I received a letter from my Financial Advisor two weeks ago. With the “debt ceiling crisis” coming to a head, he felt it important to send this to all his clients. The message was familiar, but not in the way you would expect. Make sure you read the entire letter and pay particular attention the the final sentence:

Where Are the Markets Headed Next?

Whether your pessimism about the future is based solely on your feelings or what people and/or the media are saying, I believe it really is all about timing. When might the next major move happen and to what degree? I would like to address what I believe are the various scenarios that could play out. Based on your view of these possibilities will determine what steps you should consider in the days ahead regarding the positioning of your financial assets.

I’m a degreed engineer out of Miami University. That was way back before they invented color. We engineers were trained to “Worse Case” things. Stated simply, what is the worst possible thing that could happen? In the financial arena, the worst case is the financial system shutting down. That means, in my mind, the banks are closed, stock, bons & mutual funds don’t exist and the currency has no value. You can’t swap a $10 bill at Exxon for some gas because it no longer has value. So if you believe this scenario will happen, what should you do?

Here’s my hypothetical model: 

First, get everything out of investments that are denominated in currency. Sell all your investments including IRA’s & 401(k)’s, pay the taxes and penalties if you incur any and buy things that can be stored and bartered with. Maybe some gold & silver, chocolate, food, coffee, bicycle parts (since there will be no gas probably as transportation will shut down as well), etc. You get the picture. Now you have all of your assets in hand and can trade as need be to get what you want.

If the worst case does not happen, you made a major mistake. But if you believe in your heart of hearts this will happen, this seems the only logical thing to do. There are several rabbit trails off of this. How long will it be this way? Will a new currency come into existence? Will the financial markets really stop functioning? But the real question is when? I remember back in 1973 when we had the first major round of inflation, oil embargoes, gas lines, extreme situations int he middle east, many people were saying and thinking the same things back then. But here we are 38 years later still functioning.

What if the system shuts down, the currency is devalued or replaced?

The new dollar bill is called the “zognoid”. It will be red with lightning bolts on the top and bottom. Okay, I’ll stop: you get the point. To get the new zognoid, you will have to turn in your greenbacks. Conventional wisdom would be to have some gold & silver along with diamonds. Anything that traditionally has held value during turbulent times would be the choice. So adding some of these kinds of items to your investment mix might be appropriate. People did that back in 1979 when gold got up to around $900 an ounce. It promptly fell back to less than $300 an ounce and stayed in that range for over 20 years. Only recently has gold gotten back to, and exceeded, the earlier heights. In either case this step, if the events unfold as described, would have preserved wealth.

Last but not least, the system continues on in its current state with markets functioning as they have for the past 100+ years. Between this time and when things might shut down, it is business as usual. So what is one to do? Well, 

The basics are still the basics:

• Don’t react and pull funds out due to fear
• Only pull out funds if it is absolutely necessary
• If you are done with the market, have a plan in place to exit in an intelligent manner
• And of course, if your financial plan supports doing so: Buy, buy, buy while things are on sale

My advice and personal feelings on these matters:

Talk to us (ie: Financial Planners). Before you allow yourself to get whipped into an emotional frenzy, let’s talk. We can construct a plan to navigate these troubled waters. This is especially important for folks who are using their assets to live on. Exit strategies must be in place. In my mind, if you are more than 10 years away from using your funds, it is steady as she goes unless you are scared to death. If so, let’s design an intelligent exit strategy.

NOTE: The above letter was written in December 2008. As you can see, my feelings have not changed!!