Want to know the truth? The truth is that no one knows the truth. Uncertainty is at a fever pitch, with scarce visibility about what the future will hold.
“Everything is uncertain, perhaps to a unique degree,” said GMO Asset Management co-founder Jeremy Grantham. “The market’s P/E level typically reflects current conditions. Markets have historically loved fat margins, low inflation, stability and, by inference, low levels of uncertainty. This is apparently one of the most impressive mismatches in history,” he concluded.
Grantham isn’t the only notable investor sounding the alarm.
“There’s a trade war, there’s a technology war, there’s a geopolitical war, and there could be a capital war — that’s the reality,” said Ray Dalio, head of Bridgewater Associates.
With so much uncertainty, now is the time to prepare your portfolio for volatility.
Set your house in order
Volatility can disrupt the most stable financial situations. Even if you believe your savings can handle a prolonged period of uncertainty, it’s critical to review your risk factors.
Debt is the biggest challenge during times of uncertainty. Payments are usually fixed, giving you little opportunity to scale them with changing conditions. And if you do miss a payment, additional interest can make it even more difficult to meet these obligations.
Today, about 15% of the average Canadian household’s income goes toward debt payments. Roughly half of those expenditures are dedicated to interest payments alone. That’s a disaster waiting to happen.
If you have credit card, auto, student, business, or mortgage debt, make sure you can continue to meet these payments, even if markets tank and you lose a significant portion of your income. No one plans to lose their job or for their portfolio’s value to crash. But every down market leaves millions of unprepared savers out in the cold.
Capitalize on uncertainty
Everyone wants to buy when prices fall, but few can. That’s largely due to the goldfish effect. When times are good, expenses and obligations rise commensurately. When uncertainty hits, savers scramble to adjust, rather than take advantage.
Now is the time to build a budget, grow your emergency savings, and stress test your income levels. But once that’s done, you need a game plan to capitalize if markets turn lower.
The biggest thing you can do is build a stock wish list. What are your favourite companies? Which stocks would you race to buy if markets plunged by 30%, 40%, or even 50%?
Focus on businesses that will succeed long after the short-term volatility passes. A classic example is Enbridge (TSX:ENB)(NYSE:ENB).
Enbridge is the largest pipeline operator in North America. It’s nearly a monopoly. If energy producers want to ship their output, oftentimes their only option is through Enbridge. This greatly reduces year-to-year uncertainty, as the company almost always has customers lining up at its door.
Enbridge isn’t the only long-term stock that you should keep your eye on. There are dozens of suitable options. But the time to do the work is now. Know what you’ll buy before uncertainty hits.
