I can tell that breaking news is happening somewhere or that markets are moving by the number of emails or direct messages I get from people asking for financial advice. The free time associated with stay-at-home orders coupled with the economic uncertainty that the pandemic has caused has only amplified these types of calls for advice. So, I thought I would answer the most frequently asked questions now in one place for the benefit of all.
What’s going to happen to financial markets?
Economics is an academic pursuit with the caveat “ceteris paribus,” or “all else being equal,” proceeding most evergreen “rules.” Finance is a more specific body of knowledge that tries to answer questions when all else is not equal. Not only are markets moving so quickly that it is nearly impossible to isolate one variable at a time, but the very nature of markets is changing. Gone are the days of free-market economies with laissez-faire competition. Therefore, it is difficult to judge what will occur in finance without having a good idea of how politicians will manipulate financial markets. Currently, the Federal Reserve, the European Central Bank and the Bank of Japan, among other central banks, are all propping up markets. The legislature of those countries and regions is also spending untold trillions to soften the blow of the pandemic. This has been going on for months, but will it continue?
The Donald Trump administration has signaled more financial stimulus with another $2 trillion-$3 trillion in the pipeline. The Fed has signaled similar “no amount too large” type stimulus that all points to a floor in financial markets. If I had to bet which way financial markets would move in the near to midterm, I would say I believe the pandemic and its effects have not been taken into account nearly enough; however, policymakers will continue to prop up markets to prevent a fall. Obviously, the general rules of diversification apply should you invest in securities.
Should I invest in gold? The U.S. dollar? Local currencies? My answer to these questions is always to focus on paying off debt where applicable, which means keeping your money in the currency that your debt is denominated in. Ignoring this step may increase your debt should the investment not pan out. As for gold, it has been rallying considerably but whether or not it is a good investment at these levels depends on how much worse the pandemic will be and how much more stimulus will be pumped into economies. If you believe tapering will begin shortly as it did five years after the Great Recession, gold is a bad investment. If you believe this type of stimulus is the new normal, then gold may be a good investment for you.
The rule of thumb is generally to only risk “100 minus your age” – so a 20-year-old can risk 80% of his or her wealth whereas a 70-year-old should only put 30% of their wealth at risk.
These have been, in brief, some of my responses to those that ask, and I hope they are beneficial to all.