Wealth Protection…….Protecting Your Assets in Times of Uncertainty

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Wealth Protection…….Protecting Your Assets in Times of Uncertainty

We live in uncertain times. Quite a few huge financial institutions have failed, and others are in deep trouble. Everyone is focused on US fiscal problems at the moment, but there are similar issues around the globe. If things were more certain, this would be a much simpler article to write. Instead, I’m going to give advice on how to hedge your assets against a very wide array of circumstances.

One of the best pieces of advice I’ve ever gotten about traveling is to never keep all of your money in one pocket. It’s not very hard for a thief to pick your pocket. It is hard for the thief to pick 3 or 4 of your pockets. The nice thing about money (and actually part of the formal definition of money) is that money is divisible. You don’t have to (and shouldn’t) keep it all in one place.

There is a ‘Golden Rule’ of limiting risk to a small percent of your account and to NEVER violate this rule. Even a really good brokerage could go under. Whatever bank the brokerage uses could also go under. Sure, US banks have FDIC insurance, but will that cover you if your money is jammed into a corporate account of a US brokerage? (Assuming your money is at a US brokerage in the first place.) Not really. FDIC coverage has limits, and is primarily designed to protect accounts belonging to individuals, not corporations. Also, even if the money is safely insured, what will you do during the weeks (months?) while the government paper-pushers slowly move to straighten things out? Other countries provide wildly varying degrees of protection from bank failure, but none of them will give you instant access to 100% of your cash if your bank fails, much less 100% of your forex account balance if the bank your forex brokerage uses fails.

Once your account approaches a size you feel comfortable with, start taking some money out. Put it someplace safe (maybe spread between personal savings accounts at several well rated banks, maybe stashed securely at home). Wherever you put it, consider this to be your “reserve” account. You can still TRADE like all the money is in your forex account, as long as you don’t spend the part that’s in your reserve account, and as long as you never risk enough of your account to trigger a margin call.

Another thing to consider is compounding your money. By this I mean making profits on your profits. This can work, but you still need to pull some money out to reward yourself, pay the bills, or to donate to worthy causes. Don’t forget that there are some scam brokers who will let you make all the profit you want, as long as you never try to withdraw any. Regularly pulling some profits out of your forex account will give you plenty of warning if you’ve picked a broker like this, so that you don’t waste months or years building up a huge balance only to have the broker steal all of your profits from you.

Something else to consider about compounding – some people seem to have a mental limit to the amount they can get an account up to. Once they hit this limit, the account balance seems to just hover in that vicinity. It’s a psychological thing that affects many (but not all) traders. If it happens to you, pull 20% out and work your way back up to your limit. You may find you can’t ever break it, or you may find that doing this a few times lets you slowly increase your limit. If you can’t break your limit, that’s fine. Just keep pulling some out and working back up to your personal psychological limit.

Another thing to reduce your risk is to have two (or more) forex accounts at different brokerages. When you only have a few thousand dollars in the market, it might not be worth your effort. When you’ve got ,000 or more, do you really want to trust 100% of it to one broker (and to that broker’s bank)?

OK, so far, you should be considering keeping your accounts at more than one brokerage, and you should have a reserve account at a bank (or several banks, or locked away at home). You should also be pulling out some profits every now and then and using that money elsewhere.

You are now safe from being completely wiped out if any one bank or brokerage fails. This is good. But there’s still a lot more you can do to protect your money.

If you still want your money to earn more money for you, there are plenty of other ways to invest it. The returns may be less than forex, but the risks of your forex accounts and all your other investments crashing simultaneously are less than any one investment crashing alone. Your choices will vary, depending on how much of this “excess” money you can afford to invest and what level of fiscal disasters you are trying to avoid.

If you’ve got a LOT of money and live in a country with a stable government and a reliable record of rights for land ownership, real estate is an excellent place to park some money. Currently the USA isn’t the only place dealing with a real estate bubble bursting and a credit crisis. If you’ve got a big pile of cold hard cash sitting around, this is the time to think about hunting for some real estate bargains. You could sell your house and upgrade to a better one, or you could buy some property to rent to others. It’s a big decision, so I suggest you do some major research on the subject before parting with any money. (No, I am not going to write an article about how to avoid real estate scams.)

You could get into the stock market. Just be aware that you can make and lose money in stocks very quickly. It’s better to be a good forex trader (or a good stock trader) than an average forex AND average stock trader (remember, average traders lose money). If you want to have some lower stress stock investments, consider finding some reliable companies that offer shares with a good dividend, and diversify your portfolio (own stocks in companies in several different sectors). Once again, before dropping in any serious money, you need to do some research. I personally only trade stocks only on extremely long-term trades, so don’t have any advice for you on this sector of investment.

You could trade commodities. Once again, it’s better to be a good trader in one market than to be an average trader in two or more markets. Personally, I know VERY little about the commodities market (other than how many ounces of silver equals 1 contract), so I can’t really advise you on this.

CDs and well-rated bonds are generally considered to be very secure, but usually pay low interest. Of course, generally the world isn’t in the middle of a mortgage and banking crisis, so the security these investments provide may be not be nearly as high as a few years ago.

Precious metals are often considered to be a good investment during times of inflation and during major economic uncertainty. Unfortunately, at the moment, the main uncertainty for the US economy is whether it slides into a recession (possibly deep, maybe very deep) or makes a very slow recovery. Either way, there’s not any serious core inflation pressure at the moment (the bulk of US inflation at this time is food and energy related, and those prices are very volatile). As I’m writing this (September, 2008), the dollar has regained some strength, and precious metals prices have fallen quite a bit from their most recent highs. Of course, there are two ways to view this. You can avoid precious metals out of fear they will fall lower, or you can watch closely and try to snap up some bargains. Personally, I’m going bargain hunting.

When I say precious metals as wealth protection, I don’t mean ETFs or options contracts. You can use those as investments if you like, but for REAL wealth protection, there’s nothing quite as secure had having direct possession of precious metals. Paper contracts for gold and silver are supposed to be backed up by physical metals, but the accounting used to figure this out looks like Enron’s last balance sheet before the company finally crashed. Maybe there really is enough precious metal to back all of those contracts, but no one seems to be in any sort of hurry to do a REAL audit to prove it. If the dollar (or whatever your local currency is) did suddenly lose 80 or 90% of its value, would you even know where and how to take delivery on an ETF or commodities contract? This would be assuming the metal was really there to back up the contract and also, assuming someone at the brokerage or commodities exchange hadn’t already “liberated” the metal.

There are some other precious metals traded (platinum, palladium, etc.), but the two best recognized ones are gold and silver. These can be used for general wealth protection, but also are useful for “worst case scenario” situations where economic meltdowns, hyperinflation, and other extreme scenarios occur. This would cause paper money to become nearly valueless and precious metal prices (both in terms of paper currency and in terms of how much they could buy) would go up dramatically. Overall, since physical gold and silver are more widely exchanged than other precious metals, they will generally be easier to buy and sell.

Some precious metals investors focus only on gold and consider silver to be the “poor investor’s metal.” Personally, I prefer silver for a number of reasons (besides the fact that I’m not exactly what you would call extremely wealthy). In the event of a serious economic meltdown, silver is a lot easier to use as money. How are you going to get change from that 1 ounce gold coin when you want to buy a loaf of bread? In quite a few languages, “silver” is one of the words used for “money.” Although gold has also been used as money throughout history, silver was generally used for making smaller denominations – sometimes to the point where the average person would use silver almost exclusively. Silver investing is also a lot cheaper to get started in than gold. Another purely psychological reason for me is I personally find that a pile of silver worth about 00 is much more satisfying to look at than the same value of gold.

Physical silver is available in many forms. The two most commonly purchased for wealth protection purposes are .999 fine (99.9% pure silver) and junk silver. The .999 silver comes in a variety of sizes and shapes, but 1 ounce rounds, 1 ounce bars, 10 ounce bars and 100 ounce bars seem to be the most popular among those who are buying silver for long term wealth protection. One ounce Silver Eagles are produced by the US mint and are very popular, both for those wanting silver for wealth protection and among coin collectors. Junk silver is coins purchased not for their numismatic value (collectible value), but solely for the silver content of the coin. Older US coins are commonly bought and sold as junk silver, but certain older Canadian coins and some coins from other countries also qualify. US dimes, quarters, half dollars, and dollar coins dated 1964 and earlier are made of 90% silver. JKF half-dollars from 1965-1970 are made of 40% silver (often called “silver clad”), and many of the nickels made during WWII (some 1942, all 1943-1945) are made of 35% silver (commonly referred to as “War Nickels”). Some more recent uncirculated and proof coins from the mint are silver clad, but these often have higher numismatic value, so are less common to find available as junk silver.

One advantage of junk silver over .999 pure silver is that even if silver prices fall to 10 cents an ounce (VERY unlikely), all of the junk silver from the US and much of it from other countries is still valid as currency and can be spent just like any other money. One thing I like about the 40% silver clad JFK half dollars is that their face value equals their silver value first if silver prices did ever take a really huge drop. Silver falling below about .38 an ounce means that silver clad JFK’s stop losing any additional value, since they are still worth 50 cents as currency no matter what happens to silver prices. Personally, I strongly doubt that silver will fall this far, but the purpose of this article is to tell you how to protect your wealth against a WIDE variety of circumstances, both likely and unlikely. Some people prefer to buy only 90% silver coins, but my junk silver collection includes all different silver percentages from US coins as well as some coins from other countries. Being open to a wider array of choices has also let me get bargains that others passed up.

Be careful when shopping for silver on eBay and elsewhere. The price of silver (and other precious metals) per ounce it for TROY ounces. An avoirdupois ounce (used for weights of just about everything besides precious metals here in the metric-challenged USA) is smaller than a troy ounce. I have seen eBay listings that didn’t specify what kind of ounces when selling mixed coins as junk silver. Some of these were correct for troy ounces, others were using avoirdupois ounces and were really worth about 9% less. If in doubt, ask. If you still aren’t sure, bid 10% less than you would otherwise.

With the current economic oddities, some people are worried about a completely different problem. The current banking and credit crises is reducing supplies of available cash and could lead to deflation. For a consumer with a lot of cash, deflation is a wonderful thing. Prices of goods and services go down. The problem is that severe deflation is associated with events like the Great Depression. Cutting prices of goods and services doesn’t help you if you don’t have a job or any cash. Even if you have a job, your company will be getting less and less money for goods and services. Either your salary will go down or you will lose the job. I can’t help you with the job, but do suggest keeping at least some of your assets in cash – cold hard cash in your hand, not in your bank. As previously mentioned, what are you going to if the bank fails or severely rations withdrawals in order to not fail? Yes, the government will step in sooner or later to help, but governments tend to not react very quickly in cases like this. Having cash reserve available for investment also put you in a position to take advantage of deals you might otherwise have to pass up.

Personally, I take this one step further. My personal emergency cash supply isn’t all in US dollars. I’ve got Euros, British Pounds, Chinese Yuan, and small amounts of quite a few other currencies safely locked away. My bottom line would be severely damaged if the dollar took a large dive relative to other currencies, but I’d also have some foreign money on hand that would be worth a lot more dollars than I paid for it. I like to think of this as forex with 1:1 leverage.

Speaking of safely locking things away, if you have significant amounts of precious metals and/or cash, you need to put some effort into protecting your assets from theft. Don’t put it in a safe deposit box at a bank. You won’t have easy access to it 24/7, and if something goes wrong with the bank, you could be blocked from accessing it for a long time. A small safe (many of these are also fire-resistant), firmly bolted (from the inside!) to the wall or floor is a good start. If you are in a flood-prone area, put your cash and other valuable documents inside plastic bags. You can increase the security even more by having the safe be inside a locked cabinet or closet. You can also place some low-value items you are storing anyway on top of and around the safe to further conceal it from view. If you are in a high crime area, get a cheap lockbox, put a small amount of cash and a few silver coins in it, and attach it to something that it can easily be pried away from. Letting the criminals think they found your “secret stash” should make them less likely to keep searching.

One other point I’d like to make is that it’s always a very wise precaution to have at least 2 weeks worth of food and water stored in your home. Some people might think I’m some kind of survivalist nutcase for suggesting this as part of a wealth protection article, but I live in Florida. I’ve seen more than my share of hurricanes over the years. No matter where you live in the world, some kind of natural disaster can happen. All the cash, gold, and silver in the world won’t buy you a bottle of water or a can of soup after a town is leveled by a hurricane, tornado, or earthquake. When supplies finally start to come in after a disaster, price gouging is common. Having your own disaster survival supplies can not only save you a lot of money in these situations, but can also save your life and the lives of your family members.

Most of these wealth protection ideas (besides real estate investing) can be started with very little money upfront. You don’t have to buy hundreds or thousands of ounces of silver all at once. You don’t have to buy 2 weeks worth of extra food to store all at once. You can start by putting away a single day’s worth of food supplies every few weeks. You can buy a few silver coins a month. You can put 10% of your trading account into an interest bearing savings account at a well-rated local bank. You can put a few dollars a week into a cheap (and well-hidden) lock box until you can afford to buy a small safe. If you manage to get a small amount of foreign currency, toss it in the safe with your other cash.

There is one sure way to not protect your wealth – just don’t do anything. It’s easy and convenient to do this. You can sit there and take the risk that your brokerage and its bank will never fail (even though regulated brokerages and large banks have failed). You can assume that there will never be a natural disaster that could cut off your access to food and water for a few days or more (happens all the time, all over the world). You can rest assured that your local currency will never lose value against other currencies or against precious metals (a forex trader who thinks currency can’t lose value – insane!). You can assume that you’ll always have quick and easy access to all of your money via ATM, credit, and debit cards and have no need for a supply of cash (electronic networks for cash transfers do occasionally go down even under perfectly normal circumstances). Don’t diversify your holdings. Keep all your money in one pocket. Just don’t complain to me if something goes wrong and you lose everything.

1996 Green Coin Book

List Price: $ 7.99

Price: $ 10.49

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