What is the trick to surviving a stock market crash?
One of our readers posed this question after we gave our thoughts recently about the Next Big Stock Market Crash.
It is our opinion that there are a lot of hidden economic factors in China that could drag that economy down and take much of Asia and the developing world along for the roller coaster ride. The trick to surviving a stock market crash is to anticipate and prepare. As such we have written about issues such as when to sell stocks and following direct foreign investment as a means of seeing where the smart money is going these days. As the US Federal Reserve reduces its quantitative easing stimulus program, interest rates are going up in the USA and taking the value of the dollar along for the ride. This is one of the factors that are pulling money out of so called developing economies. Our first suggestion for surviving a stock market crash is to avoid being over extended as some of these economies falter. What stocks will be hurt as the global economy weakens, China’s real estate bubble bursts, and countries that depend largely on raw material exports to China see their orders dry up? These are not just foreign stocks but companies like Caterpillar, CAT, that depend on global construction projects for their success. And we end with the reminder that more often than not, cash is king.
Panama Instead of Brazil
If you are going to invest offshore you need to do your own research. Lots of folks rushed in and invested in Brazil when things were hot and now are licking their wounds. As China orders dry up Brazil is hurting. A lot of foreign direct investment just up and walked away. ($35 Billion invested in 2007 and $3 Billion pulled out in 2012) On the other hand the little country of Panama had foreign direct investment of $1.8 Billion in 2007 and $1.6 Billion in 2012. Panama has the Panama Canal that pumps a billion dollars of cash directly into the national treasury each year. It is a major transportation hub and has strong banking and insurance sectors. When the canal expansion finally gets finished it will only mean more riches for this nation. Panama exports a lot of watermelons and bananas to North America and Europe and does not worry about Chinese orders drying up for oil, coal or steel. Picking an economy offshore that will continue to thrive in good and bad times is part of the trick to surviving a stock market crash.
Investing and Holding Cash at Home
When economies suffer, equities fall in price and real estate goes for a song. Having a cash reserve gets you through the bad times and allows you to buy when prices are at their lowest. To the extent that you stay in stocks, consider utilities as they continue to make money selling electricity even when folks are not going out to the restaurant, taking vacations or buying an iPhone. When the dollar is strong is not the time for investing in gold but it can be a good time for investing in consumer goods companies or breweries as folks always need soap and can usually find money for a beer, or a six pack, with which to celebrate their good fortune or drown their sorrows.