Although it is extremely difficult to forecast a financial crisis and even to pinpoint the moment it begins, you can still prepare yourself for the inevitable and come up with a backup plan. Economic cycles make it easier to predict an upcoming downturn but at the same time reinforce themselves. When people expect a crisis, they will behave accordingly: play it safe and pulling the money out of the economy, making the downturn even more likely. The problem is nowadays a lot of people believe the crisis is imminent.
Robert Kiyosaki says the next financial crisis will be like an avalanche. Fred Harrison, the man who has successfully predicted the financial crisis of 2008 three years prior, is warning about an upcoming recession. Amar Manzoor, another expert, feels the same way. According to a lot of specialists, we are quickly running out of time to get ready for the “next big thing”.
But the question is how to avoid losing money and probably even capitalize on the next economic crisis? These are the 3 simple rules that will make your life safer and easier when the crisis finally hits the economy.
Make sure that you pay enough attention to the personal savings. Financial crises are often associated with high unemployment rate, low disposable income and overall stagnation. Everyone can end up losing their job. It may, therefore, seem wise to start saving today. Try to have at least 6-month worth of savings.
Invest in your own human capital. Learn something new, acquire new skills, until it is too late become a professional in an unrelated field. Even if the upcoming crisis bypasses you there is still risk of your particular field becoming obsolete due to spread of new technologies (e.g. robotics) or changing economic landscape (outsourcing to developing countries). Start transforming yourself into a more valuable employee now and don’t forget to build a strong social network. People who can bail you out in times of trouble are worth their weight in gold.
Two points mentioned above will help you avoid losing money. The third one, however, is about making even more on the bearish market. Crisis is a perfect time to apply value investing principles. Market psychology works in mysterious ways. People are too optimistic during the boom and too depressed during the downturn to make financially sound decisions. They buy high and sell low. Which is in fact the opposite of financially rational behavior. Any major crisis is a good opportunity to buy lower. Comprise a list of big companies with impressive fundamentals (more on that here) and good enough chances of making it through the crisis. Wait for them to lose a substantial share of the market value and make your move. It is quite possible, though not guaranteed, that the companies will regain the lost value over the course of a few years.
BONUS point. If you believe things will get really ugly during the upcoming recession (like they did in 1929), you should also consider buying gold instead of fiat currencies. This precious metal never goes out of style.
By following these simple steps, you will increase your chances of being better off during the next recession than the rest of your less prepared environment.