Entrepreneur, investor, and founder & CEO @VirtuseExchange
One of Warren Buffet’s most famous sayings is "Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1." So, realistically, my target scenario during a recession is to stay flat. But, my blue sky scenario is to actually try and make some money as the world collapses all around.
So, this is the list of 15 lessons learned the hard way from my own experience and observations:
The first step to making money during the downturn is to be OK with no longer making money during an upturn. It hurts to miss out on gains, but missing out on gains is the only way to not lose money. Your goal is to time your asset allocation so that you have the least amount of risk exposure when the cycle turns. The problem, obviously, is that nobody knows when the cycle will turn.
This is truly invaluable advice from The Hitchhiker's Guide to the Galaxy by Douglas Adams. So, make a plan and don’t make any hasty investment decisions. Try not to worry so much, especially if you are not near retirement age. If you have at least a 5-year investment horizon, recessions should be factored into your portfolio.
Gold is immune to recessions and so far it has been resistant to corona crises as well. Returns are usually inversely proportional to the returns of both stocks and bonds. So often, when other major asset classes fall, gold rises. A good hedge is to buy the largest, most popular gold ETF, SPDR Gold Shares (GLD). But in the digital age you can even buy gold in the form of a cryptocurrency with PAX Gold (PAXG).
Sharing similarities with gold, the US Dollar also boasts safe haven attributes. Due to its role as the world’s reserve currency and the backing of the world’s largest economy, the US Dollar is both liquid and sought after during downturns
One of my best pieces of advice is to have some cash on hand during recession. Buying stocks during economic slowdowns is a time-proven strategy to build wealth. Good companies generally don't become bad stocks because of a recession or coronavirus. They do, however, often go on sale because of the crises. As Baron Rothschild, said: "the time to buy is when there's blood in the streets."
Many investors focus too much on short-term stock price fluctuations. They tend to feel good when stock prices increase and become anxious when they fall. Some companies will thrive during a downturn. Consumers still need to eat during a recession, Costco (COST) and Walmart (WMT), for example, are good bets. How long should you hold a stock? Warren Buffett says if you don't feel comfortable owning a stock for 10 years, you shouldn't own it for 10 minutes.
According to Forbes, divorce rates go up when the economy goes down. And when couples split, the assets have to be sometimes liquidated fast, especially to satisfy court rulings. For you savvy investors out there, one man’s heartbreak is another man’s treasure.
The benchmark Bloomberg Commodity Index is currently about 55% down from the peak in 2011. Commodities have intrinsic value and you can assume their prices will not fall to zero. Thus, when they reach technical lows, I see a tremendous buying opportunity. Go long with iPath Bloomberg Commodity Index (DJP).
The only way to make a lot of money in a downturn is to take a risk. This means losing money if the downturn never comes. The easiest way to short risk is to buy an ETF that goes up when the underlying index it tracks goes down. One of the most liquid short ETF is Proshares Ultrashort (QID), shorting Nasdaq 100 Index. Russell 2000 small cap index (TWM) is quite popular in a bear market, as well.
Volatility is a certain bet during crises. You can easily buy a volatility ETF such as iPath S&P 500 VIX ST Futures ETN (VXX). During the recent “corona crisis” sell-off, the VXX almost tripled from $15 to $40.
When the world is collapsing, investors tend to seek the safety of US Treasury bonds. Two of the most common ETFs to buy are iShares 7+ Year Treasuries (IEF) and iShares 20+ Year Treasuries (TLT). Buying TLT will give you more upside.
This is when cash comes handy too. As we saw during the last downturn, when the economy tanks, people lose their homes. When the market plummets, properties can be yours for pennies on the dollar. Once the market recovers, which is always the case you have a good cash-flowing property. The last recession was a nightmare for homeowners, but it turned out to be a boon for some real estate investors.
Stablecoins are a storage place for crypto investors to escape the volatility. Dollar deposits no longer offer any returns. By investing in the new digital dollars you can profit from a large interest on your holdings. Blockfi, for example, offers 8.6% on Gemini Dollar (GUSD), and soon on Paxos Standard (PAX).
Think about what is the most impactful thing that you can do and where to grow. Don't make decisions when you are angry or ecstatic. The best decisions are made with a clear conscious mind, not in the throes of any emotion. Everything has its right moment. And remember, what other people think doesn't matter. Stick outside of the box and be confident.
People sometimes describe bitcoin as digital gold. But the difference is that while gold is physical and clunky, bitcoin is borderless and digital.
The real genius of the Satoshi whitepaper lies in the fact that it predicts the upcoming collapse. It’s an alternative financial system that you can own a piece of. Bitcoin is essentially a call option on an outcome. I believe that Bitcoin has the potential to save us from the corona recession and the everything bubble.
Ray of sunshine for investors is that nothing lasts. Recessions never create a new normal and, eventually, the economy will recover. For those of you who have enough money to be happy, taking an excess risk is unnecessary. Once you’ve made your money, the key is to keep it.
Ras Vasilisin is the founder and CEO at Virtuse Exchange, Singapore-based multi-asset platform with a significant presence in the EU, that allows investors in more than 100 countries to trade crypto and traditional assets.
(Originally published here)
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