7 things to do (and not do) in a downturn

Billy Joel with his Uptown Girl lyrics was a sensation in the 60s and 70s. Those were the days when uptown and downtown were the in-vogue words.

Today, it is 'downturn' that is garnering all attention. And each one of us is part of the harsh transition from an upturn economy to a downturn economy.

The economic slowdown in India and the recession in many parts of the world are affecting us all in many ways. Here is a list of things that we need to do and some that we should not do during the downturn:

1. Respect the job we have

In a downturn, new job opportunities vanish. This is evident with the many campus placements drying up. The same is true for new posts for experienced managers. More so, the management of any company will be looking to cut the existing posts too to reduce their overall expenses.

Perks in the form of free meals, travel allowances, etc may also be reduced. As a salaried person, it is thus important to hold on to the existing job it will be the main or only source of income.

For business people, the caution here is not to bleed the business. The regular reinvestment required in the form of stocks, retraining manpower to compensate those who were retrenched, using the opportunity to employ economical highly skilled persons should continue. 

2. Reduce expenses and lifestyle purchases

One sure way to find some excess cash in a downturn is to reduce expenses and lifestyle purchases. The point is not to cut down on the fresh fruit that we buy for our children, but on the new sofa set that we planned for our living room.

The new model mobile phone or the new laptop or the new car are a strict NO, at least not till the downturn is over.

3. No new debts, please

If the point 2 above is followed, a new loan can be avoided. However attractive the price may be, to buy a house or a car on loan during a downturn is highly risky. With no guarantee of a steady income, by taking a loan, we are adding to a steady monthly expense.

Frequently in a downturn, we may have to work for a lesser income, if we lose a job. Some companies today have already implemented a pay cut for existing employees. A loan repayment will be in jeopardy if any such thing happens to us.

4. Shy away from risky investments

Recession is the time when, risky investments such a pyramid schemes and Ponzi investments flourish by showing fantastic returns. It is best to keep a distance from such schemes at any time; more so in a downturn.

Investments in business expansions for business people are also risky in a downturn. Exceptions for this are certain industries which are recession proof in India like college and school education.

Even in the education sector, private coaching and certificate courses centers are facing a slow down. Much care and detailed analysis is required before taking investment decisions.

5. Be insured

Health and term life insurance plans need to be in-force. Please revive those that have lapsed. We need to take up new ones if we do not have these. While taking the health plans we need to ensure that everyone in the family including children and our parents are covered.

Terms plans in life insurance are very cost-effective plans with high cover. These need to be taken at high values for the bread-winners at least. A thumb rule is to have a minimum of 12 times the annual income as life cover in a term plan.

6. Do not stop that SIP/ULIP monthly premium

During the downturn, the stock market also will be low. By stopping the investment through the monthly investment mode of mutual funds and life insurance companies we loss the advantage of 'cost averaging'.

Cost averaging has two sides -- buying more when the market is low; growing all when the market is high. We buy more units for the same investment, as the units of the mutual funds and the ULIPs are at a lower NAV (Net Asset Value).

By stopping the SIPs/monthly premiums we lose out at the buying more stage. This will also short circuit the grow-all stage as we will not have much units in our hands for them to grow.

7. Educate yourself

Being prepared for the upturn is something that we need to do. Educating ourselves with higher skills and domains required for promotions and in other lucrative domains will keep us ahead once things turn positive.

The same applies to business people too in identifying new opportunities to grow their businesses once the downturn turns in the other direction.