Amir Baluch is the founder of Baluch Capitalwhich offers a range of alternative investments with above-market risk-adjusted returns.
While banking and financial crises are a part of the economic cycle, this doesn’t lessen their effect on businesses, and therefore many professionals and business owners are desperately wondering how they can survive the next downturn.
Fortunately, the predictability of these routine crises also makes the solutions to protect your personal and business finances much more obvious.
I’ve now been through several of these economic cycles. From the time I was in medical school through the present day, I’ve seen the stock market crash multiple times, countless banks and financial institutions implode and other markets soar and dip. I’ve experienced it as an amateur investor, business owner and fund manager.
Surviving Banking Crises
While the media certainly makes these events sound terrifying and falling like the sky, it is more common than you think.
Before the failure of Silicon Valley Bank and Credit Suisse, there were numerous banks that went bankrupt in the 2008 financial crisis. Well before that was the savings and loan crisis of the ’80s and ’90s, which saw numerous institutions fail. Before that was the Great Depression where around 9,000 banks failed.
While some predict that the potential 2023 financial crisis may prove to be worse than initially thought, no matter what happens, I don’t foresee it as the end of the world. Things will bounce back, which is an extremely important fact to keep in mind as you make decisions about your money in the midst of any economic downturn.
Still, according to a Real Estate Witch poll, 55% of Americans surveyed expect to lose everything they have in a new recession. People are worried. So, how do you make it through?
Protecting Your Finances
Optimizing operational expenses is usually among the top considerations for business owners when these situations arise.
One of the most important factors at a corporate level is not to have all of your deposits at risk in one bank. It doesn’t matter how large they are, or how long you’ve been in business. Spread that risk. Ensure that you will have access to some money on any given day, and pay attention to the amount you have in any single account. Beware of breaching the FDIC or other insurance thresholds.
Having financial lifelines is also critical. When banks fail, venture capitalists can freeze up, making it very difficult to raise equity unless you have a sound model that can definitively thrive in the situation. At the same time, interest rates are likely soaring, and traditional banks are probably not lending money.
This means staying ahead of working capital needs by finding alternative solutions. This may include factoring or implementing buy now pay later features to get more cash coming in from upfront customers.
Diversifying income sources in your business is also going to be vital for survival. This may include finding new customer groups to target and serve or shifting more of your income to more passive income investments.
Investing Through A Financial Crisis
It is common knowledge that the best deals are available during times of financial stress. It is often when innovative businesses are started and the largest leaps of wealth are created.
However, this isn’t about making big gambles or taking on undue risk. This is a great time to take advantage of discounts and better-value deals. Look to protect your assets from the downside while investing in anything with great upside potential.
Overall, this is about diversification and ensuring you have a mix of correlated and uncorrelated investments in your portfolio. Remember those saws from the playground when you were a kid? When one thing goes down, another invariably goes up. This is the kind of balance you want to keep in mind.
As you review your finances, this is a good time to readdress and restructure your portfolio allocation. In my view, you may not want more than 20% to 40% in any given sector or asset class at times like these.
Based on trends I have seen, some investments you may consider for balancing your portfolio now include:
• Private Equity funds
• Real estate
• Crypto and blockchain investments
• AI trading bots
Above all, who you choose to invest with is ultimately the most important factor when it is getting choppy out there.
Three Quick Tips For Surviving The Next Financial Crisis
1. Consult those who have gone through similar crises before. Learn the mistakes they made as well as what they did right and how they are positioning themselves to win this time around.
2. Trade losing investments for new alternatives. Reduce overexposure in any asset classes or sectors by shifting peaked investments with alternatives that have more potential. I find that many people tend to be over concentrated in public markets, for example, and may want to consider alternative investments.
3. Adapt quickly. Look at where the opportunities are emerging. Adapt fast and embrace new ways of doing things before it’s too late.
Financial crises and even big bank failures are probably more common than many realize. It is a routine part of the economic cycle. Fortunately, because of their regularity, there are many proven actions that everyone can take right now to avoid losing—and even set themselves up to thrive until the economy rebounds again.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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