Should I include cash and bonds?

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volcker
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Should I include cash and bonds?

Post by volcker » Tue Jun 30, 2020 11:51 am

Hi everyone,

I'm targetting a portfolio 50/50 stocks/precious metals, plus 2 years worth of living expenses in cash (I'm currently selling some gold to buy stocks to reach the target). While my portfolio excludes half the assets in the PP, I'm posting here since I think this community could provide some input to challenge my reluctance to hold more cash or bonds than those two years. My goal is to keep this asset allocation forever, with periodic rebalancing.

The rationale for my portfolio is that stocks are likely to come out ahead in the long term, but if they don't, I expect precious metals to more or less make up for the losses. I think PMs hedge against scenarios like peak oil supply, loss of faith in fiat currencies, debt crisis, and more.

I've read several Bogleheads books and I understand the solid role that bonds have played for more than a century in a portfolio, but I think things have changed. I don't trust fiat currency long term. I think there are way too many dollars, way too much debt, way too many unfunded liabilities that will be printed away or financed with unpayable debt, and I think that the US can never realistically pay down its debt, which means it's like a Ponzi scheme without the fraud. They are committed to borrowing (or printing) to pay forever. I think there's a real risk that history will one day catch up with them. Many countries have tried that approach before and run into the limits of it.

I think the reason to hold cash in the PP was to hedge against deflation. I'm not very concerned about deflation. Bernanke very eloquently laid out the reasons why deflation is unlikely to happen, and if it does, it's extremely unlikely to be long-lived. Central banks are amply armed and amply motivated to guard against it. But high inflation, well that they are neither highly motivated to prevent, nor amply armed to correct. Volcker was finally able to break the back of inflation in the 80s, but I don't think that they could pull it off again if (or when) inflation became a big problem again. Try Volcker's 20% interest rates with the current debt load, and it would simply lay bare the US' insolvency for everyone to see.

Cash does dampen volatility, but it also substantially reduces return, and it's simply unsound (irresponsibly managed). I think of gold as real money that can't be printed.

And long bonds... 1.39% nominal return for a 30 year treasury, from an issuer that can barely keep the lights on without printing money or borrowing more? That's almost guaranteed a loss in real terms if held to maturity, for taking on the risk that rates could rise dramatically (in fact, there is no ceiling on how high rates could rise, since the debt is unpayable). The US has certainly gotten away for years (or decades) with the privilege of racking up unpayable debt while antagonizing one of the main buyers of that debt (China), so it can certainly go on for a lot longer than I think it should go on, but I still get the creeps from the idea of making cash or long bonds a substantial part of my portfolio (beyond the emergency fund). It also just feels awful to lend money to Uncle Sam. Precious metals are not perfect, but at least they are not trying to rip you off.

Please understand that in saying this I'm not criticizing the PP or anyone's portfolio. I'm simply stating how I personally feel about including these asset classes in my own portfolio. I have nothing against other people following the PP.

Thoughts?
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Re: Should I include cash and bonds?

Post by pmward » Tue Jun 30, 2020 12:24 pm

Well, we have had deflation... for 12 years now and going. I do think that bonds have unique diversification benefits, as there are times when bonds will perform well while stocks and gold do not. That being said, if you're ok taking that risk, and have a strong enough stomach for the volatility, there's nothing wrong with it. The cash has 2 functions though, 1 being liquidity, and the other to temper the long bonds. However, you can reduce cash as a way to reduce bonds in order to get the same benefits with a lower allocation. Think something like 40% stocks, 40% gold, 20% long term treasury, or 45% stocks, 45% gold, 10% long dated zeros.

See here for a quick comparison between your proposed 50/50, the vanilla PP, and my proposed 40/40/20. You will see that putting that 20% in 30 year bonds both increased returns and lowered both volatility and max drawdown. The 50/50 is still a pretty volatile portfolio on the whole. So while the ideal of not wanting to buy bonds is all well and good, they still do serve a functional purpose. If you choose to go without them I just want you to be aware that you are consciously leaving a big gaping hole in your defensive line and that at some point in your lifetime the markets are likely to run the ball right through that undefended area. The key is to learn and understand the tradeoffs, so that you can make an educated and informed decision. Also, remember that volatility always feels worse in reality than it looks on paper, and that is always something extremely important to keep in mind when backtesting.

https://www.portfoliovisualizer.com/bac ... tion4_3=25

Remember that the PP is about creating a portfolio that is greater than the sum of its parts. No individual part is perfect. If you take one away there is a tradeoff to be made. I'm not a super stickler for the exact 25/25/25/25 myself, I see the portfolio more as a framework and a philosophy, and I see nothing personally wrong with tweaking the formula a bit to fit your situation a bit better. But I do think that there is always a need for some bonds. Remember, rebalancing is the very magic that makes the PP work. It's the forced buying low and selling high that create its consistent performance. There is almost always going to be an asset that is high, and one that is low. For a new PP user there will always be some asset they are afraid of buying at any given time. There will never be a time when stocks, gold, bonds, and cash are all "low" in unison.
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Re: Should I include cash and bonds?

Post by volcker » Tue Jun 30, 2020 1:30 pm

pmward wrote:
Tue Jun 30, 2020 12:24 pm
Well, we have had deflation... for 12 years now and going. I do think that bonds have unique diversification benefits, as there are times when bonds will perform well while stocks and gold do not. That being said, if you're ok taking that risk, and have a strong enough stomach for the volatility, there's nothing wrong with it. The cash has 2 functions though, 1 being liquidity, and the other to temper the long bonds. However, you can reduce cash as a way to reduce bonds in order to get the same benefits with a lower allocation. Think something like 40% stocks, 40% gold, 20% long term treasury, or 45% stocks, 45% gold, 10% long dated zeros.

See here for a quick comparison between your proposed 50/50, the vanilla PP, and my proposed 40/40/20. You will see that putting that 20% in 30 year bonds both increased returns and lowered both volatility and max drawdown. The 50/50 is still a pretty volatile portfolio on the whole. So while the ideal of not wanting to buy bonds is all well and good, they still do serve a functional purpose. If you choose to go without them I just want you to be aware that you are consciously leaving a big gaping hole in your defensive line and that at some point in your lifetime the markets are likely to run the ball right through that undefended area. The key is to learn and understand the tradeoffs, so that you can make an educated and informed decision. Also, remember that volatility always feels worse in reality than it looks on paper, and that is always something extremely important to keep in mind when backtesting.

https://www.portfoliovisualizer.com/bac ... tion4_3=25

Remember that the PP is about creating a portfolio that is greater than the sum of its parts. No individual part is perfect. If you take one away there is a tradeoff to be made. I'm not a super stickler for the exact 25/25/25/25 myself, I see the portfolio more as a framework and a philosophy, and I see nothing personally wrong with tweaking the formula a bit to fit your situation a bit better. But I do think that there is always a need for some bonds. Remember, rebalancing is the very magic that makes the PP work. It's the forced buying low and selling high that create its consistent performance. There is almost always going to be an asset that is high, and one that is low. For a new PP user there will always be some asset they are afraid of buying at any given time. There will never be a time when stocks, gold, bonds, and cash are all "low" in unison.
What do you mean by deflation over the past 12 years?
At any rate, I guess the concern about deflation that the PP tries to address is one in which stocks crash, so regardless of whether the last decade saw deflation or not according to the definition we want to adopt, at least stocks and gold didn't do badly.

Thanks for the portfoliovisualizer link. I can see the historical record of these different strategies. It's understandable that taking a portfolio with a big chunk (50%) of gold and replacing part of that with long bonds is likely to increase returns if analyzed over a half century of past data, since long bonds have had positive real returns, while gold does not have a good track record of above zero real returns over the very long term. And if the period starts in the 1970s, then it's also going to have lower volatility, since gold has been unanchored to currency and has thus been very volatile. Long bonds should have positive expected real returns, that's the normal state of affairs. The problem is, the world is not normal any more. Central banks have decided that you should expect to lose money in real terms for taking on the risk of a 30 year bond. The market no longer sets these rates freely.
I think we both agree that if we're designing a fixed asset allocation to be maintained blindly over a random 40-year period without the benefit of knowing when that period will be (whether past or present), including at least some bonds is a great idea. That's the point of the PP, being agnostic about the future. I would not want to have a 50/50 stocks/precious metals allocation, if I were to be randomly assigned a 40-year period and could not touch the allocation at all.
While I think the evidence from decades of academic studies of performance of professional money managers suggests very strongly that I should not expect to have absolutely any skill timing the stock market or picking stocks (and thus I don't), I do think that a regular investor like me can look at a heavily distorted market like bonds, or the management of monetary policy by central banks, and conclude that over the next few decades, the risks from cash or bonds are not worth the negative real expected returns (assuming that one is willing to tolerate the added volatility of a portfolio without fixed income, which I am). Maybe it's just hubris on my part to think I can assess these risks even at a big picture level.

And as for rebalancing, I think my strategy will still benefit from buying low and selling high, as the stocks/gold ratio will be anything but stable. But of course, there's no law of economics that will prevent both from ever going lower at the same time (my hope is that this situation would be only temporary, and I'm prepared to wait it out).
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Re: Should I include cash and bonds?

Post by pmward » Tue Jun 30, 2020 2:16 pm

volcker wrote:
Tue Jun 30, 2020 1:30 pm
pmward wrote:
Tue Jun 30, 2020 12:24 pm
Well, we have had deflation... for 12 years now and going. I do think that bonds have unique diversification benefits, as there are times when bonds will perform well while stocks and gold do not. That being said, if you're ok taking that risk, and have a strong enough stomach for the volatility, there's nothing wrong with it. The cash has 2 functions though, 1 being liquidity, and the other to temper the long bonds. However, you can reduce cash as a way to reduce bonds in order to get the same benefits with a lower allocation. Think something like 40% stocks, 40% gold, 20% long term treasury, or 45% stocks, 45% gold, 10% long dated zeros.

See here for a quick comparison between your proposed 50/50, the vanilla PP, and my proposed 40/40/20. You will see that putting that 20% in 30 year bonds both increased returns and lowered both volatility and max drawdown. The 50/50 is still a pretty volatile portfolio on the whole. So while the ideal of not wanting to buy bonds is all well and good, they still do serve a functional purpose. If you choose to go without them I just want you to be aware that you are consciously leaving a big gaping hole in your defensive line and that at some point in your lifetime the markets are likely to run the ball right through that undefended area. The key is to learn and understand the tradeoffs, so that you can make an educated and informed decision. Also, remember that volatility always feels worse in reality than it looks on paper, and that is always something extremely important to keep in mind when backtesting.

https://www.portfoliovisualizer.com/bac ... tion4_3=25

Remember that the PP is about creating a portfolio that is greater than the sum of its parts. No individual part is perfect. If you take one away there is a tradeoff to be made. I'm not a super stickler for the exact 25/25/25/25 myself, I see the portfolio more as a framework and a philosophy, and I see nothing personally wrong with tweaking the formula a bit to fit your situation a bit better. But I do think that there is always a need for some bonds. Remember, rebalancing is the very magic that makes the PP work. It's the forced buying low and selling high that create its consistent performance. There is almost always going to be an asset that is high, and one that is low. For a new PP user there will always be some asset they are afraid of buying at any given time. There will never be a time when stocks, gold, bonds, and cash are all "low" in unison.
What do you mean by deflation over the past 12 years?
At any rate, I guess the concern about deflation that the PP tries to address is one in which stocks crash, so regardless of whether the last decade saw deflation or not according to the definition we want to adopt, at least stocks and gold didn't do badly.

Thanks for the portfoliovisualizer link. I can see the historical record of these different strategies. It's understandable that taking a portfolio with a big chunk (50%) of gold and replacing part of that with long bonds is likely to increase returns if analyzed over a half century of past data, since long bonds have had positive real returns, while gold does not have a good track record of above zero real returns over the very long term. And if the period starts in the 1970s, then it's also going to have lower volatility, since gold has been unanchored to currency and has thus been very volatile. Long bonds should have positive expected real returns, that's the normal state of affairs. The problem is, the world is not normal any more. Central banks have decided that you should expect to lose money in real terms for taking on the risk of a 30 year bond. The market no longer sets these rates freely.
I think we both agree that if we're designing a fixed asset allocation to be maintained blindly over a random 40-year period without the benefit of knowing when that period will be (whether past or present), including at least some bonds is a great idea. That's the point of the PP, being agnostic about the future. I would not want to have a 50/50 stocks/precious metals allocation, if I were to be randomly assigned a 40-year period and could not touch the allocation at all.
While I think the evidence from decades of academic studies of performance of professional money managers suggests very strongly that I should not expect to have absolutely any skill timing the stock market or picking stocks (and thus I don't), I do think that a regular investor like me can look at a heavily distorted market like bonds, or the management of monetary policy by central banks, and conclude that over the next few decades, the risks from cash or bonds are not worth the negative real expected returns (assuming that one is willing to tolerate the added volatility of a portfolio without fixed income, which I am). Maybe it's just hubris on my part to think I can assess these risks even at a big picture level.

And as for rebalancing, I think my strategy will still benefit from buying low and selling high, as the stocks/gold ratio will be anything but stable. But of course, there's no law of economics that will prevent both from ever going lower at the same time (my hope is that this situation would be only temporary, and I'm prepared to wait it out).
Sure you will be rebalancing between stocks and gold. But that is only 2 uncorrelated assets. The more uncorrelated assets the better when it comes to rebalancing. And yeah, do remember that people have literally been calling the top in the bond market for decades now. We are simply at a point where the Fed cannot afford to let the bond yields go up substantially, and they won't. The downside is limited, at least until the deficit is inevitably inflated away. Now this might be a bad thing if you're holding to maturity, but if you're holding and rebalancing along the way I'm not sure that your portfolio would be as harmed as you assume it would be because there is some upside on capital appreciation possible. Like you mentioned, we are a long way from normal. So expecting normalcy to come back anytime soon (if ever) is probably wishful thinking. Anyways, I'm really just taking the other side here to ensure you look from all angles. If you're ok with the risks and the volatility, so long as you are aware of the risks you are taking, then I think that is fine. But I do think that at least a small long term bond allocation would probably help more than it would hurt over the course of your lifetime, even in a scenario that rates go back to "normal" over the next few years. I mean, a bear market in 10-20% of your portfolio, especially when other assets would be in a bull market, really is a drop in the bucket.
Last edited by pmward on Tue Jun 30, 2020 2:43 pm, edited 1 time in total.
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Re: Should I include cash and bonds?

Post by pmward » Tue Jun 30, 2020 2:23 pm

Also, as far as deflation for the last 12 years, look at all the liquidity that has been created by the Fed. Even with that inflation has been under target. Imagine what it would have been like without it. Since 2008 we have been in a secular deflationary cycle. 2008 and 2020 have been the most jarring "crisis" moments, but even in the good years low inflation / low growth has still been problematic. There's no rule that says a secular deflation has to end at 12 years, and with our current demographics there's no reason to believe it will end in the near term. Food for thought, the S&P 500 profits in aggregate peaked back in 2012. For the last 8 years all increase in profits using per share metrics in aggregate for the entire S&P 500 has been entirely through levered stock buybacks. Why have we had these levered buy backs? Low interest rates and QE. Without low interest rates and QE stocks would have had a miserable decade, and eventually the gains they've brought forward will come back out. The bill always gets paid eventually.
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Re: Should I include cash and bonds?

Post by volcker » Tue Jun 30, 2020 4:47 pm

pmward wrote:
Tue Jun 30, 2020 2:16 pm
Sure you will be rebalancing between stocks and gold. But that is only 2 uncorrelated assets. The more uncorrelated assets the better when it comes to rebalancing.
It depends on the expected return of the assets. I have not ran the correlations, but in the hypothetical case that the Argentinean peso were to have a highly negative correlation to US stocks, it would not be wise to "diversify" into pesos. They would still sink the portfolio, rebalancing and all.

pmward wrote:
Tue Jun 30, 2020 2:16 pm
And yeah, do remember that people have literally been calling the top in the bond market for decades now. We are simply at a point where the Fed cannot afford to let the bond yields go up substantially, and they won't. The downside is limited, at least until the deficit is inevitably inflated away. Now this might be a bad thing if you're holding to maturity, but if you're holding and rebalancing along the way I'm not sure that your portfolio would be as harmed as you assume it would be because there is some upside on capital appreciation possible. Like you mentioned, we are a long way from normal. So expecting normalcy to come back anytime soon (if ever) is probably wishful thinking. Anyways, I'm really just taking the other side here to ensure you look from all angles. If you're ok with the risks and the volatility, so long as you are aware of the risks you are taking, then I think that is fine. But I do think that at least a small long term bond allocation would probably help more than it would hurt over the course of your lifetime, even in a scenario that rates go back to "normal" over the next few years. I mean, a bear market in 10-20% of your portfolio, especially when other assets would be in a bull market, really is a drop in the bucket.
I fear that the Fed may have run themselves into a corner. They cannot let interest rates go back to normal as you say, but I suspect that one day big inflation is going to show up, and then they are going to have to choose between terrible and absolutely disastrous courses of action.

pmward wrote:
Tue Jun 30, 2020 2:23 pm
Also, as far as deflation for the last 12 years, look at all the liquidity that has been created by the Fed. Even with that inflation has been under target. Imagine what it would have been like without it. Since 2008 we have been in a secular deflationary cycle. 2008 and 2020 have been the most jarring "crisis" moments, but even in the good years low inflation / low growth has still been problematic. There's no rule that says a secular deflation has to end at 12 years, and with our current demographics there's no reason to believe it will end in the near term. Food for thought, the S&P 500 profits in aggregate peaked back in 2012. For the last 8 years all increase in profits using per share metrics in aggregate for the entire S&P 500 has been entirely through levered stock buybacks. Why have we had these levered buy backs? Low interest rates and QE. Without low interest rates and QE stocks would have had a miserable decade, and eventually the gains they've brought forward will come back out. The bill always gets paid eventually.
Well, low inflation is still inflation, not deflation. And stocks and PM didn't do badly over the entire period. Deflation used to be more of a threat under a gold standard, but with the golden chains broken, the "logic of (Ben's) printing press" makes it extremely difficult to have a long-lived deflation.
I forgot to mention, my stock allocation is 15% US and 85% non-US, so I'm not expecting to be hurt when the tide turns against US stocks. I don't like high valuations when I can avoid them.

I think you have good points. Treasuries are not as bad as Argentinean pesos. And, as a side note, I can imagine scenarios in which gold loses value permanently (cheap and plentiful gold from seabed mining, or, more far fetched, from asteroid mining, or some real breakthrough in crypto that ends up dethroning gold for good, etc.), so one could well think "I expect bonds to lose value in real terms, but in the less likely scenario that gold loses value permanently, I'd want some bonds". Maybe my reluctance to go even 10% treasuries has to do with how crappy it feels to lend so cheaply to an insolvent debtor.
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Re: Should I include cash and bonds?

Post by mathjak107 » Tue Jun 30, 2020 5:03 pm

All stock markets end up falling ..when America sneezes the world catches cold ..owning foreign stocks will offer no protection if we tank here
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Re: Should I include cash and bonds?

Post by pmward » Tue Jun 30, 2020 5:10 pm

volcker wrote:
Tue Jun 30, 2020 4:47 pm
It depends on the expected return of the assets. I have not ran the correlations, but in the hypothetical case that the Argentinean peso were to have a highly negative correlation to US stocks, it would not be wise to "diversify" into pesos. They would still sink the portfolio, rebalancing and all.
Expected return is a guessing game. People have been guessing against bonds for many years now, very incorrectly. When bonds actually start to underperform, then we can talk about lowering their expected return. In the meantime, there is no evidence that this will happen, it's simply a guess.
volcker wrote:
Tue Jun 30, 2020 4:47 pm
I fear that the Fed may have run themselves into a corner. They cannot let interest rates go back to normal as you say, but I suspect that one day big inflation is going to show up, and then they are going to have to choose between terrible and absolutely disastrous courses of action.
Once again, fear and reality are on two opposite sides of the spectrum. I don't think they've backed themselves into a corner yet. They have much further they can go. These things also swing over many decades, and they aren't a straight line, they give plenty of volatility for rebalancing along the way.
volcker wrote:
Tue Jun 30, 2020 4:47 pm
Well, low inflation is still inflation, not deflation. And stocks and PM didn't do badly over the entire period. Deflation used to be more of a threat under a gold standard, but with the golden chains broken, the "logic of (Ben's) printing press" makes it extremely difficult to have a long-lived deflation.
I forgot to mention, my stock allocation is 15% US and 85% non-US, so I'm not expecting to be hurt when the tide turns against US stocks. I don't like high valuations when I can avoid them.
No it is a deflation when the only inflation you have is generated by money printing. The current, the great force underlying our entire economy is deflationary. There is no getting around this fact. Falling or low inflation is "deflation". Even Ben's printing press hasn't solved the issue... if anything it has made it worse. Large amounts of government debt exhibit a deflationary force on the economy as a whole. Also, I'm not sure your foreign stocks are going to save you. This is a global phenomenon, and the U.S. has been tame compared to the EU and Japan which dominate your ex-US holdings.

pmward wrote:
Tue Jun 30, 2020 2:16 pm
Maybe my reluctance to go even 10% treasuries has to do with how crappy it feels to lend so cheaply to an insolvent debtor.
Is this investing based on data or based on feelings?
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Re: Should I include cash and bonds?

Post by volcker » Tue Jun 30, 2020 6:27 pm

mathjak107 wrote:
Tue Jun 30, 2020 5:03 pm
All stock markets end up falling ..when America sneezes the world catches cold ..owning foreign stocks will offer no protection if we tank here
Often true in the short term, but not in the long term. I was referring to pmward's comment that the US stock market has been on fire since 2009. Developed ex-US has not (In dollars, VEA was cheaper at the start of this year than it was in 2007). If mean reversion does its thing, dev ex-US would outdo US equities over the next say, 10 years. That's why I'm not worried with mean reversion catching up with the S&P.
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Re: Should I include cash and bonds?

Post by volcker » Wed Jul 01, 2020 2:38 pm

pmward wrote:
Tue Jun 30, 2020 5:10 pm
Expected return is a guessing game. People have been guessing against bonds for many years now, very incorrectly. When bonds actually start to underperform, then we can talk about lowering their expected return. In the meantime, there is no evidence that this will happen, it's simply a guess.
I'd say an educated guess.
While I respect your point of view, I find it unconvincing. Long bonds have their odds stacked against them. The fact that the expected return is not guaranteed does not change the point that the odds are not good. But maybe the disagreement is more about what the expected return actually is, and this depends on the subjective outlook for inflation.
To me, a country that used to be committed to deficits in the trillion plus range as far as the eye can see, and this was even before the first person coughed up some SARS-COV-2, and that is insolvent however you want to look at it (cannot possibly pay down the debt, in fact cannot even stop growing the debt pile), well that's a substantial risk that inflation will one day rise dramatically before my investing horizon is up, and that would trash long bonds. Bond yields can always go negative (just ask the EU) but to me that's bubble madness, so I don't particularly care to miss that upside if it were to happen. It's like missing the NASDAQ ride from 3500 in late 1999 to the 5000 top in 2000. If I was living 1999 today, I would be fine missing that upside by staying away from the NASDAQ.
That's a long way to say that the best case I consider is simply for real rates to stay slightly negative, and the worst case is pretty nasty.

This assessment does depend on the current yield, and right now the yield curve is really bad. If the 5 year TIPS were solidly positive, and if gold were $1700 or higher, well maybe then it would be easier to sell some gold and buy a bit of 5 year TIPS. (Of course, maybe the only time we ever get there is when all hell has already broken lose and rates are rising sharply, so I'm not holding my breath here.)

pmward wrote:
Tue Jun 30, 2020 5:10 pm
No it is a deflation when the only inflation you have is generated by money printing. The current, the great force underlying our entire economy is deflationary. There is no getting around this fact. Falling or low inflation is "deflation". Even Ben's printing press hasn't solved the issue... if anything it has made it worse. Large amounts of government debt exhibit a deflationary force on the economy as a whole. Also, I'm not sure your foreign stocks are going to save you. This is a global phenomenon, and the U.S. has been tame compared to the EU and Japan which dominate your ex-US holdings.
Tell me more. I don't understand what you're trying to get at.
I get it that in the absence of Fed intervention, the economy would enter a deflationary liquidity crisis, 1930s-style. But where I think we diverge is that I fully trust the Fed (and other major central banks) not to let that happen. They've so far proven their deflation fighting credentials. So I don't see the point of investing to hedge a nasty deflation that I find extremely unlikely to happen and also be long-lived.
I would not want to be 100% stocks because those are certainly volatile, but most scenarios in which stocks do poorly for many years, and which are plausible given our starting conditions now, tend to be of the kind where PMs do OK or better.

The scenario that a 50/50 stocks/PMs portfolio is not well equipped to withstand is one in which developed stocks crash, PMs crash, and this lasts for many years, all 3 conditions simultaneously. If this were to happen, sure, it would be great to have a warm stash of bonds ride to the rescue.
Even the 1930s crash, while very nasty, did not fit that criteria. Gold did not crash. In fact it was revalued in 1933 for those who were able to hold on to their gold. (I don't live in the US, so I ignore the fact that gold became ilegal for US citizens.) My 50/50 portfolio would have softened the blow to equities by rebalancing from gold to equities, even though a PP would have smoothed the ride even more.
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Re: Should I include cash and bonds?

Post by ahhrunforthehills » Wed Jul 01, 2020 3:08 pm

@ volcker

I have been wondering this recently as well (in fact, I had a very similar post the same day as you in a different thread).

Someone else pointed out that this guy did an analysis and found that adding bonds to a stock/gold mix reduced your overall risk very little, but at the expense of massive performance: https://www.youtube.com/watch?v=LA2Yr6NoZyA (around 5:05 is where he gives his opinion).

His ideal allocation is 65% stock and 35% gold. In other videos he commented that anything more than 35% and your risk adjusted reward starts to really go down the crapper.

People may say "... but treasuries can go negative!" This MIGHT be true, but in that environment many investors will begin pouring into gold as an alternative store of wealth.

Also, are we talking about taxable accounts or non-taxable accounts? It might be true that the magic of the PP is rebalancing, but I recently started thinking that magic becomes a curse in a taxable account.

I ran the comparisons through portfoliocharts, the simba spreadsheet, portfoliovisualizer, etc. 62.% stock, 32.5% gold, and 5% t-bills seems to be pretty hard to argue against (especially if you are talking about After Tax/After Inflation returns).

If we are talking about Physical Gold, your tax rate will be fully dependent on your income. Your income will be determined by how many fixed income investments you have (i.e. Bonds). If you only owned stocks and gold, you would not have any income. Therefore, your tax rate for selling gold would be insanely low.

Edit: Your previous post (saying that you were not from the US) came as I was typing mine, so the tax benefit I mentioned might not apply to you. However, depending on your country, holding gold would obviously come with other benefits that paper assets do not have.
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Hal
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Re: Should I include cash and bonds?

Post by Hal » Wed Jul 01, 2020 5:13 pm

ahhrunforthehills wrote:
Wed Jul 01, 2020 3:08 pm
@ volcker

I have been wondering this recently as well (in fact, I had a very similar post the same day as you in a different thread).

Someone else pointed out that this guy did an analysis and found that adding bonds to a stock/gold mix reduced your overall risk very little, but at the expense of massive performance: https://www.youtube.com/watch?v=LA2Yr6NoZyA (around 5:05 is where he gives his opinion).

His ideal allocation is 65% stock and 35% gold. In other videos he commented that anything more than 35% and your risk adjusted reward starts to really go down the crapper.

People may say "... but treasuries can go negative!" This MIGHT be true, but in that environment many investors will begin pouring into gold as an alternative store of wealth.

Also, are we talking about taxable accounts or non-taxable accounts? It might be true that the magic of the PP is rebalancing, but I recently started thinking that magic becomes a curse in a taxable account.

I ran the comparisons through portfoliocharts, the simba spreadsheet, portfoliovisualizer, etc. 62.% stock, 32.5% gold, and 5% t-bills seems to be pretty hard to argue against (especially if you are talking about After Tax/After Inflation returns).

If we are talking about Physical Gold, your tax rate will be fully dependent on your income. Your income will be determined by how many fixed income investments you have (i.e. Bonds). If you only owned stocks and gold, you would not have any income. Therefore, your tax rate for selling gold would be insanely low.

Edit: Your previous post (saying that you were not from the US) came as I was typing mine, so the tax benefit I mentioned might not apply to you. However, depending on your country, holding gold would obviously come with other benefits that paper assets do not have.
Have a look at Belangp's video on taxation and rebalancing....

https://www.youtube.com/watch?v=MhszdAX9Leg&t=4s
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