What a year 2011 has been. Charles Dickens’ “A Tale of Two Cities” comes to mind: “It was the best of times, it was the worst of times.”  It really isn’t the best of times, but it’s not the worst of times, either. It is scary.

Great anxiety and uncertainty about Europe is creating a stressful environment as 2011 comes to an end.

Anxiety
I’ve spent the last few days at the Hard Assets Conference in San Francisco. I heard the end of the world proclaimed. From the price of gold and the Dow Jones Index reaching parity (they are currently at $1700 and 11,200), to predictions about the demise of the Euro, Germany leaving the EU, and other outrageous, potentially possible, prognostications, professionals are, to quote one friend, “as freaked out as I’ve ever seen.”

The current anxiety is really about the increasing trepidation that worldwide global growth will be derailed by the debt crisis across the developed world.  The reason why this would be so scary is that if global growth is derailed it’s pretty darn likely that “deflation” will ride to victory, and all assets will pretty much decline, leading to unprecedented worldwide debt defaults.

Capitalism endures
But let’s take a step back.  Is a global recession really likely?  How has the developed world fared through other crises over the last century?  I’ll tell you this, betting against global growth has historically been a bad bet.  In the last 100 years, capitalism has endured and survived the “War to End All Wars,” the Great Depression, the Nazis, fascism, communism, World War II, the Cuban missile crisis, the counter-culture movement of the ’60s, the Korean War, the Vietnam War, stagflation, high inflation, supply-side economics, George W., the tech and dot com bubbles and the profligate policies of central banks and elected officials.  Presently, it is digesting the global banking crisis, real estate deflation and the problems with the Euro.

Through all these challenges, a sustained contraction in global growth only occurred in the 1930s.  So is it reasonable or prudent to bet against that record?   It is beginning to look contrarian to believe that global growth can be sustained.

The big question, however, is really — how are we to handle this uncertainty? Is the current economic system really in danger of collapse?  For those of us in the investment field — and for those of you trying to prudently plan your future — how do we protect ourselves?  What is prudent?

Your Retirement
At Barnes Capital we believe that every retirement plan should rely on multiple pillars.  If you have worked a fair amount, you will receive one pillar in the form of Social Security.  It will likely cover your grocery bills and utilities and perhaps supplemental medical insurance in retirement.  To cover your property taxes, maintenance and/or rent, you’ll need another pillar, probably an IRA or company pension worth about $500,000.  With those two pillars, you can enjoy a basic retirement.  Medical expenses will help you live longer, but you will need a third pillar to pay the premiums, deductibles and out-of-pocket expenses.

The Debt Solution
The solution to Europe and all the debt in the developed world’s system is sustained inflation of between four and five percent for the next 30+ years.  As we work our way to fiscal solutions in Europe, volatility is likely to remain extraordinarily high. High-quality international corporations likely provide the greatest long-term security for prudent investors.

If your sizable fixed-income allocation in your portfolios have locked-in safe yields in the 6% plus range, you probably do not have to trade out of them, particularly in retirement accounts which you will not touch for 10+ years.

Finally, I believe that everyone should have 5% to 15% of their portfolio exposed to gold. This exposure to gold could even include some gold stocks, which I generally do not like. They are universally deplored, likely to become cheaper and also offer great value on an unfortunately selective basis.

Get Someone Objective in Your Corner
The bottom line is this:  You want to think through your situation with someone objective to assess the appropriateness of your current allocation.

Barnes Capital LLC is a Registered Investment Advisor.  We manage trusts and retirement income portfolios. Financial planning is an integral part of our process. We protect client capital using municipal bonds, highest quality dividend companies and precious metals, which have protected wealth in every epoch spanning five millennia of bankruptcies, inflation and other forms of attrition. Call 925-284-3503.