ChatGPT Tips For Recession-Proofing Your Finances

As economic cycles ebb and flow, recessions are an inevitable part of the financial landscape. While we can’t predict when the next downturn will occur, we can take proactive steps to safeguard our finances and thrive even in uncertain times.

I thought I would ask OpenAI’s ChatGPT how to prepare for a recession.

Here is the response:

ChatGPT’s Recession Tips

Preparing for a recession involves a combination of financial planning, risk management, and personal development. While it’s impossible to predict when a recession will occur, taking these steps can help you be better prepared:

1. Build an emergency fund: Save 3-6 months’ worth of living expenses in a readily accessible, low-risk account, such as a high-yield savings account or a money market fund.
2. Pay off high-interest debt: Reduce your debt burden, particularly high-interest credit card debt and personal loans. This will improve your financial flexibility and reduce the risk of default during a recession.
3. Diversify your investments: A well-diversified investment portfolio can help protect your wealth from market volatility. Consider a mix of stocks, bonds, and other assets like real estate or commodities, tailored to your risk tolerance and financial goals.
4. Maintain a strong credit score: A good credit score can be advantageous during a recession, as it may provide access to lower interest rates on loans or credit cards if needed.
5. Review your budget: Regularly assess your income and expenses to ensure you’re living within your means. Cut unnecessary expenses and prioritize essential items such as housing, utilities, and groceries.
6. Continue investing: Don’t stop investing due to fear of a recession. Stick to a long-term investment plan and consider dollar-cost averaging to take advantage of potential market declines.
7. Enhance your professional skills: Invest in your career by acquiring new skills, certifications, or education to make yourself more valuable in the job market. This can help you maintain or find employment during a recession.
8. Maintain a strong professional network: Networking can be crucial in finding new job opportunities or gaining support during difficult times. Stay connected with colleagues, attend industry events, and participate in online forums.
9. Establish multiple income streams: Consider starting a side hustle, freelancing, or investing in rental properties to create additional income sources. This can provide extra financial security during a recession.
10. Stay informed: Regularly monitor economic indicators, news, and expert opinions to stay informed about the state of the economy. This will help you make better financial decisions and adjust your plans as needed.

ChatGTP Specific Asset Investing Tips For A Recession

All the tips mentioned above are good tips for recession, but also in general. What I wanted to know more was what specific investments performed better. So I asked again: can you give me the “highest performing assets in recession historically.” This is what it said:

Historically, certain assets have shown resilience or even performed well during recessions. While past performance is not a guarantee of future results, these assets have been considered relatively safer investments during economic downturns:

1. Government bonds: Generally considered safe-haven assets, government bonds, especially those issued by stable countries such as the United States, have performed well during recessions as investors seek less risky investments.
2. Treasury Inflation-Protected Securities (TIPS): These are U.S. government-issued bonds designed to protect against inflation. Their value increases with inflation, providing a hedge against rising prices during a recession.
3. Gold: Gold has traditionally been viewed as a safe-haven asset during economic downturns. Investors tend to flock to gold as a store of value when financial markets and currencies become unstable.
4. Consumer staples stocks: Companies that produce essential goods, such as food, beverages, and household products, tend to be more resilient during recessions, as demand for these items remains relatively stable.
5. Utility stocks: Utility companies, such as those providing electricity, gas, and water services, usually have more predictable revenue streams and lower volatility, making them attractive investments during economic downturns.
6. Dividend-paying stocks: Blue-chip companies with a history of paying consistent dividends can provide a steady income stream and added stability during recessions.
7. Defensive stocks: Companies in sectors such as healthcare, pharmaceuticals, and telecommunications tend to perform better during recessions, as their products and services remain in demand even during economic slowdowns.
8. Cash and cash equivalents: Holding cash or cash equivalents, like money market funds or short-term certificates of deposit, can provide liquidity and preserve capital during periods of market volatility.

This is all good information, but what about specifics? So I asked, “can you give me the performance numbers of each asset class during the last recession?”

It responded:

The performance of asset classes during the last recession, which was the Global Financial Crisis of 2007-2009, varied depending on the specific time frame and the assets considered. Here’s an approximate overview of how some key asset classes fared during that period:

1. U.S. Government bonds: The U.S. 10-year Treasury bond yield dropped from around 5% in 2007 to a low of about 2% in late 2008. This resulted in a significant price appreciation for existing bondholders.
2. Treasury Inflation-Protected Securities (TIPS): TIPS underperformed nominal Treasuries during the crisis due to low inflation expectations. However, they still provided positive returns and outperformed most equity classes.
3. Gold: Gold prices increased by over 25% from 2007 to 2009, moving from around $840 per ounce at the beginning of 2007 to approximately $1,100 per ounce at the end of 2009.
4. Consumer staples stocks: While the S&P 500 index experienced a decline of around 56% from peak to trough, the Consumer Staples Select Sector SPDR ETF (XLP) experienced a drop of approximately 30%, showcasing the relative resilience of this sector.
5. Utility stocks: The Utilities Select Sector SPDR ETF (XLU) experienced a decline of around 40% during the recession, which was less severe than the broader market decline.
6. Dividend-paying stocks: The performance of dividend-paying stocks varied depending on the company and sector. For example, the iShares Select Dividend ETF (DVY) experienced a drop of about 55% during the recession, roughly in line with the broader market.
7. Defensive stocks: Defensive sectors such as healthcare and telecommunications experienced smaller declines compared to the broader market. For instance, the Health Care Select Sector SPDR ETF (XLV) and the Vanguard Telecommunication Services ETF (VOX) experienced declines of approximately 37% and 30%, respectively.
8. Cash and cash equivalents: Holding cash or cash equivalents provided stability and preserved capital during the recession, as they did not experience significant price fluctuations.

Conclusion

I didn’t think the advice from ChatGPT was great or bad, just a general high-level. As AI continues to get better, I think we will see better advice that is more specific. I also think I need to learn to use the prompt better.

Once I asked for specific performance, the logic seemed clear.  Buy gold. Just kidding, Always seek the advice of a financial professional (not an AI chatbot) before investing.