How To Prepare For The Next Financial Crisis: 3 Key Investment Strategies

One of the most dangerous things a market can do is perform so well for so long that investors forget what darker days feels like. After months of living in a historic bull market, it’s easy to postpone preparing for the inevitable downturn, because it doesn’t seem possible. But it is inevitable.

Wise investors don’t just plan for the next downturn when they see it on the horizon — they plan for it everyday. They look for investment options that can serve them with long-term, value-based investments, keeping an eye on the future with no sacrifice on performance. In the modern finance world, these options often come in the form of alternative investment strategies and innovative platforms. These are designed to use new solutions to prepare for the classic market patterns we’ve seen so many times before.

Though the trigger of the next recession may still be a mystery, we should make no mistake: as boom and bust economic history has shown us, new highs are often followed lean times. Keen students of the economic cycle should also remember that it’s much easier to prepare than to react.

Preparing to Prepare

There’s a powerful rule of thumb that investors have historically used to gauge when the market’s about to take a drastic turn:

“You know the market has hit bottom when no one can imagine it going back up, and you know the market has hit the top when no one can imagine it going back down.”

Before the Dow’s drop in early February, the widespread consensus was that the U.S. economy was unusually healthy. We left the “Great Recession” behind years ago, unemployment was historically low, consumer confidence was soaring, and the stock market could do no wrong. Most of these evaluations have been well-founded — but if you point your nose the right way, you can detect the telltale scent of overconfidence in the air.

Luckily, February’s correction reversed in short order. However, traders and investors have kept their heads on a swivel in preparation for the next dip, drop, correction, or worse.

What’s the secret to anticipating these events? Diversification, patience, and resolve, for starters. These are qualities that I see put into action everyday by my team at Fundrise. I want to share a few of those strategies to make viable for every investor.

1. Diversify Like It’s 2018

Diversification has been the cornerstone of excellent investment practices forever. When you distribute money among a variety of investment types, a single event is less likely to seriously damage to all of your finances all at once.

The important thing to know is that today’s options for diversification are much different than they were even five years ago. Classic diversification strategies like Modern Portfolio Theory advocate a simple balance of stocks and bonds. For years, most investors felt that as long as they had investments in those two assets, they were good to go. That’s no longer the case.

This is largely thanks to tech’s impact on finance in providing expanded diversification options for virtually every investor. These include everything from entirely new, unproven investment categories, like Bitcoin, to fully established but previously exclusive investment types, like real estate. While an investor used to need extensive knowledge and capital to fully diversify, it’s now possible for anyone with an internet connection and a bank account. Stocks and bonds remain a strong core for most investors’ portfolios, but as smart alternative investment options emerge and become more accessible, many investors can protect their finances by exploring more extensive diversification strategies.

2. Understand the Benefits of a Less Liquid Investment

One of the dangers of a market crash is the tendency of investors to overreact. They panic and move their money as quickly as they can — crippling their own portfolios with short-term losses while continuing to weaken the market for everybody else. Although this is fundamental behavior from the market and from human beings, there are strategies for insulating yourself from the knee-jerk strategies of other investors: intentionally seek less liquid investment types.

A less liquid investment has a number of counterintuitive benefits. As a reminder, highly liquid markets are designed to support the selling and buying of securities. To support this kind of activity, a market has to employ extensive and expensive resources. Picture the loud, hyperactive floor of the New York Stock Exchange. Alternatively, a lower-liquidity market preserves all those expenses for investors’ returns, making it ideal for patient investors seeking higher returns, with longer-term plans.

Fundrise investments, for example, are inherently less liquid. While our investors can request a redemption of their shares at any time, our assets are built to mature over five to seven years, to maximize returns. That’s the nature of private market real estate. It also gives our investors potential protection from more fickle peers. For example, when the next crisis appears, we expect that some investors may ask for immediate liquidity. Unknowingly or not, those investors would be demanding to sell their investment in order to generate the cash required to provide that liquidity.

An investment service that’s susceptible to forced selling can hurt its own investors by locking in lower returns rather than having the patience to ride out the storm. We have designed our governance specifically to prevent this scenario. We’ve built an investment model to perform over the long run, not trade in the short-term, which is key for avoiding a sudden market shift.

3. Stay True to Your Investment Principles

This one is easy to understand in theory, but in practice is a true test of an investor’s character. If you’ve already taken the steps above — to diversify and to commit yourself to a patient, long-term investment strategy — can you stay true to the beliefs that led you to those decisions when the storm really starts?

Just like the old adage quoted above, when the world behaves one way for too long, it’s tempting to feel like it’ll never change. But try to remember why you’ve invested your money in the first place. If you’re a new investor with long-term goals, don’t take your cues from day-traders with much different outlooks. Don’t just trust what you hear (this article included!), investigate for yourself. When the test comes, you’ll know what to do, even if every indication from the world around you seems contrary to that strategy.

Seasons Change

Although none of us want to see another financial crisis, we shouldn’t blind ourselves to the inevitable — or not take strides to be ready when it comes. In fact, whenever the next downturn does occur, smart investment services may even be able to serve their investors by using their solutions, innovation, and technologies to create new opportunities to buy, not sell.

The story of the market is long, with many arcs and chapters. It’s our job to learn from the market’s history and nature and to know how to expect the (not-so) unexpected.