Financial Forethought column is an AANS Neurosurgeon series focused on simplifying financial matters for the busy neurosurgical colleague. The intent here is not to replace your financial analyst nor subscription to the Wall Street Journal, but to offer insight into the everyday tools that can shape one’s financial future. Examples of past performance given in this article may not reflect future considerations, and the information given here does not constitute financial advice or endorsement by the American Association of Neurological Surgeons.

Where do we go from here? Undoubtedly, by the time this pecuniary masterpiece gets to you, our financial landscape will likely be radically different (hopefully not approaching Dan Simmons’ latest vision portrayed in “Flashback”). Nonetheless, current questions raised about the fiscal health of our country, never mind your portfolios, warrant an in-depth review of where one should place his or her assets in these unsettling times and avoid kissing their assets goodbye.

August 5, 2011, will forever be remembered as the day the “music stopped.” That was the day Standard & Poor’s, whose rating stalwarts missed the events preceding 2008, degraded our sovereign debt to less than its iconic AAA rating. (For more on Standard & Poor’s rating system, visit the previous Financial Forethought column here.) This may not have come as a surprise to any student of fiscal propriety. But, having already been downgraded by the Chinese, it nonetheless represented a sobering dose of monetary reality, no matter what political or economic spin you prefer to follow. It is akin to the patient on prolonged life support who inevitably dies.

Geopolitical considerations aside (try not to worry about China and Japan owning $3 trillion of our debt … 21 percent of the overall picture), what does this actually mean to you and the rest of Main Street? No matter how hard the financial architects at the U.S. Department of the Treasury try to convince the public that deflation is a bigger worry than inflation, one must remember that we live in a world that is “flat.” Billions of dollars are moved within microseconds to far-reaching lands at the touch of a keystroke, and our macro/microeconomic perturbations have far-reaching impact well beyond our borders. Ultimately, Newtonian laws of physics will apply here, despite the inevitable efforts of our financial stewards (reading too much Michio Kaku?) to apply String Theory to justify the continued onslaught of “quantitative easing” and the relentless increase in money supply ($2.6 trillion to date).

While no one can offer a perfect crystal ball (unless you are Bernard Baruch, who always sold “too soon”), one truth remains self-evident: In the face of a 300-percent increase in money supply over the past three years (and still growing), without a corresponding increase in productivity nor economic growth, inflation will raise its ugly head. While the ability to print unlimited money to buy one’s own debt historically has been a potent force to keep interest rates at near zero returns for innumerable years, it will not be enough indefinitely to tame the tigers overseas in their pursuit of a meaningful return.

So what can the average investor do in this time of uncertainty? In view of the inevitable inflation on the horizon, it is reasonable to assume that our economic climate undoubtedly will see many changes. While a number of younger individuals may not recall the decade of interest rates as high as 18 percent, a number of older folks nearing retirement will remember the WIN (“whip inflation now”) initiative put forth by former President Gerald Ford to get a handle on the runaway inflation. It wasn’t until Paul Volcker (former Federal Reserve Chairman) was able to control and subsequently reduce the country’s money supply that we were able to shed the yoke of our suffocating inflation. While countless contrarians may argue that inflation will be the least of our problems during an economic downturn, it would help to remember that the endless supply of greenbacks will continue to assault the value of the dollar on the world theater, in turn making everything — including oil — more expensive. One mustn’t forget the ever-increasing debt of $16 trillion, with no demonstrable plan in sight for reduction, as added measure for the world to require some type of interest payment to justify buying even more debt from a profligate spender.

Where does this leave the rest of us? It all depends on how much risk you are comfortable in taking. Standing the test of time, one can never forget that cash is king. While this is difficult to swallow with interest rates at near-zero levels, there are other avenues to improve the yield. Current bank CDs and Treasury bills with 5- to 10-year maturities may offer 3 to 4 percent returns, but will tie up your money for this lengthy time. Longer terms risk locking you into a more modest return, and also put you at risk for missing out on a potentially larger rate of return when inflation appears. One also can invest in the government’s TIPS (Treasury Inflation Protected Securities), which offer an inflation-adjusted return, but will likely be limited or curtailed if Federal officials see increasing payments on the horizon.

An unorthodox but rational approach would be to consider opening a bank account in other countries such as Australia, which is offering anywhere from 5 to 6 percent interest on its savings accounts. This also provides an additional hedge against a falling dollar. One can do the same for Canada or the European Union if you believe that the Euro has a reasonable prognosis. The majority of international bank accounts offer a reasonable degree of government insurance against default and allow one to wire funds at significantly less expense than converting your money through ATMs, etc. Of course, you have to remember that you will be subject to the winds of currency movement (both up and down), in addition to local taxes.

Alternative approaches for those that believe that stocks have considerable potential, despite the inevitable volatility and potential downside, is to consider investing in stocks that offer a decent dividend. Currently, there are a number of world-class, strong and long-term players (Intel, Microsoft, Cisco, etc.) that pay a 3 to 4 percent return, which will only go up if the price of the stock declines. Should the price of the stock increase, one still has the dividend maintained (from when he or she acquired the stock) as well as the capital gains from the improved stock picture. Even should the stock decline in value, the dividends usually are continued — unless you were GE in 2009, when its business (and credit operations) deterioration prompted the first dividend reduction in company history. Caveat emptor.

Currently, a lot of money is tied up in bond funds. Remember that bond prices decrease when rates go up, and, thus, the value of any fund that invests in bonds correspondingly will decrease should rates rise. Currently, many funds are invested for short-term periods in an attempt to minimize any capital losses should and when rates head North, which unfortunately provides a meager return at this time. For a more thorough overview on bonds, particularly municipal bonds, see the previous issue of this column by clicking here.

Real estate can be a two-edged sword. As with any asset, buying low and selling high always works. Currently, there is a surfeit of housing across the country, which will likely remain the case for many years. Nonetheless, there are a number of good values in many markets and, thus, the large number of “cash” purchases. Short sales (where the bank sells the home for less than the outstanding mortgage) offer tremendous values in the “right” market. It wasn’t that long ago (in the ‘70s) that New York City real estate was selling for bargain prices in the setting of an impending bankruptcy, eventually turned around under the stewardship of Felix Rohatyn. There are many similar markets today (Florida, vacation areas, etc.) where overextended investors are selling at prices 50 to 70 percent below market peak. The downside rests in the need for a minimum of 20 percent down (often higher), potentially lower prices and carrying maintenance costs. However, this is offset by ridiculously low interest rates, a possible vacation home and, of course, the potential for upward appreciation in the market — of course, it can always go lower, although a quality “limited-supply” asset should appreciate over the long term.

A final and brief word about gold and other precious metals: Unless you are a sophisticated investor, these vehicles only can be considered a hedge against inflation or worldwide instability. In many parts of the world, gold is considered the ultimate insurance against an uncertain future. The supply is relatively limited, and a large amount is tied up in two countries: India and China own 20 percent apiece of the world’s gold stocks. The lack of any interest payments (in fact, there often are carrying costs/transaction fees for the actual material) and storage questions often add another level of complexity to the overall investment. Nonetheless, one can simplify this by purchasing gold funds such as Exchange-Traded Funds, gold mining stocks or partial ownership in gold repositories. As there have been speculative runups in the past for Internet stocks, real estate and, currently, social-networking stocks, gold or any other precious metal will not be immune to the same market forces.

For those interested in looking at this problem in greater depth, consider reading “The Big Short” by Michel Lewis, “The End of Wall Street” by Roger Lowenstein, and “Aftershock” by David Wiedemer, Robert A. Wiedemer and Cindy S. Spitzer.

Editor’s Note: The above article was written toward the end of August. Because the market is in a state of constant flux, the context of this content may have been affected, but it should still prove valuable on a larger scale and provide some guidance not only for now, but for the future.

Robert F. Keating, MD, FAANS, a member of the AANS Neurosurgeon Editorial Board as well as the AANS Membership Committee, is professor and chief of neurosurgery at the Children’s National Medical Center, George Washington University School of Medicine, Washington, D.C. Apart from his academic and clinical pursuits, he has always taken an active role in preserving capital and is interested in sharing his experience with his peers. He is happy to solicit any questions or recommendations for future topics.