What if the U.S. is just another empire waiting to crumble? A client recently asked me this question. My personal opinion is that we’re not about to crumble. I believe we are one of the most innovative, socio-economically mobile and self-reflective civilizations in history. But in case our end is in fact near, below are my thoughts on how I would invest for such a scenario.
I’ve just spent several weeks traveling around Turkey, Greece, Italy and Germany, and I have learned more about the history of great civilizations than ever before. The U.S. is quite young by empire standards, and we’d be fools to say that we “know” things are going to be fine based on 250 years of history. The Romans, Greeks, Turks, Moguls, Nazis and Incans all thought they were invincible too.
Building a Portfolio for Permanent Uncertainty
The real question, as financial advisors, is how do we build a portfolio for permanent uncertainty? Our belief is that there will not be a seminal event where we’ll know “this time it’s different” and the end of the empire is upon us. Therefore, we can’t use a watchful eye to respond to a situation where we’re deviating drastically from our history. If we’d had such a readiness to respond, we likely would have run into cash in 1994, 2000 and 2007, and who knows when we would have gotten back in. I believe chances are very high that our clients would have had a significantly worse investment result had we followed that path.
Instead, we’ve asked ourselves, “What economic circumstances have accompanied the end of most civilizations?” The best source I’ve come across is the book This Time Is Different: Eight Centuries of Financial Folly, which profiles the financial collapses of many countries over the centuries. I summarized the book in our fourth quarter newsletter in 2010. As we’ve studied these failed civilizations, we’ve found that inflation can be a killer, so we’ve included many categories that can do well in high inflation environments (real estate, inflation-protected bonds, trust deeds and mortgage bonds, commodities, and short-term bonds). Financial systems can collapse altogether. For this reason, we invest 40% of our non-bond portfolio outside of the U.S. so that we’re not taking excessive country risk, even with respect to the U.S., the world’s reserve currency.
We feel that this kind of diversification, while less effective than it used to be thanks to the high inter-dependence of all assets and countries on each other, is still the best chance anybody has of protecting and growing wealth over an uncertain future landscape.
