Investing it all about the future. It’s about ensuring you have the real resources to provide for a healthy and happy life. As life expectancies increase, wealth inequality increases, and asset prices increase, this becomes an increasingly difficult task for a majority of people. It’s easy to lose the forest through the trees, so in this series of articles, I will put to paper how I think about the topic of inflation and money. I am looking at this topic in isolation considering only inflation, currency, other short term liquid cash equivalents, precious metals, and cryptocurrencies. I come up with a strategy of diversifying these types of assets in isolation. Things like stocks and longer-term bonds are not being considered in this first layer of investing.



Inflation and Money



Let’s say you are very fortunate and you have saved $10 million dollars and have a yearly expense of $100k per year. You are only concerned with being able to maintain your $100k lifestyle and not run out of money. Theoretically, that money would last 100 years if the real buying power stayed constant over time. It might be tempting to let that $10 million sit in a bank account and not worry about investing at all, but this chart shows how long the $10 million would last when you take into account inflation.



Source: self



Furthermore, historically there are instances of currencies undergoing much higher inflation if you look at what happened to Germany or Hungary. Your $10 million would have lasted less than 1 year if you started in 1922 Germany.



Source: https://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Republic#/media/File:Germany_Hyperinflation.svg



Inflation Hedges



Inflation is as good an excuse as any to introduce classes of assets that provide some protection against inflation. I will classify them as money, commodities, real estate, debt, and equities.



Money, whether it be a currency provided by a government, a precious metal, a cryptocurrency, or something else always has the same function. To be exchanged for real goods and services. It’s impossible to say for certain what the money of the future will look like, but it is prudent to examine the history of money which may offer some clues to the future. At the time of writing, inflation in the USA and in most countries is low and has been declining since the 1980s even as money supply and debt have expanded as a percentage of GDP. The consumer price index in the USA has increased by over 50% over the last 20 years while M2 money supply as more than tripled.



Source: https://fred.stlouisfed.org/series/M2NS



Diversification of money



If you are sure what we will be used as the money of the future and what will not be overly devalued by inflation, then it would be ok to stick to a single type of money. If you are like me that default choice would be dollars. But if you are not sure, it is prudent to diversify your money holdings to multiple currencies, precious metals, and even cryptocurrencies. It’s important to set expectations and the goal of a money holding is not to get a return on investment. It is to mitigate inflation and maintain buying power. You may get lucky and see an increase in buying power over time but that is the exception, not the rule.



Per my previous article about wealth inequality, I find it especially prudent to hold some money in ways the wealthy do not. Inevitably a diversified portfolio of money will underperform whichever type of money maintains its buying power the best



Source: http://money.visualcapitalist.com/worlds-money-markets-one-visualization-2017/



In 2019, I use the money supply, the total value of gold/silver, and the total value of all cryptocurrencies as a starting point for determining a diversified portfolio of money. I then try to discount what would happen if inflation spiked up above 5% for dollars and other currencies. There would likely be a flight away from currencies and toward alternate forms of money. Given my time horizon of 50+ years, I think it’s very likely for this scenario to unfold. In order to account for that likely scenario I underweight dollars relative to the market and overweight precious metals and cryptocurrencies.



Global money

15% dollars

77% bucket of other currencies

7.6% gold

0.1% silver

0.3% cryptocurrencies



My Proposed Money Allocation

40% dollars

40% bucket of other currencies

15% gold

2.5% bucket of other precious metals

2.5% bucket of cryptocurrencies



The easiest allocation is dollars. Given it is the most used world currency it is easy to keep dollars in FDIC insured bank accounts like Marcus on a money market account. Both of which provide convenient liquidity and an interest rate.



How to invest in other all these potential forms of money?



How to invest in precious metals? One option is to simply buy the coins and store them at your home or at a bank safe deposit box. This is a good option if you have a safe place to store the metal and do not plan on needing liquidity quickly or often. There are heavy transaction costs (up to 5%) when you do exchange the precious metal back to dollars. This only makes sense if you intend to hold for at least 10 years. There are also security concerns with storing precious metals at home or even transporting them through the mail and to and from a bank safe deposit box. The investments below try to balance low fees, security, and ease of backtesting.



My Proposed Money Allocation

40% dollars (SHY)

40% bucket of other currencies (PLMIX)

15% gold (IAU)

2.5% bucket of other precious metals (SLV, PPLT, PALL)

2.5% bucket of cryptocurrencies (directly)



Source: portfolio visualizer



Source: portfolio visualizer



As you can see the over the last 5 years the performance of this allocation has been no better than just holding short term treasuries. Note that I manually adjusted cryptocurrency down for 2.5% to 0.5% to adjust for the 5x return over the last 5 years. If you look at this performance and find it disappointing, I think you are missing the point. This portfolio is designed to be a hedge against inflation without making a big bet on a single form of money. Just as you can diversify away from holding a single stock, I suggest diversify away from holding just dollars into other forms of money, whether it be other currencies, gold, cryptocurrencies, or other precious metals. This provides a form of defense against hyperinflation. Since this portfolio holds many forms of money, it is likely that one over more goes to 0 over time. That’s why it’s important not to rebalance this portfolio. Rebalancing with anything that goes to 0 can take the entire account to 0. When inflation rears its ugly head again, this portfolio is designed to mitigate some of that inflationary risk.

