You may recall The Flying Wallendas. They were a danger-craved circus act. Best known for performing high wire acts without a safety net, the group was founded by Karl Wallenda in 1922.
A 73 year old Karl Wallenda tried walking along a wire rope strung between two high rise Puerto Rican buildings in 1978. Nearing the second half of his walk, a swell of wind sent Karl falling to certain death 120 feet below. Karl Wallenda tempted fate one too many times.
This parable is similar to the problematic situations shared among today’s market investors. The last 30 years have had a few scares, but more often than not, rolling the dice has produced riches for these market gamblers. It’s clear that investors and financial advisors have become complacent. Too many are walking a financial tightrope without a safety net because it’s the only way they know. They are grossly unprepared for anything but good weather.
The economic climate determines the market’s cyclical movement. Stagnation, inflation, strong growth, and deflation shape the direction of every type of investment. The economic weather forecast can be modified over time, but the last big wave of change happened long ago, making future movements much tougher to predict.
What Are The Possible Forecasts?
Many discussions about inflation center on concerns over the Federal Reserve ordering more money into circulation. Yet, that cause and effect situation is not guaranteed. Rather, deflation in the 1930s United States was a direct result of increased money production.
Increased quantitative easing from the Fed creates a counter reaction, where the rate of spending, or velocity, decreases considerably. Uncertainty about the future has restrained the desire to spend.
What investment groups work best when deflation occurs?
Interest rates are likely to fall. This means long-term, high quality bonds, such as Treasury bonds, should perform well. Overall, goverment bonds with longevity have a good chance to yield high returns through a deflationary period.
Rest assured the Federal Reserve hopes a boost in money supply leads to inflation.In fact, they have an official inflation target of 2%. Creating inflation may be simple and logical on the surface, but there’s some danger that inflation will shoot up higher than intended.
Inflation alters how people spend their money, which somewhat dampens the enthusiasm of heightened spending The target is not productive investment, but protection of wealth and lifestyle. The future’s volatility slaps a label of “risky” onto startup businesses and new products that would otherwise attract investors.
What investment groups work best when inflation occurs?
When prices rise, money is likely to flow to investments viewed as a store of value or physical assets that have practical use. Gold, real estate, and commodities are some examples.
The Goldilocks premise counts on the economy’s ability to stroll across that high wire safely. There are a few variations of this possibility.
First, there could be a revolutionary breakthrough on the horizon (along the lines of the automobile or computer) that creates strong economic growth. Goldilocks could be in the cards, but it’s not worth an all-in bet.
Miraculous industry expansion isn’t the only path to a Goldilocks situation: world banks (including the Federal Reserve) would have to print money in the right amount at the right time. This would give governments enough time to enact economic reforms to remedy its instability.
What investment groups work best when Goldilocks occurs?
Stocks. Stocks are a regularly solid investment in a Goldilocks situation, and for good reason. You’re in a solid position for Goldilocks if your current investments follow this strategy. If you aren’t convinced Goldilocks will be the ultimate outcome, you are walking that high wire into the wind without a safety net.
Stagnation occurs when the economy remains static in its current state. We may see inflation, growth, and deflation at times, but overall, the economy would not experience sustainable improvement over a long period of time.
What investments deserve attention during a Stagnation period?
Income producing investments should work well. When price appreciation is slow, income-driven investments help keep a stream of cash flowing in until growth becomes sustainable. A pro-active approach to trading also helps turn a profit in unsteady markets.
So Which One Will It Be?
Intellect and education can take you far, but it can’t help anyone guarantee the future. Even Ben Bernanke, who gets his information before anyone else and controls the printing press, can only resort to educated guesses.
Guessing isn’t inherently bad, as long as you comprehend the situation you’re predicting. Sadly, numerous investors lack that information, and leave that up to a financial advisor that thinks they have the answers.
There is a silver lining: guessing is not required for success. You just need to think about diversification differently than the past. Diversification among stocks and the situations above becomes vital.
There are dark clouds approaching. Whether it comes our way remains to be seen. In any event, make sure you understand how your investment strategy is likely to perform under any scenario. Without adequate preparation, the coming storm could sink your investment ship.