Why a Recession Doesn’t Have To Hurt

04/2/08 posted by Lazy Man

If you’ve picked up a newspaper or turned on a television or radio, you’ve probably heard about the recession. For a long time there was much debate, but now most analysts agree we are in a recession.

Recessions are generally have negative connotations, but there is some good that comes from it. As Baron Rothschild once said, the best time to buy is when there is “blood in the streets.” I’d go with the more general, “opportunity knocks loudest when times seem their worst.”

With that in mind, here are some ways to make the most of a recession.

Buy Stocks at Bargain Prices - I still haven’t contributed to my Roth IRA for 2007. We had a wedding to fund and my income dropped dramatically in October. Neither of those are good excuses - it’s more about me being Lazy. I welcome the recession as an opportunity to make the most of that money. I’m buying and holding stocks for the long term - more than 30 years from now. I’d rather buy stocks at recession prices than bubble prices. I wouldn’t recommend waiting like I did, I accidentally timed the market well. It could have been worse.
Relief for those with HELOCs - The Federal Reserve is cutting interest rates at a furious pace. Those who have gotten themselves in trouble by tapping their home equity can pay off more principal and less interest.
Cheap Housing - Home prices have dropped in many places around the country. I’ve seen prices drop 10% in Boston and San Francisco - two markets I follow. Usually when this happens, mortgage interest rates go up. However, around the country, rates are at their lows of a few years ago. If you are in the market for a home, have cash for a down payment, and can afford it, it is the best time to buy a home.
Rebate Checks - Many people are getting $600 or $1200 in an economic stimulus package. I would rather have a good economy, but let’s not ignore that this is real money that many will use to buy an iPod or Wii. On second thought, perhaps this should go into the “Why I Hate a Recession” column.

One thing that I don’t like about recessions is that I don’t make as much money in high interest saving accounts. Though peer-to-peer lending is a different asset class in many, many ways, I will consider shifting some of money from those savings accounts to Prosper.

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Lazy Man has been a lender at Prosper since February 2006. He is the author of the personal finance blog, Lazy Man and Money and the health and fitness blog, Lazy Man and Health.

Posted in Personal Finance Education

9 Responses

Chrisfs | April 2nd, 2008 at 11:25 am

Put money into that IRA, keep the magic of compound investing in mind, it’s a lazy person’s best friend. Some stocks are cheap, though the trick is to figure out which things are cheap unnecessarily and which are cheap because they are near going bankrupt. Personally I stick with mutual funds just for that reason.
There bunches of worthy loans on Prosper but keep in mind, it’s not liquid like a high interest savings account.

Mrs. Micah | April 2nd, 2008 at 1:31 pm

@Chrisfs, I think you make a good point. We should only buy stocks “on sale” that we’d buy anyway. For me, that’s index funds. For others it might be AAPL.

Llama Money | April 2nd, 2008 at 1:34 pm

The stocks make everything ok by me. Worry about losing a job sure isn’t any fun, but I love picking up bargains in the stock market. Now, and the coming summer months will provide great opportunities if you look carefully.

Cos | April 2nd, 2008 at 3:16 pm

Gray’s Papaya - too funny!

All very good information - being able to remain solid on IRA contributions throughout 2007 and going strong into and through 2008 we definitely serve anybody well during a recession. It’s also a good time to use money like a HELOC for the purposes intended (NOT lifestyle). It’s not just a relief for those that were being hurt by their HELOC but also a time for people to draw upon equity that was never tapped. Naturally it would be a good idea to be wise about the purpose of a HELOC draw. A sensible remodel to a home would be a much smarter use of the money over a vacation or a frivolous remodel (”keeping up with the Joneses”) and can be done while the money is cheaper to borrow.

NewHorizon | April 2nd, 2008 at 4:14 pm

“…I will consider shifting some of money from those savings accounts to Prosper.”

Could I ask what’s the tipping point for you during this consideration? I mean, for example, how low would the savings account interest rate need to be for you to make the definite decision to shift to Prosper?

No Debt Plan | April 2nd, 2008 at 8:19 pm

Haven’t some banks cut HELOC availability down because there isn’t equity in the house to back it? I thought I read that somewhere.

Lazy Man | April 3rd, 2008 at 1:55 am

I don’t have a hard and fast rule. It’s largely a gut feeling involving more than a few factors. The biggest factor is evaluating when I really need the money in those savings account. This is something that changes with life’s goals. If I find that our goals are further out, I may put more money in the stock market.

I also wouldn’t shift a lot more money to Prosper. It might be just 10-20% of those savings - and only if my emergency fund would still be in good order.