It is commonplace these days for so called “investment experts” to assert that we are heading towards trouble after all as, bestselling author of “A Wealth of Common Sense”, Ben Carlson says, “There seems to be a growing consensus among smart people I follow right now:
Therefore, a recession is now inevitable….”
However, as Carlson’s blog explains, all of the above is of very little use to someone who is trying to invest her savings in equities. Why so?
First off, there is tons of pent-up demand post Covid-19. Carlson is writing with reference to America but anyone who has gone to a holiday resort in India recently or tried to buy a flat in a desirable part of Mumbai, Bangalore or Delhi can validate that this is equally true of India.
Secondly, household wealth has rocketed in recent years: “Each quarter, the Federal Reserve releases a report on household wealth. Last year saw the largest increase in household net worth ever… Households have never been wealthier.”
So, Carlson says that no one can predict when the inevitable recession will come: “So we could go into a recession this year or next year or four years from now.
I honestly have no idea. All I know is we will have a recession at some point. Since World War II, we’ve had 13 recessions in the United States…”
As a result, the “knowledge” that there will be a recession is of very little use to those looking to invest their savings: “Peter Lynch once said, “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.”
The same is true of recessions.
How do you prepare for one? The same way you prepare your finances for anything else. Instead of changing your portfolio because you think a recession is coming, create an investment plan that is durable enough to withstand a wide range of environments (one of which includes economic contractions).
Give yourself a margin of safety with a high savings rate and an emergency fund not because it will help you survive a recession but because it will help you survive any number of curveballs life will inevitably throw at you.”
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