You need a wealth retention strategy. Here's mine...

We go into some depth on how to really diversify your investments at a time when capitalism itself looks to be risky.

You need a wealth retention strategy. Here's mine...
Photo by Towfiqu barbhuiya on Unsplash

My personal conviction for retaining wealth during any a major world-wide catastrophe is that you should have a diversified portfolio to weather the storm.  That portfolio is going to be diversified as much as possible whilst still being manageable and making sense.  We’re not talking about having stocks from different companies because they are all stocks and when the stock market falls then all stocks fall, some more and some less.  We are by nature contrarian; we’re not following the received wisdom of the financial sages here; we’re thinking outside of the box.

I may mix up my terminology along the way here, but I’m talking about investments as a mixed portfolio of assets.

“Assets put money in your pocket”Robert Kiyosaki, Rich Dad Poor Dad

Assets are things that we own that have a value attached to them.  Our house and all the items in the house could be considered assets, but generally, apart from the house, the contents are of little real value.  You need to be intentional about the assets that you have in your house.  Choose items that are likely to increase in value rather than decrease in value.  This can include Fine Wines and Whiskies; it could include tools and machinery.  It may be a particular car, especially if you know what to look for.  Artwork, is also popular as a collectible.  However, you need a certain amount of skill to correctly appraise these items and to store them correctly so that they retain their value.  So let’s look at my favourite investments.


GOLD & SILVER

Precious metals have a long history of retaining their purchasing power relative to the currency of the day.  We talk about the price of gold going up or down, but it is actually the currency becoming weaker or stronger.  Right now, the price is approximately 1500 USD per ounce.  In 2003 the price was 400 USD per ounce.  That isn’t because gold, got more value, but because the purchasing power of the dollar decreased.  The cost of everything went up during that same period.  Back when my parents bought their house it cost a whopping 10,000 GBP, forty years later the same house sold for 250,000 GBP, but they could still only afford another average family sized home.  Wages increase similarly, we like to think it increases our purchasing power, although it just keeps it at the same level right in line with inflation.  In relation to gold my salary in the UK went down even as my experience went up.  If I’d been paid in gold when I started in 2003, then my salary would have been 90 ounces per year, but by the time I left the UK in 2018 my salary had decreased to 50 ounces per year.  Perhaps this time frame is abnormal but it illustrates the point.  Therefore I consider Gold to be an asset that is easy to store, does not require any technical know-how and will perform better than cash in the bank.  Silver likewise, although you get a lot more for your money so you require a larger storage area.  It has additional value for its use in industry.  Other precious metals are available but are probably not so easily tradeable.  Although jewellery can be a nice way to treat your loved one and get an investment at the same time, be aware that the mark up on jewellery is far above the spot price of the metal.  Therefore I would choose investment grade coins and bars as an asset.


PROPERTY

Already mentioned is property.  Inflation causes the value of property to go up over time.  Over the period that I have been working the value of property did not perform as well as gold, although in my particular town there was a property boom between about 2001 and 2007.  I captured a small part of this boom but then the value of houses went down again due to the financial crisis of 2008/9.  House prices recovered but my house did not outperform my salary during the 10 years I owned it, going from 2.8x my salary in 2005 to 2.1x my salary in 2015.

I value property not for its value retention but for three other reasons:

  • It is easy to understand
  • It is necessary for living
  • It can provide an income

Property is a simple investment in that you can see it, touch it, repair it and even improve it.  It is to a certain extent a liability because it requires us to pay expenses for its upkeep but if the mortgage is cheaper than the rent then it could be a no-brainer to purchase a house.  My personal preference is to purchase the cheapest house that will allow you to live happily.  Also purchase one that has potential for improvements.  Choosing, where possible to do the improvements yourself.

You do need a house to live in, so owning that house means that you are not dependant on anyone.  However, if you own a house by mortgage then you are going to need to keep up with the payments and so can become dependent on monthly salary.  If you can get away from this then all the better.  I am not against mortgages, but I am against being required to pay for something every month.  Whilst mortgages are currently very cheap I would certainly keep a mortgage so that my other investments can work harder, than pay off the mortgage and have no other investments.  The smaller the mortgage the less dependent you are on that monthly salary.

Earning an income from houses is also a very easy business.  There are many blogs about this and I personally had a second house that was being used as a guesthouse.  The cost of the house was about 150 GBP per month for the mortgage and utilities but the income could be over 1000 GBP per month.  The downside is that it is work, it takes time and some problems inevitably will come that need resolving.  Alternatively a normal rental house in my town will make a profit of about 400 GBP per month, which is ok, but I have quite a bit of equity in the home and so the Return on Capital Employed (ROCE) is only 6%.  Again it’s better than cash in the bank.

Alternative possibilities with housing is to buy larger than you require and rent out one floor, or a granny flat.  If you’re single, or your family agrees, then a room could be let out to a student or family member, or friend.  In some cities garages or driveways can be rented by commuters, or maybe a garden or garage office could be created.  Another possibility with housing is the tax benefit when you run a home-based business from one room of the house.  Every person should attempt to start even the most meagre of side hustles just for the tax benefits.


STOCK MARKET

The stock market has without doubt provided the greatest returns over the last century of any other investment vehicle.  And I’m not talking individual stocks, of course there are winners and losers, but the stock market as a whole has made many people rich.  The reason many people can afford to retire for so long having paid so little whilst working is because of the returns.  In the last 10 years, a community of people known as the FIRE (Financial Independence Retire Early) community have brought this strategy to a new level and taken their retirement into their own hands and out of the hands of the actuaries.  Recognising that over a 50 year period, even including the downturns of the 1930s and 1970s, the S&P 500 would return enough to allow a withdrawal of 5% of the capital per year such that the capital would survive for a 33 year retirement.  By reducing this to 4% per year then it is a much more likely that the capital will survive significantly longer than 33 years.  Furthermore, many studies have shown that the average returns of the stock market outperforms 75% of managed funds once fees are taken into account.  So the chances of you or I being in that winning 25 percent is pretty low and would require quite a lot of management on our part and quite a bit in costs.  If we can bring the costs down and the time commitment down then that will make us more likely to achieve our goals.  In the FIRE community, the participants are generally young, 20-30, without children and possibly with a partner who is also earning, what economists might call DINKs (Double Income No Kids).  Especially when they are both graduates with good incomes then they have a lot of disposable income.  They can place this straight into an index fund, minimise their expenses and watch compound interest do its work.  They typically invest 100% in index funds and invest over 50% of their income, sometimes up to 75%.

Now this is an attractive proposition, to invest as much as possible and earn passive income so that you are no longer dependent on a monthly salary.  However, as a prepper, you must always expect the black swan event that could cause the stock market to crash 50% or more.  The crash in itself is not a problem.  Continue investing your income month after month and the stock market should recover and your portfolio will grow rapidly during the recovery.  Studies have repeatedly shown that those who panic sell during a crash, tend to miss out on the recovery and would have been better to just ride the storm.  I have personally done this in 2020, anticipating a large crash due to lockdowns and restrictions, but I did not anticipate a massive money printing scheme holding up the stock market and even causing it to grow.  The take away here is to stick to the strategy.  The very thing the governments of the world did not do when the pandemic arrived!

If you are in Europe, as I am, then I would still invest in the S&P 500 because the returns are stronger than any other stock market, but then I would also invest in your local stock market because then changes in exchange rate will not be so noticeable.  So I would choose 50% S&P 500 and 50% FTSE 250, but we will talk about allocation later in this article.


CRYPTO CURRENCY

Crypto currency is a very recent asset.  Some would say it is an asset class all on its own.  It is similar to stocks in that the coins that you own often fund the company and technology behind the coin.  The downside is that the sector has very few regulations and fraud/scams are frequent.  Also there is no way to attribute a fundamental value to the technology because there is no particular use-case being targeted.  Some coins do seek to solve specific problems in business, but they tend not to be making money by solving those problems but purely through the appreciation of the coin itself.

There is clearly a value to blockchain technology, with governments and banks around the world scrambling to consider how they can implement and use the technology themselves.  The biggest question mark over crypto currency is how will the governments handle regulation.  Recently El Salvador said they will make Bitcoin legal tender.  However, China made all crypto currency transactions illegal.  China, being much bigger than El Salvador, was able to create a major crash across the asset class.  However, the assets recovered within a month or two possibly because of other investors looking to take advantage of the discounted prices.  All eyes are on the US and Europe to how they will respond.

The liquidity of crypto currency is important.  It is very easy to purchase and to sell.  It is subject to large movements due to headlines, social media, and wealthy individuals or institutions etc., but it is not influenced directly by the involvement of central banks.  It will tend to behave as an inflation hedge meaning as more money is printed, the value of money is deflated and the value of crypto currency is inflated, similarly to gold.  But unlike gold it can be bought and sold at very low margins and with very little effort.  Crypto currency still has a relatively small market capitalisation and so will increase in value as it becomes more accessible and seen as lower risk.  This is necessary to stabilise the price as well and see it become more acceptable.

Crypto currency has the added benefit of enabling anonymous transactions similar to cash, but digital and online.  Not all of the currencies are anonymous and how to use it as currency can be found in another article.  I would simply recommend holding some crypto in your portfolio for the next few years as there is a lot of upside potential.  Stick to the top ones though as they will capture some upside whilst limiting downside.  Ethereum (ETH) and Bitcoin (BTC) could be you sole investments.  Again, we’ll talk about this in a separate article.

I need not tell you, that Crypto currency is digital.  It requires a computer, phone, watch or similar to function.  In the event of an Electromagnetic Pulse Attack on the US, then crypto will be of no use, but in the short term it is useful, the same as stocks.


FOOD

We have other articles considering food, and typically it is not an investment but a liability, you need food to live and it costs money every month to get the food you need.  However, inflation causes the cost of food to go up, and during a crisis; food may increase in cost rapidly.  Recently in the US the cost of raw ingredients for Pizzas increased over 100%.  China saw vegetable prices surged just last week due to an anticipated severe winter.

If you have a secure supply of food ready in advance, then you can weather these temporary changes and maybe take advantage if there is opportunity to sell some items.

Only purchase food that you and your family are able to eat though.  When we first stocked up on food we made the mistake of purchasing large amounts of cheap freeze dried coffee, even though we used the freshly ground coffee ourselves.  Ultimately the freeze dried coffee ended up not being used and donated to a food bank.

Get your diet in order now!  Over-eating is expensive and will cause some real issues when trying to stock up.  The same can be said for eating healthy vegetables and tinned vegetables and meat are usually not as healthy as fresh.  But I’m hoping that in the event of a complete collapse of society, it will only take a year or two to establish a regular supply of fresh veg from our own garden.  We’re not doing this currently because we have three young children and we did do this for a short time using an allotment in the UK.  It is a lot of work!  But now we know what is required and we’re ready to pick it up again if we need to.

The recent trend in fasting has helped us recognize that we don’t need as much food as we think we do.  We can skip breakfast (and snacks) and survive until lunch.  Many people survive on one meal a day (OMAD).  I find it a good spiritual practice to restrict your eating, get your body in control.  Your body works for you, your mind, not the other way around.  Make sure you bring it into submission.  This will bring the cost of food down and allow more money to be allocated elsewhere.  This may conflict with health advice elsewhere on this site, as healthy fresh fruit and vegetables, and good quality meat are all more expensive than they highly processed, sugar and oil laden alternatives.  Here you need to find the balance that works for you.


LAND

This could be written about under property or under food so I’m putting it here below both of those sections so that you can understand that farm land has a value.  Usually much lower than residential or commercial land, but the value is that it will typically follow inflation and that it can be used for farming if required.

The difficulty however, is finding it at an affordable price and in a suitable location.  When I lived in the North West of England, then farmland or woodland could be found in the region of 10,000 GBP per acre but often the lot sizes are large making the asking price high, or the location of the land is a fair way from where we lived making it unappealing to visit regularly to maintain it.  Allotments can be purchased privately if you’re simply looking for somewhere to grow vegetables although the prices can be considerably higher than farmland.  Or you may be able to afford a larger house with some land attached, although these are increasingly difficult to find and the scarcity adds to the price premium.  If you can find a larger property then consider ways to reduce the cost by running a business out of it as mentioned above.

My interest in land is not simply to grow food but to provide a more remote location that may be safer for the family, and to take advantage of off-grid technologies that would enable a much cheaper way of living.  Off-grid means that the house would not be connected to mains electricity, mains gas or mains water.  You would therefore not have to pay for any of these services and would be free from supply disruptions and free from price inflation and monthly obligations.  If you were able to build an off-grid property then it is certainly possible to bring the building cost right down and to live mortgage free.  I say, if it were possible, because thanks to building regulations, it very often is not possible.  In the UK, you are not allowed to build on farmland, unless it is an agricultural building to be used for agricultural purposes.  The exceptions to this are if there is, or was, a residential building already on the land then it is possible to restore and extend this property.  Those opportunities go for a premium and that is not what I’m looking for.  My goal would be to erect some temporary housing structure, a house on wheels, or a floating house, and to live in that.  Planning permission would still apply but in this case is easier to obtain.  An earth-ship is probably my ultimate desire, in a location with access to arable land, woodland and water. Time will tell whether this is a pipe-dream, or if we can actually attain it one day.  If we are able to build up a side-hustle enough to pay the bills without working a 40 hour week, then that would leave time to cultivate plants and tend livestock and then we could get permission for such a project.  Alternatively this next year we will start investigating locations in Europe.  We’re currently living near Stuttgart, Germany, where property prices are ridiculous.  Many people here will never own a house and need to rent even in retirement.  That may include us.  If we move back to the UK then we could probably retire 10-15 years earlier simply by not needing a mortgage or to pay rent.


CASH

What I mean by cash is money in the bank and cash at home.  Cash can be important to get through a crisis.  The number 1 reason for having a cash is because emergencies happen and they may not be the emergency we’re expecting.  It could be as simple as a car crash requiring us to purchase a new car.  We don’t want debt!  Debt makes you a slave to your creditor.  However, in certain circumstances we can use it to our advantage, if we are disciplined and frugal, then debt can just be a way to get cheap money.  I’m thinking 0% interest for 1 year.  If you can get it why not, set a reminder in your calendar and start a savings plan so that that debt gets paid off in full before the deadline.  Back to cash though, an emergency fund should cover 3-6 months of wages so that if you lose your job, you can still cover your expenses.  If you’re financially savvy, then you’ll already know what your expenses are and you can make do with 3-6 months of expenses.  Or you don’t keep it in actual cash but have your emergency fund in Crypto currency.

Secondly, cash should be actual cash in the house, because banks may close and bills still need to be paid.  What do you mean banks may close?  This is an increasing risk, like when Lehman brothers (an investment bank), went bankrupt, the same can happen with the local bank.  In 2008 Governments around the world declared that some banks were “Too big to fail”.  Banks were bailed out by governments (money printing) and they were supposed to be made stronger, but ultimately the whole banking system became weaker.  One think that did change, is that now, banks are allowed to steal your money if they need to, they call it a “Bail in”.  If you have money in the bank and the bank gets into trouble, then they can take your money.  Currently this is only true for deposits over 100,000 Euro (85,000 GBP) as far as I am aware.  So that’s not going to affect the emergency fund.  But what else could happen?  If the bank is in trouble, then before it even announces it, it will probably close all the doors and turn off the cash machines.  This will prevent anyone from removing money to get under the protected amount.  It would probably also prevent you from paying your bills and withdrawing cash for groceries or the window cleaner.

Computer systems problems have been known to cause major issues at banks, preventing customers from accessing online and mobile services, sometimes for days at a time.  The ATM networks have also suffered failures preventing customers from accessing cash, although this is less common.  If customers get any idea that the bank may be about to prevent withdrawals then the cash in the ATMs would not last long.

Other currencies besides your own currency can also provide some further diversity to help weather any imaginable economic storms.  If a currency collapses then it tends to do so on its own whilst other currencies survive.  This may not be the case in the future, and the demise of the Euro and Dollar have certainly been prophesied.  Cash however, has the greatest acceptance currently amongst the general population and if your currency quickly loses value then an alternative currency from a neighbouring country is likely to be acceptable to the local shopkeepers.  In Europe we have plenty of choice in Swiss Francs, Polish Zoltys, Croatian Kuna etc.  In the USA you’d go for Canadian Dollars or Mexican Pesos.  The drawback of having your neighbours currency is that the value of the currency will be partly derived from its nearest trading partners and so their value is not guaranteed in any major crisis.  Still, one month’s salary in cash could be worthwhile.   Finally for cash, I believe Russia has massive energy supplies and a strong military, and China is the world’s factory and so I see their currencies strengthening as they work more closely together bypassing the US.  I can gain exposure here by buying Rubles and Singapore Dollars through the Banking App “Revolut”.


ALLOCATION STRATEGY

Now to the allocation strategy that will enable you to retain wealth during any foreseeable crisis:

Step 1. Get a food supply for a couple of months organised if possible, and water for 1 week.

Step 2. Reduce your expenses and start moving all available surplus to savings/investments as follows (Debt is handled in a separate post):

  • Cash in bank (1 month’s salary), Cash on hand (1 month’s salary)
  • Crypto (Bitcoin, Ethereum, one other) (20%)
  • Stocks (S&P 500 ETF, FTSE 250 ETF, Emerging Markets ETF) (30%)
  • Physical Gold and Silver (10%)
  • Land / Property (Equity) (40%)

The percentages given are an indication of my own personal risk profile.  I’ve been dabbling in crypto for a few years now and am happy with the risks.  Stocks traditionally have been very safe and provided good upside potential, however, they could be severely over-valued right now.  That’s 50% of your wealth in liquid, digital assets.  Silver and Gold are not very liquid and really only helpful in the rarest of events, they may have some upside but that’s only of interest if you intend to sell later.  Land and Property is the least liquid asset, but does provide a certain security that the others do not.  It will not be easy to get the proportions exactly as you like for example if you have only just bought the property then there will be very little equity.  Try to increase the equity in the property at the same rate as increasing the savings in all other assets.  If you do not own property then consider investing the equivalent amount into a residential property ETF.

An example:

Every month if you are fortunate to have 1000 € left over then it should be divided as follows….

  • Property ownership you need to work out for yourself (250€ per month is mortgage interest and 250€ is mortgage repayment for example), 250€ represents 25% therefore 150€ could be paid into a residential property ETF to reach the 40% mark.
  • 100€ per month should go toward gold or silver.  4 ounces of silver could be had for around this much, but gold will need to be saved up in a separate account and bought every 6 months or so.  You could use a gold/silver ETF or you could use Revolut.
  • 300€ per month going into a stock broker account.  With 100€ into S&P 500, 100€ into FTSE 250 and 100€ into an emerging markets ETF.
  • 200€ per month going into your Crypto broker.  With 80€ going on Bitcoin, 80€ on Ethereum and 40€ on you other favourite coin.

That is how I’m doing it.  Let me know in the comments if you would do anything differently.

As a side note, I plan to do another article looking at the specifics of each of these points, including how to save in a pension fund or a tax advantaged account.  Essentially, you can replicate the strategy above using ETFs.  Just remember that then it is not really diversified as the ETFs may all share a single management company and the broker is a single point of failure also.