make money during a recession

How to Make Money During a Recession: Crash Proof Portfolio

The latest financial crisis saw Americans losing roughly 50% of their net worth in the stock market. This article will provide time-tested truths for anyone to make money during a recession!

Retirement Crisis

Retirement accounts were slashed, companies were laying off employees, and financial institutions were in a credit crunch.

This was not a huge deal for anyone decades away from retirement, but many near-retirees had to postpone their retirement for multiple years.

Additionally, individuals who had recently retired may have been forced to re-enter the workforce. Read this article to learn more about when you can retire.

Going Long

The most common meaning of long is in the length of time an investment is held. A long position is the buying of a stock, commodity, or currency with the expectation that it will rise in value.

Holding a long position is a bullish view. Going long on a stock or bond is the more conventional investing practice in the capital markets.

make money during a recession

With a long-position investment, the investor purchases an asset and owns it with the expectation that the price is going to rise.

This investor normally has no plan to sell the security in the near future.

Going Short

A short position is created when a trader sells a security first with the intention of repurchasing it later at a lower price. There are two types of short positions: naked and covered.

A naked short is when a trader sells a security without having possession of it. Naked shorts are illegal in the U.S. for stocks.

A covered short is when a trader borrows the shares from a stock loan department. The trader pays a borrow rate during the time the short position is in place.

Going short is a bearish view. You would only go short on an investment if you expected the price to drop in the future. Going short is a way to make money during a recession!

Net Short With Put Options

A put option is a contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a pre-determined price, within a specified time frame.

The specified price the put option buyer can sell at is called the strike price. 

Put options are traded on various underlying assets, including stocks, currencies, bonds, commodities, and indexes.

A put can be contrasted with a call option, which gives the holder to buy the underlying at a specified price on or before expiration.

Buying a put option is a way to limit risk and hedge against a major downturn in the economy. You could purchase a put option on an S&P 500 ETF for a relatively low-price.

Then, if the US stock market tanked, you could exercise your put option and make A LOT of money!

A popular trade during a recession is to short general indices or sectors that are experiencing a credit crunch.

For example, in March 2020 the airlines and hotels are the most heavily shorted stocks due to the pandemic.

American Airlines and Delta both lost over 75% of their equity value from the highs. Tactical traders could’ve capitalized on the downturn.

Volatility ETFs (Long)

A volatility ETF is a financial product that allows investors to gain exposure to volatility. This allows investors to hedge against portfolio risk, without having to buy options.

Volatility ETFs are based on the securitization of volatility.

When investor confidence is high, volatility indexes (VIX) show low numbers. If investors think that stock prices will fall, or that economic conditions will worsen, the index value increases.

This is a great way to make money during a recession!

Volatility ETF managers use a pool of money (similar to mutual funds) to trade futures. The fees with these funds are high due to the active management and high turnover.

However, they are great tools for investing during worsening economic conditions. During the early 2018 sell-off in the S&P 500, VXX doubled from $25.68 to $50.

The same thing has happened with the August 2019 sell-off. Betting on volatility for the long-term (multiple years) is a losing proposition due to “decay”.

As of this article being updated (March 2020) the recent pandemic forced the VIX index above 83!

The circuit breakers were triggered four times over two weeks, and double digit moves were commonplace.

I even told a friend that any market move less than 5% “wasn’t that big of a deal”. That’s how desensitized traders become towards volatility during a recession!

Rental Properties

I absolutely love the BRRRR Real Estate Investment Method that Brandon Turner developed from BiggerPockets.

The BRRRR Real Estate Method stands for buy, renovate, rent, refinance, and repeat.

It essentially uses the equity and profit from one property to fund the next property with leverage.

It’s no secret that the bulk of money made in real estate occurs on the buy-side, not the sell-side.

Well, there’s absolutely no better time to buy an investment property than during a recession. Sellers may have their hand forced to accept a steep discount.

I like the idea of using leverage to fund deals, but the ability to close deals fast with cash can create a further depreciated purchasing price.

Now, you can’t simply buy any property and expect to make money. The property needs to cash flow and have future appreciation potential. Location, location, location!

A cash flowing property means the rent payments cover property taxes, insurance, maintenance, mortgage, and profit.

This is not an easy feat, so make sure to diligently take your time before buying something!

On top of cash flowing, you still want to earn an additional return of 3-5% (on top of mortgage pay down and equity appreciation).

Until the past couple days, you could earn 3%, for 30 years, by buying a government bond. Make sure your property headache is able to supply returns.

I recommend putting 20-25% put down, so you don’t over-leverage yourself on the deal. Additionally, keep excess reserves in case of an emergency.

The beauty of rental properties is people will always need somewhere to sleep at night. Rental rates are incredibly stable, and this will dampen any volatility.

Treasuries (Long)

The risk-free rate is very self-explanatory! It’s the rate of return you can expect to get for no risk of loss.

Although there is technically no risk-free investment, most finance professionals will use the yield on U.S Treasuries.

If the government defaults on its investors, we’ll most likely have bigger issues than calculating the risk-free rate!

The reason this investment is viewed as “risk-free” is because the government can print money, and tax the U.S citizens (which is an extreme amount of cash flow potential).

For this reason, the investment is viewed as risk-free.

While the stock market is tanking, and investors are getting their heads chopped off, capital floods into the Treasury market.

Warren Buffett’s first rule of investing is to not lose money! This influx of capital leads to a demand shock, which ultimately increases the price for Treasuries.

Gold (Long)

Gold is a commodity that tends to do VERY well during downturns. The precious metal generates no earnings and provides no dividends, but it’s a commodity that can be traded.

It is a speculative hedge that a lot of great investors use in an “all-weather fund”. The more dire the economic situation, the more valuable hard assets become.

Here is a great video of Tony Robbins explaining his investing conversation with Ray Dalio!

Ray is one of the world’s best investors, and he uses gold as a hedge in his portfolio for clients.

Invest in Yourself

The people who don’t lose their jobs in a recession are those who are too valuable to their firms. Focus on building enough skills, client relationships, and internal goodwill to be forever employed.

Your largest wealth building tool is your income! I talk about investing in yourself further in this article!

My favorite way to develop professionally is by attending subject-matter specific conferences.

It won’t take much internet browsing to discover professional organizations in virtually every possible career field.

Accountants have the AICPA, financial analysts have the CFA, and there are numerous organizations for insurance and banking.

All these professional societies sponsor workshops and seminars to educate professionals about emerging trends or new technology that is disrupting their industry.

These conferences are also a great way to network with thought leaders and build your professional brand.

A lot of conferences take place in cool locations (Las Vegas, Los Angeles, and New York) to draw more participation!

Recognize Buying Opportunities

Low prices are a time for HUGE opportunity! We should see this as a part of a normal market cycle, and buy as much as we can during the process!

“The time to buy is when there’s blood in the streets”.

Behavioral finance shows that people are actually more loss-averse than risk-averse. This means that people feel the emotional pain of a loss much more than the pleasure gained from an equal-sized profit.

Investopedia states “Loss-aversion describes peoples’ tendency to sell winners too early and hold on to losses for too long.

When people are in the black, they act risk-averse, yet when they’re in the red they become risk-seeking.”

Most investors panic as they see their asset prices plummet. However, those who maintain calm and collected are able to see the resulting prices as a buying opportunity.

Buying assets from those restless individuals is essentially buying them on sale.

Fear drives asset prices FAR BELOW their intrinsic values. This rewards patient investors who allow prices to revert to their expected levels.

Profiting from investing in a crisis requires discipline, patience, a systematic investing strategy, and enough liquid assets to seize the opportunity!

This is the best way to make money during a recession.

Better to Not Make Money Than Lose

There is a growing probability there will be a recession before the end of 2020.

If you have already made over a 200% return in the stock market since 2010, is it so bad to only make 2% a year if you have to take a lot more risk?

You need to weigh your guaranteed return against the possibility of missing out on further gains or the possibility of losing money.

As I mentioned in my article “5 Investing Mistakes All Beginners Make“, trying to time the market is a mistake made by almost every investor.

A typical mutual fund investor has lost almost 2% more a year in total returns from market timing than their indexing counterpart.

Investors should not be focused on trying to “miss the bad days”. They should be focused on “being invested during the good times”.

This is actually within our circle of control. If you missed the 10 best days of investment gains from 1998-2017, you missed 67% of potential investment returns.

This alone will help you make money during a recession!

make money during a recession

Timing the market is NEVER an evidenced-based solution, but it is okay to heavily limit your downside risk if necessary.

Being overexposed in equities during a bear market may have significant ramifications if you cannot afford to lose the income stream your investments provide.

Conclusion

Hopefully this article shows you it is possible to make money during a recession! It is easy to be overtaken with fear and grief, but stay the course!

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