Are you ready for the upcoming financial crisis?

We all know financial storms rear their ugly heads from time to time. The question is. Can we predict when the next crisis is going to occur?

Because if we can, that’s a going to be a massive help for our investing future.

Spoiler alter: I think we can.

And that’s because of a little something called cycles.

You can find these everywhere. including investing.

In finance, you have Economic cycles which last somewhere between 15 and 20 years and in real estate you have the 18 year property cycle.

Just in case you can’t see the connection. 17.5 is halfway between 15 and 20 and that rounds up nicely to 18 years.

You could read a book on either of these cycles. We’ve written a lot more on the property one here. But for our purposes we just need to know this.

These cycles describe the upswing and downswing of economic activity. In other words, the build up to and bursting of bubbles!

Why now?

So why mention them now?

Well, it’s pretty clear that the last time we had a major financial crisis was in 2007. It’s now 2024.

By my reckoning that’s 17 years ago ie just one more year away from the magic number.

No matter whether you think in terms of property or shares – Houston we have a problem.

If history is to repeat like it has decade after decade we could be getting incredibly close to our current cycle’s crescendo.

And if it is, doesn’t it raise three questions critical to your financial future?

• Is it different this time?
• Should I sell out of all my investments right now?
• If not what should I do?

And I think its worth looking at each one of those in a bit more detail.

Is it different this time?

Whilst nobody knows what the future holds, surely history is our best guess. Particularly a pattern that has been repeating for decade upon decade.

I’m no statistician, but I’m pretty sure the odds of a repeat beat the odds of a change.

Without any evidence to suggest otherwise, it’s got to be a safer bet to assume an upcoming financial crisis.

Just to be clear. I’m no naysayer. For sure, keep positive and hope for the best, but at the same time it probably pays to plan for the worst.

Should I sell now?

With that in mind, you may be tempted to sell all your investments immediately, but in all likelihood that’s unlikely to be the correct course of action.

Whilst these cycles seem pretty conclusive, the problem you have is that the big gains with any investment tend to arrive during the later stages of the build up to the peak.

The crash might happen tomorrow, but it may be one of the longer cycles this time around and end up lasting 20 years or more.

If that’s the case, then we could have another few years of big gains to cram in.

And you probably don’t want to miss those.

During the past three decades the US stock market returned 8% annually. As long as you were continuously invested that is.

Simply missing the best ten days would have cut that down to about 5%. Miss 30 and you are down to under 2%.

And the worst of it is the best days tend to cluster around the worst days ie they could come right before a crash!

There’s a similar picture when it comes to property too.

2008

According to the land registry house prices began going down in May 2008. But here’s the interesting thing.

• The previous may (2007) they were up 10.6%.
• The may before that (2006) 6.5%.
• And the may before that (2005) 8.1%.

In case you aren’t familiar with typical house price growth, that’s way above the average of about 4%.

And its worth pointing out that a 27% increase in the 3 years building up to the bubble bursting is greater than the average 20% drop that the average house buyer experienced during the crash.

The bottom line being. Markets may crash tomorrow. They may not. And if they don’t the intervening time before they do maybe where the big gains are to be made.

What should I do?

In other words. You probably shouldn’t exit the markets.

But that doesn’t mean there aren’t other pieces of financial housekeeping you can look at to help weather the storm.

Starting with debt.

Make sure any you have is manageable. And I think this is particular true for mortgages.

The trouble with market crashes is they tend to cause companies to go bankrupt and people to loose their jobs.

If there’s any chance either of those things could happen to you, it pays to start making arrangements now for how you’d deal with that situation.

Paying off as much debt as you can now to ensure you can service your debt whatever happens could be a wise move.

Missing mortgage payments can lead to repossession ie you loose your property. Nobody wants that.

Risk assessment

And now is probably as good a time as any to have a look at your investments and make sure you are happy with the risk you are currently taking on.

If not. It could make sense to dial it down a bit.

If you’ve been investing prior to 2008 you’ll know what it feels like to watch your net worth crater. You’ve been there and got the t-shirt. You know how plummeting stock prices make you feel. You know how well you dealt with it. Nows the time to act accordingly.

On the other hand, if you started investing more recently you could be heading for untested waters.

At the end of the day, filling out forms and tinkering with numbers on spreadsheets don’t usually cut the mustard when it comes to handling your affairs in the midst of a crisis.

You may be one of the special ones who does have a good feel for your tolerance to risk.

But most people, most of the time, are a lot more risk adverse than they think when the proverbial hits the fan.

If in doubt simply turn your risk tolerance down a notch or two.

I’m not talking about selling out. Just have less exposure to the stuff that is likely to go down.

You can’t loose

If you usually have 80% of your money in the stock market and 20% in bonds, you could decrease your stock allocation to 70 or even 60%.

You haven’t switched anything off. You’ve just turned it down a bit.

The beauty of this approach is that you essentially can’t loose.

It’s psychological more than anything. If stocks keep going up, then you’ve won because you didn’t sell out totally. You’ve still got plenty. You feel great. But if they go down, you did the right think by selling. You feel great then too.

This approach lets you stay in the game.

At the end of the day for most people most of the time that’s the key to a successful investing.

The longer you can let compound interest work for you the richer you are going to be.