Economic Collapse. Yes, it’s a real risk, societies have risen and collapsed all throughout history. Each time the people thought this time was different and that they were too smart or knowledgeable to allow it to happen again. With a global pandemic shaking the world, fascism on the rise, and countries moving more towards isolation than cooperation, an economic collapse is a real risk.
The good news is it is not a risk worth worrying about. Why not? Well you can worry about it all day and accomplish nothing. The reality is it still has an exceptionally low probability of occurring. Since this is an investment related blog, let us discuss how it would impact your finances.
When clients discuss their investments with us, there is always that fear in the back of their mind that they might some how lose it all. A risk, which would only come to fruition due to an economic collapse so bad that our society never recovered from it. In this scenario, everything would be worthless. Yes, your stocks would be worthless, as would your house, your cash, your car, your gold, etc etc.
I like to explain this to people by using a rollercoaster metaphor about why you shouldn’t concern yourself with he risk of this happening, as you are subject to it whether you invest in the market or not.
Picture the stock market as a roller coaster. It roars higher for no reason, then spins out spiraling downwards in a frenzied rush. Yet, through all of it’s highs and lows, it has continued to progressively chug higher and higher over time. The people who have decided to take the risk of investing in the stock market are those who are riding the roller coaster and participating in all the fun and returns it provides. Now the group of people too afraid to invest in the market, well they are the people on the sidelines watching the roller coaster. They are too scared to go on and miss out on the action and returns as it goes higher and higher.
Now let’s just say something does happen to the stock market, and the roller coaster breaks off its rails and the entire thing comes crashing down. Obviously, the people who were on the roller coaster have been wiped out, but what do you think happened to all the spectators standing beside the roller coaster? They get taken out with it as well unfortunately.
You see, if the market ever truly does collapse to 0, society as we know it will have ended. Meaning those who were in the stock market and those who were not are all going to be in the same position. If however, the market continues to chug higher and doesn’t fall off, the people who decide to take the risk will continue to enjoy the ride.
It is unfortunate, but it is an unbalanced risk. Those who take the risk get the rewards, and if it truly unwinds, well everyone is going to be screwed. Those who stayed out, get no benefit if it continues doing well, but suffer equally as much if everything goes kaput.
I want to be clear this is discussing a complete economic fallout, the likes of which would require a major war or complete collapse of our financial system to unfold. It is also discussing a well diversified global portfolio. If you have picked 3 weed stocks and the rest of your money is in cryptocurrency, getting wiped out completely is a real possibility. Large market events do happen, and they can and will put stock investors in a worse place financially. Fortunately, throughout history, these investors have continued to be rewarded every single time. Who knows, maybe this time will be different. Only time will tell.