If I’m to be honest, I have done nothing but make bad investment decisions over the course of my life (especially when it comes to shares).
I’ve been the person to buy at the height of share market hysteria, only to sell when the market crashes (in turn realising my loss for real).
My accountant (Benedict, who I like to call Eggs) asked me “Why do you always lose money on shares?” and it made me stop and think. I would always buy shares when the market was at its peak (due to hysteria) and then sell the moment the market crashed (in turn making a realised loss). I was basically looking at my feet when I should have been looking into the horizon (focusing on the long term, not the short). I did this because I preferred the security of cash in my account rather than watching my money go up and down with the stock market.
But why did I panic? The answer was that whenever the media mentioned a downturn, recession or ‘bad economy’ I began to fret.
I went into defence mode with my personal finances. The funny thing? I realise now I am not alone. The rest of the world does this also and herein lies the opportunity to grow your money. We are swayed by the media, what we see on the news and what is printed. However, most of these journalists wouldn’t have the foggiest idea about share markets or long-term wealth building.
So what’s my point here you might ask? Well, it turns out that the most successful investors and wealthy people in the world actually use a bad economy or recession to their advantage. It’s a time when millionaires become billionaires and I have figured out the formula.
Here are the top things you can do to grow your money in a bad economy.
Invest money when no one else is investing
When tough times hit, people flock out of shares. This results in share prices often tumbling quite low, as was evident at the height of the GFC here in Australia.
This is a time when people like Warren Buffett (regarded as the most successful investor in the world) will start to buy. He doesn’t see panic, he sees opportunities to buy shares at a lower price because no one else wants them even though they are worth much more.
Real life example: Westpac Bank shares were around $14.60 in January 2009 because of world market concerns. Today the same shares are around $33. That is around $18 in growth. It has actually more than doubled. Imagine if you had $10,000 in that? Over 4-5 years you would have effectively doubled your money.
The trick is to buy shares when no one else wants to and in companies that you trust and can foresee having long-term value to the market (which is why many argue that shares in food companies are smart, as we will always eat). Just stay well away from speculative stocks and taxi driver hot tips.
Use tough times to pay down debt
When times are tough, don’t sink into your turtle shell and become defensive with your money. If investing isn’t your thing, look to repay debt instead.
Quite often in a bad economy, the RBA will lower official cash rates and in turn, our mortgages and debt interest rates will tumble lower also. This is technically done to help the economy comfortably continue to spend.
I, however, use the lower rates in a different way. I use the lower rates as a chance to expedite my repayments and really start to pay more. Use lower rates to repay credit cards, personal loans, bad debts and more. After that, attack your mortgage.
It’s a double win really. Rates are low so interest charges are low. You add extra repayments into that and your interest repayments become even smaller. A great way to pay off your mortgage quickly.
Hot tip: If you have a heap of debts, try and repay a couple of the more painful ones (like high-interest credit cards) first. The sense of accomplishment of knocking one debt off will drive the rest. Read about this strategy in our article on the debt snowball method here.
Avoid the lipstick factor
In tough times a phenomenon happens. It’s called ‘the lipstick factor’ and it’s the theory that when people tighten their belts and reduce their overall spending, they begin to buy little treats for themselves that are under $50 more frequently.
For instance, a lipstick. Or perhaps cologne for a man. So while the person believes that overall they are spending less, these micro-purchases begin to add up and actually cost them more.
Avoid these purchases and instead, use your money to either invest or pay down debt. Once you have no debt, you will have more disposable income per year. This means you can treat yourself then, while of course still maintaining your investment strategy.
Stop buying, start chasing ambitious plans
The other thing you need to do in tough times is stop buying things in general and focus more so on the long term. Change your mindset from things you need today to what you are going to need tomorrow.
What if you lost your job? Do you have a significant stash of money set aside to ensure you can make mortgage repayments and pay expenses?
Use a bad economy to get some of your housekeeping items in check; a cash stash, lower debt, sell things you don’t need – do an all-round spring clean of your money and look to create ambitious plans for the future that you can start today.
Turn off the TV, focus on goals not the worlds problems
Turn off the TV and ignore the newspapers. Yes the markets are bad and the world is about to explode, but history shows us that we always come back bigger and stronger than ever before.
Don’t buy into the hysteria of the media. That’s what 99.9% of the world do and why people like Warren Buffett become rich.
Ignore the hype and focus on the above. You will be further ahead than the next person for years to come if you do.