Bill’s Blog | May 11, 2023
After meeting several hundred individuals and business owners in my career, I have seen a repeatable pattern with almost all investors. They are not well diversified, putting them at significant risk when the next financial crisis unfolds. Many business owners have most of their wealth in their businesses (often 50 to 80%), usually some in real estate and possibly some in an RRSP. In my opinion, this is still not diversified enough. I will share some action steps later to consider.
In a significant recession, business activity will slow, real estate will lag/correct or crash, and the stock/bond market will correct or crash. What happens if this unfolds just before you want to retire or slow down? Most asset classes are highly correlated, so wisdom is to have a sizable portion of your wealth in non-correlating asset classes, hedging strategies and multiple baskets.
It is essential to understand that not all asset classes react the same in a severe market event. Second, how will your assets perform once central banks and governments react to the next crisis? Third, do you fully understand the risks of your current asset basket? These are critical questions that we must understand and know what to do. Knowing there is a problem is one thing; being proactive and taking the proper steps to protect your wealth is quite another.
If I had a dollar for every time I have heard experienced fund managers say, “This is the time to be very defensive.” over the last six months. That would provide a pretty nice steak dinner with my wife! But, unfortunately, risks are growing due to too much global debt, geopolitical risks, and highly incompetent leadership in government, banks and society in general. So I encourage you not to be complacent or distracted by endless media fluff. Instead, focus on what is essential, carefully plan (seek out wise counsel if necessary) and then take action.
Before investing in any asset class, you must understand what you are getting into and its risks. All asset classes have risk! In my online Wealth Foundations course, I do a session on risks and counterparty risks which many Canadians do not grasp when they invest. I, too, had to learn some tough lessons on not understanding risks in investing. Before you invest, make sure you do full due diligence, ask lots of questions and seek out wise counsel. Once you are comfortable with the risk, deploy a small amount of capital, especially if it is your first or second time in a new asset class. Then, if you are wrong or the deal fails, you do not take a significant hit to your capital.
Here are a few action steps to consider:
- Have a sizable portion of your wealth in precious physical metals (gold/silver) outside the bank. Not only does this add diversification, but it has been the best risk protection asset for 5000 years. In addition, precious metals are an insurance policy against the devaluation of our currencies and have the potential for a significant gain in our current economic cycle.
- Have multiple life insurance contracts—segregated fund contract, Guaranteed Investment Account (GIA) and superior to a GIC, Whole Life Par with cash values, Guaranteed Income for Life contract, and possibly an Annuity. These contracts keep some of your wealth outside your estate, provide excellent guarantees that banks cannot offer, and protect you from the evolving banking crisis unfolding.
- Privat equity. From years of experience, one must be very careful when entering this space. I have witnessed the good, the bad and the ugly. With a small basket of well-researched and quality-diversified private equities, this can be an excellent way to have some of your wealth outside of the stock market. Remember, the management team must have an impeccable and proven track record (decade or longer), low or no debt, and best-if cash flowing. Be extremely careful or avoid land development deals, as these have considerable risks during recessions or can experience protracted delays over permitting or regulation issues even in good markets.
- There is no such thing as 100% recession-proof businesses, but some businesses do better in downturns—essential services like energy, pipelines, pharmaceuticals and food production and distribution. Non-essential businesses get hurt the most in high inflation, a prolonged recession or can often go bankrupt. Be careful if you are in business or want to start a new enterprise. Avoid new debt, pay off debt, build up cash and manage cash flow carefully.
- Cash or cash equivalents: If you have not built up cash to diversify, I recommend building up 20 to 30% and having the majority outside the banking system.
- Hedge your investment portfolio: If you do not have the expertise to do this, I recommend you have a portfolio manager who does. Hedging can be done in multiple ways, from simple cash/gold to more advanced and technical strategies.
I invite you to join me and James Longstreet (Fivefold Wealth Management) on our next webinar to interview one of Canada’s top trend forecasters, Martin Straith, founder of “The Trend Letter.” Founded in 2002.
Please register for this event:
You are invited to a Zoom webinar.
When: May 27, 2023, 10:00 AM Vancouver
Topic: Identifying Market Trends, both Up & Down
Register in advance for this webinar:
After registering, you will receive a confirmation email containing information about joining the webinar.
All the best in 2023,
Bill Westmacott, Financial Educator & Life Insurance Broker