Best Hedge Investments: Gold, TIPS, Dollars

(Please note that long-term TIPS ETFs are not suggested because they can lose substantial trading value. We do suggest short-term TIPS ETFs–or a “TIPS ladder.” Stocknectar.Org receives no approval nor payment from any suggested brokerage or ETF. However, this is only general information, not financial advice. Please modify any suggestions according to your personal situation. If you do not fully understand this information, please seek professional advice.)

  • A TIPS ladder. Buy some individually-bought 10-year TIPS each year. Also sell one “rung” with the highest trading value or hold to maturity if the value of every rung is low. Then you will never lose a penny so long as you are able to hold to maturity. This also will maximize the hedging potential and minimize US tax rates.  There are no trading fees for individual TIPS. We suggest TD Ameritrade as a good broker for maintaining a TIPS ladder with a user-friendly interface and telephone support. (We do not suggest TD Ameritrade for ETF trading for non-millionaires because of its fees of $10 per ETF trade.)
  • Gold-vs-Stocks-2007-2013Invest in gold bullion ETFs: SGOL, GTU, IAU, PHYS. Gold is an investment that can never totally lose value. Gold also is likely to increase in value eventually because the amount of new gold is running out. The price of gold is also more stable than any other precious material, such as oil or diamonds. However, the price of gold is still somewhat unstable. The security of your gold also depends on the security of the place where it is stored. Therefore we suggest to divide your gold between 3 different ETFs. Also, to avoid the high “collectibles” tax rate on long-term gains for gold, US residents might want to designate a different two months for each gold ETF, during which time that ETF is not used each year. Therefore, a fourth gold ETF is needed to hold gold whenever one of the others is not used. Most investors will probably be comfortable with holding 10% of account value in gold full-time and increasing to 30% of account in gold temporarily during stock market downturns. This strategy can offer substantial security potential with only a mild potential for hindering investment gains.
  • Hold paper dollars (US $50 and $100 bills) in safety deposit boxes in several different cities. This is very different from keeping money in a savings account. Any money held in a savings account is actually an “unsecured loan” to the bank. If your bank declares bankruptcy, the FDIC is not required to pay you back in cash–and may instead pay you back with worthless stocks in your bankrupt bank. (See: “The Confiscation Scheme For US And UK Depositors,” by Ellen Brown, 2013.) Or, as happened in Greece in 2015, severe limits might be placed on how much money you can withdraw from a savings account. Some bank employees might tell you that it is illegal or against the rules to hold cash in a safety deposit box. However, it is only illegal if you are trying to dodge income taxes. Also, regardless of the “rules” of a bank–no bank wants to know what is in your safety deposit box–because that would expose the bank to liability claims. So, just put whatever you want in your boxes and do not tell the banks. The downside is that the contents of safety deposit boxes are vulnerable to theft or natural disaster and cannot be insured for reasonable rates. Therefore, avoid any location that is subject to natural disasters. Also, do not hold a large value in any single location. Also visit each safety deposit box once a year, in order to avoid a clerical error possibly declaring the account to be closed.
  • Hold a combination of dollars and close-to-spot gold coins in safety deposit boxes in several different cities. The dollars will cushion against a loss in value for gold and the gold will cushion against a loss in value for dollars. In some ways, this is more secure than holding gold or cash in trading accounts. However, to avoid high US “collectibles” taxes, gold coins should be divided into 6 groups, with each group temporarily sold to a friend for two months each year, while thus declaring “ordinary” tax rates for gains or losses. Each “sale” can be done on paper, never actually removing any gold from its safety deposit box. However, any such gold should be divided between 3 to 6 different cities–in locations without natural disasters–and in a state with either no sales tax or no use tax. (The lack of a “use tax” probably enables sales to qualify as untaxed interstate commerce if conducted with someone who lives in a different state. Each year, consult with a tax professional and with each state’s Department of Taxes to be sure you are correctly understanding and following all current laws. Please note that a “high security” investment is no longer “high security” if it might be confiscated or penalized due to legal technicalities.)
  • short-term-TIPS-2003-2014Short-term TIPS ETFs. Short-term TIPS seldom gain or lose more than 2% annually. TIPS are also “inflation protected” and also “backed by the full faith and credit of the US government.” Therefore, short-term TIPS are much safer than so-called FDIC-insured CD’s. Therefore, everyone should hold at least 25% of savings in short-term TIPS. The most fearful investors might want to increase the TIPS to 50% of savings. You can own short-term TIPS simply by investing in any of the following ETFs in any brokerage account: VTIP, TDTT, STPZ, STIP, SIPE. However, please note that a TIPS ETF can hold 1/5 of its assets in cash. Therefore, a large TIPS investment should use three or more different TIPS ETFs–or a “TIPS ladder” as explained above.

In conclusion, there are several good alternatives for a maximum-security cash-like investment. It is a good idea eventually to diversify between all of them. However, this takes time. Meanwhile, any investor can instantly enhance security by investing in short-term TIPS ETFs.

We caution against resorting to quasi-safe investing: corporate bonds, municipal bonds, annuities, money market accounts or CD’s.

Even if FDIC-insured, the FDIC is not necessarily more secure than Fannie Mae or Freddie Mac: all three are quasi-federal programs, but federal bailout is optional, not required. (See: “The Confiscation Scheme For US And UK Depositors,” by Ellen Brown, 2013.) Quasi-safe investments are like a wooden fire escape–apparently safe, but only so long as there is no major fire. Once your money is lost, it makes no difference that the investment was supposedly “low risk.”

In the 2008 crash, most stocks lost more than -50%, while corporate bond investing often did well. However, gold or a TIPS ladder did even better. Furthermore, if not for the “optional” 2008 federal bailouts of major banks, then many additional corporations could have declared bankruptcy–perhaps resulting in a wave of panic and a consequent plummet in value for all corporate and municipal bonds. Perhaps you might think there will never be another 2008-level recession–or that there will not be another collapse of major banks–or that if there is a collapse there will be more bailouts? However–why take a risk when there is no reason to take a risk? You can simply replace those corporate or municipal bonds with a TIPS ladder. If you desire a bit more gain, add a bit of broad-based US equity ETFs.

SPY-XRT-GURU-FPX-VBK-XRT-2011.07-2015.07Corporate bonds might make some sense for the multi-millionaire who can afford losses. However, for the average investor, it is better to divide the portfolio between investments that have a strong benefit-risk ratio (broad-based US equity ETFs) and investments that are truly high-security (short-term TIPS ETFs or a TIPS ladder). This black-and-white division of medium-risk plus high-security enables a larger portion to be truly safe–and also enables the at-risk portion possibly to become safe with Stop orders. This also enables the at-risk portion possibly to generate double its value. If so, this eventually doubles the high-security portion. If so, then you might end up better off even if the entire medium-risk investment is somehow lost. In contrast–what is the point of a large low-paying quasi-safe investment–and that probably condemns the entire investment to remain relatively small and at-risk?

No gains are safe until put in a safe place. The more the quasi-safe investing, the less your savings can grow and the less of it can become truly safe. Quasi-safe allocations are an outmoded convention from a time when ETFs did not exist–when a “discount broker” charged something like $50 instead of $5 per Stop execution–and when blue-chip corporations such as GM, AIG and Goldman Sachs were presumed never possibly to default. In spite of the obvious disproof in 2008, investment professionals continue to parrot strategies built on the long-dead assumptions of a previous century.

Covered Calls, Put-sells, Put-buys and short-selling are other wooden fire escapes. Covered Calls and Put-sells are often touted as adding to security and profits. However, they limit your investment choices, require constant attention, and worst of all, reduce the effectiveness of Stop orders. Put-buys and any method of short-selling usually cost more than they earn–and if derivative-based are not safe from a 2008-level collapse of major banks sans bailouts. Even if you come out ahead with short-selling, the long term gains will always be much less and the risks much greater than for the same level of expertise applied to long-buying. Why bother?

Our Planet EarthFor the average investor, the most important hedge maneuver is merely to stop investing. Stop orders are the most safe safety feature for equity ETFs, just as brakes are the most safe safety feature for a car. Likewise however, Stops will slow down your average gains and are not foolproof. As we have just seen (July 8, 2015) trading can be halted intentionally or due to a technical glitch. Also, the Stops could fail during a sudden collapse. Also, the account value could be “whipsawed,” meaning whittled down by false starts, unless sufficient leeway is allowed during prolonged periods of unusual ups-and-downs. Therefore, even with Stops, the most cautious investors might wish to increase their short-term US Treasury TIPS ETFs (or TIPS ladder) to 50% of portfolio value.

In theory, the USA could default. However, in 2008 and other times, it was the federal government that bailed out municipalities and corporations, never vice-versa. If the USA goes down, every government also becomes at-risk–even Swiss currency or government bonds then could not become more than quasi-safe. So, if doubtful about the US government, the only meaningful diversification for TIPS is gold. Please note that a TIPS ladder is slightly safer than short-term TIPS ETFs–if you can hold every rung to maturity. Similarly, close-to-spot gold coins are slightly safer than gold bullion ETFs–if you can divide the coins between safety deposit  boxes in six different cities that are not subject to natural disasters or sales taxes.

There is also good reason for simply holding some paper US dollars in safety deposit boxes.

We encourage everyone to consider all of the above alternatives for increasing the safety of their cash. Meanwhile however–so long as you avoid applying more than 10% of savings to any single gold or TIPS ETF–safe-haven strategies using ETF-based gold and TIPS can be activated immediately and can be relatively secure. ETFs also provide the only practical method for instantly switching from stock market investments to ultra-secure holdings during downturns.

Leave a Reply