Are you interested in arranging your finances so that whatever happens to the economy you carry on making money? Share prices and property prices may fall, inflation and interest rates may rise, but there is no reason why – with a bit of careful planning – you shouldn’t turn every situation to your advantage. In fact, if you are ready for it, a recession could be an once-in-a-lifetime opportunity to fast track your wealth.
Before I explain how you can cash in on any future downturn let me just say that I am not predicting a doom and gloom scenario anytime soon. After their meeting in St Petersburg in early June finance ministers from the Group of Eight nations released a joint statement in which they said that: ‘Global growth remains strong and is gradually becoming more broad-based.’ Nevertheless, it is always prudent to be prepared. After all, markets move in cycles and sooner or later the current cycle must come to an end. Furthermore, a little advance planning won’t cost you a penny and could well earn you a fortune.
If you want to profit from a slump – or even a small slip – there are three different steps you need to follow.
Firstly, review your debt situation. In the current low interest climate it has been relatively easy to borrow money and many people have taken on quite a bit of debt. Whilst no one is predicting a return to the high interest rates of the 1980s and 1990s in the immediate future, it is wise to consider how you would be affected by even a modest increase. If you are interested in discovering how to pay off all your debts – including your mortgage – quickly and easily watch out for the next Power Report.
Secondly, you must make sure that your existing assets are recession proof.
After all, there is no point in making money in one area, only to be losing it another. Let me say now that I am not a great one for owning shares and other investments myself. I have my home and one other property and my business interests and a pension and that is it. Coming from my background it seems quite a lot. But compared to many people it is hardly any wealth at all. Still, I have studied how many of the world’s most successful investors have made serious money and I know that they follow a strategy of cashing in on gains long before they believe the market has reached the top of the cycle. In this way they optimise their returns without suffering unnecessary losses. Whether you follow this course, or not, one thing you must do is diversify. Don’t imagine, for instance, that if you own a basket of shares in blue chip multinationals located in different parts of the world – you have diversified and thus reduced your exposure to risk. In recent weeks we have seen that a geographical spread of leading equity markets has offered little protection. To diversify properly you should invest in a broad range of assets – everything from a pension to overseas property and from managed funds to fine art. I’ll also be covering how to build up personal assets – even if you don’t have much to start with – in future issues of the Power Report.
Thirdly, you want to ensure that you have sufficient cash or liquid assets on hand to seize opportunities when they arise. The other day the Independent newspaper asked business chiefs whether the recent dip in the stock market was the beginning of a major and sustained crash in the stock markets or just a small correction. The most interesting answer, to my mind, came from Tom McAleese, MD of Barclays, Ireland, who pointed out that every price fall was a buying opportunity. A fall in the stock market of 10% - which is what the world has experienced since the start of the year – means that shares are now worth 10% less than they were a few months ago. Given that companies are reporting strong earnings, valuations are effectively lower – profits have gone up but share prices have not. If and when we enter a bear market it is the investors who have cash available that will clean up. They will be able to buy into solid, asset-backed companies at bargain basement prices and benefit from the next upward swing. Incidentally, what applies to a fall in the stock market applies to a fall in any other market. A general downturn in the economy will make it cheaper to buy all sorts of other valuable assets including property and alternative assets such as classic cars, jewellery and fine art.
Whether or not you expect even a mild recession there is much to be said for switching out of higher risk/higher return assets into relatively liquid investments that can be converted to cash when a market opportunity presents itself. Gold (as I explained in the last issue) is one place where you might put your cash. Another, perhaps more sensible option, is to buy index-linked government bonds. The huge advantage offered by index-linked government bonds is that your return is certain and you are protected against a market crash, rising interest rates or inflation. Swiss Bonds are widely favoured as the ultimate in security. However, a Swiss 10-year bond offers a yield of just 2.7 per cent. Instead, consider putting your cash into Norwegian bonds, which currently produce yields of more than 4 per cent and - thanks to the country’s oil revenues and political stability - must be considered just as safe.
Justin Power
info@powerreport.net
http://www.powerreport.net
[tags]finance, debt, assets, stock market[/tags]
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