They say the U.S. “recovery” began in June 2009. And though it’s been one of the weakest recoveries in history, it’s also been one of the longest.
Today, we have record high stock prices and record high debt. (Coincidence? Perhaps.)
Common sense alone says the probability of a stock market correction and economic recession are growing every day.
As we learned in 2008, real estate investors don’t always escape Wall Street disasters unscathed.
And while we enjoy and hope for continued sunshine, experience says it’s a good idea to pack an umbrella … just in case.
So what does that look like for real estate investors?
We think there are three things every investor MUST have in order to thrive in a downturn … and really, these apply to ANYONE who wants to be in a position to profit from bad times when they inevitably come.
When financial markets seize up, cash is king. Or better stated, liquid wealth which isn’t dependent on a counter-party is REALLY useful.
But deposits in a bank can be frozen or seized. And if the bank AND the institution guaranteeing the bank fails, you could even lose ALL your savings.
We know. It seems extreme. But it’s not unprecedented. And the whole point of preparing is to imagine a worst-case scenario.
Cash is valuable in a financial crisis because the prices of quality assets often get dragged down by the collapse of the garbage assets. Crashes can be indiscriminate.
Think about 2008. When mortgage-backed securities collapsed, they took high quality real estate, stocks and other assets with them.
Back then it was possible to buy properties way below replacement cost … IF you had cash … because there was no credit available. Lack of credit created the problem … AND the opportunity.
So in a worst-case scenario, where bank deposits are even just temporarily frozen, cash OUTSIDE the banking system becomes VERY valuable.
Of course, if Central Banks start printing currency to re-inflate the system, there’s also a risk that your cash loses some purchasing power. Think Zimbabwe for a worst-case scenario.
So some investors think it’s a good idea to diversify liquid reserves to include non-cash liquid stores of value … such as precious metals like gold and silver … also OUTSIDE the banking system. Now you’ve mitigated risk from both a banking collapse, a credit collapse, and a currency collapse.
It’s been said your network is your net worth. The idea is relationships are an important asset. It’s true in good times … and even MORE true in bad times.
Relationships with the right people … people with specialized knowledge, a strong network of their own, and resources (including the aforementioned liquid reserves) … can open up all kinds of opportunities for you.
These are people you can barter with, borrow from, partner with, and call upon for ideas, advice, and introductions.
A wise investor is ALWAYS investing in developing strategic relationships. That’s one of the primary purposes for our annual Investor Summit at Sea™
It’s hard to quantify the ROI on your financials, but any accountant can tell you good will is worth a lot … and in a financial downturn, your network could be worth a FORTUNE.
We often say, “You either know how to generate revenue or you have to work for someone who does.”
But in down times, jobs are harder to come by. When you know how to sell, you’re able to create a job for yourself … and also for others.
And in bad times, there’s more talent available needing work. So in some ways, it’s actually easier to build a great team coming out of a recession.
To generate revenue, recruit and lead a team, negotiate favorable deals, and get into and stay in important relationships …. you’ll need sales skills.
Professional salespeople know sales isn’t a personality type or genetic pre-disposition. Salesmanship is a learned skill … like welding, computer programming, or accounting.
We actually consider salesmanship to be an essential survival skill … one well worth learning. Robert Kiyosaki says, “Every entrepreneur needs to be able to sell.” We agree.
This may not be what you think …
When most investors hear “diversification” they think asset allocation … spreading your investments around to various asset classes so if any one goes down, it doesn’t take down your whole portfolio.
“Professional” financial advisors like to call real estate an asset class … like stocks, bonds, currency or commodities.
It’s a rant for another day, but for now we’ll just say real estate is ALL those things in one … except with a lot less paper or exposure to market manipulators.
The kind of diversification we’re talking about is structuring your financial life to avoid over-exposure to any single aspect of the financial system.
This is the voice of experience talking …
Heading into 2008, our businesses and investments were ALL heavily dependent on credit markets. And when the credit markets seized up, so did our businesses and investments.
We THOUGHT we were diversified.
We operated an educational company, a mortgage brokerage, a real estate brokerage, a radio show, a real estate development company … and even a publishing business.
On the portfolio side, we owned a variety of real estate product types including single-family homes, apartments, office buildings, and resort properties … in several different U.S. states, and three foreign counties.
Pretty diverse, right?
BUT … the common thread for almost all of our ventures was a very high dependence on credit. We were overexposed to the credit markets.
It was a bad structure. Then the financial crisis came and the structure collapsed. VERY no fun.
The lesson for us and for you … take a GOOD look at your financial structure.
What are you dependent on? Is there any ONE thing which could unravel it all?
Our good friend Simon Black at Sovereign Man says, “If you prepare for a crisis which doesn’t occur, how are you worse off?”
Or to paraphrase Les Brown, “Better to be prepared and not have a crisis, then to have a crisis and not be prepared.”
We say plan for and enjoy the sunshine, but always pack an umbrella … just in case.
Until next time … good investing!
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