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Last financial crisis happened 10 years ago - there is the risk of another one some time in the future. I am middle class worker with an average savings. I know that investing in gold should be safe to minimise damages from the next potential financial crisis. Which other investment strategy should I choose if I want to prepare?

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    How do you define "financial crisis"? What specifically do you think will happen that you want to guard against? – Ben Miller Oct 28 '17 at 13:03
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    I keep a year's worth of food, 500 gallons of clean water, ~100 oz of gold, $50k in cash (assorted bills, and not all US), ~40k rounds of ammo and a dozen firearms in my underground bunker. My greenhouses are equipped with grow-lights for year-round food production, and I keep a few tanks of fresh diesel fuel on hand for the generators and other equipment. While my house has an adequate security system, the out-buildings do not, but should. A water bucket for the helicopter is nice to have, but only important if you don't have a reliable stream/river/lake source on/near your property. – Hart CO Oct 29 '17 at 0:21
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    And that is why @BenMiller 's question is important to answer, because people can have wildly different ideas about what might happen and what it means to be prepared. – Hart CO Oct 29 '17 at 0:32
  • Gold is ‘iffy’ during recessions. In 2008 it dropped 30% before recovering and ending up 4% for the year. I wouldn't consider being down 30% as minimizing damage. – Bob Baerker Sep 28 '18 at 19:46
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How would gold have protected you during the 2007/8 crisis? In no way, shape or form.

The ways to protect yourself at any time are:

  1. A reasonable debt/salary ratio:
    • In other words, don't over-extend yourself on the mortgage, how much the mortgage broker says you can buy with 0% down.
    • Ditto on the cars you buy.
  2. A healthy emergency fund.
  3. Diversified investments
    • Don't follow investment fads
    • If you really think that the bubble is going to pop soon, shift more into bonds. (They recover quicker.)
  4. Don't buy gold and silver. (Hard to pay for groceries with it.)
  5. Minimal CC debt.

Boring, huh?

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    3b is the only one relevant to a oncoming crisis; all others are good advice for everyone at all times. – Aganju Oct 28 '17 at 13:27
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    @Aganju that's my whole point. A fiscally prudent person is always prepared. – RonJohn Oct 28 '17 at 13:35
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    I meant it as a praise, not a critic. – Aganju Oct 28 '17 at 13:38
  • Gold more than doubled in price (UK) between 1 jan 2007 and 1 jan 2009 (331/oz > 665/oz). I would take that... Buying and selling gold is quick, easy, and has a very low margin. But I agree with the rest of this post. – Mike M Dec 19 '17 at 15:18
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    @MikeM "Gold more than doubled in price (UK) between 1 jan 2007 and 1 jan 2009" actually, 82% rise (from 332 on 29-Dec-2008 to 605 on 31-Dec-2008), and only because the GBP lost so much value. In USD, it "only" went up 38% (not including storage fees). And you'd have to know when to sell the gold and get back into the equity market, since gold has gone up -- in USD -- 47% (not including storage fees) in the intervening 9 years, whereas the S&P500 has gone up 288% -- not including dividends. – RonJohn Dec 19 '17 at 15:46
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Those ‘crises’ are only an issue if you need your savings during the time of crisis.
If you have time to sit it out, you should just do that, and come out of the crisis with a gain.

People that lose money during a crisis lose it because they sell their investments during the crisis, either because they had to or because they thought they should.

If you look at historic values of investments, the market overall always recovers and goes over the orignal value some time after the crisis. Investing even more right in the crisisis the best way to make a lot of money.

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Your asset mix should reflect your own risk tolerance.

Whatever the ideal answer to your question, it requires you to have good timing, not once, but twice. Let me offer a personal example. In 2007, the S&P hit its short term peak at 1550 or so. As it tanked in the crisis, a coworker shared with me that he went to cash, on the way down, selling out at about 1100. At the bottom, 670 or so, I congratulated his brilliance (sarcasm here) and as it passed 1300 just 2 years later, again mentions how he must be thrilled he doubled his money. He admitted he was still in cash. Done with stocks. So he was worse off than had he held on to his pre-crash assets. For sake of disclosure, my own mix at the time was 100% stock. That's not a recommendation, just a reflection of how my wife and I were invested.

We retired early, and after the 2013 excellent year, moved to a mix closer to 75/25. At any time, a crisis hits, and we have 5-6 years spending money to let the market recover. If a Japanesque long term decline occurs, Social Security kicks in for us in 8 years.

If my intent wasn't 100% clear, I'm suggesting your long term investing should always reflect your own risk tolerance, not some short term gut feel that disaster is around the corner.

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In the 2008 housing crash, cash was king. Cash can make your mortgage payment, buy groceries, utilities, etc. Great deals on bank owned properties were available for those with cash. Getting a mortgage in 2008-2011 was tough.

If you are worried about stock market crashing, then diversification is key. Don't have all your investments in one mutual fund or sector.

Gold and precious metals have a place in one's portfolio, say 5-10 percent as an insurance policy. The days of using a Gold Double Eagle to pay the property taxes are largely gone, although Utah does allow it.

The biggest lesson I took from the crash is you cant have too much cash saved. Build up the rainy day fund.

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There are a 2 questions you need to ask yourself.

  1. When do you want to "retire" and what will that look like? Will you be working?

  2. What risks will derail your plan?

At some point, you'll either need to stop working or be forced to stop working. It's at that point when you'll need your savings.

So what you're really worried about is - when you'll need to use your savings.

The most common and dangerous risk people face is losing their job and being unemployable or having a health issue. These are "internal risks" that you need to deal with through mitigation (eating healthy, improving your job skills) and risk transference (insurance).

Don't worry about predicting the future. You're making an assumption that there will be another financial crisis in your lifetime, which may be wrong. We could also have a long bull market as well.

There's no way of predicting external risks, so don't worry about it. Your investment strategy should focus on the easy things to control - diversification and asset allocation.

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A somewhat provocative (but not unserious) proposal: Rent, don't buy a house to live in. In 2007/8, the thing that got many people in deep trouble is their mortgage. It's not a productive investment but a speculative bet on what was in fact a bubble and a class of assets that is notoriously slow to recover after a slump.

Before thinking about your savings or buying into silly ideas about gold, you should realise that as a middle class worker, the biggest risk after a crisis is losing your job. Renting your accommodation means being able to downgrade or move very quickly and not being forced to sell a house at the worse possible time. If you really do need to liquidate some of your investments at a bad time, having a more diversified portfolio means that you are not losing everything to meet some short-term obligations.

Assuming you're in the US, this means forgoing some nice tax advantages that might be too tempting to resist (I'm not so I am basing this on what I read on this site) but, bubbles aside, there is nothing that makes real estate a particularly good investment as such, especially if you also live in the house you're buying. You might very well come out on top but you expose yourself to several risks and are less prepared to face a crisis.

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    I had a mortgage in 2007/8, but it didn't go anywhere near affecting me. Why? Because it was a modest mortgage for my salary, in an affordable neighborhood. And renting does not mean that you can downsize quickly, because you signed a lease (typically 12 months). – RonJohn Oct 29 '17 at 13:30
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    @RonJohn Sure, my point never was that everybody with a mortgage is going to be bankrupt when a crisis hit. But there is a higher risk of disaster. “For my salary” suggests you just kept your job, great, but if you want to prepare for a financial crisis, you cannot assume that. – Relaxed Oct 29 '17 at 14:40
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    It's not like that in US. You sign a lease, which is a long term contract between you and the landlord. He doesn't raise the rent during that time, and doesn't kick you out unjustly, while you stay there are pay the rent on time (as long as the building is maintained). In the state where I live, if you leave early, you must continue to pay the rent owed in the lease. (The landlord does, though, have an obligation to make reasonable effort to rent the unit. If it is rented, the previous tenant is off the hook.) – RonJohn Oct 29 '17 at 14:55
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    @Philipp That's exactly my point, paying a mortgage is not always better. The pseudo-common sense about paying your landlord vs. building capital is silly and misleading. Beside tax incentives, the main thing that make it look better is precisely the possibility to partake in bubbles and that come with a lot of risk. And yes there are new bubbles all over the place. In fact, it's this kind of thinking (but a house ASAP) that get people into all kind of debt they should not have contracted. – Relaxed Nov 14 '17 at 15:39
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    @MikeM That's because there was inherent risk in buying property. Ask someone forced into bankruptcy because they bought during the 2007 bubble, if buying was the better choice for them. – Grade 'Eh' Bacon Dec 19 '17 at 15:13
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The answer depends heavily on your personal circumstances.

If you own your house outright, that is better than renting. Its value is irrelevant, you are not selling.

If you have enough cash to last you out, there is no point in investing- why put your wealth at hazard when it would only bring in money you would never spend. (Yes, for a retired person this is entirely possible).

If you have enough cash, then your only counter-party risk is the government that issued the fiat currency. That is one of the reasons that gold is popular- it is free from counter-party risk (but not some others...)

Some above say that you need to state what kind of crisis you are trying to prepare for- if you know that it isn't a crisis for you! By their very nature they are unforeseen (and sometimes unforeseeable). So you need to deal with as wide a range of situations as possible. If you rely on an income then that is probably your biggest risk. How long you can survive without income is an important metric.

BTW it was not the ones with no equity in their property that suffered- they just walked away. Worst case is owning exactly the percentage that it went down...

  • "If you own your house outright, that is better than renting." This assumes that the value of your house remains, while the investments you would have otherwise purchased, went down in value. Buying a house is not really a protection against a 'financial crisis' (which often hits housing prices the worst in an over-leveraged economy). Buying a house is more a protection against the opposite - a booming economy which increases rent you would otherwise be paying. – Grade 'Eh' Bacon Dec 19 '17 at 15:11
  • Yes, if the economy is growing (which it has, with some reversals, for the last few hundred years...) property tends to be a good investment. But your house is also a utility. The investment return is both any growth in price and the saving in rent, But it is not entirely financial- you have more control of your environment. You can largely live the life you want unencumbered by rental agreement clauses (e.g. no pets). Each must make his/her own balance. Betting against property in the UK has been a bad idea for at least 50 years - a very bad idea. Of course, the past is no guide to the future – Mike M Dec 20 '17 at 10:00
  • Remember that the OP is specifically asking about preparing for a possible financial crisis, not how to prepare for a growing economy. And fully agreed that there are benefits to home ownership regardless, but this is a core example of why buying a home carries risk with it. – Grade 'Eh' Bacon Dec 20 '17 at 13:17
  • It is all about taking risks where the upside is greater (size, chance, or both) than the downside. You can be wrong half the time and still win... – Mike M Dec 20 '17 at 21:18

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