Ralph Brorsen

I’m no macroeconomist, but did you stop to consider they might be right? Just consider a) HUGE US decifit. b) We’re running out of oil.

Ramit Sethi

Yes, much less time!! But I’ll be getting some new ones like that posted soon…I have a list of 18 new personal-entrepreneurship articles I’m doing. Thanks for asking, Michael.

frank

I would add that their dire predicitons make diversification outside of the US even more important. As for the market defaulting, they can use put options to mitigate that, albeit it is an imperfect and expensive way to do it.

Jason Ellis

I would add another point to mikshir’s list:

3) Even if they are right, and you invest US Dollars in foreign investments, if the US goes belly up, what will thos US Dollars be worth anyway? Zero. So, assume that the dollars will be worth something in the future, and invest normally.

People like this kill me cause the amount of legitimacy given them is not proportionate to the evidence they can provide that what they are saying is true. “What if the sky falls tomorrow?” is not a good reason to drastically change your time-tested investment strategy.

Derek

Ramit I think you should just relax
Arguing is ALWAYS a waste of time.

Person1: I believe something.
Person2: I don’t believe something.
Person1: Well I’m right.
Person2: Sorry my friend I have a list of facts that says you’re wrong.
Person1: I don’t care.
Person2: I hate you.
Person1: Good, cause you’re stupid.

So you disagree with people, big deal, move on. If you were seriously clenching your fists that’s a good indication to let go because nothing constructive is happening.

Concentrate on other things that lead to a better result (like watering plants, or watching insects).

Gualberto Diaz

As much as OPEC wants to switch over to Euro’s right away, it won’t happen. There aren’t enough Euro’s in print at the moment. To dramatically switch over from US Dollars to Euros would send the WORLD markets into chaos, not just the US markets. Major Central banks hold our currency as reserves. It’s in nobody’s best interests except for Islamic fundamentalists who only want to see the decline of the Western Devil for the Dollar to decline.

Iranian officials have even stated that the petro exchange which was set to open this past Monday would be doing transactions in both Dollars and Euros because there aren’t enough Euro’s.

I personally feel we will see a decline in the power of the US. It WON’T happen overnight. At this point in time though, if the Greenback declines, there won’t be anything to take its place.

Jennifer

Oy.

Two points here:
1. There are a million different things to do with an IRA given a million different senarios. It’s up to individuals to critically determine the likelihood of each of these senarios and diversify accordingly.
2. If you have your IRA with a company like Vanguard, I believe you can always convert it to another fund penalty free if you are afraid that the immediate future won’t favor your current fund.

Then, because these two guys that your friend listens to are obviously working on fear appeals and peripheal logic, you need to destroy any and all source credibility they have. Guys like that are dangerous.

Anonymous(e)

Ramit, you’re wrong about something: You can only withdraw your principal without the 10% penalty if you put your money in a Roth IRA — and that too five years after you put it in.

If your “retirement account” is a Traditional IRA or a 401(k), then you will have to pay the 10% penalty (with a few exceptions, such as buying a first home) if you withdraw your money.

These Friends might have pie-in-the-sky arguments, but you might want to read up on some stuff that is going on in the world and actively threatening the US Dollar.

Regularly posted articles on Yahoo! Finance might be a good place to start.

Chris Yeh

For God’s sake, if the argument is that the US government will collapse (as another commenter has pointed out, you CAN invest in foreign securities in US retirement accounts–I’m heavily into overseas mutual funds in my IRAs and 401ks), I don’t think they’ll be in any position to levy 10% penalties!

Sometimes the stupid just need to be bitch-slapped with the flaccid mass of their own brainlessness.

ib

hi ramit, i totally see your point and i agree.

i have friends who feel the way the person you were conversing with does, and part of me even feels the same way at times. BUT to not prepare for the future is really stupid. most of us WILL get old and need to survive on something. unless they have a better plan, there are proven methods working for people and it would be dumb to not take advantage of any, no matter what the beliefs are.
reminds me a little of Madame X’s (of My Open Wallet blog) father. kind of sad (believed in impending economic doom & didn’t invest like he could have before he grew old — um, but he invested!). http://myopenwallet.blogspot.com/2005/11/financial-genetics-my-dad.html

cmadler

As several people have pointed out, this should not be a question of whether to invest in a tax-advantaged vehicle (IRA, Roth, 401k, etc) or in taxable assets. The question is WHAT you invest in.

There are several very plausible reasons that we could see a major market collapse in the next 5-10 years:
1. Devaluation. The dollar has been gradually devaluing for several years. As this continues, capital begin flowing out of dollars and likely into Euros.
2. Debt. A very large portion of US debt is owned by foriegn governments (China, for example, holds quite a bit). If the dollar continues to decline relative to their currencies, OR if we have diplomatic trouble (Congress is currently considering a HUGE tarriff against Chinese imports) they could begin selling. This could trigger a scenario similar to what Argentina recently went through.
3. Baby boomers. Most baby boomers are counting on the US stock market for their retirement. They are beginning to retire now, and are taking that money out of US stocks. $5 trillion is expected to leave the market in the next 3 years, and $15 trillion over the next ten. This creates an enourmous selling pressure.
4. ERISA. Even those baby boomers who do not want to sell will be forced to starting around 2017. ERISA mandates Required Minimum Withdrawals from pre-tax accounts (IRA, 401k, 403b) at age 70.5, at that point the selling will increase even farther.
5. Panic. When things start to go bad, people panic and overreact. So a little bit of downward pressure from any one of the above could result in a huge sell-off. Millions of Americans in or nearing retirement will be especially jumpy.
6. Housing bubble pops. Take a look at iTulip.com; they discuss some possible scenarios for the correction in the housing market, which I think we all know is coming. As people find themselves underwater on houses they intended to sell (in many cases to finance part or all of retirement), downward pressure on stocks will increase.

All of these seem to me to be reasonably possible (and synergistic – if one happens it makes all the others more likely and more severe) scenarios, the question is what to do? I am thinking diversification out of dollar-denominated assets, or possibly exchange rate futures (although the latter is not a great long term solution).

Kien

I don’t believe in all the doom and gloom that people keep talking about because quite honestly a person who is smart enough can find a way to make money in any economy… even in anarchy. I personally have an investment thesis in case of doomsday which is to invest in GAG – Guns Ammo and Gold. But I still have my shares in tech companies because I’m not that pessimistic.

Something that should be a concern as far as investing in 401Ks is related to the National Debt and was pointed out by Suzie Ormon who has a great TV show on CNBC. She says that 401Ks were made back in the 80s when taxes were really high. The government created 401Ks so that people can shelter their money and have it grow tax free. So the plan was to put as much money in the 401K as possible and avoid paying the upfront taxes. Then some time later you withdraw the money when the tax rate is low and your advantage is all the money that you invested has grown and you withdraw it at a lower tax rate.

However, today year 2006 we’re at the lowest level of taxes we’ve been at in decades. And with the National Debt looming out there, there is only one solution… RAISE TAXES. So Suzie goes on to point out that if you put too much in a 401K right now you will putting it in when your taxes are low and withdrawing them later when your taxes are likely to be high, which obviously makes no sense. I’m not saying don’t use the 401K at all, but understand that it’s a tool and not a perfect one. You must understand how to use it. Suzie Ormon suggest only adding to the 401K what your company will match.

I hope this was informative.

cellardoor

Fist clenching indeed…

1.Unless your friend is going to invest in assets that are non-publicly traded securities, why the hell wouldn’t he put the money in his retirement fund and invest it however the doom’n'gloomers want? So what if the US collapses — stick your IRA money in emerging market funds if you like. (The takeaway for me, isn’t that the US will or won’t collapse — just that the guy probably doesn’t know what he’s talking about.)

2.Unless maybe he thinks that a future administration will abolish the benefits on IRA’s and punitively tax them disproportionately — and even then, what does he think will happen to non-IRA assets?

3.A tongue in cheek suggestion: The only way he’d be correct to avoid contributing is if he’s putting that money into guns and survival gear. If so, he should still invest in a traditional, but self-directed IRA (w/insane fees), and buy the guns through it (and at least get the AGI deduction — I suspect this guy’s income isn’t high enough to knock that out). Technically, if he starts using them for his own benefit, that’s self dealing (I think that’s the term), just as if you sell a valuable house from your taxable portfolio to your self-directed IRA for $1. The only thing is, in the scenario where he needs to use them — I doubt anyone’s going to care…

4.What the hell were his alternatives? Let me guess — a fund run by the guys who told him not to invest in retirement accounts?

5.I’m trying desperately to come up with a scenario where the guy wasn’t on crack — is it possible he meant that he didn’t want to pay social security taxes?

Pablo

I’ve been reading your blog since this past fall, but the points these gentlemen bring up are quite absurd. Like the first poster mentioned, there must’ve been a bong and a Che Guevara shirt somewhere when this conversation took place. Utilizing Britain as an example of an empire falling is the most fallacious of all the silly points these guys made. Look at the London Stock Exchange: it is now competing with New York in the financial world for supremacy as the biggest purveyor of global capital. Bloomberg, of all people, is frightened by the growth of the financial industry in London. Britain was on the up and up in 1750; it controlled the world by 1850. I would’ve killed to have invested in British industries in 1750–by 1850 I would’ve been the equivalent of a 19th century billionaire. And even during Britain’s precipitous decline as a first rate world power post-World War II, there was nothing remotely catastrophic about its decline, which more than allowed for London to remain a vibrant financial center. I predict the same will happen to the U.S. and its financial structure vis a vis the rising powers in Asia. Of course there will be bumps along the way, but I’d bet on the resiliency of the American financial system much more so than on the opinions of these knuckleheads.

rob

@Pablo –
Couldn’t agree more, that one astonished me too. I think it’s a mindset here (America) that the american colonies *were* the british empire, and it all went bad for them when we became independent. I apologise on their behalf. I’ll invest my 1 pound into the iron industry at, oh, around the time of Henry VIII thanks.

SK

Hey .. I remembered reading this post so came back to it. Seems like your friends were on to something…. Do they have a personal finance blog I can subscribe to?