Are you preparing for the worst?

By Mike

explosionLast week, after reading Stew’s article about why he does not expect to buy gold, I started thinking. Over the past few months, I’ve been hearing an increasing amount of interest in preparing for “worst case scenarios”. It seems as though last year’s major crisis left some very important consequences. So what are these dark scenarios? Here are a few that are often discussed:

Collapse of the entire financial system: This one can no longer be dismissed easily since it was a distinct possibility during last year’s collapse of several US and foreign banks.

Hyperinflation: With all of the money being pumped into circulation by the US government, many think inflation will pick up and could get out of control in the coming years

Collapse of the US dollar: The US dollar, by almost any standard, has suffered major losses in recent months. There is a lot of speculation about the causes, the lack of the US government support to defend its currency, etc.

US Government bankruptcy: With costs out of control, there is no end in sight for the deficits in the US and in fact they are becoming more critical year after year. Military, health care and pension issues are only a few of the reasons for the deficit. Will foreign governments decide to stop funding these deficits one day?

Apart from a few individuals, I think the vast majority would concede that these are remote possibilities that probably will not happen in our lifetime. However, an increasing percentage of the population is starting to prepare for worst case scenarios. How?

1-Cash is king: Having debt is bad enough but even having all of your money locked into investments means you could lose it all if things turn very bad. For this reason, many investors are keeping higher cash balances in their accounts and also at home, hidden in all kinds of places.

2-Metals: When a currency loses its value, one of the alternative assets over time has been precious metals such as gold and silver. For that reason, there is an increased interest in buying physical holdings that buyers can keep at home either in a safe or in a well hidden place. Metals have also been known to be one of the best ways to maintain purchasing power when inflation picks up significantly. These investors are often reluctant to buy gold in the form of ETFs for example because their worst case scenario also involves a complete collapse of the financial system which could render such assets worthless.

3-Diversification: Rich investors are looking at setting up foreign accounts where they can escape from exposure to the US dollar as well as the US financial system.

It does seem like a gross exaggeration doesn’t it? I’m not saying it’s not possible. Of course, it is difficult not to acknowledge the risk, especially after the near collapse we witnessed in late 2008″¦ but personally, I’m not preparing for these scenarios in such a dramatic way for these reasons:

1-This type of crisis does not happen every year: Usually, all parties learn a great deal during such times which helps improve and stabilize the structure. Remember that major recessions usually happen once per couple of decades

2-The US government showed it was willing to do almost ANYTHING to save the system. Let’s not forget the magnitude of what was done last year. Major stimuli, injecting hundreds and thousands of billions of dollars, buying stakes in banks, etc. I personally believe that the only way a complete collapse of the economy would occur would be through a collapse of the US government”¦ and if you believe in such a scenario, then I hope you have personal security guards to protect that gold.

3-It’s just too expensive. Do you know how much preparation  for this type of possibility will end up costing you in commissions, lost interest, etc? Over the course of a lifetime, it will end up being very costly. I just think it’s not worth it; I’ll take the gamble”¦

author: Mike

image source: scott3eth

8 Responses (including trackbacks) to “Are you preparing for the worst?”

  1. Craig Says:

    It is very difficult to prepare for the worst since no one wants to think about it and it is difficult to do because you have so many other things to prepare for. I think you just have to live your life, prepare a little but don’t go crazy with it.

  2. kenyantykoon Says:

    i hope to God that these things may not happen soon because i am in a very precarious position vis-a-vis my finances and investments. I would be wiped out completely if they were to happen. My fledgling portfolio would be shot to hell because there are so many things that i have not factored in, the chief being inflation.

  3. Andrew @ Earn Give Save Says:

    There is definitely something to being prepared for the worst possible scenarios, but I am always trying to guard myself against fear. I tend to make poorer and more snap decisions when I’m living into what they’re talking about on the news.

  4. Credit Card Chaser Says:

    Wouldn’t hurt to not only have a pile of US cash under the mattress but a pile of Euros under the mattress as well… just in case :)

  5. Abdullah Says:

    It’s nearly impossible to prepare oneself for a disaster in nature or man-made. I feel almost powerless in this regard in how to go about preparing oneself to effectively meet such an event.

  6. FinanciallySmartServices Says:

    Can one prepare for the worst when this individual is hoping that things will turn around. What we need to do is try and live within our means and save as much as we can.