Investment strategy if US Debt Crisis

[jm67]

In looking at recent political developments, it seems like the only thing that US political parties agree on is increased deficit spending.

If the US debt becomes unsustainable, and we enter a Greek style crisis in a few years, what's the best investment strategy to pursue now? My financial advisor has basically told us there's nothing to be done - basically diversify slightly toward international holdings, and hope for the best. Is that the only option, or should be be looking at other, more creative investment strategies? FYI, right now I have the usual AA of 401K, mutual funds, and bonds, mixed in with some rental income.

 

[bingybear]

udn before the dollar crashes.

 

[cbo111]

I have the same concern. My current plan is to buy a couple 2020 Corvette C8's with the new mid-engines, one to drive, and one to hold for investment. What a sweet automobile! DW is not overly thrilled with my plan.

 

[Aerides]

I don't share your pessimism - at least not as far as a "greek style" crisis being anywhere near a reality. But if we do, there is little that an individual could do.

That said, we keep a small number of years of expenses in cash (CD's). That allows us to ride out any reasonable recession without touching investments, and we re-balance as needed.

PS, as a new member, welcome! We invite you to introduce yourself to the community, here's a thread on how to get started:
http://www.early-retirement.org/forums/f26/read-this-before-you-introduce-yourself-65548.html

 

[MichaelB]

I have the same concern. My current plan is to buy a couple 2020 Corvette C8's with the new mid-engines, one to drive, and one to hold for investment. What a sweet automobile! DW is not overly thrilled with my plan.

If you let her choose the color will that help?

 

[Spock]

There are alternatives. Its all about diversification, which also includes countries/currencies/banking systems. Gold is also an alternative as a vehicle for moving into whatever currency comes out on top.

I do not recommend either of these guys, but if you want to start to explore the concept there are websites like Simon Black at SovereignMan or Doug Casey's InternationalMan. Both of these places are all hype to get you worked up and then offers you a subscription to learn about what steps to take. I only mention them as concepts that go beyond what your financial advisor left you with.

 

[mrfeh]

My financial advisor has basically told us there's nothing to be done - basically diversify slightly toward international holdings, and hope for the best. .

This is what I suggest, which is what everybody should be doing regardless of the national debt.

I also suggest not worrying about events with probabilities of < 1%.

 

[RxMan]

I question the importance of international exposure. So many United States companies earn a significant percentage of revenues overseas anyway. Is it really as important to hold international stocks? I’m just wondering.

 

[mrfeh]

I question the importance of international exposure. So many United States companies earn a significant percentage of revenues overseas anyway. Is it really as important to hold international stocks?

Yes.

Do a search at bogleheads.org if you want more feedback/opinions.

 

[pjigar]

I question the importance of international exposure. So many United States companies earn a significant percentage of revenues overseas anyway. Is it really as important to hold international stocks? I’m just wondering.

I don't hold international funds just for that very reason.

 

[GravitySucks]

Gold.
If the US $, the world's trade currency, defaults all the other currencies are going to be hit just as bad if not worse.
Disclaimer, I only hold enough gold to possibly bribe a border guard as I think the risk of the default happening is close to zero.

 

[OldShooter]

I question the importance of international exposure. So many United States companies earn a significant percentage of revenues overseas anyway. Is it really as important to hold international stocks? I’m just wondering.

That thought comes up a lot, but I don't think its an argument to not hold international stocks like Shell, BP, InBev, Volkswagen, etc. I also wonder but don't know what US companies' market share is in non-US markets. Single digits? There's a big world out there with a few billion people working away; the US is only about 5% of the world's population.

Here is an interesting list I found: https://en.wikipedia.org/wiki/List_of_largest_companies_by_revenue Some of these, like Saudi Aramco, are not available to investors, but it is still striking to me that only two of the top ten companies are US-based, though there are a few near-misses. Lots of Chinese companies too. Personally, I don't think its wise as an investor to completely ignore all of this.

To the point of the thread, there are lots of scenarios where the dollar weakens, possibly to a substantial degree. If/when this happens, anything traded on a worldwide basis will go up in price. 20% devaluation = 25% price rise. This includes oil, of course, but also most agricultural products like grains. Granted that we as retirees probably don't worry about big screen TVs going up 25%, but we all consume oil, including oil-derived plastics, and we all buy bread, meat, and some clothing and shoes. All priced on a world market.

Part of the resolution will be to slowly bring manufacturing back to the US, since our labor will be cheaper -- but most manufacturing inputs are again priced on a world market.

International holdings of US investors will also go up in value, but overall a significant devaluation won't be fun.

 

[Ian S]

In looking at recent political developments, it seems like the only thing that US political parties agree on is increased deficit spending.

If the US debt becomes unsustainable, and we enter a Greek style crisis in a few years, what's the best investment strategy to pursue now?

The problem here is a completely false equivalence between the Greek crisis and any kind of crisis the USA might encounter. The Greeks borrowed in euros over which they had no control. The US borrows in dollars over which it has complete control. Yes, printing too many $$ could result in inflation but the apocalyptic scenarios predicted for hyperinflation due to quantitative easing after the financial crisis never materialized. Clearly the conventional wisdom about printing vast amounts of money producing hyperinflation was wrong.

Also, the USA has a far more effective tax collection system than the Greeks. The fact that Americans are required to use US currency to pay their taxes is at least in part why the dollar has value. Also, the fact that the Federal Reserve requires $$ be used in our financial system forces the economy to place value on the fiat $$.

 

[GrayHare]

Diversification is the accepted standard for risk abatement, and that means some % held in the form of real assets such as land and gold.

 

[Animorph]

Since inflation seems to be the likeliest symptom, you should borrow a ton of money at today's fixed rates and as long as possible. When inflation occurs, you pay the loans off with the worthless dollars. At the same time, don't be a lender at a fixed interest rate. Hard assets are supposed to be good. So borrow money, buy gold, pay it back with worthless dollars, and you're set!

 

[marko]

I think seriously preparing for such a scenario is a waste of time at best and prevents one from seeing more realistic opportunities at worst.

I knew a guy who spent $10MM buying overpriced land and moving his family up in the woods of Wyoming (in a $2MM house) because of Y2K.

I'd need binoculars to find this concern on my worry list.

 

[USGrant1962]

The problem here is a completely false equivalence between the Greek crisis and any kind of crisis the USA might encounter. The Greeks borrowed in euros over which they had no control. The US borrows in dollars over which it has complete control. Yes, printing too many $$ could result in inflation but the apocalyptic scenarios predicted for hyperinflation due to quantitative easing after the financial crisis never materialized. Clearly the conventional wisdom about printing vast amounts of money producing hyperinflation was wrong.

Also, the USA has a far more effective tax collection system than the Greeks. The fact that Americans are required to use US currency to pay their taxes is at least in part why the dollar has value. Also, the fact that the Federal Reserve requires $$ be used in our financial system forces the economy to place value on the fiat $$.

This.

The US debt is a problem and may become a larger one when interest rates rise. But it is unlikely to become a "crisis" in any actionable time frame (to use a Bogleheads term). I'm not sure why this question is timely anyway. There was a huge run-up of the debt from 2008 to 2012 (from about 60% to 100% of GDP) which has since dampened, only reaching ~108% in 2019.

As I said, I think the debt is a problem, however I diversify including international and a few iBonds/TIPS, but that is just my AA and not a response to today's debt as opposed to yesterday's.

 

[RenoJay]

Interesting that Greece is mentioned. At the time of their crisis a few years ago their debt yielded around 30%. Today is yields less than 10 year US treasuries! It would have been a great deal to but Greek bonds. The point is, if/when disaster strikes, something will be dirt cheap (and bone-chillingly scary to buy) if you have some sideline cash and a lot of Pepto Bismal.

 

[mickeyd]

I'm nearly 74 and I have plenty of stash and a guaranteed income stream. It's my heirs who should be worried.

 

[papaof2]

Think outside the usual "investing" box

Perhaps think outside the "investing" box. IF things go badly, they will NOT recover quickly. Remember Katrina? Think the .gov can get out of a financial "Katrina" any faster or with any less loss of life?

If things go very badly, you will need basics such as food, water, shelter, heating, etc. Consider buying (or buying an interest in) a farm. Perhaps invest in long term storage foods - dried, canned, freeze-dried. You need a place to keep those things, so an owned house with space for storage (dry basement, unused rooms - NOT an attic). Set up a rainwater catchment system to water your flowers. Store filters to make that water drinkable. Have an alternate heating system and an alternate source of power (solar, wind, hydro depending on where you are). Learn to grow veggies in 5 gallon buckets so you can move then out into the sun during the day and back into the house at night. Do you really think hungry people won't steal food? In better times, I've had 5 gallon cans of gasoline and kerosene "disappear". Expect that to happen to any visible food. Lots more ideas like this.

If things go badly slowly, investing in something that pays higher interest than CDs might be a good idea. AT&T stock closed at $33.81 today. It has paid dividends every quarter for decades. Currently that's $0.51/share/quarter or $2.04/share/year. Do the math - that's 6% interest which very few offer. Not as secure as you think those CDs are (they're not as safe as your checking account which is a 'demand deposit' account) and not as readily accessible but again, where else can you get 6% interest?

Whatever you do, diversify. Remember Lucent? A guy at our church bragged about how great his retirement fund was because Lucent stock was near $90/share. What's it worth today? My brother-in-law's wife made good money at the bank she worked for and at retirement wouldn't hear of diversifying because it was "bank stock" - and they're not in their planned retirement home because they didn't have the $$ to buy it when that bank stopped doing so well and the stock tanked. If you have $$, take care of them. Maybe even keep a few $$$ in your safe. In many circumstances, a basic fire-rated Sentry safe is cheaper than 2-3 years' rent on a much smaller safe deposit box. Get the mechanical combination lock safe, not one of the electronic ones that can be opened with a large magnet in a sock (multiple examples on youtube).

We're not likely to be considered rich (or even well off) but we're pretty much covered for the long haul because we are diversified in investments (beans and rice keep better than some stocks and bonds ;-), the house is paid for and we plan any expense over $300 - maybe only a few minutes of "This vs that; this month vs next month" but no unexpected $1000 expenditures. If your utility providers offer "budget" or "leveled" billing so your monthly payments don't have massive jumps during the year, use it as another zero-cost budgeting tool.

 

[audreyh1]

Maybe if European interest rates rise above ours we could be in trouble. And Japan too.

Until then I'm not so worried.

 

[jm67]

Thanks everyone for the calm & helpful replies. There are some good suggestions for diversification & I appreciate the explanation of how the US is not like Greece. I hope that logic holds true.

 

[HI Bill]

I see the only answer to the OP's concern as complete diversification. International and domestic equities, real estate, and precious metals (not funds). Located in different countries. If you have enough to invest in all of these in multiple countries throughout the world, you can withstand virtually any economic or geopolitical storm. I would think for most, you'd need $21M+ to be able to diversify in such a real manner. (Say, $3M invested in 7 countries). Then, no matter where the SHTF, or whatever its sources was (war, inflation, famine), you could find refuge. The odds are small in one person's lifetime, and the cost is unrealistic to achieve for an individual. JMHO.

 

[Mr._Graybeard]

... Consider buying (or buying an interest in) a farm.

Funny you should mention this. I met the manager of a bond mutual fund this spring -- he bought my father's old farm. It was the third farm property he'd bought in the area that I know of.

 

[2soon2tell]

As long as the US can monetize the debt it is a big problem but manageable. The question is which event happens first runaway inflation or deflation. I believe it is prudent to have 10% of your portfolio in gold and silver bullion just in case TSHTF.