Pursuing Financial Independence in a Recession

FIRE was easy as the Dow doubled from 2013 to (early) 2020. But now what??

A severe recession would certainly make the pursuit of financial independence less fun. Imagine a world where:

  • You could no longer depend on dividend income, as more and more companies suspend or cut dividends (In the 2007-2009 market, dividends were cut more than 20%, and dividend paying companies’ stock prices halved)
  • Side hustles could no longer be plucked from the nearest tree, as gigs dry up along with demand
  • Your net worth, despite extreme saving, declined steadily, (maybe even year after year), due to falling equity prices.

What would your Twitter feed look like without breathless updates about net worth milestones, side hustle successes (“Bye, boss!”) and tall tales of debt annihilation?

What Now?

Given recent events, a recession is a real possibility in the coming months. Even if we sail through the current crisis, a downturn is eventually inevitable. IMCO (In My Contrarian Opinion), I think you have several options when this happens:

Option 1: Stay the course

Also known as : “Keep doing what you’re doing, don’t look at the stock market or your net worth for awhile, just keep hustling until this passes and you’ll come out ahead.”

I think Twitter would certainly have you do this, as my feed is filled with admonitions against panic selling, discouragement, or expressing any reaction to the recent goings on. And I think your commission based broker (also on Twitter) would back that up.

Assessment: Not realistic. Anyone obsessed enough with money to seriously pursue FIRE is going to feel the hit of a 12% portfolio hit in one week. It’s hard to stay motivated to save, save, save and hustle hustle hustle when there’s no result to show for it. I would have trouble with this route personally, and would initially default to Option 2.

Option 2: Netflix and Scotch

You might just want to bury your head in the sand until all this passes. Stay off Twitter (even if that impacts your blog traffic), try to avoid all the news (especially financial news), drink your sorrows away, binge watch mediocre Netflix programming, or just increase the dosage of your meds until the Dow recovers.

Assessment: Better. Or at least understandable. Losing a lot of money, especially money that you have made so many sacrifices to get, hurts. And you should let yourself experience that hurt. Nobody believes you when you tell them you’re not the least bit worried, anyway. So go ahead and drown your sorrows – at least for a little while.

Option 3: Panic and Sell Everything

I know that “everyone” (if “everyone” is a spokesperson for Merrill Lynch) is saying that this course is precisely what you should avoid. Selling poor performing stocks, or any major asset at a fire sale price, will only result in said asset immediately spiking in value post-sale, causing you to bitterly regret your actions, and perhaps even reject the way you’ve lived your entire life to date.

Assessment: Also understandable under certain circumstances. If you don’t have access to cash to cover at least six months expenses (e.g., not even if you were to use credit to stay afloat), you may want to consider selling a few things at a loss. Also, nothing wrong with taking gains. As a friend of mine once said: “Never try to buy at the feet and sell at the head…buy at the knees and sell at the shoulders.” Sensible and sane advice.

Option 4: Get creative, take risks.

This course can best be described by my reaction to the 2009 stock market crash: during the financial meltdown, the first thing I did was yank the remaining $100k out of my HELOC, sock it away into a savings account, and look for real estate bargains. I found a sweet condo in a brand new high rise in downtown Miami, complete with white glove service and infinity pool, for a mere $110k. The payments on the money I used to buy it were about $400, but I rented the place for $1250/month. I netted $500 after HOA fees and expenses. And this was after investing basically none of my own money. The best part was, if things got really hairy and I got had to foreclose on my house, I could always move into the Miami condo since I “owned” it free and clear.

Assessment: Best (and most fun) option. My advice would be to get your hands on as much cash as possible, whether it be through deferring purchases or repairs, low cost borrowing, or selling some assets that you feel have run their course in terms of appreciation. Then wait for a while and look for bargains. I avoid stocks, because it’s really hard to see behind the curtain of any one company. A once high flying enterprise may be saddled with debt and may not survive the latest downturn.

Instead, I look for undervalued assets that, even during previous crashes, still maintained at least some of their value. In order of preference, I would focus on the following:

  • Real estate, with this basic rule of thumb: if you can rent it at a price that’s affordable even to a couple making minimum wage, and it’s still a place nice enough for you to live in yourself, buy it. First of all, worse case scenario, you can move into it. But I find that high end accommodations are usually only affordable to the masses for a very short time. Eventually a luxury home finds a luxury buyer. Oh, and that condo in Miami? I rented it steadily for five years then sold it at a 100% profit.
  • Art: I’m a huge fan of investment grade art and prices have only been going up in the last decade. A recession might be the perfect time to buy that Warhol or Picasso print you’ve had your eye on. I know this must sound absurd coming from a guy who bemoans the hurdles to FI faced by the poor – but it’s actually more economical to buy auction grade art than anything else for your home. And historically speaking, art is a pretty solid investment. More will be explained in an upcoming post.
  • Cars: as many of you know, I bought my last Porsche 911 at the time of the 2009 crash. It’s lasted beautifully since then, and I think this might also be a good time to replace it with a newer, gently used, but heavily discounted update. Brands that last but which are rarely discounted, like Mercedes and BMW, Tesla are also good alternatives. Play your cards right, and the car you buy may last you well into the next downturn.
  • Designer wear: no, not the kind that may be out of style by the time the Dow returns to its pre-crash levels. I’m talking about stuff that lasts for years. I have already sung the praises of Prada shoes, but you might also consider a good watch or quality luggage. These things rarely go on sale, and recessions tend to be the only times they can be had for a discount.
  • Travel – first a couple caveats: I know this is hardly an investment and I generally prioritize stuff over experiences. But let’s face it, in a COVID-19 inspired recession, there may never be a cheaper time in our lifetimes to travel. And, the usual suspects like Venice and Barcelona will finally be rid of those busloads of tourists. Of course, this is an ideal move if 1) you do have the cash to do it and 2) you don’t worry too much about respiratory infections. Personally, I’ve always wanted to fly in a seat with a door, and this may be my chance to achieve that lifelong dream.

To Summarize

You could say that I’m agreeing with others in that a recession would represent a buying opportunity. But I would look beyond the stock market, where the chances of catching a falling knife seem high. Instead, this might be a great time to buy that investment home or vintage Rolex you’ve been lusting after. 10 years from now, you might look at these items and ask yourself “how could I ever have afforded that?”. 

And if you don’t have the cash to do so? Scotch, meds, and 12 hour streaming marathons are an acceptable alternative. So is just sitting there and staring into space, which is also a course I have recommended even in non-recessionary times.

How are you coping with the recent downturn? How would you handle a recession? Tell me about it in the comments below.

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