Yesterday I shared my Student Loan Bubble fears. While I am admittedly not an economist, I see way too many parallels between the student loan situation of today and the housing situation of the 1990′s and 2000′s.
While I don’t suggest anyone go crazy and put their entire net worth into physical gold, I do think it’s important to put at least a small portion of your wealth into something that would be safe in the event of a Student Loan Bubble Bursting, or any other reason for a double dip recession or full-on depression.
I honestly don’t know what would happen if the student loan bubble ends up bursting, but since the government is holding most of the debt, I believe there’s going to be a fair amount of money printing, or inflation, involved in the solution.
The problem with forgiving student loans is that it won’t go over very well with all the people who diligently paid off their student loans or paid for their college education up front. This is a political nightmare and I honestly can’t even think of a solution that would be acceptable to the majority of the country.
Preparing for a Double Dip Recession or Depression
Before I get into the specifics here, I want to clarify that I will personally be moving about 10% of my assets into the financial instruments I mention below. I think 10% enough to give me some wealth in the event of a disaster, but also allow me to continue with my regular financial life. Diversification is a great way to safeguard yourself when you don’t know what’s going to happen (not that any of us really know anyway).
Now think back to the Great Recession of 2008. The stock market tumbled around 50%. The last place you want to be in an American recession or depression is in the American stock market. You would have done well for yourself if you took all your money out of the market in 2007 and held it in cash.
Except if you are worried about inflation (which I would be), you don’t want to hold cash either. $20 today could be worth a pack of gum tomorrow if inflation gets out of control. Here are some good ways to protect your wealth against inflation and general recession and depression.
Treasury Inflation Protected Securities (TIPS)
If you want to make sure your dollars are indexed to inflation, this is a good way to do it. TIPS can be purchased directly through the government or you can get them in a mutual fund such as the Vanguard Inflation Protected Securities. TIPS protect not only against inflation, but also against deflation. When you buy TIPS, the value of your investment increases with the consumer price index (aka, inflation) and you also get semi-annual interest payments. It’s not going to make you rich, but it’s not going to make you poor either, which is the goal here.
They are the safest place to be as long as the dollar maintains its standing as a currency of choice throughout the world. If people around the world lose faith in the dollar, then having a bunch of greenbacks isn’t going to buy anything. If you also consider a student loan bubble bursting soon would mean we have two massive bubbles burst within 3-4 years of each other, you can see how the world might not be too keen on the dollar.
Physical Gold and Silver
I have to admit that I’ve never really understood by people believe gold and silver are inherently valuable. They are just rocks. You can’t eat them if you’re hungry, or drive them to work, or live in them if you need a place to stay. However, these stupid little rocks have been “valuable” throughout the history of the civilized world, so it’s a good bet that they will continue to have value in the future.
The reason I suggest physical gold and silver, as opposed to buying Gold ETFs or funds, is because you will need access to your wealth immediately in the case of a severe depression. Plus, call me a skeptic, but who knows if your Gold ETFs actually have physical gold backing their shares anyway? I definitely don’t recommend a large portion of your portfolio in gold, but do think you should have at least some on hand in case of an emergency.
Here’s a great series on how to invest in physical gold and silver.
If you don’t trust the dollar, you may want to invest in other countries and put some of your wealth in other currencies. The trick here is that you need to find the right company and the right currency, which makes this investment twice as complicated as a domestic investment. It’s no help to invest in a French company bond if the euro takes a nosedive along with the dollar. Being the international investing novice that I am, I prefer a diversified ETF with exposure to many different international bonds and currencies.
I honestly haven’t done the research yet to find my favorite international bond fund, but here is a big list of them. I may do a follow up post in a few days if I do some research and find a few good funds.
Keep 10% of your Investments Ridiculously Safe
I’m usually a very aggressive investor, but with a student loan bubble looming and a double dip recession very possible without even considering student loans, I believe now is the time to lock in some of your wealth and make sure you aren’t completely broke in the worst case scenario. If you think this recession/depression stuff is a bunch of baloney, then you may not want any of your money in these investments. If you are very sure the Dow is headed back to the 6,000′s, then you might want to put 100% of your wealth in these things. It’s up to you.
I’m somewhere in the middle, which is why I like 10%. What are you doing (if anything) to safeguard your wealth for an economic disaster?