand it. So do the hard work as preparation; get your watch list ready so you know the intrinsic value of those companies you like. So if or when a crash happens, you know exactly what company you're going to buy and exactly what price you're going to buy it at. That's actually very important; you know, do the homework before the recession. Otherwise, you're just rushing, you're more likely to make a mistake, and you're less likely to buy the business you want at the right price.

Now, moving on, another important point to consider in preparation for a potential recession is to avoid being invested in very speculative plays. Now, honestly, I don't care whether you speculate. Maybe you bought into some startup or a SPAC or a new cryptocurrency or something, but if the market is getting really hot, no doubt it's very dangerous to be heavily invested in speculative investments. For example, new companies, recent IPOs, you know, companies with excessive debts, companies that are pre-revenue—that's a classic one, because here's the thing: you know the market hates uncertainty, and if the stock market is already heading south, companies where it's difficult to understand what they're actually worth will get crunched much, much harder than, say, an Apple or a Facebook, where it's fairly straightforward to determine the intrinsic value of that business.

For speculative investments, it's not uncommon for those stocks to get crunched 50, 60, 70 percent in a big recession or a market crash or something, whereas for Apple, I mean, it fell 23 percent last March; Facebook fell 30 percent; Google fell about the same. Now, yes, 20, 30 percent—it's not nothing, but you know, if you were speculating that, say, that airlines wouldn't be grounded for very long, you would have lost about 70 percent. If you thought you might gamble that the capital-intensive cruise liners would be completely fine, then you know you would have lost 80 percent. So you definitely want to avoid speculating, especially in overvalued markets. Stick to well-managed, you know, low debt, high cash flow, wide moat businesses, and you'll suffer a lot less during a recession.

So moving on then from there, the last step I wanted to talk about how you can best prepare for an upcoming recession is to work—really work—on controlling your emotions. Learning to step away from the emotions that influence your behavior, because here's the thing: when the market is crashing, people freak out, and a lot of times, it's honestly not their fault. There have been studies done that showed that when the market is going down, words like "recession" appear much more frequently in news headlines. I mean, when the market is crashing, all you'll hear is doom and gloom; you can trust me on that.

But you don't want that to influence your emotions so much that you never actually do anything. I mean, you would hate to be in a big crash and then not invest because everybody says it's going to get worse, and then you just watch the market bounce back up to where it was before. That makes me cringe; it's such a wasted opportunity. So somehow, someway, come to terms with what you'll likely see and hear during a crash. Come to terms with how you'll likely feel during a crash and try and remember that crashes are not scary; they are exciting; they are awesome.

I remember last March, I was actually in Melbourne at the time of the crash. Myself and Hamish were up at 1 AM watching the market lose 5, 10 percent. We were talking on Facebook, and we were getting so pumped up. Our portfolios were getting absolutely decimated at the time, but we were happy about it. We were excited! It was actually that moment there that I realized that I actually do have the right emotional mindset to be an investor. And you know, fast forward a year, both myself and Hamish have both made very healthy returns because we weren't scared to act decisively when we were presented with that crash situation.

So definitely long-term mindset; ignore the doomsday predictions, and you'll be fine in the long run. Overall, guys, they are really my best tips I could think of anyway that would help you prepare for a potential recession that might come in the next little while. Again, not predicting that something's going to come—you really would be a fool to try and predict the time that a stock market crash or a recession would occur. But there are still some definite good practices we should put in place now to make sure that we are prepared for when that time inevitably comes. We're definitely going to live through a recession at some point in our life, so it's best to be prepared for when that happens.

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But guys, that will just about do us for today. Thanks for watching, and I'll see you guys in the next video. Thanks again to Sharesight for sponsoring this video. So recently, I finally decided to stop being lazy, and I imported all of my stock portfolios across into Sharesight. Finally, I should have done that a hell of a lot sooner! So with Sharesight, you sign up, you link your Sharesight account with your stockbroker, or you just add your positions manually, and then from there, Sharesight tracks everything for you.

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