Yield curve part 2: How to cope with recession risk?

I am a bad student as I posted this so last minute as I was very busy this week :(

Btw, this topic well suit as my 2nd part of yield curve post, which signify a potential recession is coming!

As usual, you may watch my video here for a better animation and illustration. Please give a like on this video, and subscribe my channel to give me some supports. This will really motivate me!

Let's start!

Hello everyone! In my last video, I have shown that if the yield curve inverted, there is a high chance for the US to enter recession and the stock market would crash! I also prepared an animated video to show how the yield curve behaves with stock market at the different phases.

So, since we know that most of the time inverted yield curve indicates that the probably for the market to tank is high. Should we sell all our stocks now?

Although overall stock is an anticipation of “future”, but we can always refer to the history pattern to help us plan for our investment or trading strategy. It will also be instructive for investors to note that historically there has been a time-lag between yield curve inversions and onset of recessions; the time-lag between yield curve inversions and recessions ranged from at least a few months to few years.

We call this: Long Lead and Lag Times.

Thus, never rely on any news or headline to make a decision!

What I will or not do during the lag period?

I need to emphasize my disclaimer here. I am a long term investor. Thus, the stocks that I am holding, are planning for 5 or even 10 years. I have done thorough research on my stocks, thus I have confident on them and do not mind to hold. I also have the holding power as all my money used in investment, are not my daily or urgent fund. I already allocate an urgent fund that is enough for our family up to 9 months.

Do:

1. I will continue to shop for stocks. As mentioned previously, I am a long term investors, and since I know that historically the stocks will still go up after the yield curve inverted, I will still buy the stocks that dips to the attractive price.

2. However, if the market has gone up and reach resistance level, or previous all time high, I will stop buying.

Don't

1. Panic sell. I won’t panic sell whenever I read some headlines. Panic sell is the fastest and easiest way to lose money in stock market.

2. Use all my funds. This is more for money management rule. Even though there is a high probability that the market will rally higher during the lag period after the yield curve inverted, but, I will still keep a healthy cash ratio of 10-20% on hand to prepare for the worse.

Next, what shall we do when the recession hits us? Shall we sell all the stocks 6 months later?

My answer is NO. Keep investing without timing the market is the best way to compound our asset.

The opportunity costs that we miss when the market rallies in fact, could cost more than the market dips. The longer we invest, the lower the risk of losing money.

Inverted yield curve and its implications notwithstanding, investors should stick to their financial goals and invest according to their financial plans. Downturns do not last for very long; unwarranted risk aversion may lead to sub-optimal returns and compromising long term financial interests of investors

Of course, if you are not comfortable to ride the volatility or the market tanks, and do not want to see our portfolio just going red, there are a few things we can do to protect our portfolio during the recession period:

1. We can always sell part of the shares when it reaches previous swing high or new high. This could help us to keep part of the profit in our pocket and lower down our average price. If the market still rallies, we still have stocks to enjoy the profit. Just take note that, we never know when the market will tank. If you sell your shares but the stock still rallies, follow your plan. Do not FOMO, regret and buy them back at high. This will make us very uncomfortable or disrupt our phycology when the stock starts to tanks.

2. Hedge our portfolio with Put option or VIX option. This is a big topic, and I am still learning it. Probably I can prepare a video to talk about this. However, hedging requires strong discipline and new investors are not recommended to do so. As a wrong move could accelerate the loss or reduce our profit significantly.

3. Asset allocation is the most important attribution factor in success of our financial goals. While we should ideally review our asset allocation in a systematic manner at regular intervals, prolonged period of volatility and / or deep corrections is the time, when we should take a look at our asset allocation and rebalance if required.

Next. Let us see what are the stocks that are potentially going up during the recession!

During the last covid-19 crash, we could see that:

The following stocks are quite stable during the crash:

Consumers tend to spend carefully during recessions. Many people begin buying lower-priced items. They also typically eliminate optional expenses such as paying professionals to take care of routine home and car maintenance. Instead, they usually spend more money at dollar stores, home improvement outlets, discount retailers, and auto parts stores.

Next, let us move forward to the earlier recession: The great recession in year 2007 to 2009, which caused the subprime mortgage crisis market crash.

Lastly, let us look for one more recession: Early year 2000 recession. During this period, market suffered from the dot.com bubble crash.

This is the summary table for the index and the selected stocks performance during the last 3 recessions:

However, I feel that the time to buy them are not there yet based on the technical analysis. Remember to subscribe my channel so you could get my update if I start to purchase these stocks.

Nonetheless, if we are a long term investor, if we are patience enough, the index is always going up. No matter what recession or crash in the pass, every point was the best buying point compared to today's price.

Let me end my video with Warren buffett’s quote: The stock market is a device for transferring money from the impatient to the patient.

Please subscribe my channel and like my video to motivate me to prepare more quality videos. Thank you and see you in the next video.