What Should I Do? The Basics of Resilience (Part 7 – Protecting Wealth)
Note: This article is part of a series on personal preparation to help you answer the question, "What should I do?" Our goal is to provide a safe, rational, relatively comfortable experience for those who are just coming to the realization that it would be prudent to take precautionary steps against an uncertain future. Those who have already taken these basic steps (and more) are invited to help us improve what is offered here by contributing comments, as this content is meant to be dynamic and improve over time.
Graduates of the Crash Course series emerge aware that, economically speaking, the next twenty years are going to be completely unlike the last twenty years. This invariably leads to the question, "How do I prepare financially?"
We have entered some truly treacherous investing waters, where we must question everything and accept nothing, even (and especially) the base assumption that any given currency, be that the US dollar or euro or Yen, will retain its value. Is a ‘double-dip’ recession coming? Nobody knows for certain, but all the warning signs are there. Our view is that it’s best to start thinking about preserving and protecting your wealth now, while you still have that opportunity. The bottom line here is that you should not be taking your cues from what your neighbors seem to be doing, but instead being sure that your own house is in order.
There are no easy answers and no magic bullets. But neither is there any need to take immediate or hasty action. Rather, I want you to view yourself as beginning a journey. The time has come to put one foot in front of the other and take responsibility for your own financial future. The ideas below are drawn from our more detailed guide to Taking Control of Your Personal Finances (Note: Access to this page requires free registration on our site). As always, it is up to you to decide if you want to make use of the information offered here, or not. We present these ideas for your consideration and as educational material. We do not offer investment advice at PeakProsperity.com, and this material is not meant to be taken as such.
Here are a few basic ideas to get you started:
- Get out of personal debt. This means paying down what you can and taking on absolutely no new debt if at all possible, especially if it is purely consumptive in nature (that is, it won’t increase your future cash flows). During the Great Depression, debt was a killer. During the 1990s and 2000s, credit (debt) advanced the living standards of many and became to be viewed as simply "something to manage." But being in debt severely limits your options during good times, and it is a positive destroyer during down times. Less tangibly, but just as important to us, being out of debt feels really, really good, as if a weight you didn’t know was there has been lifted. During stressful times like these, removing a nagging source of worry has a value all its own, which is not to be underestimated.
- Get some inflation protection. Nearly all governments, when faced with the massive liabilities and debts that those in the developed world currently face, have opted for the same solution: Print money. So we can be pretty certain that we'll see some quite solid inflation as we go forward over the next few years (decades?), especially as resource crimps arrive at the same time that the electronic money presses are working hard to conjure up an economic miracle. But there is another worrisome potential source of inflation, and that is all the US debt held by foreign countries. Trillions upon trillions of dollars of US debt are held by foreign concerns. What would happen if all those claims got ‘submitted’ (i.e., bonds get dumped) over a short period of time? My view is that the US dollar would collapse, triggering massive inflation in everything the US imports and would effectively ‘export’ inflation to the rest of the world. That would include oil, gas, consumer electronics, clothing, and especially food. So what is "inflation protection?" It means holding non-paper-based assets. Gold, silver, oil, grains, and base metals are a few examples. My personal choice has been to hold gold and silver, but there are many other vehicles. For those interested, I have prepared a short document that details the hows and whys of gold/silver purchasing.
- Diversify out of US dollars. Many residents of European countries consider holding all of one's assets in a single currency and a single country to be a sign of madness. Of course, Europe has a repetitive history of violently proving the validity of this viewpoint, while the US does not, but you may also want to consider how the truly wealthy in the US handle their affairs. The financial managers for the very wealthy always recommend having assets in multiple currencies and multiple countries. While it is simply not feasible for the average US citizen to hold offshore accounts, especially post-PATRIOT-Act, US citizens can easily hold foreign currencies (such as through everbank.com) as well as gold/silver (a.k.a. "the anti-dollars"). I also hold gold as a “currency hedge." I personally do not hold too much in foreign currencies anymore – although this was a strong strategy of mine from 2003 to 2008 – because the almost daily interventions of various central banks in the currency markets has turned them into more of a casino than a fundamental play that we can assess on the basis of trade, interest rates, and other key variables. Still, having a bit of diversification here can be useful and, if you have the opportunity to hold foreign bank accounts, those can offer an important buffer.
- Take control of your finances (and keep your holdings highly liquid). This is outlined in the steps below.
First Step - Take Control
The very first step is for you to feel personally in control of your finances. You are responsible for your finances. Nobody else. While I think it's perfectly okay to work with a trusted financial advisor or planner, that relationship still needs to be a partnership, and you need to get in the habit of authorizing and directing your investments, or else spending time thoroughly vetting someone who will. I know this is a scary proposition for many people, but I've learned that the hardest step is the first one. After you've moved a few things around, it gets easy (and fun). The purpose behind this first step is to remove any barriers to action.
The main purpose of the steps below is to get your funds into the most liquid position they can be. That is, we place a lot of value in being able to move and access funds quickly if the mood strikes us. At times this may be because we are leery of the place we are holding the funds and want them someplace safer, and at other times we just want the freedom offered by being able to rapidly access and redirect our funds to other uses, should that seem the prudent thing to do. In short, we place a premium on liquidity and safety – two qualities that could be real wealth-savers in a severe economic downturn.
- Write down the amounts of all of your different assets and liabilities. This would include bank accounts, 401ks, annuities, pensions, Social Security, brokerage accounts, mortgages, real estate, etc. GUARD THIS INFORMATION CAREFULLY.
- Record all the relevant information about where those assets are held. Account numbers, phone numbers, contact info (if there's someone at the other end to call), routing numbers, website URLs, and any other information that would be necessary to either access or move the funds. GUARD THIS INFORMATION CAREFULLY.
- Determine all the rules, processes, regulations, penalties (if any), and mechanisms that surround your ability to access or move the funds. Understanding the rules surrounding (and often limiting) your access to your funds is usually an eye-opening experience. Most are surprised to discover that “their” money is not accessible to them without jumping through a daunting array of hoops. In order to determine what the rules even are, you will need to develop and pose some very specific questions to your account manager or institution. Often it's a game of "you can get the right information only if you ask the right question." Her are some sample questions:
- “What are the steps I need to take if I want to move money out of this account?” Be sure to find out whether the rules change if the money is being transferred within or outside of the managing institution. Also take careful note of the forms required. Some mandate that a physical signature be on file, which means you are tied to the mail or other form of physical delivery. If these exist, get them on file even if you have no intention of moving the money at all. You may want to move it later on; having this step cleared up beforehand can be a real time saver. Also note that joint accounts usually require two signatures and sometimes two separate forms.
- “How fast could I get this money into an account at my local bank?” Be sure to understand the various mechanisms and thoroughly test out the one you want to use. For example, wiring money may have different rules, and require different forms to be filled out, so compare this option to others, such as having the funds moved via EFT or sent in check form. Once you think you have all the right forms in place, go ahead and move a tiny amount. That’s when the rubber meets the road. In some cases, there are redemption restrictions in place that limit your ability to liquidate holdings to anywhere from the close of business that same day to up to nearly a decade (in the case of some annuities).
- “What penalties, fees, surcharges, commissions, or other imposed costs will be associated with moving these funds?” If at all possible, get these in writing before making a move. It’s astonishing how many of these are layered on top of even the most routine transactions. fBe especially leery of any fees that are not fixed but vary with the size of the transaction. Find out if there are any ways to avoid them. Sometimes there are, and this is an example of an answer they will not reveal unless you ask the right question.
- “Have I missed anything, any step, form, signature or other requirement, either internal to your organization or regulatory in nature, that is needed in order for me to move this money immediately?” You won’t know unless you ask!
- Take action: Actually move some funds from one of your accounts to another. This step will break the 'inertia' that most of us experience.
- Link up all of your main accounts via EFT and practice moving funds among them. Unless you practice, you won't know how long it takes or what sorts of wrinkles exist. You should also check to see if you can initiate a transfer electronically, by phone, and in person (assuming you have a branch office nearby). In a crisis or emergency, having the ability to rapidly move funds out of one institution to another could be a real wealth saver. All of my accounts are so linked and tested.
Once you are comfortable that you know what you've got, where it's located, how it's distributed, and the rules and regulations governing access, then you’ll be in a better position to react to a variety of circumstances/scenarios and take action. These steps are the exact ones that I took in my process of becoming financially self-dependent, and I swear by them.
Second Step – Develop Your Game Plan
The next step is to determine what scenarios you think are most likely to play out in the future and their likely impact on your investments. Many folks don’t feel they have the expertise to do this on their own. If you’re one of these people, finding a good financial advisor if you don’t already have one, is an important next step.
A good financial advisor will take the time to learn about your financial background and goals in depth, as well as get to know you personally, and tailor a customized investing plan accordingly. We recommend working with advisors on a "percent of assets under management" basis – steer clear of commission-based advisors, as their incentive structure can be at odds with your financial interests. If you don’t know where to start looking for a financial advisor, referrals from family and close colleagues are a good way to start, as are these resources provided by the Certified Financial Planner Board of Standards. (While we don’t currently connect investors with individual investment advisors on this site, we are exploring how we might do so in a valuable way for our members. If you’re an interested investment advisor, or have one you work with that you would highly recommend, please contact us)
You then need to determine which investing horizons to concern yourself with. I use three: near, middle, and long-term. Each has its own body of information to consider and digest. Here’s my best estimation of the events that will likely characterize each:
- 0-2 years
- ongoing housing bust
- double-dip recession (bad for stocks)
- growing energy disruptions (e.g., BP Deepwater)
- 2-4 years
- Energy demand/supply crossover
- Boomers begin retiring
- Growing pension issues
- 4-10 years
- Government insolvency
- Peak Oil/other resources
- Geopolitical conflict/war
I recommend that you create a similar chart based on your own assessment of the most probable outcomes the future holds and think about their implications. Start with the nearest horizon, and ask yourself or your trusted financial advisor a few basic questions, such as:
- Are my assets well-diversified with respect to asset classes?
- What percentage of my wealth is denominated in a single currency? Am I hedged in any way in case that currency begins to weaken substantially?
- What risks do my particular holdings face in another recession? In a depression?
- What about during an event like an outbreak of hostilities with Iran?
- What sources do you (or your advisor) use to keep informed? Have you watched the Crash Course? What do you think of its thesis and outlook? How should our portfolio change if/as the predictions it makes (increasing oil cost/scarcity, money printing, slow/negative economic growth) come to pass?
- How liquid are my investments? How quickly can I liquidate, move, and access my holdings?
Third Step - Take Action
This is where you begin to get comfortable making decisions and taking action. I recognize that this is typically the hardest part for people, and it was for me as well.
Buying Gold & Silver
It’s no secret that I’m a big fan of owning precious metals. Why? Because it provides you with the most direct way to protect your wealth from paper money devaluation with no counterparty risk. Gold is the only financial asset I know of that is not simultaneously somebody else’s liability. That makes it rather unique. I think everyone who can should have at least some exposure in their portfolio to gold and silver.
There are many ways to invest in gold and silver, but for the individual who is just starting out, we highly recommend beginning by purchasing at least a few ounces of physical bullion.
Most of us are so unfamiliar with buying physical coins or bars of precious metal as an investment that it feels somewhat alien at first. Buying my first lot of gold was both exhilarating and a bit unnerving, and it almost felt as if I were 'doing something wrong' (like a kid sneaking candy, or shoplifting, perhaps). That’s why just getting started – buying your first few ounces – is the most important step. After you’ve done it once, it gets a lot easier psychologically.
We advise a 2/3 gold, 1/3 silver allocation. Gold provides the monetary protection against a systemic financial breakdown, while silver is a hedge towards a more normal future. Silver's main value is as an industrial metal, and it will do extremely well post-crisis, due to scarcity issues and the increased expense of getting it out of the ground. For me, silver is a long-term play, possibly lasting decades and possibly involving transference to grandchildren who have not even been born).
For gold, we recommend the American Gold Eagles and Canadian Maple Leaf coins. For silver, we recommend starting with pre-1964, 90% silver U.S. coin bags (they come in varying sizes to accommodate your budget).
For buying physical gold & silver, we recommend:
- Quick, easy, 24/7 online purchasing (US & Canada)
- High marks from the PeakProsperity.com community
- A+ rating from the Better Business Bureau
- Attractive combination of price, selection, customer service, and security
- Colorado Gold
- Phone ordering (US only)
- Mention that you’re a referral from PeakProsperity.com
- High marks from the PeakProsperity.com community for excellent customer service
- A+ rating from the Better Business Bureau
- Phone ordering (US only)
- Local coin shops
- Transactions can often be anonymous
- No minimum purchase requirements or shipping fees (although sales taxes may apply below certain amounts – commonly $1,500)
For investors with substantial wealth to protect, we also recommend:
- Anglo Far East
- Extremely high-touch, white-glove service – 24/7
- Option to take physical delivery at any time, anywhere in the world
- Very low purchase premiums to spot
- Can buy and sell in US $, Euros, and Pounds Sterling (no currency conversion costs)
- Allocated bullion held at low storage fees
- Choice of storage location: New York, London, Zurich
We have a lot more to say in our guide to Buying Gold and Silver. We consider it a must-read, especially if you’re ultimately planning to invest a substantial portion of your wealth in precious metals.
Allocating Your Other Assets
Now it’s time to invest your remaining wealth according to your outlook for the future. As you begin, here are some broader questions you might ask yourself (or your financial advisor):
- Investing and horizons: Is there a way to navigate both the near-term and long-term landscapes with a single investment stance? For me, there’s one no-brainer in this category, and that’s making energy improvements to your home. Solar hot water can offer a better than 10% return, even without an increase in energy costs. Insulating can offer a payback time of only a few years. In today’s world of 0% interest rates on saved money, the returns offered by energy improvements can be sound investments under any circumstance, but they become fabulous investments in a world of rising energy costs.
- How do I stay informed? There are so many possible things to focus on. How do I filter and condense it all? What do I keep my eye upon?
- What are the key warning signs I should watch, no matter what? My list includes the dollar, bonds, stocks, oil, and gold. I figure that any major shifts will be signaled in these markets well before anything is announced on TV or in the newspapers. The Money & Markets section of our site provides updated data throughout the day on the most common markers I think people should follow. You should consider picking a couple of things to begin keeping an eye on, based on your investment allocations. For example, if you happened to be invested largely in cash and bonds, you'd want to keep a careful eye on the US dollar, because any weakness there will impact both of your holdings. If the dollar suddenly started to weaken significantly, and I held cash and bonds, I would move those assets into gold as fast as I possibly could.
Your asset allocation strategy should be based according to the probabilities that you (and your advisor, if you have one) assign to major trends. For example, if you believe, as I do, that inflation and declining energy reserves are really two of the main stories for the longer-term future, then here are some areas to begin looking into:
- Your resilience: The first investment that you should make is in increasing your resilience. For instance, in case the US attacks Iran and the Strait of Hormuz becomes impassable (a reasonable scenario in the current political climate), you'll want to consider all the possible impacts and shortages that could result from a lack of oil. What would you do if a sudden shock made basic supplies temporarily unavailable or unaffordable? Have you done all that you can around your home to minimize your vulnerability? Our What Should I Do? The Basics of Resilience series is designed to help you identify the non-financial investments that you should seriously consider making in preparation for such developments.
- Energy: My favorites are oil and natural gas producers that have significant reserves in North America.
- Treasury Bills ("T-Bills"): I like these because you can easily move in and out of them (they are very liquid) and they come in very short maturities such as 4-week, 3-month, and 6-month. I place a high value on being able to move rapidly out of any given investment, and these fit that bill. Two ways to participate here are with TreasuryDirect and a Treasury-only money market fund. In every case, I am referring to short-term bills only, not longer-term notes and bonds.
- Gold and Silver: (For my thoughts on this topic, see the reasons described in ‘Buying Gold & Silver,’ above.)
- Treasury Inflation Protected Securities (TIPS): These pay you a percentage premium over the official government inflation rate (the CPI), and this is an 'okay' way to go if you do not want to handle or think about your investments for long periods. I am not crazy about them, because I think the inflation rate is vastly understated, but that is simply my opinion.
My views on the matter have always been clear – protecting wealth is Job Number One. There are ample warning signs that the various governmental stimulus programs in the developed world are not working and that the risk of the recession returning to our official statistics (to differentiate the point that I think it never left Main Street) is very, very high. Now is not the time to play catch-up with your portfolio; now is the time to favor caution over greed and prudence over risk.
As I currently see it, the chance of a 10% advance in the stock market is about the same as a 30% decline. Those are bad odds if you are holding stocks. Additionally, I think that municipalities and corporate bonds are vastly overrated by the (still, for some reason, in-business) ratings agencies and that a renewed recession will begin to expose the rot there as well.
However, I don’t have a crystal ball, and I don't know if deflation or inflation is going to win out over the near term. My personal view happens to favor deflation followed by inflation, but I believe inflation will be more a function of loss of faith in fiat currencies rather than the usual recovery-induced return of the banking credit machine.
In the absence of a working crystal ball, I continue to hedge my bets 30%/70% for a deflation/inflation outcome and therefore favor cash to gold/silver in the same 30/70 ratio. But that happens to be my personal stance, and yours should be tailored to reflect your own situation and personal assessment of the markets and our chances for a lasting recovery. As yet, I do not see one on the horizon, because our fiscal and monetary authorities decided to try and sustain the unsustainable, rather than let the chips fall where they may.
The guidance above is provided to empower you to assume command of your own financial destiny. That said, I do offer personal and business consulting services for a limited number of people whom I think I can help. These can take the form of a one-on-one phone session or a visit to your company to help motivate and align your key employees for the challenges of the coming times. If this is of interest to you and you'd like to learn more or schedule a consultation, click here.
If you have not yet seen the other articles in this series on resilience, you can find them here:
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