‘Alas, alas, that great city Babylon, that mighty city! for in one hour is thy judgment come.’
Here at Money Morning New Zealand, we spend a great deal of time considering the apocalypse.
Except our doomsday isn’t one of nuclear explosions or hail fire and brimstone. Instead we look at the backbone of our society — the world of money.
At one point, money was tied to reality. It was redeemable. It was a true representation of value.
But today, most money is nothing but zeroes and ones on a server. Modern dollars are created by the click of a button…and can disappear just as quickly.
They’re deposited into your account digitally, then you spend them with a card…and then they vanish digitally. They spend their whole lives bouncing throughout the Interwebs without a tether to reality.
And that’s what concerns us…
When a ‘financial apocalypse’ strikes, the life savings of billions of people could evaporate in a moment. If the servers that house those all-too-important zeroes and ones go down, what would happen?
Some in our network believe in preparing for the worst-case scenario. They’re our doomsday preppers. They believe in gold bars and cash. They might even invest in bunkers, guns and supplies.
To them, investments on the stock market are sunk costs. If they rise, then great. If not, so be it. The real play is holding on to real-life assets — assets that don’t disappear when the power goes out.
Most of us follow a more moderate approach. We invest with the possibility of a crash in mind. We hedge our more speculative investments by sticking some of our money in assets perceived to be safe havens.
And if you already do that too — great. If not, then you should take a look at the two strategies below.
Dr Zvi Bodie’s doomsday portfolio
Besides a 100% gold ingot strategy, one of the most defensive financial strategies you’ll ever find is Dr Bodie’s Doomsday Portfolio.
Originally proposed in 1995, this strategy highlights two investment vessels: Treasury Inflation Protected Securities (TIPS) and call options.
The TIPS make up most of the portfolio — Dr Bodie recommended 90%.
TIPS are just like your normal Treasury Note or Bond, but with the unique twist of being adjusted for inflation. So if you are receiving coupon payments every six months, you can expect them to increase in relation to the Consumer Price Index (CPI).
Now, don’t expect your TIPS to make you rich. These instruments provide very little return, if any. In fact, during times of low confidence, TIPS can often wander into negative yield territory.
In New Zealand, the closest thing you’ll find to TIPS are Inflation-Indexed Bonds…also called ‘linkers’, as they’re linked to inflation.
The Crown regularly offers about $100m in IIBs each month. The most recent tender came in at a yield around 1.8%
If you’re interested in these bonds, consider discussing purchasing them through your financial institution.
The other 10% in the Doomsday Portfolio are the call options.
Now, options trading can be a bit difficult for the average investor. In short, options are contracts that let you sell or buy an asset at a certain price in the future. There’s a bit of science behind it (and a bit of financial magic too) but it allows you to make a speculative investment on an underlying asset.
The ancient Talmud strategy of thirds
‘Let every man divide his money into three parts, and invest a third in land, a third in business and a third let him keep by him in reserve.’
Bava Metzia 42a
The Talmud is an ancient record of Jewish law. It contains debates between rabbis on interpreting the law…and recommendations on living according to it.
One golden nugget is the strategies of thirds listed above. It recommends putting your wealth in three parts: land, business and in reserve.
And, like a three-legged stool, this strategy holds up in shaky times.
In modern terms, you can break this strategy into three elements.
The first — land — can be purchased through Real Estate Investment Trusts (REITs). REITs are professionally managed companies that own and operate income-generating real estate. Think office buildings, warehouses, storage facilities, apartments, etc.
A big REIT in New Zealand is Kiwi Property Group Ltd [NZX:KPG]. You can invest in it just like any other share on the market. Learn more here.
The second element is business. For you, that can mean equities. At Money Morning New Zealand, we believe one of New Zealand’s biggest opportunities for investors is in the retirement sector. It’s a growing industry with several big players in the local market.
The last third of investments is the wealth in reserve. We believe the Inflation-Indexed Bonds mentioned above are a good option here. Cash is also handy to hold, although it’s vulnerable to inflation. Almost any bond will fit the bill here. As for gold, we feel it’s a fantastic way to shield your wealth against volatility.
Don’t expect this last part to generate those big double- and triple-digit returns. Its purpose is to protect you…and keep it all from blowing away.
Both of these strategies — Bodie’s Doomsday Portfolio and the Ancient Talmud Strategy of Thirds — are great ways to prepare yourself for a crisis in our view. But both have trade-offs.
We’re developing our own hybrid portfolio that will incorporate the best bits of both…and a little of our own secret sauce. When it’s ready and back-tested, we’ll send it your way. Just make sure you’re subscribed to our daily newsletter, Money Morning New Zealand.
Editor, Money Morning New Zealand