How to deal with the next recession

By David G. Wilson Jr. The Daily Record Newswire One of the foremost economic forecasters, the Economic Cycle Research Institute, recently predicted that "a recession (defined as two consecutive quarters of negative gross domestic product) is on the way and it is unavoidable." These economists should not be taken lightly. They correctly predicted the last three recessions and developed the methods used by the leading economic indicators. They have a "long history of measuring and predicting turning points" in the economy. If we are headed for a recession, it may not feel much different than what we are experiencing now. Economic activity has been so weak that even if GDP drops for a quarter or two, it may not feel any different. Europe still has not dealt with Greece's debt problems and undercapitalized banks, and China is slowing down (three straight months of slower manufacturing activity). Probably most troubling of all is that policy makers have little in the way of tools left to address the problem. These factors may cause a deeper-than-expected recession. History indicates that if we experience a normal recession, stocks could drop 26 percent, on average, from peak to trough. We have already dropped 19 percent from peak to trough, so we may only have a little more to go. If you are a long-term investor, now may not be the time to run for the exits. Because if you do sell, you will have to make two correct decisions -- timing your exit from the market, and timing your re-entrance, when it appears the coast is clear. The problem with this strategy is that when economic conditions improve, and many of today's problems are distant memories, stocks will probably be much higher. How should an investor deal with the next recession? 1. Make sure stock exposure does not exceed risk tolerance. Sell as much stock as necessary to maintain a proper balance. 2. Maintain a higher-than-normal cash position so that when opportunities present themselves, advantages can be gained. The next recession should not be viewed as the world coming to an end, but rather an opportunity to buy great companies at cheap prices. This is exactly what the greatest investor of the last half century, Warren Buffett, does. And this seems to be the secret to his success. 3. Buy high-quality companies that have consistently increased their dividends over five, 10, 15 or even 25 years. Why buy stocks that pay dividends? Because they tend to hold up better in difficult markets and you get paid while you wait. The key to dealing with the next recession is to view it as an opportunity to buy things at reasonable prices. The world is not ending, but fear and panic will not go away. When the next recession ends, a cyclical recovery will begin. Companies will continue to provide products and services that a growing middle class around the world will need and want to consume. Innovation will continue to drive economic activity and our standard of living. Years from now, when we look back at this time, we will wonder why we didn't take advantage of the opportunities available. In my opinion, don't be scared; be an opportunist! ---------- David G. Wilson Jr. is senior vice president of investments with the Wilson Financial Group of Stifel, Nicolaus & Co. Inc. in Portland. Contact him at 503-499-6260 or wilsond@stifel.com. Information herein is from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Investment involves risk and may result in losses. Published: Thu, Oct 27, 2011