Have you heard about counterparty risk? Perhaps you have heard of the about it (if not check out my post) and understand that this exposure could have a devastating effect on your money. Now you might be wondering what asset class does not have counter-party risk so that you can protect your wealth?
Let’s find out!
When I talk about insuring your wealth, many people think I am talking about insurance policies. And I am in a way, but not in the literal sense.
While there are financial strategies that can be achieved through insurance products, this is not what I’m talking about here.
Before I share what the assets are, I want to ensure you understand why we want to protect our money.
Wealth accumulation often takes years, even decades. So, losing your wealth can be devastating to your overall financial success.
Finding strategies that reduce risk and protect your money are incredibly important as 50% loss of your wealth means that you’ll need to get 100% increase on the value of your assets just to break even. Many forget this math.
There are many things we can do to protect our wealth and this asset class is just one of the ways we can do that.
The Counterparty Risk-FREE Asset
The asset class I am talking about here are precious metals, particularly gold and silver.
These assets have been around for centuries and will likely continue to stay with us for centuries to come.
They have survived wars, famine, regime change, and currency collapses.
While they are not considered an investment, in my book, they serve a purpose of wealth protection and preservation. Which is why I refer to them as Wealth Insurance.
Our currency fluctuates consistently in relationship with other currencies and given the current financial and political structures, our currency can be devalued by simply printing more of it. This often results in inflation (for more information, please see the post about what inflation is).
Having some gold and silver in your portfolio of holdings has a purpose of taking some of your wealth and storing it in an asset that offsets inflation and counter-party risk.
Paper or Physical?
This question is a very common one, which is why I decided to attack it here.
Purchasing paper gold is done by buying a paper asset (like a stock or ETF). Holding paper assets may give you a feeling that you are own a precious metal. However, remember these are companies and derivatives that give you exposure to gains and losses, but these have a counter-party risk.
Obtaining a physical metal, such as bars or coins, gives you direct ownership. Because there are no other parties involved in the holding (unlike paper), you eliminate counter-party risk, which is the objective.
I believe in running your life like a profitable business. I often look to banks to understand how they operate and what strategies I can implement in my life that mimics their operations.
If you look at the central banks around the world, you will notice that many of them have gold in their vaults and are purchasing gold, mostly for protection purposes.
Our currency is not backed by it (as of the date of this post, no currency in the world is). However, having something of value that can be sold or traded, to obtain cash or goods necessary is good. You want something that others desire and will continue to desire into unforeseen future. That is important, when you think about what you’re holding. With holding gold (and silver), they are the only asset that has zero counter-party risk.
Benefit From Inflation
While there are no guarantees with any asset or investment, these have a long history of keeping up with the inflation and providing a safety net. They tend to perform extremely well in inflation. The major force designed by the fiscal policies today is inflation. And higher the inflation, better they perform.
If you are looking to protect your wealth from counter-party risk precious metals are the way to go. If you decide to create a shelter for your wealth in this asset class, remember it’s not an investment, but an insurance policy.
Are you looking to invest in physical assets? Take the course “Instant Wealth Through Real Estate for Beginners” today.