By Dr. Harry Hamann (MBA), January 06, 2022

Why predicting a recession will not make you richer in financial markets (do this instead!).

One of the early mistakes that I made was being overly pessimistic when it comes to financial markets. Yes, markets can go down. They can correct. Even for a prolonged period of time. In a recession (contraction in the economy; consecutive prints of negative real GDP

growth), (stock) markets can go down substantially (40%, 50%, even more!).

The point is this: will the average private investor make money by being overly pessimistic in financial markets? No. Can exceptional short sellers make enormous profits by betting on

declining stock prices? Yes. Why was one of my early mistakes to be overly pessimistic in

financial markets? Opportunity cost. If you are not exposed to the markets, you also "lose" the potential upside. This opportunity cost can in fact be larger, than potential drawdowns in corrections! This is a chart of the US Dow Jones (stock index) from 1974-2022.
Does it pay to be overly pessimistic and being fearful of a recession? No!

Yes, you can have prolonged periods in which your buys are in a drawdown. If you buy-in over time, there is long-term only one direction: UP! There are counter-examples (e.g. Japanese stock market) in which you can be in a drawdown for 20 years! The final direction will still be up.

Just be careful with exotic markets. When it comes to financial markets, the US is still the top dog (largest economy, still growing well, lots of innovation, reserve currency of the world, biggest and most liquid financial markets, trustworthy and reliable, good rule of law, etc.). Get exposure to US stocks, slowly buying over time.

Best of luck, Harry

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