Can the value of assets be protected in times of economic trouble? In the free market system, asset values are under the consumers’ diktat. In this environment, one can only succeed at maintaining or growing asset value if one serves consumers better—asset values are never secure. In Western countries (let alone elsewhere), the state often adds uncertainty to that which exists in markets. The current situation is perhaps a good example of state-generated uncertainty. An important question is what to do to protect one’s own assets from (state-generated) inflation and economic turmoil?
What to do will depend on (a) how severe the meltdown is and (b) whether the rule of law and the institutions remain in place as the country goes through the crisis. Here are some ideas:
- Buy non-perishable commodities that hold value and can be stored and protected easily. Gold comes to mind immediately. Gold has been a good hedge against inflation in the last few decades.
- Buy and hold real property for a long time, plus diversify asset location. The Economist, which this week has an interesting article discussing the subject (p. 84), mentions buying a sheep farm in New Zealand. Other countries come to mind: Australia, Hong-Kong, Norway, Singapore, Sweden, Switzerland, and United Arab Emirates. There are others. Check the corruption index and the strength of the rule of law. Holding real property for a long time is a good way to go through the ups and downs of the market without losing money.
- Buy a basket of currencies from Central Banks with a solid (anti-inflation) reputation. Countries that have current account surpluses such as Japan (the Yen) and Switzerland (the Swiss Franc) are mentioned in the article. The New Zealand and Australian dollars could also be considered even though both countries have run current account deficits in the past decade because they are net borrowers and growing. The Euro should also be considered (as long as the Germans are in charge of it) as well as the British Pound. Another issue to consider is where to keep the money. Opening bank accounts in foreign countries is not terribly difficult these days and can be managed remotely easily via the Internet.
- Buy blue chip securities in the same countries you would buy land or currency from, and hold on to them for many years. As Jeremy Siegel has shown, stocks in the long run are a good hedge against inflation and many other economic woes. (And make sure your securities are in your name and not in “street name” so that if your brokerage firm goes bust, you are the true owner.)
Other suggestions? While it may be possible to protect oneself partially from a severe financial meltdown, ultimately, there isn’t much individuals can do to avoid losses when institutions break down.