Subsequent to the US Presidential election in early November 2016, I have become “uber cautious”. My rationale for becoming this way is that:
- Corporate debt levels are growing exponentially despite sputtering profit growth.
- High-yield debt with “thin compensation” relative to increasing risk of default.
- Political turmoil in various parts of the world appears to be escalating.
- Subprime auto-loan default rates in the US now match those seen just before the 2007-2009 recession.
- The number of retail outlets expected to close in 2017 will exceed that of 2008.
- Almost half of certain emerging-market debt (the sovereign and quasi-sovereign variety) is below investment grade.
- Canadians’ household debt (watch videos) at elevated levels.
- Consumer debt levels in the US rivals those just prior to the Financial Crisis in 2008.
- The quality of the leadership in Washington (not just at the Presidential level but his entire entourage). I suspect countless Americans who voted Trump into office held out hope that his “business prowess” would improve their lot. Had they read The Art of the Deal, a biography about Trump, they would have realized his “business prowess” is highly suspect. In my opinion, this man has few morals, is unethical, and is essentially a con artist. I recommend you listen to this 9 minute interview with The Art of the Deal ‘s “ghostwriter”.
It would appear I am not the only investor who is of the opinion (and here) that investors are becoming increasingly complacent in a world fraught with risks that could lead to a sizable market correction. While some “experts” suggest now may be the time to sell, I am not going to this extreme as our investments are concentrated in companies with strong financials and strong competitive advantages. While these companies may suffer a slowdown in the event of an economic downturn, I suspect they will be able to capitalize on opportunities when their weaker competitors stumble.
Given my uber cautious outlook, my wife and I have taken the following precautionary measures:
- We do not hold speculative positions but if we had had any, we would have exited them by now.
- We made a concerted effort to significantly reduce the very little debt we had. If you have debt, give special attention to the reduction of demand loans priced at variable interest rates.
- With our debt levels at negligible levels, we will continue to build our cash reserves so we can take advantage of opportunities when presented; the cash component of the FFJ Portfolio is currently at its highest level since its creation.
In addition to these precautionary measures, some readers have informed me they have gone to further extremes than my wife and me. They have:
- Downsized/relocated to capitalize on the dramatic increase in the value of their principal residence. Clearly, a plethora of factors come into play and this suggestion may not make sense from your personal standpoint.
- Sold non-income producing personal belongings (eg. motor boats, motorcycles, vehicles, etc.)
- Created additional sources of income through the creation of a side business or part-time employment.
I am certain you can think of other ways to improve your personal financial circumstances. Perform a “How to create additional streams of income” search on the internet to obtain ideas.
I think we should be optimistic about the long-term future prospects for the major world economies. Given this, I think your probability of creating long-term wealth is heavily weighted in your favor if you take the appropriate measures to stay, and to remain, in a strong personal financial position.
Your lot in life, however, is highly unlikely to pan out the way you desire if you choose to:
- Continually spend more than your after tax income;
- Disregard the risks associated with carrying excessive and expensive debt;
- Invest in speculative ventures with the intent of hitting “home runs”;
- Acquire material items that are unlikely to appreciate in value and/or to generate an ongoing income stream;
- Focus exclusively on the short-term and totally disregard long-term planning by not developing and analyzing several “what if” scenarios.
I recognize this post is light on the “how to” aspect of wealth creation. That, however, was not the intent of this post. The manner in which you decide to enhance your wealth is personal and is influenced by a host of factors that are specific to you; I could not possibly give justice to how you should create wealth without knowing your personal circumstances. What I hoped to impart through this post is a sense of urgency to prepare yourself to weather the next financial storm.
Oh, and by the way….using your home as a personal ATM is not an appropriate course of action!