Getting Rich in a Recession

There has been lots of talk about an upcoming economic recession, so in this video, I’m going to cover 5 ways you can invest during a recession to keep your portfolio in the green.

Recently, FedEx’s CEO says he believes a recession is impending for the global economy. There have been talks of inverted yield curves and inflation and bear markets for awhile now, so it may be a good idea to have some ideas of where and what you can invest in during an economic downturn. But remember, I’m just a goofball on YouTube, so the following ideas are just that… ideas. Only invest in things that you understand and feel comfortable with.

And thanks to Tradestation for sponsoring this video.

I-Bonds

First up are Series I Savings Bonds. Now bonds are typically known for being a safe, low-interest way to balance out a portfolio, but I-Bonds are particularly interesting because the interest rate you earn is linked to the inflation rate.

Here in the US, the inflation rate as of September of this year is 8.3%, down from June’s high of 9.1. But, you can currently buy I Bonds at a rate of 9.62% until October when a new rate will be set. You lock in 9.62% for 6 months from the time of purchase. The treasury will set new rates in November and May based off of the Consumer Price Index… but the change is only applied to your bond every six months from the bond’s issue date.

Now there are a few caveats. First, you are maxed out at investing $10,000 per year in these bonds. Second, you have to own them for at least one year… but if you cash out before 5 years, you forfeit the interest from the previous 3 months. So ideally, this is a longer-term hold in your portfolio.

The savings bonds themselves are exempt from taxation, but interest earned is subject to Federal income tax… because of course.

Now to buy them, you’re going to use this Web 1.0-looking government website…. But it’ll get the job done.

VIX Calls

So we just talked about an extremely safe form of investing, but now let’s look at something a bit riskier: VIX Call Options

In case you aren’t familiar, the VIX index measures the market outlook for volatility based off the S&P 500 stock index option prices. Some people refer to the VIX as the fear index. Typically, if the market tanks, volatility rises. Look at the COVID crash in March of 2020.

VIX’s support line for months prior was around 12 and at its peak in March, it hit 85, for a 600% increase. Now, of course you’re not going to have perfect entries trying to time the market, but I would be interested in VIX around the $24 level if I expect the S&P to continue to drop.

So, I mentioned call options. If you are new to options trading – well I would probably skip this one altogether, but with calls, you’re making a directional bet that the underlying – in this case the VIX – will increase in price. But, these options contracts could also expire worthless if we’re wrong, so keep that in mind.

We also want to make sure these contracts have plenty of time on them before they expire. Right now, I could buy VIX calls expiring in March of 2023 with a $23 strike price for $700 apiece. That is essentially saying that VIX will be at least $23 by March 22nd of 2023… but because options pricing is somewhat complex, for this to be profitable, I need the VIX to be over $30 in March.

Anyways, call options could be a decent hedge for a portfolio if continued selling in the market is expected in the short-term.

SPY Put Options

In a similar vein to VIX call options, you could forget about the VIX altogether and go straight to shorting the S&P 500. You can do this by selling short an S&P futures contract, buying put options on an S&P 500 ETF like SPY, or buy inverse ETFs. My favorite of these is buying put options on SPY.

Because an increase in volatility causes an increase in the cost of an options contract, ideally, you want to buy before a major decline. If you buy during a large drop and then volatility decreases, you could still lose money even if the market continues to decline.

Now this gets into the “timing the market” territory which is dangerous, but you could buy a small amount of SPY puts as a hedge in your portfolio.

Again, let’s look at SPY puts expiring next March. You could buy puts with a strike of $409 for about $4100. This can be an expensive hedge depending on the size of your portfolio, but if the market were to drop to June’s low of around $365, you would make roughly 15% if you sold in March.

Remember, this strategy risky, but if you like to actively manage your portfolio, this is a viable option… pun intended.

Sell Put Options

If you’ve always wanted to buy the dip but have a hard time pulling the trigger when the market is dropping, you could consider writing put options.

Let’s say you want to load up your portfolio with100 shares of Apple. But Apple is hovering around $154 and you think that the market is going to continue dropping and you would rather buy Apple at a lower price. Well, you could create a limit order at.. Let’s say $142… and if the stock ends up going down to $142, you would be the lucky owner of 100 shares of Apple.

Now alternatively, let’s consider selling – or writing as it's called – a put option on Apple instead of placing a limit order. We could sell a Put option for $259 expiring next month. That $259 goes in our hypothetical pocket. Now at any time, the counterparty – AKA whoever bought the put contract from us – can make us buy 100 shares of Apple at $142. But that’s fine with us – that’s what our original goal was, but now the benefit is we get to keep the 259 dollars in premium that the buyer paid us for that contract. This effectively lowers the cost of the Apple shares to around $139 and 41 cents apiece.

Of course to do this, you need to be able to afford the 100 shares of Apple at $142… so that cash will be tied up until the option expires or is exercised. If Apple never drops to $142 and the option contract expires worthless, we just made $212 and can write another put contract for the next month.

So essentially, it’s almost like placing a limit order but you get paid to do it. Now it’s more complex than that, but if this sounds interesting to you, I recommend you research it further.

Real Estate

Okay, enough stock market talk. Let’s look at investing in real estate during a recession. Just because the stock market is dropping or there’s a recession doesn’t automatically mean real estate prices are going to drop, but it can definitely help cool off a hot housing market, which is what we’ve had for the last few years.

Single family homes, condos, duplexes, triplexes, 4-plexes, or apartment buildings can all make viable rentals if that’s something you’re into. The downside is that interest rates are usually higher at the beginning of a recession, so borrowing money becomes more expensive. When we bought our house a year and a half ago, we locked in a 2.75% interest rate. Now the raters are over 6%, which has a huge impact on the affordability of real estate.

At some point, the Federal Reserve will adjust their rate policy to encourage spending and borrowing and ideally that will coincide with lower real estate prices.

But rental properties can still be great investments as rents don’t normally drop during recessions… sometimes it just increases demand since fewer people can afford to buy homes.

Another sector of real estate investing to consider is self-storage. In 2008, when some real estate sectors had 60% losses, self-storage saw a 5% gain. People love their stuff and they gotta store it somewhere, especially if they downsize their home.

Final Thoughts

So those were 5 different methods to consider during a recession, but, the smartest thing for you might be to do nothing. If you are relatively young, there’s no reason to panic during a market downturn. You don’t need to panic and sell your portfolio. You can just sit on your hands and wait for the market to rebound.

Thanks for watching. It’s good to be back.