The Best Investment in a Financial Crisis?

A lot of people worry about the possibility of a financial crisis. That’s not surprising, considering the news these days. A balanced investment portfolio, however, can help relieve some of that anxiety.

A financial crisis is like a storm at sea, and knowing what the best investment in a financial crisis means knowing how to safely navigate that storm. Of course, we all hope that a crisis won’t happen, but it pays to hope for the best, and plan for the worst.

The best investment during a financial crisis will depend on the type of crisis and how bad it is. For example, in a deflationary crisis, a common saying is “cash is king.” A slowing economy means prices go down, and whoever has cash can buy up assets at bargain prices. In an inflationary crisis, however, getting stuck with cash is the worst thing that can happen.

In the same way, a minor recession has different challenges and opportunities than a doomsday scenario. Knowing what the best investment in a financial crisis will require looking at individual asset classes and seeing how they weathered crises in the past. As the saying goes: whoever does not learn from history is doomed to repeat it.

Cash

During the Great Depression, a stock market crash in America led to a spiral of unemployment. Losses in the stock market forced companies to lay off employees, and more unemployment meant people started buying less. People buying less meant less profit for companies, and more layoffs, forming a vicious cycle.

Since everyone needed cash, producers and sellers were forced to lower prices. Some companies sold at a loss just to keep their doors open, and many property owners were forced to sell land or houses at rock bottom prices just to get by.

People who had cash did very well in this situation, buying stocks and real estate at dirt cheap prices. However, on the other side of the Atlantic in Germany, people with cash did not do so well. Paper money and bank accounts became worthless as the currency crashed.

In short, cash can be a safe place to keep money during a financial crisis, but it depends on how well the government that issues the money manages the crisis.

Pros:

  • Highly liquid.
  • Easy to store and move.
  • Backed by governments, including sometimes by deposit insurance.

Cons:

  • Little to no growth potential.
  • Subject to inflation.
  • Can be destroyed in fire or floods if stored at home.

Stocks

In most financial crises, the stock market crashes. However, there are some stocks that perform better than others.

Companies that sell basic goods at low prices also usually do better than those selling luxury products, since consumers have to pinch pennies during a crisis. Walmart was one of the best-performing stocks of the 2007-08 crisis. Companies like Procter and Gamble and Kelloggs also did well, since people started to eat out less and dine at home instead. Utilities and materials stocks, like mining and lumber, are also seen as relatively safe since they own essential productive assets.

Stocks with strong underlying assets like land and machinery can also be a good hedge against inflation. Dividend-paying stocks can also be a good source of passive income.

In a very serious crisis, however, it’s not clear how well the stock market would do. For example, if there is a civil war, martial law, or another scenario, it could be difficult for someone to get money out of the stock market. During World War 2, the Nazi government froze the German stock market after the battle of Stalingrad, and when it was unfrozen, stock prices dropped to near zero.

That’s an extreme example, of course, but it shows that in extreme situations governments can and will freeze the market. Russia also recently froze its stock market for several days in order to prop it up during its war on Ukraine.

Pros:

  • Can be profitable in minor financial crises.
  • Dividend-paying stocks generate passive income.
  • Stocks with strong underlying assets can be a hedge against inflation.

Cons:

  • Higher risk.
  • May not withstand major financial crises or wars well.
  • May be difficult to get money out during geopolitical instability.

Bonds

In mild recessions, bonds often act as a kind of safe haven due to their low, stable returns and generally low risk. On the downside, bonds are usually paid in fiat currency. This means that inflation can easily eat up profit derived from bonds by their maturity date. Furthermore, in a serious crisis, there could be a corporate or sovereign default, where creditors are unable to honor their obligations. This can cause losses for bondholders.

Pros:

  • Lower risk than stocks
  • Better returns than cash

Cons:

  • Only as stable as the institutions that back them
  • Subject to inflation, since they are denominated in fiat currency

Real Estate

Real estate represents the biggest percentage of many people’s net worth. It’s a very useful and inflation-resistant asset and often comes with a host of government tax incentives.

Some financial crises can his real estate hard. The 2007-08 subprime mortgage crisis led to a real estate bubble bursting and an average 30% decline in home prices, with steeper declines in some areas. Even if prices go down and you are unable to rent a property, you will still need to pay maintenance costs. Real estate is also very hard to sell, and needless to say, hard to move if you need to flee the country.

Pros:

  • You can live in it.
  • Rental income.
  • Inflation resistant.
  • Tax benefits.
  • Good growth potential.

Cons:

  • Highly illiquid.
  • Requires maintenance.
  • High transaction costs.
  • Possibility of bubbles bursting.

Precious Metals

Precious metals, especially gold and silver, have thousands of years of proven history as a safe investment. They are highly resistant to inflation and prices tend to remain stable even during political and economic crises.

One of the drawbacks of metals is the difficulty of storing and securing them. Storing them at home means there is some risk of theft while storing them in a secured and insured vault can be expensive. Also, unlike other investments, they don’t have as much growth potential, although in an inflationary environment you can buy more with them.

Historically, there have been some issues with precious metals. Governments also know that they are more valuable than government currencies, so many governments have confiscated gold and silver from citizens during financial crises. Hitler seizing the gold of Jews is a well-known example, but it also happened in America during the Great Depression. For people living in countries with corrupt or repressive governments, it is very difficult to safely move gold or silver out of the country.

Pros:

  • Highly stable value.
  • Inflation resistant.
  • Proven track record of value.
  • Safe from bad government policies.

Cons:

  • Heavy and difficult to transport.
  • Can be expensive to store and secure.
  • Subject to government confiscation.

Cryptocurrencies

Cryptocurrencies like Bitcoin are an emerging asset class. They operate outside of the control of governments, which makes them attractive to critics of government policies.

They have some properties of precious metals, like having a limited supply, but with high tech advantages, like the ability to send money anywhere in the world instantly. This means it is also much easier for people in countries with repressive governments to move wealth out of the country safely.

While cryptocurrencies have seen massive overall growth over the last decade, they are subject to wild price swings. Investors who buy and sell at the wrong time can easily lose fortunes. There is also a lack of clarity about regulation and taxes on cryptocurrency profits, although that’s slowly changing.

Pros:

  • Massive gains are possible.
  • Easy to send and receive.
  • Independent from bad government policies.
  • Resistant to confiscation.
  • Highly liquid.

Cons:

  • Extremely volatile.
  • Massive losses are possible.
  • Legal ambiguity.

SilverToken

SilverToken combines the strengths of both precious metals and cryptocurrencies. Each SilverToken represents over 1 ounce of investment-grade silver. Ownership is secured by the Ethereum network, the world’s most secure decentralized digital asset platform.

SilverTokens represent ownership in physical silver held in a series of 12 secured and insured vaults in 8 different politically stable countries, including the Cayman Islands, Singapore, and Switzerland.

Transactions carry a small, 1% fee, and 50% of this fee goes toward increasing the silver holdings of all SilverToken holders. This means SilverToken has all the investment properties of physical silver while being a growth asset at the same time.

Like cryptocurrencies, they can be sent privately, instantly, and securely anywhere in the world. This makes it especially valuable to those concerned about government overreach.

Pros:

  • Safe from inflation.
  • Stable value.
  • No vault storage fees or insurance.
  • Value steadily increases.
  • Can be sent anywhere in the world cheaply and instantly.
  • Secure from government interference.
  • Resistant to confiscation.
  • Can be exchanged for cash instantly.
  • Private.

Cons:

  • Exchanging for physical silver requires personally going to the vault or having it delivered by mail.
  • Some basic computer knowledge is required.
  • Each transaction carries a small, 1% transaction fee.

Every Cloud Has a Silver Lining

A financial crisis doesn’t have to be something to fear. In fact, financial crises can actually present a number of opportunities. This doesn’t have to mean profiting off the suffering of others;  many lucrative investments can actually help the process of recovery after a crisis.

One of the best ways to profit from a financial crisis is by buying up distressed assets at low prices when the crisis hits. SilverToken is a great way to achieve that because it holds its value against inflation, and yet can be easily and instantly sold for cash at any time. This shows that technology may be able to help us better make it through financial crises in the future.

 

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