Storm ahead? Here’s how to prepare for a financial crisis

*Particularly pertinent now given recession cycle probably starts soon*

Every 10 years or so a financial crisis hits global markets – and it’s 10 years since the last one. This week the IMF warned that not only are the storm clouds of the next global financial crisis gathering, but also that the world financial system is unprepared for another downturn.

Will your pension be wrecked? The value of your house plummet? Will your industry be hit by a wave of redundancies? The bad news is that even the big investment houses, which traditionally talk up markets in the hope that you will invest, are pessimistic about 2019.

Case to note: previous financial crisis initiated by false impressions of property market.

 

Over the last decade central banks have fuelled a boom in share values and property prices by slashing interest rates and pumping the financial system with virtually free money, called “quantitative easing”. Now, debt levels are worse than ever, just as the US-China trade war continues, and the Brexit saga staggers on.

*article on quant easing can be found on this website*

Build up your rainy-day fund

Losing your job is the biggest risk from a financial crisis.

“If you don’t already have an emergency savings safety net, now is the time to focus on building one. It’s sensible to have three to six months’ worth of expenses in an easy access account so that if the worst was to happen, you don’t run out of cash while you get back on your feet,” says Sarah Coles of Hargreaves Lansdown.

Build up your rainy-day fund

Losing your job is the biggest risk from a financial crisis.

“If you don’t already have an emergency savings safety net, now is the time to focus on building one. It’s sensible to have three to six months’ worth of expenses in an easy access account so that if the worst was to happen, you don’t run out of cash while you get back on your feet,” says Sarah Coles of Hargreaves Lansdown.

Shorting the market

If you are convinced that the stock market is going to crater over the coming year, you can “short” it and produce a profit by using exchange-traded funds (ETFs). But really you are moving into pure gambling territory (and your company pension fund manager won’t permit it).

For example, the Legal & General FTSE 100 Super Short Strategy Daily 2X inversely replicates the index, so pays out twice the size of a fall. If the FTSE 100 falls 4%, you make 8%. ETFs can be bought at most online trading platforms once you have set up an account. But as investment manager Fidelity warns: “In a short sale, losses can accumulate far beyond an investor’s original expectations.”

Soure of article at: https://www.theguardian.com/money/2018/dec/15/storm-ahead-heres-how-to-prepare-for-a-financial-crisis

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