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How investors can earn during financial crises - 02.07.2019

Nobody hopes for financial crises. It is difficult to find people who are pleased by hearing about falling quotes and bankruptcies, let alone seeing the value of their assets shrink on their broker’s reports before their very own eyes.

However, the most unpleasant consequence of financial crises is the uncertainty they generate. First, they always begin unexpectedly and it is never known how long they will last.

The situation that has developed in the financial markets throughout mid-2019 can be described in one phrase - “a crisis that has not officially started yet”.

Indeed, there have been price correction expectations in financial markets for at least two years. In addition, according to results of the year 2018, most of the larger stock markets showed a negative dynamic.

The situation with more conservative assets is no better:

  • higher interest rates have led to lower prices for bonds;
  • the leading investment real estate markets - in London and New York - have been reeling for three years now;
  • those who decided to wait out a period of uncertainty and placed money in bank accounts, are losing their savings due to inflation and negative real interest rates.

Nevertheless, financial analysts and journalists ignore threatening signals and exaggerate the value of positive factors. It seems that market participants and the media are trying to talk stock markets away from a wave of lower prices.

Unfortunately, such tactics always leads to financial losses, and the more carefree investors behave before the crisis, the more difficult it is for them when the crisis finally comes. The most striking example is the stock market collapse Japan faced in 1990. Even after nearly 30 years, the Japanese stock market index is 40% less than its peak values ​​of 1989.

Moreover, many Japanese companies were unable to repay loans received from banks – further contributing to the price of real estate in central Tokyo decreasing by 100 times. As such, due to the notable scale of this financial disaster, the years following it were labelled the “lost decades” in Japan.

In 2019-2020, something similar could happen on a global scale. The first signs of an impending thunderstorm are as follows:

  • uncertainty in stock markets (indices for two years have been unable to hit the maximum values ​​achieved in 2017);
  • uncertainty in the leading investment real estate markets i.e. London and New York;
  • lack of growth factors of the world economy;
  • increased tensions between countries (trade war between the United States and China, tensions with Iran, continuing sanctions against Russia, etc.);
  • the ongoing increase in public debt in the USA and EU countries.

Of course, thickening clouds do not always mean rain will come. Nevertheless, when problems are not solved, their cumulative effect results in disaster. And it is clear that due to the irresponsible attempts to restore order post-GFC, the disaster this time around will be more profound and long-term than previously was the case.

Therefore, traditional markets today are very close to the line, after which the “lost decades” can occur for the entire world economy.

In such conditions, the questions “how to earn?” and “what tools to invest in?” are especially pertinent.

Therefore, in this article we will formulate a number of general rules that should be followed in order to receive a positive financial result from investments even in times of crises.

1. Carefully choose the objects of investment.

This rule is relevant in financial markets regardless of their relative stability at a given time. However, during periods of rising prices, those who abandon this rule may not be punished.

Although in times of crisis, the consequences of ignoring this rule can be fatal for a portfolio of assets.

2. Study risks and minimize them.

Generally speaking, risk is the likelihood that the actual scenario will be different from the expected one.

In a negative sense, risk is the probability of losing all savings.

Traditionally it is considered that bank deposits are the least risky. They are followed by bonds whose risk is considered to be slightly higher. Within this large class, the instruments also vary in risk level.

The next level in terms of risk is a class of shares. And finally, investments in derivative financial instruments are considered the most risky.

However, the theories above tend to prove very different from practice, especially in periods of global crises.

For example, any bank can go bankrupt. Thus, the thesis about the safety of deposits is refuted.

Of course, such events very rarely happen all of a sudden; in most cases, signs of future troubles are visible in advance.

Therefore, having carefully studied the risks, one can know what to prepare for, and, accordingly, have time to take appropriate defensive measures.

A good habit for investor can be choosing instruments with minimal risks (when expected return is the same).

For example, in the current situation of uncertainty in financial markets, it is likely that over the next 6-12 months, the value of shares will decrease. Under these conditions, a reasonable solution would be to sell stocks and invest in those instruments that are guaranteed to generate income - for example, in bonds with a maturity of up to 1 year.

3. Choose what you understand.

Those who understand processes behind commercial success of an enterprise, can predict that enterprise’s stock price very closely.

Consequently, those investors who invest in projects that they understand are also more confident because they can notice before others when something goes wrong.

4. Choose instruments that behave independently of financial markets.

Despite most people are under impression that finance and financial markets have penetrated into all spheres of modern life, there are still investment instruments unrelated to the state of financial markets.

The market for private lending and microloans, the market for innovative projects and venture capital financing, as well as a large number of other markets, live their own lives.

The studying and understanding features of these independent markets makes possible for investors to earn income in any period of time and in any situation on the financial markets.

5. Diversify investments.

Traditionally, this rule is formulated as "Do not put all eggs in one basket."

If we restate it in accordance with the rules spelt above and in relation to the current situation:
“Place funds with minimal risks in various markets which you understand and which do not depend on the behaviour of traditional financial markets.”

If one follows these rules, your investments will be reliably protected from financial crises.

This article opens a cycle in which we plan to talk about alternative ways of investing money that are not related to traditional financial markets. We are aiming to write and publish articles during the Summer of 2019, so that when instability begins to infect global financial markets (most likely to begin around the coming autumn), you can be fully prepared and protected.