What kinds of catastrophes would you hope to survive? Is preparing for an economic meltdown even on your To Do list?

Can you protect yourself from extreme events with judicious investment decisions? Is it even worth trying?

If it’s a giant meteor heading towards Slough then you’d want to go in the first impact. Slough might gain something aesthetically, but it wouldn’t leave a future to relish.

But what about a more modest society-rattling scenario? Some kind of economic collapse, say.

How might such a scenario unfold and what will it do to your investments?

My experience of economic meltdowns is modest. So rather than making up my own scenario, I’ll lean on someone else’s imagination.

The Mandibles

In her book, The Mandibles*, Lionel Shriver follows the plight of one family in their attempts to survive the mother of all economic meltdowns. It’s based in the US but it’s not too hard to imagine a UK parallel.

In the novel, runaway US debt turns international investors sour on Treasuries. The dollar loses its privileged position in favour of a new international reserve currency, the bancor. The US is excluded from the new currency bloc, however, and in a fit of presidential pique the US defaults on its debt.

Further beset by a wide-scale cyber failure, a flailing government turns to money printing and capital controls. The ensuing hyperinflation leads to nationwide economic and social breakdown.

Sounds plausible.

The permanent portfolio?

Faced with such a situation how would you like your investment portfolio to be positioned? Is there any mix of asset types that would help?

Who knows. But let’s look at what happened to the Mandibles.

Equity and Bonds

Mr Mandible senior started the book with a vast equity and bond portfolio, the inheritance of which had his offspring jockeying for position.

Unfortunately, the entire US finance system ground to a halt after the debt default. It never recovered in its original form. The value of the Mandible’s portfolio dropped to zero before the end of chapter one.

A complete and permanent failure of stock markets has happened before. The clearest examples required a communist revolution, as in Russia in 1917 and China in 1949.

Other examples often followed war. For example in Germany in the aftermath of WWII, where hyperinflation followed by currency reform effectively wiped-out pre-war investors.

In short, equity and bonds may not be the rock to cling to in a catastrophe.

Cash

Real-world examples of hyperinflation making cash next to meaningless are plentiful.

In post-WW1 Germany, workers were paid twice a day because cash was losing value so quickly. The price of bread went from 250 marks to 200 billion marks over the course of 1923, with subsequent (possibly apocryphal) tales of people taking wheelbarrows of cash to the bakers.

In 2009, after an intense bout of hyperinflation, the government of Zimbabwe released a 100 trillion-dollar note. Hopefully the wheelbarrows could be left at home for a few days.

The Mandibles suffered a similar fate. In the early stages of the crisis, the one remaining family member with any cash coming in needed to spend it on food the same day, as it wouldn’t be worth much a day later.

By the end of the book the dollar had disappeared entirely, to be replaced by the bancor.

Gold

For the Mandibles, gold was still very highly valued but that led to its own problems.

Any gold held by a nominee financial institution disappeared overnight, along with the equities and bonds.

Beyond that though, the US government outlawed the private ownership of gold. Enforcers went door to door to confiscate all gold items, from jewellery to gold teeth. Houses were ransacked and residents subjected to vigorous interrogations. Only those with the most secret hiding places, nerves of steel, and an impenetrable poker face managed to hold on to something.

Again, history suggests this is a credible response to currency and debt crises.

Whilst not quite the same brutal confiscation suffered by the Mandibles, both the US (1933) and the UK (1966) have previously deemed it necessary to restrict the private ownership of gold.

Property

Freehold property ownership proved a better investment for the Mandibles. Whilst in the short term they were thrown out of their house by gun-wielding squatters (who were later thrown out by even scarier gun-wielding squatters), once some sort of normality was restored a few years later, property ownership was reinstated.

Communist revolutions tend to be less kind to property rights, but if you can avoid those then it seems there’s a fair-to-middling chance you’ll get to keep your house by the end of any upheaval.

Although you may need to budget for a new kitchen and carpets by that point.

Guns

Guns often seem to play a key role in apocalyptic tales of human endurance, but starting gun fights is not a good survival strategy.

As we saw with the squatters, there’s always someone else with a bigger gun. It might be best to stay out of the arms race altogether.

Skills

Much more useful is to acquire some practical skills. If you can grow food, fix the roof, or dig a cess pit, you will find yourself in demand.

Developing a new skill is the greatest investment of all. It cannot be confiscated and will pay you dividends for ever. But you need to pick the right subject.

One of the older Mandibles was an economist back when the economy was still functioning. While his offspring fought for their collective survival, he dedicated himself to writing a thesis on why he was right about everything all along, despite not foreseeing the economic collapse.

Spoiler: he did not survive until the end of the book.

(Some less generous readers may think that economists aren’t of much use even when the economy is functioning.)

Survival

Some of the Mandibles did survive to see some sort of order restored. Key to this was joining a small community on a ranch owned by their uncle. Which was handy.

Survival is hard on your own. You need friends with complementary skills to make a go of it.

One of the Mandibles even managed to hang on to some gold throughout the whole ordeal. That helped them get back onto their feet.

Plan A

So there you have it. Own a property, bury some gold in your garden, practice your poker face, get some friends, and go to carpentry evening classes.

Survival guaranteed!

But what if the next real disaster doesn’t look like this? Will any of the above help you when it comes to the crunch?

Or maybe there won’t be a disaster, but you end up eating cat food because most of your portfolio is buried under the Hollyhock.

Plan B

I do not have gold buried in the garden (although of course I would say the same if I did). And I’m told my face always betrays exactly what I’m thinking – which can sometimes be embarrassing but more to the point means I would not fare well under interrogation.

I do own a property, and I maintain good relations with my daughter and her partner who live in a rural area and grow some of their own food. But my motivation for this was not related to surviving economic meltdown.

Whilst a cautious approach to investing – founded on diversification and a hefty cash buffer – will hopefully enable me to ride out the ups and downs of the market rollercoaster, I have no contingency plans for anything worse.

While the sun is shining, I will enjoy my good fortune in life and maybe go out for a walk. I’ll worry about the gun-toting squatters when they turn up at the door. If I’m lucky they never will.

Fingers crossed.

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There is nothing like investing when it comes to exposing yourself as a weak-minded gimboid.

I know all about buying stocks low and selling high. I understand the rationale behind Warren Buffett’s aphorism, “be fearful when others are greedy and greedy when others are fearful.”

Yet when my portfolio hits red, I fret. And when my return numbers glow green, I feel the pleasure centres in my brain light up like Vegas.

The uptick in fortune means it will cost me more every time I buy additional equities, of course. But hang the expense, I want to be a part of this now! The party’s on and I need to get my snout in the trough, quick.

I know this because despite being a good passive investor who pound-cost averages and rebalances annually, I am not an entirely mechanical man.

And oh, the flesh is weak.

Only flesh and blood

You see I long allowed myself a measure of freedom when investing – a certain amount of money to put into the market every year that wasn’t dictated by the calendar.

Don’t get me wrong. This was never a gambler’s float, used to punt on some company that’s rumoured to be on the verge of discovering cancer-curing jam.

I invested my discretionary dollop in index trackers. However I was free to do so whenever I wished.

Sounds good? The snag is that in reality I struggled to take the plunge when the market did. I wasn’t always been brave enough to blow my ammo when equities were relatively cheap. I held on and on until the upswings, and then I got less for my money.

Oh I had my excuses. Especially when I hadn’t yet escaped the rat race, and so was still subject to the whims of The Man as well as Mr Market.

Impure instinct

Especially before full-strength financial independence had my back, my brain was always on hand with self-justifications to reassure me that reason was actually in control, not instinct:

• I was worried about my job.

• My company was restructuring.

• My monthly drip-feed was already casting cash into the cavernous cake hole of the capital markets.

• “I better not throw in any more in case I’m axed! I’ll need every penny.”

The reality was that the overweening fear of loss was in charge.

What these optional investing side quests actually taught me was I am just one of the herd. A member of the cattle class.

I’m not special. I react and feel like everyone else who makes up the statistics that show this sort of irrational behaviour can cost investors dear.

Gorilla warfare

The truth is it takes willpower to overcome the apeman within, and there’s some evidence that willpower is in limited supply for all of us. We can’t bank on having enough in reserve when we need it.

This in turn means the fewer decisions that are left up to my meat-bag of a brain, the better.

Passive investing would be much easier if we could program a robot to handle it all for us and to physically prevent our continued interference, like some benevolent Dalek with a taser.

Perhaps the AI revolution will give us all the cold-blooded reptilian investing agent of our dreams?

Once it’s emerged from the primordial slop, I mean.

Well, perhaps. But until we can trust an agent to run our portfolio without it going rogue and selling the house to bet everything on pork futures, it’s up to us to manage our all-too-fallible frontal lobes.

Don’t just do something

Back when I still stacking my escape-stash, automatic investing droids were nowhere to be seen. So instead I automated as much of the investing process as possible.

You see, the one human behaviour that always worked for me is inertia.

• I never messed with the direct debit that funnelled money out of my bank account and into my broker’s.

• I kept hands-off the regular investment scheme that piped cash straight to my chosen funds.

• I dared not touch lock-in wrappers like ISAs, pensions, and fixed-term bank accounts, where a cost is imposed for premature evacuation.

Inertia is the great human pacifier. It’s a force that’s more powerful than fear in my world – especially if the fear is something intangible, like an investing loss.

Eliminate all carbon units

There are other weak points where human intervention can easily scupper the best plans.

For instance, you might fiddle with asset allocation every time you choose the next fund to buy. And, boy, what mischief you can get up to when it’s time to rebalance…

“Sell those lovely equities to buy more bloody bonds. In this market?!”

Putting my investing on rails did help me to resist the urge to keep thrashing my winners.

But it sometimes also took a stiffening of resolve, and a quick prayer of deliverance to the passive investing gods.

Older and colder

Since I declared myself FIRE – and declared to my bosses where they could shove The Accumulator’s Personal Growth and Development Plan V4.6 – I’ve found it easier to leave my portfolio to do its thing.

I suppose the same fully-funded sangfroid that enables me to do some work on the side without getting sucked back into the office is also helping me to ignore the market noise.

Have I then reached some state of investing transcendence?

Doubtful. So far so good, but I’m regularly tested and I’m still only a passive investor.

I stayed the course during the Covid crash, true, and I learned more than I lamented during the recent bond-a-geddon.

But who knows how a real humdinger of a bear market would hit me?

Better to stay humble and self-aware.

Automatic for the people

If you recognise these frailties in yourself, then there are various tools you could explore to take the human edge off – from automatic investment plans at online brokers, to all-in-one personal finance apps that limit your investing choices but also your horizons.

They can still be enablers when it comes to self-destructive fiddling, though. And they can be relatively expensive.

These days there’s a lot of talk that AI agents will soon do everything for us. In theory it sounds like automatic investing nirvana. But when you think about how obsequious the typical chatbot is, would you really trust one not to egg on your worst impulses?

Besides, from what I can see AI is so far mostly being deployed to tempt investors off the rational path.

All-in-one not one-for-all

Perhaps the closest proxy for a truly hands-off investing robot is a good multi-asset fund.

Made popular in the UK by Vanguard’s LifeStrategy products, a multi-asset fund is an index-tracking, fund-of-funds with built-in rebalancing features – truly automatic investing.

All you need do is pick the asset allocation of your choice, set-up a direct debit to keep it oiled, and then let the program run.

With this sort of investing the human being is taken off the table – which is the point of the exercise after all – and everything is left to the robot. No more pesky emotions.

Of course, you might eventually start to worry that your multi-asset fund hasn’t got all the assets you want. Not in the right doses, anyway.

Perhaps you’re being greedy or fearful, or perhaps you’ve become better informed. Humans are not incapable of judgement, after all. It’s the rash decisions we want to tamp down, not the strategic thinking.

At least with your investing machine whirring away in the background, you can take time to explore your options with the serenity of a wannabe Cyborg Buffett.

Batteries not included.

Take it steady,

The Accumulator