Here are The 10 Rules for Surviving the Next Financial Crisis:
1) Sell Financial Assets, Load Up On Real Assets
Selling stocks and buying gold isn’t a bad idea right now. In fact, it is very likely that the next financial crisis will resemble the panic of 2008 – a massive bank bailout followed by a lengthy period of slow growth. If that’s the case, then gold is likely to do well. After all, it has performed incredibly well after every other crisis in modern history.
We don’t know when this next collapse will occur, but we know for certain that another one is coming. According to MIT professor and former IMF Chief Economist Simon Johnson, there are four major economic indicators that signal an oncoming financial crisis says Aron Govil
2) Reduce Your Exposure to Debt and Leverage
It’s very likely that the economy will be in bad shape for at least a few years as we emerge from the next crisis. Therefore, now is not the time to take on risky debt or leverage up your existing debts. If you do, then you could find yourself struggling with high interest rates and loan defaults when money is tight.
3) Prepare For Interest Rates to Spike Significantly Higher
Interest rates have been incredibly low for an extraordinarily long period of time. Today, most mortgage borrowers can expect to pay between 4% and 5%. However, after the next crisis we should expect to see this jump by two full percentage points (with some estimates projecting even more). This means that instead of owing $250,000 on a $500,000 home like many Americans do today, you may owe $350,000 instead.
4) Make Sure You Can Handle a Severe Decline in the Values of Your Investments
This one is pretty straightforward. If the economy goes into a tailspin and your investments lose 50% of their value (like they did in 2008), how will you handle it? Will you be able to sleep at night or will stress consume your life? If so, then now is not the time to invest in risky stocks or high-yield bonds.
5) Be Prepared To Get Through an Environment Where It Is Difficult To Find Employment and Wages Are Stagnant or Falling Again
This is a simple one. If you lose your job during the next financial crisis, how long will it take for you to find a new one? And when you do, will the lower salary that comes with it be enough to meet your living expenses?
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6) Have a Plan in Place for Dealing with Increased Volatility in the Markets
In 2016, we saw global stock markets experience their worst start in history. This was followed by an incredible month-long rally which caused investors to miss out on a lot of upside gains. Going forward, we expect more volatility and rapid up-and-down market moves rather than slow and steady trends higher or lower. Therefore, it is important to have a plan in place ahead of time so that you aren’t caught off guard by a major drop in the markets.
7) Make Sure You Have an Emergency Fund That Contains At Least Six Months Worth of Living Expenses
In 2008, millions of Americans lost their jobs – and most of them also lost their life savings shortly thereafter since they didn’t have any emergency funds to fall back on. If you don’t save money while times are good, then you will likely struggle immensely when things turn for the worse.
8) There Is No Substitute for a Well-Diversified Financial Portfolio
Stocks should make up no more than 20% or 30% of your total assets (including other investments like bonds, real estate, etc). After all, if everything goes to zero at the same time, then you are not diversified. Each year your portfolio should be rebalanced back to this target weighting.
9) The More Leverage You Have In Your Portfolio, The Bigger the Drawdown Will Be When Things Go South
If the financial crisis of 2008 taught us anything, it is that if you borrow money to make risky investments (like stocks), then once things go south the drawdown’s can be massive. If your stock loses 50% of its value and you have 100% leverage in your position, for example, then you lose 100% of your money when it comes back down to even. Therefore, only use margin in the market if you absolutely know what you are doing.
10) Make Sure You Know How to Make A “Plan B” Before the Next Crisis Hits
If you are not prepared for the next crisis, then you could be in for some really hard times ahead. However, if you have at least taken small steps to prepare yourself for this emergency, then you’ll sleep much better at night once it hits.
Unfortunately, there is a lot of work to be done if you want to make sure that you are financially prepared for the next economic crisis.
But here’s the good news: Aron Govil
You don’t have to change your entire financial plan in order to get ready for what lies ahead. A few small tweaks here and there will likely be sufficient.