Welcome to the 130th episode of the Alternative Investing Podcast!
In this episode, I'll share some guiding principles and insights to help you decide whether it's a good idea to continue investing in a volatile and uncertain market.
If you're an investor who wants to make smart investment decisions regardless of market conditions, then make sure to listen to this episode!
Are you anxious to continue investing now that the market is still uncertain and volatile?
If your answer is yes, that’s okay. Many are also in the same shoes as you.
Based on my observation, one factor that affects people’s anxiety is doomsayers who use specific words that cause fear. On top of that, there are also wealth gurus and financial planners who don’t act and say things in your best interest.
Time and time again, I’ve heard many people talk about being told that they should continue to buy certain discounted asset classes, which I believe could lead them to disaster.
So today, I want to share with you a few ideas I got from an international conference I attended.
This conference, and others like it that I've attended, are what move the needle in my investing career.
The insights and ideas I’ve learned give me confidence about the steps I’m taking and the opportunities I’m playing with. So, let me share some of those ideas with you so they can help you make wiser decisions in your wealth-building journey.
The Need to Hold Cash Reserves
In recent podcast episodes, I discussed the importance of having better cash reserves to protect yourself from volatility.
I still stand behind that because the government is still trying to stop inflation right now.
So if you’ve got good cash saved up, you'll be prepared for anything that might happen.
But I want you to be careful of people who make comments about investing that trigger FOMO (fear of missing out) or FONGO (fear of not getting out) from other investors.
If you want to make good investing decisions, you must get your emotions out of the way and fall back on research and intuition.
Protecting What you Have
If you want to be in a good place in this volatile market, you need to protect what you have.
Many people "red-line" their finances, which means they borrow and spend as much as possible just to continue to invest.
However, I don’t think it’s a good idea because of the associated risks with this kind of behaviour.
Even though Australia and New Zealand handled major problems during the global financial crisis, unfortunate things can still happen if you don’t protect your assets.
So one of the biggest takeaways you can learn from here is to defend first and grow second.
Being Clear on Your Investing Rules
On my recent trip to New York, I had great conversations with my trusted advisors, who are experts in one specific strategy.
We talked about what’s currently happening in the market, how their strategy is adapting, and what the future looks like.
Please note that the conversation isn’t a prediction about what will happen.
Instead, it’s a discussion about all the levels of insurance they’re putting in place to make sure they will succeed no matter where the market moves.
For context, let me give you a little background about one of my trusted advisors.
This advisor of mine has a long track record of success and has been through multiple market cycles. He specialises in buying self-storage facilities across the country and has a very strict set of criteria for what makes a good investment opportunity for him.
He made a lot of money for so many people over the past few years, but if there’s one thing he’s really mindful of, he doesn’t just buy things for the sake of buying. According to him, many people have been doing the same thing he’s been doing for a long time because they realised how profitable it is.
Unfortunately, he observes that people are still buying self-storage deals by leveraging finance, which doesn’t work, even though the prices are high and the risks are great.
So he decides to watch the market carefully for new opportunities that may arise in the next 12 months to two years.
When it comes to all of the deals he already has, they are well-protected because they were purchased at long-term fixed interest rates, meaning they will continue to be profitable as they also have multiple exit strategies.
Not Listening to the Talking Heads
Another thing I want to talk about is something I learned from a panel discussion at a conference I recently attended in Los Angeles.
The panel, made up of people who have been successful for a long time, shared their thoughts on what’s happening in the market.
One of the lessons I learned from them that might be helpful to you is that you should not listen to the talking heads and the hype in the market. And the reason is that many people speak with a high degree of certainty and authority despite having a limited understanding of wealth-building and current events.
If you can observe quiet but wildly successful investors, you will know that they don’t listen to those talking heads I just mentioned. They are fact-based. They are very knowledgeable. They’re up-to-date with current trends, and they have a lot of success doing real deals.
I don’t know about you, but if you’re going to ask me, I would want to listen to and deal with people with credibility and a proven track record instead of those people who just hype you by pretending they know everything.
One funny example that I can relate to is my son. He’s 17 years old now with a lot of confidence, thinking he knows how life is and what’s happening in the world.
Unfortunately, he doesn’t consider some of life’s complexities that we know when it comes to wealth and investing. He’s been following a lot of young influences, which have been very successful over the past five to ten years but haven’t experienced many market cycles.
It was a momentum play as I view it, but I find it challenging to explain it to my 17-year-old son, who may or may not understand that idea.
As adults who have been through different cycles for several decades, it is nice to be reminded that many people have no idea what will happen in the future but remain vocal about their opinions.
This is why I admire trusted advisors who are very careful and don’t ask investors to put their money into deals until they are locked in. For me, that’s a great way of doing business compared to some investors who will take your money at any time and place it in any deal.
Nowadays, you can see this happening with venture capital funds, where fund managers are often paid based on the total amount of money they manage, so it’s easy to compromise their investing rules, if they even have them.
I’m not saying that they are bad people. It’s just that they’re under a lot of pressure to keep the money working. As a result, they either take or do deals that are not in the investor's best interest or expose them to a level of volatility that maybe they shouldn't be exposed to.
Testing Your Market Assumptions
The third thing I got from the conference is what they mentioned about the market being in the midst of transition.
What they do is watch newer and less experienced investors so they can learn from any possible mistakes. On top of it, they’re also looking at deals that still make financial sense, no matter the interest rates.
Now more than ever, it is the perfect time to test their assumptions when doing deals because there are a lot of changes in the market.
So some of the questions they went over are:
Now, let me share with you more advice I heard over the last couple of months.
Number one is that if you’re looking to invest in a traditional property right now, you need to understand that you're playing the long game.
Is it possible that the real estate deals you buy today will not be as good in the next 12 to 24 months? Unfortunately, the answer is yes.
So if you have plans to buy any real estate, be prepared to slide backwards because that’s just part of the journey.
If you’re starting out as an investor, I highly suggest you focus on high-quality assets because you need to stack the odds in your favour as much as possible. When I say that, I mean focus on real estate that people want to live in and on a median or even lower house price.
That is because you want a large pool of ready renters and buyers if you need to sell it.
Now, when it comes to cash flow, focus on the cash flow costs that you can live with.
Many Australian and New Zealand properties will not generate much cash flow, so you need to apply some sensitivity analysis to your numbers. Ask yourself: What would happen to my numbers if interest rates increased to 7.5 or even 8%? Can I live with that?
When you’re prepared to do sensitivity analysis, you will have confidence in choosing what to buy.
However, you need to remember that you can’t predict the market's direction. You won’t even know if it will continue to evolve into a recession.
So if you want to start or continue investing, remember not to look for homes that are too high or too low in price because I’m sure you don't want to be a slumlord by buying too many low-priced homes, and you don't want to invest in high-priced homes and lose money.
One of the things I tell people when they’re trying to figure out where to buy real estate is to ask themselves if they could live in that exact property. The reason is that, personally, I stay away from properties that I wouldn't want to live in myself.
If you’re looking for the right opportunity now, I love to talk about alternative investments because they exist regardless of market conditions.
Your ability to take advantage of a section of the market that is out of reach of most individual investors but too small for institutional investors means there are always opportunities to exploit it and make money.
This means that it is more important than ever to make sure that you align with better deal operators—people who have been through many cycles, have a deep understanding of the market, and are careful about the deals they make.
One of the best things about alternative investments is the multiple exits, and many trusted investors I know in this space continue to talk about making money from the buy.
To wrap everything up, one of the first things you want to do as an investor right now is align yourself with smart thinkers and people who are vigilant but not fearful.
The second thing, of course, is to educate yourself. Doing this makes it completely unnecessary to rely on a single person for your wealth-building journey.
With my clients, I don’t tell them to put all their faith in me. Instead, what I did was create a community of smart people who can help you think things through and who can give you different perspectives on how to see things, how to take advantage of opportunities, and how to protect what you have.
Most people rely on one person to answer their financial and wealth questions, which can be risky and harmful because it’s not just conceivable to be a one-stop shop, no matter how many advertise that it's possible.
Next, I want to emphasise that you should stop trying to predict the future and instead focus on probabilities so you can prepare accordingly.
Imagine that we’re all riding these boats across the waves with a big swell right now.If we can drop a deep anchor, be grounded in our mindset, and make wise decisions, we can continue to navigate the current environment without getting thrown off the boat.
So now, should you keep investing during this volatile and uncertain time? Yes, you can, but only if you have protected what you have.
I would not recommend taking big risks to make much money in the next few years. This is not the time to take chances, nor is it the time to be gambling.
If you want to be in good shape, always remember this principle: defend first, then grow second.