Although it isn’t pleasant, times of crisis are almost inevitable and can have some significant effects on your investments. Join us this week as we jump into times of crisis and some things you can do to protect yourself:
Economic Crises
Certainly over the course of time we have seen a great deal of economic crises plaguing everything financial, from the stock market to property. The most recent one that springs to mind is Covid, where everything shut down and it felt like the world had stopped turning for many. Host Andrew Baxter explains that an economic crisis can come in the form of slowing growth, rising inflation, high unemployment as well as a range of other factors. These may not appear to be a crisis at a surface level due to how gradual they tend to be, but over time they will have their effects on an economy and eventually the lives of the individuals within it which can cause some pretty significant consequences, as we have seen in times like Covid or even the GFC. In difficult times such as these, many try to hide from the trouble but in certain instances you can connect the dots to find pockets of opportunity in what may seem to be a hopeless situation.
Interest Rates and the Property Market
One of the most common forms of debt is the mortgage and when interest rates go up, it can really hurt the hip pocket. Host Andrew Baxter notes that the issue a lot of people find themselves in when rates are increasing is they may struggle or even fail to make their repayments on their home as necessary. Refinancing is likely something we will start to hear more about over the next few months as banks compete for the loans which can provide some relief to anyone paying off a house. If you are paying a mortgage and starting to feel the pinch of the currently higher interest rates, it may be beneficial to shop around and look for a more attractive rate elsewhere. This may even be something you explore every year or so as part of an overall review of your financial position to make sure you are maximizing your wealth where you can. Another property topic to think about is commercial property which has a historically higher vacancy rate. The methods to deal with vacancy in commercial property are not pretty as you may need to offer a rent reduction or a rent-free period simply to get the property filled before you can generate the sort of rental income you likely had in mind when you bought the property.
Managed Funds
Typical managed funds generally consist of a portfolio of stocks and ideally you want to see the market move higher in order to make a profit. So what happens if we see a major pullback in the market which we know we do see every few years? In this case, Host Andrew Baxter notes that if there is an expectation of a recession and you feel this portfolio is going to take a turn for the worst, it may be best to cut the fund loose. Hanging onto an investment you believe is likely to lose money doesn’t make any sense and managed funds very rarely incorporate positions that are hedged to the downside correctly let alone holding positions that profit should you see the market perform badly.
Trading the Market
If you trade the market on your own accord, there are some ways to deal with times of crisis and you have a bit more flexibility than those with their money tied up in a managed fund. Host Andrew Baxter explains that if you have elected to trade the markets yourself and veer away from the managed fund space, then the onus is on you to be on top of your market timing as well as having the skills to manage your portfolio in a falling market. Timing your exit is great, but it can be easy to stay out so long that you miss out on the upswing when the market recovers. Sometimes it can be wise to err on the side of caution as some downturns can last for a long time and really be difficult to pick as to when it’s going to turn around.
