The two dirty words, inflation and recession, are everywhere. Even if you are not into investing or finance, you can’t help but see them all over the news headlines, financial blogs and YouTube channels. It is as if the world is moving toward an inevitably doomed economy, and everybody is going to become poorer.
I have studied a lot about inflation and recession in my more than 15 years career as a financial adviser. It is not to say that I am totally optimistic about the stock market and economy, but I think there is too much misinformation circulating around.
People often repeat what they hear without first verifying if it is true and whether they repeated it correctly.
My followers know that in 2020, I have already said “inflation is the only way for the world to get out of the pandemic” and this will cause a retirement crisis globally.
Additional reading: 5 Ugly Truths of the Coming Retirement Crisis and How to Deal with It
You can’t make an informed decision based on the wrong assumptions. So today, I want to give you a clear perspective of what is happening and what you should do about it.
Why does the wealth gap become larger after each crisis? Because when the majority of people see the crisis as a problem, the rich minds see it as potential.
Financial success requires a combination of the proper: mindset and psychology (40%); along with knowledge and skills (40%); and a little luck (20%).
In the first part, I will talk about the right mindset and psychology that you need to have at this moment. In the second part, I will demystify some common misunderstandings about inflation and recession and their impacts on the financial markets.
Doomsayers don’t know more than you
The first thing you need to do is to qualify the information you read.
In a bad market like now, the doomsayers will go around and tell people that things will only get worse. What do they say? Well, they have catchy headlines to grab your attention. For example:
- “Most people have no idea what is coming!”
- “Why a recession is inevitable!”
- “The upcoming crash will be worse than all the past financial crises!”
I have seen such “wisdom” year after year and I can understand why it is prevailing. Social media influencers know that telling people what they already believe and reinforcing it is the best way to attract viewers.
Most financial influencers don’t even bother to fact-check or substantiate what they claim. They just have to make some bold statement in a sexy headline, because most readers don’t read beyond the headlines anyway.
But aren’t these the same “gurus” who were pitching going-to-the-moon stocks and cryptocurrency just a few months ago? Aren’t they the same I-just-want-to-help-you influencers who told you to “buy when others are fearful”? How about their “diamond hands”?
Independent thinking is hard to come by
You may think you make a decision based on your own research, or if everybody is talking about the same thing, it must be true. In reality, most people just fall into social conformity.
Have you heard of the “elevator experiment”?
Imagine you enter a lift. Everybody is facing the back of an elevator instead of the door. Would you follow suit? It sounds odd, right? And you may say, “Of course, I won’t face the wrong way.”
But experiments show most people will. Enjoy this video below.
Social conformity is especially amplified in today’s world when you obtain most of your information online. If you can understand that social conformity has great power, you can understand why mainstream media are all singing the same song.
This is not to say all financial media are bad, but independent thinking comes with a price. While the number of followers and likes determines their bank balance, it is much easier and safer to say the things that most people repeat than stick your head out on the chopping board.
That is why telling you to buy an ETF, or dollar-cost averaging will never go wrong, even though it may not be constructive for most people.
Additional Reading: ETF Investing: 3 Myths busted.
You can also be forever bearish about the stock market and one day you will be right too. The 2008 Global Financial Crisis has produced some star fund managers or “financial celebrities” who “predicted” and shorted the market back then. I have followed their works for the past decade, and nothing impressed me. And most of them already disappeared from the scene.
Have skin in the game
That is why not only do you need to have considerable knowledge, experience and endurance to face the challenge, but you must have skin in the game.
When the market drops 30%, it is easy to say things like:
- “This is bad, don’t invest!” or
- “Practice Dollar-cost averaging with the good stocks.” or
- “Buy when others are fearful.”
But I am almost certain that people who say these statements are either never investing their own money or have invested very little of their own wealth. As the best selling author Nassim Nicholas Taleb said,
The symmetry of skin in the game is a simple rule that’s necessary for fairness and justice, and the ultimate BS-buster… Never trust anyone who doesn’t have skin in the game. Without it, fools and crooks will benefit, and their mistakes will never come back to haunt them.
People who understand financial freedom through investing know that you always have to be invested. You need to be “in the market”. When you are out of the market, your mind is out, and it is very hard for you to come back.
People who avoid the crash will never catch the bottom. – Ivan Guan
This is NOT to say that you need to buy and hold, which is a terrible strategy. But you need to have a plan. You need to know what you can hold and what you should let go of.
Additional reading: Why a buy and hold investment strategy makes little sense.
Some part of your investment may be yesterday’s darling which benefited from globalization and easy money. If you think the macro backdrop has changed, you should adapt them to the investments that can benefit from the future economy.
I have been watching the financial market for nearly 2 decades. One thing I have learned and believe is that if everybody is talking about something, it is almost never going to happen.
If everybody on the street thinks that the market is going to crash, then they all should have done something about it and the market will not crash. The market always turns when all hope is lost.
As John Templeton famously said,
Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.
The market is always forward-looking. A bull market always climbs a wall of worry.
When all the bad news is already presented to you, there is no more bad news to push the market down further. So, when you see the presence of a severe market drop and high volatility, it is a sign that most people have capitulated. Read this article to understand what I mean.
Additional reading: Investment Pitfall – A Consumer’s Mind
When the Fed raised the interest rate by 0.75% last week, many people were crying that the market is going to crash more. I got calls and messages from clients asking if they should “cut their losses.” But this is the message that I sent to my clients:
While I could still be wrong, it is a fact that the market has shown a sign of relief. And if you have sold after hearing the “devastating” news and followed some doomsayers, you may have just sold at the near-term bottom.
Let me summarize …
First of all, the doomsayers may get on your nerves, but you really should verify what they are saying. Some of the information and resources they provide can be useful, but you don’t have to take their conclusions seriously. I always intentionally look for diverse views, hear multiple angles of the same story and try to form my own independent thinking. I recommend you do the same.
Secondly, never take anyone’s advice if they don’t have skin in your game. Always question the incentive when you receive advice, especially when you are emotionally vulnerable in today’s market.
Lastly, stay in the game and always adapt your existing portfolio. I am not a fan of dollar-cost averaging or buy and hold because I believe the market is always changing. As I discussed in this article, it is foolish if you think you can money with little or no intelligence. When your previous investment assumption changes, so should your portfolio.
As a licensed adviser, I help my clients manage their investment portfolios for retirement. You can click here to find out more.
In the next article, I will dive deeper:
- Why inflation should not be your biggest fear.
- What is the difference between inflation and inflation expectation?
- Why interest rate hikes and monetary tightening are not the same things?
- Why we are already in a recession (not going to) and what will get us out of it?
It is going to be a bit more technical, but it will help you demystify many misconceptions about the inflation and recession topic.
Read Part 2: Is high inflation here to stay?
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