Ideas to hedge a "normal" retirement port.

[pedorrero]

I am interested in hearing opinion on how to invest part of my funds as a hedge. In my case:

Most of my "retirement" comes from a trust fund I have no control over. For argument, let's say that it is invested 60% stocks, 40% bonds, with the usual diversification. This is pretty accurate. My income is pretty much guaranteed, and I have almost zero debt.

I've always thought to have a "disaster hedge" or inflation hedge position, which means mostly gold, silver, or stocks thereof. I own my home, and vice versa, which seemed a good inflation hedge at least until 2005 or so

Currently own: a house (~ $150K) and gold ( ~ $100K); this is a pretty good inflation hedge.

Lacking and difficult: a true deflation hedge. This would mean basically bonds of a trusted government. USA? Euros? I doubt the trust fund would keep a position in that (I've lobbied for it), even though it would certainly fit the term "conservative" or "conventional" investment. I'm unsure how much of "my" money is tied up in CDO, MBS, or similar trash -- but I have no control, so try not to worry about it.

Since I have no control of the trust fund, my logic is this: I should have most of the assets I do control in gold or similar hedges. Recently I came into about $5K of additional money, that I'd like to invest.

Ideas for that? Gold coins? Gold stocks? Other speculative stocks?

 

[brewer12345]

Solid deflation hedge would be 30 year treasuries, as well as long term fixed rate debt from top shelf gummints (thinking Swiss, but UK, Germany, maybe a bit of Japan).

From talking about hedges, you then jump to speculation. Did I miss something?

 

[pedorrero]

No, I did mention gold stocks and they are indeed speculative. I've dabbled in them too now and many years ago (that, in part, is why I have $100K in gold coins rather than, say, 40K in stocks). Other than the big risks, I think a limited amount of speculation might be good. I call it my "play money" portfolio... my main goal still, is to have some hedges against the trust fund. This probably means just keep the gold in case The End ever does arrive. Many people would consider gold very speculative (it is), but it can serve a purpose as a hedge. While in terms of my own money, I already have a large position (something like 30-40% of my net worth), it is < 10% of the Trust account. Some bonds would be nice but I don't have the capital for it.

 

[haha]

The best hedge against inflation or deflation is a secure job.

But you probably already know that.

Ha

 

[RockOn]

Options for hedging market risk. I read on another thread about using options. It was stated that for 2 or 3%/year one could hedge a stock portfolio. That isn't really true is it? The last I checked using at-the-money puts it would cost much more than that to hedge a stock portfolo for a full year. Am I wrong? Is there any way to buy full coverage insurance on stocks for 2 or 3% a year that I do not know about?

 

[haha]

Options for hedging market risk. I read on another thread about using options. It was stated that for 2 or 3%/year one could hedge a stock portfolio. That isn't really true is it? The last I checked using at-the-money puts it would cost much more than that to hedge a stock portfolo for a full year. Am I wrong? Is there any way to buy full coverage insurance on stocks for 2 or 3% a year that I do not know about?

A blanket statement cannot be made, since put premia vary with perceived volatility. You can somewhat even out the voltility inspired price swings by doing bear spreads, selling one put and buying another.

Still, 3% is not an "only"- it is a fair amount of money. It's great if you hit it right, otherwise it's just a big fat drag on performance.

Ha

 

[mathjak107]

i have 10% of my money in the permanent portfolio prpfx. thats as close to a disaster fund you can come to. for a more conventional hedge we have those mutual funds that actually bet against the markets like the inverse profunds

you could buy equal amounts of the following 4 etf's which cover every economic trend

TLT 30 YEAR TREASURIES (DEFLATION

US TREASURY MONEY MKT

GLD GOLD

XLG AND TMW STOCK ETF'S

 

[brewer12345]

Rock, put premia vary widely over time, as Ha has observed. Right now, options of all sorts are very expensive, given the volatility in the market. But in calmer times, put premia become much less expensive and can be worth buying. Right now, I would be a seller rather than a buyer, personally.

 

[Patrick]

Lacking and difficult: a true deflation hedge. This would mean basically bonds of a trusted government. USA? Euros? I doubt the trust fund would keep a position in that (I've lobbied for it), even though it would certainly fit the term "conservative" or "conventional" investment. I'm unsure how much of "my" money is tied up in CDO, MBS, or similar trash -- but I have no control, so try not to worry about it.

Why would you want to hedge against deflation? Deflation (as in the dollar's buying power increases) is a good thing, no? If it does in fact take place (very small likelihood of that happening, IMHO), your purchasing power should increase and your trust fund income should buy more goodies for you, so you should be OK.

 

[FinanceDude]

Rock, put premia vary widely over time, as Ha has observed. Right now, options of all sorts are very expensive, given the volatility in the market. But in calmer times, put premia become much less expensive and can be worth buying. Right now, I would be a seller rather than a buyer, personally.

I think if you look at a study, sellers make more money than buyers of options over time.........

 

[brewer12345]

I think if you look at a study, sellers make more money than buyers of options over time.........

Maybe, but we are talking about someone wanting to hedge/insure a portfolio. Right away that implies that you are willing to pay up for such protection. (Which is why I do not bother).

 

[RockOn]

Why would you want to hedge against deflation? Deflation (as in the dollar's buying power increases) is a good thing, no?

Deflation is a good thing. I don't think so..... If you think the Fed is panicking now, wait till the BLS says there is deflation. That scares Bernacke more than the banking crisis. It will be fun to watch. I hope the helicopters fly over my house.

 

[Patrick]

Deflation is a good thing. I don't think so.....

Why not?

 

[mathjak107]

FROM WIKIPEDIA

During deflation, while consumers can buy more with the same amount of money, they also have less access to money (e.g., as wages, debt, or the return realized on sales of their products). Consumers and producers who are in debt, such as mortgagors, suffer because as their (money) income drops, their (money) payments remain constant. Central bankers worry about deflation, because many of the tools of monetary policy become ineffective as inflation drops below zero (deflation). Deflation may set off a deflationary spiral, where businesses slow or stop investing, because the investment risk is perceived as higher than just letting the money appreciate due to deflation. (The deflationary spiral is the opposite of the hyper-inflationary spiral.) Similarly, in deflation consumers have an incentive to delay consumption, which may contribute to the deflationary spiral.
Deflation is generally regarded as a negative in modern currency environments, because a deflationary spiral may cause large falls in GDP and take a very long time to correct

 

[RockOn]

Why not?

My take...

Deflation might sound good, and mild deflation might be ok.

But have you heard of 1929 and the 30's?

Look at what happened in Japan since 1990. Stocks are still only worth 25% of what they were in 1990. Banks have been in trouble for 18 years, real estate crashed. Comsumers would wait to buy until prices were lower and the economy stalled for years, it still isn't good there, 18 years later.

I am pretty sure you haven't seen Ben panick at all compared to what he would do if deflation was heating up, (which possibly could be beginning because of the housing market). It's one of the main reasons he's throwing huge amounts of credit at the banking problem. He does not want deflation. Once it takes hold, stopping it is harder than stopping inflation. To see how the FED fears deflation look back to 2003 when prices started to fall, the FED Funds went to 1% for more than a year causing many of today's problems.

 

[pedorrero]

The USA's experience during the Depression (1930s) is weird for a few reasons. Four years in (1933?), FDR called in the gold (not all of it came -- the second mouse gets the cheese, read on...), devalued the dollar from $20 to $35 despite the dollar's having increased in value due to the ongoing deflation. As a result, other countries sent gold TO USA for many years thereafter. This all started to reverse by the 1960s (mainly France); Nixon pulled the plug on the gold standard in 1971 and it hasn't been heard from since. Gold's huge rise, 1972-1980 was largely due to the $35 "fixed" value from 1933-1971, despite the large inflation during those years. In any case, gold today is worth roughly 27 times what it was in 1971.

As above poster notes, even on the "paper standard", a country (Japan) can face a deflation and can't fight it even by creating money out of thin air. To be fair, Japan's "depression" is pretty tame in comparison to what the world went through in the 1930s.