Investment Advice In A Time Of Historically High Debt Levels
The turbulence shown by global stock markets in recent weeks highlights the vital need that almost everyone with savings has to diversify and protect their portfolio.
The harsh reality is that another global economic slowdown is either rapidly approaching or has already begun. There appear to be weaknesses almost everywhere in the system – from the price of oil and the impact it has had on jobs, to the continuing weakness in Eurozone economies, to the slowdown in China and general lack of faith that the markets have in their economic data – there are good reasons for asset prices to fall.
Depending upon the information you read and whom you believe, it also seems very likely that the world is near the end of a cycle of debt expansion that could produce much more weakness in the coming months.
In such an environment, it is important for investors to assess how they are exposed. For private investors, the current low-interest rate environment in most major economies looks set to continue. If anything, the risks are on the downside as more central banks move into the uncharted waters of negative interest rates. While economists can speculate as to what will come next, the reality is that circumstances like these have not existed in anyone’s lifetime giving us very few touch points to the modern world.
This means that the normal talking heads on television offering their best stock market tips and tricks might not be very helpful. As a rule, we humans are positive people and when we think about markets, we think about a better future – which means being long. At the current time, this might not be the smartest move.
The goal in all times, but especially now, ought to be lower risk, while also lowering volatility and trying to maximise returns. It is this hard to achieve combination that has helped to make Ray Dalio famous. His long-term returns through myriad economic conditions have built his reputation.
While this combination is difficult for most of us to achieve, with personal, corporate and government debts at all time highs in many countries, most of us really ought to be using our available funds to repay some of those loans. Clearly, this is not a great way to save for retirement, college fees or that wonderful holiday you have planned, but it would have the impact of reducing our own personal debt levels and therefore, the risks being taken in our own household.
When it comes to personal finance, often the most boring and sensible option is also one of the wisest.