Uncertain Future

[ultimo]

I plan to buy puts on GLD or ZG. As I wrote above, it takes more time than I expect so I won't enter the position for a while yet. I'll set an alarm on my calendar, as suggested.

If I'm wrong, eh.

I quit trading in options years ago--to risky. I only take long-term buy and hold positions based on macroeconomic trends.

Fees, commissions and taxes also take a big chunk out of options proceeds, as well.

 

[ultimo]

My crystal ball shows: gold will start declining the middle of next year.

I don't disagree with you, as that would also be a seasonally low period for gold. The declines will likely be brief, however, as central banks, fund managers, jewelers and retail investors increasingly appear to be treating pullbacks as buying opportunities.

 

[Zathras]

I began this discussion after going through the FireCalc worksheets and questioning whether the typical split amongst asset classes was a prudent way to go with the economic dynamics currently in play, and which still have a long way left to go.

And what did firecalc have to say? What conclusions did you draw from the scenarios you ran?

Again, many have responded to your question. Lots of diversification. Perhaps you would like to respond to that suggestion?
Others have mentioned using 'buckets'. If you are ok with some long term risk, but want to make sure you don't loose much/anything in the next year or two, take a year or two out now while prices are good, then keep that in cash (MM/short term CDs, etc). Then you are protected in the short term and can still invest some in longer term, but riskier stuff.

 

[kumquat]

I don't disagree with you, as that would also be a seasonally low period for gold. The declines will likely be brief, however, as central banks, fund managers, jewelers and retail investors increasingly appear to be treating pullbacks as buying opportunities.

The obvious solution is to sell your gold and buy tin-foil. The hat business is about to take off. Don't miss the opportunity to get filthy rich.

 

[ultimo]

The obvious solution is to sell your gold and buy tin-foil. The hat business is about to take off. Don't miss the opportunity to get filthy rich.

Actually, most commodities should do well... even aluminum.

If the global economy improves, then expect increased activity in manufacturing and infrastructure to increase demand.

If the global economy deteriorates, then expect money to move out of cash assets and into commodities.

Gold isn't even the best one to be in, but it's easy.

That said, I've already done well in gold and wish to get on with retirement planning. I appreciate all the comments I've received here about diversification in economically unstable times.

 

[Ed_The_Gypsy]

No, no, Zathras,

Optimism is not to be tolerated. It is time to panic.

Give him the cool aid.

And what did firecalc have to say? What conclusions did you draw from the scenarios you ran?

Again, many have responded to your question. Lots of diversification. Perhaps you would like to respond to that suggestion?
Others have mentioned using 'buckets'. If you are ok with some long term risk, but want to make sure you don't loose much/anything in the next year or two, take a year or two out now while prices are good, then keep that in cash (MM/short term CDs, etc). Then you are protected in the short term and can still invest some in longer term, but riskier stuff.

 

[HFWR]

If the global economy deteriorates, then expect money to move out of cash assets and into commodities.

This seems counterintuituve to me...

Btw, have you looked at the Harry Browne Permanent Portfolio?

 

[Gone4Good]

This seems counterintuituve to me...

Shhhhh, the trick is not to think too hard about it.

No matter what happens commodities always go up. It's a sure thing.

 

[Meadbh]

Shhhhh, the trick is not to think too hard about it.

No matter what happens commodities always go up. It's a sure thing.

......you know why? Because they get used up, and then you need some more. Gold you can recycle.

 

[ultimo]

And what did firecalc have to say? What conclusions did you draw from the scenarios you ran?

The FIRECalc model is based on historical stock market, interest rate and inflation data. I believe it has a couple of weaknesses. One major flaw is that stock market indices underestimate returns because they doesn't account for dividends. The other is that, if one envisions an economic future dominated by FED fiscal policy, government stimulus spending and other interventions, skyrocketing taxes and interest rates, along with a continuing bull market in commodities, then the FIRECalc results are pretty much meaningless. That's why I came into the forum: to see what others who share my views are doing.

Again, many have responded to your question. Lots of diversification. Perhaps you would like to respond to that suggestion?

I've responded to that several times. Namely, I'm interested in diversification that minimises exposure to things I think won't do well over the next five to 10 years. I don't want to be in stock index funds (in the long term). I'm skeptical about bonds (in the short term). Up to now I've had my money in gold and foreign currencies (and, believe me, I'm inured to jokes and jobs about gold and gold bugs... heard 'em all by now.) Diversification to me is flawed advice if it means throwing part of my money down the drain just because I'm unwilling to connect the dots and accept that the certain things are inevitable.

A lot of people here seem to think that absolutely anything could happen in the future, so one must be prepared for any scenario. I disagree. I think the basic economic parameters going forward have been established. I'm interested in diversification withiin those parameters.

 

[Gone4Good]

So you have already made up your mind and want our approval. Good luck!

Got to hand it to brewer for nailing this one on the very first try.

 

[ultimo]

Shhhhh, the trick is not to think too hard about it.

No matter what happens commodities always go up. It's a sure thing.

I disagree. Boom markets in commodities tend to run in 20 year cycles.

 

[ultimo]

Got to hand it to brewer for nailing this one on the very first try.

You're right that I've made up my mind that certain things are likely to happen in the future with regard to economic conditions.

I have not made up my mind what I should put my money into under those conditions. I did get some very good suggestions here from a few people.

I really don't believe that these are times for an "anything could happen" view of the future. It's not business as usual anymore. It requires that models be questioned and that people seek out their own answers rather than accept time-worn financial advice that no longer fits the times.

 

[Zathras]

ultimo, so you want diversification but only in the areas that you know will do well??
People use diversification to cut down on risk, that is the whole idea.
If you KNOW what is going to do well, by all means, invest solely in that, or that group of things.
Most people around here freely admit they can't know with absolute certainty what is going to do well and what won't.
So rather than place a bet and hope for the best they diversify so they won't loose everything if the one asset goes bust.
Sure, you do better if you are right, but on the chance you are wrong, and if you are not diversified, you get wiped out.
But by all means, feel free to diversify between the assets you know are going to do well in the future.

 

[Zathras]

I really don't believe that these are times for an "anything could happen" view of the future. It's not business as usual anymore.

Aha, so this time things are different

 

[ultimo]

ultimo, so you want diversification but only in the areas that you know will do well??
People use diversification to cut down on risk, that is the whole idea.
If you KNOW what is going to do well, by all means, invest solely in that, or that group of things.
Most people around here freely admit they can't know with absolute certainty what is going to do well and what won't.
So rather than place a bet and hope for the best they diversify so they won't loose everything if the one asset goes bust.
Sure, you do better if you are right, but on the chance you are wrong, and if you are not diversified, you get wiped out.
But by all means, feel free to diversify between the assets you know are going to do well in the future.

To put a finer point on things, I know (shorthand for believe very strongly) that certain conditions are firmly in place and they will drive the broad macro trends going forward. I don't know for sure what will do well, especially over the next two to five years. I do know where I don't want to be. I want to diversify but to eliminate the obvious losers. I think that's pretty rational.

 

[ultimo]

Aha, so this time things are different

Yes, I believe they are, and that's, in part, why I believe models like FIRECalc may be misleading.

"Business as usual" has meant, up to now, that one strives for a balanced, well-diversified portfolio because anything could happen--the stock market might be up next year, and down slightly the next, etc., but that over the longer term, it all balances out.

It's different now. We're at the beginnings of trends that take years to unfold. It's not business as usual anymore....

 

[REWahoo]

It's not business as usual anymore. It requires that models be questioned and that people seek out their own answers rather than accept time-worn financial advice that no longer fits the times.

You are making the well-worn "this time it's different" arguement. Sometimes it is, but more often it isn't. Only time will tell and few investors are willing to take extreme portfolio positions based on what someone on an internet board is "sure" will happen.

That said, you can be among the first to say "I told you so" if you are right. If you aren't, I doubt we will ever hear from you again.

[Cross-posted with Zathras]

 

[M Paquette]

To put a finer point on things, I know (shorthand for believe very strongly) that certain conditions are firmly in place and they will drive the broad macro trends going forward. I don't know for sure what will do well, especially over the next two to five years. I do know where I don't want to be. I want to diversify but to eliminate the obvious losers. I think that's pretty rational.

Just beware that there's no secret knowledge in current financial and economic conditions. Knowledge is widespread, and understanding of expected broad macroeconomic trends is also widespread, if diverse. Much of what you are concerned with, as well as other areas you may not be aware of, has been considered and is now priced into the broad market of various assets.

Knowing this, I'm sticking with my current asset allocation, which provides similar allocations to my 'buckets' post above.

 

[ultimo]

You are making the well-worn "this time it's different" arguement. Sometimes it is, but more often it isn't. Only time will tell and few investors are willing to take extreme portfolio positions based on what someone on an internet board is "sure" will happen.

That said, you can be among the first to say "I told you so" if you are right. If you aren't, I doubt we will ever hear from you again.

[Cross-posted with Zathras]

I'm not asking anyone to follow my advice. I've explained my position because I've been asked.

And, likewise, I don't care what anyone else here does. These are personal decisions. I don't even give my friends advice.

I doubt I'll be saying "I told you so," because once I reallocate my portfolio I'll be off doing other things. I'm not here for lifestyle advice. I came here with a specific question.

Thanks to all.

 

[traineeinvestor]

I fall into the camp of people who believe that current stimulus measures (and government inability to keep spending under control generally) have and will continue to result in continued expansion of the money supply. In principle, this should be inflationary. However, I do not feel that a deflationary or stagnation scenario casued by (among other things) higher taxes can be entirely ruled out. In effect, there is enough uncertainty to lead me to prefer a diversified portfolio of cash flow producing assets (+ a few commodities) over a portfolio that is concentrated in assets which are expected to do well in what I expect to be the more likely scenario.

 

[ultimo]

Just beware that there's no secret knowledge in current financial and economic conditions. Knowledge is widespread, and understanding of expected broad macroeconomic trends is also widespread, if diverse. Much of what you are concerned with, as well as other areas you may not be aware of, has been considered and is now priced into the broad market of various assets.

Knowing this, I'm sticking with my current asset allocation, which provides similar allocations to my 'buckets' post above.

The markets are constantly being repriced. The Aussie dollar went up recently on expectations of another rate increase, and now it's back down because the possibility is less certain. The U.S. dollar is up on expectations of improved employment, but we'll see how things pan out and, ultimately, where workers put their money--into retail or into savings.

That's why it's best to look five to 10 years out. Probably the biggest drivers on that scale are the deficit, the U.S. dollar, interest rates and the Chinese economy. I'll set up my diversified buckets within those parameters, and expect that everyone else will similarly act based on their own view of the world.

To act and be wrong is, at worst, stupidy. To not act, or to act counter to one's instincts, when you feel strongly about something is insanity. I guess, the worst case, I'd rather feel stupid than insane. Hopefully, I'll continue feeling the way I do today

 

[Alan]

To act and be wrong is, at worst, stupidy. To not act, or to act counter to one's instincts, when you feel strongly about something is insanity.

History is littered with folks that have ruined finances because they followed their instincts as regards financial decisions. For example I'm sure all those folks who instinctively followed Madoff are feeling much more stronger emotions than just stupidity.

 

[ultimo]

I fall into the camp of people who believe that current stimulus measures (and government inability to keep spending under control generally) have and will continue to result in continued expansion of the money supply. In principle, this should be inflationary. However, I do not feel that a deflationary or stagnation scenario casued by (among other things) higher taxes can be entirely ruled out. In effect, there is enough uncertainty to lead me to prefer a diversified portfolio of cash flow producing assets (+ a few commodities) over a portfolio that is concentrated in assets which are expected to do well in what I expect to be the more likely scenario.

Thank, traineeinvestor. This is the question of the decade, perhaps the century. Inflation or deflation? I tend to believe that the U.S. will continue to print money, and that this is inflationary. Even with higher taxes, I think there will be inflation in certain sectors, such as commodities. I think China and India, as examples, will start to experience their own internal domestic demand, develop regional markets and will thus exert an increased demand for commodities. The price of imported electronic gizmos may go down, but the price of copper may rise.

But it's very dynamic... it's possible we could have continued deflation for a while, followed by inflation, followed by more severe deflation. . .

When I filter out all the noise and unknowables, what I'm left with is commodities (which I feel will do well under most scenarios) and bonds, when interest rates inevitably rise in the future, as they are starting to in other countries.

What you have done, i.e., concentrating your portfolio in areas you think will do well, is exactly what I'm trying to do. Everyone has to follow their own instincts. Mine tell me to start moving out of gold (not because I don't believe it will go higher, but because I'm not young anymore and don't want to wait out a correction) and to take a "capital preservation" stance until it's time to buy long-term bonds.

Fortunately, I can work for as long as I need to, but I'd like to be retired in the next few years. Unfortunately, timing is everything and there's no schedule for what's going to happen in the world.

Thanks, again.

 

[ultimo]

History is littered with folks that have ruined finances because they followed their instincts as regards financial decisions. For example I'm sure all those folks who instinctively followed Madoff are feeling much more stronger emotions than just stupidity.

Most of those investors relied on something other than instinct. The advice of others, for example. Peer pressure. Wanting to be in the "in" group. Etc., etc., etc.

Instinct that results from study and research is the best we can go on, I'd think. Instinct that results from questioning everything, not taking anything for granted, and avoiding wishful thinking. Those Madoff investors would have avoided some big mistakes had they not taken anyone else's word as good enough. Yes, they feel much worse than stupid, aI'm sure, although they were, indeed, very, very stupid. But stupidity's the least of their problems now, I'd expect.