I’m sure it’s the right strategy for me (not for you)
The world is starting to get more than a little scary at the moment. Stock markets are dropping sharply, crypto is crashing, inflation is decimating savings, there is a war in Ukraine, and governments are printing too much money.
During scary times, I like to do two things. I like to preserve my wealth and set myself up for future opportunities.
This is easier said than done. Sometimes I feel like I’m trying to time the markets, which is generally a bad strategy, but I just want to stay safe.
It seems like all the indicators are pointing to a global recession. We are in a perfect storm that most of us have never seen in our lifetimes. Sure, we’ve all been through recessions, and we always bounce back, but this feels very different.
This time we have a whole lot more negatives to contend with. Since the 2008 crash, many countries have taken on massive amounts of debt. During the pandemic, most countries decided to take on even more debt. It’s just not sustainable.
Add in the war in Ukraine and the lockdowns in China, and it’s obvious (to me) that the coming recession won’t be easy to climb out of. In the UK, the Bank of England Governor has predicted “apocalyptic” food price rises for the rest of this year. GDP is expected to be more or less flat until at least 2024.
In the US, UK, and many other countries, interest rates are going to be rising. That means we’ll be paying more for our mortgages, leaving us with less money to spend.
Increased interest rates also mean that countries will have higher debt repayments to deal with. That means less government spending as well.
This means we’re going to be a lot worse off than we are right now.
So, why am I hoarding cash?
Reason #1 — Preserving my wealth
For all the above reasons I see a huge economic hit coming our way. Stock markets are dropping, crypto is crashing, and inflation is eating away at our cash.
This gives me a dilemma. UK inflation is currently at 9% and is forecast to reach double digits very soon. That means that any cash I hold is effectively losing 10% a year.
On the other hand, past recessions have seen stock markets drop as much as 50%. Crypto has fallen 90%+ in the past.
As I’m fairly risk-averse, I would rather have a 10% certain loss from holding cash rather than a potential 50–90% loss from holding stocks or crypto.
I see the 10% loss as the price I have to pay to stay safe. I’m ok with that. Well, sort of. I don’t really have a choice.
I don’t have 100% of my wealth in cash though, so I am still able to benefit from any upside.
Reason #2 — Preparing for future opportunities
The best time to buy assets is when there’s blood in the streets. I don’t see any blood yet.
If stocks dropped 30% from here I’d start dollar-cost-averaging back into a few index funds.
I sold all my index funds a couple of months ago. Even if they don’t drop in price any further, I can sleep better at night knowing that I’m out of the market. The stress of watching markets crash is not for me.
I’m still invested in crypto, though I started to cut some of my holdings a few days ago. Up until last month, I was still investing a little extra each month.
Some think that crypto may already have hit the bottom, but it could drop much further. Bitcoin is currently at around $29,000, with some predicting a bottom closer to $10,000. If it gets to $20,000, I’ll start dollar-cost-averaging back in.
I sold my home a couple of years ago. That was nothing to do with the economy though. I decided to move on and have been considering where to buy next, as I would like to have a solid base from where to continue my travels. I need somewhere to call home.
I was planning to buy soon but will wait to see how the economy works out. I’m not in a rush.
I expect to see bargains in stocks, crypto, and property over the next few years. I’m patiently waiting to take advantage of these. Cash will be king.
I’m not sitting still though. I have my writing side hustle and will likely start another one. I still want money coming in during these tough times. The more I can earn through the recession, the better placed I’ll be to come out ahead.
This is just my strategy
This is just my strategy. I’m not suggesting it’s suitable for anyone else. What works for me right wouldn’t have worked at other times of my life. We all need to do what suits us best at whatever point we’re at in our lives right now. That’s different for everyone. And we all have different risk profiles.
Do your own research and make your own decisions. Don’t make financial decisions based on what someone else did.
I could be wrong.