There's Always a Recession Coming - Using History to Understand the Future

​There have been 22 recessions since the turn of the 20th century -- see the table below for a list of all of them (sourced from here) -- and we have currently experienced one of the longest expansion in US history as of early 2017 - by June 2017 we will have experienced an 8-year expansion (almost 96 months) - this is the third longest bull market in over 100 years. Clearly at some point within the next 2 to 5 years, we're going to experience a recession. 

A list of all recessions over the last century - sourced form www.nber.org/cycles.html

​This article isn't about 2017 or this latest bull market, however - it's about the economy in general and the fact that things so far have been cyclical. Given the last century of markets, we can safely assume things will continue more or less the same way unless deep structural changes cause some sort of change. These types of changes might be:

• the rise of superhuman artificial intelligence allows for elimination of business cycle due to far more efficient resource allocation
• the global war that drastically changes the amount of capital available
• the deeper political corruption that creates perverse incentives in the economy

Until those things happen, a prudent person would assume a recession will occur when a bull market has been going on for a long time. 

Can you predict when a recession will happen? NO.

Can you predict how bad the recession will be? NO.

BUT, can you reasonably assume there will be one? YES.

Now, why are we writing this piece? Doesn't it seem obvious? Well, in fact, there are generally two schools of thought in personal finance and investing when it comes to recessions - neither of which are healthy for most people to adopt:

• The "don't think about recessions" group: These individuals recommend dollar cost averaging into broad mutual funds or ETFs over years and years without paying any attention to how overvalued or undervalue the market it and without paying attention to how long the latest bull run has gone on for. They might be reasonably ok, but we can do a lot better than what they are advocating. There is not need to purposely handicap yourself the way they want you to.
• The "let's predict the time and magnitude of the recession" school: These are quantitatively-oriented people who are trying to predict when a recession will occur and how bad it will be. This might work sometimes for advanced investors, but for the vast majority of people, this is at best a waste of time and at worst a very dangerous practice for your portfolio. 

What's a better option? The better way is to simply observe things in light of historical data and without trying to quantify things. In this observation, you need to be incredibly humble of your lack of ability to really predict much but you still need to be mindful of the length of bull market runs. As the run gets longer - as Year 1 turns into Year 5 and then turns into Year 8 of a bull market you will want to 

• start slightly toning down the level of investing
• start piling up a ton of cash on the side as dry powder so you can take advantage of very low prices when the recession hits

Most people will sell during a recession - usually after having purchased at the previous highs in a euphoric frenzy. You, however, should be sitting calmly with a pile of cash ready to buy excellent stocks at very low prices. In the meantime, you'll still want to be investing - you don't want to stop investing and wait for a recession because you can't rally predict when it will come and you don't want to spend years sitting around waiting without getting any market returns. 

Be wary of those individuals who try to predict things too much, in fact, add a lot of risk to the equality. The risk comes from the false assurance they provide themselves or others - it is better to wisely understand your total lack of knowledge about something than to confidently go forward when ou really don't understand something. As Mark Twain so eloquently stated: "It ain't what you don't know that kills you, it's what you know for sure that just ain't so."

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