What should we do to PROTECT ourselves?

[kev374]

If we have a bunch of dollars saved up in a high yield savings account what can we do to protect against inflation? It seems the Fed is going to keep cutting interest rates and the dollar may decline tremendously.

A few questions, hopefully we will get some good ideas out here.

Is it wise to invest in gold right now, what is the best way to do it besides physically buying it, meaning what kind of instruments are there that represent value in terms of gold.

Which currencies are a safe bet, particularly what is the opinion on investments in Euros, Indian Rupees or Chinese Yuan.

Regarding India and China I am concerned about inflation in these markets and also the contagion of a US recession to these countries. What could be the spillover effects? India has been having tremendous wage inflation especially in the software sector of almost 15% per year.

There are also massive housing and stock market bubbles in Indian cities where Real Estate asset prices in cities like Bangalore having risen 400% in the last 7 years, a situation similar to Southern California. Credit extension is increasing at a pace of 33% annually which is scary!

[HLS]

We will only know in hindsight what the correct hedge was to protect “buying power” against inflation.
There are many collectibles that hold up quite well, but you need to know what you are doing. (Coins, stamps,antiques,etc)

For most people just having CASH in the bank would be security, which many people haven’t got.
I wouldn’t worry about gambling on what MIGHT outpace inflation.

Just having some dollars to take a hit would be a step up for many.

The best advice is to live below your means and prepare for the worst earthquake/hurricane/storm/tsunami that you could ever imagine, and hope that it only rains. (A 99c umbrella can protect you from that)

I posted the below on another thread:

As I advise my closest friends, at this time, I tell them to get cash in the bank that is FDIC insured to weather whatever storm might be brewing. As much as possible. When you have liquid cash available you can withstand financial curveballs that get thrown at you.

I know people with 2 years (or more) of liquid living expenses in cash, and they still have income streams today.
They have a ton of equity and dont care if home prices go up or down, they aren’t moving away (yet)

I think that people who cannot get into a similar situation are just living beyond their means, and will be “a slave to the man” most of their lives. Living paycheck to paycheck and planning for “retirement” doesn’t work for everyone.

Most people never know the joy of financial freedom, some learn it too late in life. If the storm doesn’t come, you still have YOUR money in the bank, plus some interest.

Better to be prepared than be caught off guard.

Having toys, possessions, stocks, cars, equity etc. won’t pay the bills, allow you to buy food, travel, or enjoy life until it’s turned in to CASH.

Do you know what I think the governments biggest fear is ?
I’d say it’s that people stop spending money. Lowering interest rates sole purpose is to get people to spend money TO STIMULATE THE ECONOMY… Does it really “keep people in jobs” ??

If the govt REALLY wanted to be helpful,
They would let the housing market collapse without intervention. we need an economic cleansing and entire generation or two to understand pain & reality. Reward the people who didn’t buy because they knew they couldn’t afford to.
They would encourage saving by raising interest rates so there was an incentive to save, not spend.
Let people save most of their income and tax them when they spend money on CRAP.
They would rewire the social INsecurity system that is broke like many pensions funds.

Approximately 4% of San Diego homes are on the market today and are virtually unsalable at what people “think” their homes are worth. The other 96% are fooled about their “equity”. Imagine if 10% of homeowners want to cash out at the same time, it impossible as there are nowhere near enough buyers UNLESS the prices are in line with affordability and/or it is attractive to an EDUCATED investor so that they get a return commensurate with their risk.

So as long as there are people afraid of missing out and willing to pay more than someone else, there is a market.

At an auction an unlimited number of people can watch while 2 (two) bidders push a price to the moon.
Does it REALLY eastablish a value that the rest of the world has to agree with ?

The stock market is a legalized pyramid scheme. On a micro scale, you would be thrown in jail for “trading stocks”.
On a macro scale, “everyone’s doing it”

The stock market defies logic. Bad news can make stocks rise, good news can make them fall. It’s all about “Wall Street expectations” Can they beat the street.

That being said, people can definitely make money from the market, EXACTLY like in houses, but not everybody can make money all the time.

No tree grows to the sky. There is a forest fire once in awhile and ALL trees burn down.

It’s a game. Not everybody wins. People end up broke for one reason or another, or in a state of health that money cannot fix.
Play the game if you wish, but if you don’t define your own rules, you are just in with the sheep, following the herd, soaking in the propaganda.

AS A DISCLAIMER, If you got this far, I’m not sure that I believe all of the above, but I enjoyed writing it.
Just think about what COULD happen, and be prepared.
I welcome any rebuttals 😉

[kewp]

What I’ve been doing:

Moved into stable, high-value, recession-resistant employment (IT at a public Uni).(hedge against economic downturn)

Consolidated all debt while adding none, paying down at a rate of a 1/3 my salary monthly. This will roll over into non-US dollar-denominated investments after the debt is gone. (hedge against declining dollar)

Moved into small, inexpensive rented apartment within walking distance of free shuttle to my place of employment (hedge against energy and housing inflation).

Went mostly vegan.(hedge against energy/commodity inflation)

[sdrealtor]

You forgot lining your walls with tin foil to hedge against alien invasions.

[bsrsharma]

What do you think of this:

If you want to protect your cash holdings, how about moving to a good place that was not inflated by the bubble, pay cash and buy a house you can afford comfortably. That way, a good part of your wealth is converted into tangible assets that can’t be depreciated by fiat money. With the remaining funds as safety net, you can live a happy comfortable debt free life. With the modern miracle of telecommuting, you can even work in far away places remotely.

I am very uncomfortable with holding large amounts in gold or foreign currency. Farmland may be good investment (people are always going to eat, even in recessions!), but I don’t know how to buy and lease/rent it to a farmer. If you think you can do some smart organic farming, that may be a profitable idea! (Even the Amish seem to have good life – at least in movies)

[surveyor]

sdr:

my usual afternoon beverage is now all over my monitor because of your comment. kudos.

on a related note:

is it me or are some of the posts starting to sound like the financial equivalent of hypochondriacs.

people, people, it will be YEARS before the doomsday scenarios play out, if at all! certainly there will be short term pain for those some, but the U.S. of frakkin’ A. ain’t going anywhere for awhile.

[bsrsharma]

YEARS before the doomsday

Right!

 Parity with CAN $ 2007

 Parity with Mexican Peso 2037

[Anonymous]

Kev374,

Have you read Peter Schiff’s book “CRASH PROOF?” You should be concerned with the dollar falling and putting it in a FDIC account and keep for fingers crossed is still money lost. Have you considered MERCK Hard Cash fund? Look into it.

[kewp]

is it me or are some of the posts starting to sound like the financial equivalent of hypochondriacs.

I love it!

Enjoy your kool-aid while it lasts, “sdrealtor” and “surveyor”!!!

[waterboy]

I like the farm land/farming idea because even if you aren’t good at it the government will subsidies

[HLS]

BRS,
Why would you want to pay all cash for a home in an area that wasn’t inflated ?
Leverage & OPM is still the way to go.

With a fixed rate mortgage, you end up paying back in cheaper dollars, and if you invest well, you come out way ahead of the game, esp after an inflationary period.

There are areas that are totally immune to the bubble, and even if they decline a bit, I’m willing to bet that they recover and rise faster than our local market.

Having rentals that pencil out in bubble immune areas offer great leverage and depreciation at a much better return than CA. There are tenants almost everywhere.
If it pencils out now, any appreciation should just be a bonus.

Kewp, not sure what your debt % rates are, but there are huge amounts of money available via balance transfer offers that extend interest at 4% or 5% for a few years, leving the cash available at your disposal.

I don’t think there is anything wrong with MANAGEABLE debt.
Save the cash as a cushion and make the monthly payments, esp when you can earn more on the cash than the debt is costing you.

You are pretty conservative, but I don’t think you will be having any financial difficulties any time soon! Good for you.

[sdrealtor]

Not to worry kewp! I’ve got twenty 100-gallon barrels of kool aid in my garage to hedge against powdered drink mix inflation.

get a life!

(sorry bout the monitor surveyor)

[bsrsharma]

HLS: The original poster sounded like he had a ton of cash sitting around and wanted to know if it is a good idea to invest in gold or foreign assets. I think, for his situation, becoming debt free and living a stress free life is preferable to doing something risky (I consider both gold & foreign currency speculation high risk for most piggingtonians. Unless you can lose a million $ and not worry a bit, gold & currency won’t help you). Your suggestion is much better for someone who can manage risk & leverage credit responsibly. Buying a house with mortgage and getting a lower yield on a low risk investment (like a CD) isn’t attractive to me. Renting out a home is also unattractive due to all the hassles of being a retail landlord.

Ideally, I would invest as much as I can in a diversified pool of global funds. Large cap multinationals should be relatively low risk if well diversified.

[HLS]

BRS, we definitely DO NOT disagree.
I don’t think that I am going to state anything that I don’t think you already know.

I don’t know what a “ton” of cash is, He said “a bunch of dollars” and that means different things to different people.

I know people that have had excellent success with property managers, and do little other than deposit checks and read their reports on multi units. I realize that it’s not for everybody. It’s only on paper, but their net worth is great based on returns on their original investment.
Had they paid cash for their house, they would only own ONE property free and clear.

I’ll be the first to point out that leverage can make you rich when you are right BUT it will multiply your losses when you are wrong.

Most wealthy people got there by gains in real estate. Either land or buildings. Leverage is the key.
A 10% gain in real estate can be equal to a 50% gain in stocks.

I think having a PILE of cash today is very conservative, but to each his own, Some people are totally risk averse, and there is nothing wrong with that.
Many people are getting less than 4%, and THAT to me IS silly when you can get around 5.5% FDIC insured.

I personally wouldn’t have any money in the stock market that I couldn’t afford to lose 100%, I think that the stock market has more yahoos involved that don’t know what they are doing than the housing market did. They aren’t financing 100% in stocks, but they also think that the “market” only goes up. I wouldn’t WANT to lose 100%, but many people are counting on the stock market for their retirement gravy train. Shades of 1929 all over again.

Some day reality may kick in to the stock market just like it has with housing, except that while housing is regional,
a downturn in stocks will affect every single square inch of this country and beyond our borders, just like the mortgage mess has. Maybe it won’t happen.

Money CAN be made in stocks, but I pity the people that get left holding the bag. Just two short years ago nobody thought that housing bubble would pop, and many people still don’t accept it today.

I also consider metals or commodities risky. One of these days those guys on late night TV that scream about gold being $1000 might be right, but how much will a gallon of gas or milk be ??

Fortunes will be made, and you can make money from panics and manias when you time it right. Many people just don’t understand cycles.

[Rich Toscano]

Apologies for the plug, but I wrote some thoughts on this very topic (pretty high-level, admittedly) here: http://www.pcasd.com/cash_not_as_safe_as_it_seems

Rich

[Author]

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