Hedging Against U.S. Dollar Losing Global Reserve Status

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Hedging Against U.S. Dollar Losing Global Reserve Status

Post by stuper1 » Wed Apr 05, 2023 12:57 pm

We run pretty much a Golden Butterfly portfolio. We hope to retire in a few years. We don't really need any growth in our portfolio to make retirement possible, but we don't want to lose out to inflation and a little real growth would certainly help. My wife and I will have some pensions and Social Security, but the larger SS check will likely be deferred for 8 or so years, and we will be tapping our investments during that time fairly heavily, especially if we want to travel, etc. Also, I reckon there is a not insignificant chance of a serious recession and other financial problems ahead which could cause cuts to our state-funded pensions and SS along with high inflation.

The other big risk I see ahead, with a not insignificant chance, is the US dollar losing global reserve status. I'm not a financial genius, so I don't know what all the implications are of that. I would think one possibility is high inflation, and another is rising interest rates, which means my long-term Treasury allocation would lose value.

This thread, I hope, will be about ideas to hedge against the risks identified above. I don't really want to argue about whether those risks are real or not, but just assume that they are real and have a not insignificant chance of impacting our financial lives in the next 5 to 15 years. And of course keeping in mind that maybe none of these risks will actually manifest itself, so I don't want my hedging ideas to end up shooting me in the foot in the end but preferably just tread water while the rest of the portfolio carries on like it should.

What would Harry Browne do in this situation? Increase our gold allocation? Add an allocation to international stocks, and if so, how much and which sectors? Decrease our allocation to long-term Treasuries? What about short-term Treasuries?

I welcome constructive input but again I don't really want to argue about whether the risks are real or not but rather what to do if they are real.
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Re: Hedging Against U.S. Dollar Losing Global Reserve Status

Post by Hal » Wed Apr 05, 2023 2:24 pm

stuper1 wrote:
Wed Apr 05, 2023 12:57 pm

What would Harry Browne do in this situation? Increase our gold allocation? Add an allocation to international stocks, and if so, how much and which sectors? Decrease our allocation to long-term Treasuries? What about short-term Treasuries?

I welcome constructive input but again I don't really want to argue about whether the risks are real or not but rather what to do if they are real.
Crystal Ball ready - check, Ouji Board ready - check

If your currency is collapsing then invest as if you are in a country with a small economy because your economy WILL shrink.

As per HB's radio show, invest in the dominant country in your area and set up PP that way. Since there is no dominant country at the moment, then a World PP seems the only option

Shares - 25% Developed & Emerging Markets on a capitalisation basis.
Gold - 25%. NOT held in the USA
Cash - 25% Hard Currency Eg https://www.merkfunds.com/merkx
Bonds - 25% using same currency allocation in Mark fund above. If too difficult, then 1/3 each of Shares/Gold/Cash

Allocation to the above PP is based on the "Able to sleep at night" rule. Would also suggest this is purchased using an offshore broker.

PS: For myself, as I DO live in a country with a small economy, I could easily live with a 30% Shares, 30% Gold, 30% Merkx fund, 10% AUD in short term Treasuries (Not a bank)
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Re: Hedging Against U.S. Dollar Losing Global Reserve Status

Post by DogBreath » Wed Apr 05, 2023 2:43 pm

Are you aware that the Merk Hard Currency fund
1 year -11.55%
5 years -2.43%
10 years -2.56%

I would maintain that it is not a suitable substitute for cash, and because it is heavily invested in the AU and CAD dollars it is not safe for anything as those two countries' governments have questionable morals.
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Re: Hedging Against U.S. Dollar Losing Global Reserve Status

Post by Kriegsspiel » Wed Apr 05, 2023 5:05 pm

Fun! I'd imagine that if the US "loses" reserve currency status, then you wouldn't want to have much of an allocation to international stocks. I'm thinking along the lines of Zeihan (Zeihanic lines?): The US won't be able (or want) to maintain global force projection without the reserve currency. Other countries won't maintain their productivity or standard of living if the US doesn't protect them from their regional powers. China becomes a failed state when other countries interdict shipping lines that the US formerly patrolled.

The US can produce enough food and (probably with some modifications) energy for itself. Imports/exports are relatively low. So even when the economy shrinks, the US should be able to muddle through. If this is actually something you're concerned about, IMO you should probably work on:
  • stockpiling imported goods
  • getting a fuel efficient car. Cheap oil is probably the main benefit we get from the current situation.
  • getting some tools and learning to repair things (and buying things that can be repaired), since disposable/throw away stuff depends on cheap overseas labor
  • stockpiling non-perishables (not just food). You should really do this anyway if you're concerned about inflation
  • getting more accustomed to eating in-season (or western hemisphere) so that international food imports disappearing aren't such a bummer
  • stuff to decouple from the grid and insulate yourself from deglobalization, like installing solar panels, a wood stove (and securing a supply of wood), growing some food, insulating your house, buying from a local farm
  • possibly start a small local business, especially if you work for a company that depends on the current world order
I'm sure this is basic prepper stuff. As far as financial moves, in keeping with the above, you'd want to mostly get out of companies with international exposure, especially China. The total market index is heavily globalized, so it would take a hit; it might be a good move to look through the SP500 and buy the companies that are more US-centric. Keep your gold. Interest rates would probably spike due to capital becoming short, so you'd probably want to get rid of your long bonds, and keep your durations down. Get a big mortgage on your house.

/crystal ball
You there, Ephialtes. May you live forever.
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Re: Hedging Against U.S. Dollar Losing Global Reserve Status

Post by Hal » Wed Apr 05, 2023 5:50 pm

Kriegsspiel wrote:
Wed Apr 05, 2023 5:05 pm
Fun! I'd imagine that if the US "loses" reserve currency status, then you wouldn't want to have much of an allocation to international stocks.
/crystal ball
Hi Kriegs, agree, fun topic! Wonder if we could use what happened to Britain post WW2 as a guide to possible outcomes. Not sure where we can find pre 1970's data on British Shares / Bonds / Currency though...

Farewell from a former British colony for now ;D
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Re: Hedging Against U.S. Dollar Losing Global Reserve Status

Post by boglerdude » Thu Apr 06, 2023 12:28 am

Tilt toward inflation protection, as the Fed's legal authority to print is 5x. And the public's tolerance for nominal deflation is lower. ie spoiled children (a subset of the communists) have more political influence thanks to social media narratives and government handing billions to universities through student loans. No one eats their vegetables anymore, recessions will be papered over and Wall St bailed out.

And the rules change at the zero lower bound so it wouldnt be crazy to underweight long bonds when they get below 2%.
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Re: Hedging Against U.S. Dollar Losing Global Reserve Status

Post by seajay » Thu Apr 06, 2023 4:11 am

Pre 1930's and gold was money, the gold standard. But even when on the gold standard methods were found to periodically disconnect from that. King Henry 8th devalued 'worth their weight' coins by mixing copper into silver coins. A inevitable requirement sooner or later.

Imagine a island with a population of 100 that has collective 100 ounces of gold wealth, that later expands to a population of 500 and that's also more productive/efficient. For fairness/balance each citizen has less gold that buys more (gold price rises).

In the mid 1930's the price of gold was (re-)set at $35/ounce, so that's a reasonable indicator of a 'fair' price as deemed at that time. The global population was around 2 billion, that has risen four-fold to 8 billion more recently. Global GDP was around $7.8T, compared to $108T more recently, so growth/efficiencies (single machine harvesting a crop in a field quicker than a former army of perhaps 30 workers) of a 108 / 7.8 = 13.8 multiple improvement.

4 times more people x 13.8 efficiencies = 55.2, multiply that by the 1930's $35/ounce gold price = $1932 present day 'fair' gold price.

When Britain ended the gold standard, where any prior money such as Sovereign One Pound gold coins that were deposited into banks were returned as One Pound Paper Pound Note currency, the prior tendency for the state to pay real rates of return in order to borrow gold (money) also ended. Previously bond total returns compared to stock total returns, but under fiat inflation and taxation enabled the state to broadly be able to borrow for free. It no longer needed to borrow gold, as it could just print/spend fiat currency.

The US$ stepped up to take over from the Pound, got common agreement that international trade would use US$ instead of former gold, and that the US would peg the US$ to gold. But where again periodically that needs to be 'downgraded' to account for more people/productivity. In more recent times however the 'there is no alternative to US$' is more perceived as 'we need a alternative to the US$'. With US$ settled international transactions all such transactions flow in/up and back down/out of the US, such that the US could 'sanction' others, pull the plug/prohibit transactions. With international trade pegged to the US$ that also meant that the US could print/spend - such as to fund a massive military might, and in effect export inflation onto others (rest of the world pay for that military might). For most of time the US$ is still generally pegged to gold, but where periodic 'steps' occur, pretty much the same as when on the gold standard. Russia, China, Arabia, Iran, S America, Africa, India ... however, a large chunk of the global population are in effect saying 'no more, we will find a alternative to the US$', and are setting up the mechanisms for that. What that means is that the US will find it more difficult to print/spend on a large military - funded by others, to instead be more accountable for its spending domestically. The transition away from US$ based clearance to 'the alternative(s)' will also reduce the influence/strength of the US.

The US$ will however still remain a major part of reserve currencies, but be more aligned to trade weighted averages. If two neighbouring countries both have 80% of international trade between them, then they'll typically maintain reserve currencies weighted to 80% in each others currencies.

Basically the US will be more self accountable, have to actually cover/fund its spending, a general levelling down, a transition from a general globalization trend to a self-serving/provision de-globalization, along with less military capabilities and otherwise global influence.

British investors following the decline/collapse of the British Empire/Gold standard simply opted to diversify. Instead of being content with British land (home), British stocks, British Bonds, were better served with perhaps a British home, US$ invested in US stocks (primary reserve currency) and gold (global currency and a commodity). Three currencies, three assets diversity. The same might hold for US investors as/when its financial/military dominance declines. Maybe US land/home, global stocks, gold. Even the ancient Talmud knew about concentration risk millennia ago, and advocated for safety to split wealth evenly three ways, land, commerce, in-hand.
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Re: Hedging Against U.S. Dollar Losing Global Reserve Status

Post by barrett » Thu Apr 06, 2023 5:17 am

stuper1 wrote:
Wed Apr 05, 2023 12:57 pm
What would Harry Browne do in this situation? Increase our gold allocation? Add an allocation to international stocks, and if so, how much and which sectors? Decrease our allocation to long-term Treasuries? What about short-term Treasuries?
Just kind of stating the obvious, probably, but if the USD is under threat, I would expect gold's price to shoot up so much that your allocation (as a percentage of your overall portfolio) will likely increase automatically.
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Re: Hedging Against U.S. Dollar Losing Global Reserve Status

Post by stuper1 » Thu Apr 06, 2023 1:18 pm

Seajay, thank you for your excellent comments. I found them very helpful, and I share many of your views. You mentioned investing in US land/home, global stocks, and gold. As a followup question, what about US bonds or global bonds? Did the prudent British investor have any of his/her money in bonds in order to smooth out the investing ride? As a reference point, I am currently at roughly 20% US Treasury long-term bonds and 20% US Treasury short-term bonds, per the Golden Butterfly allocation.
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Re: Hedging Against U.S. Dollar Losing Global Reserve Status

Post by seajay » Thu Apr 06, 2023 2:40 pm

stuper1 wrote:
Thu Apr 06, 2023 1:18 pm
Seajay, thank you for your excellent comments. I found them very helpful, and I share many of your views. You mentioned investing in US land/home, global stocks, and gold. As a followup question, what about US bonds or global bonds? Did the prudent British investor have any of his/her money in bonds in order to smooth out the investing ride? As a reference point, I am currently at roughly 20% US Treasury long-term bonds and 20% US Treasury short-term bonds, per the Golden Butterfly allocation.
Pre 1930's and savers mostly just held bonds. Rather than keeping Sovereign gold One Pound coins alongside One Pound Note paper currency in their cookie jar at home, they could lend that gold/money to banks/state in return for interest (more gold). The state in effect paid them for it to securely store their gold. And where bond total returns compared to stock total returns - such that stocks were predominately seen as being for speculators/gamblers. That all ended in 1931 when too many were withdrawing their savings - in the form of gold sovereigns, and the state was running out of gold. Parliament rushed through legislation to end that, progressing it through to law (Act) within a single day, and that meant thereafter when you asked to withdraw your money as gold you were instead given Pound note paper currency. You could still buy gold with that, but it was no longer a direct 'by law' transfer/option.

Many might have been hesitant to lend their gold (that was no longer money, having been replaced solely by Pound Notes) and alongside the devaluation of paper money perhaps sought alternative assets/choices. But then along came WW2 and there was a big push to be 'patriotic' and buy War Bonds, that many/most did. But it was a new paradigm, where prior real returns comparable to stocks and inflation broadly averaging 0% transitioned to where there was predominately inflation (devaluation of paper money) along with taxation, that in effect meant the state could borrow for free. And for the next few decades bonds did indeed yield negative real yields after inflation/taxation. The mid 1970's saw the UK at risk of default on its debt interest payments, and a IMF loan had to be secured just in case. That was never actually required but did put sufficient fear 'out-there' to have the Pound decline and interest rates spike massively. At those levels bonds were very generously priced and most rewarding for the next few decades (1980's through 1990's), but even at well into double digit interest rates many didn't buy in fear of yet higher yields to come (potential losses). But the great gains since the 1980's re-attracted investors back into Gilts (Treasuries). Even cash on deposit rewarded 2% real, everyone did well. Forward time from relatively low interest rates ??

A STT/LTT barbell generally compares to a central 10 year bond bullet, is the more neutral stance. The US supremity/advantage is such that US bonds are more assured/safe. When the US prints/spends and devalues the US$ in the process the likes of China will print and buy more US treasuries or otherwise be at risk of having it lose out on its interest payments on the US treasuries it already held. As a safe/smoother choice the PP or GB are fine for US investors. In contrast others (non-US) are perhaps more inclined to tangible assets, less faith in their own government bonds. Land, gold, art ... type assets, with stocks more commonly accepted as investments rather than being speculations as they were considered in pre 1930's years.

Fundamentally any in-demand asset will tend to broadly offset inflation, be that bonds, gold, land, stock (prices) or donuts. Stocks in addition pay dividends, as might land yield imputed rent benefit, but on a price only basis they might all broadly compare, but in a volatile manner. Diversifying equally across multiples tends to smooth out the volatility, and a smooth/consistent 0% only requires a modest 1.3% additional supplement in order to fulfil a 30 year 4% SWR outcome. Historically nearly all of that 1.3% came from 5% average stock dividends, 25% weighting. Since the 1980's however there's also been a rising tide, as even cash deposits yielded 2% real (transition from high to low interest rates). On the counter-side of that however as/when yields rise, then rather it taking decades to transition more commonly the rise is short/sharp. A broad saw-tooth type total cycle. When such spikes (large losses) occur, you want to be diversified enough to endure less pain/loss. The PP's engine is such that it has that in mind/covered.
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Re: Hedging Against U.S. Dollar Losing Global Reserve Status

Post by whatchamacallit » Thu Apr 06, 2023 3:34 pm

I can't think of another currency to hold besides the substantial gold that is already in the permanent portfolio.

I will say that I wonder if we are actually about to see an unexpected rise in the value of the us dollar. I have been hearing everyone and the media speaking about the fall of the us dollar. It seems to happen when everyone is on one side of a trade it goes the other way.
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Re: Hedging Against U.S. Dollar Losing Global Reserve Status

Post by Kriegsspiel » Thu Apr 06, 2023 5:04 pm

It seems likely that the experience of the British and the US getting knocked off the hill are going to be very different. The UK was able to send their capital to the US was because the US was a friendly ally with aligned interests, and were able to diversify internationally because the US was just starting on it's world-policing mission.

And don't forget, in the two-pole world of post-WW II, a lot of the world was off-limits to investment from the West. A deglobalized, multi-polar world, where the $ isn't the reserve currency and the US military isn't a worldwide force, there could be several areas that are closed to Western capital. OR, maybe more likely, they're not closed to it, but they're hostile to it. For instance, confiscating foreign property, nationalizing companies, defaulting on debts, corporate espionage etc etc could all become even more flagrant than they are now.

We are seeing the beginnings of this new reality already. China has been conducting unrestricted warfare (their words) in the economic sphere for years, Argentina (among others) defaults on foreign debt as a matter of course, Turkey was actively discouraging foreign investment a couple years ago, and in the last year the US confiscated a ton of foreign property from Russia, and torched a ton of financial connections, including American ownership of Russian companies and debts. Russia confiscated corporate property in retaliation.

If this becomes the new normal, which seems to be the direction we're headed, then international diversification wouldn't be a smart play.
You there, Ephialtes. May you live forever.
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Re: Hedging Against U.S. Dollar Losing Global Reserve Status

Post by boglerdude » Thu Apr 06, 2023 8:28 pm

Re: bonds, what is the person you are loaning to going to do with it. The only free lunch is population growth. New home, car, education loans. On top of that, there's more rich people than ever handing out those loans
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Re: Hedging Against U.S. Dollar Losing Global Reserve Status

Post by stuper1 » Fri Apr 07, 2023 2:59 pm

It seems there's a difference of opinion on whether foreign stocks are a good idea for a US investor in my shoes. I'll have to think more about that. I have a home-country bias, but I'm not completely opposed to foreign for a diversification benefit.

Here is what I'm thinking of shifting toward in the next few years, looking for good buying/selling opportunities (e.g., if/when gold prices go back down and long-term Treasury prices go farther up). Basically I'm worried about inflation and that Treasuries will be losing their appeal as the worldwide flight-to-safety asset. Please critique these ideas and let me know if you see any pitfalls that I should consider:

1. I've been keeping my gold percentage around 15%, but I'm thinking of increasing the target to 20%, again not right now with prices near all-time highs, but if prices fall somewhat, then that would be the time to start shifting in this direction.

2. Decrease my US Treasury holdings from 40% to 30%, split half and half between short-term and long-term. But if long-term yields fall below 2%, then switch the long-term portion to intermediate term and just leave it there no matter what future yields do.

3. Increase my stock portion from 40% to 50%, split half and half between total stock market and small-cap value.

One thing that gives me pause is a lot of people do things just the opposite, meaning as they enter retirement they lean toward more bonds and less stocks. I just don't have the faith in Treasuries that I used to have. My new plan would have me at 50% stocks and 50% other things (Treasuries and gold), which should be relatively safe. Of course, I will need to watch our withdrawal rate and keep it low enough to somewhat match actual returns going forward.

As I said, I welcome any comments, critiques, etc., which may keep me from doing something stupid.
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Re: Hedging Against U.S. Dollar Losing Global Reserve Status

Post by joypog » Fri Apr 07, 2023 3:49 pm

It’s basically a golden butterfly that is underweight bonds, especially if you switch to ITT. I think the performance gains are negligible when wiggling 5 percentage points one way or the other.

At that point the key is to create a systematic system so you don’t let yourself get carried away by emotion making changes at the worst times. That’s the strength of the fixed asset allocation system with set rules.
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Re: Hedging Against U.S. Dollar Losing Global Reserve Status

Post by boglerdude » Fri Apr 07, 2023 6:35 pm

The only portfolio ever posted here that was arguably stupid was techno's 50%+ gold allocation
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Re: Hedging Against U.S. Dollar Losing Global Reserve Status

Post by Mark Leavy » Fri Apr 07, 2023 8:00 pm

boglerdude wrote:
Fri Apr 07, 2023 6:35 pm
The only portfolio ever posted here that was arguably stupid was techno's 50%+ gold allocation
I'd be interested in your dissection of technovelist's utility function.
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Re: Hedging Against U.S. Dollar Losing Global Reserve Status

Post by stuper1 » Sat Apr 08, 2023 7:49 am

boglerdude wrote:
Fri Apr 07, 2023 6:35 pm
The only portfolio ever posted here that was arguably stupid was techno's 50%+ gold allocation
Honestly, I didn't understand his portfolio back when he was posting here, but I get it now. He was far ahead of me in contempt for the US government political and financial leadership at places like the Fed and Treasury. Now, I can understand not wanting to put any money in US Treasury bonds. A 50/50 stock/gold split has a better average annual return than the traditional benchmark 60/40 portfolio.
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Re: Hedging Against U.S. Dollar Losing Global Reserve Status

Post by Hal » Sat Apr 08, 2023 8:20 am

stuper1 wrote:
Sat Apr 08, 2023 7:49 am
A 50/50 stock/gold split has a better average annual return than the traditional benchmark 60/40 portfolio.
So would you, or other forum members, feel comfortable with a 50/50 portfolio then?
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Re: Hedging Against U.S. Dollar Losing Global Reserve Status

Post by stuper1 » Sat Apr 08, 2023 8:40 am

No, I wouldn't feel comfortable with 50/50 stocks/gold. I need some cash to feel comfortable. This discussion has inspired me to come up with a couple more alternative retirement portfolios:

Option 1:
25% total US stock market
25% small-cap value US stocks
25% gold
25% short-term Treasuries

Option 2:
20% total US stock market
20% small-cap value US stocks
15% foreign stocks (maybe an emerging market index fund?)
25% gold
20% short-term Treasuries

These are somewhat different from my original thought:
25% total US stock market
25% small-cap value US stocks
20% gold
15% short-term Treasuries
15% intermediate-term Treasuries

Does anyone have any thoughts on the prospects of these options going forward for someone in the decumulation stage? They have all worked fine in the past. It's the future that's hard to know.
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Re: Hedging Against U.S. Dollar Losing Global Reserve Status

Post by D1984 » Sat Apr 08, 2023 9:38 am

stuper1 wrote:
Sat Apr 08, 2023 7:49 am
boglerdude wrote:
Fri Apr 07, 2023 6:35 pm
The only portfolio ever posted here that was arguably stupid was techno's 50%+ gold allocation
Honestly, I didn't understand his portfolio back when he was posting here, but I get it now. He was far ahead of me in contempt for the US government political and financial leadership at places like the Fed and Treasury. Now, I can understand not wanting to put any money in US Treasury bonds. A 50/50 stock/gold split has a better average annual return than the traditional benchmark 60/40 portfolio.
By "better average annual return" do you mean from 1970-2022, 1972-2022, 1975-2022, or 1980-2002...or another period entirely?

I tend to be somewhat chary of using returns for portfolios containing gold that include the early 1970s; partly this is because gold wasn't technically legal until 1975 (although there were more than a few easy enough ways around this) but mostly because (in all likelihood) some and/or much of gold's return from 1971-1974 was simply a "catch-up" from it being fixed in price from 1933-1970 i.e. in all likelihood a lot of the gains that happened in those four years was simply "making up for lost time" over the previous ten-fifteen years when gold almost certainly would've started rising in price already had it not been artificially fixed at $35 an ounce.
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Re: Hedging Against U.S. Dollar Losing Global Reserve Status

Post by stuper1 » Sat Apr 08, 2023 10:05 am

It's a good point. If you test it at portfoliovisualizer.com, you'll see that 50/50 stocks/gold from 1976 to 2022 did do a little worse than 60/40 stocks/bonds, but 50/50 stocks/gold did about the same as 50/50 stocks/bonds. There's really nothing wrong with a 50/50 stocks/gold portfolio.
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Re: Hedging Against U.S. Dollar Losing Global Reserve Status

Post by Hal » Sat Apr 08, 2023 10:32 am

stuper1 wrote:
Sat Apr 08, 2023 8:40 am
Does anyone have any thoughts on the prospects of these options going forward for someone in the decumulation stage? They have all worked fine in the past. It's the future that's hard to know.
Cannot comment on future prospects, but your allocation is similar to BelangP's. I think he uses 2:1 High Dividend US fund to Gold and a cash reserve. More details here -> https://www.fundyourretirement.com/podc ... -belanger/

Edit: This may be useful as well https://evidencebasedwealth.com/?p=591

Edit 2: Stuper, you have got me reading BelangP's book again. Highly recommend it!
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Re: Hedging Against U.S. Dollar Losing Global Reserve Status

Post by boglerdude » Sat Apr 08, 2023 7:35 pm

Didnt work as well as expected. I should post this on Bogleheads. "50% gold is a good portfolio"
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Mark Leavy
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Re: Hedging Against U.S. Dollar Losing Global Reserve Status

Post by Mark Leavy » Sat Apr 08, 2023 10:04 pm

boglerdude wrote:
Sat Apr 08, 2023 7:35 pm
Didnt work as well as expected. I should post this on Bogleheads. "50% gold is a good portfolio"
What didn't you expect? You had several polite, well thought out responses to your post. Information, expansion, requests for your thoughts. Adult discussion.

I think the responses speak highly of the forum members here. If you expected anything different, then that was on you.
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