It seems like all around the world, we're having some economic problems.
2008 is a year where we saw price inflation on a global basis. We're also seeing a global housing crisis. A global food shortage. And an increase in oil prices around the world.
What is going on here?
While there are many ideas as to what is causing all these problems, one thing is for certain: shortages and price shocks on a global basis require a different approach to wealth management. As one crisis can easily lead to another -- for instance, a rise in global oil prices will increase transportation costs, which in turn will increase prices for everyday goods and services -- there is a serious danger of a "domino effect" of sorts that creates greater economic chaos than most of us have seen in quite some time -- possibly in our life times.
With that in mind, there are four guiding principles individuals should bear in mind when looking to preserve their wealth in a turbulent global economy:
1. Liquidity is Key. Liquidity -- the ease with which you can get in and out of your investments -- is of greater value than ever before. As underlying economic ecosystems are vulnerable, investors should pay extra attention to ensure that they can get in and out of investments as easily as possible. As an example, houses tend to be a bit illiquid; it takes time to buy one, and to sell one. In a deepening housing crisis where the market is overwhelmed with sellers relative to buyers, sellers may be in a particularly dangerous situation; it's a buyers market, and as prices continue to fall, the relatively illiquidity of housing as an investment becomes more apparent and detrimental to one's overall investment portfolio.
2. Short Term Strategies. Related to the idea of liquidity is the notion of short-term investing. For the past few decades, many people, particularly Americans, have grown accustomed to thinking of long-term investing as a safer bet -- i.e. retirement funds, buy and hold strategies with solid companies, etc. In times of economic turbulence, longer term outlooks become harder to forecast. Instead, individuals should look to manage their wealth on a more short-term basis, where one can obtain a more reliable data set upon which to make investment decisions.
3. Technical Analysis. A natural extension of short-term investing is technical analysis -- the decision to base investing decisions based more so on price patterns rather than fundamentals. For instance, a longer term strategy may be to buy stocks of company XYZ, because company XYZ makes a great product and has an experienced and intelligent management staff. Such a strategy may have yielded great results in a more stable economic environment, but in today's more volatile markets, it becomes more important to look at buying and selling activity, and make decisions based on what assets appear to be overbought, oversold, or ready to make a big price increase. Technical analysis may seem like a foreign concept to many, but it is increasingly becoming the primary way professional speculators -- like hedge funds -- participate in the market. The good news is that with the advent of the Internet, an abundance of information, and online trading, learning and successfully applying technical analysis is easier than ever.
4. Diversify on a Macroeconomic Basis. As we noted earlier in this article, one potential cause of concern is for there to be a "domino effect" of crises -- this is why liquidity, short-term strategies, and technical analysis are important. Likewise, so too is the importance of diversifying on an international basis. In other words, as the economy becomes increasingly internationalized, true diversification will mean diversifying across economic ecosystems. One example is currency trading; this allows traders to diversify against currency crises. Another example is investing in commodities -- oil, agricultural products, precious metals, etc -- as these products have a global demand, as opposed to being dependent upon a single ecosystem, as individual stocks and mutual funds generally are. In sum, by embracing these four principles, individuals can find ways to preserve and even enhance their wealth during times of global economic turbulence.
