Protecting What You Got Part 1

I believe far too much emphasis has been placed in maximizing gains, we first need to backtrack and decide how are we going to protect what we got? There are too many people that can't sleep at night because they didn't protect what they have.

Many people live paycheck to paycheck. What if gasoline prices double, could you still pay your bills? What if it multiplied by 10? Everyone has a point, no matter how extreme where they can be broken financially, the goal is to reduce or eliminate all perceived risks that one can think of.

So you may have an account dedicated towards hedging. You may buy a UGA fund (gasoline), a DBA or FUD fund (food), you may buy an income fund that eventually will grow to handle your expenses and also hedge against risks of government tax increases to pay the bond holders (municipal and treasuries), or bet against treasury if you have a fixed rate mortgage.

You may have a fund that bets on both the dollar (UUP) and perhaps another currency in case the demand shifts.

If these match your annual expense, and you cannot meet obligations one month, you can withdraw 1/12th of it to pay for expenses. The goal is to have multiple years worth of insulation from risks, and you may even benefit if the expenses of living go up.

That's one way to protect your interests. Perhaps you own a house? If so, and the equity has skyrocketed like it did in 2007, you might refinance and take out a huge loan get mortgage to the gills and put that money into treasuries. Now if the price of home tumbles, you have locked in a high interest rate and if the government lowers interest rates to try to get things moving you will have a very high principal and be able to pay off your home. The interest coming in will help you make good on your house payments and you can think about refinancing at a lower interest rate in the future. Technically you might owe more than the house is worth, but because you protected yourself from a decline, you have insulated yourself from the damages.

But that's only one area "hedging daily expenses" that needs to be handled. Some people advise to save in cash 6 months of expenses. If I were certified to, I would advise to have a year saved in CORE expenses saved in ETFs that will increase if those expense increase first, and to be withdrawn only in the event of an emergency.

What you do after you build the core "protection" strategy is complicated and will be covered in detail in the next post of protecting what you got.