The Value of Investing in Hard Assets
I have always advocated for investing a portion of your portfolio in hard assets (gold, silver, real estate, commodities, etc.). Hard assets can protect you against inflation, which can erode the purchasing power of your cash over time. You only have to look at the grocery store or the gas station to see why. Inflation is clearly happening all around us, yet the official government statistics don't show it. Did you ever wonder why the Consumer Price Index or CPI doesn't track with your experience? For one thing, CPI excludes food and energy costs - officially because these items are volatile and can skew the index, but these are the very things that people buy every day. Below is an alternative view of inflation compared to the official measure, which removes calculation methodology changes that have occurred since 1980 that have actually lowered the reported inflation rate. As you can see the real rate of inflation is most likely closer to 10% than the 2% reported. This is all the more reason to have hard assets as a part of your investment portfolio to protect against this "hidden" inflation.
Beyond that, does the official measure of unemployment track with what you know is happening in your community to people you know, friends and family? The real rate of unemployment in this country is most likely north of 20% when you include "long term discouraged workers" who have exited the workforce, versus the official measure of just under 5%, as shown in the chart below. Again, official measures tend to understate reality. If unemployment is truly that high, then it's all the more reason to diversify your income from relying solely on your job and include passive income strategies, in addition to hard asset investing.
Another investment theme, which is linked to inflation concerns, is the continued deterioration in the value of the dollar. With the government printing more dollars every day through low interest rates and quantitative easing, the decline in the value of the dollar has accelerated - this worsens inflation and diminishes the purchasing power of dollar denominated assets (like your bank account). The charts below shows two views of this. The first is the growth of the money supply (M3 is the broadest measure). As you can see, while the money supply growth rate has flattened in the current economic recovery to just under 5% annually, the amount of money in circulation has continued to grow and is approaching $20 Trillion!
The long-term decline in the value of the dollar suggests that official reports also understate the true decline in the dollar index. When you think that the dollar today buys about 60% of what it did in 1980, that's cause for concern. Indeed, some are concerned that we may experience hyperinflation in the United States before too long.
If you are interested in this subject, I highly recommend two books that help explain what is happening and how to protect yourself as an investor:
The Dollar Crisis: Causes, Consequences, Cures by Richard Duncan - In this book the author describes the flaws in the international monetary system that have destabilized the global economy and that may soon culminate in a deflation-induced worldwide economic slump.
The Dollar Meltdown: Surviving the Impending Currency Crisis with Gold, Oil, and Other Unconventional Investments by Charles Goyette - another alternative investing book focused on the author's concerns around our currency system and advocating for gold, oil and other unconventional investments to secure and grow wealth.
Ironically, in an inflationary environment with a declining dollar, the best position is to be a long-term borrower and investor in hard assets. Real estate works best, since you can still get a 30-year fixed loan for 5% to 6% (on investment property) today, which will be repaid in devalued dollars, while the value of the property appreciates due to inflation. Most people claim they do not want to be in debt at all, but that misses the point that there is both "good debt" and "bad debt." I define "bad debt" as loans to buy things you consume - even your primary residence, because these things do not earn a return on investment. "Good debt" would include a mortgage on an investment property, assuming the property provides you with positive cash flow each month, or a loan to purchase a music royalty stream (assuming the rate of return on the royalty investment is higher than the interest rate on the loan you take out). A good source of small business loans is Kabbage. I also like Prosper for personal loans that can be also be used to fund investments..
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