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Is it a Recession?

As you’ve probably heard by now,  the $700 bailout plan was rejected.  The markets have reacted accordingly and have sold off aggressively.  The TSX had the largest 1 day point decline in history dropping 840 points and the DJIA also had a bad day with a 777 point drop.  Around the world, London’s FTSE fell 3.2%, Germany’s DAX dropped 2.9% and Tokyo’s Nikkei had a minor 1.3% drop.

Leading the charge for Canada was a crappy quarterly earnings report from RIM, weaker oil and resources.  Surprisingly, Canadian financials have held up relatively well during the recent sell off (thank goodness).

That brings us to the R word, what is recession?  Recession is defined as two quarters (or more) of negative gross domestic product (GDP) growth.  We haven’t had a recession in Canada for 16 years and we aren’t there now.  But what if there was a global recession?  Would that change your lifestyle?

What to do in a global recession:

  1. Stop checking your portfolio numbers so often.  It can be depressing watching your portfolio sink month after month.  Be confident that your investment plan will come through in the long term.
  2. Keep Investing.  Continue contributing to your investment accounts as if everything is normal as it’s only a matter of time before the markets come roaring back.
  3. Be Frugal. Practice frugality to raise cash to buy companies/ETF’s that are under valued.  Here are a few ways to save money.

My feeling is that they will get some sort of bailout package approved, and the markets will do a temporary bounce.  For you brave souls looking to make a quick trade, take a look at the horizon beta pro ETF‘s.

Question for you, if we go into a deep recession, how will it affect you?  Will you spend less?  Buy equities that appear cheap?  Or sit back and wait for the next bull market?

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FT About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 18 comments… add one }
  • Mr. ToughMoneyLove October 1, 2008, 10:35 am

    In a recession with flat or down markets, I recommend shifting investment funds to more aggressively paying down debt, including your mortgage. That way you are assured of a positive return on your money (equal to the interest rate on the debt) and it prepares you for possible job loss.

  • WhereDoesAllMyMoneyGo.com October 1, 2008, 10:56 am

    Almost doubling revenues is a crappy earnings report? :)

    Tina Fey rules

  • FT FrugalTrader October 1, 2008, 11:10 am

    ToughMoneyLove – Good point. I’m a believer in paying down debt, but i’m also a believer in having cash on hand to take advantage of the deals.

    Preet – LOL, you know that it’s all about earnings expectations! I watched Baby Moma the other night, great movie.

  • Dividend Growth Investor October 1, 2008, 11:40 am

    RIMM was one of the 3 momentum hoursemen on Nasdaq ( GOOG, AAPL, RIMM) so the fact that it crashed is not surprising..What goes up must come down.. But a growing tech company trading at a P/E of 21..How awesome is that!

    As for the recession it should be business as usual. Have an emergency cash stash.. Invest the rest in stocks, mutual funds and keep a properly allocated diversified portfolio. And last but not least, keep your job skills marketable and up to date.

  • Mike October 1, 2008, 11:49 am

    I hope they DO NOT get a bailout approved, http://mises.org/story/3132

    and they have many other excellent articles and media interviews.

  • OilyGasMiner October 1, 2008, 12:26 pm

    Frugal your first point in “What to do in a global recession” descrives my self entirely. I have my streaming quotes open, and I get more and more depressed watching my portfolio sinks. I should stop doing this, as there are times where I just want to SELL and cut my losses. But you are right that ignoring this completely would probably be better of for my mental stability’s sake.

    I do think we are in a recession, we’ve seen the nation go against the big 4 in a vote of NO for the bailout. The big 4 (to me) are Bush, Cheney, Paulson, and Bernanke.

    However these guys are smarter than that, (well at least three of them, minus the bush). I strongly believed they planned a part B to their overall planning. I read yesterday that the SEC modified its guidance for financial companies, whereby management is now in a position to subjectively place value on various assets sitting on the books. Now sure they have the option to conservatively value these assets, but let’s face it, we WILL see over optimism on their part. I’m shocked most people aren’t discussing this, as this could be even more detrimental than the bailout itself. The banks now have a free pass to “cook their books”. What happened to the SOX rules? What happened to rules in general? For this I strongly agree that we are in a recession. Source

  • Gates VP October 1, 2008, 1:09 pm

    FT:if we go into a deep recession, how will it affect you?

    Business as usual.

    Save money, manage spending and keep highly marketable. I joined a dynamic growing company and my resume points from the last 18 months are probably worth as much as those from the previous 36.

    None of us have enough money to “fix the markets” (no one does). All we can really do is keep building out our personal forts and income streams.

    Personal opinion: the market is not done dropping.

    There’s a lot of focus on Financials right now, but I don’t see lots of people talking about the impending holiday season being really bad. It will be. I expect retail to take another big hit, but we won’t start seeing/feeling it until January.

  • FT FrugalTrader October 1, 2008, 2:32 pm

    Gates, how has your area held up real estate wise? Are you seeing a lot of foreclosure signs etc?

  • Gates VP October 1, 2008, 6:39 pm

    Hey FT, KC has actually dodged the bubble for much of the last few years. Median family income sits at about 46k and you can get brand new large family homes in the city for 130k. It’s almost cheap enough here that I would consider owning.

    My little region is surrounded by lots of old money*, a lot of these places were probably paid for decades ago. But even outside, I’m not hearing about lots of local foreclosure b/c the price to income ratio has been so fair. Prices are down here and there, but KC has been kind of a “dirt town” for the last 8 years. The local economy just started to pick up two years ago, so they really skirted that whole “bidding wars problem”.

    *(And I mean old money, the first time I ventured down one particular street I thought these places with the 20 foot stone columns were banks or event halls. They weren’t :)

  • cannon_fodder October 1, 2008, 7:03 pm

    I’m fortunate on the job front to be the only person in my company doing my job. So, it would require someone to decide that they didn’t want to still go in this new direction that even our CEO talks up to shareholders/investors. Frankly, because of certain other factors, I’m sure I’d still be offered a different job still within the company. My wife is in the same boat – she is in a position that the company always needs and she is the only one in that role.

    Also, my wife and I have no problem with keeping costs contained. About half of our income already goes into wealth creation (RRSP’s, RESP’s, non-registered investments, mortgage principal paydown) so we have a cushion of discretionary investment spending that could be curtailed if we needed to.

    If anything, a recession hurts those that can least afford it and can often help those that need it the least.

  • MomOfOne October 1, 2008, 9:05 pm

    FT,
    So with the recent financial chaos and tremors in the stock markets, for hard wage earners like myself & my spouse, should we put-off the contributions to RESPs and RRSPs for now and keep the money safe at 3% interest in a savings account instead?

  • TStrump October 2, 2008, 1:09 am

    I’ve always been fairly frugal so the prospect of recession doesn’t scare me.
    I don’t waste my money – I drive a ’93 Temp – it’s hideous but it’s paid for!
    I’m actually looking forward to huge adjustments in stocks real estate, etc.
    I see this as an opportunity …this means when things are cheap, I’m buying!

  • Thankful For Fools October 2, 2008, 5:41 am

    If you’re working in a secure enough job then a recession can only effect positively for someone young enough to take advantage of it. In fact, I’m taking whatever money I can get my hands on it and investing during the dip, while I got a chance to purchase some undervalued securities.

    It’s not so bad.

  • Dividend Growth Investor October 2, 2008, 10:29 am

    Gates VP,

    It seems like we are in the same area. Are you in KC MO or KS KS?

  • Nurseb911 October 2, 2008, 4:36 pm

    Great tips: be frugal & keep investing.

    I think when you look back a lot of investors wish they had done things differently in the last down period in the markets and learning from mistakes to maximize on new opportunities is the hallmark of an investor who can learn and adapt over time.

  • Gates VP October 2, 2008, 6:55 pm

    @DGI, the world can’t be that small can it?

    I’m in KC, MO, living/working in Westport / 43rd / Plaza region. The mansions I was referring to are down Ward Parkway.

    Is that close :)

  • Dividend Growth Investor October 2, 2008, 8:57 pm

    GatesVP,

    I am in the OP area. I read somewhere that KC as a whole was the third cheapest place to rent ( and not too expensive to purchase new/existing homes either).
    We do have a higher than average unemployment here by 1-2% however..

  • MultifolDream$ October 3, 2008, 6:57 pm

    With TSX now below 11,000 it just the best time to have cash for investing.
    And it doesn’t look like the $700B bailout approved today (now law) will be the blessed quick fix …

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