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Building Wealth With a Fiat Currency

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Hello,

It's been a long while since I've posted here - life has been intriguingly and fantastically busy. Before getting into the meat of my question, I'll give a bit of background information. As a very few of you may know, I'm a sixteen-year-old. I'm taking a strong interest in building my personal wealth; I have done a significant amount of research regarding investing and finance, and I am confident that I will manage my Federal Reserve Notes well.

That said, I am aware of the fact that our currency has nothing backing it, and I accept the possibility of its eventual complete loss of value. I don't know when this will happen and not seen any plausible predictions, but I hate the idea of having built a significant amount of wealth just to have it collapse because the currency is worthless.

So what do I do? Collect commodities and metals? I wouldn't want to put the bulk of my expansive investments into this, since there is no real room for growth except in post-economic apocalypse scenarios.

Also, will the Dollar hold any value after it collapses?

I'm at the threshold of beginning to invest and make significant (or more significant than they have been in the past) investments. I'd like to do it right and be comfortable that my money is safe.

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Hello,

It's been a long while since I've posted here - life has been intriguingly and fantastically busy. Before getting into the meat of my question, I'll give a bit of background information. As a very few of you may know, I'm a sixteen-year-old. I'm taking a strong interest in building my personal wealth; I have done a significant amount of research regarding investing and finance, and I am confident that I will manage my Federal Reserve Notes well.

That said, I am aware of the fact that our currency has nothing backing it, and I accept the possibility of its eventual complete loss of value. I don't know when this will happen and not seen any plausible predictions, but I hate the idea of having built a significant amount of wealth just to have it collapse because the currency is worthless.

So what do I do? Collect commodities and metals? I wouldn't want to put the bulk of my expansive investments into this, since there is no real room for growth except in post-economic apocalypse scenarios.

Also, will the Dollar hold any value after it collapses?

I'm at the threshold of beginning to invest and make significant (or more significant than they have been in the past) investments. I'd like to do it right and be comfortable that my money is safe.

Hello Aubrey,

First, I am not a stock broker and below are just my personal oppinions.

I agree that putting the bulk of your investments in commodities would be unwise unless you had specific information of an eminent collapse of the dollar. Especially at your age, high risk/high yield investments would be preferable. Something to keep on mind is that during the depression 3/4 people still had jobs and the stock market crash only dropped the dow about 30%, if I remember correctly. Significant, yes, but at your age, you have plenty of time to recover from something like that were it to happen again.

That being said, I have had a number of people recommend putting 5-15% of your investments in metal. Depending on your judgment of how likely and soon you think a collapse of the dollar will be, you might do a little more or less then that but should not put anywhere near a majority in them. In an economic environment with poor liquidity, that 10% will be worth significantly more in buying power then it is currently which would afford you some great purchasing opportunities were such a situation to arise.

As far as what to buy as a metal hedge, swiss francs(gold) are pretty ideal because the fact that they are coins allows you to circumvent the requirement of providing your soc sec # which must be done when purchasing bullion. (In order that it can be confiscated should the government require it) Also they trade at very nearly their weight value.

There's 2 cents.

As a side note, philosophically, I strongly advise against making decisions based on appocolyptic predictions. A collapse of the dollar could happen in a century as easily as a day and to make decisions about your life in regard to theoretical macro economic predictions, which socialism has proven time and again to be incapable of significant accuracy, will not likely benefit you. It is tantamount to walking around in a constant state of ready, waiting to get mugged, or planning each day around an earthquake which you think might happen. Living your economic life in a state of emergency is quite wrong for a number of very obvious reasons.

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The dollar isn't going to collapse in the sense of becoming worthless. Still, even if one thinks it is... as a young lay-person, most financial advisers would tell you to put the bulk of your retirement money into stocks. Those are just as real as commodities.

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I'm a stock broker. And honestly, the day dollar loses its value, it really doesn't matter what you're holding. It would take something completely apocalyptic like a nuclear holocaust. And frankly, it would also mean a world wide economic collapse. If that happened, what the hell are you going to do with an underground vault filled with gold? Realistically, there is really no point in worrying about the dollar collapsing, at least not during our life time.

By the way, it really isn't that bad of an idea putting your money into commodities and metal these days considering the speed with which their prices are rising -- given the fact that places like China, South East Asia, Latin America, and other emerging economies are requiring a lot of it, among other things. Heck, during the past four months or so if you had your money in corn futures (due to ethanol) or frozen OJ (due to bad weather), you're looking at bigger returns than just about any mutual fund on the market.

The truth is most people really won't make enough money in their life time to really have to worry about what to do with their money. You go to a finance professional with a couple hundred Gs and all they're going to ask you is if you're a "conservative investor" or "proactive investor" or whatever stereotype investor -- all pretty meaningless because frankly they're just trying to sell you whatever it is the management up top get them to sell. To get someone to actually pay attention to develop a customized investment plan for you, you need at least a million or two in disposable cash.

Finally, in my personal opinion, if you have more money than you know what to do with it and just want to have something that will keep in value, the safest bet is something like real estate. As long as you pay attention to the general market trend and don't grossly overpay for the property, it's something that will virtually always go up in value in the long run. Think about this - the middle east oil families are some of the richest people in the world, and basically they just buy up lands and buildings all over the world from New York to Shanghai. The Saudi royal family for instance owns about 7% of all real estate in the United States, an incredible amount when you really put it into perspective. To quote Tony Soprano, "Buy land, because God ain't making any more of it."

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The dollar isn't going to collapse in the sense of becoming worthless. Still, even if one thinks it is... as a young lay-person, most financial advisers would tell you to put the bulk of your retirement money into stocks. Those are just as real as commodities.

Actually most financial advisers will probably tell you to put the bulk of your money into some sort of fund, and probably a fund that's part of the company's roster. When you look at what a financial adviser actually does, they're really just sales people that's trying to sell you a product. They're under pressure from up top make make a certain amount of quota on certain funds, and they're generally paid according to the amount they sell in commissions. In other words, they have a vested interest in selling you certain products. Generally they're issued a guideline that divides customers into certain types -young professionals, young parents, middle age families, or retirees- and just sell whatever funds under those categories.

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Wealth accumulation qua wealth accumulation is about the most pointless activity you could ever get involved in, anyway. Money is only as important as what you intend to do with it.

If anyone is seriously concerned with the potential for a collapse or violent sea change of civilization, the plan they should follow is:

A.) Buy lots of books

B.) Read what's in the books

C.) Master many complex skills

If you know how to create wealth you'll never have to worry about accumulating it: whatever happens, as long as you're alive you can start over.

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Wealth accumulation qua wealth accumulation is about the most pointless activity you could ever get involved in, anyway. Money is only as important as what you intend to do with it.

To be honestly I think for a lot of wealthy people I've met, wealth accumulation isn't really about the money itself, but rather about the challenge and the sense of accomplishment it gives them. It's really no different from someone trying to master a craft that they enjoy.

I mean, I don't really consider what someone like Warren Buffet does pointless per se. If you consider it from the demand side, they're basically re-directing wealth where it's needed, and establishing fair market value for companies.

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Actually most financial advisers will probably tell you to put the bulk of your money into some sort of fund, ...
Fair point; to clarify, in the context of this question, by "stocks" I meant anything that has stocks as it's underlying basis. The point is simply that companies are real, just as commodities are. So, funds...sure.
Wealth accumulation qua wealth accumulation is about the most pointless activity you could ever get involved in, anyway. Money is only as important as what you intend to do with it.... ...
While saving for the sake of saving does not make sense, people save (relatively) large amounts for large future expenditures and for regular expenses during retirement and that does make sense. Edited by softwareNerd
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Well, RM, now that you've been told that most people "don't really have to worry about their money", and "wealth accumulation (qua of course) is pointless", with don't really strike me as helpful.

I don't think the concern here is the collapse of the dollar, but rather the leakage of value away from your investments due to monetary policy that would cause a run of higher than historical inflation. Today it is hardly a worry since inflation has been so low for so long, but most of us can remember different days, and these were not "apocalyptic" events that caused it. Double digit inflation is enough to dent anyone's portfolio.

What you are looking for is called an "inflation hedge", something that holds or even increases in value during inflationary period. It woudl be nice if this asset also gave off some value at other times too, but that is not absolutely necessary. The trick then is to recognize what parts of your investments are at inflation risk and what parts act as inflation hedges.

Hard assets generally are inflation hedges, such as direct commodities, and real estate. Frankly, for the average middle class person who owns a house (assuming its not in a declining area) that is all the inflation hedge one needs (and maybe even a little too much). Also recognize that businesses that deal in hard assets are also somewhat protected during inflationary times, so gold stocks, beyond just bullion. I don't know much about REIT's, but would suspect because they are based in real estate investments that they are more stable during inflationary times (maybe someone who knows these better can comment). Companies that are based almost entirely in intangible assets may not fare as well during such a period so recognize the risk they pose.

I think the 5-15% rule that aquelasa stated is probably more important as your wealth grows and you need to diversify against different types of risk. If you're young and don't have a lot of assets, then do as SNerd says and go the stock route, you'll more than make up for the risk you incur with the greater growth rate and the longer compounding period you have, another reason why most young people who have homes are already set in this department.

Beyond that, I don't know much more. I'm a passive investor so my money just sits. I know the theory, that's about it. Maybe Galileo Blogs or Snerd can offer you some additional ideas.

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I agree with many of the comments on this thread, in particular:

* Invest in stocks because they grow in value very fast over the long haul (if you're 16, your investments get to benefit from a very long period of compounding)

* Invest in yourself by developing lucrative skills, but only in a field you are passionate about

I also agree with the warnings against accepting an apocalyptic vision, either broadly of the world or more specifically of the value of the fiat dollar. I do not think the world is going to collapse, at least not very quickly. I also think it is highly unlikely that the dollar will collapse due to some sort of hyper-inflation. Although the dollar has no gold backing, it does have the rather solid intellectual backing of some able economists. Even though many of their premises are incorrect, such as a reliance on Keynesian economic theory, nearly all economists understand the need to keep inflation low and to preserve the value of the dollar. These economists become future Federal Reserve chairmen.

Having said that, I do think inflation is on the rise, but it is still unlikely to approach the level we saw in the late 1970s. Therefore, invest in stocks. Either do it through a mutual fund or pick individual stocks of companies you know something about and like. For example, is there a computer gaming company you admire, or a clothing company? Etc.

Investing successfully in individual stocks is difficult; it is a skill honed over a lifetime. You will make mistakes, some of them serious. Because of that, I recommend putting a significant portion of your funds in mutual funds and increase the amount you invest in individual stocks as you get more comfortable. Of course, many busy people never invest in individual stocks because of the time commitment. You will also do well if you only invest in mutual funds.

As for investing in real estate, that is always worthwhile. The best investment you will make, because you will enjoy it every day you live in it, is your house. It is also a good inflation hedge.

Gold can work as an investment. Personally, I think it is difficult to do successfully unless you have a strong view on whether inflation is growing or subsiding. If you do not have such a view, I would stay out of it. Even with such a view, I would not put a large percentage of my money into it.

Finally, run screaming from ethanol, or anything related to it. It is an artificial boom spiked by subsidies. Already, politicians are beginning to back away from this one. When the bust hits, it will hit hard.

Have fun. Don't be afraid to make mistakes. They are learning opportunities that enable you to keep getting better.

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If you want to invest in stocks, be prepared to do a lot of homework. That is, unless you're in a market like China, or we hit a stretch like the internet boom again. If you don't have the time to constantly study the market (which you should, given that you're sixteen... although when I was that age I had other things I'd rather do than looking at stocks all day), I'd say don't bother. In my experience for every one amateurs investors that doubles or triples his money, there are nine others that either lose money or don't make nearly as much as they would if they had just left their money in a mutual fund. The ones that make money all have one thing in common -- they follow the market all day, everyday, and read or watch anything stock related they can get their hands on. For most of them it's their hobby, and not just simply an investment.

If you are serious about playing the stock market though, I would recommend that you get some books on technical analysis. It's one of the most important tools for traders, and it's actually alot of fun if you like that sort of stuff. It would be much easier if you had someone who is proficient with it to mentor you though, and some friends/co-workers to discuss it with. Furthermore, it takes alot of experience to translate what you learn onto the actual market. At 16 though you have a lot of time to learn. If you already have experience with stock trading, keep practicing. If you don't, I recommend that you start by doing virtual practice runs (I think e-trade used to have that option... not sure if I remember correctly) until you get comfortable with your assessments.

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I agree that, in general, individuals ought not to be buying individual stocks (nor, for that matter, individual bonds). For the vast majority of people, the best way to invest in stocks is to buy an index fund or slightly diversified mix of some long-performing mutual funds.

Edited by softwareNerd
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If you want to invest in stocks, be prepared to do a lot of homework.

Am I correct in assuming that when you say "invest in stocks" you're talking about single stock buys as opposed to funds? (which is a form of investing in equities).

GB's advice is quite good. YOu could invest in diversified funds until you feel more comfortable that your stock picking skills are good. Personally, I'm a fan of exchange traded funds which are like mutual funds indexed to the S&P, NSDQ100, etc, but buyable as "stocks". I have no intention of becoming a stock picker any time soon. A good detail of this strategy is available in Yaron Brook's, Investing: An Objective Approach, which basically argues as Moebius, that in order to succeed as a stock picker you have to have competitive advantage against the pros, and the average Joe has no such advantage and would be better off being a passive investor with a diversified fund.

Edited by KendallJ
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Am I correct in assuming that when you say "invest in stocks" you're talking about single stock buys as opposed to funds? (which is a form of investing in equities).

Yeah man, that's what I'm talking about .

GB's advice is quite good. YOu could invest in diversified funds until you feel more comfortable that your stock picking skills are good. Personally, I'm a fan of exchange traded funds which are like mutual funds indexed to the S&P, NSDQ100, etc, but buyable as "stocks". I have no intention of becoming a stock picker any time soon. A good detail of this strategy is available in Yaron Brook's, Investing: An Objective Approach, which basically argues as Moebius, that in order to succeed as a stock picker you have to have competitive advantage against the pros, and the average Joe has no such advantage and would be better off being a passive investor with a diversified fund.

The thing about exchange traded funds is that it's kind of boring if you're a proactive investor. The safest (best?) way to play exchange traded funds is to just deposit a set amount every month -- as long as the looong term trend is up, you'll do fine. Personally I'll only buy ETFs if the ETF of a country like China or some other emergent economy -- I know that their economy is going to grow at a high rate, but I'm also unfamiliar with individual stocks. In that case, buying the ETF is a relatively safer way to invest in a vibrant foreign market.

By the way, I think the average Joe could become good enough at stock picking to beat the pros, if they do their work and have a solid understanding of the market. I have met many clients who are far, far better stock pickers than most brokers. The thing is those are the same people who wake up reading the Wall Street Journal, watches finance shows all day long, and chat about stocks when they meet up with friends. I mean, these are generally people who just like trading and made it into their hobby.

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Keep in mind that money/currency is not the source of wealth. It's how wealth is measured at a given moment in time. The point of savings is to have claims on others' goods and services in the future. Ultimately, the only thing that can give you such claims is to have ownership of valuable goods and services yourself. This is why equities are good long-run (though not necessarily good short term) protectors of savings from inflation. For example, even after an imagined currency meltdown a global food company will still be providing services worth approximately as much as before, in real terms. Similarly, if your own profession offers real value to others, it can be a source of wealth regardless of what happens to the currency. Fixed income (e.g. bonds) on the other hand are typically claims directly linked to the value of a particular currency, and are inversely sensitive in value to inflation/devaluation. (TIPS or I-bonds can offer some partial protection against devaluation, but typically offer pretty low returns).

I don't consider precious metals and commodities as such to be good long term investments, mostly because they have a 2000 year history of negative inflation adjusted returns, in aggregate. Much more valuable is investment in the minds and human effort that turns such commodities into useful goods. Productive assets, in other words.

Real estate can be good, especially when bought at the right place and at the right time, and comes with tax advantages for many, but it is also a high-involvement asset requiring significant time and attention, with high transaction costs and sometimes low liquidity.

One caution, however, if you overpay for stocks, they can disappoint. And in the short run, stocks do not generally react well to currency devaluations, inflation, rising interest rates, economic decline, especially if starting from a period of high valuations and expectations.

The best investment of all is in your own capabilities/knowledge/ career development/ or business and or entrepreneurial opportunities that you have an edge in and interest you. Because of the time/reward effort involved in investing, it may well be better to focus your time on what you're good at, and leave most of your investment decisionmaking to professionals (e.g. buying funds).

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