There’s been a lot of talk around a coming recession. According to economists, it’s not if, but when. Some put it in late 2020 while others still don’t have a date. As this conversation continues to simmer, another one is already cooking up.
It’s about an impending worldwide debt default. Some financial analysts call it a restructuring while others call it financial engineering. Regardless of whatever name you settle on, the end result remains the same—it’s not good.
The time to change the course is far behind us, which means there’s little to zero chance of escaping the painful effects this debt default will have. However, many countries can alleviate this financial tragedy, but that will take a miracle to pull it off politically, considering the tensions already witnessed in the last one year alone.
From that, it’s safe to say that the people who have the power to do something aren’t “interested” in doing so, leaving one option for the common investor—do something yourself.
Before diving into the general rules to follow, it’s important to understand that there’s no one-size-fits-all solution.
1. Get Active
Buy and hold strategies have been on the rise, similarly to how the markets have risen. This investment strategy is expensive, especially when you can get the same if not better results by being your own manager. In some instances, index ETFs can get you great returns with negligible investment.
Buy and hold is a great investment strategy, there’s no doubt about that. However, while this may be right for the numbers, it’s wrong for human nature. Here’s why. It’s written in almost all stock market 101 books or even advice from a successful investor.
Stick to your investment strategy. It’s the only way to get tangible results. However, only a handful of investors do this. In fact, the second the market shows signs of becoming bearish, they’ll offload their shares. Ask any advisor who will tell you how common this is in their line of work.
While the advisor’s job is to help you avoid making rash decisions and incur losses, they can only give out so much advice. At the end of the day, it’s your money, and you can do whatever you want with it. Having said that, genuine advisors are hard to find because you have to find someone that you’re in sync with to trust them.
By getting an active manager to handle your investment, they’ll be able to manage risk, a crucial skill needed to navigate the volatile times ahead.
2. Get Several Managers
Mistakes are synonymous with human beings and this means even the best active manager will make them. However, this shouldn’t be a reason to fire them. Instead, this should be a reason to work with several, each with a different strategy to handle certain asset classes.
Nevertheless, you require some skill to assemble such a team. Besides, what’s the point of having managers who pile up losses after losses? Relying on human discretion is the worst mistake you can make. Such managers will abandon you as soon as you invest some money. Instead, include data in your decision-making.
You also want to experiment with other investment strategies other than long or short equities. Today, this strategy is no longer the alpha in the game and can get quite frustrating for passive investors.
3. Go Liquid
The worldwide debt default is on its way, making it the worst time to be a nation 21 loans quick unsecured lender. However, there’s only so much you can do because for starters, having your money in a savings account makes you a lender. For the bank, your savings represent a liability on their balance sheet.
Sounds like a dicey situation because even if you decide to buy equities, you’ll still become an indirect lender when a company leases real estate or equipment. Investing in physical property is the way to go – something storable such as gold. However, it’s advisable to invest in little quantities, which raises the question, what else is there to do?
Lending is here to stay. This means if you must lend, do it smartly. This includes doing your research to find out whether you’ll earn any profits from the principal amount. Liquidity emerges as the best way to do that.
With Treasury bills, money market funds, and bank accounts, you have the freedom to trade \ without notice, meaning they are extremely liquid. However, what many people forget is the price they’ll pay for liquidity—usually lower yields on these assets.
Having high liquid assets is great only when you need instant cash. However, this is not the case for many people because they can stash their money in such accounts for years, and they lose because of meager interest rates.
In other words, this is a lost opportunity because the same amount would have earned more if you invested in a CD. While this may be true, it’s still important to maintain some liquidity because the future is unpredictable. On the contrary, some investors take the liquidity game too far, which often leads to reduced returns.
The debate on increasing tax rates for the rich continues to rage and while the idea may have been far-fetched, it’s evident that the window for low tax rates on wealthy individuals is fast coming to a close. Nevertheless, setting high tax rates doesn’t mean you’ll have to pay high taxes.
It means people will get creative, but only as far as the law allows. For example, you can defer your taxes by using life insurance. Then there are low-cost annuities that charge as low as $20 per month; you have control of your investment and can defer the capital gains at least until you sell them.
The annuities and your bank account have one thing in common, and that is they are both liquids. The only difference is the annuities are tax-deferred. Also, if you have a small business with few employees, the best move will be to come up with your own benefit plan.
This way, you have control of the investments and you are allowed to put more money into this plan, unlike with traditional 401(k) or IRA.