Uncertain Future

[ultimo]

There are so many uncertainties with regard to the future that it's difficult to know how to plan.

Even the worst case scenario in FIRECalc may not be bad enough to reflect what the future may hold.

U.S. dollar index is at new lows and heading lower. Interest rates held artificially low into the foreseeable future. Inflation and higher taxes almost certain.

I've had a large percentage of my savings in gold and gold funds since 2001, and the rest in foreign currencies. At that time it was easy to foresee what was going to happen economically. It's much more difficult now, the question being, how much worse will it get?

Hate to sound pessimistic, but I'm sure others have similar concerns. I'm skeptical of the various asset allocation models I've seen (e.g., X% stocks, Y% bonds). What happens if both go bad?

The strategy I'm considering is to cash in gold and gold funds, hold on to the cash, and then invest in bonds when interest rates inevitably rise. Didn't 30 year bonds hit 15% back in the late 70s or early 80s? At some point, especially when inflation kicks in, I'd expect interest rates would have to move up significantly.

All thoughts appreciated!

 

[brewer12345]

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

 

[ultimo]

Haven't made up my mind, nor am I looking for approval.

I'm interested in how others are dealing with economic uncertainty in terms of asset allocation, and I've shared my thoughts on what I'm currently considering as a strategy.

 

[73ss454]

Was there ever a time in history where the future was certain? Put a plan together that your comfortable with, rebalance once a year and hope for the best.

Otherwise put your money in CD's and get eaten up by inflation.

 

[samclem]

I've had a large percentage of my savings in gold and gold funds since 2001, and the rest in foreign currencies. At that time it was easy to foresee what was going to happen economically.

If was easy for you to see then, why didn't you get in and out of the US stock market on the rises and dips? You'd have made a fortune. Or, you could have just shorted financial stocks or GE starting in mid 2008--easy money.

The truth is that it's only easy to see in retrospect.

We had a recent good discussion on possible/likely US inflation, here it is.

 

[ultimo]

Buying dips in the market seems like gambling and doesn't appeal to me--I prefer to stay out of the stock market altogether.

There's never been a time when the future was certain, but when you're facing retirement certain assumptions have to be made. The future certainly seems more uncertain now than it has in the past when it was clear the bull market was unsustainable ("if something can't go up forever, it won't.")

So I'm assuming the following will happen:

1. Higher inflation
2. Higher taxes
3. Higher interest rates

I'd be interested if anyone shares my view that keeping cash for the next couple years might be a good strategy. I've done well in gold and am willing to cash in, wait, and then buy government bonds at some point in the future. I don't have a good feeling about the typical asset allocation model which requires that one put money in stock index funds and bonds... at least right now.

Thanks

 

[ultimo]

Samclem, it was much easier to foresee economic trends than to buy and sell specific stocks. I don't follow the stock market, but I do follow macroeconomic trends.

 

[ultimo]

Thanks for the link to the discussion on inflation. Heyyou posted exactly what I'm thinking about:

High inflation may offer you the opportunity of long term, guaranteed double digit bond income from your shrunken portfolio...

What I'm considering doing is not allowing my portfolio to shrink, and to do that by cashing out and waiting patiently in CDs or something. I'd be willing to give up a small percentage to inflation just to keep it safely away from volatility.

An interesting topic!

 

[ultimo]

I'd love to get a copy of this report:

Société Générale tells clients how to prepare for potential 'global collapse'

Société Générale has advised clients to be ready for a possible "global economic collapse" over the next two years, mapping a strategy of defensive investments to avoid wealth destruction.

Société Générale tells clients how to prepare for 'global collapse' - Telegraph

In a report entitled "Worst-case debt scenario", the bank's asset team said state rescue packages over the last year have merely transferred private liabilities onto sagging sovereign shoulders, creating a fresh set of problems. Overall debt is still far too high in almost all rich economiesas a share of GDP (350pc in the US), whether public or private. It must be reduced by the hard slog of "deleveraging", for years.

"As yet, nobody can say with any certainty whether we have in fact escaped the prospect of a global economic collapse," said the 68-page report, headed by asset chief Daniel Fermon. It is an exploration of the dangers, not a forecast.

Under the French bank's "Bear Case" scenario (the gloomiest of three possible outcomes), the dollar would slide further and global equities would retest the March lows. Property prices would tumble again. Oil would fall back to $50 in 2010.

Governments have already shot their fiscal bolts. Even without fresh spending, public debt would explode within two years to 105pc of GDP in the UK, 125pc in the US and the eurozone, and 270pc in Japan. Worldwide state debt would reach $45 trillion, up two-and-a-half times in a decade.
(UK figures look low because debt started from a low base. Mr Ferman said the UK would converge with Europe at 130pc of GDP by 2015 under the bear case).

The underlying debt burden is greater than it was after the Second World War, when nominal levels looked similar. Ageing populations will make it harder to erode debt through growth. "High public debt looks entirely unsustainable in the long run. We have almost reached a point of no return for government debt," it said.

Inflating debt away might be seen by some governments as a lesser of evils.

If so, gold would go "up, and up, and up" as the only safe haven from fiat paper money. Private debt is also crippling. Even if the US savings rate stabilises at 7pc, and all of it is used to pay down debt, it will still take nine years for households to reduce debt/income ratios to the safe levels of the 1980s.

[Continued via the link above]

 

[plex]

Regardless of what strategy you use, I would not recommend going 100% or even 50%, in any particular type of asset. Every type of asset class has risks to it, and I really mean, every single asset class.

This applies to gold, gold, historically, has kept up well with inflation, and has been an inflation hedge. There is a big caveat to this though, over a very long span of time, it tends to increase with inflation, during shorter periods of time, it has a tendency to contract during types of large uncertainty (recessions), and retract during expansions (after recessions). We have seen gold expand 500% in the last 8 years. Do you think that tracks inflation, which has only gone up (very roughly) 36% in that period? Where do you think gold is heading next now based on that information?

My advice, stick with with diversification (figure out a proper one for your needs). Even among the safe assets, there are certain risks you still have to use diversification to hedge against.

Also, the dollar falling only matters in context to trades made between international and domestic stock, and when you go buy things outside the country. It should not affect how you are allocating your domestic mix, only your domestic/international balance.

 

[shotgunner]

If the Maya's are correct my early semi-retirement ends on 12/21/2012, accepting that fact has made planning much easier.

It was painful to watch my portfolio go down in 2008 and early 2009 because a portion of it was in equities. Things looked bleak in early March for sure. However, although I have not fully recovered what I lost I have been happy to see my portfolio increase since March.

I was not able to predict the decline and the advance but they are easy to see in hindsight. A balanced portfolio, rebalanced as needed seems to be a very effective way to be prepared for whatever happens.

We could have an economic collapse or maybe we won't.

If you are not working and you cash out to a CD's you have effectively locked in your standard of living with the only guess being the amount and effective of inflation. This strategy is great if your N/W is so large you can live forever on a 100% cash position, most of us can't.

Make your best decision on what you really believe the future holds and then live with that decision right or wrong, a mistake either way brings consequences. If you are looking for affirmation of what you believe you are looking to join a herd and a herd mentality, no matter how big or small the herd.

 

[ultimo]

I agree that every asset class has risks, but every now and then the future is so clear that decisions are easy. That was the case with gold (and foreign currencies) in 2001. The writing was on the wall.

Now we're in an era dominated by fiscal policy and it's not so easy to see what's going to happen. Natural economic forces are blocked by intervention.

I disagree that the falling dollar matters only in terms of international and domestic stocks or when one buys things overseas. It also matters to oil and gold and, ultimately, to inflation since we import so many of our goods from China, etc.

I never do things by halves, perhaps ultimately to my detriment. Clearly, gold is going higher, but there's a point, though, where I'm happy to say that I have all I need to survive and am willing to cash in. The question then becomes, now what?

And that's the question I'm mulling over right now...

 

[ultimo]

If you are looking for affirmation of what you believe you are looking to join a herd and a herd mentality, no matter how big or small the herd.

I've never followed the herd, as my previous decisions demonstrate. People thought I was nuts in 2001 to put my money in gold!

I'm just fishing to see if there are others who perhaps think similarly outside the box. I'm questioning the typical asset allocation model and wondering if there are others who have a similar view to mine and what their strategies are. That seems fair enough, and what forums are for.

Although I made a great decision in 2001, I make no claims of being a market prognosticator. Fortunately, my job at the time put me in contact with CEOs of international companies and I learned a lot from them, including the fact that what people are really thinking often differs from the info their companies put out.

 

[CyclingInvestor]

"The world will only end once. Everything else is a buying opportunity." (Attribution unknown)

 

[ultimo]

"The world will only end once. Everything else is a buying opportunity."

Well, I definitely disagree with that. It's the minor ups and downs in between nirvana and annihilation that'll kill ya.

 

[LOL!]

FWIW, I use a typical asset allocation strategy and have done so since 1999 with equities, fixed income and real estate in the portfolio, but no gold.

I have found that it works splendidly. Some years, things go up and other things go down. In other years, things go down and some things go up.

Presently the portfolio is about where it was in late 2006 which is the same place where it was in late September 2008. That is, ignore the run-up in 2007 and loss of the 2007 gains in 2008 and the portfolio is just chugging along. This despite the 45+% drop in equities from 2000-2002 and 50% drop from the October 2007 highs to the March 2009 lows. This is also despite a low allocation of about 30% to fixed income and cash.

The main thing that all this has confirmed for me is that rebalancing when the market drops substantially actually works. Ups and downs don't kill ya, it's when you forget to rebalance in times of nirvana and annihilation that do.

And it's threads like yours that tell me we are closer to annihilation (i.e. buy equities) than we are to nirvana (i.e. sell equities).

Here's a little article from today helping to explain this: http://www.nytimes.com/2009/11/22/business/22mark.html

THE benefits of this approach were evident over the two years through October, when a basic portfolio split 50-50 between broad stock and bond indexes, with annual rebalancing, dropped by only 3.5 percent, Vanguard found. By comparison, the S.& P. 500 lost about 30 percent in that period.

 

[REWahoo]

It's the minor ups and downs in between nirvana and annihilation that'll kill ya.

I'm with LOL! - those are rebalancing opportunities.

I'm of the opinion those who worry "the end is near" would do better stockpiling MREs and ammunition. And if you're really worried, check out this company - they appear to have all the bases covered: Montana Gold Bullet, Incorporated

 

[walkinwood]

I've never followed the herd, as my previous decisions demonstrate. People thought I was nuts in 2001 to put my money in gold!

What else have you predicted that came true? Look for your past predictions and gauge how often you were right v/s wrong.

re: the future, you may very well be correct, but you need to figure out the magnitude of the damage if you're wrong. If you can live with that, then you're fine & have probably diversified your investments in some manner - even if not the traditional equities/bonds. Just know, that the financial industry also did its "stress tests" before 2007, and passed! That's confirmation bias at work, and it is very difficult to identify.

I think it is a given that interest rates will rise in the future - but when? When inflation strikes, bonds do not jump up overnight, do they? If the bond interest rates do not go up immediately, will the purchasing value of your cash not shrink before you invest in bonds? I'm interested in hearing the mechanics & timing of moving from cash to bonds when inflation hits. An example using the 70s will be great.

 

[Zathras]

There are so many uncertainties with regard to the future that it's difficult to know how to plan.

This is exactly what diversification is for. If you go all into one asset class, and bad things happen to that one asset class, you get hammered. If you diversify the pain is much less, you may even get a net gain even if one area gets hit.

I've had a large percentage of my savings in gold and gold funds since 2001, and the rest in foreign currencies. At that time it was easy to foresee what was going to happen economically. It's much more difficult now, the question being, how much worse will it get?

No one can tell with certainty. So to protect yourself from bad things happening you use diversification.

The strategy I'm considering is to cash in gold and gold funds, hold on to the cash, and then invest in bonds when interest rates inevitably rise. Didn't 30 year bonds hit 15% back in the late 70s or early 80s? At some point, especially when inflation kicks in, I'd expect interest rates would have to move up significantly.

This largely depends on the size of your portfolio and your annual needs.
If you have tons of funds and don't need to draw down your portfolio this may work for you.
As you noted that the past is not a gaurentee of future results, there is nothing that gaurentees you 30 year bonds will hit 15% again. You may 'expect' interest rates to move up significantly, but what if they don't in the time frame you are planning for?

Someone recently predicted the S&P would go down to 740 by the end of October. Prior to that they predicted a drop in the S&P over the next (at the time of their posting) 30 days, TWICE.
It seems obvious to them that this HAD to happen, was going to happen without a doubt.

You may be right, things may get worse, but you may be wrong and they may stay the same, or even improve. I am ready for any of these events through diversification. No, I won't hit the jackpot in any of those scenarios. But likewise I won't take a serious hit in any of those events.

 

[FIREd]

I'd love to get a copy of this report:

Société Générale tells clients how to prepare for potential 'global collapse'

Société Générale has advised clients to be ready for a possible "global economic collapse" over the next two years, mapping a strategy of defensive investments to avoid wealth destruction.

Société Générale tells clients how to prepare for 'global collapse' - Telegraph

In a report entitled "Worst-case debt scenario", the bank's asset team said state rescue packages over the last year have merely transferred private liabilities onto sagging sovereign shoulders, creating a fresh set of problems. Overall debt is still far too high in almost all rich economiesas a share of GDP (350pc in the US), whether public or private. It must be reduced by the hard slog of "deleveraging", for years.

"As yet, nobody can say with any certainty whether we have in fact escaped the prospect of a global economic collapse," said the 68-page report, headed by asset chief Daniel Fermon. It is an exploration of the dangers, not a forecast.

Under the French bank's "Bear Case" scenario (the gloomiest of three possible outcomes), the dollar would slide further and global equities would retest the March lows. Property prices would tumble again. Oil would fall back to $50 in 2010.

Governments have already shot their fiscal bolts. Even without fresh spending, public debt would explode within two years to 105pc of GDP in the UK, 125pc in the US and the eurozone, and 270pc in Japan. Worldwide state debt would reach $45 trillion, up two-and-a-half times in a decade.
(UK figures look low because debt started from a low base. Mr Ferman said the UK would converge with Europe at 130pc of GDP by 2015 under the bear case).

The underlying debt burden is greater than it was after the Second World War, when nominal levels looked similar. Ageing populations will make it harder to erode debt through growth. "High public debt looks entirely unsustainable in the long run. We have almost reached a point of no return for government debt," it said.

Inflating debt away might be seen by some governments as a lesser of evils.

If so, gold would go "up, and up, and up" as the only safe haven from fiat paper money. Private debt is also crippling. Even if the US savings rate stabilises at 7pc, and all of it is used to pay down debt, it will still take nine years for households to reduce debt/income ratios to the safe levels of the 1980s.

[Continued via the link above]

Just a few thoughts:

1) Societe Generale clearly states that this is not a forecast, but a mere exercise aimed at exploring the possible dangers we are facing.
2) The scenario outlined is one of three possible scenarios explored, and it happens to be the most bearish one. Given the media's bias towards sensationalism, it is not surprising that the media chose to focus exclusively on that particular scenario. However, it does not make that scenario any more likely than the two other, less bearish scenarios.
3) If Societe Generale is so great at analyzing macro-economic environments, how come they didn't see the worse financial crisis since the great depression coming and had to be bailed out by the French government in 2008?

 

[Ed_The_Gypsy]

There have been real global disasters in the past. I do not think we will see anything like them again. Honestly. Nothing a good asset allocation won't survive.

Gold will not survive a real meltdown. Only ammunition and a secure camp in the woods will. If you don't run into someone bigger than you. If your ammunition doesn't run out. If you don't run out of food or water. If you don't get sick. If you have someone who can stand night watch. (Don't fall asleep!)

Now, will one be able to maintain an unchanging lifestyle forever while depleting his assets at the rate of 10% a year? Those people are living in a dream world and certainly will have their own personal disaster.

One ultimate solution might be to buy a good boat and learn how to navigate and fish and then disappear to sea for a few years.

People did survive the Great Depression. Some better than others.

 

[NW-Bound]

... Gold will not survive a real meltdown. Only ammunition and a secure camp in the woods will. If you don't run into someone bigger than you. If your ammunition doesn't run out. If you don't run out of food or water. If you don't get sick. If you have someone who can stand night watch. (Don't fall asleep!)

Now, will one be able to maintain an unchanging lifestyle forever while depleting his assets at the rate of 10% a year? Those people are living in a dream world and certainly will have their own personal disaster.

One ultimate solution might be to buy a good boat and learn how to navigate and fish and then disappear to sea for a few years...

Recently, I have been obsessed with getting an RV for extended travel. Though I do not see myself not having a permanent home (not yet anyway), I have read blogs of people who live a nomadic life in a class C RV, or even a small travel trailer. They seem to enjoy their life. Some even post their expenses. Heck, it still costs more than SS, but I hopefully should always be able to supplement it with my shrinking assets even if the market tanks again. Do I sound optimistic here?

So, me worry?

By the way, knowing that you are in the oil industry, I remember that in the late 70s when I was getting my undergraduate degree, the graduating seniors talked about how the chemical engineers were getting the highest offer. Then, in the early 80s, when I was working, there were talks about how the U-Haul one-way rent was cheaper going into Texas than the rent going out, due to the en-masse exodus from the oil state. Good grief! I am glad I am not in that field.

 

[oldtrig]

Was there ever a time in history where the future was certain? Put a plan together that your comfortable with, rebalance once a year and hope for the best.

Otherwise put your money in CD's and get eaten up by inflation.

I have heard that statement for 25 years yet I am still in pretty good shape. I invested $300,000.00 in 2007 yielding 5% for 5 years. I split these up in mine and DW names. When they mature in 2012 I will be 65 and start SS. I have never invested anything in the market other than my state retirement and I have no say on that.

 

[kumquat]

Good timing, how did you do during the previous 23 years?

 

[Rustic23]

I remember reading a book in the 70's that said that when interest rates went over 10% you should move strong into bonds, below that stocks.