Where should I keep cash in the event of a total market crash?
I hope this question makes sense. If the market were to completely crash to the point where banks had to freeze checking/savings/stocks/bonds, sell off assets in order to pay their debts, and depositors could no longer access their cash, where would the best place be to put your cash to avoid this type of scenario?
The "Total Market Crash" scenario that you've outlined is more severe than the Great Recession. In the event or a massive stock and bond market dislocation, there is a near certainty that the world's central banks would pledge unlimited liquidity to the financial markets to quell panic. In the scenario you mention, consumers have limited or no access to their own money. One must assume that you are preparing for a scenario, then, where the world's central banks have no credibility. That suggests that traditional currencies like the dollar and the euro have limited or no use in the meltdown for which you are preparing.
In my view, this is a disaster scenario with consequences so unpredictable, they are difficult to hedge against. That said, you are probably better served by setting aside precious metals like gold or silver. In a world with a failed banking system, these are likely to be the closest thing to legal tender.
Keep in mind that the world's product markets might be impaired as well in your scenario. Hoarding, and possibly looting, could spread. Stockpiling canned food would also be worthwhile.
Without sounding flippant, in the Doomsday scenario you portray, what makes you think cash will be any good? Look at a bill in your wallet, and note the phrase ‘this note is legal tender’. It only works if everybody thinks it works. Money no good, you can roll cigarettes with it: refer to ‘Weimar Republic currency’ or ‘Zimbabwe currency’ on your search. I’ve had this question many times before, so some folks say ‘I’ll buy a gold ETF.’ And my response is, ‘When everything collapses, how will you get your gold?’ So let’s think it over: if the market completely collapses, financial assets will be at least temporarily worthless. That would leave you with a barter based system or chaos. In the barter-based system, metals like gold or silver may be worth something, although many barter economies have functioned on packs of cigarettes or stone disks. In chaos, the barter breaks down, and now you need a couple of Navy SEALS and a lot of ammunition. If it’s any consolation, we’ve had whole societies collapse and we’re still here, so I’d pose that having some hard assets makes sense. Krupp and the Sumitomo Copper company survived multiple wars, currency collapses and in Sumitomo’s case, a nuclear bomb. Both of those companies were established in the late 1500s, and Theisen Krupp is still here, and so is Mitsubishi (which was Sumitomo). Capitalism is resilient.
Leon LaBrecque, JD, CPA, CFP®, CFA
Managing Partner | LJPR Financial Advisors
Your question is very dark, but a good one. What you describe is more than a market crash, it describes all short-term liquidity freezing up and a run on the banks. If that happens even your access to your safe-deposit box may be limited. You would have to keep the cash in a private area that was safe and you would always have access to.
What many don't realize is that most business require short-term loans for day-to-day liquity. Like having insurance, it allows for better allocation of resources. If what you describe does happen, there will be a lot of business failures.
If this bad day really happens, then you might want to consider some currency substitutes, like gold, silver, or diamonds. Since you might not be able to guarantee the currency will be accepted.
While I have worked with clients of many views and I respect them all, I would not recommend allocating too much of your net worth for what is a very low probability tail risk. It does not mean you don't plan for the tail risk, you just don’t sacrifice the 99.999% probability for the .001% probability.
Mark Struthers CFA, CFP®
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This is for informational purposes only. Your specific situation would need to be taken into account. All information is subject to change. Not to be considered investment, tax, or legal advice.
The good old doomsday scenario! If that were to happen you would need something hard to trade with and that could include bullion coins in various sizes, non-perishable foods ( no Spam and Twinkie jokes please) and a strong personality. How much of your resources should be devoted to that depends on your conviction. That scenario, while possible is barely plausible and you would not like to have put all of your eggs in the wrong basket. Personally, I think that a 5 percent allocation to precious metals is good for a normal portfolio and for a dooms dayer, then that should be in physical form, not a tracking security.
In the scenario you suggest it pays to remember what money is. It is a symbolic measurement of other people's willingness to do things for you. Depending on the particular symbol you're holding (US dollars, gold coins, etc.) the measurement may be more or less after a crash. I think the US dollar would fare better than any other currency. Perhaps in a debacle such as you describe, gold (and other semi-liquid commodities) would suddenlly flood the market and could be picked up for pennies on the dollar by those holding US dollars. So holding some cash in a safe place is always a good idea. The question is how much and I don't think there is any right answer.
But going back to the fact that all currency is worthless without other people, maybe it would be a good idea to make the kinds of friends on your way up who will take you in on your way down!