Media coverage of sharemarket corrections can spook even the most professional investor. It can be scary. Before building the bunker, it’s worth remembering a couple of things.
I love the advice of Warren Buffet from his biography, Snowball:
“Cash combined with courage in a crisis is priceless.”
“Don’t invest in things you don’t understand.”
“Don’t try to catch a falling knife until you have a handle on the risk.”
In other words, in times of crisis it’s critical to understand the environment and assess the risks. So it’s all about being careful.
The world isn’t ending
It’s also worth remembering investment markets move in cycles. Every boom will end in a bust and every bust will end in a recovery. The timing of these movements is unknown.
Markets are driven by the emotions and psychology of those people operating in them. It’s so easy to get depressed at times like this, to think it’s the end of the world and we’re all doomed.
Despite what the doomsayers preach (usually when they’re selling a book based on fear), history tells us that taking a contrary view during a crisis can be the most rewarding time to invest.
Contrarian Investment Strategies was a book published in 1998 which analysed 11 major post-WW11 crises. It found that a year after each of these crises (with the exception of the Berlin Blockade) the average gain in the US sharemarket was 25.8 per cent and 37.5 per cent after two years.
Since then we’ve had the September 11 attack in 2001 which sent US shares plummeting 11.6 per cent over the following five trading days. One month later, stocks had completely recovered.
Remember September 15, 2008 when the collapse of Lehman Bros sparked the Global Financial Crisis and the doomsayers were predicting the collapse of the banking system? The US sharemarket dropped 16 per cent in the following year, was down 10 per cent after two years and had retraced the falls after three years.
More recently, sharemarkets collapsed during the COVID lockdowns but have been consistently breaking record highs since lockdowns were lifted.
History tells us to keep these crises in perspective.
Even so, unless you’re a professional and have the skills, it’s time for us amateurs to tread carefully as the new White House regime continues to disrupt.
So here are my thoughts on managing money during uncertain times.
Family finances
Keep on top of your debt reduction program and try to build an emergency stash equivalent to three-six months salary. With talk of the tariff wars feeding into inflation, the outlook for interest rates is now even more uncertain despite the recent cut.
There are also predictions this could lead to an economic recession in the US and Europe, which means banks will become more cautious.
So keep your credit lines in place because accessing new loans could be harder and more expensive in the future. Also, job security will be important. It’s a good idea to be nice to the boss and make sure they understand you’re a valuable asset to the team.
Capital security
When professional investors get scared they flee to safety. For them that means protecting their capital rather than getting the best return. Often they move into the US dollar because it’s the most liquid market in the world (which ensures accessibility) and there is little chance of the US going broke (we’re all in strife if it does). For us, the equivalent flight to safety is having a foundation platform of investments in bank term deposits, savings accounts and cash.
Shares
Get advice from your financial planner or broker, but when it comes to the sharemarket, the focus should be on quality and yield. Think big strong companies with a proven track record and which pay good reliable dividends.
Fund managers and brokers also focus on so-called “defensive stocks” which are companies that perform well during economic downturns. Supermarkets (because everyone has to eat), breweries (tough times drive us to drink) and gaming stocks are a couple of examples.
Property
Like shares, quality and yield are the drivers of property investing during a crisis. Well positioned, easily rented properties should be the focus because these are the properties which hold their value best and are also able to be sold quickly.
Superannuation
Check the investment option you’re in. The closer you are to retirement, the more conservative the mix of options should be. Balanced, fixed interest and capital secure provide the best protection in a crisis.
Gold
The precious metal has traditionally been a great store of value against economic and financial upheaval. But it can also be a currency play against fluctuations in the US dollar.
Gold has been the best performing investment asset over the last 12 months as investors fly to safety and the falling Australian dollar has magnified the gains for local investors.
Gold bugs swear by the metal, but it can have a life of its own which doesn’t always go according to plan. Even so, it’s certainly worth holding some gold in a portfolio.
