Safe is the New Risky: Old Investments May Not Be What You Think

If you were born before the 1980s, your financial decisions are likely based on advice passed down from your Baby Boomer or Greatest Generation parents. They are probably more financially comfortable than you are, so it’s probably safe to follow in their footsteps, right? Wrong.

The conventional wisdom forged in post-WWII prosperity, which feathered many a Great Generation and Baby Boomer nest, does not reflect the forces underlying today’s economy or the massive technology-driven changes that are coming down the pike. It’s time to reassess what’s safe and risky and build new kinds of financial success strategies.

These three pillars of middle-class success used to be true: 

A good job doesn’t guarantee financial security. Salaries have stagnated, even as the economy has grown. From 1979 to 2018, net productivity rose 69.6 percent, while typical workers' hourly pay increased only 11.6 percent (after adjusting for inflation). Put another way, even though Americans are working more productively each year, the benefit has primarily accrued to employers and shareholders.

(source https://www.epi.org/productivity-pay-gap/)

Pensions are a thing of the past, and employees bear all the risk burden of their 401Ks. What’s more, employees are paying significantly more for basic benefits like health insurance.

In contrast, there’s never been a better time to be an entrepreneur. Loans are cheap, and new technologies have made it simple to set up a small home office, conduct e-commerce, and collaborate with specialists. Starting a business took a lot more cash and commitment 30 years ago. Owning your client relationships gives you the kind of control you can’t have when working for someone else.

Bonds are bunk. Investors used to count on bonds to yield a safe 4-6% yield, and people balanced their portfolio by combining riskier stocks and steady bonds. They are used is risk-parity investment strategies. But now, US Treasury bonds are an interest-free risk—a far cry from the days when they yielded risk-free interest. 

Here’s how. After the financial crisis of 2008, the Federal Reserve took short-term interest rates to zero. And by taking interest rates down to zero, Fed action guaranteed that, in the long term, interest rates will have nowhere to go but up. And since bond prices and their interest rates are inversely related, all bond prices will eventually decline as rates inevitably rise.

Your savings account is losing you money. It used to be that a saver could put their money in an FDIC-insured savings account and generate interest returns far over what the inflation rate might be. Savings accounts always had a net positive real rate of return. That is sadly no longer the case. Most savings accounts generate no interest rate yield, or, if they do, it’s a fraction of a percent. With no real interest, your savings account exposes you to inflation risk.  

The US economy is heading into unchartered territory. On top of the anticipated Covid-19 recession, Gen X-ers and Millennials are inheriting decades of national debt and asset price inflation, which is sure to lead to a sovereign debt crisis at some point. What does smart investing look like now?  

First off, you need to redefine “diversified.” It’s time to go beyond stocks and bonds — investors need to look at commodity-trend strategies for long-volatility and new, technology-driven crypto assets like Bitcoin.

Crypto assets represent a new asset class for investors. They are not correlated to stocks, bonds, or gold. They can increase in both price and value without the economy growing. They can be used to generate real income of 4% - 12% interest. Owning crypto assets helps an investor diversify by providing an asset class that is not solely US-dollar denominated. Crypto assets are still new and therefore still volatile; but crypto assets will become increasingly attractive as the market matures.

We are still in the early adopter phase of blockchain technology, with a global penetration of less than 2%. This makes crypto assets the ideal candidate for early investment.  

As with almost every area of life, it’s wise to be skeptical of the conventional wisdom and stay agile and ready to make the most of emerging opportunities. You may not explain cryptocurrency to your parents or grandparents, but your children will thank you for your visionary investment.