Predicting a rise in inflation or a drop in the stock market at some point in the future reminds me of the saying, "Nobody gets out of life alive." The inevitability simply reinforces the fact that there is no avoidance; we can only prepare and plan.
This week on CNBC, Marc Faber lived up to his nickname, "Dr. Doom," by predicting a catastrophic investment loss for investors, particularly the wealthy.
Faber, editor of the "Gloom, Boom & Doom Report," says within the next few years, high inflation will wipe out up to half the wealth of the affluent because the government has been printing money in response to its inability to control debt.
But "gloom and doom" hardly begins to describe his assessment. Here's a quote from CNBC: "Somewhere down the line we will have a massive wealth destruction that usually happens either through very high inflation or through social unrest or through war or credit market collapse." Gee, anything else?
Even if you believe some of the financial and social doomsday scenario, how can you begin to protect yourself from investment losses? We might have grown a little fat and happy during the nearly-20-year wealth boom that fostered easy credit and caused many to lose sight of the slow-and-steady approach to investing and saving. But now that the recession has reminded us of how quickly a house of cards can be blown away, it's a good time to reassess the fundamentals as the economy slowly begins to recover.
- Use debt wisely. Americans are saving again rather than spending, and that's good. Although your emergency savings account will not earn much interest for the next few years, better to have it than to be paying off debt. Forget about layaway and paying over time for anything but necessities. Luxuries are not meant to be purchased on credit. And when it comes to buying a home, run through several scenarios in your mind -- including job loss and a rise in interest rates, property taxes or insurance -- to make sure you can really afford it.
- Don't stop investing. I've written many times in this blog that the wealthy have recovered from the recession faster than the rest of the population because they've invested in the market and didn't rely on their home as a means to obtain cash or provide investment growth. Think of your home as one asset class in your portfolio. So far, a balanced investment approach has been one of the few constant factors that allow for growth over time. Asset classes will not move up or down in tandem (that's one of the ways you know the portfolio is balanced) so keep a mix of fixed income, equities and cash. There are some mutual funds that are hedges against inflation so add those to the mix. Don't let neither fear nor exuberance guide your approach: If the stock market takes off, resist the temptation to pile all your assets into it at the risk of your safer investments.
There are no shortcuts to building wealth. People who gained spectacular riches during the wealth boom saw it evaporate if its foundation was based on credit.
Do you believe we're in for another wealth crash anytime soon? How are you preparing?
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