Nervous about the 25% Gold Allocation - Want to Ease In

Discussion of the Gold portion of the Permanent Portfolio

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jhigh

Nervous about the 25% Gold Allocation - Want to Ease In

Post by jhigh » Sat Jul 17, 2010 6:02 pm

Hi Everyone,

I'm a fews weeks away from switching from a traditional stock heavy portfolio to a Permanant Portfolio, but I'm still nervous about the 25% gold allocation.  For reasons that I don't really want to get into right now, I'm at a point in my life where I just can't deal with buying/storing/security of physical gold right now, and I've read enough comments here and on the giant bogleheads thread that make me wary of gold ETF's.

I intellectually understand the role gold plays in a PP, but I'm just not "feeling it" emotionally to the level where I can allocate 25% to paper gold.  I hope to get there at some point in the near future.  For now, I would feel comfortable with 10% going to GLD/IAU.

While I'm in this mode, would it be best to leave the inflation protection space of the PP at 10% and just allocate the remainder to 2 year treasuries?  Would TIPS be worth considering? Perhaps a little extra equity allocation to small cap value?

I know this is highly subjective, but I would welcome any advice on alternative allocations as I ease in to a PP.

jh
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Re: Nervous about the 25% Gold Allocation - Want to Ease In

Post by craigr » Sat Jul 17, 2010 6:11 pm

I completely understand. I was right where you were years ago when I started the portfolio. I did the 25% and just got it over with, but I understand your nerves.

I generally advise just getting it over with. But, if you just can't bring yourself to do it then you can start with a hybrid of gold/cash and then write down and commit yourself to buying into the allocation over X number of months or whatever. Make it something concrete like "I will increase my allocation of gold by 2% a month for the next seven months until I get to 25%" or whatever. The reason is you don't want to turn it into a market timing maneuver and if you set down concrete action then there is a big temptation to time the market. Once you write it down, then each month you must ensure you do what you said regardless of what you are seeing in the news.

If you do this, then I would keep the money you are allocating to gold in cash and not TIPS personally. A T-Bill fund will be very safe and responsive to inflation. It may just tread water in that case, but you will be unlikely to lose very much money as the interest rates on a fund like that adjust very quickly to market conditions with little impact on the asset value underneath.

But you may find that as a few months go by you get more comfortable with the portfolio and may just wake up one day and take the plunge and finish buying the gold and just moving on.

Personally, once I got over my doubts and just bought the entire portfolio I felt better. Each asset works pretty well to balance off each other so underweighting one can be a curse as much as a help. You never know.


Re: Gold ETFS

You know there is a lot of opinions on them. My feeling is this: If you have the option of using a gold ETF or holding no gold, then by all means use the Gold ETF. I think a portfolio with no gold allocation is exposed to serious inflation risks. In this case an ETF is a far better option than holding no hard assets at all in an investment portfolio.
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Re: Nervous about the 25% Gold Allocation - Want to Ease In

Post by SmallPotatoes » Sun Jul 18, 2010 12:37 am

I've been back and forth about the 25% GOLD nearly every hour of the day for a few months. Finally, I had had enough and just bought in. In other words, what you're feeling is normal. If you didn't value your money you wouldn't be nervous about investing it in an uncertain economic state.

I'll echo Cragir about setting an investment plan and add only this: only commit what you're willing to the PP. You could do 10% PP and 90% VP if you like, if it helps you sleep better.  In time, like many of us, you'll probably get used to the PP and perhaps prefer it.   
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Re: Nervous about the 25% Gold Allocation - Want to Ease In

Post by MediumTex » Sun Jul 18, 2010 8:54 pm

The good news is that the PP gets easier with practice.

Go at whatever speed makes you comfortable, but I believe you will be happy with the PP allocation once you work through the strange feelings most people have when they first start out with it.  

It's sort of like going through a Wall Street propaganda detox process.
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Re: Nervous about the 25% Gold Allocation - Want to Ease In

Post by jhigh » Mon Jul 19, 2010 1:48 am

Thank you everyone for your replies!  This just goes to show how much of a head game investing has become.  We all got used to a 70% stock allocation as being "normal" (feels like I wasted 10 good years on that strategy).  I'm ashamed to say I've given that same advice over the years.  :-[ With the benefit of hindsight, 70% in equity seems absurd.

Now when I look at a 4x25 PP allocation, I think ok, 25% in stocks, bonds, cash - that sounds reasonable, somewhat traditional.  Then I think 25% gold...for some reason that doesn't feel like 25%.  Even just typing this right now, I get the same visceral reaction as if I had just typed 75% gold!  Maybe that's a just a testament to gold's power as an asset class?

Still, I can't help think that If I told my collegues (most of them reasonably open minded) that I just put 25% of my retirment portofio into gold they would think I had gone to pot. 
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Re: Nervous about the 25% Gold Allocation - Want to Ease In

Post by craigr » Mon Jul 19, 2010 2:19 am

jhigh wrote: Thank you everyone for your replies!  This just goes to show how much of a head game investing has become.  We all got used to a 70% stock allocation as being "normal" (feels like I wasted 10 good years on that strategy).  I'm ashamed to say I've given that same advice over the years.   :-[ With the benefit of hindsight, 70% in equity seems absurd.

Now when I look at a 4x25 PP allocation, I think ok, 25% in stocks, bonds, cash - that sounds reasonable, somewhat traditional.  Then I think 25% gold...for some reason that doesn't feel like 25%.  Even just typing this right now, I get the same visceral reaction as if I had just typed 75% gold!  Maybe that's a just a testament to gold's power as an asset class?

Still, I can't help think that If I told my collegues (most of them reasonably open minded) that I just put 25% of my retirment portofio into gold they would think I had gone to pot.  
Like others have stated,  you can just ease into it if you feel better. But you just can't turn it into a market timing game.

When I first read about Browne's investment strategy and saw the 25% gold allocation I literally blurted out: "This guy is fu*king nuts."

But I told myself I'd explore all options as I was not happy with the level of risk in my strategy I was using (traditional stock/bond investments). So I read what he had to say and did the research myself. Sure enough, he was right. Gold can be a bad asset to own at times, but sometimes it's the only thing worth owning. When I looked at worse case gold scenarios (like the gold crashes in the early 1980's) the portfolio was not hurt by the incident. In fact, whenever any asset did especially bad (whether gold, stocks or bonds) there was usually one or more assets doing well enough to offset the losses.

So ultimately I just accepted that I could lose money in the gold as I could in any investment. But I had solace in knowing that there is a good chance one of the other assets would offset the losses.

As I tell other people, each asset makes up 25% of the portfolio initially. If the asset falls by 50% the day after you buy it that would stink. But assuming no other asset goes up in price that's a -12.5% total portfolio loss. Not great, but it's also not devastating (consider that stock heavy portfolios had 30+% losses in 2008 for instance).

However the reality is that a 50% drop in gold is probably going to be offset by price appreciation in the bonds or stocks. So even assuming a huge loss in the gold, the chances are good that the overall portfolio value is probably not going to be affected much, and in fact may still post a gain.

In 2009 for instance if you decided to setup the portfolio in January and went 25% into everything you'd quickly find that your LT bonds dropped about 20% in value the next two months. Not good. But the stocks and gold went up (stocks sharply). By the end of the year you posted 8% gains in total portfolio value even though you lost 20% on the bonds.

One of the things with portfolio management is to not look at assets in isolation then. You must train yourself to look at the total portfolio value and not get too wound up in what one particular asset is doing. With the Permanent Portfolio this is especially important because at any one time you're probably going to have one asset doing pretty poorly and the others are expected to take up the slack.

And the above is as it should be in a diversified portfolio. IMO. I don't like seeing all my assets going up at once. That means they can all go down at once which is far more destructive.
Last edited by craigr on Mon Jul 19, 2010 2:29 am, edited 1 time in total.
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Re: Nervous about the 25% Gold Allocation - Want to Ease In

Post by MediumTex » Mon Jul 19, 2010 8:29 am

jhigh wrote:Still, I can't help think that If I told my collegues (most of them reasonably open minded) that I just put 25% of my retirment portofio into gold they would think I had gone to pot. 
I work with a group of pension actuaries and institutional investment managers and I have occasionally mentioned the PP to my colleagues, and they look at me like I am crazy.

Don't let that sort of thing bother you.  It's your money and only you have to live with the consequences of your decisions.

If it helps any, I read the other day that the University of Texas endowment just bought $500,000,000 in gold.
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Re: Nervous about the 25% Gold Allocation - Want to Ease In

Post by LNGTERMER » Mon Jul 19, 2010 10:21 am

If it helps any, I read the other day that the University of Texas endowment just bought $500,000,000 in gold.
That is the sort of thing that actually scares the heck out of me. VTI for instance more or less represents the totality of the US stock market and thus in theory is very difficult for one large institution or entity to corner the market and manipulate it.
For gold, it’s mostly held by governments or large institutions. The thing is they usually hold it, but once one such entity decides to dump it we are all screwed, especially if more of them follow.

This could be paranoia but I do not want us small inventors, who are simply investing our dearly earned cash allotted for retirements to lose our shirts. By the way I am all in the PP, I decided to take the plunge about a month ago. I never invested in Gold so I admit I do not understand it, but I do share the fears of the other posters.
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Re: Nervous about the 25% Gold Allocation - Want to Ease In

Post by Pres » Mon Jul 19, 2010 11:32 am

MediumTex wrote: If it helps any, I read the other day that the University of Texas endowment just bought $500,000,000 in gold.
Maybe they also hold $500M in stocks, $500M in long term treasuries and $500M in cash. ;-)
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Re: Nervous about the 25% Gold Allocation - Want to Ease In

Post by MediumTex » Mon Jul 19, 2010 12:32 pm

Pres wrote:
MediumTex wrote: If it helps any, I read the other day that the University of Texas endowment just bought $500,000,000 in gold.
Maybe they also hold $500M in stocks, $500M in long term treasuries and $500M in cash. ;-)
I believe the endowment is $22 billion, so a $500 million gold position isn't all that impressive. 
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Re: Nervous about the 25% Gold Allocation - Want to Ease In

Post by MediumTex » Mon Jul 19, 2010 12:35 pm

LNGTERMER wrote:If it helps any, I read the other day that the University of Texas endowment just bought $500,000,000 in gold.
That is the sort of thing that actually scares the heck out of me. VTI for instance more or less represents the totality of the US stock market and thus in theory is very difficult for one large institution or entity to corner the market and manipulate it.
For gold, it’s mostly held by governments or large institutions. The thing is they usually hold it, but once one such entity decides to dump it we are all screwed, especially if more of them follow.

This could be paranoia but I do not want us small inventors, who are simply investing our dearly earned cash allotted for retirements to lose our shirts. By the way I am all in the PP, I decided to take the plunge about a month ago. I never invested in Gold so I admit I do not understand it, but I do share the fears of the other posters.
I feel for you when it comes to your nerves, but the PP is for people just like you (i.e., people who don't like losing money or worrying about having to always be making the right calls).

Just let the PP take care of you.  The smoothness of the ride over time (both financially and emotionally) will surprise you.
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Re: Nervous about the 25% Gold Allocation - Want to Ease In

Post by craigr » Mon Jul 19, 2010 1:00 pm

LNGTERMER wrote: This could be paranoia but I do not want us small inventors, who are simply investing our dearly earned cash allotted for retirements to lose our shirts. By the way I am all in the PP, I decided to take the plunge about a month ago. I never invested in Gold so I admit I do not understand it, but I do share the fears of the other posters.
Again though you must look at the portfolio in total and not assets in isolation. Think of it as a room full of money. Each year you look in the room and see how much money is in it. If the room has more money, you are happy. You may not know if it was the stocks, bonds or gold that put the new money in. Likewise, you may not even know what investment lost money. In fact you couldnt even tell by looking at the pile of money that there were any losses. All you care about is did the portfolio grow enough to give you real returns over inflation. The losses in some asset is not relevant as long as the overall direction of the entire portfolio is going the right way.

The constant worry about this asset or that one going up or down leads down the road of market timing. It is just not possible to time the market with consistent profits. But when you look at a portfolio in total you can relax about expecting an asset to lose money because you will have another that will probably do fine. In fact I simply expect to be losing money somewhere at any time. So then it's not an issue. I know from past experience that things will work out somewhere else in the portfolio.
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Re: Nervous about the 25% Gold Allocation - Want to Ease In

Post by Jan Van » Mon Jul 19, 2010 1:09 pm

MediumTex wrote:Just let the PP take care of you.  The smoothness of the ride over time (both financially and emotionally) will surprise you.
That's what I'm hoping for. I currently have 1/3 of my money in the PP, the other 2/3 still in UB&H. And I must admit my gold allocation is now at 20% within the PP, but I'm adding to that weekly...
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Re: Nervous about the 25% Gold Allocation - Want to Ease In

Post by MediumTex » Mon Jul 19, 2010 2:29 pm

jmourik wrote:
MediumTex wrote:Just let the PP take care of you.  The smoothness of the ride over time (both financially and emotionally) will surprise you.
That's what I'm hoping for. I currently have 1/3 of my money in the PP, the other 2/3 still in UB&H. And I must admit my gold allocation is now at 20% within the PP, but I'm adding to that weekly...
If you can get through the first six months, you will find it is easy from there on out. 

The PP is a completely different approach to investing and intuitively you are probably sensing that the PP also has some very different assumptions about the world embedded in it than the standard investment mix.  As you begin to understand these embedded ideas in more detail, you will begin to appreciate the wisdom of Harry Browne more fully.  He was an astonishingly perceptive and subtle thinker. 

You will marvel at how the craziest and most unpredictable event in world affairs seems to somehow already be accounted for in the PP mix. 

The talking heads will begin to look especially foolish and even well-informed investors will begin to look like people with large cognitive blind spots, which results in all of their followers having similar cognitive blind spots as well.
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Re: Nervous about the 25% Gold Allocation - Want to Ease In

Post by LNGTERMER » Mon Jul 19, 2010 9:39 pm

Thanks for the excellent insights and analogies, i.e considering the portfolio as a room full of money to be looked at once. I laughed at that one.
I guess I just need to study Gold as as asset a bit more. I am coming from a pure stock investing perspective, i.e the usual distribution between different fund classes. It's now very clear to me how foolish this idea was, however, gold which I am starting to like the fact that it's distinct asset that has some currency hedge kinda build in it some how scares me as well. I am just not sure as to how susceptible it is for manipulation for example. In an efficient market were there are a lot of players and the asset is more or less distributed amongst many holders it would be fine, however I am not sure if that is the case. I know many governments and a few large players hold a huge quantities of it. Now that I am in the PP for the long term my only worry is that at some point gold will be dumped so much that it might take generations for it to recover. Not sure how much the re-balancing will help in this case since the idea behind re-balancing is that laggards will catch up at some point.
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Re: Nervous about the 25% Gold Allocation - Want to Ease In

Post by craigr » Mon Jul 19, 2010 9:56 pm

Well always remember rule #16 which is to never invest in anything you don't understand. While I think the portfolio needs gold to provide full protection, if you are uncomfortable with it then park the money in cash until you understand it more. The last thing you want is to buy an asset you don't feel comfortable with and then bail out if it hits a snag.

Also consider that it's not such a bad thing to own an asset that the govt says is worthless yet they continue to store tons of it themselves around the planet. There is a lot of duplicity in their arguments against gold.

As for gold market manipulation. I personally think no market can really be controlled. Gold is a relatively small commodity in the world. If the markets decide it's time for it to go up, nobody can stop it.

But again I think the secret to diversified investing is to get away from this idea of looking at assets in isolation. It's just not a good idea. Unfortunately I see even respected "experts" constantly do this when trying to make a case to avoid asset X and buy their favorite pet asset instead.    
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Re: Nervous about the 25% Gold Allocation - Want to Ease In

Post by craigr » Mon Jul 19, 2010 10:15 pm

re:gold could take years to recover.

Yep. Could happen. Happened to stocks too the past decade. Or it could stay where it is now.  We don't know. When the Dow was at 14000 I owned stocks in my permanent portfolio even though it seemed they were expensive. Yes, I could have market timed. But how dumb would I have been if the market went up to 20000? And it could have happened. But hindsight is always 20/20. As it were, I had gold and LT bonds and they saved my bacon (when various experts said they were useless assets). You just need to have a plan and stick to it.
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Re: Nervous about the 25% Gold Allocation - Want to Ease In

Post by MediumTex » Tue Jul 20, 2010 8:48 am

LNGTERMER wrote: Thanks for the excellent insights and analogies, i.e considering the portfolio as a room full of money to be looked at once. I laughed at that one.
I guess I just need to study Gold as as asset a bit more.
Here is a suggestion:  If you have not already purchased some physical gold, go buy an American Eagle one ounce coin as soon as you can.  For a few minutes each day hold it in your hand and think about how that coin is part of your own permanent asset allocation and how it represents a store of value outside the world banking/monetary/political system.  It's an interesting exercise and one that can help clarify what gold is really all about.

The problem with investing is that most of it is highly abstract, with shifting entitlements and valuations that are normally far removed from reality.  For example, what does it really mean to own a share of stock in a company?  OTOH, owning an ounce of gold is a thoroughly reality-based experience.

I think that one of the problems with the PM ETFs is that they prevent people from being able to have the experience I am describing above.  The first time you hold a gold coin in your hand, it may feel strange, but as you begin to accumulate a personal store of gold, you will begin to see it as an integral part of your overall investment strategy.  You will also begin to understand why gold has remained a durable store of value, and how even in a world of debt-based fiat money, the largest holders of gold in the world today continue to be governments and central banks.

Once you have owned gold for a while as part of a balanced portfolio like the PP, you will never want to be without it.
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Re: Nervous about the 25% Gold Allocation - Want to Ease In

Post by Jan Van » Tue Jul 20, 2010 10:22 am

MediumTex wrote:Here is a suggestion:  If you have not already purchased some physical gold, go buy an American Eagle one ounce coin as soon as you can.
Kind of funny, I guess, I have more trouble pulling the trigger to buy one or two coins, but I have bought a bunch of IAU and SGOL. I've been looking at the BullionDirect site again and again, and couldn't do it yet. I do want to hold one in my hand though... But then I think, what if I want to sell it. Who'll want to buy it from me? What if it's a fake coin? How do I sell it? So I've stuck to the ETFs so far. Really I do want an American Eagle. And a Krugerrand.  ;D
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Re: Nervous about the 25% Gold Allocation - Want to Ease In

Post by MediumTex » Tue Jul 20, 2010 10:52 am

jmourik wrote:
MediumTex wrote:Here is a suggestion:  If you have not already purchased some physical gold, go buy an American Eagle one ounce coin as soon as you can.
Kind of funny, I guess, I have more trouble pulling the trigger to buy one or two coins, but I have bought a bunch of IAU and SGOL. I've been looking at the BullionDirect site again and again, and couldn't do it yet. I do want to hold one in my hand though... But then I think, what if I want to sell it. Who'll want to buy it from me? What if it's a fake coin? How do I sell it? So I've stuck to the ETFs so far. Really I do want an American Eagle. And a Krugerrand.  ;D
All I can tell you is that I was once where you are right now and I know the precise cluster of emotions you are experiencing.

Only time and practice will allow reality to fill in the gaps that your imagination is currently filling for you.  One common experience, I think, is to view buying gold as a deeply pessimistic thing to do.  Once you get over the hump, though, you will see that buying gold is no more pessimistic than buying car insurance--it's just something you need to do to operate safely.

A few comments, though:

1. You are VERY unlikely to get a fake coin from a reputable dealer.  Gold is hard to counterfeit.  I wouldn't worry about this too much.

2. If you ever want to sell coins (which you shouldn't if you only own a few) it's no problem to do so.  Any dealer will buy them from you at the spot price of gold or a little more.  Every coin that dealers sell is a coin that they bought from someone else.
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