Phil predicts a devaluation of the buying power of the US dollar. Therefore, there may be problems on the horizon for investors.
Inflation is a natural result of currency fluctuations, because it will cost more to purchase goods and services. In some markets, inflation destroyed the stock market for 20 years! For instance, when there was a high rate of inflation in the United States from 1965-1983, the rate of return was nearly 0%.
If Phil’s predictions are true, there will be a major problem for investors with diversified portfolios, because your buying power will be dwindled down nearly in half.
Diversification is the idea of creating a portfolio that includes multiple investments in order to reduce risk. Someone who is an entrepreneur might think it is best to lower his or her risk and have 100 businesses, rather than focus on one or two. Most people over-diversify. They split their money into hundreds of stocks in hopes of making a great return. This is not the best strategy, because your rate of return is going to be widely dependent on whatever fluctuations the market is experiencing. If you know how to invest, you don’t have to diversify.
But on the other hand, investors who own fewer companies will be in better shape. Warren Buffett is a perfect example of this! He made billions of dollars in the 1970s—in fact, it was his best era for investing. The reason for this is because as the market started to realize that there were serious structural problems with currency, it became extremely volatile. The market went from 1000 on the Dow Jones peak in 1965, down 30-50% about 10-15 times in the next 15 years. Rule #1 investors thrive in this kind of market environment. This is why it’s so important to understand when and why businesses go on sale, per the Rule #1 investing principles.
Focus your portfolio on businesses you understand, that you know you are buying cheap, and let the diversification happen naturally. It’s worse to be in things you don’t understand than to be un-diversified in industries you do understand. If you’re doing your work well, you shouldn’t have an industry-wide permanent bad surprise. The number of stocks I own, and thus my diversification, such as it is, will ebb and flow as I find great businesses to buy.
Phil also believes that as a result of this election, there will be dramatic changes in fiscal policies and in tariffs with China. All of these side effects will create a lot of short-term volatility. Even just a few days after the election, the market immediately jumped up, and has just recently leveled out. It’s hard to tell what will come next.
On today’s podcast, Phil predicts what may happen next in the market and why all you can do as a rational Rule #1 investor is rely on the knowledge you’re equipped with.
Prepare yourself for whatever may happen in the stock market. Download my Stock Market Crash Survival Guide today: https://bit.ly/3eNtFZ6
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