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.
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.
