A post by Maynard
The other day, George Soros sounded the warning of another market crash. Soros is not our favorite person, but he knows a thing or two about finances.
[Soros] said the same strategy of borrowing and spending that had got us out of the Asian crisis could shunt us towards another crisis unless tough lessons are learned. “The success in bailing out the system on the previous occasion led to a superbubble, except that in 2008 we used the same methods. Unless we learn the lessons, that markets are inherently unstable and that stability needs to the objective of public policy, we are facing a yet larger bubble. We have added to the leverage by replacing private credit with sovereign credit and increasing national debt by a significant amount.”
You don’t need to be a doomsayer to be concerned. It may not be the end of the world, but one way or another, further financial turmoil is likely. At the very least, the American government will have to seize a lot wealth in order to service its huge debts and pay the bills and obligations it’s running up. This will likely be done through stealthy means, such as debasing the currency, or a levying new taxes that aren’t exactly income taxes (so Obama can say he didn’t raise your income tax).
While we work collectively to save the world, we must also think about what we should be doing to save ourselves. One particular question is how we can protect our savings, if we have any.
I’m not qualified to answer. I’m just another financial fumbler who wants to set something aside so I’m in a better position to weather the storm on my own nickel. But they didn’t teach us how to save money at Starfleet Academy. So in tossing out a few thoughts, please don’t make the mistake of thinking I know what I’m talking about. I’m posting this more to raise the question than to solve the problem. With that caveat, here are a couple of vehicles that are in my mind.
I’ll start by mentioning our knee-jerk notion of buying gold. You’ve thought about gold, haven’t you? But consider the underlying economics of that decision. Under any sane scenario, gold is a lousy investment. An ideal investment is multifaceted, in that it has practical use as well as appreciation. For example, your house is an investment that you can also live in, or rent to someone else. Putting money in the bank or stock or bond market means you’re allowing someone to make use of your savings for the purpose of building a productive asset.
Therefore, you should only buy gold when you believe your situation allows no productive pathway. That’s when you pay someone to dig a hole in the ground and scrape out an ounce of gold, which you store in your safe deposit box. Nothing useful is produced, and you only profit if the world is generally destroying its assets, in which case your non-productive but stable position rises as the world sinks.
You see why, most of the time, you don’t want to be in gold. Hoarding gold wastes resources and does you no good. But there are moments when gold is the only thing. Maybe this is one of those moments. You’re never really sure until it’s too late.
There are also practical difficulties in buying gold. It gets tricky to invest retirement accounts and other restricted funds in bullion. You can buy mining stocks and funds, which isn’t quite the same. There’s a SPDR that trades on the NYSE, “GLD“. I can’t say whether that’s a good investment.
What about stocks? You probably know the stock market has trended sharply upwards this year. I think this is driven largely by the artificial liquidity of the stimulus environment, rather than any sense of an improved economy. That is, the government has pumped money into the financial system. With interest rates at zero, the stock market becomes an attractive repository. Stock prices reflect an influx of money that doesn’t know where else to go. But if there’s no solid basis to push stocks up, then the current bull market is just another bubble, and it will fall as all other bubbles inevitably do. I’m not saying this is going to happen; I’m just laying out a theory.
Assuming the financial markets will continue with some semblance of normalcy, some mutual funds come to mind. These are Vanguard funds I’m pointing out here. All mutual funds have management fees built into them, but Vanguard’s fees are the lowest in the industry. All other factors being equal, that means a Vanguard fund will put you farther ahead.
If I had to pick a single mutual fund for my own assets, it might be Vanguard Wellington. Wellington is a balanced fund, with about two thirds of its assets in major stocks, and a third in quality bonds. It’s an ancient mutual fund, launched in 1929. That gives it a long history of surviving both bulls and bears. However, it’s not immune to hiccups. The collapse of 2008 knocked down a $20,000 portfolio to about $14,000. The 10-year return is 6.7%.
The Wellesley Income Fund might be more conservative, in that it focuses on interest and dividends. Its assets are two thirds in quality bonds and a third in dividend-paying stocks. This is generally less volatile, and thus should be a safer bet…and you probably want greater safety as retirement draws near. The 2008 debacle knocked an $18,000 portfolio down to $15,000. Its 10-year return is 7.1%, which is higher than Wellington’s. You would expect Wellington to top Wellesly in the long run, but the turbulence probably disrupted that for this period. Sometimes the short run overruns the long run.
There’s a Vanguard fund for Precious Metals and Mining. This is very volatile, and it, too, crashed in 2008. A $100,000 portfolio dropped to $35,000. Don’t get into this sort of fund unless you know what you’re doing and you’ve got nerves of steel.
There’s one fund I’m very curious about, and I’m wondering if anyone out there can comment intelligently. That would be the Vanguard Inflation-Protected Securities Fund, which invests in Treasury inflation-indexed bonds. Would this provide protection against the surge of inflation that many consider likely to come? On the negative side, the long-ish nature of the bonds (7 to 20 years) would depreciate the base when interest rates rise, as they certainly would with higher inflation. Also, these bonds will take a hit if/when the U.S. bond rating drops (that is, when the world decides Uncle Sam is a credit risk). This fund has been fairly steady over the last 10 years. In 2008, a portfolio worth $18,000 fell to about $16,000.
Of course there are countless ways to invest or save, and I’ve only touched on a couple of them.
I’m investing in shovels because the country is in a hole and we keep right on digging. Which is fortunate because we may soon need to bury this critically injured economy. Maybe we can step up the pace a bit and dig all the way to China…and then we can ask them to borrow even more money.
I have been listening to a mp3 download series called “Financial Sense” since 2004. They lay out the strategies pretty well. They provide a good financial education, based on common sense. I check their facts from time to time, and have yet to catch them in any fabrications, even when their reports seem hard to believe.
Pelosi is pushing a 401K windfall provision that would reduce your social security (SS) benefit by $1 for each $1 you draw from your 401K, or IRA.
Obama hired an “independent” economist consultant from the Center for Social Justice (or similar named group) to make a recomendation for social security’s solvency. She recommended that all 401K and IRA’s should be rolled into SS in exchange for a $600 per year increased benefit. That would apply to a million dollar 401K or $2000 401K, or IRA. Give it all up, and get the same low benefit. Public employees, and Union members would be exempt of course. This got out, and people went nuts. The admin. backed off and said she just made some recomendations — that’s all. Just a suggestion. Calm down.
George Soros is accumulating a large position in gold held off shore in an allocated deposit account. (That means the gold is his personal property, and can’t be leased or loaned out by the depository.)
Warren Buffet began accumulating Silver at such a rate that he got a warning from the feds a la Hunt Brothers. ( To long to go into.) He had 2 million ounces up to that point, and now accumulates through a proxy agent basically.
Russia, India, and China, all resourse rich, are buying gold, silver, copper, lead, Nickel, and other strategic base metals, turning paper dollars into commodities as fast as they can, and are reducing the amount of U.S. treasuries they will buy because they see through the smokescreen of quantitative easing by the fed, which is nothing more than just plain money printing.
What to do? Gold and silver are money. Not just a store of value, but a true exchange of value for value in a transaction. It is for this reason that the Supremes once found that personal “income” was not created when you are paid, but rather the transaction is an exchange of value between to individuals, and therefore no income is derived. Gold and silver mining stocks are also good, but research is needed. You can get hoed down pretty good just taking a broker’s word for what’s hot. Other commodity stocks, and food producer stocks are good. Favor dividend paying companies. ETFs are paper claims on the assets held and can be settled in cash at the funds’ discretion. Not so hot in a meltdown situation.
Though I agree with most of what you said about gold, putting a small portion of your investment portfolio into gold should still be recommended. However, if a worst case scenario developed, then any investment other than physical ownership would probably be lost anyway – remember Argentina nationalizing everyone’s 401K’s a few years back? And when you buy physical gold, there is always a huge spread to overcome before you’re in the black.
But if you have spare cash, and you want to own physical gold, you might consider doing what I’ve known others to have done, and that is… Stake out “snipe bids” on ebay for numerous auctions of gold coins at barely above melt. Sure, they lose better than 90% of the auctions, but having placed so many such bids, they occasionally score.
Still, ebay has its own problems, so unless you know how to spot reliable sellers, I’d say beware.
Other than gold? Dunno. Maybe companies involved in food production? People gotta eat, don’t they? Based solely upon my own faith though, I’d recommend prayer as the absolute best investment.
Well-informed post. How’d you get so financially savvy anyway?
I’m an engineer with an MBA. A nerd on two fronts, I listen to the program I mentioned, and read many of the books they reccomend.
A warning on buying gold and silver coins on E-bay auctions: There are counterfit coins out there. In the 80′s a group successfully counterfitted Krugerands by striking a bonded sandwich of gold and tungsten (heavier than gold) into a blank, planishing the blank and striking it on a real coin press fitted with Chinese made counterfit dies. They weigh, ring and assay perfectly. There are tests like sound reverberation tests that root them out. Fake gold coins used to be cast of 10k gold, and had no ring even if they weigh right. Now there are lots of phonies pouring out of China, and Russia.
The best way to get gold at a fraction over spot is from Kitco.com, or Northwest Territorial Mint. NWTM is a bullion coin striker. They bring it in, assay, strike the bars, or rounds, and guarrantee to buy their own products back at market plus a small premium. The spreads are minimal. I especially like the “Stage Coach Silver” products. They are struck in one ounce, and have four quarter ounce break scores for making change. Cool.
If you need a tank of gas an you have a 100 ounce bar, that’s going to be an expensive tank of gas. Smaller is better. Have the order delivered to you at work, then go to the bank to your safe deposit box, and pretend to put them in there. Where you actually keep them is between you and yourself. Remember Roosevelt confiscated gold. Every fiat currency has gone completely bust in the history of the world. The Russian default happened over nite ( over a week-end) and it can happen here. Start pricing everything you buy in silver and gold. It’s fun. A model “T” cost $450 in 1921, that’s 22 – 1/2 ounces of gold, equal to $24,750 today. You can get a good basic, quality car for that money today.
IloiloKano, you hit the nail on the head, but not necessarily as it pertains to gold. For financial stability, physical ownership is the key. My great-grandmother weathered the depression as a widow with 12 children-because she owned her house out right and never owed anyone anything. Life wasn’t easy-she had to grow her own food and didn’t have much money, but she wasn’t a slave to any bank or to the government. We all need to get out of the cycle of borrowing and spending more than we make. To paraphrase financial guru Dave Ramsey, “the paid for house is replacing the BMW as the ultimate status symbol.” If you own your home and have no debt you don’t have to worry as much about a crash, because you don’t need all that income to SERVICE THE DEBT. Gold and precious metals are an idea, but I wouldn’t consider them unless I was debt free (not even a mortgage or car payment) and had money to invest. I personally would probably go for investing in real estate first however. If you’ve got the money, why not buy some houses and rent them out? There are risks, but the market is pretty much bottomed out right now and they can generate a nice stream of rental income for you-especially if you can buy them outright.
exactly- my mother’s family made it through the depression because they owned their properties. my grandfather worked several jobs his whole life , paid for big purchases like cars with cash and never ever used credit cards. they thought debt, even when renamed ‘building up a credit rating’ was shameful.
if you couldn’t afford it basically you couldn’t have it. they were shocked at my bank when i came in for a check to buy my car- apparently it was an oddity that caused them confusion.why would anyone not want to be enslaved to the bank over their car loan? that’s the whole problem- living within your means is an oddity in our society. that our government reflects this state is no surprise. we have created the urkel. we destroy it by addressing within our own lives where we follow the same damaged ways of thinking and behaving. too many americans order their finances like the federal government does- spend spend spend, buy everything on credit and cry later. is it any wonder why so many do not see why a government can’t indulge this behavior anymore than individuals should?
I don’t care for gold or much of the materials stocks. They are priced high now, are notoriously illiquid, don’t make or sell anything.
My two best ideas are still doing ok. One is panning out now, but is not yet commonplace wisdom, so there’s room. The idea was, in an expanding market with financial troubles, ie credit crisis and low consumer confidence, you need advertising. And though Google is the low priced way to place ads and everyone loves Google, you need traditional agencies to build a consumer’s appetite and interest. I like OMC and WPPGY. Both are at or near 52 week highs, but if you back it up two or three years you’ll see they aren’t that close to a peak value. That’ll come around in the 3rd year of President Palin. OMC is US based, WPPGY is UK based, both are big and international. I like OMC more than WPPGY.
The other is based on the simple observation that ‘cow girls need style’. So there’s The Buckle, BKE. Nicely profitable, physical footprint is almost entirely flyover country, is just starting to expand into the blue coasts — noto bene, they did not (unlike Target) expand and expand into their markets when real estate was peaking circa 2000-2008. About 480 stores, all built or started with cash on hand, no debt, nice dividend, not particularly given to slaughterhouse sales points, great sense of who they are and their market. Likes to give out special dividends every couple years; the last was $1.80 a share. Price is currently depressed because some analyst or another has to pick on something. Store count implies well below theoretical maximum, lots of room for growth. Risk: Obama decides to screw with red states farm subsidies, putting flyover into a depression. It could happen, but haven’t seen anything that suggests that it will.
PS. DOW chemical, and chemicals in general. All of them are still smarting from $17 natural gas feed stocks, though that’s three years ago. Nat gas is now under $4, getting towards a point where it’ll be cheaper than coal for power plants — around $3. Meantime, chemicals are making money again. Risk: Obamanauts with an environmental grudge. Dupont might be a better choice, but I like to root for an underdog.
Stay away from financials, they’re all a house of cards.
I like diversified stocks as a investment because it’s hard to steal everything everywhere all at once. And if these Debtocraps decide to put some sort of big fee (tax) upon selling, I’ll sit em out again. Eventually it’ll be reversed and the portfolio will recover its value.
I am torn about health care. If it turns out that companies shift their healtcare costs to government, then big traditional unionized biz ought to be raking in the dough and their stocks will soar. Or maybe they won’t, so maybe low-headcount no-defined pension biz like much of the tech world will be the ones that do better. These are harder to find, many are staying private (thank you SarbanesOxley). In the former category of bigger succeeds better, add Warren Buffet. If he’s right, and he might be, then tracking behind him and portfolio might be a good thing. Lately, I’ve been muttering into my beard (or beer. It depends) about Verizon who have planted lightfiber in front of my house but have not yet lit it up. They don’t seem to be overspending on their capital costs, but they are investing for the future. One day, it’ll be all turned on and this post and millions like it will be whisked into the intertubes on high speed fiber.
Or not. Do your own guessing.