Why speculative investors could be about to get a rude awakening

Speculative investors could soon be facing problems.

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It's never a bad idea to invest in quality businesses with long-term futures. I think that's the easy way to beat the market and grow your wealth.

However, large amounts of people have been drawn to potentially dangerous investments due to low interest rates and central bank stimulus. There is a lot of money that is going to be taken out of the global system in the next few years.

I do not wish to come across as scare mongering. A lot of the potential negative consequences that could happen usually don't. However, there's a great quote by Warren Buffett: "Only when the tide goes out do you discover who's been swimming naked."

People who invest in speculative assets are the ones who get found out and face the biggest losses when economic tides turn.

A rising US interest rate and a volatile President is causing many emerging market currencies, like Turkey's, to weaken. This is particularly dangerous when their debt is in US dollars! Most quality Australian and US businesses do not have a huge amount of money tied in this area.

There were many US financial institutions that were caught up in the US sub-prime mortgage crisis. Luckily our large financial institutions like Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) avoided the catastrophic fallout in the GFC. Hopefully they can withstand the current housing market declines.

Heavily indebted ASX businesses as well as individual investors could be in trouble over the next couple of years if they went too far up the risk curve.

Foolish takeaway

Taking on debt only works if you can repay it. Considering interest rates were at record lows I hope those indebted property investors and businesses made sure they could repay at a higher interest rates.

President Trump does not care about other currencies or other countries. In-fact he only seems to care about the industries of his supporters. If you're invested in riskier bonds or riskier businesses I would consider whether you'll be able to sleep easy at night if the global economy gets a bit rougher and there's more volatility.

I think it's better just to avoid those riskier assets from the start.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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