Could Cyprus Happen Here? What Can We Do?

Several readers have sent me rather concerned emails over the past week over the banking situation in Cyprus, where the government, facing a deep financial emergency, essentially took money from every bank account in the country, anywhere from 6.7% to 9.9% depending on the size of your balance. Here’s a detailed description of what happened there.

Many of you pointed me toward this op-ed piece from Forbes Magazine in which the author, Steve Forbes, offered up opinions like this:

Holders of Roth IRAs may be in for a rude shock. Their contributions have been made with aftertax dollars, with the promise that the ensuing benefits would be exempt from federal income tax. Slapping a special “emergency” levy on these assets will become an irresistible temptation for politicians as the pot of assets gets bigger. Impossible? Your Social Security “contributions” are made with aftertax dollars, and it was promised that those benefits would be tax free, but Washington started chipping away at that vow back in the 1980s. Today millions of Social Security recipients find a portion of their benefits subject to the IRS.

and this:

The sobering truth is that there is no safe hiding place to stash your cash, gold or silver other than stuffing ’em under your mattress (and pray that the boxes or bags in which you store the cash can withstand the assaults of rats or mice).

and this:

There are other ways, of course, for governments to get your money—the age-old one being inflation. The Federal Reserve has already stated that it wants to get inflation up to 2.5%. Put aside for the moment the impossibility of concocting a true price index—the Consumer Price Index, for example, allocates less than 1% of the cost of living to health insurance! Inflation, as John Maynard Keynes wrote nine decades ago, is a form of taxation—and, in this case, taxation without representation. Especially invidious is the fact that inflation hits lower-income earners disproportionately hard, as they spend a higher percentage of their income on fuel, electricity and other necessities. If you ever run into a Federal Reserve official, ask him how taxing the American people like this helps stimulate sustainable long-term growth. I’ve done it, and the official always gets flustered.

In one respect, the Forbes article is right: there is nothing that is absolutely secure in this world. There is nothing you can invest in that you can be sure will have any value tomorrow. Your investments could be derailed by terrorist acts, technological innovation, seizure of land by eminent domain, an inflationary spiral, or countless other events.

The best thing you can do as an individual to protect yourself in an uncertain world is to diversify. Don’t put all your eggs in one basket, ever.

From a purely financial angle, that means don’t invest everything you have in any one thing. Split it up widely. Own little bits of everything. Have some cash, have some domestic stocks, have some international stocks, have some bonds, have some real estate, have some precious metals. Don’t have everything in the same kind of account, either, particularly when your investment plan relies on some specific tax benefits.

For most Americans, when we’re talking about investing, we’re often talking about retirement accounts. The easiest way to add diversity to your retirement account is to put your money in a target retirement fund. This will split up your retirement savings among many different investment types, with more risk exposure when you’re younger and less when you’re older. It’s all handled automatically. If you can, have some of your money in a 401(k) and some in a Roth IRA to hedge your bets against an uncertain tax future.

However, diversification doesn’t just refer to one’s investments. Diversification should play a role in many aspects of your life.

Diversify your skills. Build a strong set of transferable skills that will help you no matter what happens to the economy. Work on your communication, your leadership, your project management, your time management, and your information management skills. Those will help you almost everywhere you go in almost any field.

Diversify your relationships. Build lots of relationships in your field, but also outside of your field. Be known as a dependable person and work to build deep connections with people from all walks of life. When things become problematic, you’re going to need to draw on those personal relationships.

Personal skills help with both of these areas. Can you make minor repairs and maintenance on your car? Can you fix a broken toilet or a broken lawnmower? Can you grow your own food? Can you replace a light fixture? Would you know where to start when it comes to fixing a leaky roof? Could you jump right in if someone needed your help with these kinds of tasks?

Personal skills not only build relationships, but they can provide avenues for earning money in many situations.

The events in Cyprus should be a clear signal that diversification is very valuable. However, financial diversification is just the first part of it. Beyond financial diversification (which is quite useful), the more skills you have and the more relationships you have, the better off you’re going to be weathering any storm that comes your way.

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