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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.

Author Bio

Total Articles: 1120
Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Article comments

Manshu says:

Very interesting views, I didn’t realize from reading this blog that you held such strong views against buying gold right now. I agree with that, and hinted towards that in a post about India’s purchase of gold.

That buying gold at the top didn’t make very much sense to me. A lot of people obviously question that saying how do I know its not gonna rise further? Of course I don’t – I have no clue.

Just look at tulips, or oil or tech or whatever, it just doesn’t make a lot of sense right now.

PT says:

Excellent work, DR. Good to hear a conservative talk show allowing an anti-gold position. All the ones I listen to push gold everyday. It sounded like you caught ole Bob off guard a time or two with your responses. Ha!

Four Pillars says:

Clearly the answer is to take over Canada and take some of their valuable Canuck bucks! 🙂

Nice interview – you have a great radio voice. My opinion is that gold is a great investment only if you know when to buy low and sell high. Otherwise – it’s just another cyclical investment which will be in the dumper at some point in the future.

Stuart says:

I believe foreign investment is one of the best ways to go. You will get a return from the dollar depreciating against the currency of the other country plus the returns from that investment. You do need to be careful where and how you invest though. From my point of view any country that is commodity rich is a great bet. On my blog I write about investment opportunities in Commodity Rich Canada. Give us a look if you ever think about Oil and Gas, Forestry, Mining, and even Technology.

Tamalpais Bank says:

Nice post and valuable points.

Be it gold or real estate or oil or technology… We cannot predict when and how their prices can increase or fall down. One can invest in these only if they know the timeline of when to buy ad when to sell it. We must not sell a product when their market is down. Definitely one day or the other their value will increase. Wait for that day and make your deal.

John Connor says:

I agree with mostly about what is said. However, he says no gold, but leverage yourself on real estate-which still has very bad fundamentals, plus leverage risk, plus alt-a mortgages and 1 in 6 fha loans defaulting, foreclosures still climbing when bought will lower you equity position and possible loan calls. Hmmmmm, not thinking your risks through there. That is part of what cause the real estate crash. Plus if inflation takes off interest rates along with it to control it-but will fail, as a real estate investor you cant get reg. fixed % rates for 30 yrs, only at most 5 with a balloon payment or variable market %.

However, gold when bought has no liabilities with it. If you remove the American/Western European egocentric views and think truly globally, it is viewed by the world as the ultimate reserve currency. That is why central banks hold it and for the first time are net buyers of the metal. India is on the block for the 2nd half of the IMF gold. It is only 1/2 way to it’s inflation adjusted high. Is it due for a healty correction? Absolutely as seen this Friday. But so is the S&P valued at 130+ e/p, is that sustainable?. That means it takes 130 yrs of earnings for that purchase price of that stock. Bond markets are showing signs of deflation. Budget deficiets, doubling the money supply, low interest rates are gearing for a currency crisis in the USA. Remember gold is financial insurance, NOT for speculation or for investments. With the dollar fundamentals the way they are, gold still only at least 1/2 way there. Cyclical charts show we have a long way to go. Research the monetary system, it is debt based. Did you know we just traded IOUs everyday? IOUs is our and most of the world’s currency system. Free on google video: Moneymasters and Debt As Money 1&2. Otherwise I agree with his premse, just we are far from the Tulip bubble in the 1600s, and I dont agree with leveraging and taking on more debt in a very fragile economy.