Investing in The Changing World Order

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Last week, I wrote a pessimistic post about the future – Are You Prepared for Cold War 2? I spent so much time talking about how things are worsening that I didn’t have time to talk about the investing part of it. Today, I’ll share how we can prosper in the changing world order. Fortunately, I am a little bit more optimistic after doing more research.

The world order is changing, but nobody knows how long this process will take. It could take 5 years or it might take 50 years. The United States might be able to hold on to the top dog position for longer than anyone thought possible. We are still the biggest economy in the world (for now) and we have democracy on our side (for now). We also have many allies around the world who believe in freedom and equality. Even if the world order is remade, we can still come out relatively prosperous. Globalization might be in decline, but America (North and South) has the resources to flourish regionally. If we get it right, the US could continue to prosper even in a less globalized world. That’s a tall order, though. The US has a pretty horrible track record of how we “cooperate” with our neighbors to the south.

Changing World Order

Here is a quick recap of the problems the world is facing.

The US is in decline. The US was a hegemony for many years, but China is challenging that. We also have a lot of internal unrest due to many factors such as inequality, race, fiscal irresponsibility, healthcare, and ideology.
Covid caused a lot of problems and it is still disrupting the global supply chain.
The war in Ukraine is causing further disruptions and the world is facing a shortage of energy, food, and fertilizer this year. The price of energy and food is soaring everywhere. Some countries are already facing unrest due to food insecurity and big inflation. Perhaps this supply problem will persist for many years, who knows?
China is the world’s fastest-growing economy and it drives the world’s economic growth rate. However, it is facing a lot of problems. Their housing market bubble is bursting. The zero Covid policy is causing more disruption in the supply chain. 373 million people in 45 cities across China are in various stages of lockdown. Their population is in decline and they dislike immigration. Their economy is slowing down. How long can it keep growing? Etc…
Globalization is in decline. Companies will have to adjust and stock prices probably will suffer.
Just my speculation – Xi Jinping has a similar agenda as Putin. There is a good chance he will invade Taiwan someday. This will cause even more problems for the world economy.

I found a fun presentation by Ray Dalio about the changing world order. Check it out.

Personally, I think he is somewhat right. There will be a struggle to change the world order, but I’m not convinced that China will become the next big enchilada. They have a lot of problems to overcome. BTW, the section on the world’s reserve currency is really good. Everyone should understand how the dollar helped the US become a superpower.

Investing in the changing world order

Ok, let’s see how we can prosper over the next 30 years. Inflation will be high in 2022 and it won’t come down anytime soon. There are too many problems in the world right now.

Cash flow is king

The first thing we all need to do is to make sure our house is in order. Your cash flow needs to be positive. That means your income needs to be higher than your expenses. That way, you can save and invest. That’s the secret to wealth.

If your annual cash flow is consistently negative, then you’ll never achieve financial independence. This is especially bad when inflation is high. You’ll have to borrow money to just survive and you’ll pay a lot of interest.

Cash is trash

Cash flow is good, but cash is trash* in a high inflationary environment. When inflation is 7%, your cash will be worth 7% less next year. Your buying power will decrease if you keep your money under the mattress. We need to invest that money.

*A catchy quote from Ray Dalio.

Bonds might be okay

Traditionally, investors take money out of stocks and buy bonds when there are a lot of uncertainties. But, long-term bonds don’t pay much interest. Inflation is higher so you’ll lose purchasing power. Bond fund prices also decline when inflation increases. The easiest way to stay even with inflation is to buy inflation-protected bonds – TIPS. The I Bonds from the US Treasury have a 7.12% initial interest rate and it will adjust for inflation. You can buy $10,000 of these per person per year from Treasury Direct.

Invest for the long term

The most important thing about investing is to take the long-term view. Don’t panic when the stock market crashes. Your net worth will decrease, but you’ll be just fine as long as your cash flow is positive. Eventually, the stock market will go up. Keep investing and you’ll come out ahead later. Here is some advice for individual investors everywhere.

Don’t invest the money you need. If you need money to pay for college, a house, a car, or anything, then don’t invest that money. The market can crash and you’ll be forced to take a loss. Invest only the money you don’t need anytime soon.
Diversify. Don’t put all your eggs in one basket. Netflix was a great investment over the last few years, but its stock dropped over 60% since the beginning of the year. If you want more stability, then you need to diversify and spread your investment out among different sectors and asset classes.
Invest in companies with pricing power. When inflation is high, invest in companies that can raise their price. Would you pay 10% more to watch Netflix, especially if you’re struggling to put food on the table? Probably not. But apparently, people are willing to pay more for Apple products even when they have to eat ramen for dinner. Some brands have the power to raise their prices and some don’t.
Real estate. Investing in real estate is a great way to diversify. If you’re lucky, you locked in a low mortgage rate over the last few years. High inflation will make those mortgage payments less painful (cheaper) every year. You can also invest in rental properties and commercial properties to profit even more. The United States still has a housing shortage. I invest in commercial properties around the US with CrowdStreet. It’s a great way to generate passive income because I don’t want to be a hands-on landlord anymore. It’s too much work.
Commodities. Historically, commodities go through the roof when there is a war. Food and energy already have high inflation, but all commodities will get a lot more expensive if the war in Ukraine spreads. China might try to reunify Taiwan so that’s another factor to take into account. I hope not, but you never know what a dictator will do.
Fees matter. In 2021, over 80% of actively managed funds underperformed the S&P 500 index. Most investors are better off when they invest in passive index funds with low fees. Imagine paying 2% fees on top of losing a bunch of money from the stock market decline. That’d hurt.
Value stocks. Value stocks tend to do better than growth stocks in a high inflationary environment. Growth companies that rely on debt to grow will have a more difficult time because they’ll have to pay high interest. Value companies tend to have better cash flow which makes them more stable.
Invest in yourself. Last but not least, you need to invest in yourself. Increasing your skills and exploring your creative side will pay off in the future. The world is always changing and you need to change with it. You have to be flexible and adapt.

An Uncertain World

Ultimately, preparing for the changing world order is very similar to what we already should be doing. We need to earn more than we spend so we can invest the difference. We should ignore short-term volatility and keep investing consistently. Also, diversify with real estate, commodities, and other assets. High inflation might look scary, but history shows that investors will be fine over the long haul. So we need to keep investing through the thick and thin.

The world order is changing, but nobody knows how long this process will take. Ray Dalio thinks China will take over the world soon. However, I’m not so sure. China has a lot of problems they need to deal with. Instead of the next superpower, they might become the next Japan. Who knows? Anyway, I doubt China will become the de facto world leader in the next few years. We have plenty of time to prepare for the coming struggle, hopefully…

What do you think? How can we prosper while the world order is changing?

Real estate probably will continue to perform well. We still have a housing shortage in the US and people need to live somewhere. Check out CrowdStreet if you want to generate passive income from commercial real estate. It’s way easier than being a landlord.

Image credit: Wance Paleri

Joe started Retire by 40 in 2010 to figure out how to retire early. After 16 years of investing and saving, he achieved financial independence and retired at 38.

Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!

Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.