Uncertain Future

[ultimo]

Quote:

And the answer from almost everyone is Diversification. You don't seem to like that idea, but it is basically the best strategy to protect yourself.

My original question was what people holding a bearish view of the future would diversify into. I'm not interested in the "typical" asset allocation model, which is middle of the road. I'm very interested in a bearish asset allocation model.

As I said, I'm considering selling my physical gold and funds. The reason I'm considering selling them is to minimize my financial risk. I think the case for gold over the next ten years or so is a very strong one. I also think there will be some significant pullbacks during that time. If I were younger, I wouldn't be thinking about selling, but I'm considering retirement in the next two years and am less able to wait out any long-duration downturns in the gold market. So I'm what some people might call a "gold bug," but at the same time I'm considering selling.

So my question was: what should I invest in? I'm not opposed to diversification, but what's the best bearish approach to diversification?

Bonds don't seem good right now--interest rates are too low. The Australian dollar isn't bad, and I'm already in it, so I'll keep that in my portfolio going forward. Not sure what else I should be looking at, but will continue to do some research...

Thanks, all

[FIREd]

It depends what kind of bear scenario you are envisioning... Runaway inflation a la Weimar? Brutal financial collapse Argentinian flavor? Great Depression II: the remake? Slow deflationary spiral Japenese style? Madmax, the apocalypse? So far you have not answered that question.

Depending on the kind of scenario you are envisioning, a number of investments could be best performers: market shorts, long term bonds, assets stashed in foreign countries, foreign currencies, etc...

[MichaelB]

Quote:

Originally Posted by ultimo My original question was what people holding a bearish view of the future would diversify into. I'm not interested in the "typical" asset allocation model, which is middle of the road. I'm very interested in a bearish asset allocation model. As I said, I'm considering selling my physical gold and funds. The reason I'm considering selling them is to minimize my financial risk. I think the case for gold over the next ten years or so is a very strong one. I also think there will be some significant pullbacks during that time. If I were younger, I wouldn't be thinking about selling, but I'm considering retirement in the next two years and am less able to wait out any long-duration downturns in the gold market. So I'm what some people might call a "gold bug," but at the same time I'm considering selling. So my question was: what should I invest in? I'm not opposed to diversification, but what's the best bearish approach to diversification? Bonds don't seem good right now--interest rates are too low. The Australian dollar isn't bad, and I'm already in it, so I'll keep that in my portfolio going forward. Not sure what else I should be looking at, but will continue to do some research... Thanks, all

You like gold, think it has a strong future, yet you expect to reduce your gold holdings. You ask for a bearish allocation but don’t want bonds. You do want diversification.

Firedreamer’s question is worth repeating.. what exactly are you bearish about?

Still, you still have many options. Why not just short the market you are bearish about? Long/short funds might interest you, as well as Hussman fund. Then there is the ultimate portfolio diversifier - Venezuelan Beaver Cheese.. .

[kumquat]

Quote:

Originally Posted by ultimo So my question was: what should I invest in? I'm not opposed to diversification, but what's the best bearish approach to diversification?

For the US Equities portion of your portfolio, I'd suggest the Bear version introduced here

[HFWR]

I'm stocking up on Acapulco Gold...

[kumquat]

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Originally Posted by HFWR I'm stocking up on Acapulco Gold...

Can I move in next door?

[ultimo]

Quote:

You like gold, think it has a strong future, yet you expect to reduce your gold holdings. You ask for a bearish allocation but don’t want bonds. You do want diversification. Firedreamer’s question is worth repeating.. what exactly are you bearish about?

The problem is that I believe gold will outperform by a large margin, but over the next ten years, not two, which is my timeframe for retiring.

I could sit tight and wait for ten years but I'm already 53... and this is an "early" retirement forum.... which is why I came here...

I think gold will do very well next year, and possibly the next, but when there's a pullback it'll be severe and I don't want to wait a year (or two, or more) for it to come back. Look at a chart of gold and you'll see I've already done that, and don't want to do it again.

Why are bonds antithetical to a bearish view? Buy bonds today at some paltry percent and then wait for rates to rise? What good is holding bonds at 4% today if they'll be at 5% next year, or 10% in five years?

What I do want to do is preserve my capital for when bonds are at 10+% in 6-10 years.

I want to maintain a steady course over the next few years, and I know that:

a) the dollar is going down
b) interest rates will be rising
c) the stock market will do whatever... probably go up to some extent because all the printed money has to go somewhere
d) taxes going up
e) inflation increasing
g) gold going up, but volatile nonetheless. Great for when you're young, but hard to deal with when you're older
h) twin deficits spiraling out of control
i) U.S. dollar losing status as reserve currency

...and so on.

All I want to do is to hold ground for the next two to five years, and then I'll start doing some sort of bond "ladder," I suppose. I just want to get through the next few years without losing a significant chunk of money in some typical asset allocation model that suggests one put money into things that are clearly not going to do well in that timeframe.

Does anyone have an asset allocation theory that doesn't involve physical gold under that scenario?

Whew! Why is this so complicated?

[ultimo]

Quote:

For the US Equities portion of your portfolio, I'd suggest the Bear version introduced here

If I'm being laughed out of here, I'm clearly in the wrong place. Sorry, but I thought this was a forum for people who were enjoying early retirement because they were savvy, or planning on early retirement because they had a good plan in place in view of the future.

[ultimo]

Quote:

It depends what kind of bear scenario you are envisioning... Runaway inflation a la Weimar? Brutal financial collapse Argentinian flavor? Great Depression II: the remake? Slow deflationary spiral Japenese style? Madmax, the apocalypse? So far you have not answered that question. Depending on the kind of scenario you are envisioning, a number of investments could be best performers: market shorts, long term bonds, assets stashed in foreign countries, foreign currencies, etc...

Thanks, Firedreamer. The scenario I'm envisioning is has to do with the twin deficits--a huge U.S. budget deficit, plus a severe slowdown in exports. It all leads to higher unemployment, for one, plus the need to offset the budget deficit with higher taxes, amongst other things. From an investment perspective, I see the U.S. going out on the global marketplace with bonds and having to compete with other countries and ultimately having to raise interest rates. The Australian dollar is rising because Australia is raising interest rates. The U.S. dollar is going down, in part, because of the artificially low interest rate. At some point the U.S. has to pay off debt, and to do that, has to attract (foreign) investment dollars, which will require higher rates.

It's a really simple scenario, but economists make it seem so complex. That's why I said earlier that it's all about supply and demand (for U.S. dollars). Where's the demand for U.S. dollars going to come from? Assuming the demand will decline, what would you invest in?

[traineeinvestor]

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What I do want to do is preserve my capital for when bonds are at 10+% in 6-10 years. I want to maintain a steady course over the next few years, and I know that: a) the dollar is going down b) interest rates will be rising c) the stock market will do whatever... probably go up to some extent because all the printed money has to go somewhere d) taxes going up e) inflation increasing g) gold going up, but volatile nonetheless. Great for when you're young, but hard to deal with when you're older h) twin deficits spiraling out of control i) U.S. dollar losing status as reserve currency ...and so on. All I want to do is to hold ground for the next two to five years,

I spent some time considering how to deal with a rising inflation and rising interest rate scenario earlier this year:

1. sell all bonds or similar (other than those listed in #2) with terms of longer than 2-3 years. I would prefer to keep short term bonds/CDs rather than cash (i) to get a bit more interest and (ii) to reduce the temptation to buy too early in the interest rate cycle

2. buy i-bonds (or similar) and (possibly) some longer term high rated non-callable corporate bonds with interest rates that either float or will float at some point in the future. With the latter, you need to be very careful with credit quality

3. buy real estate using long term fixed interest rates for investment purposes. Since real estate may take a short term hit as rising interest rates off set the inflation impact, keep the gearing conservative - ideally you want a cash surplus each month

4. buy hard assets like timber, farm land, collectables and bullion

5. buy commodities and commodities funds as an imperfect currency hedge - most commosities are priced in US$

6. pay off all floating rate debt

7. maximise tax efficiencies under current tax laws

8. invest offshore - look for countries with low debt to GDP ratios and favourable demographics

9. if you are going to surrender your US citizenship, do it sooner rather than later (the same with changing states in the US) - a difficult process may get harder going forward

10. consider investments which generate a return which is either tax sheltered or which generate part of their return without the need for realisation (e.g. real estate)

11. improve your skill set to maximise your chances of remaining employed or finding employment or generating some side income should the need arise

12. do what you can to keep your health. In these conditions the cost and availability of health care is likley to come under pressure. Prevention will be the best medicine

13. keep/develope a good social circle and low cost hobbies and interests - these are important in more ways than one

I've done some of these but am still sitting on the fence regarding inflation/deflation (or, more accurately, the timing).

Hope this helps.

Needless to say, I am not qualified to give investment advice.

[ultimo]

traineeinvestor, you're really not such a trainee. Thank you for your reply... am going to re-read it and think about it and post back here in a day or two.

Many thanks!

[oldtrig]

Acapulco Gold
Remember that from Vietnam

[brewer12345]

I have the perfect solution for all the Chicken Littles: equity indexed annuities.

[Bestwifeever]

Quote:

Originally Posted by HFWR I'm stocking up on Acapulco Gold...

A new definition of buying and holding?

[samclem]

Emphasis added:

Quote:

Originally Posted by ultimo I want to maintain a steady course over the next few years, and I know that: a) the dollar is going down b) interest rates will be rising c) the stock market will do whatever... probably go up to some extent because all the printed money has to go somewhere d) taxes going up e) inflation increasing g) gold going up, but volatile nonetheless. Great for when you're young, but hard to deal with when you're older h) twin deficits spiraling out of control i) U.S. dollar losing status as reserve currency ...and so on.

I think this "knowing" on your part might be at the root of some of the pushback you are getting here. You should welcome the challenging of your assumptions. Frankly, you don't know these things are going to happen, any more than anyone else knows how assets will be priced 10 years from now. We are all making risk/benefit decisions. Each of us has only one nest egg, which is why most of us chose a diversified asset allocation that will certainly NOT prove to have been the ultimate allocation in retrospect, but which provides protection against almost all eventualities.

Quote:

Originally Posted by ultimo Whew! Why is this so complicated?

You are right, it is complicated. Mostly because the money flows, and macroeconomic trends that will result in some countries prospering and others falling behind, are not static and they are subject to feedback mechanisms that are incredibly complex. Every action causes investors, consumers, bankers, producers, and politicians to react in ways that further impact on other aspects of the machine.

This complicated "system" makes it impossible to be certain about the future relative value of various assets. I think it would be wise to thoroughly re-examine the basis of your assumptions, and especially the cost of being wrong. Things often sold as "conservative" investments for bad times (CDs, gold, etc) can sometimes prove costly in real terms.

[HFWR]

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Originally Posted by kumquat Can I move in next door?

I hear the bunker next door is available...

[MichaelB]

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If I'm being laughed out of here, I'm clearly in the wrong place. Sorry, but I thought this was a forum for people who were enjoying early retirement because they were savvy, or planning on early retirement because they had a good plan in place in view of the future.

This is an excellent place for both planning and enjoying early retirement. Folks here aren’t laughing at you. You're intimidating and condescending. You know what is going to happen, which asset classes are going to do poorly, yet ask for advice, get but then reject it in a fairly critical manner. You repeatedly mention diversification yet reject the two most important diversifies; bonds and gold. You have to admit, you’re hard to please.

Try here "Make more money, don't lose too much" - NEW portfolio version 1 - Feedback/suggestions requested Hopefully both the thread and the board will be more helpful.

[DblDoc]

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Originally Posted by ultimo If I'm being laughed out of here, I'm clearly in the wrong place. Sorry, but I thought this was a forum for people who were enjoying early retirement because they were savvy, or planning on early retirement because they had a good plan in place in view of the future.

They are and they do but you don't like the advice they are giving. That should set of some alarm bells...

DD

[M Paquette]

Quote:

Originally Posted by ultimo The problem is that I believe gold will outperform by a large margin, but over the next ten years, not two, which is my timeframe for retiring. I could sit tight and wait for ten years but I'm already 53... and this is an "early" retirement forum.... which is why I came here... I think gold will do very well next year, and possibly the next, but when there's a pullback it'll be severe and I don't want to wait a year (or two, or more) for it to come back. Look at a chart of gold and you'll see I've already done that, and don't want to do it again. Why are bonds antithetical to a bearish view? Buy bonds today at some paltry percent and then wait for rates to rise? What good is holding bonds at 4% today if they'll be at 5% next year, or 10% in five years? What I do want to do is preserve my capital for when bonds are at 10+% in 6-10 years.

OK, you have a two year time horizon before you start spending. Think 'buckets'. The cash you'll need for the near term should be, well, cash. For 2-5 years out, you want to avoid risk to principal, so you might want to avoid equities, commodities, or long term bonds (risk to net asset value as interest rate rises is worst on these). Something like CDs or a short term bond fund works well here. Stick with a duration of 2 years or less.

Past this near-term survival allocation, you can play with higher risk/return investments. You might want to eventually put funds for 5-10 years out in a longer duration bond fund eventually, but not while you believe interest rates are low and are certain that they will be higher in a few years. Preserve your principal for now by keeping those funds in something with a short duration.

For funds needed 10-20 years out, you can take on more risk. Look at a combination of total US market and total international (FTSE ex-US, for example) market. Stocks tend to catch up with inflation over the long run, and international exposure gets you growth outside of US dollars that you expect to shrink. The total market funds are very tax efficient.

Past 20 years, you can have a smaller more speculative slice to play with emerging markets via a mutual fund, and commodities such as gold.

Quote:

Originally Posted by ultimo I want to maintain a steady course over the next few years, and I know that: a) the dollar is going down b) interest rates will be rising c) the stock market will do whatever... probably go up to some extent because all the printed money has to go somewhere d) taxes going up e) inflation increasing g) gold going up, but volatile nonetheless. Great for when you're young, but hard to deal with when you're older h) twin deficits spiraling out of control i) U.S. dollar losing status as reserve currency

Just be aware that lots of other investors are thinking along the same lines, and have bid up the price of what they consider safe investments. There may be a bit of a price bubble in US Treasuries and gold right now.

[ultimo]

Quote:

Originally Posted by M Paquette OK, you have a two year time horizon before you start spending.......

Thanks, M Pacquette, especially the advice on timeframes. I'll re-read your post, as well, as I put together my strategy. Much appreciated!