What’s Your Exit Plan When Financial Crisis Strikes?

Yesterday, the fire alarm went off in our office.

It turned out to be a bogey…but not before the entire building was evacuated.

When the alarm first started blaring, those of us in our office on the 26th floor made our way to the fire escape…

…where we made it down about one storey before hitting the traffic jam of people.

Altogether, it took us nearly 30 minutes to descend the hot, uncomfortable stairwell.

As I made my way down the 26 storeys, I realised that if there had been an actual fire…I would almost certainly have died.

Especially if the fire started on a lower floor, say the 10th. There would be a heap of panicking bodies clogging up the narrow stairwell. Eventually someone would trip…then we’d all dogpile…and toast like little marshmallows.

Great…

But after my macabre musing, I realised that it’s a proper metaphor for our financial world today.

If the fire alarm is pulled, and everyone rushes for the escape, how would you fare?

Would you make it out alive?

Or would you end up in the dogpile on the 23rd floor?

I reckon most folks have decided to be blissfully ignorant. They’ve turned off their hearing aids. They’ve slipped off their shoes. They’re not going anywhere.

Perhaps they trust their financial advisor or KiwiSaver fund manager to rescue them…to pick them up in a firefighter’s hold and walk them out of the flames…

At least, that’s what a lot of people did in the US back in 2007 and 2008. Then they watched as a decade of gains were erased.

And many of them didn’t have that kind of time on their hands…

Maybe they were retired…or about to. Or saving up for a down payment on that house. Or building up an education trust fund for their kids’ university.

Then they had a decade-sized wrench thrown in their plans.

Couple that with a crash in the housing market and KAPOW! Double-whammy. Folks lost decades of hard work and prudent living in a matter of months.

So, again, I ask — if the fire alarm were to be pulled today, how would you fare?

Liam Dann at the NZ Herald seems to think the alarm’s already been pulled.

That the bull market is dead. In a recent article, Dann said:

A real stock market rally, a new bull market underpinned by fresh productivity, improved profits and investor enthusiasm for shares, looks a long way away.

Whatever happens, the post-GFC conditions that drove double-digit market returns for almost a decade are no longer with us.

We are in the last phase of this economic cycle.

The IMF echoed his concern, ‘…Storm clouds are building.

Indeed, this party has gone far too long. Fuelled by the worldwide campaign of ‘easy money’, businesses (and indirectly shareholders) have grown plump and unwieldy. Their unquenchable hunger for low interest rates has done little but persuade the masses that we’re in a happy chapter in history.

But, lo and behold, a new chapter is on the next page…and this one may not be filled with years of plenty. Instead, we see famine.

Tickled by the flames, investors will head straight to the door…just to find everyone else barraging in too.

It could become a dogpile like the world’s never seen before. A smouldering heap of confused investors wondering where it all went wrong.

But you don’t have to be a part of that dogpile.

You have many options available to help you prepare for a financial meltdown.

The first step is simply evaluating your holdings — stocks, KiwiSaver, property, etc. What do you own and how vulnerable would it be in a downturn?

You can ‘stress-test’ your portfolio. If all your stocks and properties took a 25% haircut, would you be okay? Would you be able to afford groceries and petrol?

Unfortunately, too many people never think about that. Maybe they don’t want to. But they should…and by analysing their holdings now, they might avoid getting burned later.

That’s not to say that there aren’t some investments that weather storms better than others.

There certainly are.

The portfolio of my paid service, Small-Cap Speculator, for example…is up several percentage points in the green…while most major market indices are a sea of red.

It’s about being deliberate with your investment decisions…and avoiding the main thoroughfares, where most investors would inevitably dogpile when the alarm’s pulled.

Because if you’re not deliberate…if you’ve opted for autopilot…then you’ve given up some of your control over your wealth and that might make it harder to navigate choppy waters when the storm clouds arrive.

Now if you’re a long-time reader, this won’t be new to you. Those in my network, including Bill Bonner, have been forecasting rain for years.

And for the past decade, we’ve been mostly wrong. Despite the alarming number of indicators flashing red, today’s miracle market has stayed afloat.

And it’s possible that it could stay afloat for many more months…even years. It’s certainly the party line of the mainstream media.

So I won’t presume to tell you what will happen. Only what could. Take stock of your wealth…and consider your exit plan for when the blazes start licking at your heels.

Best,

Taylor Kee
Editor, Money Morning New Zealand

 

 


Taylor Kee is the lead Editor at Money Morning NZ. With a background in the financial publishing industry, Taylor knows how simple, yet difficult investing can be. He has worked with a range of assets classes, and with some of the world’s most thought-provoking financial writers, including Bill Bonner, Dan Denning, Doug Casey, and more. But he’s found his niche in macroeconomics and the excitement of technology investments. And Taylor is looking forward to the opportunity to share his thoughts on where New Zealand’s economy is going next and the opportunities it presents. Taylor shares these ideas with Money Morning NZ readers each day.


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