Assets that will survive a financial correction

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Welcome to Finance and Fury. Today’s we’ll be talking about what assets will survive a financial correction. The assets that that people still have confidence in. Confidence is key! In any asset, confidence is what is required.

Why is confidence important?

If a lack of confidence/panic is what causes prices on assets to drop heavily then the solution is in assets that, while their prices may be impacted (short term volatility) they will not go to zero.

Human behaviours/emotions pay a significant role

  1. Bubbles (and FOMO) – you see the price going up, you jump in because you fear missing out. This can create overpricing.
  2. Works in both directions – Crash – when people fear a share crash, they sell their shares in a panic, and the crowd follows dropping the price quickly
  3. The fundamentals/intrinsic values of things don’t matter in a financial collapse. People aren’t looking at Fair Value when all they can focus on is 40% losses – they only see the losses
  4. Subjective values – do people value it regardless of intrinsic values

Never sell after the fact

  • Hubris to think you can sell out before the market crashes – ‘timing the market’
  • You have to own assets that will survive or become more valuable

Asset goes down in value – so what?

Depends on type of asset and what you do, and what those investments are to you

I think of TLS, bank shares are volatile term deposits – not expecting great growth off them, the valuations are almost like a Utility company – but decent dividends

When shares do go down in value

  1. If you sell, you crystallise or realise the loss
  2. They keep going to zero

The Solution

Avoid selling early and crystallising losses or losing 100% of the investments that you have

  • Step 1 - Buy good companies, diverse business models, diverse markets and lot of different companies, across asset classes (Diversification)
  • Step 2 - Don’t panic sell

Buy alternative asset classes

  1. Gold/Silver/Palladium/Platinum
    • Not on futures contracts or derivatives, but one that holds the underlying asset
      • Not enough gold/silver etc. in world to cover size of ETFs/funds with positions in gold
    • Water
      • I’m looking into this one, I just find it interesting
      • 1lr of petrol is cheaper than buying a bottle of water from the gas station
      • Don’t collect too much – The Government might tax you

The Worst Case – you are in a position that you have to sell

  1. Most common cause is leverage /debt – this applies across asset classes
  2. Two-fold
    • The lender wants their money back – they may have someone else to pay, or have lost confidence themselves in getting money back
    • Cashflows – The cost of the debt is too great compared to what you can cover

Types of assets to watch out for

  • Shares with Margin Loans
    • LVR levels
    • Run up of leverage causes a lot of bubbles, then corrections
  • Property that is highly leveraged
    • Not PPR – not forced to sell that hopefully
    • But if people are losing jobs, rents may come down or be non-existent
  • Mortgages – MBS, Managed funds marketed as ‘Income Funds’
  • Other ‘debt instruments’
    • Corporate notes/hybrid securities
    • Credit – short term 90-day bank bills – used for short term funding
    • Derivative exposure
      • Warrants (do play some part)

Summary – There are assets that, while not retaining the value like you might want (drop in price), if you hold them you can survive

  1. Have a range of investments (not just bank shares)
    • Some physical assets – Gold
    • Shares in companies that people will still use – not fad companies or ones built on people’s discretionary spending
    • Property – ensure that you can hold this long term and not need to sell
  2. Make sure they are quality assets
  3. Don’t sell
  4. It sounds easy – though it’s not easy seeing the value of your assets drop – but it is better than selling out and missing the rebounds due to emotions

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