It is currently a very challenging economic environment. The Federal Reserve Bank has increased the federal funds rate over the past 5 meetings. The market anticipates more fed funds rate increases ahead. This means there will be more pain.
The trickle-down impact of rising fed fund rates is that the cost of borrowing becomes more expensive. It is now more expensive for companies looking to fuel growth by borrowing money to build the next factory. Mortgage rates have increased drastically over the past year. An increase in the cost of financing slows everything down.
The Federal Reserve is trying to tame inflation by raising interest rates. Things become more expensive to buy with credit. This should drive down demand; thus, lowering prices. The consequence of this should be a lower inflation rate.
People now fear this raising interest rate environment might wreck the US economy and throw us into a recession.
Will the United States economy have a “soft” landing where the Fed can balance slowing down inflation without destroying the US economy? Or will there be a crash landing in which we enter into a rough recession?
I have always been a very optimistic person with one eye on reality and another eye on a hopeful future. I try to find the positive of a tough situation.
A recession is challenging for many and I am not here to make light of one. But as an optimist, I want to look at the other side of the coin and see if there are unnoticed benefits to a recession, especially for people who are financially sound.
When life hands you lemons, you try to make lemonades.
Some Unexpected Benefits Of A Recession For People With Financial Means To Weather The Economic Storm
Silver Lining #1: A Recession Can Help Stress Test The Stability Of Your Cash Flow
I’ve spent over a decade building up my rental portfolio with many small multi-family properties located in New York City.
Rentals are not entirely passive investments. If anyone tries to tell you that, then either they are new to being a landlord or just very, very lucky. There are always issues to handle such as a leaky roof, basement flood, or a thermostat control that lost power. All those things happened to my rentals over the past 2 weeks.
It is not easy dealing with tenant issues. Those issues tend to also creep up during the worse times such as a family vacation.
But I put up with the management of my rental properties because they are my ticket to financial freedom. One day, I hope to FIRE from my rental cash flow.
It is always nice during the first week of the month when the rental checks from my tenants come in. I view rental payments as a source of relatively stable cash flow.
However, is it stable enough for me to retire? What is my downside scenario? I was able to find out during COVID.
New York City was hit hard during the pandemic. The city was in lockdown. All the benefits of being in New York City seemingly disappeared overnight. No more going out to nice restaurants, hitting the clubs, or taking part in the many cultural experiences here.
People fled elsewhere. And many who stayed found themselves out of a job. As a result, a number of my tenants had a challenging time making their rent payments.
My rental cash flow didn’t dry up entirely but it was impacted severely. At the depth of the pandemic, my rental cash flow ended up being 60% due to delinquencies, vacancies, and providing COVID discounts.
But it didn’t stay there for long. The government offered tenants help during this time by increasing unemployment payments and other subsidies. My tenants started paying their rent again.
And over time, there were rental assistance programs that allowed the landlord to apply for back rent. Ultimately, I ended up not collecting a very small fraction of my total rental income.
Now that I have experienced probably the worse event that can happen to my rental cash flow, I feel more confident about the stability of my cash flow from my rental properties. I’ve hopefully seen the worse downside case and can plan accordingly when I take the leap to FIRE.
The pandemic allowed me to stress test the stability of my rental cash flows.
View the recession as an opportunity to stress test the steadiness of your cash flow stream.
Silver Lining #2: A Recession Can Produce Investment Opportunities
We all try to follow the old adage “buy low, sell high.” It is very hard to do, especially if the markets are consistently making new highs such as in 2021. When is there an opportunity to buy low if the markets are trading at an all-time high?
Investments I have purchased in 2021, rather they are stocks or alternatives, have been a loss leader for me now that those markets have retracted significantly from their highs.
This isn’t only unique to me. The same goes for well-to-do Americans.
To get into the top 1% of net worth in America in 2019, the household needs a net worth north of $11.1 million. That number went up to $15.3 million by the end of 2021. It has since come down to $12.8 million by June 30, 2022.
I have some money saved up sitting on the sideline waiting for a good entry point. A recession will provide me with an opportunity to put that money to work.
The S&P 500 is in bear market territory. My investment portfolio is down big when compared to the high just a few months ago. Instead of being down about this, I view it as a tremendous opportunity to put my money to work.
I am still waiting patiently for there to be capitulation in the markets. I don’t think we are quite there yet but another 10% decrease in the equity markets will make for a good entry point for my investments.
The crypto market has retracted significantly from its high as well. I’m also patiently waiting for an opportunity to put some dollars to work there.
Silver Lining #3: A Recession Results In A Break From Obsessing Over My Investment Portfolio
In 2021, when the markets were running hot, I was constantly checking the performance of my investments. This was especially true with some of my crypto investments.
It felt like the crypto market was making a new high each and every day in 2021. My crypto portfolio ballooned during this time.
Seemingly, the first thing I did back in 2021 when I woke up was to go to coingecko.com or OpenSea to see how my crypto or NFT investments performed. Did they hit new highs while I was asleep? The last thing I did each day prior to ZZZs was to check on crypto/NFT prices as well.
I felt an addiction to the crypto market. It was constantly on my mind. Seeing my investment portfolio hit a new high gave me an adrenaline rush. I told myself I needed to stop checking prices so frequently but I couldn’t.
What got me off of my constant “obsession” was the market drop. Instead of making new daily highs day after day, the crypto market adjusted downward. A lot of investments went down 80% or more from their highs.
When the decline happened, I started detaching myself from the “obsession” and I found myself thinking about market performance less and less.
It felt like I was finally able to step away and return to a healthy balance of being aware without being obsessed.
It was a much-needed mental break.
At some point, once the market has fallen low enough, I will return back to constant monitoring of the markets for investment opportunities.
Silver Lining #4: A Recession Leads To Less Envy During A Market Downturn
I don’t believe I am an envious person in nature. I feel extremely fortunate to be in the financial position I am today.
But I couldn’t stop myself from feeling envious of all those stories about people turning $20,000 into millions because of the hyperbolic rise of the crypto market last year.
It took me over two decades of hard work, disciplined savings, and investments to build a decent financial nest egg. Last year, kids in their early 20s made millions by trading the newest crypto coins or NFTs.
Almost on a daily basis last year, there were stories of another person making a killing off of the market trading crypto or a meme stock.
I couldn’t help but feel a little bit of resentment towards how easy it was for certain people to make life-changing money. Where was my 1,000x investment return?
Now, with the market downturn, I don’t see those stories anymore. In fact, I started seeing sad stories about how many people were over-leveraged and lost their investments or life’s savings.
Those stories are really disheartening to hear.
While the down market impacted my investment portfolio significantly, my real estate portfolio is still holding up relatively well.
I believe the New York City real estate market will cool down soon. However, I don’t believe there will be a major correction (nothing close to 20% down).
The market downturn has resulted in less envy and more empathy.
Silver Lining #5: A Recession Can Be The Catalyst To A Re-Evaluation Of Life
I’ve spent many years climbing up the corporate ladder. I never view myself as a company man but that’s what I ended up being.
There were countless hours spent at the office completing projects, navigating office politics, and improving my professional skillset in order to succeed.
After over 2 decades of the climb up in my professional career, I am now making a healthy income.
My financial nest egg grew over this period as well.
It is a bit disheartening to see that a bad month in the markets can almost wipe away a year of income from my corporate job despite making a very healthy salary. This puts my pay into perspective.
Consequently, this makes me re-evaluate my life more, especially the benefit of work. If I can lose the equivalent of one year’s pay due to a bad month in the equity market, is there a reason to keep going?
A recession can lead to a time to take stock of what is really important and reassess how I want to live my life.
Silver Lining #6: Retiring In A Recession Can Make The Retirement More Bullet Proof
Although I am not retired, I believe retirement, similar to life, has many twists and turns.
If it is entirely your choice of when to retire, your chance of success in not outliving your savings is probably greatest when you start retirement during a recession.
The retirement numbers work out a lot better when your investment portfolio is at an all-time high. You also might be more inclined to withdraw more seeing the robust performance of your portfolio.
And then when the market downturn hits, your retirement situation looks a lot less rosy.
Retiring during a recession prevents you from only looking at the most optimistic picture. If your investment portfolio during a bear market can still sustain your retirement lifestyle for decades to come, then you only have upside.
Once the market recovers, then you are sitting pretty. Also, given the lower investment portfolio balance at the start of retirement, your withdrawal amounts can only go up in the future.
Silver Lining #7: A Market Downturn Re-Affirms My Believe In A Slow And Steady Approach To Investing
It is not always easy following a slow and methodical path. The financial path that worked for me is one made up of many years in corporate America, saving like crazy, and investing the savings in a diversified basket of investments.
And I have an unwavering belief that over time, compounding will work its magic.
Sometimes, I don’t appreciate what I’ve built over time until there is a market downturn. With a diversified portfolio, despite my equity and crypto investments taking a dive, the portfolio is still buoyed by my real estate properties and private equity investments.
The drop isn’t as severed when compared to being fully invested in public stocks.
It helps to reaffirm, when times are bad, that the process works.
Conclusion
Being in a recession sucks. Seeing fixed income, real estate, and equity markets free falling from their highs is gut-wrenching.
But for those fortunate to be in a strong financial position entering a recession, there are unexpected benefits.
There is a chance for an opportunity in every crisis. Stand strong, and, hopefully, you can find yourself benefiting in a tough economic environment.
To The Audience: How has the market downturn and the prospect of a recession impacted you? How has your investment portfolio fared in today’s market? Is there a surprising benefit to the market downturn for you that you didn’t think possible prior to experiencing it?
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Recessions can provide some pretty incredible investment opportunities, as long as you have cash sitting around. As with the 2008 bear market, this bear market will provide some fantastic buying opportunities when the time is right. Have a great week!
I agree on the investment opportunity. That is why I am saving my cash stack and waiting patiently for another 10% adjustment to the S&P 500.
Don’t be disheartened. Stories of gamblers and their huge wins have been around for centuries and historically the “house always wins.” Buying cryptos and NFTs is a gambling move and who should know better than a gambler like me. Everybody boasts about their huge wins, when they cash their winnings and leave. But not many tell the stories of returning eventually to the table and losing part or all of it. For the lure of the highs associated with the win is too much. People who made it big with cryptos will eventually look for the next risky big thing. But the steady investor will balance his risk by having a mixed portfolio and slowly building up their worth overtime without going burst. I lost quite a bit of money being a gambler, losing thousands and getting into debt. But I realized it and today have a mixed portfolio of property, stocks and cash generating a generous return which will allow me partial retirement now and full retirement in 2 to 3 years. “Slow and steady wins” eventually.
People tend to only talk about their wins but not their losses. That helps create a FOMO environment where the last person to jump into an investment is left holding the bag. I admit – it is tough to shake wanting to put money into a high flying, speculative asset such as cryptos/NFTs when you constantly hear stories of quick riches. I’ve fallen into the FOMO trap a few times.
It is great you were able to turn around your mindset. How did you mentally shift from being a gambler to playing the long game and building a diversified portfolio?
A couple of things happened. I had a few rental properties, some shares in individual companies and I worked 50hrs a week to help fund a casino habit where I sometimes win big or lost big. My friend who was looking after my rentals stole the rent and I did not find out until the bank called me to say they were going to foreclose. I was living in a different city. Once I got that abated after putting all my income towards the mortgage for many months. Than I was diagnosed with a health issue and spent a year at home, recovering from multiple surgeries. Had to sell my rental properties for a profit as I had no savings and medical bills piling up. Then I found FIRE movement while browsing online and I took stock of my situation and turned it all around
Thank you for sharing your story. It seems like there were shocks to your situation which made you re-evaluate your approach. Glad it worked out and you were able to rise above it.