I’m gonna play devil’s advocate today. And you may not like it. A lot of the FIRE folks, and I do mean A LOT, even the non US ones, like to present their FIRE strategy essentially as Earn More, Spend Less, Invest the rest in VTSAX and chill. And if you were to backtest that approach over probably the last 40 to 50 years, that’s been a solid solid strategy. But as we all know, past performance does not guarantee future results.
What if we’re at the precipice of something big? Something… irreversible?
I think America has had a huge advantage, given that their currency, the USD is acting as the global reserve currency. But, can we take that for granted, that the USD will ALWAYS remain the world’s reserve currency? The US is in serious, serious debt, and the dollar is only propped up because the world currently demands it.
But with the recent QE exercise, and the world being exposed to the fact that there can be rampant printing of the dollar to no end, how is that going to impact their perception on the dollar?
End of USD supremacy?
We’ve all treated inflationary currencies as a sort of universal truth. But an inflationary concept is only beneficial to the ones who have assets. Your money is worth less over time. Why? Your hard earned money sitting in the bank, is literally decaying away into less and less value, while the rich sit on inflationary assets like property and precious materials, making the asset-less poorer and poorer, and having to pay more cash for the same amount or less, of resources.
Why is the US dollar worth what it is? It is because of global demand for it as the reserve currency. Everybody needs to trade with it. But with the covid situation still unspooling, and the central banks printing what seems to be unlimited amounts of the dollar, the questions are bound to be coming. What does the excess supply of dollars coming into the economy going to do?
Make no mistake, the dollar will be devalued, but by how much?
China becoming the biggest economy?
If you google “will china become the biggest economy?”, the results that come back are indicative of when, and not if, china becomes the largest economy.
When this happens, USD will take another hit.
Interestingly, China is also the largest foreign holder of US Treasury. If and when they are ready, they can potentially flood the global market with the dollar, kicking it off a cliff. They will take a hit, but I’m guessing it will be a calculated hit with a backup plan to recover.
The rise of Gold and other assets
When we look at the performance of Gold year to date (+10%) and Bitcoin year to date (+49%) against the USD, we often look at it as “oh, the value of gold and bitcoin are rising, awesome!”
But, on the flipside, that also means that the USD in losing value in relation to these other things. This is why gold, real estate are traditionally seen as hedges to a devaluing currency.
For those of you who are strongly cash biased and do nothing but squirreling away those benjamins in your bank (or under your mattress), you’re losing value, every day.
VTSAX and Chill?
There’re lots of macro-economic factors at work and major headwinds coming America’s way, and VTSAX being fully domestic on a US basket of equities may have worked in the past, but I’m not sure of it’s ability to have the same returns going into the future.
Japan’s lost score
If you think stonks only go up, I’ll bet you that’s what the Japanese thought in 1990 too. Until the Lost Score happened. Here’s a look at the Nikkei Index since 1991.
So what do we do?
I don’t know. But I think looking at investments across a more globalised and macro view might be a better strategy moving forward. Looking back, the US equities market has been riding on a 40 year bull market.
But looking forward, do you see the same trajectory, given what we know? I don’t have the answer, but I think VTSAX and chill might not be it. I think we’re on the brink of huge changes, both on the technology as well as geo-political arenas. With big changes, come big and outsized investment opportunities, visible only if your eyes and minds are open to it.
I’m happy to hear your thoughts on this.
Currently already slightly over 40% of S&P500 revenue is from non-US. If non-US purchasing power get stronger & non-US economy become bigger, then more & more revenue of large US companies will be earned from overseas in stronger foreign currencies.
Or if just want to close eyes, then go with a global etf e.g. VT or VWRD. But don’t complain whenever it underperforms a pure US one.
Fyi, foreign stocks killed US stocks during the 1970s till early-1980s when inflation was high and USD was dropping like a drunk boxer.
Foreign stocks (esp EM and Asia ex-Jap) also walloped US stocks during both first halves of 1990s and 2000s.
If you can tahan a 25% allocation to cash and 25% allocation to long-term bonds, you can consider the Permanent Portfolio. You won’t be getting 20% or 30% returns. But it has performed ok-to-good during the Great Depression, WW2, 1970s stagflation, dotcom bust, GFC and so far during Covid.