10 ways to protect yourself from a double dip
Life will always throw you curves. Just keep fouling them off. . . the right pitch will come, but when it does, be prepared to run the bases.
~ Rick Maksian
There’s been plenty of debate lately over whether or not we’re headed into a double-dip recession, a mild slowdown, or maybe even a depression. Since the markets have been falling pretty steadily since May, much of the discussion has tilted toward the bearish end of the spectrum. Here’s a sampling of some recent commentary:
- Is a Massive Head and Shoulders Pattern Completing … Just Like on the Eve of the Second Wave Down in the Great Depression? This comes to us from Zero Hedge, complete with a really compelling chart of the S&P 500 from 1929 to 1933. The similarities between that period of time and the recent failure of the massive rally after the credit crisis crash are definitely noteworthy. Does that necessarily mean we will follow the same path? Of course not. But it’s worth considering and maybe one more reason to pull some risk off the table.
- David Rosenberg: Paul Krugman’s Doom Warning is Spot On: You know we’re in interesting times when Rosenberg and Krugman agree on an economic diagnosis. True to form, however, they differ sharply on their prescriptions for a cure.
- 10 Reasons to Be Bullish & 1 BIG Reason to Be Bearish: I always want to hear both sides of any debate before I form an opinion. Here are some bullish arguments, followed by some really negative predictions from uber bear Robert Prechter.
To dip or not to dip?
Regular MapleMoney readers know that I tilt toward the bearish camp, having been cautious on the markets for several years now. So naturally, I think we’re headed for a double-dip, right? Not necessarily. I honestly have no idea exactly how the economy or the stock market will perform next quarter or next year. I do think a double-dip is possible, but I would say that some type of slowdown is probable.
My point all along has simply been that there are enough bearish warning signals out there that I don’t feel comfortable putting very much of our money at risk. In that sense, it doesn’t matter whether the statistics actually confirm a double-dip recession or not. Having said that, the aforementioned stats have taken a turn for the worst lately, so that has reaffirmed my cautious stance. I could easily argue for an oversold rally at some point in the near term, but I still think the larger trend is lower until the debt problems work their way through the system. That will take time.
10 ways to stomach a double-dip
Whether you think we’re headed for a double-dip or not, there are a few things you can do to protect your money – just in case:
1. Boost your emergency fund
An emergency fund is just some extra money that you set aside for unexpected expenses like home or car repairs, or even a job loss. If you don’t have an emergency fund, now’s a great time to start. If you do have one, now’s a great time to add to it.
2. Formulate an emergency plan
What would you do if you lost your income? How would you react to a 40% or larger loss in your investments? Could you cover your basic expenses if you become disabled? For how long? What expenses could you cut immediately in a worst-case scenario? In All Your Worth, Elizabeth Warren and Amelia Tyagi call this type of planning financial CPR. It’s a great idea anytime, but it may be more important than ever if we’re about to hit another rough patch economically.
3. Cut the fat
If your budget isn’t as streamlined as you’d like it to be, take a little time to look at how you spend your income. Are there any areas where you’re spending more than you’d like? Would that money be better allocated to savings or an expense that you might value more?
4. Get more liquid
Do you know where your money is? If you run into some unexpected financial challenges, could you raise a decent amount of cash without selling investments at a time when you’re forced to realize a paper loss? For example: If you lost your income and needed to liquidate some of your investments to pay for basic expenses, could you do so easily, or would you need to sell stocks or equity mutual funds? If you were forced to sell during a market dip (or worse), you would lose that capital permanently and possibly trigger fees if you own mutual funds. If you hold a reasonable cushion in liquid vehicles like savings accounts, you can access your money without penalty or capital losses.
5. Keep a little cash in a safe place
In this case, I’m referring to physical money kept in a safe place in your home, not cash in a bank account. This is just to ensure that you always have a little cash if you need it. We started doing this after that big power failure in August of 2003 when we couldn’t access our cash for a couple of days. We don’t keep a lot on hand – just enough to cover some essentials if needed. Like most people, we tend to rely on electronic versions of money to pay for most things. That doesn’t work well in a power failure or other emergency situation.
6. Income audit
Take a look at where your income originates. Is it stable? If you’re employed, are there any rumors about cutbacks or layoffs? If so, it might be a good time to dust off your resume just in case. If you’re self-employed, how would your business weather an economic slowdown right on the heels of the last one? Are there any steps you could take to diversify your income or create an alternate income stream?
7. Emergency expense inventory
Often, when we need to tap our emergency fund for a car repair or other expense, we realize that the expense wasn’t really such an emergency after all. Maybe the car was making a funny noise for a while before it actually required that new part. You can avoid dipping into your emergency fund very often if you’re aware of the condition of all of your assets. Is your roof getting a little long in the tooth? Has your air conditioner or furnace been around as long as you can remember? Is your washing machine over 10 years old? If so, it may be time to set aside some extra cash in anticipation of replacement costs. (Mr. Cents would add that if you care for those assets really well by performing regular preventative maintenance, you’ll get a lot more life out of them. ;))
8. Go short
If you’re really bearish, you can always short the market. Or, if you’re like me and you don’t want to have a margin account (usually required for shorting stocks), you can use inverse ETFs. They rise when the market falls. But be careful. You can lose money with these too if the market rallies. This type of strategy is better suited to more active, knowledgeable investors.
9. Buy volatility
Volatility indices like the VIX usually rise when the market falls. In Canada, you can buy an ETF that tracks the VIX (symbol: VXX) if you want to belong volatility. Again, this is really swimming in the deep end of the pool for most investors. Also, this particular ETF doesn’t track VIX futures as closely as you might like. I only mention it because it’s another way to profit in a down market. I prefer to keep it simpler, buying inverse ETFs for bearish trades.
10. Stay vigilant, but don’t panic
Bearish commentators are often compared to Chicken Little, always calling for the sky to fall. I can’t speak for anyone but myself, but I would hazard a guess to say that most market watchers with grizzly dispositions are simply trying to help folks avoid financial pitfalls. In fact, a little preparation right now could save you from panicking if the double-dip does materialize. If it doesn’t, you’re no worse off. Rather, you’re probably in a better financial position than before.
I don’t know whether the economy will slip into recession again or not, but I’m preparing our finances as though it will. No matter what pitch the market throws next, we’re ready to foul off a few while we wait for the one we want. That way, if the pitcher turns a little wild, we’ll be able to stay in the box.
Are you preparing for a double-dip or do you think talk of another recession is premature?
Disclosure: As of this writing, we own a small position in HIX (a single inverse ETF that’s bearish on the TSX).