INVESTMENTS IN FUTURE

INVESTING IN DIFFICULT ECONOMIC

                              TIMES

Unless you’ve been living under a rock, you probably know the world is still struggling with

the aftermath of the global financial crisis that erupted in 2008. The crisis has been so

profound that it has left a deep imprint in any aspect of our social, economic and political

well-being. Indeed, there is hardly any person, institution, business or bank that has not

felt the dire effects of the turmoil that ensued as a result.

This financial crisis, being the most severe since the Great Depression, raised a number of

issues that need to be addressed in order to avoid the same mistakes in the future. The

most pertinent question remains –why modern financial crises occur?

The answer to this question is manifold. While the immediate reason can be a bursting of

a stock market bubble, a default of a country or crash of a currency, the long-term reasons

are usually far broader and more complex. In any case, a financial crisis wipes out the financial

wealth of many investors and causes institutions to lose credibility in the eyes of

people.

One of the factors that magnify the negative effects of a financial crisis is the improper

selection of assets that investors make for their portfolio. A wise investor should search

for a portfolio that is immune to such conditions of low institutional credibility and poor

stock performance. Investing in difficult economic crisis, at the very least, requires choices

that leave you “on the safe side”. Among many, such are gold and alternative investments.

UNDERSTANDING THE CURRENT GLOBAL

                    FINANCIAL CRISIS

From the year 2007 to the present, the U.S. has been experiencing something called the

“Great Recession,” the worst financial crisis since the Great Depression in the 1930s.

That’s not to say that many other parts of the world haven’t experienced financial problems

of their own. For instance, Europe began experiencing its financial crisis in 2008,

which, rather than being solved properly, was treated with a monetary stimulus. This has

resulted in a debt bubble that continues to damage the economics of many European

countries to this day.

The United States has also tried to curb the current global financial crisis with a stimulus

package and bailout for its banks, but that hasn’t cured every problem. And we should not

forget the other parts of the world, as it is important to focus not only on the U.S. or EU. So,

in Japan we have a debt crisis and deflation that has been going on for years. In China, an

economic slowdown is looming. And the Middle East has economic issues because of their

sociology-political imbalances.

HOW CAN YOU DEAL WITH YOUR

FINANCIAL CRISIS?

Believe it or not, there is a way for you to avoid the effects of this current economic downturn.

You can protect your wealth and become prosperous in these tough times by diversifying

your portfolio, making a structured investment plan, discovering new highlight

investment products like cryptocurrencies and investing in the trustworthy gold and silver.

That’s right – investing into the gold and silver markets at the proper time can certainly benefit

you. With a solidified upward trend in spite of the falling value of the dollar, investing in

gold and silver can help you avoid a personal financial crisis. During the final two decades

of the twentieth century, the U.S. economy was the envy of the world. It created 30 million

new jobs while Europe and Japan were creating virtually none. It imposed its technological

and ideological will on huge sections of the global marketplace and produced new millionaires

the way a Ford plant turns out pickup trucks. U.S. stock prices rose twenty fold during

this period, in the process convincing most investors that it would always be so.

Toward the end, even the federal government seemed well run, accumulating surpluses

big enough to shift the debate from how to allocate scarce resources to how long it would

take to eliminate the federal debt.

As the coin of this brave new realm, the dollar became the world’s dominant currency. Foreign

central banks accumulated dollars as their main reserve asset. Commodities like oil

were denominated in dollars, and emerging countries like Argentina and China linked their

currencies to the dollar in the hope of achieving U.S.-like stability. By 2000, there were said

to be more $100 bills circulating in Russia than in the U.S.

But as the century ended, so did this extraordinary run. Tech stocks crashed, the Twin

Towers fell, and Americans’ sense of omnipotence went the way of their nest eggs. The US

government is borrowing $450 billion each year to finance the war on terror as well as an

array of new or expanded social programs. Short-term interest rates have been cut to an

incredible one percent, and while growth is finally accelerating, borrowing at every level of

society is rising even faster. The dollar, meanwhile, has become the world’s problem currency,

falling in value versus other major currencies and plunging versus gold. 

The whole world is watching, scratching its collective head, and wondering what has changed.

The answer, as will become clear in the next few chapters, is that everything has changed,

and nothing has. The spectacular growth of the past two decades, it now turns out, was a

mirage generated by the smoke and mirrors of rising debt and the willingness of the rest

of the world to accept a flood of new dollars. Just how much the U.S. owes will shock you.

America is at the point where new debt goes to pay off the old rather than to create new

wealth. Hence the past few years’ slow growth and steady loss of jobs.

So why say that nothing has changed? Because today’s problems are new only in terms of

recent U.S. history. A quick scan of world history reveals them to be depressingly familiar.

All great societies pass this way eventually, running up unsustainable debts and printing

(or minting) currency in an increasingly desperate attempt to maintain the illusion of prosperity.

And all, eventually, find themselves between the proverbial devil and deep blue

sea: Either they simply collapse under the weight of their accumulated debt, as did the U.S.

and Europe in the 1930s, or they keep running the printing presses until their currencies

become worthless and their economies fall into chaos.

This time around, governments the world over have clearly chosen the second option.

They’re cutting interest rates, boosting spending, and encouraging the use of modern financial

engineering techniques to create a tidal wave of credit. And history teaches that

once in motion, this process leads to an inevitable result: Fiat (i.e., government-controlled)

currencies will become ever less valuable, until most of us just give up on them altogether.

These are strong words.

Now, what does a collapse in the value of the dollar mean for your finances? Many things,

mostly bad, but some potentially very good. First, it hurts people on a fixed income, because

the value of each dollar they receive plunges. Ditto for those who are owed money,

because they’ll be paid back in less-valuable dollars (hence the disaster about to hit many

banks). Bonds, which are basically loans to businesses or governments that promise to

make fixed monthly payments and then return the principal, will be terrible investments,

since they’ll be repaid in always-depreciating dollars. For stocks and real estate, the picture

is mixed, with a weak dollar helping in some ways and hurting in others.

One of the winner is gold. For the first 3,000 or so years of human history, gold was, for a

variety of still-valid reasons, humanity’s money of choice. As recently as 1970, it was the anchor

of the global financial system. And since the world’s economies severed their links to

the metal in 1971, it has acted as a kind of shadow currency, rising when the dollar is weak

and falling when the dollar is strong. Not surprisingly, gold languished during the 1980s

and ’90s, drifting lower as the dollar soared, and being supplanted by the greenback as the

standard against which all financial things are measured. But now those roles are about

to reverse once again. 

In the coming decade, as the dollar suffers one of the great meltdowns

in monetary history, gold will reclaim its place at the center of the global financial

system, and its value, relative to most of today’s national currencies, will soar. The result:

Gold coins, gold-mining stocks, and gold-based digital currencies will be vastly better ways

to preserve and/or grow wealth than dollar-denominated bonds, stocks, or bank accounts.

Another very interesting asset class is the relatively new introduced class of currencies:

cryptocurrency. Bitcoin has been a pioneer in this sphere – it appreciated a staggering 75

times in 2013.

INVESTMENT PLAN

Each investor should realize that every investment decision he makes with his portfolio is

only his and not someone else’s. Try to always be “in control” of your portfolio - never rely

on someone else to do what you should be doing. If you lose a grip on it, you will rather

be “managed” by your portfolio than vice versa. Here are broad categories of asset classes

that investors can put their money in:

TRADITIONAL INVESTMENTS               ALTERNATIVE INVESTMENTS

                 

                                                                                

» Stocks                                                                » Hedge Funds

» Real Estate                                                         » Bonds 

» Commodities                                                     » Mutual Funds

» Money Markets                                                 » Private Equity  

                                                                              » Managed Futures

If you are looking to invest in something, you have thousands of choices. You can choose

from stocks, commodities, bonds, alternative investments etc. Before making an investment,

the most important and at the same time the most difficult thing is to obtain detailed

information about the asset that you are about to invest in. Many investors wrongfully

think knowing the name and some basic information about an asset is enough. Yet, this

cannot be further from the truth – you have to delve hard before taking a decision. 

                                                   COMMODITIES 

 METALS

 » Aluminum

 » Copper 

 » Gold 

 » Lead

 » Nickel 

 » Palladium

 » Platinum 

 » Silver 

 » Tim

 » Zinc 

ENERGY

» Coal 

» Crude Oil 

» Electric Power

» Heating Oil 

» Natural Gas 

» Unleaded Gasoline

» Uranium Ore 

LIVESTOCK & AGRICULTURE

» Cocoa

» Coffee 

» Corn

» Cotton

» Feeder Cattle

» Lean Hogs 

» Live Cattle 

» Orange Juice 

» Pork Bellies 

» Soybean Oil

» Soybeans 

» Sugar

» Wheat 

EXOTICS & FINANCIALS 

» Currencies 

» Emissions Allowance Credits 

» Ethanol 

» Indexes 

» Lumber 

» Rates

» Rubber 

» Silk 

» Wool

                                                               

Fortunately, if you are not ready to commit time and effort to become proficient in collecting

data and investing in a profitable manner, there are people always people whom you can

hire to do the job for you. Asset managers have a knack in analyzing the economic trends,

different financial statements, and gather information from different business employees

and suppliers. Yet, this comes at a cost – commissions for asset management are high. At

the very least, even if you trust an investment manager or advisor, you have to be to know

where your investments are; otherwise you can be easily misinformed or even deceived.

The most important part about investing is to decide where to invest, and when to invest.

Investing in areas in which you have to most amount of information, and where you can

do good on your own, is the best area to invest in. Areas such as foreign stock markets are

generally considered more difficult, as they require the gathering of more information (as

compared to gold and commodities, for instance). In any case, if you wish to increase your

money at a rate faster than the rate of inflation, then you should be ready to take risks.

Taking risk is an indispensable condition for being a successful investor, especially in situations

of financial crises. Our investment journey can sometimes be a roller-coaster ride,

yet if you are wise enough you can always increase your wealth. You just need to make an

informed decision about when to invest and when to spend.

The pillar principle you should always observe when investing is “don’t put all your eggs in

one basket”. In other words, do not place too much funds on one investment. Rather, be

sure to spread your money over a number of investments. The key word to denote this

process is “diversification” – a word that you will encounter time and again throughout the

chapters that follow. That is, diversifying means investing in a number of different assets

and not just one. The economy can rise or fall, there is absolutely no certain time when this

happens. But if you are prepared to face the low times, then you have a great chance of

being prosperous.

 History is the best thing that you can refer to while preparing for these

low times, because it almost always provides clues to help you take preventive measures.

There are many uncertain economic times that you can refer to in the history to make

yourself aware of the situations, and be prepared for it. But what kind of uncertain events

should you look out for?

WEATHERING MAJOR ECONOMIC TIMES

Figuratively speaking, the economy is behaving pretty much like a man who has indulged

himself in drinking too much and then feels uncomfortable in the morning. Although one

knows that drinking after a certain limit there will be negative consequences such as headaches

and vomiting the next day, he still continues to drink because he feels accomplished,

here and now. This is pretty much how today’s global economy works. First, we notice rapid

growth of a country along with the technological advancements. And investors, accordingly,

see this as an opportunity to increase their wealth. But there are times when investors

get overexcited about these opportunities, overinvest and drive prices excessively high.

This is when the economy loses its balance, because it “overheats” and creates bubbles.

During the bubble formation, everyone feels happy because prices are appreciating dramatically

and everyone feels wealthier. When this bubble bursts eventually, the economy

suffers for some time before it manages to get “back on track” to its normal state.

STOCK MARKET BUBBLE AND CRASHES

The Great Depression is a direct consequence of one of the most severe economic bubbles

that occurred in the 20th century. When the stock market bubble burst in 1929 following

“the booming” 20s, an unprecedentedly harsh financial crisis erupted whose consequences

loomed large during the decade that followed. Among many, the main reason for the burst

of that bubble was excessive credit and excessive spending. These led to the increased

debts that the US was not able to handle, and eventually the economy collapsed.

Now,more or less, we are experiencing a repetition of events after the burst of the real estate

bubble in 2008. As bubbles have proved, they occur again and again, no matter what measures

individuals and governments take (in fact, the earliest known bubble is the Tulip mania

in 1673, and since then there have a number of similar financial bubbles). Therefore,

the best thing to do is to prepare ourselves for such a bubble, because it is probably the

only way to face such a situation. Here’s how you can bring yourself in a suitable position:

• Keep yourself clear of consumer debts, and try your best not to use the credit

cards unless you have a really urgent need to do so. Consumer credits are the

best way to keep your debt increasing, and when the hard time comes you will

find yourself squeezed against the wall to return money when your income levels

will be suffering.

• Try your best to clear your mortgage as soon as you can. Having any kind of debt,

especially for a long period of time, puts you in a very risky, losing position. Re-paying

your mortgage fast is probably the smartest thing to do in the face of a crisis.

This ensures that not only will you not pay excessive interest rates, but that you

won’t end up being homeless.

• Make sure you are saving money for emergencies. Do not engage in overspending

because if a crisis comes, you will find yourself broke in no time.

• Do not be lured to think there are no lucrative investment opportunities during

crises. It is true that the opportunities are harder to find, but the richest are usually

those who invested at hard times when everyone else was saving.

• Make sure to diversify with your own skills and abilities. This is especially true

during crisis, when in order to be profitable as an investor, you have to be ever

more astute and prepared for the challenges

If you have been studying these bubble bursts closely, most of them are very similar to

each other. Take the dot-com bubble for instance. During the late 90s, people thought that

they can get rich quickly by investing in the internet and technology. However, in 2000, the

dot-com began to implode, doing a lot of damage to naive investors. Even though this bubble

did not create much of an economic turmoil compared to the 2008 real estate bubble,

it was still able to do harm to those who had not done their math properly and who had

not been able to take a comprehensive look of what was actually going on.

• There is always a way to get round these types of bubbles – as already mentioned,

always maintaining a diversified investment portfolio is the most efficient way

to immunize from the effect of any type of bubble burst (especially if you keep

“safe-haven” assets in your portfolio, or assets that perform well during crises,

such as gold, for instance). People who suffer the most, are the ones who invest a

lot of money in a particular type of stock. People who had invested most of their

money in the technology stocks during the burst of the dot-com bubble hoping to

be more profitable than the average investor were the ones who nearly got broke

after the bubble burst.

• Don’t get too overexcited when the next “big thing” comes. Yes, it was probably

a good investment to buy securitized instruments such as CDOs (which we are

going to discuss in L5) when they were the next big thing. Yet, the problem with

investments that are too popular is that everyone wants to join and bubbles are

easily formed. Think rationally and asses the pros and cons – be sure to always

escape before the bubble bursts.

• Don’t panic when a crisis erupts. Yes, your investment portfolio might hit the bottom,

but what usually happens is that financial markets overreact for some time.

Keeping your portfolio might sometimes be a good idea, as it will rebound when

the overreaction fades away.

Follow a systematized and coherent way of assessing the profit prospects of financial instruments

– be sure to always perform comprehensive fundamental and technical analysis

of the asset you wish to invest in (you can find more info about fundamental and technical

analysis in L2, L3, L4 and L5).

REAL ESTATE BUBBLES AND CRASHES

Bubbles are not intrinsic to stock markets solely – these can form with any type of asset.

The 2008 real estate bubble is the most illustrative example for this. Homeowners

purchased their homes with mortgage loans with floating interest. When the demand for

credit rises, interest rates also rise. Hence, their credits became more and more expensive

for them, since the interest was rising. At the same time, when it became clear that the

price of houses is overvalued and the bubble burst, suddenly the houses people bet with

the mortgage (formally known as mortgage collateral) became cheaper than the credit

they have to pay. It was then that they realized it is easier for them to not pay the loan

and let the bank take their house, because thus they will profit. Banks found themselves

in losses so severe that one of the biggest of them, Lehman Brothers, collapsed. Short and

simple – boom and bust.

Long story short, the rational actions of investors correct the irrational ones that formed

the bubble. Yet, as shown, it is always good to be rational when everyone else on the mar-

ket irrational. One thing you can do, especially in the case when you have to deal with real

estate and mortgages, is the following:

So how can we save ourselves from the real estate bubble?

• You should opt to pay at least 25% percent as your down payment for your new

home to makes things easy for yourself. A rule of thumb – if you find yourself

struggling to pay those 25%, then you cannot afford that home. Start looking for

something else, or you will get into the abyss of over-indebtedness sooner than

you think.

• Don’t over-rely on real estate agents and brokers to inform you about your budget,

and what type of house you can afford to live. Start working out on your budget,

and keep in mind that you will eventually have to pay mortgage no matter

what you do. So make sure that you remember that and not be seduced to pay

excessive amount for homes that will put a hole in your personal budget. Also

remember that you will have other expenses too.

• If you don’t have any plans in living at the same place for 5-6 years, then you

should probably not purchase a home. It is always better to rent, because you almost

always split the maintenance with your landlord. Other than that, the costs

involved in owning a property is high as compared to renting it. It will take you at

least five years to settle down in that place.

STAYING STRONG DURING MARKET

OVERREACTIONS

There are various non-trivial socio-political events that are currently going on around the

world. Whether it is the compromising of a leading political figure, or it is another scam

that took place in Asia, it is almost always reflected in the short-term price of assets. Most

of these events, especially if they do not result from long-term trends and are not expected

to change the overall “landscape”, don’t make a big impact on the world economy.

Again, remember what we said earlier about overreaction – the market tends to panic at

negative news, but then it settles off, sooner or later. Take John. F. Kennedy’s assassination

for instance - the stock market went down by 3 percent after the assassination took

place. Nonetheless, the market was able to rebound quickly and restored its levels in only

4 days and even added additional 4-5 percent in the weeks that followed. To cut the chase,

very often people exhibit irrational panic for a small time period, and then everything is

restored back in place.

Another example that merits mentioning is the infamous attack on the World Trade Center

that shocked the entire world. The stock value of the Dow Jones Industrial lost an average

of about 14 percent in a week, and it was recorded as the highest value drop in a week in

history. But it took the index only 2 months to recover from that loss and take an upward

march.

• The best way to shield yourself from these types of unexpected political events is

to make sure that you stay calm and don’t jerk your knees.

• Never forget the most important lesson - make sure you have a diversified port-folio.


PLAN FOR LIFE’S UNCERTAINTIES

 We all know that life has its own ups and downs, and that we eventually have to face them (if there are no ups and downs in your life, then you are probably dead). Anything can happen in life, at any time – the same counts for financial markets. You need to make sure you are ready to face anything by keeping your savings ready. And having savings aside that you are not afraid of losing unexpectedly is only when you make sure that - you named it – you keep diversified asset holdings.

KEEP AN EYE ON WHAT’S GOING ON 

The best way to make an estimate of the upcoming, uncertain thing in your life is to always keep a very wary and focused eye on what’s actually going on around you. There will be times when the market would be booming, and you will be thinking that everything is finally getting the shape you always desired. Yet everything can change in a matter of minutes and all the plans you had made about your happy future might suddenly become more distant than you’ve ever thought. There will be unexpected economic changes throughout the world and before you know it. For instance, inflation might hit a given country even ifs economy is weak (such situation is known as “stagflation”, a notable example in this regard is Japan). You need to make sure that you have a financial plan in place that you need to achieve in the coming years. While pursuing those goals, make sure that you are monitoring the global economy, your national economy, your local economy, your current job, your personal life – all in one place and all in one and the same context - never separate them. There will definitely be times when you might need to readjust your plans according to the events happening around you. In order to make sure that you are heading in the right direction, you should develop an intuition to sense the appropriate adjustments you need to make to your plan way in advance – only the most flexible and the fastest adjusting reap consistent profits on the market.

 MOTIVATE YOURSELF AND DEVELOP A PLAN

Mastering the intricacies of investing is a creative endeavour. No creative endeavour can be complete without an inner drive to excel. Investing is not pure math – there is always an element of qualitative reasoning and judgment behind your investment decisions. Learning how to successfully approach this qualitative element of investing is the very crucial difference between being successful and being unsuccessful on the market. Apart from finance-related qualitative judgment, there is another crucial qualitative aspect that any good investor should consider. You guessed it – a trader should have his own internal impetus to achieve goals and constantly excel, or put in simple words – you should have inner motivation. Needless to enumerate, there are a number of outside factors that motivate people to engage in investing on financial markets. However, what keeps successful investors on top is their inner motivation and self-discipline. Inner motivation is not a clearly definable term. Loosely speaking, it is doing something for the sake of doing it correctly and properly. In the context of investing, inner motivation basically means doing something for the sake of doing it in an informed and structured manner.

 The latter statement might sound naive and vague at first glance. Yet, this mental cause and-effect relationship is inextricably related to a trader’s main “outer” motivation – profit. If you do not commit enough time, effort and most importantly, diligence on the market you still might be profitable for some time.

 A successful investor is not one who’s profitable for some time – it is one who’s profitable on a consistent and sustainable basis over a long time period. In other words, an investor who avoids the “pain-in-the-ass” analysis in his decision making and relies mostly on luck will fail to reap any consistent benefit from the market. Financial markets punish the lazy – remember, you compete with millions of people that are probably better prepared than you in terms of theoretical knowledge. Do not let yourself fall into despair by this fact- any investor can compensate “dry” knowledge with motivation and diligence. Indeed, diligence is the crucial word here, especially one of its sub-realms - self-discipline. In fact, this trait of character is probably the more important than any other when it comes to investing.

Being able to rise to the challenge and to commit to doing what is difficult is a must for any good investor. Mental shortcuts are not an option – in financial markets, the reward is strictly proportional not only to the effort, but also to the efficiency and consistency of applying this effort. Just like you impose yourself not to eat carbohydrate if you are on a diet, the same way goes with escaping the temptation of taking the “easy” path in investing. 17 Self-discipline goes hand in hand with planning. Having a pre-defined plan with clear benchmarks and a “doable” trajectory is an indispensable prerequisite for the success of any investor. Bench marking means establishing feasible thresholds about what, how, where and why investment decisions and actions should be made. Also, load yourself with patience – statistics convincingly shows that, regardless of whether or not he is well prepared theoretically, the average beginning investor is at a loss in his first months. Patience should also be your guiding point on any market trade you make – do not open or close positions on the basis of emotion and sentiment, but think twice. One keystone in planning is to set yourself boundaries when to stop.

Not closing a winning position in time or leaving a losing position for too long is what usually trips investors down. A successful trader knows when to stop. Do not let profits or losses blur your judgment – do not be greedy and do not take premature decisions. Also, learn to lose – losses are part of life and you should be able to accept them Last but not least, do not aim at unrealistic heights – if you want a 1000% return for a month, think twice – financial markets is hardly the place for you in such case.