Prepare For a Financial Crisis Even If It May Never Come

During both booms and busts, there is always a group of investors who believe things could get worse. It’s probably not the worst mentality to have. Constantly protecting your capital and investing conservatively does pretty well over time. While you might not achieve the highest returns in booming years, you also don’t lose your pants in a crisis either.

I would argue a conservative approach is also becoming more important as the frequency of financial crises increases. According to Deutsche Bank analysts, financial crises are an increasingly regular occurrence if we look at the big picture.

Frequency of Financial Crises

The chart below shows data compiled by Deutsche Bank. As you can see, the frequency of financial crises has been increasing as time goes on.

frequency of financial crises

Source: Financial Times; Deutsche Bank and Global Financial Data

 

It’s likely that the more market participants there are, the higher the likelihood of a crisis. This is because most investors have a herd mentally. They follow other investors and push up the market to unnecessary highs and down to unnecessary lows.

As reported by The Australian Financial Review:

‘…the era we live in does indeed have more financial crises than those that went before.

This is true globally, demonstrated with a welter of statistics, and there is a clear point at which the crises began to accumulate: August 1971, when President Richard Nixon brought the Bretton Woods agreement to an end, ending the tie of the dollar, and ultimately most other currencies, to the price of gold.

Possible Financial Crisis Catalysts

But along with their historical research, Deutsche Bank also names a range of catalysts that could trigger the next crisis: an economic recession, a central bank unwind (selling bonds to lift interest rates), a government default (likely Italy), among others.

While the trigger may be unknown, I believe a future crisis is inevitable. Learn how to protect yourself here.

Regards,

Härje Ronngard,

Junior Analyst, Markets & Money


Harje Ronngard is a Junior Analyst at Markets and Money. With an academic background in finance and investments, Harje knows how simple, yet difficult investing can be. He has worked with a range of assets classes, from futures to equities. But he’s found his niche in equity valuation. It’s not good enough to be right on average when it comes to investing. The market is volatile and it only takes one bad day to ruin your portfolio. You don’t want to end up like the six foot man that drowned in the river that was five foot deep on average. It’s why Harje is constantly reminding investors of their downside risk here at Markets and Money. He does so by simply asking just two questions.  What is it worth? And how much does it cost? These two questions alone open up a world of investment opportunities which Harje shares with Markets and Money readers. Right now Harje is focused on managing research and investments over at the Legacy Portfolio. An investment publication designed to significantly grow investor’s wealth over time with deeply undervalued businesses. Harje also contributes his insights in Total Income, headed by income specialist Matt Hibbard. Harje loves cash-rich businesses, so he feels right at home amongst Matt’s high yielding income plays.


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