Protecting Your Wealth in an Economic Crisis
No one knows his way around a financial crisis better than Warren Buffett does. From October 2008 to March of 2009, shares in Berkshire Hathaway, Mr. Buffett’s company, fell by 32 percent. Because Berkshire owns numerous companies that performed well, the book value of the corporation ended up seeing a decrease of just 9.6 percent by the end of 2008. An article in The Guardian reports that 2016 may see another financial crisis. Albert Edwards, an analyst for the bank Société Générale, recently said, “Development in the global economy will push the U.S. back into a recession.” When it comes to protecting your wealth in an economic crisis, embrace the tips and suggestions put forth by successful financiers and industry experts.
Financial Tips à la Buffett
Warren Buffett recently shared three factors that he uses to spot a company that is likely to survive economic downturns. The first thing that he looks for is a sizable and consistent flow of earnings. Massive liquid assets comes in at number two, and the third thing that he looks for is no major near-term cash obligations.
You can use Mr. Buffett’s tips to determine the type of companies that you should have in your portfolio. By taking this step, your wealth is more likely to withstand the next financial crisis relatively intact. Consider investing in companies that supply necessities as these businesses usually retain a steady stream of profits.
Along with using Mr. Buffet’s three financial principles for your investment choices, consider applying them to your personal finances. Make sure that you have a reliable stream of income. For instance, avoid jumping from employer to employer. To embrace this principle even more, be sure to purchase life and disability insurance to ensure the wellbeing of your family. For the liquid assets principle, set aside at least six months of income. If you’re retired, try to kick this amount up to two years. When it comes to the no major near-term cash obligations principle, avoid overspending on frivolous possessions.
Avoid Investment Mistakes
The Early To Rise site points out “Risk is an element of every business and investment transaction.” Despite the accuracy of this statement, keep in mind that some risks are greater than others. Three basic practices can help you avoid several common mistakes making you better able to protect your wealth during a crisis. The first mistake is having too much invested in one asset class such as stocks or bonds. The second mistake is putting too many funds into one area of these investment divisions. You’re making this mistake if you have most of your money invested in just one company. The third error is keeping your funds in an investment as it drops.
A Better Investment Strategy
According to MarketWatch, you should reallocate your portfolio if you see signs of a financial crisis. Ken Moraif, a senior advisor for Money Matters, wrote, “Retiree investors should bolster their portfolio with a broadly diversified range of stocks to participate in potential rallies.” Whether or not you’re retired, be sure to diversify into different asset classes. If one falters, then your other investments should help you protect your wealth just like Mr. Buffett’s company.
With this strategy, you may even gain money when one asset drops. For instance, if the stock market falls, then the bond market may rise. While the traditional Wall Street model is to invest in two different asset classes, you’ll be better protected by investing in five or more. You can invest in cash, bonds, precious metals, short-term stocks, long-term stocks and rental real estate.
The main benefit to expanding your asset allocation plan is that you’ll have less downside risk. In addition, the different asset classes are not linked. This means that your wealth will face less volatility and damage when the market gets wonky.
When it comes to protecting your wealth, keep in mind that your main priority is to safeguard your principal. If market hiccups occur, fight the urge to gamble with your investments by making major changes based on impulse. Stay calm and don’t panic. Also, consider working with a financial adviser who can help you make rational investment choices regardless of the market’s state.
Heed the Warnings
With management and diversity, you can protect your wealth even when financial catastrophes occur. Albert Edwards said, “The financial crisis will reawaken. It will be every bit as bad as in 2008 and 2009, and it will turn very ugly indeed.” When you take wealth protection steps like those that Mr. Buffett recommends, you’ll be able to weather any economic crisis. For more wealth preservation tips, visit the PersonalMoneyStore.com.