by John | Jun 9, 2016 | Liquidity
Holding physical cash makes sense in the event negative interest rates are implemented in the country in which you reside.
Physical cash only meets one of my Five Investment Goal Categories I consider when allocating capital.
Not only that, but it absolutely stinks on the other four.
The US Dollar has over a hundred year history of going down in value. The US Dollar does not appreciate or pay any interest, does not generate monthly income and is very vulnerable to geopolitical risk.
Why would I hold onto something I know will go down in value?
Even though the US Dollar fails in four out of five categories it excels at one: US Dollars are EXTREMELY LIQUID.
Cash dollars are accepted across the United States. US dollars are also the global reserve currency and accepted around the world.
I Want Cash if there are Negative Interest Rates
One of the things I believe is coming are negative interest rates. Negative interest rates would mean that a percent of the money in your bank account would be removed and given to the bank.
You’d be paying the bank to store your money.
If you think this is crazy you’re right. But it’s already being done in places like Japan and Europe.
Regardless of where I lived in the world I would want some of my money in physical local currency.
In the United States, the Federal Reserve has stated they aren’t investigating negative interest rates.
I take this denial as a strong contrarian indicator that they are in fact considering negative interest rates.
Negative Interest Rates
In a negative interest rate environment a person is better off holding cash as opposed to leaving money in a bank account.
I greatly dislike fiat currencies in general and the US dollar in particular. Despite my dislike of holding US dollars they are still needed to buy basic items like food and clothing and pay rent.
If the United States does implement negative rates, rational people would seek to withdraw their money from the bank in the form of cash and so the US government would naturally try to prevent this from happening by imposing limits on how much cash could be withdrawn per day.
I don’t want to be rushing out to the bank to make a withdrawal with everyone else when the Government announces capital controls. I want to be the guy that already has a months expenses worth of cash available.
I prefer smaller bills like the $10 and $20 because higher denominations like the $50 and $100 will likely be banned first as the war on cash intensifies.
Even if I didn’t think negative rates or capital controls would happen in the US (or the country in which I resided) I want to have extra cash available in the event of a natural disaster or when there are power disruptions and credit card readers won’t work.
Holding a months worth of expenses in cash is right for me and provides needed liquidity for my overall asset portfolio.
by John | May 19, 2016 | Capital Appreciation, Geopolitical Risk Protection, Liquidity, Passive Income, Preservation of Purchasing Power
Inflation has reduced the purchasing power of dollars by over 90%. Holding dollars is a sure way to lose value.
You need diverse and high quality investments to protect your purchasing power from the ravages of dollar debasement caused by inflation.
No one likes going to the store to find that a box of cereal is smaller and costs the same price or the same item now costs more.
Inflation is caused when private banks and the Federal Reserve increase the money supply. A larger money supply means there are more dollars in circulation.
This increase in dollars chasing the same amount of goods and services in the economy leads to rising prices or what’s properly called price inflation.
It is common to simply refer to rising prices as “inflation”.
I take steps to protect my Wealth from inflation
You can’t do anything about rising prices, but you can take steps that grow your wealth so that when you need to buy something you have more dollars (or Euros, or Yen) with which to pay the higher prices.
This is what is known preserving purchasing power and is a key concept.
I’m going to talk about two investments that help me meet my investment goals.
At the end of this article you’ll have an opportunity to subscribe to my Newsletter.
Newsletter subscribers receive details on the actionable ways I’ve chosen to protect myself from inflation that you can start doing today even if you only have a few dollars to invest.
These investments are not suitable for everyone and it might not be right for you, but the investment you’ll learn about immediately just by signing up below is an investment to which I’ve personally allocated several hundred dollars.
Let’s jump into two investments that help protect wealth from inflation.
Investments to Fight Price Inflation
8 March 2017 Note: I have further refined my value investing metrics in my article Better Metrics for Value Investing.
Believe it or not, there are certain stocks that trade below their book value.
Investopedia tells us that book value is “the total value of the company’s assets that shareholders would theoretically receive if a company were liquidated.”
So, if a stock is trading at a book value of .5, that means if you could buy all the shares then liquidate the company, you would make 50% per share. Now I’m not planning on buying all the shares of a company and liquidating it, but by purchasing quality stocks below book value there is built in downside protection.
There are other criteria as well, and stocks that meet the criteria are value stocks:
- Price to book less than 1.5
- Price to earnings less than 15
- Return on equity greater than 8% on average per year
- Dividend Yield
Value investing is how folks like Warren Buffet became billionaires.
When I allocate capital, I do so to areas that meet one or more of my Five Investment Goal Categories.
Value Stocks hit on all Five Investment Goal Categories. Value stocks serve to preserve purchasing power, provide capital appreciation, can create monthly income via dividends, foreign value stocks help hedge against geopolitical risk, and stocks tend to be among the most liquid assets.
One such stock I purchased back in October 2015 is Sberbank of Russia, ticker SBER on the London Stock Exchange. I have a offshore brokerage account (which is perfectly legal) that allows me to trade a variety of foreign stocks directly on foreign exchanges.
SBER has a price to book of 1.2, a price to earnings of 13.8, a return on equity of 9.53%% and a modest yield of .4%.
Source: MorningStar.com and TDAmeritrade.com
I purchased 100 shares of SBER at 4.772 USD, my brokerage firm charges me a $40 commission for both buy and sell. Sberbank is currently trading at $7.556 so I’m sitting on an unrealized 58.34% profit.
Not all of my trades go this way of course. I have $10,240 cost basis in my international brokerage account, and my account value is currently around $8,950. So I have both unrealized gains and losses that currently net out to unrealized losses. However, for value stocks, my time horizon is in the 2-3 year range and I’m very confident that in that time I’ll be in the black.
I’ll be devoting future videos and posts to value investing, which I feel is very important.
The second investment I’ll touch on today are Precious Metals.
In my culture we have a saying, “Gold is the money of kings, silver is the money of gentlemen, barter is the money of peasants – but debt is the money of slaves.” Okay, that is actually a quote by Norm Franz from his book Money & Wealth in the New Millennium: A Prophetic Guide to the New World Economic Order but I’ve adopted it.
Gold took a serious pummeling since the latter half of 2011 through 2015. But despite that correction Gold has been up over 15% in 2016 and is up over 240% over the last 25 years. Yes, 240%.
Gold can’t be printed out of thing air and has been used as money throughout human history.
Gold also hits on four of the five criteria to varying degrees. Gold has a 5,000 year history of preserve purchasing power, it is unrivaled in this category.
If gold is undervalued, as I believe it is right now, it could provide capital appreciation (in purchasing power terms, not just dollar terms). Gold is a superb hedge against geopolitical risk, and while physical gold bullion is not liquid at this time compared to fiat cash, it is more liquid than say real estate or a business.
Despite large gains, I believe that Gold is still a great value and will go even higher and so I have chosen to invest a portion of my savings in physical gold.
I began purchasing physical gold and silver in December of 2012 and as a result I’m underwater on some of my positions. I’ve continued to make purchases throughout this time and overall I need gold to rally back to $1,400 to break even, and silver back to $24 to break even.
I would have preferred to have bought gold at the lows of $1,040, but as yet I don’t have a crystal ball that allows me to perfectly time the bottom of markets and I firmly believe that based on the fundamentals gold will make new highs in excess of $2,000.
When it comes to gold I firmly believe that it is better to be early to party than late. If the dollar goes down dramatically in value in a crisis situation there simply might not be any physical gold available for sale.
I also own multi-hundred dollars worth of gold through a relatively new and innovative way to purchase and store physical gold with very little up front investment. The benefit of this new way of owning physical gold is that it is very liquid as well.
Inflation is a destructive force, but with the right investments I’m able to position myself to continue to grow my wealth in spite of rising prices. I’ve discussed two assets I own: value stocks and precious metals that could be helpful as you make your own investment decisions.
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