You can't start a portfolio in 1975 with gold because it will make any portfolio that holds more gold look worse than any portfolio with less gold. Not apples to apples. I suggest starting a portfolio in a year where all the assets were positive so they are on equal footing:
https://www.portfoliovisualizer.com/bac ... 5&Gold3=20
It looks to me like the .50%-1% real outperformance is coming from the fixed income bull market more than anyhting else. Lets exclude that period too because it was an anomaly.
Let's try it pseudo-"out of sample":
https://www.portfoliovisualizer.com/bac ... 5&Gold3=20
BTW, notice the bug. I think I'll stick to 25% gold. The PP isn't about optimizing your return, but optimizing your risks. Just juice up Prosperity to up the returns as I've said many times. It's far better to overcome the drag of gold by doing that than giving up your sovereign risk protection.
Can we trust low correlations?
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MachineGhost
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Re: Can we trust low correlations?
Last edited by MachineGhost on Mon Sep 05, 2016 7:42 pm, edited 7 times in total.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
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Kriegsspiel
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Re: Can we trust low correlations?
MachineGhost wrote:You can't start a portfolio in 1975 with gold because it will make any portfolio that holds gold look worse than any portfolio without gold. Not apples to apples. I suggest starting a portfolio in a year where all the assets were positive so they are on equal footing.
MARX CALLED AND HE WANTS HIS BACKTESTING METHOD BACK
Re: Can we trust low correlations?
That's why I really like the Heat Map charts. It lets you see the good years and bad years for any portfolio all at once. Picking only one square out of the 990 possible options to decide what is "best" with no context of the range of historical outcomes just seems silly to me.MachineGhost wrote:You can't start a portfolio in 1975 with gold because it will make any portfolio that holds more gold look worse than any portfolio with less gold. Not apples to apples.
FWIW, the Desert/Swedroe hybrid is pretty good.
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MachineGhost
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Re: Can we trust low correlations?
Yes, its a Golden Butterfly but with a three-way equity split and less gold. Just need to fix the latter and then you have the Golden Butterfly in a Desert Portfolio. The way I see it, you need as much gold to turn the 70's as non-red as possible.Tyler wrote:FWIW, the Desert/Swedroe hybrid is pretty good.
I guess if you do annual rebalancing, it wouldn't matter so much that you don't have a 25% weight for the rebalancing bands. But the rebalancing bands have proven superior to annual rebalancing for the PP.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Re: Can we trust low correlations?
Thanks Tyler for doing the heat map for Desert's newer portfolio.
Getting back to the OP's query: part of HB's genius was allocating not based on backtested performance or correlations but on having a meaningful slice of assets that would thrive in particular economic conditions. As we saw in '08, "non-correlated" asset classes will often correlate/tank in unison in a market crisis; in the case of the PP, only the LT Treasuries saved it.
William Bernstein argues (convincingly, IMO) in "Deep Risk" that (a) gold isn't an inflation hedge, and (much more importantly) (b) it's not smart to allocate equal percentages of a portfolio to protect against events which are anything but equally likely to happen. The Golden Butterfly is effectively at PP partially informed by Bernstein's analysis, in that it ups the allocation to equities since prosperity and inflation are far more likely scenarios than devastation, deflation or confiscation. Desert's latest portfolio (10% ea. TSM, SCV,EM, gold + 60% ITT) is the Larry Swedroe porfolio informed by Harry Browne. I don't see it as a variation on the Golden Butterfly since it has the bare minimum of gold, ditches the bond barbell in favor of the ITTs and prominently features the kind of tilting to small, value and international that PPers hate and folks like Bernstein, Fama & French etc. love.
Desert is obviously far from alone in wanting to own only enough gold for SHTF insurance, and 10% does it in the context of his other choices here. The stock choices are also interesting - they're actually plain vanilla compared to the 100% (of the 30% total equity allocation) international small cap and EM choices Swedroe recommends in "Avoiding Black Swans." With 2/3rds of the stocks being domestic you don't have the huge tracking error with Desert's iteration, while the ITT's offer most of the flight-to-safety protection of the PP without the gut-wrenching volatility of 30 year treasuries. Nominally there's no cash, but I don't see any problem with having a year's living expenses in CDs or short-term treasuries as part of the 60%.
In any case, I'd argue that both the Golden Butterfly and Desert's latest allocation are just as well thought-out and put together as the PP.
Getting back to the OP's query: part of HB's genius was allocating not based on backtested performance or correlations but on having a meaningful slice of assets that would thrive in particular economic conditions. As we saw in '08, "non-correlated" asset classes will often correlate/tank in unison in a market crisis; in the case of the PP, only the LT Treasuries saved it.
William Bernstein argues (convincingly, IMO) in "Deep Risk" that (a) gold isn't an inflation hedge, and (much more importantly) (b) it's not smart to allocate equal percentages of a portfolio to protect against events which are anything but equally likely to happen. The Golden Butterfly is effectively at PP partially informed by Bernstein's analysis, in that it ups the allocation to equities since prosperity and inflation are far more likely scenarios than devastation, deflation or confiscation. Desert's latest portfolio (10% ea. TSM, SCV,EM, gold + 60% ITT) is the Larry Swedroe porfolio informed by Harry Browne. I don't see it as a variation on the Golden Butterfly since it has the bare minimum of gold, ditches the bond barbell in favor of the ITTs and prominently features the kind of tilting to small, value and international that PPers hate and folks like Bernstein, Fama & French etc. love.
Desert is obviously far from alone in wanting to own only enough gold for SHTF insurance, and 10% does it in the context of his other choices here. The stock choices are also interesting - they're actually plain vanilla compared to the 100% (of the 30% total equity allocation) international small cap and EM choices Swedroe recommends in "Avoiding Black Swans." With 2/3rds of the stocks being domestic you don't have the huge tracking error with Desert's iteration, while the ITT's offer most of the flight-to-safety protection of the PP without the gut-wrenching volatility of 30 year treasuries. Nominally there's no cash, but I don't see any problem with having a year's living expenses in CDs or short-term treasuries as part of the 60%.
In any case, I'd argue that both the Golden Butterfly and Desert's latest allocation are just as well thought-out and put together as the PP.
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MachineGhost
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Re: Can we trust low correlations?
Browne did backtest, but it was explicitly for the 1981 PRPFX and not the 1987 PP.
ITT vs ST/LT Barbell is not significant at all; you'll just miss out on some minor volatility harvesting of the longer durations when rebalancing. Nothing to lose sleep over. ITT does have the disadvantage of not having any readily liquid cash for rebalancings depending on how you structure it (funds don't typically go down to zero duration so you can incur a loss by selling to raise cash if the lowest duration instrument they hold is carrying a negative return). Any exogenous emergency cash held will also drag down the net portfolio return, so that must be included for apples to apples.
Realistically, if the objective function is to survive any economic climate since 1968, then the "all weather" PP serves that purpose.
If the objective function is to minimize drawdown and non-blue squares on the heat map, then the Platinum Butterfly that I posted in Resort serves that purpose.
If the objective function is to minimize the risk that gold brings to a portfolio, then the Desert serves that purpose.
If the objective function is to maximize available stock returns while still being hedged to other economic climates, then the Golden Butterfly serves that purpose.
If the objective function is to be robust to any economic climate back to the 1920's, then the Shahidi Balanced serves that purpose.
If the objective function is to outperform mediocre future expected available stock returns, then equity strategy diversification serves that purpose.
And if the objective function is to combine ALL OF THE ABOVE, then the PP with the three Swedroe tilts included in the core level of your strategy diversification serves that purpose. My PP is very similar.
Beyond this, it is splitting hairs. There's only so much that jiggling weights and tilting can do.
Right now the primary risk to any portfolio is a sovereign debt crisis at all levels of government, not gold. Gold's already had its 20-year bear market -- stop looking to the past. So this is the only valid reason I can see for making any tactical changes to the "all weather" concept. But how and when that is done is a topic for another day and another thread.
ITT vs ST/LT Barbell is not significant at all; you'll just miss out on some minor volatility harvesting of the longer durations when rebalancing. Nothing to lose sleep over. ITT does have the disadvantage of not having any readily liquid cash for rebalancings depending on how you structure it (funds don't typically go down to zero duration so you can incur a loss by selling to raise cash if the lowest duration instrument they hold is carrying a negative return). Any exogenous emergency cash held will also drag down the net portfolio return, so that must be included for apples to apples.
Realistically, if the objective function is to survive any economic climate since 1968, then the "all weather" PP serves that purpose.
If the objective function is to minimize drawdown and non-blue squares on the heat map, then the Platinum Butterfly that I posted in Resort serves that purpose.
If the objective function is to minimize the risk that gold brings to a portfolio, then the Desert serves that purpose.
If the objective function is to maximize available stock returns while still being hedged to other economic climates, then the Golden Butterfly serves that purpose.
If the objective function is to be robust to any economic climate back to the 1920's, then the Shahidi Balanced serves that purpose.
If the objective function is to outperform mediocre future expected available stock returns, then equity strategy diversification serves that purpose.
And if the objective function is to combine ALL OF THE ABOVE, then the PP with the three Swedroe tilts included in the core level of your strategy diversification serves that purpose. My PP is very similar.
Beyond this, it is splitting hairs. There's only so much that jiggling weights and tilting can do.
Right now the primary risk to any portfolio is a sovereign debt crisis at all levels of government, not gold. Gold's already had its 20-year bear market -- stop looking to the past. So this is the only valid reason I can see for making any tactical changes to the "all weather" concept. But how and when that is done is a topic for another day and another thread.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
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buddtholomew
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Re: Can we trust low correlations?
Although we may experience one economic climate more frequently than another, we still need to hold a sufficient percentage in each asset (stocks,bonds,gold, cash) to buoy the entire portfolio. A reduced allocation to LTT's in 2008/9 would have resulted in out-sized portfolio declines.Kevin K. wrote:Thanks Tyler for doing the heat map for Desert's newer portfolio.
(a) gold isn't an inflation hedge, and (much more importantly) (b) it's not smart to allocate equal percentages of a portfolio to protect against events which are anything but equally likely to happen..
We're not necessarily looking for the optimal allocation, but rather risk adjusted return with reduced draw downs.
Tilting to prosperity or inflation is what PRPFX ultimately did/do and we can see how the mutual fund compared to the PP over the last few years.
Now, with the money "I can afford to lose" with the hopes of achieving higher returns, I am invested 70 stocks, 30 fixed income (IT Bonds).
This includes SC, INT and EM.
Also, what's the deal with gold not being an inflation hedge?
Re: Can we trust low correlations?
Re: gold not being an inflation hedge, Bernstein discusses this in detail in "Deep Risk." Here are a couple of highlights:
"In an exhaustive review of gold's long-term performance, academics Claude Erb and Campbell Harvey noted that gold returns correlated poorly not only with inflation, but also with currency shocks as well, pointing out that between 1980 and 2000, Brazilian inflation ran at 250% per year, during which interval the real price of gold fell by 70%."
(referencing the Dimson, Marsh and Staunton research from the London School of Economics):
"DMS also found that gold bullion provides only limited protection from inflation. Although they did see a loose positive correlation between annual real gold returns and annual inflation in their 19-nation sample, gold did best, by far, in the 5% of country years with the lowest inflation i.e., deflation......In other words, although gold provided little protection against inflation, it did superbly with deflation. This makes sense: when inflation is high, gold is just one more commodity against which inflation is measured: there is not reason to think that gold's price will rise more than that of copper, wheat, or oil. On the other hand, gold does best when the public loses faith int he financial system; this happens during panics, which are almost always associated, at some point, with low inflation or deflation. During the three year period between 2007 and 2009, for example, when inflation was nearly nonexistent, gold's price rose by 71%."
Bernstein also points out that "the 8.66% (1976-2013) return of the PP can be obtained as a lower SD with the simpler, gold-less portfolio that contains about 29% stocks, 35.5% each LTT,TBills; without gold, the worst inflation-adjusted one-year loss for this portfolio was 6.71% in 1977."
"That said, the PP shone in 2008, with a nominal loss of just 1.38%, which is why so many people are "Wild About Harry" these days. in 1981 however the PP lost a nominal 5.27%, which might not seem so bad except that inflation that year ran at 8.94%, meaning that the PP lost 13.05% in real spending power, a dent that I think would discomfit most of today's PP adherents."
My intention in sharing these quotes isn't to make it seem like Bernstein is a PP-basher, since he is not. Rather it's to point out just what an essential read this particular book of his - which is informed by both his deep knowledge of financial market history and a genuine appreciation for Browne's work - is for PP fans like all of us.
If nothing else, Bernstein's work and iterations of the PP such as the Golden Butterfly and "Desert Oasis" show that there's nothing sacrosanct about the 4 x 25% allocation, especially given that its most controversial component not only has no inherent rate of return but also doesn't do the one thing Browne claimed it would do: protect against inflation. That's the role of equities - and especially globally-diversified ones.
"In an exhaustive review of gold's long-term performance, academics Claude Erb and Campbell Harvey noted that gold returns correlated poorly not only with inflation, but also with currency shocks as well, pointing out that between 1980 and 2000, Brazilian inflation ran at 250% per year, during which interval the real price of gold fell by 70%."
(referencing the Dimson, Marsh and Staunton research from the London School of Economics):
"DMS also found that gold bullion provides only limited protection from inflation. Although they did see a loose positive correlation between annual real gold returns and annual inflation in their 19-nation sample, gold did best, by far, in the 5% of country years with the lowest inflation i.e., deflation......In other words, although gold provided little protection against inflation, it did superbly with deflation. This makes sense: when inflation is high, gold is just one more commodity against which inflation is measured: there is not reason to think that gold's price will rise more than that of copper, wheat, or oil. On the other hand, gold does best when the public loses faith int he financial system; this happens during panics, which are almost always associated, at some point, with low inflation or deflation. During the three year period between 2007 and 2009, for example, when inflation was nearly nonexistent, gold's price rose by 71%."
Bernstein also points out that "the 8.66% (1976-2013) return of the PP can be obtained as a lower SD with the simpler, gold-less portfolio that contains about 29% stocks, 35.5% each LTT,TBills; without gold, the worst inflation-adjusted one-year loss for this portfolio was 6.71% in 1977."
"That said, the PP shone in 2008, with a nominal loss of just 1.38%, which is why so many people are "Wild About Harry" these days. in 1981 however the PP lost a nominal 5.27%, which might not seem so bad except that inflation that year ran at 8.94%, meaning that the PP lost 13.05% in real spending power, a dent that I think would discomfit most of today's PP adherents."
My intention in sharing these quotes isn't to make it seem like Bernstein is a PP-basher, since he is not. Rather it's to point out just what an essential read this particular book of his - which is informed by both his deep knowledge of financial market history and a genuine appreciation for Browne's work - is for PP fans like all of us.
If nothing else, Bernstein's work and iterations of the PP such as the Golden Butterfly and "Desert Oasis" show that there's nothing sacrosanct about the 4 x 25% allocation, especially given that its most controversial component not only has no inherent rate of return but also doesn't do the one thing Browne claimed it would do: protect against inflation. That's the role of equities - and especially globally-diversified ones.
Re: Can we trust low correlations?
I think gold is a victim of over-simplification on both sides of the argument. People too often like to reduce gold to its reported inflation-fighting properties, but it's a complex alternative world currency where inflation is only one piece of the puzzle (read this for a nice summary of the many drivers of gold price). I read somewhere (wish I could find the link) that the IMF estimates that the gold price is driven about 50% by inflation and 50% by other factors. So just because it does not perfectly track inflation does not mean it does not respond to it. And just because there are other factors involved than the high-level inflation explanation does not negate its value in the PP or other well-diversified portfolios.
Last edited by Tyler on Wed Sep 07, 2016 11:13 am, edited 2 times in total.
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buddtholomew
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Re: Can we trust low correlations?
Thanks for the data and explanation.
As a U.S. investor, I am more interested in how gold responded when the world reserve currency was under threat due to inflation.
I suspect this paints a different picture.
I'm sure others will comment, but are you really saying other respected authors like HB, Craig and MT are all wrong!
As a U.S. investor, I am more interested in how gold responded when the world reserve currency was under threat due to inflation.
I suspect this paints a different picture.
I'm sure others will comment, but are you really saying other respected authors like HB, Craig and MT are all wrong!
Re: Can we trust low correlations?
By no means am I saying these esteemed authors are all wrong, but neither are Bernstein and the studies he references.
Tyler's wise comments here and the great article (which I personally am going to print out and save!) he provided the link to speak eloquently to just how complex an asset gold really is. Just because it doesn't provide significant inflation protection doesn't mean it isn't worth owning - something that is driven home very powerfully when you look at the most successful portfolios (from a risk:return and drawdown perspective) on Tyler's phenomenal Portfolio Charts site.
I'm all-in with the Golden Butterfly myself. All of the portfolios we're talking about here (the PP, GB, Desert's latest) are so much more robustly constructed than the plain vanilla stock-and-bond only allocations most folks rely on. One of the things I especially love about the Portfolio Charts site is being able to really look at what it would be like to live with, for example, a sophisticated slice-and-dice portfolio such as Merriman's Ultimate Buy and Hold or Bernstein's Coward's Portfolio vs. the PP and others inspired by it. When I look at the worst-case drawdowns and the number of years they last and think about what I would do in the face of such performance (and DID do during the dot.com bust and 2008 market meltdown) I am beyond grateful to all of the authors you mentioned, and to Tyler.
Tyler's wise comments here and the great article (which I personally am going to print out and save!) he provided the link to speak eloquently to just how complex an asset gold really is. Just because it doesn't provide significant inflation protection doesn't mean it isn't worth owning - something that is driven home very powerfully when you look at the most successful portfolios (from a risk:return and drawdown perspective) on Tyler's phenomenal Portfolio Charts site.
I'm all-in with the Golden Butterfly myself. All of the portfolios we're talking about here (the PP, GB, Desert's latest) are so much more robustly constructed than the plain vanilla stock-and-bond only allocations most folks rely on. One of the things I especially love about the Portfolio Charts site is being able to really look at what it would be like to live with, for example, a sophisticated slice-and-dice portfolio such as Merriman's Ultimate Buy and Hold or Bernstein's Coward's Portfolio vs. the PP and others inspired by it. When I look at the worst-case drawdowns and the number of years they last and think about what I would do in the face of such performance (and DID do during the dot.com bust and 2008 market meltdown) I am beyond grateful to all of the authors you mentioned, and to Tyler.
Last edited by Kevin K. on Wed Sep 07, 2016 12:22 pm, edited 1 time in total.
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buddtholomew
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Re: Can we trust low correlations?
That's fantastic and all...Kevin K. wrote:By no means am I saying these esteemed authors are all wrong, but neither are Bernstein and the studies he references.
Tyler's wise comments here and the excellent article he provided the link to speak eloquently to just how complex gold an asset really is. Just because it doesn't provide significant inflation protection doesn't mean it isn't very much worth owning - something that is driven home very powerfully when you look at the most successful portfolios (from a risk:return and drawdown perspective) on Tyler's phenomenal Portfolio Charts site.
Why don't you answer my question - US investor, reserve currency, unexpected inflation. How did gold perform?
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MachineGhost
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Re: Can we trust low correlations?
I'd say the sweet spot is 15%-20%, but it's easier to use 25% along with the other assets using the rebalancing bands. Too much gain is left on the table by forced annual rebalancing when you could just sit on your hands instead.Desert wrote:I agree; it seems that it's almost a requirement in the investing world to either hate gold or to be a certified gold bug. Gold provides an uncorrelated asset class (uncorrelated to equities and bonds), and also provides a compact, physical store of value unmatched by any other form of matter. We can argue how much is enough, but it appears to be a worthwhile diversification addition to most any portfolio.
How much of a 25% allocation to gold do people find reasonable to put into senior and junior gold miners for a bit of juice? I'm thinking 1%.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
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koekebakker
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Re: Can we trust low correlations?
'Deep risk' was an interesting read, thanks for reminding me Kevin!
Bernstein's answer to most forms of deep risk is, as usual, stocks. Keep as much cash/short term treasuries as necessary and put the rest in global stocks, preferrably value-tilted. Maybe add some bullion or gold stocks. That's about it. Regarding shallow risk: you just have to grind your teeth and have enough liquid assets.
His advice comes close to the allocation that I was comparing to the PP: 30% global stocks (or as high an allocation as you feel comfortable with), 60% short term treasuries, 10% gold.
Just like Bernstein I don't really see a case for taking on a lot of term risk when you've got globally diversified stocks and plenty of short term fixed income.
I might like such a portfolio more than the PP, especially for a non-US PP like mine, but for now I'm gonna put this idea in the fridge for a few months to see if it still makes sense after some time.
Bernstein's answer to most forms of deep risk is, as usual, stocks. Keep as much cash/short term treasuries as necessary and put the rest in global stocks, preferrably value-tilted. Maybe add some bullion or gold stocks. That's about it. Regarding shallow risk: you just have to grind your teeth and have enough liquid assets.
His advice comes close to the allocation that I was comparing to the PP: 30% global stocks (or as high an allocation as you feel comfortable with), 60% short term treasuries, 10% gold.
Just like Bernstein I don't really see a case for taking on a lot of term risk when you've got globally diversified stocks and plenty of short term fixed income.
I might like such a portfolio more than the PP, especially for a non-US PP like mine, but for now I'm gonna put this idea in the fridge for a few months to see if it still makes sense after some time.
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koekebakker
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Re: Can we trust low correlations?
Don't think adding 1% will make any kind of difference whatsoever.How much of a 25% allocation to gold do people find reasonable to put into senior and junior gold miners for a bit of juice? I'm thinking 1%
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MachineGhost
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Re: Can we trust low correlations?
So its the 5% minimum then?koekebakker wrote:Don't think adding 1% will make any kind of difference whatsoever.How much of a 25% allocation to gold do people find reasonable to put into senior and junior gold miners for a bit of juice? I'm thinking 1%
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
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PeteKoziar
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Re: Can we trust low correlations?
The way I look at it, what's important isn't whether gold works in inflation/deflation/etc., but whether we have n assets that are relatively uncorrelated. So long as gold doesn't move in tandem with the other two (stocks and bonds), it's a winner to reduce volatility.
What's been scary recently is that the three assets have become strongly correlated, especially at the prospect of an interest rate hike.
Also, when both stocks and bonds are more expensive than they have been in history, but gold is kind of "middle of the road" right now, I'm "bending the PP rules" by reducing my stock and bond allocation from 25% to 15%, increasing gold to 30%, and cash to 40%.
Another thing that scares me - the rise of index fund investing. Everyone buys the same funds (VT, etc.) at the same time, which means everyone will be selling at the same time. Instead, I made up my own "fund" of individual stocks that have a low PE and high profitability.
What's been scary recently is that the three assets have become strongly correlated, especially at the prospect of an interest rate hike.
Also, when both stocks and bonds are more expensive than they have been in history, but gold is kind of "middle of the road" right now, I'm "bending the PP rules" by reducing my stock and bond allocation from 25% to 15%, increasing gold to 30%, and cash to 40%.
Another thing that scares me - the rise of index fund investing. Everyone buys the same funds (VT, etc.) at the same time, which means everyone will be selling at the same time. Instead, I made up my own "fund" of individual stocks that have a low PE and high profitability.
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JohnnyFactor
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Re: Can we trust low correlations?
This was what Harry Browne originally recommended before index investing became much easier. As long as you can maintain sufficient volatility of the stock quadrant, I think it's a fine idea.PeteKoziar wrote:Instead, I made up my own "fund" of individual stocks that have a low PE and high profitability.
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buddtholomew
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Re: Can we trust low correlations?
"...everyone will be selling at the same time."PeteKoziar wrote:The way I look at it, what's important isn't whether gold works in inflation/deflation/etc., but whether we have n assets that are relatively uncorrelated. So long as gold doesn't move in tandem with the other two (stocks and bonds), it's a winner to reduce volatility.
What's been scary recently is that the three assets have become strongly correlated, especially at the prospect of an interest rate hike.
Also, when both stocks and bonds are more expensive than they have been in history, but gold is kind of "middle of the road" right now, I'm "bending the PP rules" by reducing my stock and bond allocation from 25% to 15%, increasing gold to 30%, and cash to 40%.
Another thing that scares me - the rise of index fund investing. Everyone buys the same funds (VT, etc.) at the same time, which means everyone will be selling at the same time. Instead, I made up my own "fund" of individual stocks that have a low PE and high profitability.
The converse is true as well, since target funds re-balance to a set asset allocation.
Re: Can we trust low correlations?
I can't figure out whether miners are a good idea, or just an emotional trap where value goes to die. I think of it as mad money, so the "5% min slice in order to make a difference rule" needn't apply, because maybe the correct slice is 0%, and limiting yourself to 1% just lets you engage in a dangerous vice enough to limit the damage and still blow off some steam.koekebakker wrote:Don't think adding 1% will make any kind of difference whatsoever.How much of a 25% allocation to gold do people find reasonable to put into senior and junior gold miners for a bit of juice? I'm thinking 1%
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PeteKoziar
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Re: Can we trust low correlations?
I would consider miners to be part of the stock allocation, not the gold allocation. Miners move partly as gold prices move, and partly as the overall market moves.ochotona wrote:I can't figure out whether miners are a good idea, or just an emotional trap where value goes to die. I think of it as mad money, so the "5% min slice in order to make a difference rule" needn't apply, because maybe the correct slice is 0%, and limiting yourself to 1% just lets you engage in a dangerous vice enough to limit the damage and still blow off some steam.koekebakker wrote:Don't think adding 1% will make any kind of difference whatsoever.How much of a 25% allocation to gold do people find reasonable to put into senior and junior gold miners for a bit of juice? I'm thinking 1%
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MachineGhost
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Re: Can we trust low correlations?
Miners are for leverage, nothing else. 1% could be enough to have a material effect, who knows?ochotona wrote:I can't figure out whether miners are a good idea, or just an emotional trap where value goes to die. I think of it as mad money, so the "5% min slice in order to make a difference rule" needn't apply, because maybe the correct slice is 0%, and limiting yourself to 1% just lets you engage in a dangerous vice enough to limit the damage and still blow off some steam.
But I've since changed my tune and will put them in Prosperity. Real assets should be real, not economically-driven.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Re: Can we trust low correlations?
I think 2% would be plenty enough. Miners' volatility is a multiple of other equities vol.MachineGhost wrote:Miners are for leverage, nothing else. 1% could be enough to have a material effect, who knows?ochotona wrote:I can't figure out whether miners are a good idea, or just an emotional trap where value goes to die. I think of it as mad money, so the "5% min slice in order to make a difference rule" needn't apply, because maybe the correct slice is 0%, and limiting yourself to 1% just lets you engage in a dangerous vice enough to limit the damage and still blow off some steam.
But I've since changed my tune and will put them in Prosperity. Real assets should be real, not economically-driven.
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MachineGhost
- Executive Member
- Posts: 10054
- Joined: Sat Nov 12, 2011 9:31 am
Re: Can we trust low correlations?
Hmm, in theory could add enough weight so that it matches gold's volatility, but then what would be the point?ochotona wrote:I think 2% would be plenty enough. Miners' volatility is a multiple of other equities vol.MachineGhost wrote:Miners are for leverage, nothing else. 1% could be enough to have a material effect, who knows?ochotona wrote:I can't figure out whether miners are a good idea, or just an emotional trap where value goes to die. I think of it as mad money, so the "5% min slice in order to make a difference rule" needn't apply, because maybe the correct slice is 0%, and limiting yourself to 1% just lets you engage in a dangerous vice enough to limit the damage and still blow off some steam.
But I've since changed my tune and will put them in Prosperity. Real assets should be real, not economically-driven.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Re: Can we trust low correlations?
Miners are leveraged bets on whatever it is they mine unless the company is poorly ran.