The upside of a recession
The prospect of a recession leaves most people with a sense of dread. There are, however, some benefits which if used wisely, can serve to safeguard, or even improve, your financial prospects.
We’ve identified four advantages of a recession: and how you could be profiting from them.
1. Decreased cost of living
While an economic boom cycle is great news for investors, it has the counter-effect of driving inflation into worryingly high levels. In simple terms, inflation is a rise in the average price of goods and services, as measured by the consumer price index (CPI).
During a boom cycle, the economy is in full swing; exports are high, jobs are plentiful and the nation generally enjoys high levels of prosperity. With more people eager to spend, the price of goods and services increase as producers take advantage of the high levels of demand.
Under a slowing economy, like we have now, market opportunities reduce, businesses find it harder to obtain credit to finance new projects, and people tighten their belts over concerns about unemployment. This leads to less demand in the economy, which drives prices lower as producers vie to attract sales.
This lack of demand has already seen the price of petrol drop significantly in recent months. Lower petrol prices also has a flow-on benefit of contributing to a reduction in food prices, as the cost of trucking fruit and vegetables to supermarkets is decreased.
The other big decrease in the family budget has been the Reserve Bank’s heavy interest rate cuts. These are designed to free up cash flow, encouraging households to spend more and keep the economy moving.
So what to do with this additional cash? At the risk of upsetting Kevin Rudd and Wayne Swan, you may want to consider maintaining your current mortgage repayments, regardless of the lower minimums now required.
It may also be an opportune time to get your personal debt under control. You could use the extra cash to pay off your credit cards. And, if you have several cards, and other personal loans, you may want to consider consolidating them into one, lower-interest loan.
Additionally, you could use the funds to make an additional contribution to your superannuation. More on this later.
2. Government rebates
Another hallmark of a recession is increased Government spending and rebates. While the Reserve Bank lowers interest rates to encourage us to spend, the Federal Government has the power to hand over cash to taxpayers and those on welfare payments.
The big winners here are likely to be first home buyers and lower to middle income earners, particularly those with children.
The Federal Government first home buyers grant has been increased from $7,000 to $14,000 for established homes, and $14,000 to $21,000 for new homes. Various state and territory governments have also come to the party by contributing additional grants and lowering stamp duty. This, combined with the record low interest rates, is great news for those looking at entering the housing market for the first time.
Another avenue to stimulate spending has been the Federal Government’s ‘fiscal stimulus bonuses’. First released to lower-income families before Christmas, a second round has been proposed for March/April, with up to $900 on offer for individuals and more for students.
Again, while the intention of the bonus is to encourage Australians to spend on things like electrical goods, clothing and holidays; you may want to consider how you could use the bonus to pay off credit card debt, decrease your mortgage or top up your super.
3. Sale of the century
It’s now universally recognised the global financial crisis of 2008 has wreaked the greatest havoc on sharemarkets since the 1930s. As a result, almost every superannuation fund has reported negative returns, and many industries are suffering significant reductions in their earning expectations.
This has been particularly tough for investors, especially those who have retired or are looking to retire, and depend on investment returns to live on. However, for those investors still accumulating money for their retirement, the bear market represents what could be the greatest buying opportunity in a generation.
According to MLC Investment Specialist Brian Parker, “crises provide opportunities for long-term investors to acquire quality assets at beaten-down prices.”
That said, knowing when to buy into (and sell out of) the market can be challenging, even for professional investors.
One of the best ways of reducing your investment risk is by dollar cost averaging. This process involves drip feeding a set amount of funds into the sharemarket at regular intervals. For example with managed funds, or your superannuation fund, you could invest a fixed amount on a monthly basis. When markets go down, you will be buying more units in the fund at a lower cost. And when markets go up, while you will be buying units at a higher price, the overall average price paid will be somewhere between the high and the low, thus reducing the impact of volatile markets.
Investing in a managed fund also ensures you are investing across a diversified range of industries, countries and companies. It also allows you to draw on the expertise of world-class investment managers to select the best quality investments available at severely reduced prices.
4. Remembering what’s important
In boom times, it’s easy to get caught up in the lifestyle of spending big, taking advantage of easy credit and investing in overvalued, even risky, products.
A bear market coupled with an economic recession is an opportunity to re-evaluate what’s really important. What are your long-term goals? What’s most important about your current way of life? What are your biggest concerns when it comes to the welfare and future of your family and yourself?
‘Sensible’ is the key concept here, as people the world over remember the value of spending time on family, not possessions; and investing in quality, not quantity.
Right now, it feels as though the whole world is focused on money matters, as world leaders work together on a roadmap to repair global economies and forge a new way forward based on responsibility and sustainability.
With this in mind, there’s never been a better time to talk to your adviser about your own financial map; a compass to ensure you make the most of whatever opportunities 2009 provides.
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