Caveat emptor: While I am not an economist, I have been investing since 1970 and have been a student of economics for many years. The advice provided here is what I plan to do with my nest egg but may not be appropriate for you. Here is an excerpt from Pandemic Economics, an article I wrote in May 2006 on protecting your investments during the Pandemic; the entire article is available for download from the BIRDFLUMANAUL.COM website at this link:
http://www.birdfluma...
Elements of Defensive Investment Strategy
1) Cash invested in short-term US Government only money market funds
2) Gold exchange traded funds
3) Have some enough currency on hand for 3 months expenses and consider purchasing some gold coins (1/10th oz US American Eagles) for personal use in an emergency. These need to be stored in a safe place where you can gain access to them quickly.
While some securities may rise most will fall under pandemic economic conditions. The US Treasury bond market may or may not be a refuge as the value of the US dollar, inflation, sale of overseas holding of US Treasury bonds are powerful influences that are difficult to predict in prospect. For this reason, holding long-term instruments entails risk. On the other hand, short-term US Treasury debt is likely to a relatively safe investment for those seeking capital preservation. Most brokerage houses offer a short term Money Market Fund that invests in US Treasury debt exclusively. As of May 2006, these funds have a 7-day yield of about 4.5% compared with 4.75% for the typical short-term money market account invested in corporate debt (1). The greatest risk for those investing in these instruments is inflation, which could substantial devalue the buying power of the dollar under certain scenarios. Having a portion of a portfolio investing in gold is one way to hedge this risk.
Avoid hybrid US Government Money Market Funds that in addition to hold US Treasury Debt, buy notes from Agencies who are not part of the US Government but whose debt is guaranteed by the US (like Fannie Mae or Freddy Mac). Avoid placing your money in the standard brokerage house Money Market Fund, short-term corporate bond funds, or Municipal bonds, even those rated AAA+ that are insured. While the rate of return on these instruments will be a little higher, repayment of even this high quality debt could be impaired if the country enters a severe economic reversal (2). It would not be prudent to invest money in a high risk short-term “junk bonds” or in the bonds of any foreign companies or governments. Avoid investing with banks or insurance companies or in their debt as they could experience economic reversals during the pandemic. The main reason to avoid these asset classes is because none of the companies or municipal governments who borrow in the Money Market or Bond Market will be able to operate during the emergency and as a result, some of them will go bankrupt afterwards (3). The US Government can print money if it needs to and has the power to tax US citizens in order to pay its debts. This is why US Treasury debt is superior to all other debt instruments and way it commands a lower interest rate.
A gold backed security can be purchased in your IRA or other qualified retirement accounts as well as in an individual account. One way to do this is by purchasing an electronically traded fund or ETF that trades on the New York Stock Exchange under the symbol GLD. Your brokerage houses can advise you on this fund as well as provide you with a prospectus for the GLD ETF. Each GLD share is backed by 1/10th oz of pure gold bullion that is physically held by the underwriter of the security in bank vaults. The value of these shares rise and fall based upon the price of gold.
The US American Eagle 1/10th ounce gold coin can be purchased from coin and gold dealers like Monex.
If you have real estate, you will be stuck with it until either the bank repossesses it from you or enough years pass to allow you to sell it again. It could take many years for prices to return to the levels seen when real estate prices reached bubble proportions during 2005.
In summary, plan how to position your portfolio in the event of a pandemic. As the risk of this event rises, begin executing your plan. Your goal is to have completed your plan implementation before the pandemic and the stamped begins or as soon thereafter as possible.
Footnotes
(1) The difference in rates is because money loaned to the US Government is considered to be the safer than any other US borrower and is virtually guaranteed to be repaid come what may.
(2) Contrary to general opinion, money invested in these investment instruments are at risk. Under usual circumstances this risk is negligible but under conditions of a major pandemic these risks become palpable.
(3) For example, after Hurricane Katrina hit the US Gulf coast, The Entergy Corporation announced that it might place its New Orleans operating unit in chapter 11 bankruptcies due to its lack of revenues in the aftermath of the disaster. The city of New Orleans is also without income and is likely to remain so for many months. It is unlikely that their debt or even interest on it will be repaid any time soon. It is likely that it will need to declare bankruptcy once these debts become due unless it receives a bailout from the State or Federal governments which is unlikely.
Good luck,
Grattan Woodson |
