What Will You Be Left Holding After The Next Economic Correction?
A few weeks ago my wife and I were having dinner with friends and the subject of the economy came up and how well America is doing. One of the husbands made a comment that gave me that déjà vu feeling…he said, “we are at an amazing time right now and the economy will never crash again like it did in 2008 as they have systems in place to ensure so.” Of course, I was curious to know who “they” are and what particular systems was he talking about?
I won’t bore you with the amazingly naive answer, but it did bring back vivid memories of a similar talk I had with other friends who felt this way back in 2006. They were wrong then, and this guy is wrong now.
Economies, just like markets, move in cycles. They don’t go up all the time and they don’t go down all the time. There are cycles. An up cycle is always joyful and a down cycle is always painful, but you can’t have one without the other. What goes up must come down.
Today’s America is very different than it was a few decades ago. Today, far too many people have spent their savings on the latest gadgets and gambled with their retirement money on bigger houses, flashier cars, stock portfolios, all believing that when another correction hits, the government will rescue the economy as it did last time.
But when you’re in debt to the tune of $68 trillion (the current U.S. total)… the likelihood of saving the “Too Big To Fail” victims a second time, plus the average Joe on the street, isn’t realistically possible. From 1879 until today, the U.S. has witnessed 28 recessions, which means it has also seen 29 recoveries, and the average recovery spanned only 41 months. We are 106 months into the current recovery, so any betting man could see the odds are not good for more joy.
In the summer of 1975 (in the U.K.) I had saved a few hundred pounds and was looking to buy my first car. I clearly remember asking my Father (a factory worker) when he thought prices might go up again. He answered… prices always go up right after they have gone down, and they go down right after they have gone up! This isn’t a news flash – we are in the tenth year of a recovery that has driven prices higher than we have ever seen them. Real estate values are bloated, equity values are on steroids, consumer confidence is over the top. The next logical reaction is a correction.
But when times get as good as they currently are, people have the uncanny habit of thinking that they can time these cycles and navigate them perfectly. That’s where it gets dangerous. During the dinner conversation I referred to earlier, the same husband (a fund manager) commented that there’s always something an investor can do within the financial markets to cover their exposure to losses. When pushed, he couldn’t share anything particular and ultimately confessed that the fund he managed during 2002-2008 collapsed after the crash.
History shows that financial markets get hit by many things and react in all sorts of ways. A bubble could burst, a war could breakout, a natural disaster could hit, and at any moment it could trigger something that destroys wealth. Hedging these uncertainties perfectly is impossible, but that doesn’t mean you have to lose everything.
If you have built a portfolio that provides an escape from the typical asset allocation model that normally includes mostly assets tied to the financial system – stocks, bonds, mutual funds, annuities, ETF’s, etc., then you stand to lose less when a crash happens and recover sooner when things begin to pick up again. Adding hard assets – things you physically own, will help stabilize your entire portfolio and keep you from being set back financially for decades.
This is why high net worth investors, institutions, family offices (and their wealth advisors) recommend up to one-quarter of their wealth be held in hard assets – things like real estate, gold bullion or coins, timberland, art, and producing farmland.
No one knows exactly when and how the next correction will be triggered and the depth and length of the down cycle, but the smart money has already begun to reallocate into hard assets as they look to protect and preserve their real long term wealth.
If you are wondering what a smart asset allocation might be for your portfolio, we invite you to talk with Scott Thomas at Ascension Wealth Advisors (a Fee-Only Registered Investment Advisory Firm). As a benefit of your affiliation with Precious Timber, Scott has agreed to helping you gain a greater understanding of proper asset allocation in turbulent times, and is offering a complimentary service to our clients and our mailing list friends.
No matter whether you have one question or several, contact Scott direct at firstname.lastname@example.org or call him at (615) 439-6200
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