Investing like it’s 1991
Let’s take a trip back in time.
Imagine it’s 1991.
The only shop open on a Sunday is the local milk bar…where a litre of milk costs roughly a dollar.
A loaf of bread about $1.50.
The TV show All Together Now had just started on telly.
Fat Cat and Friends was banned because the cat costume was lacking pants.
The XJO didn’t even exist yet.
Compulsory superannuation wasn’t around yet.
And Australia had just entered a technical recession…
A generation that doesn’t know bad times
A very dear former colleague of mine once told me he finished his university degree just as the recession hit Australia.
He said, ‘Mate, if you got offered a job at McDonald’s, you were grateful.’
I, on the other hand, was nine when Australia was last in a recession. A kid oblivious to what was going on.
Meaning I have spent my entire adult life only knowing the good times.
I’ve never struggled to find work. The bills have always been paid.
Here’s the thing. I’m not unique.
There is an entire generation of Aussies who have no clue what a recession looks like…or feels like.
That same generation are the ones buying their first homes. Making investment decisions. Putting money aside for private school fees, an overseas trip or leasing a new car.
A whole demographic that has never really had to ‘go without’ to get through.
Think about it. We are talking about a group of people who have never had to question their consumption-driven lifestyle. No cutbacks, no easing up on the spending.
Which, by the way, makes for dangerous investing.
The complete lack of real-world experience leads to investor complacency about the possibility of a recession.
It won’t happen to me.
There’ll be a bailout.
That’s just scaremongering.
Except there’s one small problem.
If the Aussie economy fell into recession next quarter, would you be prepared?
If you’re like most Aussies, probably not.
How much money are you willing to lose?
Here’s the one thing no one tells you in a market crash: Everyone should always be prepared to lose money.
It’s no secret that when stock markets fall, so does wealth. All that flashing red means someone is taking a loss. Yet most investors don’t believe it could possibly happen to them.
For too long, investors have had it drummed into them that they should buy shares for the ‘long haul’. Or build a portfolio that they can ‘set and forget’.
Well, that may in fact be the quickest way to lose money in a market crash.
The ‘good news’ is that how much you lose is up to you.
The first step is psychological.
Investors need to accept that they will lose some money.
But they can mitigate that.
There’s no point watching share prices tick down every day, eating into your portfolio. So with any stock investment, it’s best to decide on a stop loss and stick to it.
Blue-chip stocks are often much harder hit in a market crash than people realise. So investors are wise to set tight stop losses on blue chips.
However, there’s an upside to this: Selling shares for a minimal loss leaves investors with some cash left over.
After all, not all shares fall in tandem. Even in a falling stock market, there are typically always stocks that are going up.
Here is controversial idea: Some investors may want to consider inverse exchange traded funds (ETFs).
Inverse ETFs are designed to go up when a stock market crashes. Think of inverse ETFs as a way of shorting the market using shares rather than derivatives.
They are highly risky, often use leverage, and are generally highly illiquid. But they can be a potentially useful hedge in a falling market.
However, they should be used sparingly during volatile market periods, and only for a short time.
ETFs aren’t for everyone. For anyone moving some cash into an ETF, they’re better off keeping it small (no more than 5% of total capital) and moving early.
Investors also shouldn’t be afraid of cashing out before the peak, either. If an inverse ETF rises 50% in a week, jump out.
The shiny yellow metal
The barbarous relic.
The useless hunk of metal from a bygone era.
Gold is the one investment that historically maintains its value through thick and thin.
People have used gold as a medium of exchange for over 3,000 years. And it’s been a store of wealth since medieval times.
Empires and modern-day states have risen to power on the back of gold and bullion holdings.
But gold also protects personal wealth too, as you know.
Think of it like this:
A US$100 note in 1974 is worth about US$20 today.
In that time, the face value of the $100 note hasn’t changed, but its purchasing power has. That same note buys far less today than it did 40 years ago.
Whereas one ounce of gold — worth US$100 per ounce in 1974 — is valued at US$1,300 today.
Of course, these are just some things investors can do to protect themselves in a recession.
I have many more ideas on how to prepare for the worst. Stay tuned, as I’ll release all the details next week.
Until next time,