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3 Ways to Recession-Proof Your Finances

3 Ways to Recession-Proof Your Finances

5 min read
Erion Shehaj

Erion Shehaj is the founder of Investing Architect and a managing real estate broker at Signature Houston Real Estate...

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The most pressing question on the minds of real estate investors these days is: “When will the upcoming recession and market downturn hit?”

If you go a couple of layers deeper in that question, you can see what these real estate investors are really asking.

How bad will the next downturn be? Most importantly: What should I do next: buy, sell, or wait?

These are all fair and understandable questions. After all, no one wants to be left standing in this market game of musical chairs. No one wants to be the sucker who purchased a property at the top of the market. No one wants to be on that gut-wrenching ride downward.

Although fair and understandable, these are the wrong questions to ask, because they are seeking a prediction. The person asking the question is posing it to an expert or a specialist in the field. Implicitly, they seem to be saying, “You know about such things, being an expert and all. What do you think will happen and when?”

I’m happy to report that I have come to give you the answers you’ve been looking for with this article today.

In a nutshell, there are two groups of experts when it comes to market predictions:

  1. Those that don’t know and know that they don’t know, and
  2. Those that don’t know and don’t know that they don’t know.

The predictions of the former group are worthless. But those of the latter group are dangerous, because their worthlessness is accompanied by silly confidence.

The truth is NO ONE truly knows. Even the most experienced among us, who may have “seen the movie” before in the past, might not realize that this is an entirely different movie altogether.

So, if those are the wrong questions to ask because no one truly knows, how should we tackle the potential recession and downturn?

Related: 3 Unnerving Signs a Recession Is Coming

Businessman forecasting a crystal ball

A New Way to Look at the Problem

In his masterful 2012 book Antifragile: Things That Gain From Disorder, Nassim Nicholas Taleb offers some worldview-altering ideas that can help us address these questions.

Let’s set the table a little with some basic context. According to Taleb, things (or people) can behave in three different ways when subjected to volatility, change, or disorder.

They can be fragile, robust, or antifragile.

Fragile is self-explanatory. If you have a glass vase in a box and you subject that box to volatility by flinging it down a flight of stairs, the vase is vulnerable and will break.

Robust is what most people think is the opposite of fragile. Essentially, it’s a thing or person that can withstand the volatility and survive it. Picture the same vase made out of plastic.

Antifragile is the true opposite of fragile: It thrives, benefits, and grows during periods of high volatility.

What does this have to do with tackling the upcoming recession and downturn? Since no one really knows when the next recession is coming and how bad it will be, what can you possibly do to prepare? Or is your only option to grin and bear it?

Thinking of the problem from this new lens can help us ask better questions that we can actually answer. Most importantly, it can help us figure out a plan of action.

The first thing we need to do is drop the pursuit of prediction. That road leads to a dead end since no one really knows. Instead, let’s assume the recession is coming at some point in the future. We’ve been in a charging bull market for 11 years—we’re due for one.

Related: 5 Ways the Next Recession Can Make You Rich

For purposes of this thought experiment, let’s also assume that it will be a deep recession in the mold of 2008.

Now, freed from the burden of impossible prediction, we can ask the questions that truly matter:

  1. What steps can you take today to make your financial situation or real estate portfolio resilient to the upcoming recession?
  2. Most importantly, what steps can you take today to make your financial situation or real estate portfolio thrive and grow in the upcoming recession?

Did you notice how the tone of the question went from defense to offense, from protection to opportunity?


How to Make Yourself Antifragile in the Face of an Upcoming Recession

Any experienced investor who has been through downturns in the past will tell you that recessions are full of opportunity for the prepared investor. Further, they will tell you that fortunes tend to be made during times of high volatility and insecurity. I helped many such investors amass impressive portfolios during this time.

Here’s a simple way to verify that truth for the investor who was active during the 2008 recession.

Knowing what you know today, what would you have been able to do during that time if you had a much stronger financial position, wider access to capital, etc.?

Ask that question and watch their eyes light up. The common regret among this class of investors is that they didn’t purchase more during that time either because they could not or because they were fearful.

The key is that preparation for the opportunities brought by volatility must happen in advance.

Here are a few steps you can take now to make yourself resilient and antifragile to the upcoming recession:

  1. If you currently own investment real estate, stress test your portfolio. What’s the percentage of debt versus the value of the portfolio? Could your portfolio withstand a 10 to 20 percent drop in rental income? If you’re overstretched on debt or if the portfolio won’t withstand a 10 to 20 percent drop in rental income, you could take steps now to rebalance it. For example, you could sell an asset with high equity and use the proceeds to refinance the debt on the remainder, so you have a more balanced recession-resilient portfolio.
  2. You should repeat the same process with your personal finances. What does your current income statement look like? Are you spending every dollar that’s coming in because you’re counting on them coming in indefinitely? Have you accumulated non-investment debt lulled by the false sense of security of a bull market? Could your finances withstand three to six months of unemployment? Now is the time to take out the scalpel and rebalance your finances to make you personally more robust to recession-induced volatility.
  3. Last but not least, in the wise words of Bob Hope: “A bank is a place that will lend you money if you can prove that you don’t need it.” By the time you need it, it’s too late. What steps could you take today to set you up to take advantage of opportunities and thrive in the recession? Perhaps, you could set up lines of credit with local banks to be tapped in pursuit of opportunity later. Use the time between now and whenever the recession hits to build the relationship with the right individuals at these banks and increase the lines of credit progressively. Perhaps, you could pursue private money partners and establish partnerships now that would spring into action as opportunities arose?

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What other steps could you take to make yourself and your real estate portfolio not only robust but also antifragile to the upcoming recession?

Comment below!