Author Topic: How much to prepare for the worst?  (Read 2802 times)

put me in coach

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How much to prepare for the worst?
« on: August 20, 2020, 10:25:27 AM »
Hello, thanks for your time in reading and replying.

First, about us: We live in a very HCOL area in California but with my parents for the last 13 months to save money. Partner and I have pretty secure jobs. One of us works in the public sector and earns $107k/yr gross, and they didn't lay anyone off in 2008 or anybody this go-round (yet). The other of us works for a small foundation, $85k/yr; budget is more or less allotted for the position through Dec 2021 at least. Office culture is very open, yet no talks of layoffs or cutbacks. Net worth = ~$180k right now. That's $26k in pension (IRA traditional), $42.5k in 401k, 27k in 457. ~$85k in cash savings. I know. It's a lot, but we're toying with buying a house and it's moving around getting bank/savings bonuses. Foundation employer just upped their 401k contribution to 8%. We will both max out retirement contributions this year. Great credit >775. Cars paid off. 0 debt. We have a new kid, <1 year. We will move out of my parents for sake of sanity by end of year and rent locally. We are looking at buying a house in Oregon and renting it out to my parents. The stars will have to align if that is to happen. New York Times rent/buy calculator says it's essentially a toss up to buy locally where we live now and get some more time in at our current jobs which we love (although they're a decent-sized–albeit trafficless during the pandemic–commute from each other). If we stay long term in this area, we will probably continue to rent.

Now for the questions:
1. How imminent is hyperinflation given the pandemic and economic uncertainty? How much should we prepare against it? What should we be doing with all our cash? Our main concern is our cash savings and how hyperinflation might impact everything including the banks.

2. I'm considering investing ~$15k in precious metals. Advice on that? Would it be considered as an asset if/when we are looking to be approved for a home loan? I'm aware of the recent up-streaks for PM. I'm aware of the risk of having them in your home. I'm aware of the risk of buying from shady folks and shady shipping. I have family that trade PM and connections to folks we can trust.

3. Should we be more aggressive in buying a house given the pandemic and economic uncertainty?

4. How does one generally prepare against hyperinflation during these times? How should someone in our position prepare for it?

GuitarStv

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Re: How much to prepare for the worst?
« Reply #1 on: August 20, 2020, 10:50:53 AM »
Keeping cash savings has historically been a bad idea.  Investment in the market should protect you from inflation.

People tend to panic and invest in metals when things are uncertain.  I don't think that panic is ever a good reason to buy or sell an investment myself.

Nobody can tell you if it's better to buy or rent in uncertain times.  Could go either way depending on a lot of personal factors.
« Last Edit: August 20, 2020, 11:38:51 AM by GuitarStv »

Laura33

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Re: How much to prepare for the worst?
« Reply #2 on: August 20, 2020, 11:04:55 AM »
Do not make any changes as a response to the current situation.  Most of the time, your ideas are wrong, and the world/market tend to go somewhere no one ever expected.  In those few instances in which you're right, you're late, because thousands of absolutely fucking brilliant quants and investment bankers have much better access to market-moving data than you do and get paid a metric shit ton of money to get there first and bid up the price of whatever it is you're now interested in.  Exhibit A:  precious metals.  Oh, and they also have the same access and training to figure out when to get out of that alternative -- leaving normal people like us holding the bag.  And even with all that, most of them still get it wrong!

What you need is an investment plan:  enough stocks to keep you competitive through the up times; enough bonds/commodities/etc. to get you through the bad times; and enough cash to get by if the shit really hits the fan.  Often, major events provide enlightenment:  a huge crash can let you know that maybe you had gotten to aggressive for your own risk tolerance; OTOH, a huge, long bull run tends to persuade people that being in cash and bonds is too conservative (of course, usually they then buy in at the peak and see-saw back in the next crash).  So do not make any knee-jerk decisions now about what to invest in, based on what you've seen over the past few months.  But do reflect on what these changes have taught you about your goals, fears, and risk tolerance.  Then set up an overall asset allocation that you feel you can live with long-term.

Oh:  buying a house should not factor into your investment decisions, other than balancing your downpayment savings with your other priorities.  A house is primarily a consumption and lifestyle decision; if you make money at the end, great, but that should never be the driving factor.  Buy a house if you want to buy a house; if not, don't.

ericrugiero

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Re: How much to prepare for the worst?
« Reply #3 on: August 21, 2020, 07:23:30 AM »
Now for the questions:
1. How imminent is hyperinflation given the pandemic and economic uncertainty? How much should we prepare against it? What should we be doing with all our cash? Our main concern is our cash savings and how hyperinflation might impact everything including the banks.

2. I'm considering investing ~$15k in precious metals. Advice on that? Would it be considered as an asset if/when we are looking to be approved for a home loan? I'm aware of the recent up-streaks for PM. I'm aware of the risk of having them in your home. I'm aware of the risk of buying from shady folks and shady shipping. I have family that trade PM and connections to folks we can trust.

3. Should we be more aggressive in buying a house given the pandemic and economic uncertainty?

4. How does one generally prepare against hyperinflation during these times? How should someone in our position prepare for it?

1.  Inflation is normal and can be expected.  I think it's likely the stimulus measures will increase inflation but I'm not particularly worried about hyper-inflation right now.  (as we inch closer to socialism I do get more concerned.  There seems to be a correlation historically.)  Cash loses value due to inflation so it's not a great place to keep tons of money.  Conventional wisdom is a mix of stocks & bonds to gain more than inflation.  If you are worried about hyper-inflation, that typically affects one country (Venezuela is a recent example).  The best defense against that is probably to invest internationally as well for global diversification. 

2.  I own ~$15,000 in gold and silver that I purchased 10-12 years ago.  It's a nice "safety net" in case society collapses or something but so far I would have been much better off investing that money.  Gold and silver have been valuable way longer than any currency in circulation now and I expect that trend to continue.  However, they don't really gain value like stocks.  I'm not planning to sell what I own but with 20/20 hindsite I wouldn't have purchased.  I'm also not planning to buy more any time soon. 

3.  Personally I wouldn't change my house buying plans either way due to the pandemic.  Buy when/if it makes sense to you. 

4.  As I said above, my best strategy would be a stock/bond portfolio that has plenty of international investments.  That will still be worth something in case the US economy collapses.  In a global collapse we are all in for a rough time. 
« Last Edit: August 21, 2020, 07:27:06 AM by ericrugiero »

Fishindude

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Re: How much to prepare for the worst?
« Reply #4 on: August 21, 2020, 07:48:13 AM »
The best precious metals to have if things went to crap would be brass & lead.

phildonnia

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Re: How much to prepare for the worst?
« Reply #5 on: August 21, 2020, 10:02:46 AM »
I'm not a financial advisor, or an economist, or anything like that.  But I do try to understand what exactly I'm buying, why it's worth what it is, and how it gets its value.

If you think that hyperinflation is coming, then the simple approach is not to be caught holding dollar bills.  If, for example, you own shares in Coca-Cola, then you own a machine that turns corn syrup into a refreshing beverage.  The government could declare pine needles to be legal tender, and you'd still own that machine, and you'd still have value for as long as people find enjoyment in the red can.  This would be true if the dollar remained rock solid; it would be true in the barter economy following the zombie apocalypse. 

Precious metals?  What do they do?  How do they make anyone rich?  As far as I can see, they just sort of sit there.  And you have to pay people to guard it and insure it.  If I had to smuggle my wealth out of Vietnam in 1975, as my father-in-law did, then Gold would be the way to go.  But not as an investment.

As far as buying a house during uncertain times:  We tend to think that whatever is going on this week is the permanent state of the economy.  You should judge the purchase based on the next thirty years, not the previous six months.  You think it's uncertain right now?  Do you have any clue at all where you will be in thirty years?  That's where the uncertainty is.  If there's any certainty at all, then it's pretty much guaranteed that there will be difficult times, probably more than once.  There is nothing special about today that makes such a long-term investment better or worse -- except that economic trouble happens to be on your mind right now. 

« Last Edit: August 21, 2020, 10:06:53 AM by phildonnia »

phildonnia

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Re: How much to prepare for the worst?
« Reply #6 on: August 21, 2020, 10:26:08 AM »
The best precious metals to have if things went to crap would be brass & lead.

I think that's most likely true.  I think the obsession with gold in a doomsday scenario doesn't quite make sense.

Most people anticipating the end of the world hold their emergency gold reserves at a brokerage.  Well, if the usual tokens of value are worthless, no one will be impressed by an E*trade statement showing large printed numbers.  I'm not going to barter rabbit jerky for a piece of paper with some ink on it.

Even assuming that you go full prepper, and actually hold gold in your house or on your person: again, in that world, no one would trade anything edible for some pretty yellow rocks. 

seattlecyclone

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Re: How much to prepare for the worst?
« Reply #7 on: August 21, 2020, 10:57:58 AM »
Yeah I think the gold/silver hoarding is anticipating a very specific type of doomsday scenario. Necessary conditions for this to pay off would have to include:

1) Collapse of national governments, rendering any sort of fiat currency useless.
2) Sustained collapse of electrical and communications networks, rendering any sort of modern payment system useless.
3) Restoration of just enough order in the supply chain for food and other necessities that people actually feel comfortable trading goods for stores of value such as precious metals, instead of demanding something useful in return.

The gold and silver are useless during the immediate collapse. As things start to recover there may be a brief window of opportunity to put that gold and silver to use in a rebuilding economy before we get credit cards and such working again. There are much better things to prepare for, and even in this scenario you'll probably be better off preparing for the time before gold and silver become useful.

We do own a few thousand dollars worth of gold and silver that we have received as gifts from my prepper-leaning father-in-law over the years. The rational thing would be to sell it, but I think he's happier that we have some in the house "just in case." I expect we'll inherit a small pile of the stuff in a decade or two when he passes.

ericrugiero

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Re: How much to prepare for the worst?
« Reply #8 on: August 21, 2020, 12:05:02 PM »
The best precious metals to have if things went to crap would be brass & lead.

True.  The pile of brass & lead  that I have is considerably larger than my pile of gold/silver but not worth as much. 

The nice thing about gold is that it is one of the very few things that has consistently been valuable for thousands of years.  If the Chinese, Russians, etc take over the USA and the US dollar is worthless then gold will still be worth something.  It isn't a particularly efficient way to buy goods in a post-apocalyptic world though.  I wouldn't want to spend a $2,000 Krugerrand on a tank of gas or some toilet paper.

seattlecyclone

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Re: How much to prepare for the worst?
« Reply #9 on: August 21, 2020, 12:42:16 PM »
I wouldn't want to spend a $2,000 Krugerrand on a tank of gas or some toilet paper.

Indeed. Even if you do subscribe to the idea that a return to precious metals for everyday purchases is reasonably likely, you're probably going to be using silver for most everyday transactions. Gold is worth too much.

Metalcat

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Re: How much to prepare for the worst?
« Reply #10 on: August 21, 2020, 01:12:22 PM »
I honestly don't really understand what 15K in precious metals would really do for anyone. It would have to be such a specific situation where it would be of any use, and then, it would have to be a very temporary situation, because 15K isn't very much.

I honestly can't think of a single, plausible scenario that's even remotely likely to happen where 15K of precious metals makes a significant difference in your long term future outcomes. 15K worth of non perishable astronaut food? Sure. 15K worth of guns and ammo? Why not? 15K worth of education in life saving skills and supplies? Sounds like a great idea! Man, it's actually a fun game coming up with ways in which 15K could serve you in a doomsday scenario. 15K worth of metal falls pretty low on my list of things I would spend on to prep for global chaos.

As for housing, buy a house if/when it makes sense for you. The less house you buy, the less you need to stress about what the housing market does, so focus on seeing what kind of housing you can comfortably afford and not have to stress over. If affordable housing can't be found in your market, then think carefully about your housing plans moving forward.

Hyperinflation?
I don't really know how one can hedge against this. You will simply have to decide if you are comfortable banking on your country's economy or not. That's really what it comes down to, because how do you even plan if you think your country might go the way of Venezuela?

Personally, my thinking is that it's more important to factor in hedges against the personal risks as opposed to the global economic risks, which you really don't have many levers to hedge against. The personal risks are over leveraging yourself, divorce, job security, and having limited professional options.

Really, IMO, that last one is a very large risk factor that many people fail to hedge against. That's probably my opinion because I recently lost my ability to work in my own profession, and have been saved by my multitude of alternate professional skills. In the face of a volatile situation, the ability to pivot, change industries, change locations, change type of work, those are the most powerful hedging levers you can have when the professional world is unstable.

Personally, I would think 15K in Mandarin classes is probably a better hedge than 15K of precious metals if we're looking at more realistic scenarios of the US economy falling apart.

mozar

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Re: How much to prepare for the worst?
« Reply #11 on: August 21, 2020, 01:22:05 PM »
I recommend the book "debt, the first 5000 years" to the OP. Fiat currency has been around for thousands of years in various forms.
Before we had "modern" banking systems kings and queens would hoard gold in their castles. I'm not sure how exactly that was useful. You can melt gold. Then what? The whole precious metal market seems based on fear, not store of value.

In a stable country such as the USA the real concern seems to be when everyone panics at the same time. If you had told me that toilet paper was going to be a hot commodity this past spring I would have thought you were crazy. The best reaction to panic is to not panic.

GuitarStv

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Re: How much to prepare for the worst?
« Reply #12 on: August 21, 2020, 04:45:36 PM »
We should also draw a distinction between 'owning' gold/silver as an imaginary component of a portfolio (can't actually be spent so is useless in a really dire scenario) and physically owning bits of gold and silver that (maybe, possibly, in an unlikely event) could be spent.

Metalcat

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Re: How much to prepare for the worst?
« Reply #13 on: August 21, 2020, 05:27:13 PM »
We should also draw a distinction between 'owning' gold/silver as an imaginary component of a portfolio (can't actually be spent so is useless in a really dire scenario) and physically owning bits of gold and silver that (maybe, possibly, in an unlikely event) could be spent.

Well, not really spent, but traded. It's not like precious metals have a specific, agreed-upon value in the event of the collapse of money as we know it.

If you look at it as something to trade rather than something of inherent, definable value, it's starts being clearer that it's a silly thing to depend on. Alcohol would be FAR more valuable to trade.

RetiredAt63

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Re: How much to prepare for the worst?
« Reply #14 on: August 21, 2020, 05:57:56 PM »
We should also draw a distinction between 'owning' gold/silver as an imaginary component of a portfolio (can't actually be spent so is useless in a really dire scenario) and physically owning bits of gold and silver that (maybe, possibly, in an unlikely event) could be spent.

Well, not really spent, but traded. It's not like precious metals have a specific, agreed-upon value in the event of the collapse of money as we know it.

If you look at it as something to trade rather than something of inherent, definable value, it's starts being clearer that it's a silly thing to depend on. Alcohol would be FAR more valuable to trade.

Hmm, Trade goods: seeds adapted to local growing conditions for next year's garden, extra clothing, skills (how to grow those seeds, how to store them so you have food in winter, how to cook it).  I know lots of fibre artists who joke our skills will be needed in the next zombie apocalypse.   Can you take a filthy sheep's fleece and turn it into clothing?  We can.  Carol Deppe actually talks about the food side of this in her book The Resilient Gardener.

put me in coach

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Re: How much to prepare for the worst?
« Reply #15 on: August 22, 2020, 12:19:21 AM »
WOW!

Thanks everyone for your responses. I read all of them.

Is "prepper" an actual term!? :P

Really liked the brass and lead precious metals point. I'm a passifist, but the gamble is hardly expensive it seems. Why not.

Also really liked the point about investing to hedge against personal risk and not just economic risk.

Our risk tolerance is pretty good for long term stuff. It's been pretty easy to not worry about our retirement stuff back in February.

I think the house for us makes sense right now especially with the low interest rates. We'll see if everything lines up.

It's really refreshing to hear this advice.

seattlecyclone

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Re: How much to prepare for the worst?
« Reply #16 on: August 22, 2020, 02:15:31 AM »

Metalcat

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Re: How much to prepare for the worst?
« Reply #17 on: August 22, 2020, 05:14:45 AM »
Yes, "prepper" is very much a term, I'm pretty sure there was even a TV show about preppers at some point. The preppers I know tend to anti-vaxx conspiracy theorists, and yes, they tend to have thousands in precious metals, but can't/won't pay their visa bills.

phildonnia

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Re: How much to prepare for the worst?
« Reply #18 on: August 24, 2020, 09:42:33 AM »
The best reaction to panic is to not panic.

Well, this is actually something of a paradox.  Strangely, when irrationality takes hold of the market, the rational, reasoned, considered response is often to join them.  Notice that the ones that recently kept a cool head and didn't panic also ended up running low on toilet paper.  It's a paradox, as I said.