We never needed the nuclear meltdown survival pack. Thankfully.
When my wife and I moved to Armenia a number of years ago, the U.S. government – who had sent my diplomat wife there – issued new arrivals and their family members an unusual welcome package: A cellophane bag containing a roll of duct tape, a few surgical masks and a small bottle of iodine pills.
The U.S. government handed out these “nuclear meltdown packs” because it was concerned about potential problems at Metsamor, Armenia’s nuclear power plant. With typical Soviet attention to detail, the plant was built on an earthquake fault. So the U.S. government figured it would soothe the nerves of its employees with this baggie of anti-nuclear goodies.
At the time, Armenia was ripping a page out of Ukraine’s post-Chernobyl handbook, by demanding that the European governments that wanted to close the plant pay around US$1 billion to provide for alternate sources of energy. Though an economic minnow with fewer than 3 million people, Armenia’s dodgy nuclear power plant was at the intersection of Europe, Asia and the Middle East. And it understood first-world pressure points: The threat of a nuclear cloud drifting towards western Europe was an exceptionally effective leverage.
Armenia’s approach more or less worked. Russia wound up helping Armenia (for a price, of course), and other countries also pitched in to head off a nuclear meltdown at Metsamor (so far, at least). So we didn’t need to use our nuclear meltdown kit.
Do you have a financial meltdown survival kit?
That’s a nuclear meltdown kit. What about the financial equivalent… that is, are you ready for the financial equivalent of a nuclear meltdown?
What if you lose your job… have a major expense that wipes out your savings… or the bank where you hold your money goes bust? Or there’s a more systemic meltdown like a global economic crisis… a currency crash… or a banking sector meltdown?
Just think back to the last big downturn, the global economic crisis a decade ago. Were you prepared back then?
The first tool you should have in your kit is diversification
The idea behind diversification is simple. It means putting your eggs in different baskets. That is, spreading your risk across different types of assets, so that a decline in value in any one holding isn’t so bad – because there will likely be other holdings that rise to help balance out the losses.
But diversification goes beyond just holding a number of different assets… what if you have your eggs in different baskets, but the truck that’s carrying your baskets (that is, the entire financial system) wipes out? You need to make sure that your eggs are in different trucks. This involves spreading your wealth across different markets and economies and asset classes.
Think of it this way… investing an entire portfolio in your home market (even if it’s spread across stocks, bonds, gold and cash, for example) is like having eggs in lots of different baskets… but all on the same truck. If the truck crashes, you’re in trouble. Because all of these assets are in the same country, they’re correlated.
Correlation is the relationship between two or more assets. It measures what happens to the price of one asset when the price of a different asset changes. When they are negatively correlated, their prices move in opposite directions. This evens out your overall performance when things get bumpy. But when they’re positively correlated, it can spell disaster for your portfolio.
That’s why you need to own stocks and bonds in a variety of markets. You should also spread your savings around in bank accounts in different countries. And if you don’t already own precious metals like gold, now is the time. Gold is one of the most effective hedges against market downturns because its price is negatively correlated to stock markets. That is, when markets go down, gold usually goes up.
What about savings?
Having a rainy-day fund can help you survive any meltdown that comes your way.
Most Chinese citizens are well-prepared for a meltdown in this regard. The average savings rate in China is over 30 percent. That means a third of total disposable household income is put into savings. And the country as a whole recovers around 45 percent of its GDP.
Singaporeans also recover a large chunk. The country as a whole recovers around 44 percent of its GDP. And Hong Kong recovers around 25 percent of its GDP.
Meanwhile, the U.S. is lagging. The U.S. recovers less than 20 percent of its GDP. And according to a 2016 survey, 69 percent of Americans have less than US$1,000 in their savings accounts. And 34 percent have no savings at all.
If any of these Americans are hit with a financial meltdown, they’re at risk of very soon not having enough cash to meet basic expenses.
Then… diversification of a different nature: Of your “personal equity”
When I say “personal equity”, I’m not referring to how much you own of a company, which is the usual meaning of this term. I’m talking about a much more broad definition of your assets – financial and personal and professional experience and prospects and earnings power.
Equity is what’s left after you add up the value of everything you own, like stocks and stamp collections and your flat. Then you subtract what you owe (on your mortgage or to the taxman or your ex-spouse, for example). What’s left is your net worth, or your equity.
But personal equity is about more than what you own now – it’s about how you’re going to build your equity in the future.
I’m talking about where you’ll be earning your living – adding to your savings – in coming years. Where is your paycheck coming from? What other sources of income do you have? Where is your professional network – and how strong is it? How transferable are your skills? How many languages do you speak – and how easily could you work in a different country?
Asking these sorts of questions will help you understand how diversified you really are.
Most people work in the same country where they have almost all of their assets. And even if you do hold some foreign shares or own real estate in another country… when you factor in where and how you’ll be earning money in the future, you’re probably a lot less diversified than you think.
If you’re going to be living in the same place for a long time, maybe forever, it probably makes sense to have a lot of your personal equity in that country. But what if the banking sector goes bust… your home currency massively devalues… the real estate market crashes… or the government starts searching for ways to plug a massive budget deficit, and your assets are all in that country? They’re just cherries for the picking.
What does this mean for you? Think of diversification in a way that encompasses other countries and currencies… and skills and geographies and your backround. If your strategy towards investment – in financial assets as well as your personal equity – is completely diversified, you’ll be a lot better off in the long run.
Editor, International Capitalist
P.S. Over the past 25 years, I’ve lived and travelled all over the world in search of investment opportunities… the type of opportunities that could lead to big – even life-changing – gains. And in my International Capitalist newsletter I’ve shared several big opportunities in markets and easy-to-buy stocks that probably aren’t on your radar. It’s not open to new subscribers… but I’m looking to make it available in coming days. Stay tuned here.