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There are a number of risks to the world and its economy out there over the next several decades, e.g.

  • Peak oil
  • Global warming
  • Instability (e.g. a major war or uptick in terrorism)
  • An "unknown unknown"

From the point of view of my investments, what should I focus on to maximise my chances of coming out these events in a good financial position?

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Instead of hedging against these events, consider pulling out of your investments quickly, and into something much safer, when you notice a downturn occurring. –  Robin Green Dec 27 '13 at 19:10
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4 Answers

up vote 5 down vote accepted

If you're referring to investment hedging, then you should diversify into things that would profit if expected event hit. For example alternative energy sources would benefit greatly from increased evidence of global warming, or the onset of peak oil.

Preparing for calamities that would render the stock market inaccessible, the answer is quite different. Simply own more of things that people would want than you need. A list of possibilities would include:

  • Non perishable food (canned, dried, or otherwise)
  • Weapons and ammunition
  • Medical supplies
  • Hand tools

Precious metals are also a way to secure value outside the financial markets, but would not be readily sellable until the immediate calamity had passed.

All this should be balanced on an honest evaluation of the risks, including the risk of nothing happening. I've heard of people not saving for retirement because they don't expect the financial markets to be available then, but that's not a risk I'm willing to take.

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Honestly, if peak oil actually became a reality (instead of a conspiracy theory), investing in oil companies would provide a NICE return if ECON 101 was right about anything. –  JohnFx Aug 8 '10 at 5:13
    
Well, if our usage doesn't change, the oil will run at some point. The risk is that the peak appears very quickly, causing severe dislocation as people adjust to it. If its more gradual, or our usage changes beforehand anyway e.g. because of global warming, then hopefully everything will work out. –  Ganesh Sittampalam Aug 8 '10 at 8:27
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Different risks require different hedges. You won't find a single hedge that will protect you against any risk. The best way to think about this is who would benefit if those events occurred? Those are the people you want to invest in. So if a war broke out, who would benefit? Defense contractors. Security companies. You get the idea.

You also need to think about if you really need to hedge against those things now or not. For example, I wouldn't bother to hedge against global warming or peak oil. It's not like one morning you're going to wake up, turn on CNNfn and see that the stock market is down 500 points because global warming or peak oil just hit. These are things that happen gradually and you can react to them gradually as they happen.

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Are you willing to risk the possibility of investing to prepare for these things and losing money or simply getting meager returns if those crises don't happen?

Just invest in a well diversified portfolio both geographically and across multiple sectors and you should be fine.

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Yes, as with any hedge I would accept some cost. I'd just like ideas on what things would do well under extreme conditions, accepting the flipside that they'll do relatively poorly under normal conditions. I wouldn't predicate my planning on a crisis actually happening, but I'd like some measure of protection if one does. –  Ganesh Sittampalam Aug 8 '10 at 8:22
    
In that case, some form of commodities would be your best bet. Assuming they aren't already bid up to insane levels like Gold is right now. –  JohnFx Aug 8 '10 at 15:46
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If peak oil is a concern, hedge against the effects of high oil prices. Reduce your dependence on the gas pump by moving closer to the places you normally drive, or adjust your lifestyle so that you need less. Buy things now that depend on fossil fuels (there's a long list).

If instability is a concern, invest in a place where the chance of instability is less.

If a freak event is a concern, think through what the consequences would be, and hedge accordingly.

Etc. Etc.

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