The need (?) for disaster hedging

[pedorrero]

I use the term "hedge" with some mis-givings. Mostly that term today seems to mean high-risk investing, for the wealthy. Not exactly what a "hedge" should be, at least to me.

Assume that you are ER and have a steady, fairly reliable income source. It might either be your own investments, via a private or public pension, trust income, or any combination of those.

I believe the following are fairly reasonable assumptios:

1. The continued income (and possibly growth in principal) comes from what is a fairly conventional mix of investments (let's say 60% stocks, 40% bonds.) In the case of a public pension, I argue that it's effectively like a bond, because the payments come from the same sources that pay bond income. Ditto for corporate pensions/bonds.

2. The continued stability (relative) of these income streams depends on the status quo, more or less. Unexpected economic shocks could damage some or all of your income stream.

Question:

There are investments or tactics that could hedge economic disasters. Like most things in life, you can do it to a small or great degree. Is it worthwhile? And if so, to what extent?

My own hedging:

I subscribe (at least long term) to the theory that government(s) tend to do more damage than good to "their" economy over time, and that the damage tends to get worse. Paper money will eventually become worthless. I have history on my side. However, I am not so paranoid as to want to sever ties with civilization, move to the woods, hoard silver, gold, canned food and ammunition, and wait for the end. I come from a family that did just that, and it isn't much fun. If playing Grizzly Adams is your cup of tea, fine, but count me out.

On the other hand, and seemingly much more reasonable, is the hedging option where you just have part of the investments you control in assets that tend to hedge the conventional investments (stocks and bonds). The most accesible of these are gold in all its forms, natural resources, and perhaps real estate. Oddly enough, the list may even include cash or U.S. Bonds (to hedge against a deflationary panic.)

In my own case, some of these have practical implications. Most of my income comes from a family Trust. I have tried to persuade the Trustee to adjust the investment mix to be a bit more defensive (say, skip the junk and corporate bonds, and just have U.S. Treasuries.) I had only limited success: they did put a portion into pure T-bonds. But overall, the assets are a sitting duck for any number of economic ills: runaway inflation, high interest rates, a depression.

If you say "impossible," may I direct your attention to the decade of the 1970s? It was a lousy time for stocks and bonds.

To be fair, the Trust is pretty much asset allocated. It holds some limited positions in REITS, natural resources, etc. But your typical retirement fund (non-government) is going to be basically stocks and bonds.

So a question is: how to hedge? I can only do this with assets I control. During the years I had an IRA, I did in fact hedge. In 10-15 years, I did quite well with often positions in gold stocks or (later) bullion gold coins. So this is a type of hedge. Much of my own wealth is the value of my house, which is a good inflation hedge, but on the other hand, won't do so well in a bad recession or worse. Hmmmmm.

[wabmester]

When I first started to plan my retirement, I came up with sort of an onion strategy.

At the core were hard assets. Enough real estate and fungibles (like gold) that if the world went to hell, I would still have (1) a place to live, (2) a source of (rental) income, and (3) enough fungibles to get me out of the country.

The next layer was bonds to provide me with a long-term source of income for basic needs.

The next layer was stocks for growth. If that allocation went to zero, I'd still be in pretty good shape. If it went up, party time.

The outermost layer was for "exploration." Business seed capital, mostly.

I have since become (a) somewhat less paranoid, (b) more averse to working, and (c) much less fond of real estate. So, I just diversify across several asset classes and countries.

[Anansi]

You may still be worrying just a bit too much. You can't protect yourself from everything. I mean you still haven't done anything to protect yourself from a meteor strike.

[Mwsinron]

Quote:

Originally Posted by Anansi You may still be worrying just a bit too much. You can't protect yourself from everything. I mean you still haven't done anything to protect yourself from a meteor strike.

[clifp]

Quote:

Originally Posted by Anansi You may still be worrying just a bit too much. You can't protect yourself from everything. I mean you still haven't done anything to protect yourself from a meteor strike.

I am assuming that we have a bit of warning for any species ending meteor strike, and my bomb shelter with 3 years of spam and bottled water, generator, windmill, and solar panels, air fliter, shotgun, assault rife, along with my porn DVD collection will put me in good shape. Oh yea I live pretty high up in the hills in Honolulu, so both the Tsumani and the fall out from the North Korean nuclear strike on Pearl Harbor should miss me also.

[martyb]

[martyb]

Quote:

Originally Posted by clifp Oh yea I live pretty high up in the hills in Honolulu, so both the Tsumani and the fall out from the North Korean nuclear strike on Pearl Harbor should miss me also.

[wabmester]

OK, very funny. And very brave, too -- laughing in the face of danger and all.

Here's the way I look at things. My stash might have to last me 50+ years. A lot can happen in 50 years. In the last 50 years, we've had several wars, disasters, etc. Go back 100 years, and it's even uglier.

So, you can laugh in the face of danger. Or you can assume something bad will happen in the next 50 years and take a stab at an exit strategy.

BTW, a kayak might come in handy during a tsunami.

[yakers]

If you think things will really break down your family & social network may become more important than financial assets. Any relatives with a farm?

[bbuzzard]

Good question. Every now and then my paranoid side comes into control and I wonder if I should have 2-3% of my stash converted to gold and cast into the grade beam of my house. I actually think this is not a totally ridiculous idea, and in fact I have about $2000 in silver in the gun safe. I figure the silver plus the rest of the contents of the safe would at least get me through the first stages of anything really bad. In fact, the 5000 round of ammo might actually be more valuable than the silver if it came to that. I also have two kayaks .

I then realize that I could not tell anyone that it was there, and when I die the gold in the grade beam, which would be worth more than the house, would be given to someone else when the house was sold. Yikes!

Anyway, would it really be that bad of an idea to keep 2-3% of your assets in silver and gold? Is it paranoid or reasonable? I am also looking at a 50 years life for my portfolio. Basically, you accept a 2-3% reduction in the standard of living for some insurance against something like Germany after WWII, Iraq after the first Gulf War, or equal.

It sounds like I am already paranoid by there is an innocent explanation. I inherited the silver and just never bothered to sell it. I purchase ammo in bulk because my son and I target shoot about every other weekend, and it is much cheaper (much, much cheaper) to purchase 5,000 rounds at a time. I pay 0.15-0.20/round for what others pay 0.60-1.00/round. This is actually a recycle tissue kind of thing.

[Mwsinron]

Quote:

Originally Posted by wab OK, very funny. And very brave, too -- laughing in the face of danger and all. Here's the way I look at things. My stash might have to last me 50+ years. A lot can happen in 50 years. In the last 50 years, we've had several wars, disasters, etc. Go back 100 years, and it's even uglier. So, you can laugh in the face of danger. Or you can assume something bad will happen in the next 50 years and take a stab at an exit strategy. BTW, a kayak might come in handy during a tsunami.

Or a terrorist can set off a nuke in my city. You cant plan for everything and life is too short to worry about things basically out of your hands.

[wabmester]

Quote:

Originally Posted by Mwsinron Or a terrorist can set off a nuke in my city. You cant plan for everything and life is too short to worry about things basically out of your hands.

I always liked that AA prayer:

God grant us the serenity to accept the things we cannot change, courage to change the things we can, and wisdom to know the difference.

Understand the difference between risks you can easily mitigate and those you can't. I originally bought real estate to have a "real asset" core, but the downside was low, and it turned out that the upside was much higher than I expected.

[clifp]

Quote:

Originally Posted by bbuzzard Good question. Every now and then my paranoid side comes into control and I wonder if I should have 2-3% of my stash converted to gold and cast into the grade beam of my house. I actually think this is not a totally ridiculous idea, and in fact I have about $2000 in silver in the gun safe. I figure the silver plus the rest of the contents of the safe would at least get me through the first stages of anything really bad. In fact, the 5000 round of ammo might actually be more valuable than the silver if it came to that. I also have two kayaks . Anyway, would it really be that bad of an idea to keep 2-3% of your assets in silver and gold? Is it paranoid or reasonable? I am also looking at a 50 years life for my portfolio. Basically, you accept a 2-3% reduction in the standard of living for some insurance against something like Germany after WWII, Iraq after the first Gulf War, or equal.

Somewhat seriously,

I've menitioned before that my 100 Oz bar of silver become lost/stolen? over the course of a few moves. So while I have certainly read many accounts of refugees escaping from Nazi Germany/Iron Curtain countries/Vietnam trading their gold watches/ jewelry for food and freedom, I frankly don't know if bars of gold and silver will have the same value if the whole system is collapsing. I think people who believe they can protect themselves from a major economic collapse by having 5% of their assets in gold coins or bullion are just kidding themselves.

First and foremost, I don't really think 5% is going to have a major impact increasing my economic or physical survival . Secondly, I have no confidence that the somewhat fly-by night companies hawking gold products will be in a position to physically distribute your gold to you during a crisis. Imagine we have worse 9/11 followed by liquidity crisis like we had after the Oct 87 collapse. Do you really think that these gold companies are going to really have all the gold they have said they are storing for customers? So the other option is to keep the gold at home. I believe that a large stash of gold at home is just inviting trouble, now gold beam is a fascinating idea.


You can get further with a kind word and a gun than you can with just a kind word. , Al Capone
I no longer own a gun, but I can think of many handy reasons to have one. Now while I can't imagine needing 5000 rounds, I have little doubt in a "Jericho" situation that ammo would be more valuable than silver.

I also think owning ones home is a good idea because property rights are so entrenched in this country that even in an crisis, only the really bad guys or the government would confiscated it.

[CyclingInvestor]

Quote:

Originally Posted by clifp Oh yea I live pretty high up in the hills in Honolulu, so both the Tsumani and the fall out from the North Korean nuclear strike on Pearl Harbor should miss me also.

So, just how high do you live ?

http://www.soest.hawaii.edu/SOEST_Ne...s/Megatsunami/

--A Gigantic Tsunami in the Hawaiian Islands 120,000 Years Ago

[clifp]

"They conclude that Alika 2 threw up a gigantic tsunami which surged across the terrace and penetrated almost 4 miles inland, smearing fossil-laden sand up to at least 1,600 feet elevation. "

1100' and about 4 miles inland, I think I can run up the remaining few hundred feet if my life depended on it.

But thanks for adding an uber killer tsunami to my list of worries

[chinaco]

I thought about liquidating everything and buying gold coins. The only problem is when the tsumani hit... I would not be able to run fast enough trying to carry all of it with me.

Seriously, hedges are an important strategy. I have not factored in world wide chaos or the collapse of western civilization into my portfolio management model.

If something catastrpohic occurs that really rocks the world-wide financial system.... hard assets are probably the best way to go. There are many problems owning hard assets (actual gold bullion or coins). If you own the paper... there are just as many things that could mess your day up in this electronic world of ours.

The most likely disaster scenario now days is terrorism. Some of those scenarios are very frightening. Especially biological, chemical, and nuclear.

One could make a reasonable case for holding some small % of their portfolio in hard assets. But, the event would probably not happen in your lifetime. If it makes you sleep better at night, to lock away $100k in gold coins. You can do so. I do not believe you would lose money from it. Over the next 25 years, you picked your time and intended to liquidate when the prices looked right.

[Gearhead Jim]

It seems to me that we should decide to protect against disasters using a combination of:
How likely is this disaster?
How badly would it effect me?
How difficult/expensive is it to obtain effective protection?

As mentioned above, normal stock/bond portfolios did not protect very well against the conditions in Japan.

TIPS are probably the best protection against any financial disaster short of a total economic collapse. You get protection against both inflation & high rates, or stagnation & low rates. Of course you give up the potential upside of equities, so I wouldn't recommend anything like an all-TIPS portfolio. But putting a significant portion of your fixed-income investments in TIPS seems like a good idea.

What do you think?

[haha]

Quote:

Originally Posted by Gearhead Jim What do you think?

I think it is a good idea, and I have done so to a considerable extent with TIPS and also with ISM/OSM as discussed on this forum.

They lack the potential for speculative pop that many other assets have, but right now these inflation indexed bonds are the single largest category in my port, followed by oil and gas. During the last oil stock decline a few months ago I liquidated some T-notes and bills and re-loaded on O&G.

IMO, O&G will be the biggest asset story of the early 21st century. Don't leave home without some!

Ha

[wabmester]

Quote:

Originally Posted by HaHa IMO, O&G will be the biggest asset story of the early 21st century. Don't leave home without some!

I hope you're right. I bought a huge slug of energy stocks when oil dropped down to $50/bbl. Now I can stop taunting you with my oil bear spiel.

[bbuzzard]

Obviously, you want to hedge in entities that own O&G, not just produce it. IYHO, what is the best way to do this other than owning your own wells?