More and more, I come into contact with retired clients and prospects who have fears and concerns beyond just outliving their money or losing a loved one. As a result, they seek an advisor who adds both perspective and concrete solutions that address these deep-rooted concerns.
What they are not looking for is an advisor, or someone they just met, to provide pat answers like, "It will be okay," or "That will never happen." Their concerns can have deep personal foundations, sometimes stemming from long-standing religious or political beliefs ... and they want to protect their family and life savings against them. Some of the more popular issues include:
The United States losing its reserve currency status because of our debt-to-GDP ratio.
Hyper-inflation that will require a wheelbarrow full of money to buy a loaf of bread.
Adverse financial ramifications of the Affordable Care Act (Obamacare.)
I'm not advocating for or against these issues, just pointing out that these have become popular questions and concerns when I'm sitting knee-to-knee with clients, prospects, and workshop attendees. And I've found that in those situations, the starting point is the need to validate their concerns. Not in the sense that you have to agree with them, become a doomsayer, or protest alongside them, but more so to acknowledge their feelings are real and that you have the capacity and knowledge to help them address the issues.
A simple response such as, "I have other clients with similar concerns," or "I recently read an article on the very topic," lets them know they are not alone. Another way to validate their concerns is to demonstrate your familiarity with the main facts, popular opinions, and most of all, specific investments they can use to hedge against their fears.
Reserve Currency Status
The U.S. dollar became the primary reserve currency in 1971 when Richard Nixon stopped the convertibility of U.S. dollars into gold. Known as the Nixon Shock, it made the U.S. dollar the international pricing currency for products traded on a global market, including commodities such as oil. There are some inherent benefits to being the reserve currency, including the ability to purchase commodities at a lower rate and preferential borrowing rates (next to zero these days.)
Maintaining the reserve currency status is a luxury that the United States cannot afford to lose. For one thing, it's why the price of oil and gas is so much lower here than in other countries. If we were to lose our current status, the impact on our standard of living would be obvious. Real estate mogul Sam Zell suggests that losing the reserve status could reduce the buying power of the average American by 25 percent. That's a big number and one that can easily get people worked up.
Fact is, it appears to already be happening. Earlier this year, China and Japan began to abandon dollar-based trade with each other; as did China and Russia, who trade directly in their own currencies. Furthermore, there are reports that the BRIC nations plan to begin settling contracts in their own currencies instead of U.S. dollars, a frightening situation that could eventually force the United States to give up its blank check status.
Advisors looking to hedge against this situation can turn to foreign currency ETFs and even international dividend payers. A popular currency play is the Swiss Franc, which can be obtained through Currency Reserve Shares (FXF). Like the Swiss Franc, however, many currencies are just financial safe havens and don't provide investors with any interest or dividends on their investments. On the other hand, commodity-based currencies such as the Australian Dollar (FXA) do offer investors a 3 percent yield. That's a little more appealing considering that none of this "foreign currency" stuff comes without risk.
Another option may be to buy shares of an international dividend payer within a sector of the economy that would benefit from a decline in the U.S. dollars reserve status. For example, a global miner like BHP Billiton (BHP) might be a currency hedge since it's headquartered in Australia and its stock historically increases in value when the commodities it mines (oil, silver, copper, iron ore, and others) increase in price while the U.S. dollar declines.
The Federal Reserve's recent decision to print money through Quantitative Easing I, II and III has many concerned about the potential for hyper-inflation. While there is no precise numerical definition for hyper-inflation, most investors and the media describe it as double-digit inflation, something akin to what the U.S. experienced in the late '70s and early '80s. While we haven't witnessed this type of inflation in more than 30 years, it's not unprecedented. The U.S. was hit with significant price increases in the 1910s, the 1920s and the 1940s.
Unfortunately, the fears today about hyper-inflation are being stoked by those who compare what has happened in Zimbabwe to the United States. Zimbabwe has indeed experienced unimaginable inflation, to the tune of 1,000 percent, according to one report, but that country's economy, political environment, and resources are very different from ours. Frankly, inflation can be a silent killer even when it's below double-digit levels. A retiree's purchasing power can rapidly erode, forcing them to withdrawal larger and larger amounts to keep pace with inflation.
Most advisors understand the role inflation can play in retirement but they should consider framing it in terms other than cost-of-living riders, Treasury Inflation-Protected Securities (TIPS) and the like.
Precious metals, including gold and silver, are one of the most common hedges against inflation. Some may prefer to hold it in physical form ... like Uncle Scrooge with his vault ... but that can prove costly and burdensome, especially when ETFs like the GLD and SLV make it easier to get exposure. For advisors looking to generate some income in addition to hedging, there are also a number of gold and silver mining companies that pay dividends -- Rio Tinto (RIO), Newmont Mining (NEM) and Silver Wheaton (SLW) for example.
Another often overlooked hedge against inflation is personal real estate. This is an attractive option, particularly if the mortgage is paid off. Real assets like property hold their value better than paper assets, the value of which is easily eroded by inflation. Like gold, real estate tends to retain its intrinsic value even during periods of inflation. But unlike gold, it is possible to earn a regular income on real estate.
Owning a home eliminates the need to pay rent and any rent increases, and if you have a fixed-rate mortgage (the largest household expense for most) or have a paid off mortgage, inflation isn't a factor. This is a good reason to encourage clients concerned about inflation to pay off their mortgage before retirement. Finally, in the most extreme scenarios, with clients subscribing to a doomsday theory, remind them that they can't eat gold but can grow vegetables in the backyard.
With health care accounting for 18 percent of gross domestic product and 12 percent of the Standard & Poor's 500, the role Obamacare has on a client's portfolio is raising more concerns.
I've spent many hours researching opinions on who will be Obamacare's winners and losers. Will hospitals and insurers come out on top? Will medical device makers crumble? And what about pharmaceutical companies? Nobody really knows because there are just too many variables that need to be worked out. Sure, 30 million or more people will likely have health insurance in 2014, which will reduce the number of uninsured patients showing up at urgent care facilities, but hospitals will see smaller annual increases in Medicare payment rates.