Ready For PP, But Gold Is Holding Me Back

[tjt]

I'm sure I'm not alone with this sentiment, but investing in gold right now looks like investing in real estate in 2007.  Looking at the historical prices, it was basically flat for 30 years (with a bubble in the late 70's) then all of a sudden a few years ago it took off.  Maybe it's my lack of understanding, but the thought of putting a significant portion of my portfolio in something like that seems crazy.

The concept of a fix portfolio allocation seems logical, and it's something I want to do.  Can someone convince me gold is a good investment?

Alternatively, are there other assets like gold (not silver) that achieve the same purpose as gold in the PP, but without the recent explosion in price?

[moda0306]

Some will call this blasphemy, but go in biased against gold.  You could go in 25/25/30/20... 20 being gold, 30 being whatever you predict will do best at this point (I would think stocks after what's happened).

I find that is a better way to calm one's fears than going in little-by-little, because then you just let it operate how it normally does.

[melveyr]

Also, remember that gold is carrying the portfolio right now, but it doesn't have to. Take a look at how the PP handled the crashing of the gold bubble in the 80s. The PP did its job just fine in that time period.

Also, I think moda's solution is okay  Just remember that once a rebalancing band gets hit to go plain vanilla. Have you become familiarized with the rebalancing bands yet? When any asset class makes up 35% or as little as 15%, you bring everything back to 25% weighting.

With all of this being said, my parents just switched to the PP a month or so ago, and they are very close to the 25% split (actually gold probably makes up around 27% with todays action). I am sleeping just fine.

Happy decision making 

[MediumTex]

What we would like to convince you of is that the PP strategy is a good strategy.

In order for the strategy to work, however, you have to follow the recipe.

The things you are saying about gold have been true for years.  Will it stop going up some day?  Sure, but who knows when that day will be?

When gold starts falling, it will probably mean that the stock market has bottomed and it will start carrying the portfolio.

If you look at the PP performance chart on craig's website, you will see that even during the secular bear market years for gold from 1981 to 2000, there were still selected years when gold kept the portfolio out of trouble.

I understand your concern.  Everyone feels the same way when they get started.  I encourage you to evaluate the theory behind the portfolio and decide whether it makes sense to you.

Focusing on individual PP assets only creates uncertainty and confusion.

[Odysseusa]

I have a gut feeling that people in the developing countries and emerging-market countries have a better appreciation and understanding for gold than us Americans / Europeans. As the people of those nations become richer, they will accumulate gold.

[MediumTex]

I have a gut feeling that people in the developing countries and emerging-market countries have a better appreciation and understanding for gold than us Americans / Europeans. As the people of those nations become richer, they will accumulate gold.

The U.S. government is the largest owner of gold in the world, so maybe they know something about gold as well (notwithstanding Bernanke's apparent bewilderment at the whole concept of gold).

I think in the future everyone will be accumulating gold.  It will be a common human experience, as it has been for most of recorded history.

[Pkg Man]

If you are sitting on a pile of cash I wouldn't let the recent run-up in the price of gold (or long term Treasurys) prevent me from jumping in.  If, on the other hand, you are going to go from stocks to a PP, then I personally would average in over time (others may have different opinions).  For example, set pre-determined dates on which you will sell a given amount of stock and use the proceeds to buy the other PP assets.  You are not trying to time the markets, but merely easing in over time to minimize future regret.

This is of course no sure thing, but I do understand the concern, especially since many of those who began a PP years ago are probably in the position of selling gold and buying stocks right now.

[HB Reader]

I have a gut feeling that people in the developing countries and emerging-market countries have a better appreciation and understanding for gold than us Americans / Europeans. As the people of those nations become richer, they will accumulate gold.

The U.S. government is the largest owner of gold in the world, so maybe they know something about gold as well (notwithstanding Bernanke's apparent bewilderment at the whole concept of gold).

I think in the future everyone will be accumulating gold.  It will be a common human experience, as it has been for most of recorded history.

The first important insight I gained from HB in the 1970s was that the U.S. and the world will probably once again have to learn this basic historical truth about gold.  The second and more important insight I gained from him in the 1980s and 1990s was that I can arrange my life and invest my money in a way that incorporates this probablility without ignoring the equally basic truth that I may simply be wrong.

As I said in an earlier post, I owe HB far more than I ever paid for his books and newsletter.




     

[Lonestar]

An equal blend of Larry Swedroe's Fat Tail Minimisation and the PP has had similar risk/reward characteristics since the mid 1920's, whilst reducing both gold and LTT holdings down by a half.

7.5% Small Cap Value, 7.5% Emerging Markets, 12.5% TSM, 12.5% Gold, 12.5% Long dated T, 17.5% TIPS, 30% ST.

Would you please elaborate on this a little.  Also, explain what is Swedroe's Fat Tail Minimization.  thanks.

[tjt]

Thanks everyone.  I've gone up from 3% gold this morning to 10.  I'm going to take the advice to raise it to 15% over the next month and settle in at 15% for awhile.  My portfolio will then be:

Cash: 10%
Bond: 25%
Stock: 40%
Gold: 15%
Real Estate, other: 10%

I'm pretty comfortable with this and will hold it for awhile.

[TripleB]

Thanks everyone.  I've gone up from 3% gold this morning to 10.  I'm going to take the advice to raise it to 15% over the next month and settle in at 15% for awhile.  My portfolio will then be:

Cash: 10%
Bond: 25%
Stock: 40%
Gold: 15%
Real Estate, other: 10%

I'm pretty comfortable with this and will hold it for awhile.

My advice is first and foremost, to go 100% the 4x25% PP model. Based on your individual situation and hesitance to enter into that model, I would propose that you do the following:

Create a 15x4 model that = 60% of your money. 15% in Gold, 15% in Stock Equity Fund, 15% in Cash, 15% in Long Term Treasuries. I selected 15% because that is the most you are willing to hold in gold.

Then with the other 40% of your money, isolate that, and do 25% stocks, 10% REITs, 5% bonds. Consider this a "variable portfolio" and do NOT rebalance back into here from your PP money.

[Lonestar]

Clive,

Thanks for the explanation.  Very interesting.

As an aside, what did you use to make the graphic included in your last post?  For the graph how did you designate which positions would be dedicated to the PP and which to FTM.  I would like to use this to monitor my holdings.

[Storm]

Thanks everyone.  I've gone up from 3% gold this morning to 10.  I'm going to take the advice to raise it to 15% over the next month and settle in at 15% for awhile.  My portfolio will then be:

Cash: 10%
Bond: 25%
Stock: 40%
Gold: 15%
Real Estate, other: 10%

I'm pretty comfortable with this and will hold it for awhile.

In my experience, you're going to regret not going pure 4x25.  You're making a bet right now that Gold is not going to go up much higher.  Nobody can predict the future, and what if gold ends up carrying the portfolio for the rest of the year?  It's been carrying the portfolio really nicely for the last few days, but you already missed that rally by being only 3% so your portfolio is probably doing worse than it should, especially with your large equity exposure.