This past week I was interviewed on the Bob Connors Morning Show, a morning talk radio show in Columbus, Ohio. The topic of the interview was the soaring price of gold and the decline in the dollar. During the interview, I noted that our government has proven incapable or unwilling to control spending. Our spending was out of control under the Bush Administration, and it has only gotten worse under the Obama Administration.
Fun Fact: The Federal Government’s current $12 trillion in debt will nearly double to $21 trillion over the next ten years, according to projections by the CBO. Of the $9 trillion increase, more than half will be to cover interest payments.
In response, Bob asked me what the average guy on the street can do about our runaway spending. I answered that basically there was nothing we can do. Sure, we can vote each November for the candidate we think is best. We can write to our representatives. We have freedom of speech. But beyond that, all we can do is watch politicians drive our great country into financial ruin.
After the interview, I began reflecting on this answer. While I haven’t changed my fatalistic view, it did occur to me that there are steps we can and should take to protect our investments (and even profit) from the government’s financial irresponsibility.
1. Foreign Investments: As the U.S. dollar falls relative to other currencies, investments that trade in these foreign currencies go up in U.S. dollar value. You could invest directly in foreign currencies through Forex, but investing in foreign stocks has several advantages for the average investor. Most 401(k) and other employer-sponsored retirement plans will have several good international stock funds. And investing in foreign stocks rather than currencies gives you broader exposure. Forex can be extremely volatile.
My current portfolio is about 20% foreign, which is too low for me. I’m slowly moving it toward the 30% mark, with 40% in U.S. stocks and the remainder in bonds.
2. TIPS: Treasury Inflation Protected Securities are government bonds with interest rates that are set, in part, based on inflation. The idea is that as inflation rises, so do the interest rates on the bonds. As a result, TIPS can protect an investor from the ill effects of inflation. I invest in TIPS through a Vanguard fund (VIPSX), but most all major mutual funds offer a TIPS fund. You can find great information about TIPS on the TreasuryDirect.gov website.
3. Real Estate: Despite all the excitement about real estate going up and the crashing down, in the long term it tends to rise in step with inflation. Because of the ease of financing, one can use leverage with real estate to super-charge return on investment. Of course, with the increase in ROI comes a healthy increase in risk. While I invest in and manage single family homes in the mid-west, there are other ways to invest in real estate.
One easy approach is to buy shares of REITs, or real estate investment trusts. Currently, I invest in two REIT funds, Fidelity International Real Estate (FIREX), and the Vanguard REIT Index (VGSIX).
4. Commodities: First, forget about gold. Yes the price is rising and it’s the talk of the town. Last year it was oil. A few years earlier it was real estate. Before that it was technology. In the 1630s it was tulips. Next year it’s anybody’s guess. But a small portion of a portfolio can hedge against inflation and provide some additional diversity to your investments. A commodities fund or ETF that covers not just precious metals, but oil and other commodities should do the trick.
Of the four approaches above, it seems to me that a healthy dose of foreign investments is key. While the U.S. still has a remarkably robust economy in general, we must realize as investors that the U.S. is no longer the only game in town. President Obama’s lack of influence over the Chinese government (and President Bush’s lack of influence before that) should make this abundantly clear.
Published or updated February 16, 2013.