189: Why We Don’t Fear Recessions

0:00Hey, everyone, and welcome back to the Rich Habits podcast, a top 10 business podcast on Spotify brought to you by public.com. By the end of today's episode, you'll understand exactly why we don't lose sleep over the thought of a recession and the four specific structural pillars that we've built into our financial lives that make that possible. My name is Austin Hankwitz, and I'm joined by my co-host Robert Croak. Robert is a seasoned entrepreneur with lifetime revenues of over 300 million. And I'm a multimillionaire in my early 30s with a background in finance and economics. As the show name might suggest every episode, we talk about rich habits as they relate to business, finance, and mindset.

0:40So Robert, what are we talking about in today's episode? In today's episode of the Rich Habits podcast, we're talking about recessions and why we don't fear them. Not because we're reckless and not because we think the economy is bulletproof or that a downturn couldn't ever touch us. It's because we deliberately built our financial lives so that a recession simply doesn't have the power to hurt us the way it hurts most people. Today, we're going to walk you through exactly how all of that works. I think this episode, Robert, it's going to be a really, really fun one because we always hear chatter and headlines about the recession odds or recession this or recession indicators going viral right now online.

1:18So why don't we spend, maybe before we get into those four pillars that we were alluding to, let's spend some time setting the table as to what a recession is and what it's not and maybe help people reframe and think about recessions more from the mindset perspective and not so much the actions that we're taking. Definitely, because we think it's important to talk about the behavior and the mindset side first, helping you even completely reframe what a recession looks like in your brain. So depending on which forecaster you ask, the odds of an actual U.S. recession sometime in 2026 range anywhere from unlikely to roughly a coin flip.

1:58So that means nobody actually knows. And that's kind of the whole point of this episode. Recessions aren't rare. They're not freak. They're not black swan events. Since 1950, the U.S. has gone through eight separate recessions. That's roughly one every nine or 10 years, though in practice they cluster. Sometimes a decade goes by with none. And then you get two that are really close together. The economy runs in cycles, expansion, peak, contraction, trough, recovery, repeat. And it has done this for as long as we've had a modern economy. And every single time, every single one, the economy in the stock market eventually recovered and went back to all time highs.

2:41Robert, let's put some like real numbers around what recovery actually looks like historically, because this is where a lot of people's intuition can be way off, including my own when I was learning about recessions and what they really mean for the economy and the bear markets that tend to ensue in the stock market. So going back to 1928, the average bear market, which means a drop of 20 % or more from its peak in the stock market, has lasted about 11 months. The average full recovery back to that previous peak takes about two and a half years. Now, it sounds like a long time. And for someone who needs the money in the next year or two, two and a half years is a long time.

3:20But for someone like us who has a long time horizon, two and a half years over the course of our lives isn't that long. And it's not always even that long. The COVID crash that took place in early 2020 saw the S &P 500 drop about 35 % in just a couple of weeks and then fully recovered to its previous high six months later. The 2008 financial crisis was brutal by comparison. Stocks fell like 55 60 % peak to trough took about four years to fully recover. But I think this kind of comes back to the point, though, that recessions, yes, they aren't always cookie cutter, but the pattern of it always recovers is inevitable.

4:01That happens every single time. So if recessions are temporary and recoveries are historically guaranteed, where does the actual financial damage come from? It's almost never the recession itself. It's the forced decisions people make in the middle of a recession. Panic selling at the bottom and locking in a loss that would have otherwise been temporary. Getting margin called because you were leveraged and the broker liquidated your position at the worst possible moment and at the worst possible price. Losing a paycheck with no cushion and being forced to sell investments just to cover rent. Those are the things that convert a temporary market event into a permanent, unrecoverable loss.

4:39And we want to be honest about something here because we don't want this to come across as we're just built different and fear doesn't touch us. That's not true. It's not a useful message for anyone listening. Being financially prepared does not mean the fear response disappears. The honest version of this episode isn't we don't feel fear. It's we built things in a way where the fear doesn't get to make our decisions for us. So that's what we're walking through today. four specific structural things we've each built in our financial lives that mean when a recession does show up and eventually one will, we don't have to answer the door with panic, fear, or selling and having knee-jerk reactions.

5:21So Robert, let's talk about those four structural pillars, starting with being prepared so that we're never forced to sell something you were alluding to before. The first pillar of this foundation that everything sits on is that we don't carry any kind of financial fragility that turns a market downturn into a personal disaster. Specifically, that means three things. First, we have a real emergency fund, enough cash sitting in something liquid like a high yield cash account on public.com to cover several months of essential spending without touching a single investment. Because again, during a recession, investments are going in circles and we don't want to touch those.

5:58We want to let them figure themselves out. The second thing we're specifically doing here is there's no high interest debt sitting around to compound against us because a recession that's simultaneously squeezing your income while a credit card balance is compounding against you at 20 % interest is the worst possible combination you could find yourself in. And the third thing that we're doing that I feel like a lot of people forget about and just find themselves making this mistake more often than not is we don't have any leverage. We have no margin debt on a portfolio. We have no HELOC payments on a home.

6:29Like there's no leverage here, which means that in the instance that a stock market, some volatility happens, no one's knocking on our door saying, hey, pay us money. And Austin, here's why I think that third piece matters more than almost anything else on this entire list. A stock market decline only becomes a real permanent loss if you're forced to sell while it's down. If you're not forced to sell, a 30 or 40 % drop on paper is just numbers on a screen. Uncomfortable to look at, but not actually money lost because you haven't sold anything. So go back and look at what actually happened in 2008.

7:04As portfolio values collapsed, investors and executives who had bought stock on margin got hit with margin calls, and brokers were forced to liquidate their positions to cover the loans, which pushed prices down even further. That's a documented pattern from a financial crisis. Leverage-driven, forced selling, amplifying the crash for exactly the people who could afford it the least. The same dynamic showed up again in 2022. Margin debt across the market dropped sharply as investors got squeezed and had to sell to cover their loans right as prices were falling. In every case, it wasn't the market went down that ended people.

7:41It was the market went down and they were contractually obligated to sell into it because of having leverage at every step of the way. And that is why this is one of the most important parts of this episode. If a recession cannot force your hand, you have zero contractual obligation to sell anything at a low price. Then a recession, by definition, cannot financially hurt you in any permanent way. It can only make your net worth look temporarily smaller on a screen or inside of our net worth tracker that I know you all are using. Go check out the net worth tracker in the link in the show notes below.

8:16Robert, let's talk about the second structural pillar that we've built into our financial lives here that allows us to not feel so much fear when it comes to recessions. Definitely. This is the one we talk about till we're blue in the face. And a lot of people call me out on it, but I think it is very important and that is real diversification. And we mean that in the truest of sense, not the watered down version where diversification just means you own 10 different tech stocks instead of one. Between the two of us, we've got meaningful exposure across real estate, precious metals, public equities, spread across every sector, private business interests, international stocks, equities, and fixed income.

8:58You name it, we have diversification through it if we believe it is something that is going to be profitable and help us grow our net worth. The reason this matters specifically in a recession is that these asset classes don't move together. They're not correlated, or in some cases, they're negatively correlated, meaning when one zigs, the other one tends to zag. I think precious metals are the clearest example of this, Robert, because during the dot-com bust, the S &P 500 fell about 50%, while gold went up 15%. During the 2008 financial crisis, the same crisis where the stock market fell, 55 % peaked a trough, gold finished roughly flat, slightly positive, acting as a safe haven asset while equities were getting pummeled.

9:45And during the COVID crash, all that aftermath, gold was not some just like slightly up over here, gold was up 25 % and even moved in the opposite direction of the markets while everything was going crazy. Now, it's not a guarantee that gold or silver or other precious metals will behave that way in every future recession. Some more recent research suggests that gold's correlation with stocks has shifted a bit. But historically, across multiple separate recessions, precious metals have been one of the more reliable counterweights available to add to a well-diversified portfolio. Let's be clear here.

10:19The point of diversification was never to maximize your return in a great year. If you're fully diversified, you're never going to outperform someone who went all in on a single best performing asset that year. That's not the goal. The goal is making sure no single bad year in any one asset class can meaningfully damage your overall net worth. A recession that crushes tech stocks specifically doesn't necessarily touch real estate the same way, doesn't necessarily touch international markets the same way, and historically hasn't touched precious metals the same way at all. When one piece of the portfolio is down significantly, the rest of it is doing its work and keeping you stable.

11:01And like Austin always said, you're just out there dollar cost averaging and enjoying the ride. So, Robert, we've kind of reframed the conversation around recessions and how they're a little bit more common than people think and that it takes 11 months and, you know, all that fun stuff, two-ish years to go from trough back up to peak and everything's fine. We talked about how we're not using leverage and we're being prepared. We've also now talked a little bit about being diversified. What now is our third pillar that we do so that when recessions do come, we're not running for the hills? Definitely.

11:32The third pillar is we dollar cost average. So we're just buying through the volatility. And this is all about behavior, not just structure. And this is where most people fail, even the ones who intellectually know the correct answer. We dollar cost average in a market on a consistent schedule, regardless of what the headlines say in any given week. That means when the markets drop, we don't pull back. We don't wait for things to calm down before investing again. And we definitely don't stop contributing. We keep buying on schedule, which means the same dollar amount buys more shares when prices are lower.

12:09From a long-term investor's perspective, a recession is functionally a sale on assets we already wanted to own. And the math behind why this works is very well documented. If you go look at the S &P over any 20-year rolling period of time, let's say, for example, 2004 to 2024, which includes that 2008 crash and the 2020 COVID crash, any investor who kept dollar cost averaging on a fixed schedule the entire time came out significantly ahead of where they'd have been if they had said, whoa, wait a second, markets are volatile. Let me hit the pause button. Let me wait for things to get back to normal before I start investing again.

12:47The person who panicked, sat in cash to try and wait for things to get better, missed the recovery. And that recovery in investing throughout that volatility, So you can, you know, you buy all the way down, knowing that the stock market is, of course, going to go back up when you buy down here, Robert, and you get to enjoy this on the upside. Right. That's what we're talking about. And that's why the people who dollar cost average do so well over a long period of time, 10, 15, 20, 25 years compared to people who are emotional and they stop contributing or they contribute more or they try and do whatever other strategy they find on the Internet.

13:22Yeah, definitely. This only works, and to be clear to everyone, if you have a genuinely long-term horizon, like Austin said, 5, 10, 20-plus years. If you need this specific money in the next year or two, volatility is legitimately dangerous for you, and you should be positioned far more conservatively than what we're describing here. But if your time horizon is long like ours, volatility isn't a threat. It's the single biggest wealth building opportunity most people are too scared to take advantage of precisely because it doesn't feel good at the moment. You guys always hear us talk about building that muscle to not have reactions to the headlines and the noise that are out there.

14:01And that's specifically what we're talking about here. Investing is a muscle. We know it's not a muscle. Investing plans. Automate your investing, right? do this stuff. So it feels like second nature. You're not actually having to click buttons and go, Oh, I'm so in the red right now, but I got to buy anyway. If you're like me and Robert, where you've got your auto invest set up on whatever your brokerage is, I mean, literally every single week, Robert, I think 175 or$200 is just auto debited from my bank account and automatically invested into the index funds and ETFs we talk about. Like it just, it just goes.

14:36I don't even know it. I don't even see it. I don't even know what the price is. And yes, if you find yourself as someone who you got that investing muscle, it's not as strong as you want it to be just yet. And you kind of quince a little bit and you're like, oh my gosh, I don't know how I feel about this. Auto invest is your friend. Set up recurring investments on your broker and get started so that when you do have the volatility, you are not reminding yourself, you're not using discipline in this sort of trying to get this muscle to work to actually cost average, but it's automatically happening for you.

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15:47Generated assets are like ETFs with infinite possibilities. They're completely customizable based on your thesis, not someone else's. So go to public.com slash Rich habits and transfer your portfolio today. That's public.com slash rich habits paid for by public investing full disclosure in the podcast description. So Robert, I think this final fourth pillar to me is the most important one. And it's it's the one you're going to see the least amount of content on online. It's the one that people aren't going to talk about because it like, you know, kind of goes over the head. This fourth pillar is is a big reason why Robert and myself do not fear recessions.

16:24And that is the fact that we have marketable skills, which means we can always earn somehow, some way, because our skill set is a recession-proof asset in a way that our portfolios can never be. So let's think about it like this. A stock portfolio can drop 20, 30, 40%, and there's nothing you can do about the price action itself. Real estate values can stagnate or even decline for years at a time, depending on what the market's doing. But having a marketable skill, something concrete that you can point to and say this generates income, does not evaporate because of a recession. Even during the worst downturns in modern history, the US unemployment rate has never gone above 10-ish percent.

17:09During the depths of the 2008 financial crisis, unemployment peaked around 10 percent. And during the COVID crash, it's peaked around 14, 15 percent, which means even in the worst recessions this country has ever had, Somewhere between 85 % and 90 % of people who were actively looking for jobs found those jobs and were able to generate that income for themselves. Companies still need people who can sell things, who can build things, who can solve real operational problems. Recessions don't eliminate the need for value creation. They just make companies more selective about who they're paying to create that value for their business.

17:48I love this section, Austin, and I think it's really, really important because right now all the headlines are talking about the millions of jobs that are going to get displaced because of AI and humanoid robotics. So I think having a really bulletproof skill set is more important than it's ever been. And there's also this specific opportunity dynamic that shows up during recessions that most people miss entirely. And that is weaker competitors get pushed out. Hiring bars stay high, but budgets often reopen for people who can prove ROI immediately. And some of history's most successful businesses were actually started during these recessions and downturns that we're talking about because a recession clears out weaker competition and rewards whoever can execute during that recession.

18:36So this is really the ultimate hedge underneath all of the others. Even if the diversification somehow didn't hold the way it's supposed to, even if the emergency fund ran dry faster than expected, the ability to go generate income through a real marketable skill is something a recession cannot take away from you. Every other pillar on this list is about protecting assets you already have. This one is about protecting your ability to make more money, no matter the economic situation. And I think you have to remind people here, at least I'll be reminding all of you right now, don't wait until we have a terrible economic situation to reskill, to relearn, to get better at these marketable skills.

19:18Only you know what those marketable skills are. You might be a really good event planner. You might be a project manager. You might be a rockstar marketer, You know what your skills are, but those skills, the ability to say, I know how to do this thing really, really well. If it's marketing, if it's event plug, whatever it might be, I can do this thing really, really well. I've proven I can do it really, really well for companies that fit this specific demographic and that are looking for people to do this one specific thing. I am the best at that thing, which means in a recession, companies are still going to want to have that thing done.

19:51And you are the person they're looking for to get that thing done and prove you've got these marketable skills. And again, I think it's very important to have the emergency fund, to not be in high interest debt, to not use leverage, to find yourself in a situation where all this stuff financially works out just great. All those things are important, but you can't forget you still have this fallback of your professional career, your marketable skill set and the things that you know how to do. You are the best out of a lot of things a lot of people wish they were good at around this world listening right now.

20:27And I promise you being able to have that skill set and lean on that during times of uncertainty is invaluable. Yeah, I think the biggest thing I take away from all of that that was fantastic is preparation. If you're preparing yourself because your fearful AI is going to take your job or your company is going to get rid of your department, that's key. You're prepared. If you're preparing yourself financially with having no high interest debt, having the emergency fund, that's preparation that no one can take away from you. So I think that's the key for me and the biggest takeaway is prepare yourself, prepare your skill set, and you'll be able to make it through any recession and any downturn in the markets.

21:06So Austin, walk us through what this framework from this episode really means and how someone can actually check it against themselves to understand what they're doing right and what they're missing within this framework. 100%. So we just laid out four structural pillars that Robert and I have implemented in our money lives to allow us to kind of shrug off the idea of a recession. So if you also want to think about, well, how can I implement those? How should I be thinking about my own financial life here so that I can also get that feeling of relief? Let's walk through them. The four questions you need to ask are these.

21:42Question number one, are you prepared? That means no high interest debt sitting around. You have a real emergency fund in place. No leverage that can get called on you at the exact worst moment possible, making the volatility a permanent financial loss for yourself. Are you prepared? Question number two, are you actually diversified across real asset classes, real estate, equities, fixed income, precious metals, international, maybe different business interests, not just five or 10 different tech stocks that you found online because you think it's fun to own them. Question number three, Robert, do you genuinely have a long-term view?

22:20And are you actually continuing to dollar cost average through this volatility instead of pulling back the moment things get scary? Are you building that investing muscle that we were just talking about? And the fourth question you need to ask yourself is do you have marketable skills that can generate real income regardless of what the broader economy is doing? If you can answer yes to all four of those questions, a recession stops being something that happens to you and it becomes something that simply happens around you. I love this breakdown of the framework, and I think it's so important.

22:53And I'm trying to visualize which one I think is actually the most important. And I don't think I can. I think we've really deduced it down well of the four pillars. Everyone needs to be able to say yes to. I do that. And I have that implemented into my life. And then I think they can withstand any recession or any setback in the markets. So I think this is a really, really great breakdown and just a cool way to end the episode. And I want to say that we don't fear recessions because we think the economy is going to be perfect forever. It won't be. And we know that. We fear recessions as little as we do because we've spent years and in my case, decades building a financial life.

23:36where being right about the timing of the next downturn was never actually the requirement because we prepared before it was. I couldn't agree more, Robert. I think this episode is going to help a lot of people take a deep breath. And even for those of you that might say, wait, the Federal Reserve is raising interest rates. What might this mean about the economy? We have the midterms coming up. We've got, you know, gas prices are high and, you know, all these other different things, right? All these recession indicators people talk about. Maybe that's true. Maybe we're gearing up for a recession.

24:03I have no idea. Maybe let's assume yes. Okay. What are you going to do about it? Ask yourself those four questions. Are you prepared? And if you actually are, then that's okay. Recessions happen. They happen every, like we said, six, seven, eight, nine years, right? They're a common occurrence in this country that we live in. It's okay for recessions to happen. Recessions don't happen to you. They happen around you. And that's the mindset you need to have as a successful, financially free, financially independent person is you have to understand that they happen around you, but you control what's inside of your financial life because you prepared for it and you're making the right strides to ensure that you are going to be able to retire with dignity in the future.

24:41I love it. And it really speaks to our long-term thesis because everyone's a genius in a bull market. And it's the people that prepare and diversify and understand that markets can shift on a dime. And as long as you're prepared, everything will work out great. And you'll be able to, like Austin said, retire with a bunch of money and retire with dignity and live your normal life. And Robert, you know, uncertainty I just talked about has never felt so high as the major indices haven't experienced a durable uptrend in months. The Federal Reserve is now raising interest rates. Inflation has become incredibly sticky, which is why it's never been more important to have a plan and to stick to it.