The natural tendency for investors in uncertain economic times is to hoard cash and retreat from the markets. That would be a mistake in today’s high inflation environment.
The annual inflation rate hit a 41-year high of 8.5% in March. That means if you put $100 under a mattress today, a year from now, that $100 will only be worth $91.50 in terms of buying power.
Hoarding cash is one mistake to avoid in a downturn. The other mistake is to stay in the wrong investment. In today’s uncertain environment, public equities are the wrong investment to stay in. Hoarding cash is bad, but staying in stocks is worse. The Dow is down nearly 11% – depleting assets at an even higher clip than inflation.
Stocks have been volatile, but it could get worse with many pundits and analysts predicting an impending recession. A perfect storm of inflation, rising interest rates, war, high gas prices, and political and social unrest are all stoking recession fears. Add in the fact that stocks have been inflated from investors piling into the markets from free money (stimulus) and free trading (Robinhood), and you have a recipe for disaster, with many predicting a crash.
Since the beginning of the year, a broad and steady sell-off has been occurring, but there’s still a lot of fat to be trimmed.
Hedge fund manager Ray Dalio explained the situation in simple terms:
“. . . the problem is too many investors are crowded into stocks. And while the past few months have been characterized by relentless selling, there’s still plenty of froth that needs to be taken out of the market before equilibrium can be achieved.”
Whether hoarding cash or staying long in stocks, neither scenario is wise in the current economic environment. On the one hand, you have the diminishing power of inflation, and on the other, you have the even greater diminishing power of a quickly diminishing market.
The challenge for investors in the current economic environment is they’re battling the two-headed snake of inflation and recession. We already know that sitting on the sidelines or sticking to a losing asset are not the right paths to follow, but what options does an investor have to recession-proof and inflation-insulate their portfolios?
While inflation is now attracting all the attention and catching investors by surprise, it’s not surprising to all investors. A segment of investors is not surprised by recent developments because it’s likely they anticipated all this with the release of the first stimulus checks. Regardless, these investors never wait for a crisis to come to a head before making the necessary preparations to insulate their portfolios from volatility, downturns, and inflation.
WHAT DO THE SMART INVESTORS DO TO INSULATE THEIR PORTFOLIOS AGAINST DOWNTURNS AND INFLATION?
That’s an important question to ask for dealing with inflation and recession, but the more vital question is:
WHAT DO THE SMART INVESTORS DO TO PROFIT FROM DOWNTURNS AND INFLATION?
Savvy investors like the ultra-wealthy, family offices and institutional investors allocate their portfolios to insulate their portfolios from downturns and inflation and thrive in them.
Here are their tricks of the trade:
Target Tangible Assets Uncorrelated from Wall Street…
By targeting tangible assets with intrinsic value (value aside from what people are willing to pay for), like cash-flowing commercial real estate (CRE) or a productive business on the private markets, smart investors can grow their portfolios through appreciation insulated from Wall Street volatility.
Focus on Assets that Thrive in a Downturn and Inflationary Environment…
Assets that meet basic needs such as shelter, mental and physical rejuvenation, food, and fuel will always be in need and thrive in a downturn as consumers cut out luxuries and focus on the basics.
Focus on Multiple Passive Income Streams…
Multiple passive income streams allocated to diverse assets across multiple geographic locations are important for maintaining income because if one asset underperforms, the other assets can pick up the slack. Passive income streams are also important for compensating for any job loss or reduction in pay.
Invest for the Long-Term…
By investing in assets for the long-term, smart investors can ride out the recession and inflation storms because the long lockup periods prevent trigger happy fingers that have the impulse to cash out of assets when the going gets rough. Investing for the long-term ensures short-term kinks get ironed out.
The key to standing up to inflation and recessions is to counter them, not retreat or stick with the status quo. Hoarding cash and sticking with stocks are the two biggest mistakes you can make in a downturn.
The key to surviving – even thriving – in a downturn is to counter it with assets unaffected by Wall Street volatility and that continue to grow, generate cash flow and even thrive in the face of economic uncertainty.