Is There a Safe Way to Beat Inflation?

[bhobba]

Are there any non risky ways of beating the inflation rate( 2% annually I think)? I'm all for saving, but the fact that cash loses value frightens me. Investing is also risky too. Are there any non volatile, surefire way to beat inflation?

Any actuary will tell you such do not exist - and they are the experts at managing risk - which is all you can do. So if reducing risk is your goal the best you can do is consult an actuary. Just as an aside I am surprised more people don't consult actuaries for financial decisions - we have financial advisers, brokers, all sorts of people that are commonly consulted - but actuaries rarely. Perhaps that's because there are not many actuaries that offer personal actuary services, or because there doesn't seem much demand they don't bother doing it - my suspicion is the latter. Pity really - we had a royal commission into banking and financial services in Australia and how the usual participants acted was terrible - you can use google for the details. Actuaries have a code of conduct and an enviable reputation for unbiased advice they would not like to endanger.

Thanks
Bill

 

[FallenApple]

sers, brokers, all sorts of people that are commonly consulted - but actuaries rarely. Perhaps that's because there are not many actuaries that offer that offer personal actuary services, or because there doesn't seem much demand they don't bother doing it - my suspicion is the latter. Pity really - we had a royal commission into banking and financial services in Australia and how the usual participants acted was terrible - you can use google for the details. Actuaries have a code of conduct and an enviable reputation for unbiased advice they would not like to endanger.

So it's not less risky than keeping currency as asset? The value of currency has nearly a 100% chance of halving in 20 years. That's an absurd amount of risk. It's practically a guaranteed failure.

 

[bhobba]

So it's not less risky than keeping currency as asset? The value of currency has nearly a 100% chance of halving in 20 years. That's an absurd amount of risk. It's practically a guaranteed failure.

That's why you need to consult a professional in risk. Of course those that do not want to basically 'scam' you with trailing commissions etc will charge, and it will not be cheap. Until you can afford such advice, and it in no way constitutes actual advice which would be illegal for me to give unless I was correctly licensed, but simply what I would do, is stick it in an index fund. Once you have enough money to make it worthwhile see a professional to work out a financial plan. Again I can't advise you who to see, that's up to you, but since this is a science based forum I would see someone with good math/science skills who will take a complete approach. The following gives some idea of the issues involved, many of which you probably haven't even thought of:
https://www.advisorperspectives.com/articles/2015/09/07/think-like-an-actuary-to-become-a-better-advisor

Thanks
Bill

 

[russ_watters]

I'd imagine that a house wouldn't be worth anything in a society that has collapsed and most likely war torn as a result.

No, a house in that case is still the most important and valuable thing you own, and for the same reason it is normally: you can live in it.

 

[Vanadium 50]

An ounce of gold (or worse, a bar of gold) is totally worthless in case of total collapse. You're better off with a paid off house, a solar panel and a gun.

In the event of the total collapse, you might not even need the house paid off.

'Specially with the gun.

 

[Vanadium 50]

The value of currency has nearly a 100% chance of halving in 20 years.

Why do you say this? That's not the case for the last twenty years (instead of a factor of two, it's 1.56). It works out to 3.5% inflation annually. It has not been that high -even once - for a while.

 

[russ_watters]

In the event of the total collapse, you might not even need the house paid off.

'Specially with the gun.

True. Having the house paid off is more important for the partial collapse (see 2008-10 foreclosure crisis)

 

[BWV]

You don't need to worry about 'ordinary' rates of inflation, say 2-3% - those get discounted into interest rates, so you will only lose real value if you stuff your cash under your mattress. A typical money market fund (ignoring the financial repression and negative real rates a few years ago) will keep you up with inflation.

A high inflation scenario, either like the stagflation of the 70s in the US or a hyperinflation like in Zimbabwe, Germany in the 20s or Venezuela is different

A key tenet of economic finance is what risks investors get paid to bear and why (getting paid for risk = mathematical expectation of outcome > what could be earned in some 'risk-free' instrument like T-Bills). The only risk that meets this criteria is stock risk and the rationale is that this risk is correlated to shocks in the economy. So you get paid a risk premium for owning stocks because the risk they will experience a sharp decline in value is strongly correlated to the risk you lose your job and need the money.

 

[TeethWhitener]

Don't you have insurance for that?

Just want to point out, even with really good insurance, medical bills can still be a killer. My son was born 3 months premature and stayed in the hospital for 10 weeks. Luckily we were in network, so we only had to pay our deductible, but had we been out of network (which happens quite frequently in emergency situations--i.e., get to the nearest hospital before the patient dies), our insurance would only have covered 85% of the expenses. That's probably about as good as you're reasonably going to get. But having to pay 15% of ~$1M is still going to be painful.

Of course, your broader point about not needing liquidity for that kind of event is spot on.

And of course,

Anything north of 100k? e.g the sudden slap on of a medical debt due an emergency surgery, well, I would just leave the country at that point.

I'm not a physician, but I have to imagine that travel abroad is contraindicated by most of the conditions which would cost you more than $100k.

 

[FallenApple]

I'm not a physician, but I have to imagine that travel abroad is contraindicated by most of the conditions which would cost you more than $100k.

Traveling abroad doesn't mean I'll get endemic illnesses that would be costly. I would have done my research.

 

[russ_watters]

A key tenet of economic finance is what risks investors get paid to bear and why (getting paid for risk = mathematical expectation of outcome > what could be earned in some 'risk-free' instrument like T-Bills). The only risk that meets this criteria is stock risk and the rationale is that this risk is correlated to shocks in the economy. So you get paid a risk premium for owning stocks because the risk they will experience a sharp decline in value is strongly correlated to the risk you lose your job and need the money.

I haven't looked at the actual numbers yet, but this implies to me that in a scenario where you get laid off every recession, keeping your emergency funds in stocks should have the same return as inflation ("half of double"). And therefore surviving one recession without getting laid off makes stocks the better bet.

 

[BWV]

I haven't looked at the actual numbers yet, but this implies to me that in a scenario where you get laid off every recession, keeping your emergency funds in stocks should have the same return as inflation ("half of double"). And therefore surviving one recession without getting laid off makes stocks the better bet.

At the bottoms of the past few bear markets 10 year real returns of the S&P 500 were negative. There is a ‘gamblers ruin’ issue if you need to draw on your funds but they are temporarily down 30-50% in value. The 30 year time weighted return may be fine, but having to liquidate risky assets at a trough valuation to buy groceries can destroy wealth

 

[TeethWhitener]

Traveling abroad doesn't mean I'll get endemic illnesses that would be costly. I would have done my research.

What I mean is that if you're sick enough to cost you $100k, you're likely too sick to leave the country.

 

[FallenApple]

What I mean is that if you're sick enough to cost you $100k, you're likely too sick to leave the country.

That's true, but in such a terrible scenario, I would just pack my bags upon recovery.

 

[TeethWhitener]

That's true, but in such a terrible scenario, I would just pack my bags upon recovery.

I originally assumed you were talking about medical tourism (visiting a country with lower healthcare costs to undergo a costly procedure), but now it sounds like you just want to skip out on paying a debt. I’m not sure that’s advisable. At any rate, I doubt that fleeing the country is any more advisable than declaring bankruptcy.

In the spirit of your original question, the highest risk-free return comes from paying down debt if you have it (assuming the interest on the debt is higher than inflation—almost a certainty). If you don’t have any debt, TIPS are probably the way to go, as mentioned.

 

[symbolipoint]

I originally assumed you were talking about medical tourism (visiting a country with lower healthcare costs to undergo a costly procedure), but now it sounds like you just want to skip out on paying a debt. I’m not sure that’s advisable. At any rate, I doubt that fleeing the country is any more advisable than declaring bankruptcy.

In the spirit of your original question, the highest risk-free return comes from paying down debt if you have it (assuming the interest on the debt is higher than inflation—almost a certainty). If you don’t have any debt, TIPS are probably the way to go, as mentioned.

Right in-line with earlier mention of not spending more than (you know) you need. Difficult to "beat" inflation if you like to spend for more things than you need or really want. (Spend less on 'things', and you'll have more to invest.)

 

[bhobba]

At the bottoms of the past few bear markets 10 year real returns of the S&P 500 were negative. There is a ‘gamblers ruin’ issue if you need to draw on your funds but they are temporarily down 30-50% in value. The 30 year time weighted return may be fine, but having to liquidate risky assets at a trough valuation to buy groceries can destroy wealth

That's a big problem. The best solution I know, is the Donnely Zone System (although not the full solution to the above because you are fully invested when there is a downturn):
https://investingtimes.com/wp-content/uploads/2015/04/The-Zone-System-research-paper.pdf
http://www.investors.asn.au/assets/resources/seminars/2018/Syd-Seminar-November-2018/3-Russell-Lees.pdf

Ignore the commercial part of the above but it was the system I used when I traded (I was a long term trader - tried some others but it suited me best). Austin Donnelly was one of my heroes because what he wrote about actually worked and was a tireless campaigner against investor scams exposing the ripoff of things like trailing commissions. He also, using the zoning system, consistently picked market crashes - its simple but it worked.

To fix being fully invested during a downturn, and that is when you may require the money, sometimes called the failure of portfolio theory, as you get closer to using it, gradually move to a 50-50 mix of cash and shares. You can of course have a 50-50 allocation all the time - it was what I did - I was conservative,

Thanks
Bill

 

[FallenApple]

I originally assumed you were talking about medical tourism (visiting a country with lower healthcare costs to undergo a costly procedure), but now it sounds like you just want to skip out on paying a debt. I’m not sure that’s advisable. At any rate, I doubt that fleeing the country is any more advisable than declaring bankruptcy.

In the spirit of your original question, the highest risk-free return comes from paying down debt if you have it (assuming the interest on the debt is higher than inflation—almost a certainty). If you don’t have any debt, TIPS are probably the way to go, as mentioned.

Oh no, that didn't happen. I'm just saying that if it did, that is what I would do. I'm the type of person that refuses to be slave to financial liabilities. I'm sure that in such a scenario, I would try bankruptcy first, while at the same time packing my bags just in case. It's doomsday scenarios like this that scares me. I had a close call one time, but it was written off as charity. I nearly had a nervous breakdown because of that.

Clearly in the case of a 100k+ medical debt, skipping out on it is a absolute must, even if it means relocation. Why? Well, it saves 100k. Thats why. That's equivalent to a house overseas.

This is why a large emergency fund is so important. In case I need 5 figures of cash to set up a new life, which would actually save me money in the long run. There are several other scenarios that I can think of that's in the same ballpark which can realistically happen to anyone. (e.g imploding economy, job loss etc).

 

[berkeman]

Thread closed for Moderation...

 

[berkeman]

Thread will remain closed. Thanks to all who participated.