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Scenario 2 -National disaster that impact the overall economy (e.g. 9/11, avian flu, grid blackouts, global war)

After the 9/11 terror attacks, trading shutdown for a few weeks and the national economy fell into a slump. How do you prepare for the next big disaster that will impact your personal net worth?

I will preface this topic with some confessions and a disclaimer.

  1. I have a strong DISLIKE for mutual funds and I rarely invest in them
  2. I have a strong PREFERENCE for Exchange Traded Funds (ETFs).
  3. With any investment advice, you should always do your own due diligence before investing. Also, speak with a professional if you need further support or assistance.

Why do I dislike mutual funds?

  • Most mutual funds have higher fees than other investment vehicles such as ETFs
  • Most mutual funds suffer from liquidity problems; you cannot instantly buy or sell a mutual fund. There is a “process” by which your position in a fund is liquidated.
  • Most mutual funds managers, when deciding to invest in a particular stock, do so over a period of up to 12 weeks. So if Exxon is selling at a great discount, you’ll have to wait a few weeks for your fund to buy up those shares by which time the price will likely have moved up or down during a sell process.
  • I often wonder whether mutual funds simply aren’t the main driving factors of stocks moving up/down in price. In its most naked form, it is the worst part of the “herd” mentality when everyone chases the hottest thing which is usually the time to get out.
  • There is no way to leverage your investment in a mutual fund. Yes leverage can be a bad thing but it can be a good thing when done right.

Why do I LIKE Exchange Traded Funds?

  • Lower fees than mutual funds on average
  • Instant liquidity. You can buy/sell an ETF just as instantly as any stock
  • Variety and TRUE diversification. Many people think that if you have a portfolio of 25% bonds, 50% stocks and 25% Real Estate that you’re diversified enough. The problem with this mentality is that it leaves out so much: Precious metals (gold, silver, platinum), currencies, commodities (oil, corn, uranium), and so much more!
  • Leverage! You can usually buy/sell options on ETFs. If you own an ETF why not earn a little extra cash buy selling the out-of-money calls a few months out? This alone can add 2% to 8% to your portfolio!
  • Volume – I get the feeling that ETFs will eventually overtake mutual funds as the preferred investment vehicle. Oddly enough, perhaps someone can come up with a mutual fund comprised of diversified ETFs just keep the fees low.

Let’s run through a hypothetical: Let us assume that Avian Flu hits the U.S. and millions are sick and many will likely succumb to the illness. How will this national disaster impact you and how should you prepare?

As in the previous scenario, you should likely have ample cash on hand but I would recommend that instead of $1000, you increase it to at least $2500. The reason for the increase is due to the possible demands placed on goods and commodities during a national crisis.

What about the bigger picture?

This is where having instant liquidity can be an asset. At the first sign of a pandemic, my first response would be to liquidate all my holdings and move to cash. It is inevitability that there would be a significant drop in the stock markets. The bond markets would likely also be negatively impacted. Cash would be king and given the uncertainty of the future it may be in your best interest to be able to take that cash anywhere.

It is been noted that during periods of black plague in England, the wealthy would often send their loved ones to their country estates to isolate themselves from the troubles of the city. I’m not sure how effective this would be in our modern day age of jets, trains, boats and automobiles but it may prove effective to leave the area or US during the crisis if possible. I would suspect having a boat would be a great plus since you can effectively move yourself out into the ocean and isolate yourself from the epidemic.

When do I get back in? Where do I invest?

These are perhaps the most difficult question to answer since it includes a hypothetical disaster than may have an unusual time horizon. I can only answer it by saying that I would not, while tempted, invest in healthcare or pharmaceutical stocks during or after the crisis. Why? Something as deadly as the avian flu may leave so many financially devastated that they would likely not have any way to ever pay back their debts for healthcare or medicine even though it may seem like a “sure” thing.

What I would most likely invest in as things began to recover would be consumer cyclical sectors but that would largely depend on the landscape at the time.

As before, here are the links to some disaster readiness sites

http://communitydispatch.com/artman/publish/article_5443.shtml

http://www.redcross.org/pubs/dspubs/genprep.html#disrep

http://www.ready.gov/america/index.html