How to Protect Yourself from the Next Global Financial Panic

Making good investment decisions is both a science and an art.

You can, for example, track the performance of investment sectors, fund managers and even investment advisers with precision.

You can see their successes and failures with precision. But past performance, as we all know, is no indication of what will take place in the future.

You can calculate with reasonable precision global money flow, governmental and personal debt, unemployment, the gross domestic product and so on.

But these data combined won’t tell you with any certainty what and when some macroeconomic event might happen.

The problem is twofold. The global economy is so damn big and complicated, and humanity’s response to economic shifts is equally complex. And this is to say nothing of “black swans” — unexpected and random events that cause major turmoil.

Which is to say that for practical purposes, anticipating the future is impossible.

Still, as lowly investors, we must try. We must make regular buy, sell and hold decisions about investments we own. And we must make general judgments about the market in order to assess our holdings.

I’ve been in the financial publishing business for more than 40 years. In that time, I’ve worked with many of the best investment writers and followed their advice. I’ve even been able to see unpublished analytics that track their performance.

I’ve concluded that most haven’t a clue about the future. But there are some who are actually very good at making specific investment recommendations over periods ranging from five to 15 years.

There are also some who are very good at big-picture economic analysis. By very good, I mean they are able to write arguments that convince me, a skeptic.

Of those few who are good, about half are perennial optimists. The other half, of course, are perennial pessimists.

What I do is this…

I read the best big-picture writers I know — not to “know” what the future holds, but to get a sense of what might happen. Then I look to the specialists for specific advice that would apply.

Around 2004, my favorite big-picture pessimists were predicting a collapse of the real estate market, the dollar and the stock market. They predicted a serious economic recession as a result of the insanely overvalued real estate market and the government’s love affair with paper money.

The optimists were saying not to worry.

I found the pessimists — especially my colleague and business partner Bill Bonner — more convincing.

So what did I do?

I did not sell all my stocks. But I did sell off any stocks I had that I felt might not recover from a major economic collapse.

I did not sell all my real estate. But I sold most of the real estate that wasn’t generating a rental income that would give me more than 5% returns even if rental prices dropped 25% or 30%.

And for the first time, I started buying gold.

To keep things simple, I bought gold bullion coins. Over the course of two or three years, I bought gold every month until I had a tidy sum stashed away.

By tidy sum, I mean it was enough to support my family in the event of a sustained depression. But I did not bet the farm on gold prices rising because I had no certain knowledge of whether gold prices would go up or down.

My guess is that gold coins at that time came to represent about 5% of my wealth.

As it turned out, the pessimists were right. The economy went south, the stock market followed it and the price of gold soared.

My stock portfolio went down but not terribly because I had nothing but what I call “legacy” stocks. I owned companies that I was pretty sure would do well even during a serious recession. [Editor’s Note: You can now find this portfolio, which we call the Heritage Portfolio, right here.]

I don’t mean “do well” in the sense that I expected their stock prices to go up in value.

I mean “do well” in the sense that their corporate revenues and profits would stay stable or climb despite a stock market selloff — these kinds of stocks tend to do very well in the periods following any kind of economic disaster.

I didn’t sell those stocks because I had a long-term perspective. Now, of course, I’m glad I didn’t sell.

Until the recent pullback in the stock market, they were trading at near-record highs.

And although the theoretical value of my real estate holdings went down, I kept making good income from the properties I kept.

Making the adjustments I made — reducing my exposure to risky assets, focusing on income and buying gold as insurance against disaster — was about hoping for the best but preparing for the worst.

The collapse of the real estate bubble made millions of middle-class Americans poorer and thousands of bankers, brokers and other members of the financial industrial complex richer.

It amounted to a multi-trilliondollar transfer of wealth from Main Street to Wall Street.

In a genuinely free market, a financial recession has a positive effect. Like a forest fire, it kills off unhealthy businesses and financial practices and replaces them with better ones.

But the U.S. economy is not a genuinely free market. It is a highly manipulated marketplace in which large industries and businesses persuade local, regional and national government officials to pass laws that benefit them.

On top of that, you have a political environment that practically forces politicians (Democrats and Republicans) to continue to spend money we don’t have. Right now the U.S. national debt is sitting at $30.9 trillion — and it’s expected to increase another $10 trillion over the next 10 years.

All of which is to say that despite what you sometimes hear from the financial media and bullish investors, the U.S. economy is still very much in danger of another major financial collapse, possibly one much larger than the “Great Recession” we saw in 2008.

Meet the New Bubble, Same as the Old Bubble

That is what my favorite economic pessimists have been saying. And they could be right.

The math paints a frightening picture.

Unemployment — true unemployment, including the underemployed and the people no longer looking for work — has been about double the reported unemployment rate for the last 10 years.

Young people coming out of college have grim prospects of landing good jobs and they’re currently saddled with $1.75 trillion in student debt.

Baby boomers (folks born between 1946 and 1964) have little or no savings and many of them are still “underwater” with their mortgages.

Trillions of dollars in consumer, corporate and government debt are still out there. The debt-to-GDP ratio is now more than 100%. The federal government might use this as an excuse to let the dollar’s value collapse so it can repay its debt with cheaper money.

In other words, we are still broke. The government is not doing enough. And printing huge amounts of money has clearly not done the trick.

In fact, one of the big-picture writers I follow recently said that the political situation today reminds them of 1929, when Herbert Hoover inherited an economy that quickly spiraled downward into the Great Depression. For him, Biden may well be the new Hoover.

All this seems grim. But I’m not panicking.

Why?

Because I’ve read more than a thousand end-of-the-world predictions since I got into the financial newsletter publishing industry decades ago.

And although we’ve had several serious market dives and a recession during that time, we’ve never had the sort of total worldwide collapse that would scare me.

Still, it could happen. Next year or next month or next week, we could wake up one morning to nationwide bank closures, widespread looting and violence and a complete breakdown of law and order.

Shields Against Financial Disaster

So what shall we do about the possibility of a worldwide economic recession?

Here’s what I recommend:

#1 Have an SOA Fund

Make sure you have what I call a “start over again” (SOA) fund — a store of liquid wealth that can cover the costs of starting your financial life over again if all your intangible assets (stocks, bonds and cash held in banks) disappeared.

As I’ve explained elsewhere, the amount of money you should have in an SOA fund depends on your situation. If you are an employee, make sure you have at least one year’s income. If you own a business, make sure you have enough to restart it or a similar business.

Your fund should consist of gold coins and cash stored in local safety deposit boxes or home safes.

If things really do implode, you don’t want to be calling a broker or banker and asking them to cash in your accounts only to hear that the government has frozen such transactions.

#2 Invest in “Earth”

If you can afford to buy rental real estate, do so. I’ve said this many times. Rental real estate is an exceptional source of part-time income. It’s easy to understand. And as long as the price is right, it can be very attractive.

If you can find a single-family three-bedroom, two-bath house for $192,000 that rents for $2,000-plus per month, buy it. Buy as much property as you can in the same neighborhood to make management easy.

If you can’t afford the down payment, you can find partners to work with you. This is something any smart person can do. You don’t need to have a lot of cash.

#3 Cut Your Risky Holdings

Review your stock portfolio to make sure that it is safely invested. This is not the time to be overly speculative. Try to buy only big, cash-flowing businesses sure to weather any “black swan” event in the markets — companies that make products that are always in demand, no matter what the economy is doing. They’re often labeled “consumer defensive” or “consumer staple” companies.

Investing this way will ensure that your equity holdings will survive a large-scale financial downturn. And if there is a collapse, the decreased stock price of these companies will present a great opportunity to pick up more shares on the cheap.

#4 Go Abroad

Consider becoming an “international” person. By that, I mean having an offshore residence, business, bank account and passport or residency permit.

This may seem like a very exotic option, but it’s easier and cheaper than you might think. For example, you could have all three of these things in Nicaragua or Panama for less than $150,000.

Looking offshore gives you several benefits: a safe haven to retreat to if wherever you’re living becomes dangerous, ways to earn extra income with big tax advantages and a lower cost of living.

It’s About Staying in the Game but Hedging Your Bets…

The underlying message is this: You need to have all three elements of risk reduction in place. They are asset allocation, position sizing and loss limits.

Asset allocation will make sure you’re diversified enough so that if one segment of your wealth goes down, another will go up or stay stable.

Position sizing ensures that you are not overexposed to any one asset and thus vulnerable.

And loss limits, such as trailing stop losses for speculative stocks, will protect you from losing all your money in a given position.

If you have these three things, you don’t have to actually make many decisions since these rules make them for you.

And that’s a good thing: You want to limit the number of investment decisions you make…

This is particularly true when you are facing huge “black swan” or complicated economic events. You want the decisions to either be already made or automatic.

That prevents you from reacting emotionally, which is one of the most dangerous things you can do.

Two Things You Should NOT Do…

I’ve told you what I think you should do to guard against a financial Armageddon and a deeper stock market decline.

My recommendations are based on what I’m doing. They are by no means definitive. There are dozens of strategies that will do as well or perhaps better… but only so long as they share the basic elements of reducing risk. That is, they must focus on quality and income and use diversification, position sizing, stop losses and insurance.

No matter what, though, there are two things I recommend you not do.

First…

Don’t panic and get out of stocks, bonds and real estate completely. And don’t put all your money in gold or bitcoin. I’m not going to tell you why. I’m just going to say that if you do this, you will surely regret it.

The other thing you should not do is nothing.

We are talking about the possibility of social and financial chaos. If that happens, it will happen quickly. And the cost of being unprepared could be huge. You could lose every intangible asset you have as banks and brokerages pillage customer accounts to pay for current expenses.

Again, this is not a scenario I deem likely. But I do think it is possible. And since it’s possible, it seems only wise to take sensible and immediate precautions.

You can’t expect the government or the big financial institutions to get the economy working well again. They are the very institutions that got us into this mess in the first place.

You can’t rely on your family or friends to help you out if chaos erupts. They will be too busy scrambling for their own survival.

The only person you can rely on is yourself. You owe it to yourself and your family to prepare.

So make a commitment now. Start building your own chaos protection strategy today.

Allocate your stock portfolio to favor big, safe companies, like the ones Sean recommends in this newsletter. Buy cash-flow-positive rental real estate. Use diversification, position sizing and stop losses.

Review and if necessary, bolster your start-over-again fund. And if possible, establish a financial base outside of your home nation.

By taking action now, you won’t have to worry about being caught off guard. In the highly unlikely scenario of a total worldwide economic meltdown, you will already have all the tough and smart decisions made.