Tuesday, May 4, 2010

The Future… as a Large, Sullen Stranger


By Scott Burns

Q. How about a column on bad times? What happens to different investments if our country goes bankrupt? Or if terrorists do something really bad in a major city? I am 78 years old and want my investments to be as safe as possible.—J.P., by email from Amarillo, TX

A. Most people think the recent bear market was about as close to truly bad times as they want to contemplate. Stocks fell about 50 percent. Lots of debt went bad. Yields on everything secure fell to nearly zero. And it is difficult to sell a house, car, or boat. The current recession beats everything in living memory except for the worst years of the Great Depression.

That's pretty terrible.

In spite of that, most people still own their homes; most people still have jobs, and retirees still have Social Security and Medicare. People are still eating in restaurants and going to movies. Yes, they aren't eating out as much, and lots of purchases are being deferred.

Some deferral is obvious, such as cars. Some is subtle. Recently, an oral surgeon told me that people who would normally have had corrective procedures were electing to defer operations.

Of course, it could get worse.

The question is whether it is possible to protect yourself from truly bad times. Even the highest quality railroad bonds wouldn't have protected your future in Czarist Russia before Lenin. And the French have good reason to prefer gold over paper money. Extremes, however, are extreme— a portfolio designed for an improbable event may serve you well for a 5 percent probability event, but it will fail miserably the other 95 percent of the time.

The world is also filled with mixed signals. The dollar may fall against gold, but it may rise against the Euro. Remember, they've forgotten to have children in Europe. And some European governments are even more profligate than ours is, witness Greece. Not to mention Spain and Italy.

The best we can do is prepare on two levels.

Level one is to adjust our living to a world of increasing dysfunction. This requires paying off debt and increasing savings. It also requires broad diversification of financial assets. It means being flexible and"at the ready" It means facing every day with your feet planted for action, as though you were a constable serving an arrest warrant on a large, sullen stranger.

Level two is to prepare for chaos. This means being prepared with emergency food, water, fuel, and other supplies as though you were going to live through a major disaster like hurricane Katrina. Significantly, the last two years have seen a growing number of books devoted to exactly how to do such preparation, and it can be done with a relatively small"investment"


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