[Laocoon]

First let me greet you all since this is my first post. This seems like a helpful and well-meaning community, who all consistently post in a positive and constructive manner, despite the weight of the knowledge of what might lie ahead for us all. I look forward to contributing in a like manner.
Before becoming aware of Peak Oil, I was spending some of my free time reading about personal finance and investment. Now after reading many of the posts on these boards, it seems to me that some of the ideas of modern investment theory might be adapted to help us in "investing" our limited resources to provide for an unknown future.

Background:
Modern Portfolio Theory basically says the best way to maximize return and minimize risk is not through choosing the "right" stocks (e.g. Microsoft, GM, Exxon) but by dividing assets into different classes (e.g. large caps, small caps, emerging markets, bonds, real estate, precious metals, etc.) The question then becomes how to invest in these classes and how much to invest in each class. The answer to the former is that one should usually invest in low-cost index funds, but the latter question is the subject of much discussion and research.
For a given period in the past, one can use the historical records of how these different classes have performed to calculate what would have been the optimal allocation (i.e. giving the highest return for a given level of risk.) For example, (and these are purely hypothetical because I don't have the books in front of me) from 1970-1980 a large percentage in European stocks and precious metals might have done the best, while 1975-1985 a mixture of Japanese and large-cap American stocks would have produced the highest return. This might be interesting in an academic way, but most people are more concerned about finding out what portfolio allocation will do the best for the next twenty years, not the last twenty.
Of course, to calculate the an optimal future portfolio we would have to know how all the asset classes will perform in the future, something, which despite the assertions of those who produce finance magazines and shows, is completely impossible. So how can portfolio theory help us plan for the future? It shows us that while it's unlikely that any of us will pick the "best" portfolio allocation, we can choose an allocation that will do well under a number of different future scenarios.

Lets look at a possible portfolio:
•10% S&P 500
•10% US small
•10% REITs (real estate funds)
•10% Intl. Large-Cap
•10% Intl. Small-Cap
•10% Emerging Markets
•10% Precious Metals stocks
•30% US short term bonds

Inflation? Our REITs and precious metals should bolster lagging bonds and stocks. Weak dollar? International stocks and some emerging markets should strengthen. Booming US market? Real estate bubble? Etc? Each possibility feeds some classes and devastates others. This is possible because the asset classes that we have chosen are uncorrelated to some degree. (In contrast, two assests that are perfectly correlated will always move up together and always move down together. Essentially, there would be no point in having two separate classes, since they behave identically.)
Computers allow us to see how each allocation would perform for any number and combination of possible scenarios. We then chose an allocation that will perform adequately under all possible futures.
I'm leaving out some things (like rebalancing and the efficient frontier,) but I hoping this introduction is sufficient for our purposes. So how does this all relate to Peak Oil?

Planning for the Peak
Despite the fact that many on these boards do not have any faith in the future of the stock markets, or government bonds, or even supposedly "hard" currency, I think that the discussion of portfolio theory has many relevant points for PO planning. The biggest difference is, perhaps, only our definition of asset classes and our ideas about future scenarios.

A quick summary of some of the possible futures might be:
Nothing happens (someone somewhere invents something that allows business to continue as usual. Not likely at all, but "possible" I guess.)
Recession
Depression
Hyper inflation
Deflation
Breakdown of nation-state, but preservation of local government
Mass unemployment
Resource wars and the Draft
Die-off
Martial law
Mad-max


To deal with this wider range of possibilities we need an expanded set of asset classes:
Stored food
Self (education or re-training, health, stable income stream)
Precious metals in hand
Alternative energy (solar panels on the roof, not stocks in the bank)
Weapons
Durable goods and tools
Shelter and farmland
Community
And many more, including "traditional" classes such as US stocks and bonds, or precious metal or resource stocks that might make it through some of the softer scenarios like Recession and Hyper-inflation.

One common type of post on these forums, and certainly something that I myself wonder quite often when planning for the future, is "What kind of future am I planning for here?" Many people have already decided to some extent what they think will happen in the coming decades, from those planning for total Mad-max breakdowns (hard landings) to those who feel that our society is robust enough to adapt quickly to the new constraints (soft landing.) Each group might be making their respective plans, but there is still a large number of people who remain uncertain about which direction to go.

"What happens if I quit my IT job and buy a farm and then things get bad but don't break down completely and the farm is repossessed? Should I sell my house now or later? How is gold going to help me if there is no food or materials to buy? Do I need a gun or should I buy more food? Should I invest in oil stocks, keep cash, buy gold?" Basically, these are all questions of asset allocation and can be summarized as "I'm trying to decide between items A and B. If event X happens, A will be worthless and B will be valuable. On the other hand, if event Y occurs, it will be the opposite. So what is going to happen X or Y? Then I can decide about A or B." However, no one knows for sure what will happen, but no one wants to buy something that might later become worthless. But what many people might not realize is that the very fact that these theoretical items A and B behave so oppositely is a real advantage for making them both part of your investments. They are uncorrelated asset classes, and uncorrelated assets are the holy grail of modern investing because represent a way to reduce your risk and improve your returns. It means that no matter what happens, you have a good chance of making it through.
Even though, I was initially frustrated by investing my resources in things that seemed completely unrelated and contradictory (e.g. stocks and seed, gold coins and modern economy education,) I came to realize that their very unrelatedness was an advatage from a perspective of uncorrelated assets.

My goal is to identify and prioritize two types of classes: 1) those that are absolutely required for getting through a particular scenario even if they are useless for the others, and 2) those actions which represent investements in number of classes. As an example of the former, some sort of firearm would be a necessity for a more extreme scenario, even if it never comes out of the lock box for the milder possibilities. On the other hand, investing in one's health and community would be useful under any possible scenario.
No matter what happens you can almost guarantee that the value of some classes will go to zero through unforeseen circumstances, so the idea is to have a range of uncorrelated assets such that some of them will make it through.
Government collapse, education in a "practical" trade rendered obsolete, gold and guns outlawed and confiscated, farmland communalized, cold fusion works and energy becomes free. Any of these things could happen and would ruin someone with all his eggs in one basket. What actually WILL happen is probably something that we can't even imagine, let alone predict; therefore, the best course of action might be to "diversify our portfolios" such that we can weather any number of possible futures.

[backstop]

Dear Laocoon - nice post. A pleasure to read a sober careful assessment.

One item of a diversified approach that would seem to me central which you've yet to discuss is the proportion of ones effort/wealth that should be dedicated to developing options for the common good.

Without this item as a common goal amongst those becoming aware of peak oil, surely the probability of catastrophic outcomes will grow apace ?

regards,

Backstop

[NevadaGhosts]

Geez. What is this, a personal financial class?

Welcome Laocoon. Thanks for all that great info in your first post. It's good to talk to new people here. Please don't be scared away by soem of our doomsday predictions. None of us really know what will happen for sure. Just a lot of wild speculation. All we can do is prepare.

[Guest]

Great insightful post. Welcome aboard.

Utilizing a market-based investment approach to post-peak planning!
I like it.

Diversify, you say, and survive any scenario....good, bad, and ugly.
Makes sense to me....

[Specop_007]

WHAT THE HELL?!?! 1ST POST?!?!

You dont just WALTZ in here like you own the place and start handin out information with gifts! BEGONE WITH YOU! Do not return until you have milk and cookies. Only with gifts of milk and cookies can you give advice. Consider it initiation. Now, off with you to get milk and cokies.

Mmmm, milk and cookies.

[Laocoon]

One item of a diversified approach that would seem to me central which you've yet to discuss is the proportion of ones effort/wealth that should be dedicated to developing options for the common good.

Backstop
There are actually quite a few things that I have yet to discuss, but I thought that I had run on too long as it was.
I tried to convey some of the sentiment of what you're describing with the class "Community," by which I meant establishing ties and communication with those locally and further afield and working to build awareness and develop plans and resources for the future.
On the other hand, I also wanted to focus my discussion around investments. One of the key characteristics of an investment is that it produces a return (or causes a loss.) If you spend your time, energy or money in a way that does not come back to you positively in a concrete way, then it is not, strictly speaking, an investment. A gift, charity, altruism, yes--but not an investment. While this might sound mercenary, it is actually quite the opposite.
When I raise my children to be strong, independent, responsible adults, I don't consider that to be an investment (i.e. they'll be able to take care of me later.) I don't expect it to "pay off"; it is simply an expression of love, duty, sense of right and wrong. What kind of father would consider their efforts for their children as something that will produce an eventual return for himself? Likewise, a presentation to my colleagues about Peak Oil is not an investment; it is simply that not to do so borders on the criminally negligent.
Like working for the common good, these actions are undertaken without the expectation of return (and, therefore, were somewhat outside my discussion of how to maximize return through diversification.)