September is National Preparedness Month, which is a good reminder that we should also prepare our investment portfolios for whatever might happen.
What could possibly happen to our investment portfolios? In truth, outside of the usual threats of recession, inflation and stock market crashes, it doesn’t seem as is if anything else ever materially affects investments. But this is only half-true.
- A widespread, prolonged power outage
- Turmoil in the financial markets leading to a serious drop in the value of the dollar
- A major earthquake that could cripple a large part of the country
- A computer virus that could disrupt the entire internet
- A limited nuclear war
- A serious and prolonged disruption of oil supplies
- A 1929 style stock market collapse (89% decline overall)
I realize that some of these threats border on science-fiction, but each is plausible under certain circumstances. Perhaps the real crisis trigger would be a combination of two or more in a relatively short space of time. And there are probably a whole lot more that could be on this list.
With these possibilities in mind, let’s consider what might be done to prepare for them.
Manage Accounts in at Least Two Different Brokerages
Having your investment portfolio spread between two or more brokerage accounts will provide at least some protection from the failure of one brokerage in the event of a disaster.
It could be an Internet disruption that completely shuts down some firms, but others — perhaps through advanced preparation — manage to keep functioning. It’s applying the principle of diversification beyond investment allocations.
Keep Paper Copies of Any Account Statements
In recent years we’ve all gotten pretty comfortable going “paperless”. That has come about in part because of the obvious convenience of doing business online, as well as a concern to minimize the environmental damage brought on by the use of paper.
But a major disruption to the Internet, or even the power grid, could cause data to disappear. That would mean that the information that is conveniently stored in a brokers computer database can be damaged or destroyed.
Having a paper copy — preferably one you generate once per quarter — could help you and the broker reestablish your account.
Check That You’re Diversified
This is Investment 101, so what does it have to do with emergency preparedness? Everything! What we know and what we do are two very different activities.
During quiet times, and especially in bull markets, investment diversification just doesn’t seem to be that important. It is very easy to increase your stock holdings to 80%, 90%, or even 100% of your portfolio.
Though stocks may be the single best way to make money in your portfolio, they also tend to over-react to negative events.
Just about any serious event will cause stock prices decline, and if it’s really serious — like the events listed above — stocks could plummet. Make sure that you have an adequate amount of cash and fixed income investments in your portfolio to weather just such a slide.
Lay in a Little Gold and Silver
In the past few years, we got a glimpse of how precious metals react to disaster by the spectacular rise in price that occurred during the financial meltdown. The same is true of the bouts with double-digit inflation in the 1970s.
We can debate the investment value of gold and silver over the very long course, but you’re better to have these commodities in a serious crisis than to be without them.
Hold Treasury Securities
The safest of all fixed income investments are US government Treasury securities, and these should make up a significant portion of your “bond“ holdings.
Unlike corporate bonds or even municipal bonds, Treasury securities won’t default (not the least of which because the federal government can quite literally print money to pay them off).
But rather than holding Treasury securities at a bank or brokerage firm, you‘ll be adding an extra layer of safety by buying and holding them directly through the Treasury. You can do this though Treasury Direct.
The government doesn’t guarantee Treasury securities held at brokerage firms, but your holdings in the Treasury itself will be completely safe. It’s yet another way to diversify your holdings in the event that one or more of your brokers fails.
Invest in Resource Stocks
Resource stocks tend to be investment laggards in bull markets – but much like gold and silver, they can do especially well during times of crisis.
A major earthquake, a nuclear exchange, or a prolonged blockage of oil supplies could send resource stocks to the moon. In that kind of environment, everyone will be in need of physical resources, and resource stocks will be the best plays on this shift.
Safely Store Cash at Home
We can easily pay for what we need with debit and credit cards, but that is only true so long as the entire system is functioning without issue.
Should any disaster strike that would upset the banking system, the Internet, or the power grid, your debit and credit cards can become useless.
For just such an event, you should have some good, old-fashioned cash available to meet immediate needs. Figure enough to pay your bills for at least 30 days.
By then, electronic systems should be up and running, even if it still has a few bugs in it. This will also prevent the need to tap your investment portfolio for living expenses, at least in the short run.
None of this is to say that a major disaster is imminent, only that we should be prepared just in case. None of these suggestions require that you turn your investment portfolio upside down in order to accomplish them either.
Rather, you’re making relatively small changes on the fringes that can have a big, positive affect on protecting your investments in the event of a serious crisis.
Do you ever consider these possibilities?