A familiar sense of unease is creeping into financial markets, with economists and investors warning that the global economy could be vulnerable to another major financial shock. That doesn't necessarily mean ASX shares are on the verge of a 2008-style collapse. But the warnings are worth considering.
Nouriel Roubini, who famously predicted the Global Financial Crisis, continues to highlight the risks from excessive debt and government borrowing. Ray Dalio has similarly warned that the world is approaching the later stages of a long-term debt cycle.
Meanwhile, concerns are building around stretched asset valuations, private credit, commercial real estate and the enormous sums being poured into artificial intelligence.
So, is GFC 2.0 coming? Not necessarily.
There is no consensus that another banking crisis is imminent. However, the broader warning is difficult to dismiss: vulnerabilities have accumulated across parts of the financial system, and several could reinforce each other if economic conditions deteriorate.
Image source: Getty Images
How should investors prepare?
The answer probably isn't to sell all your ASX shares and hide in cash.
Timing a financial crisis is notoriously difficult. Investors who abandon the market while waiting for a crash could miss years of gains if the predicted crisis never arrives.
Instead, investors should focus on building resilience.
Watch leverage
Highly indebted businesses can be particularly vulnerable when interest rates remain elevated or economic growth slows.
Companies with strong balance sheets, manageable debt and reliable cash flows may have a better chance of weathering a downturn.
This is particularly important when assessing ASX shares trading on ambitious growth expectations.
Diversification matters
Owning 20 ASX shares doesn't necessarily create a diversified portfolio.
Investors should consider spreading exposure across companies, sectors and geographies and, where appropriate, different asset classes.
Concentrating too heavily in one expensive investment theme can turn an ordinary correction into a devastating portfolio loss.
Don't ignore valuations
A great business isn't automatically a great investment. If a company's share price already assumes years of near-perfect growth, even a strong business can deliver disappointing returns.
The artificial intelligence boom illustrates the point. AI could ultimately transform the economy, but that doesn't mean every AI-related ASX share will generate attractive returns from today's valuations.
Keep some liquidity
Investors should also avoid putting themselves in a position where falling markets force them to sell their ASX shares.
Maintaining an emergency cash buffer and avoiding excessive personal debt can provide valuable flexibility when markets become volatile.
Foolish takeaway
The biggest mistake may be trying to predict whether the next financial crisis arrives in six months, five years or never.
Nobody knows.
What investors can control is how resilient their portfolios are when something unexpected happens.
Rather than betting on whether GFC 2.0 arrives, investors may be better served by preparing their portfolios for volatility while continuing to look for opportunities when fear eventually creates them.
