Recession is a harsh fact of life. History has taught us that economies tend go in cycles of growth followed by contraction (of GDP, etc.). Although these business cycles are not completely avoidable there is a lot that can and should be done to soften the blow of a recession, or to avoid a prolonged and deep recession.

So what is it that we can do to minimize the effect of recession on us? How to prepare for the recession that you see is obviously coming? This is a funny question because the answer that is good for an individual is not good for the economy as a whole. For example, times are recession are hard, so for individuals it is best to try to save money and reduce spending for the hard times. While for the economy, this is exactly what causes to deepen and prolong the effects of recession. Here are some tips to keep in mind.

  • Be very very choosy and cautious about investing in stock markets. Real Estate, Banks / Banking stocks, Steel and metal are some of the sectors that must be put on high alert or 'high risk'. Fast Moving Consumer Goods (FMCG) (like toothpaste, soaps, footwear, etc.) or Pharma stocks are relatively less affected and if you think you really have to invest in the stock market, these are the two sectors that you would like to have on your portfolio. After all, even if there is a recession, people wont stop buying toothpaste and medicines, or rarely try to use 'less soap', would they?
  • In a situation of recession + inflation, usually one sees a drop in property or real estate prices. So it is best to postpone investing in real estate if possible.
  • Buying Gold has historically been a good hedge against recession, especially in stagflation - economic stagnation + inflation.
  • Pay attention to your job. The risk of job lay offs during times of recession is very high. For example you are in an IT industry in India, you could try very hard to always remain on some project in order to avoid becoming a 'lay off' victim.

As I said, some of the suggestions above like "save money" or "wait for real estate prices to drop" are a bit funny, because it is exactly these types of measures people take that deepen the effect. Had my blog been more popular, out of moral responsibility i would have been very cautious of making such suggestions.

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Sep 25, 2008

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