Should I include cash and bonds?
Posted: 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?
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?