Are you prepared for the ultimate financial collapse?

In my previous article, I called the 1929 depression the penultimate recession/depression. At the time, I thought this really meant the "ultimate recession". Imagine my embarrasment when I discovered the term penultimate meant "nearly ultimate" or "next to last".

But, as I thought about it, the slipup seemed almost fortuitous. In fact, the 1929 depression is far from the worst that could happen. Consider a complete financial breakdown...All utilities shutdown. All goods distribution shuts down. All retail outlets shut down. All money and traditional investments become worthless.

I'm not a doomsday theorist. I don't see the above scenario being likely in the near future. But, I don't think anyone can guarantee it won't happen tomorrow, next week or next year. I won't go into what might trigger it. You've seen the movies, and your imagination works as well as mine. Suffice to say, it is always a possibility. As a result, it makes sense to do some thinking and planning for such an event. Work through your own situation, but my thinking goes something like this.

Many own some rural property for just such a situation. I'm one, since that gives you additional resources. But, I believe even the typical single family homeowner has access to the resources required to gain self sufficiency.

Assuming there is plenty of air to breathe, your most urgent need is water. You are good for only a few days without it. Fortunately, you probably have 50-100 gallons in your house plumbing system, stored in the water heater, toilets and pipe. Don't use any of it for washing or flushing...this is your drinking water for 2-3 months. If you live within walking distance from a stream, pond or other natural water supply, you are set. Otherwise, consider setting up a system to collect rainwater and even dew from your roof, driveway or plants. Depending on your location, you probably can be self sufficient in water terms for the long term by collecting the rain and dew.

Your next most pressing need is food. You can live for a month or two without it. But, again, you probably have a significant supply around the house. Your refrigerator will be dead, so use the perishable food from there first. A loaf of bread, box of crackers and peanut butter are food for several weeks. A 5 pound bag of potatoes and a 2 pound bag of beans is good for considerably more, but save some back for seed. Even the leftover bacon grease and cooking oil will supply the energy you'll need for the first few months. The list is endless and varied, but you likely could survive with the food in your house for most of a year.

Next, check your yard and neighborhood. Dandelion is edible...roots, leaves and blossoms. The same applies to wild onions and garlics which commonly thrive in your yard. If you have an oak, pecan or other nut tree, you could have adequate food for a large part of each year. Even seeds from wild grasses such as oats, rye or almost any grass are edible and nutritous. In many neighborhoods dove, pigeons or other birds are harvestable by traps, or even slingshot or rock throwing, at least initially. If there is a stream or pond, you likely have fish, frogs, snakes and turtles.

All the above will likely become rather scarce fairly quickly, but they help provide the time for a transition. Ultimately, you'll need to live from what you grow. Start by putting newspapers, grass clippings, leaves or other debris on your grass to create a garden. Plant whatever beans, potatoes or other seeds you can find. The typical yard has room for more garden than you'll need to supply all your food. Remember you are not using water for flushing, so you've been going in a bucket and composting it for fertilizer and recycling the moisture for the garden. You'll need to know your neighbors and barter, trading both materials and knowledge. Maybe a bag of acorns for an ear of corn which, when planted will supply both a few months of food and replacement seed. Or knowledge about gardening for information about solar collectors.

Notice no mention until now of energy. Despite the fact that it seems critical to our modern lives, it falls fairly far down the priority list in a real financial breakdown. You can do without lights, heat, air conditioning and long distance travel. Perhaps you'll use wood or solar for cooking, dehyrating or sterilizing, but your energy needs are not great.

There you have a potential start. At this point you have a fairly sustainable life. Your plan will be different reflecting your local and resources, but give it some thought. This is the ultimate in personal finance.

The Intelligent Investor

Everyone, from Robert Kiyosaki to Ben Bernanke, from Alan Greenspan to yours truly, has been speculating recently about whether we are heading for a recession. The answer is certainly yes, but the big questions are when, how severe and what to do about it.

Meanwhile, my son gave me a copy of "The Intelligent Investor", the definitive book on value investing by Benjamin Graham. In the preface, Warren Buffet says Graham was had more influence on him than anyone other than his father. I'd heard of Graham before, of course, but had never read any of his work. I'm only part way through, but I'm already absolutely amazed to see the similarities between Graham's philosophy and what I've been writing here in this space.

And right there on page 2, written over 50 years ago, he quotes an example that sheds more light on the recession question than anything I've seen from the illustrious names above. It is set in 1929, the year of the penultimate recession/depression. The DJIA was at 300. The crash came, followed eventually by a recovery. But, by 1949, the Dow had recovered to only 177. Ouch, that is a serious depression!

Here's the kicker...If you had invested equal amounts each month during this same time frame, by 1949, when the Dow was still down 41% from your starting point, you would have gained over 8% annually on your money, more than doubling it. How is that possible, you ask? It is the result of dollar cost averaging.

Those who have been dollar cost averaging over the past several years have already seen even better results. So, if you are just starting out, quit worrying about a recession and jump in. The results from 1929-1949 demonstrate majic that is rare in financial circles.

Unfortunately for those of us who have accumulated substantial nest eggs, things are not quite so simple. We still have to worry about the potential 41% reduction in our starting balance. Besides, today we have the option of investing in several different markets. And those are the reasons I developed the "Dollar Cost Averaging on Steroids" system. I'm still hoping to find something similar in the later parts of the book, but I can see already he would approve of the concept.

It takes maximum advantage of the diversification available today to extend the majic, even in the face of significant correlation, especially for those with significant portfolios. If you are interested you can read about it in my prior article (March 12, 2007). I suspect Graham had something similar in mind when he talks about going to a cocktail party and enjoying the opportunity to participate in the market discussion with "I don't know, and I don't care. If it goes up I'll make money and if it goes down I'll buy at better prices." Yes, whether he invented it or not, he would have been a fan! I think I've used some similar words in decribing my process.

It may not be quite as simple, but it is not far from it. And it extends the basic dollar cost averaging principal to meet the needs of those who already have a substantial portfolio.

Pinching Pennies

When I talk to folks about personal finance, I have the feeling than many people want to get ahead but don't know where to start. And, all the info about mutual funds, dollar cost averaging, etc seem meaningless if you don't have the money to get started. This got me to thinking about how I got my start.

Some of my earliest memories were of our family worrying about where money for groceries or the mortgage would come from. I remember vividly when I was about 5 years old when they got out a jar of pennies to pay a bill collector at the door. Out of that came a determination to attain a degree of financial independence that would largely insulate me from these worries. But how do you get from there to independence? The answer for me was to work hard and save as much as possible, paying attention to the details...a philosophy that has stuck with me to this day. My first job was moving trash for 10 cents per hour. And, I still pick up a penny when I see it on the ground. The penny may be a small amount of money, but the time involved in picking up a penny is approximately 1 second, so the work pays about $36/hour, tax free. Not bad for unskilled labor. And, besides being good exercise, the mentality of paying attention to details at this level is the start of financial independence. Interestingly, I've noticed an inverse correlation between the wealth of the neighborhood and the amount of change you are likely to find. In a low rent apartment complex, pennies are everywhere. In a neighborhood of multimillion dollar homes you'll rarely see one. I suspect this is because the rich got that way by paying attention to the details.

From there, you are on your way. Is the dinner out worth a couple thousand pennies? Is the Beemer worth 50 million pennies? Better to camp for the night than spend the 5 thousand pennies for a cheap hotel? At least until you are well on your way to financial independence, consider taking the cheap way and investing the resulting change.

Each penny not spent will be with you for the rest of your life, multiplying through compound interest to give you space between worries about running out of money. I'm not saying you shouldn't spend the money. Just pay attention to the details and make a conscious decision, and if you make the frugal decision, one day you'll realize you are well on your way to financial independence.

I like to think I'm frugal, but others have had less complimentary descriptions. Penny pincher is one I can't dispute, and it got me started on the way to independence from most money worries.