Preparing for the Zombie Apocalypse?

[Tyson]

As I'm starting on my investing journey (got all debt paid off, except mortgage - thanks to MMM!).  I'm still in my learning phase for this stuff and still figuring out my risk tolerance.

Here's my zombie apocalypse question - people talk about managing risk with regard to investing in the stock market.  It seems like there are 2 separate mentalities with regard to investing in stocks. 

1) Stocks take a downturn, Yay!  Stocks are on sale!  Buy more.

2) Stocks take a downturn, Oh no Stagflation/Ubercrash/ZombieApocalypse is here, there goes all my money.

These seem to be correlated to if you are still working a regular job, which would tend to align with worldview 1, vs living off your investments, which would align with position 2.  Is that correct?

Anyway, I find I tend to align pretty strongly with view 1.  But I want to get a better understanding of the ideas behind view 2.  The main idea seems to be that by investing in other areas besides the stock market, that you'll hedge your bets against complete meltdown. 

OK, here's my main question.  If we really do get into a complete stock market melt down situation, doesn't that spill over into ANY other asset, no matter how diversified?  For example, real estate.  If the market completely tanks (and I mean, really, really tanks, not these piddly 13% and 20% drops, but 50% or more), that seem like it would crash everything else too, including real estate. 

If that's correct, then there's really no way to hedge against that, is there?  What am I missing?

[hodedofome]

Some things tend to do well when stocks are in meltdown mode. The US Dollar, US Bonds, gold (sometimes in past history this was true, sometimes not). There were times in the past when real estate was not correlated with the stock market, and tended to do well when the market was not. That wasn't the case in 2008 though. Correlations seem to come and go. It's entirely possible that at some point in the future, the typical asset classes that were a flight to safety will not be. Until then, it's all you got to go on however.

Institutions have used tail risk funds (think Nassim Taleb style trading) or managed futures funds which have, at least historically, been uncorrelated to both stocks and bonds. I was just listening to a podcast of this managed futures fund yesterday, and looked up their performance. It's only been around since 1997, but you can see how they tended to perform well in the past 2 bear markets, while performing somewhat poorly in bull markets. The returns are about the same for both the S&P 500 and this fund, but since they are uncorrelated, by combining them together, you get much smoother returns. http://www.mscapmgmt.com/performance_history.php

These types of funds aren't available to non-millionaire individuals, but a few managed futures funds have tried to package their fund into a mutual fund. The fees for most of those are outrageous, about the only I could recommend would be WAVIX but even then, I don't know if there are hidden fees somewhere. I just know the guys running it are good people.

I don't know if any Taleb-style tail risk funds available in a mutual fund. Most individuals couldn't stomach watching the fund lose money year after year, only to make a bunch in a bad year for the market.

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Most people ought to just have a certain allocation to bonds and pray that it continues to work in the future.

[StockBeard]

If that's correct, then there's really no way to hedge against that, is there?  What am I missing?

Part of the MMM philosophy is that you also invest in yourself, you are able to side-hustle so that you can still bring in money even when the markets are not looking great, and even when bonds, etc... don't look so good either

[hodedofome]

If that's correct, then there's really no way to hedge against that, is there?  What am I missing?

Part of the MMM philosophy is that you also invest in yourself, you are able to side-hustle so that you can still bring in money even when the markets are not looking great, and even when bonds, etc... don't look so good either

Good point


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[Kaspian]

2) Stocks take a downturn, Oh no Stagflation/Ubercrash/ZombieApocalypse is here, there goes all my money.

People have predicting this since.... Oh, ever since the markets were invented.  Are you retiring next year?  No, it says you're "just starting"?  Then diversify and fuggedabout it.    ...And stop reading doomer web sites.  :)

[Tyson]

Right.  I'm just surprised reading about stuff like permanent portfolio where they try to hedge against a super massive decline in stocks.  But my feeling is that if that super massive decline ever actually happens, it will bleed over into everything.  In other words it'll be near-societal-collapse and nothing you do to hedge will ever protect you from that....

[johnny847]

Right.  I'm just surprised reading about stuff like permanent portfolio where they try to hedge against a super massive decline in stocks, but my feeling is that if that super massive decline every actually happens, it will bleed over into everything.  In other words it'll be near-societal collapse and nothing you do to hedge will ever protect you from that....

Based on my limited knowledge of economics, yes, I agree that if we have a super massive decline in stocks, it will bleed over into virtually every asset. And if it bleeds into every asset, your money, regardless of what form it's in, is worthless anyway. At this point bartering systems would pop up (at least, that's what I've read. Zimbabwe is a test case you can read about).

Which is why I wouldn't recommend the permanent portfolio.

[Jack]

The way to hedge against the proverbial zombie apocalypse is exactly like you'd expect:

• Ignore investing; money would be worthless.
• Stockpile weapons, food and other supplies.
• Construct your lifestyle around DIY and independent subsistence. (You're probably much better off already knowing how to subsist before the disaster, rather than trying to learn as you go.)
• Own a fortified, defensible homestead.

Of course, that's for an actual apocalypse where stocks go to zero, not just 50% or something. For normal, minor stuff like stagflation, Great Depressions and Japan-style crashes the strategy is just to not sell and wait it out.

[Eric]

1) Stocks take a downturn, Yay!  Stocks are on sale!  Buy more.

2) Stocks take a downturn, Oh no Stagflation/Ubercrash/ZombieApocalypse is here, there goes all my money.

These seem to be correlated to if you are still working a regular job, which would tend to align with worldview 1, vs living off your investments, which would align with position 2.  Is that correct?

It's my opinion that this is not correct.  There is no correlation to working/not working to excessive worrying over a short term volatile market.  It has much more to do with your investing mindset than it does the milepost marker on your FI journey.  I've been a little surprised by all of the sudden market timing pessimists that suddenly come out of the woodwork.  But many/most of them are still in the accumulation phase.

So I think now is as good a time as any to decide your worldview, and correspondingly your investing philosophy.  Is the world a scary place where things are constantly getting worse, or is this an amazing time to be alive?  Is the market ready for the next crash that will wipe us all out, or is this just part of the normal business cycle?

No one can decide this for you.  And human nature probably works against you here.  But if you can take the long view, the optimistic view, not only will you be able to sleep better, you'll most likely end up with more money.

[innerscorecard]

Right.  I'm just surprised reading about stuff like permanent portfolio where they try to hedge against a super massive decline in stocks.  But my feeling is that if that super massive decline ever actually happens, it will bleed over into everything.  In other words it'll be near-societal-collapse and nothing you do to hedge will ever protect you from that....

You should read either Fail-Safe Investing or The Permanent Portfolio (which focuses more on implementation). I think your question is shown to be a false dichotomy if you look at the different economic scenarios Browne describes. I also think that if you have in fact "made it" (i.e. already retired), avoiding volatility has a value of its own. When I become FIRE, I will be willing to pay for it with slightly lower returns.