Gyroscopic Investing

I don't really understand what derivatives are but I know they're big bets that could go very wrong. Smart and wealthy people like Buffett have warned against them. I would like to know the risk to the PP if the derivative market crashes. Would it be like 2008, or more like Mad Max? Is there anything outside of the PP I should be doing that could minimize the fallout exposure?

That's why you have bonds, cash and gold. Depending on the stock/bond ETFs you might use there's some level of risk there, but if you have physical gold and cold hard cash you are more protected than the general stock buying public.

Cause you know, now that Trump is president, the stock market will never, ever fall. He told us last night. And if it does, it surely wouldn't be his fault...

In a quick read of the VTI and TLT prospectuses, there only seem to be the standard market risks, they do not use derivatives.

I don't know of anything outside the PP to reduce the risk. People might say invest in real stuff, land, real estate, art, etc. But I think most any market will crash in a Mad Max scenario, with the possible exception of gold/silver/metals.

But what do I know.

JohnnyFactor wrote:II would like to know the risk to the PP if the derivative market crashes.

I think the existence of things like derivatives and the crash that they caused (or that the abuse of derivatives caused), is the reason I hold a pp. I might be naive, but that's my thinking. Otherwise, I'd be 100% total stock market and enjoying this rally more than I already am.

Correct, the PP is probably the least vulnerable to "black swans" like a derivatives crash, among all reasonably "normal" portfolios.

At least as long as you are using actual physical gold, not ETFs or the like.

CEF is an intermediate case. According to their prospectus, they don't engage in any transactions like lending gold or silver, or encumbering their holdings in any way, and they have the physical metal in high-security vaults in Canadian banks. You would still have a lot of trouble getting cash for CEF shares if the financial system was frozen, but after it came back up you should be okay.

At least that's how it looks to me. Of course, I won't reimburse you if I'm wrong, do your own research, etc.

I've been considering Perth Mint for physical gold holding. They're just a phone call away from shipping the bullion or a plane trip away from getting it myself (google says 26 hours travel minimum!). In theory, it sounds good. I just hope the logistics of it all don't prove to be a problem.

Cortopassi wrote: In a quick read of the VTI and TLT prospectuses, there only seem to be the standard market risks, they do not use derivatives.

Perhaps TLT doesn't directly deal in derivatives, but in a market collapse like the one narrowly averted in 2008 (thank you, Obama) my guess is TLT would end up not looking very pretty. See http://www.gyroscopicinvesting.com/foru ... f=3&t=4223

There are derivatives and then there are derivatives...some are quite safe and others are beyond not safe. Some are less difficult to understand than how your ETF is put together and others are of mindblowing complexity.

Mostly people who don't have a clue provide simple answers to this question...and the real answer is a big it depends.

Between having a 120K of gold sitting in my house or owning one futures contract of the equivalent value I'd take the futures contract without hesitancy...I'd probably take it over any form of physical gold stored anywhere available to the smaller investor.

You may know something about derivatives, kbg, but I think you missed the question. It's not about holding the safest derivative of your choice. It's about, if the overall market were to be fouled up again by derivatives -- understood to be the tricky, dangerous ones -- how would the PP fare?

At least, that's how I read it.

I did read it correctly, but it's like asking what is the risk to PP if money crashes. What does that mean? Money globally, the dollar, the concept of money, M1, M2, M3, electronic transaction exchanges? What?

Like 2008.

dualstow wrote:Like 2008.

Well if we use ETFs for the big 4 then we will get a 16.11% return/7.78% CAR with a 14% max drawdown from 2007 - 2008. If we go with just 2008 then we get a .85% return and a 14% max dd. And all the derivatives directly related to the big 4 returned their index values less spread and the cost of carry interest and nary a hiccup in terms of tracking their bogeys. Was that so bad?

People should worry about what is actually more relevant and probable...the silent killer of inflation, stupid or no tax planning, failure to shelter any and all investments to the max degree possible, no estate planning, not being insured properly, behavioral errors impacting investments that then destroys long term compounding potential. There's actually a mound of academic evidence that the last issue mentioned is by far and away the most damaging to long term wealth/retirement options. The second to the last is the single largest reason for bankruptcy if you don't buy or can't afford health insurance. So maybe we should worry about those things, what da ya think?

If you have all the above ducks 100% in a row, then sure, find something far less likely to stress out about if you're the type who enjoys that kind of thing.

I agree with you on priorities.
I do think the OP's question is a good one, though.

dualstow wrote:I agree with you on priorities.
I do think the OP's question is a good one, though.

I won't say it is a bad one, but I will say it is too broad to provide a meaningful answer.

Most of us on these forums are prudently taking care of tax planning, bad investor behavior, and inflation (where we can). I don't consider those pressing issues for conscientious folks like us. I asked about derivatives because they are the ultimate black swan. The PP was designed with black swans in mind.

Here's a specific question then. JP Morgan Chase has a derivative exposure of $70 trillion. What happens if they lose those bets?

Since I've only contributed questions, here's info on what I've done to minimize exposure to general calamity. I've closed all accounts with big banks and deal exclusively with a credit union. I carry no debt, including no mortgage. I've opened a Perth Mint account and am slowly filling it. I keep in my possession enough gold coins to pay for a plane ticket to Australia. I'm willing to relocate if need be.

The question of derivatives remains because I don't know how to plan defensively against that scenario. I don't really know what could happen.

JohnnyFactor wrote:Most of us on these forums are prudently taking care of tax planning, bad investor behavior, and inflation (where we can). I don't consider those pressing issues for conscientious folks like us. I asked about derivatives because they are the ultimate black swan. The PP was designed with black swans in mind.

Here's a specific question then. JP Morgan Chase has a derivative exposure of $70 trillion. What happens if they lose those bets?

Who says most of them are directional bets? But it also appears you've been googling and ran into Zerohedge...you should go read the actual OCC latest quarterly report. Remember, a "news" organization's first responsibility is to sell advertising...accuracy and context, not so much.

I'm pitching out of this conversation. Do derivatives have risk, yes. Can an organization blow themselves up with them, yes. Are there highly risky opaque derivatives, yes? Can they do economic damage if they run amok, yes (witness 2008). Is there an inverse statement to all the previous questions, yes.

For an individual investor, should they focus much of their attention on derivatives and derivative risk? Not really.

Thanks Kbg, I appreciate the info. I'm not a reader or fan of ZeroHedge but other sites use them for source. This is the page that got me thinking about this:

http://demonocracy.info/infographics/us ... osure.html