Turbulent Markets Send Rich Investors Fleeing to Cash – But What About You?

One thing financial services professionals often find, when working with wealthy investors, is that they’re more concerned with safety than maximizing returns. People who know how to handle money understand the Math of Loss and are well aware that it takes a much larger gain to make up for even a small loss. When you have a lot of money, losing a little to the ravages of inflation and currency policy is preferable to losing a lot in volatile markets. That’s why, in times like these, many large investors will stock up on cash and just wait out the turmoil.

By some estimates, a buy and hold investor spends up to seventy-seven percent of his or her time making up losses. That means, more than three-fourths of the time, small investors are trying to get back to even. This week investors are fleeing potential losses and converting to cash due to several big financial storms brewing around the world.

Europe in Turmoil

As we discussed yesterday, world markets are in turmoil over Thursday’s upcoming Brexit vote. Whether Britain stays or leaves the European Union is, at this point, largely immaterial. Just the fact that the vote is so close will permanently wound the EU as new leadership in Britain will almost certainly push for even greater concessions, and push back harder against the overreaching collective government. Meanwhile, the other countries that are paying in more than they’re getting back, including France and Germany, will almost certainly try to ensure they get as much or more than the UK.  Good times ahead…

Bonds Not an Option

Meanwhile, Mohamed El-Erian, chief economic adviser at multinational financial services behemoth Allianz, says standard diversification strategies won’t work going forward. Bonds, the traditional balance for equity investments, are getting hammered. The yield on Germany’s ten year bonds fell to negative territory, which means investors are paying the German government to hold their money. Other analysts state it more plainly: bonds right now are a rip-off.

Cash No Longer Safe

If you’re wealthy beyond measure then losing a small amount by holding cash isn’t a big worry. But if you’re like most people, losing two percent of your savings because it’s your only “safe” option hurts. The truth is even cash isn’t the safe haven it used to be. The buying power of your cash gets whittled away by inflation. As more and more cash builds up in savings and money market accounts, the more likely central banks are to try something silly to spur people to invest that cash instead of sitting on it. Banks don’t need your money anymore and, in some cases, don’t even want it.

Protect Your Ability to Buy What You’ll Need in the Future

The spending power of your cash is a reflection of the relative strength of your nation’s currency compared to other nations, and the cost of goods and services. Since that power can fluctuate wildly, converting that cash into something tangible is how you protect its value in the future. Let’s say you buy a hunk of high grade steel for a $1 today. Five or ten years down the line you sell that hunk of steel and get $2. You haven’t necessarily made money on the deal; instead you locked in the buying power of that original $1 by exchanging it for something tangible. The steel wasn’t worth more; it was the future dollars that bought less.

The Best Assets are Both Hard and Liquid

The problem with steel is not many people have the ability to store large amounts of it, and it doesn’t have a wide array of potential buyers, making it an illiquid asset.  Since it also costs a lot of money to ship to a buyer, steel has a high transaction cost. Physical gold and silver on the other hand have value density. They don’t require giant warehouses; a solid home safe, or a depository in the case of a gold IRA, is adequate protection. High quality coins, like Gold and Silver Eagles, are also easy to exchange for cash. That makes physical gold and silver a liquid hard asset that gives you the commodity protection of a hard asset without high transaction costs or overhead.

If, unlike the ultra-rich, you can’t afford to lose two percent a year of your cash value, then you’ll need to change strategy.  By converting a fixed portion of your wealth into a liquid hard asset that maintains its value you regain the ability to protect future dollars you’re definitely going to need in an increasingly uncertain future.