Ask Money

Investing for a catastrophic future

Chris Farrell May 20, 2011

Question: Recently I’ve read doom and gloom predictions about the US economy crashing into a depression as bad or worse as the 1930’s due to the size of the deficit (which we can’t pay off) and the likelihood of the dollar being removed as the world’s reserve currency. The mass media and other financial advisors are not taking about this (head in the sand, etc.). I have my savings in cd’s and mutual funds and don’t know whether to increase the amount in either one, just to lose it all.666137 I have no faith in the FDIC insurance backed by the “full faith” of the US Government when it has no money(!!!) but I lose everything when the stock market will crash. What should I do with my money other than hiding it under my mattress? Susan, Wasilla, AK

Answer: Yes, avoid the mattress! Now, I don’t agree with your disaster scenario, but that’s irrelevant. It’s an interesting question: What to do? I think the safest path is to take diversification very very seriously.

I would spread your money among high quality domestic stocks, international equities, FDIC-insured accounts, T-bills, commodity funds, inflation protected securities, real estate investment trusts, and so on. I don’t know which investment will do well if there is the kind of economic calamity you’re worried about and which assets will plunge. At least with diversification some of your assets should zig while other assets zag.

You might get some ideas from a Kiplinger column by Steven Goldberg. It’s built around the dour insights of investment maestro Robert Arnott. In Alternative Investments to Survive This Economic Storm, Goldberg writes about Arnott concerns about “‘the 3D hurricane:’ deficits, debt and demographics.”

What do you need to survive the storm? Arnott’s toolkit includes emerging-markets stocks and bonds; real estate investment trusts; Treasury inflation-protected securities; commodities; high-yield (or junk) bonds; a long-short fund (one that owns stocks the old-fashioned way but also makes bets that other stocks will decline); and bond funds that can bet on interest rates to rise.

By the way, I find it interesting in that even though I don’t agree that the U.S. government is broke–far from it–I do agree with a strong emphasis on diversification, even for optimists. It’s very easy to paint dire narratives off current concerns. It’s also simple to spin equally positive yarns from a good piece of news here and there. Yet we need to save and invest for everything from emergencies to our retirement despite all the uncertainty. I would ignore the Apocalypse Now crowd as well as the You Too Can Be A Millionaire This Year group. Instead, I would diversify.

Diversification remains one of the most powerful ways to protect your finances from catastrophe.

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