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Finding Safety in a Dangerous Investing World - Part 1

Finding Safety in a Dangerous Investing World - Part 1

| May 03, 2023

Over the last year, it is easy to see how global political and economic instability has settled in and begun to make the world feel like a dangerous place. In this month’s edu-blog series, we will look at what has contributed to this current state of affairs and how to navigate it from an investment perspective. Spoiler alert: it’s all about long-term investment in rational companies that have withstood the test of time.

So, how did we get here? 

Well, for starters, the world is a bit of a mess. We have the war in Ukraine with no end in sight, which has caused the “relationship” between Russia and the West to get even worse. Through all this, China has been getting even more grumpy with Taiwan, making serious threats. And then, there is the situation between Israel and Iran with the potential development of Iranian nuclear weapons, making the Middle East even more tenuous. 

On top of all that unpleasantness, the world's financial system feels as unstable as it was during the Global Financial Crisis. The US experienced several bank failures; globally, Credit Suisse Bank also failed. In addition, debt is rising faster than in many developed countries' economies. Together, these global financial concerns make for a risky global financial system. 

While this all can seem dire, there are also some positive events. For example, the M2 money supply is experiencing negative growth. What is the M2 money supply, you ask? It is the Federal Reserve's estimate of the total money supply, which includes all the cash people have on hand and all the money deposited in checking accounts, savings accounts, and other short-term saving vehicles like CDs. However, what it doesn’t include is retirement account balances and time deposits that are over $100,000. 

So why is negative growth in the M2 money supply a good thing? Well, more cash gets spent when there is more cash out there. A little more cash can be good. A lot more cash can increase the risk of inflation. That's why the Federal Reserve constricts the money supply when inflation rears its ugly head. The Fed is slowing down spending to control the inflation rate.

Another silver lining is the three trillion dollars banks are holding in reserves.  

We need to know, without a doubt, that the media will ignore these positive trends and point their laser-like focus toward another potential banking crisis, war, other international military bicep-flexing, and rampant inflation. So be warned, put that cotton in your ears, and don’t believe the hype!

What we do need to accept, however, is that the chaos of the past three years, beginning with the pandemic and landing us at this point, isn’t heading out of town anytime soon. We also can’t rule out the possibility of additional problems, even though the market seems to be in a more balanced mood lately. That means, as investors, our job is to tune out the noise and use the momentarily calm state of the markets to help increase our resistance to panic.

One of the most reliable ways to do this is by focusing on the difference between the relentless long-term success of great mainstream companies and the stock market's volatility. Remember, successful lifetime equity investing requires dedication to several things, including:

  1. long-term investing,
  2. tuning out irrational headlines,
  3. being prepared, 
  4. staying focused on your date-specific dollar-specific financial plan, and
  5. the pursuit of rational businesses with a tradition of long-term growth and stability.

In conclusion, the world has become more dangerous in the last six months, and because of this, we must be prepared for the worst and stay the course for long-term success.

Until next time…

One last thought, I believe an educated investor is an empowered investor. If you like what you’ve read and think your friends and family can benefit as well, please share.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly. 

All investing involves risk, including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Dollar-cost averaging involves continuous investment in securities regardless of fluctuation in the price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.