Recently a friend asked me for some advice about what to invest in given the sharp decline in foreign equity (stock) markets as a result of fears related to the coronavirus pandemic. This is an example of Contrarian investing which is a sound investment strategy. This is also a perfect opportunity to ease back into TANA-NOMICS like an old man getting into a tub.
There’s an old adage attributed to Baron Rothschild that goes “the time to buy is when there’s blood in the streets”. Meaning, while everyone is selling off their equities to buy masks and hand sanitizer, if you choose wisely, you can buy the good ones cheaply and make money when the market rebounds.
My advice to anyone thinking of dabbling in the equity markets would be to make sure you’re on a solid financial footing first before you start risking your savings or taking on debt to invest (we call that leverage).
What do I mean by that? Investing is like building a house or a Road March winning tune. You need to have a solid foundation or catchy rhythm and later on you can add a swimming pool or Kees for the finishing touch.
Similarly, the first thing you should consider is, do I have an emergency fund? The experts say you should have at least 6 months to 1 year of living expenses set aside in case you lose your job, need bail money because you get caught keying your ex car or have sudden, unforeseen expenses. For sudden expenses I suggest having a proper insurance portfolio to cover life, health and critical illness. Throwing a barbecue or curry-cue whenever you need funds is not a good plan.
Interest rates are currently very low and are likely to head lower given all the uncertainty in the world and the “flight to quality”. This is fancy finance talk for when people are scared and want to put their money where it’s “safe” (under your Sealy Posturepedic doesn’t count as quality). So, they sell their risky equities and buy government bonds or commodities like gold. Bond prices and interest rates have an inverse relationship so the more demand for bonds drives up their prices resulting in lower interest rates (I can teach you bond valuation at some point, but not today).
So where would you get the highest returns for your money? Well you could invest in individual stocks but that’s very risky. There are a few options though that can give you good returns for virtually no risk.
A side note on risk. The older you are the less risk you should be taking in your investments. That’s because you have less time to make back any losses. It’s not because I have something against mature people though some of allyuh probably feel so after the Bayview Friday review.
You can find those low risk options by asking yourself these questions. Am I in debt and what is the interest rate I pay on that debt? Always pay your highest interest rate debt first.
Credit card debt will almost certainly be your highest interest rate debt, at around 24.99% per year. Pay that off and it’s like earning 25% on your money, risk free. If you have a mortgage that would probably be your highest debt amount. If you pay that off or even partially and you would have earned at least 6-8% on your money depending on your rate. Boom! Sorcery!
Let me be clear though, I’m not saying to wait until life is a bed of roses or people finally start coming to your Carnival Friday concert to start saving. No, you should be saving regularly. As my good friend at www.philthegap.co says “for every $1 you make you should try to save 5 cents”. Check his site out, he know ting.
So now you’re protected from surprises, debt free and in a position to invest, so what do you do? Well, you can access the international markets through mutual funds or you can try your hand at picking individual stocks.
For individual stocks you’ll need a few things. You’ll need a brokerage account, access to USD to fund the account and either the knowledge to do equity research or the intelligence to seek out an investment management professional.
Don’t come by me though. I’m poor and could only give you advice about being poor.