With all the economic mayhem happening these days you might be wondering... "where can I put my money so that it will":
- never lose 50% of it's value over night
- beat inflation and a little more
- remain highly liquidatable in case of emergency
- remain usable in case of apocalypse and total societal breakdown
The idea most people have in regard to savings and investment is to develop a security blanket.
So I came across this article which says to put your money in:
- 25% in U.S. stocks, to provide a strong return during times of prosperity.
- 25% in long-term U.S. Treasury bonds, which do well during prosperity and during deflation (but which do poorly during other economic cycles).
- 25% in cash in order to hedge against periods of “tight money” or recession.
- 25% in precious metals (gold, specifically) in order to provide protection during periods of inflation.
But I disagree... let's look at the options.
A diversified and broad selection of US stocks from the S&P 500 (the 500 largest companies in America) is a very safe and prosperous bet over the long term. American companies have been and will continue to be some of the most innovative companies on the planet. While some industries wane, others will wax. Furthermore, the NYSE, NASDAQ and other trading arenas have some of the highest traffic, nearly guaranteeing a buyer for every seller. My recommendation is to definitely put money in US stocks by purchasing index funds like the S&P 500 index.
The main advantages of US stocks is:
- Tracks with the US economy at large thus making the investment a hedge against inflation.
- A diversified portfolio does spread risk effectively.
- Stocks are not officially govt backed, but as we've seen... the larger the company the more likely subsidies and govt. protections will be involved.
- In booms and busts stocks can do well (Countrywide in the boom went way up, Netflix in the bust tripled).
To this I'd also like to add that European stock indexes are overall quite similar in advantage to the US. Essentially, if the US and Europe can't make it... nobody can.
Long Term Treasury Bonds
These are also very safe investments in the near and far term. They are extremely safe (if the govt defaults on it's loans then cashing out your bonds will be the least of your worries), and dependable.
But they have 2 very serious downsides.
- Buying a bond today for 30 years locks in an interest rate. Inflation may rise, but the interest rate wont.
- Many of the 'worst case scenarios' possible would render government bonds illiquid (same is mostly true for stocks).
Money Markets and 'Cash'
Cash and money markets are extremely liquid. They are not much more than a savings account with a low interest rate. And even though they are extremely safe, like treasury bills they:
- Don't protect against inflation
- Don't have a very high growth rate
- Many of the 'worst case scenarios' would render the fiat money in the money market account nearly useless
Perhaps the most misleading of investment vehicles is Gold. It is a widely held belief that in times of great disaster gold or precious metals would be the only 'super-sovereign' currency. The belief is supported by the thought that humans assign inherent worth to gold. They don't!
Furthermore, it is believed that gold hedges against inflation. Because of the first assumption, that gold is inherently worth something, we think that gold must track with inflation on a nearly 1:1 basis.... it doesn't!
Thus gold has the following drawbacks:
- It doesn't hedge against inflation:
- Most of the demand for Gold comes from Jewelry and for making into bouillon coins. In bad times it will become an illiquid commodity.
- It's growth is low on average.
- It's easy to steal ($20k of gold is far easier to steal than $20k of stocks)
- In time of great chaos it doesn't provide the function of a super-sovereign currency...real goods do. Furthermore, if everyone used Gold as currency in the 'bad-times' rampant inflation would occur relative to the supply of gold in circulation... thus rendering moot the potential of Gold to serve as a currency.
Gold is perhaps one of the most worthless investments in the market unless you know something about the supply and demand cycle of Gold.
So What's Left?
The following is a list of investments that I believe have the highest safety, return and hedge against inflation and Chaos. It's difficult to say what the % of your portfolio should be in each area... so no percent is given.
- U.S and European stocks are highly liquid, move with inflation but are not nuclear-apocalypse proof. A good place to put money.
- Housing Rental Income - barring a communist take over (and even with one), people need a place to live. The income tracks with inflation, but can be depressed in a housing glut or in a very low interest rate time period. Regardless, housing is the largest purchase that the average person can make. It's subsidized by the government in many ways and gives a large store of capital which appreciates with inflation plus a little. Add on to that the rents received over time and housing rental income can be a very good, safe and reliable investment.
- Education - the bulk of one's lifetime wealth comes from wages. It is well established that wage level is tied in with education level. Plus learning thins like farming, mechanics, and carpentry could either give a little extra cash when needed or provide post-apocalypse survival skills.
- Family - Price of going to the nursing home for retirement... $50k/year. Cost of living with a family you love and who loves you back until you die... priceless. Blood ties run thick and they're worth having.
- Community/Friends/Civics - Nothing hedges against loneliness, hard times and even financial struggle than friends and a surrounding community. By involving yourself in Civics you could also have a chance to set policies and change tax codes that directly affect your financial well being. It only costs time.
- Land - As Lex Luther said in Super Man... they only thing they aren't making any more of is land. Rather than putting money into gold, put it into arable farm land.
- Religion - Hey, this life might not be all there is right? Better find the truth about the metaphysical world... and supposing that God is an active and personal God then it might not be so bad to have him on your side no matter the circumstance. I hear it can be good for your health too.
There you have it, the Greentheo plan to fail proof investments that do grow over time.
- China has been running enormous dollar surpluses to keep the yuan-dollar ratio low. This keeps goods flowing to America and it's economy growing more rapidly in the short term. It also gave America extremely cheap credit. [↩]
- what do starving people need with Gold? nothing... what they need is food and other "real goods" [↩]
- assuming you don't annoy the Hell out of them in your crotchety old age [↩]