Gold as a Diversifier

[stuper1]

One of my favorite calculators at portfoliocharts.com is the withdrawal rates calculator that shows safe withdrawal rates for retirement portfolios. (BTW, thanks Tyler for making all of these awesome toys to play with on your website!!!) Below are safe withdrawal rates for a conservative portfolio without gold, and the same portfolio with gold (very much like a HBPP).

Here's the chart without gold:



Here's the chart with gold:



The above charts are for the time period of 1970 to 2016, so 47 years of data (some of which is synthetic).

Without gold, during the worst 10-year period, you would have had to contribute 3% per year to keep from losing principal, whereas with gold in your portfolio you could still withdraw 3% per year during the worst 10-year period and still not lose principal. Long-term withdrawal rates without losing principal are about 3% without gold and 4% with gold.

When I look at results like this, I just can't understand how people over at Bogleheads and other places can say that gold has no significant place in an investment portfolio. Can somebody play devil's advocate and try to explain it for me?

[stuper1]

Did I do something wrong? How come my images don't show up? This is my first time trying to post images.

[I Shrugged]

test

[Xan]

It looks like you're linking to an HTML page, and not an image. Am I wrong?

[stuper1]

Okay, I think I got it figured out. I edited the original post, and now it seems to be working. Does anybody want to take a crack at answering the question I posted at the end? Thanks.

[boglerdude]

As countries develop citizens dont need gold. India, a huge source of gold demand, will move away from gold as it modernizes. Central banks raise rates when the money supply gets too big. When they cant, you have a failed state and gold is more of an emergency tool like guns and food.

As far as backtesting with gold:
https://www.bogleheads.org/forum/viewto ... 4#p3225324

[stuper1]

Have you been to India? I haven't, but I'm guessing people there won't be slowing down on their gold purchases any time real soon. Maybe in 200 years. In the meantime, I like how in very recent history having gold in the portfolio has smoothed out the returns considerably. I don't like those 10-year periods where stocks/bonds are in the dumps with nothing else in the portfolio to take up the slack.

As far as gold being an emergency tool, that's an additional feature, not a bug. The U.S. has had a good run, but it won't last forever. At some point, we will have a serious Black Swan event much worse than the Great Depression or Great Recession. Is that in 10 years or 100 years? I don't know, but if I can be prepared for it, or have my children prepared for it, with little to no damage to my investment returns, then count me in.

[stuper1]

The guy over at Bogleheads in that link you posted said that gold's outperformance was only due to 1970 to 1975 returns. I do wish that portfoliocharts.com would give you the option to ignore those years, because I do believe that they could be misleading. In fact, there is one calculator, the Benchmark calculator, at portfoliocharts.com that does allow you to set the start date. Here is a chart starting from 1976 for the two portfolios that I compared above:



As of 2016, the portfolio without gold is slightly ahead, but remember that this is after years of the stock market being propped up by ZIRP. It wouldn't be surprising to see the portfolio with gold overtake once the bubble bursts. In any event, I prefer the smoother ride with gold, even if I end up a little behind in the end, mainly because I know my risk tolerance (from previous experience), and I'm pretty sure that I would cave in a panic and sell at the wrong time and end up behind even without gold.

[Tyler]

The guy over at Bogleheads in that link you posted said that gold's outperformance was only due to 1970 to 1975 returns. I do wish that portfoliocharts.com would give you the option to ignore those years, because I do believe that they could be misleading.

Each chart shows every start year simultaneously. If you don't trust the years prior to 1976 for gold, just ignore the first few rows of the Heat Map or the darkest few lines of the Portfolio Growth chart. Nearly every chart has the option to interpret the results that way.

The idea that gold only helped a portfolio due to the spike after Bretton Woods was repealed ignores how it saved portfolios during the 2000s. That's why I show all starting years -- to keep the gold haters from cheating.

[mathjak107]

gold has been more about timing the markets than time in the markets . the last few months i have a 20% position in gold .after gold sold off after brexit the lows became a value again today so coupled with the election uncertainty i thought now was the time .

gold is my biggest gainer as of friday's close . so i was never against gold but i was against gold previously .and as hindsite shows us i was correct it wasn't gold's time and the pieces for it to be its time were lacking when i was against owning it .

the problem as i mentioned many times about comparing safe withdrawal rates rates is they refer to specific worst case scenarios , not just how long money lasted in some rough periods .

specifically 1907,1929,1937 ,1965,1966 . we really can't say what gold would have done without being freely owned and traded here .so i prefer not to use gold in the what if's of safe withdrawal rates .

if we eliminated those dates from the picture a safe withdrawal rate for 40% equity or higher would have been 6.50%.

as it is if we do include those dates 90% of the 30 year time frames a 50/50 mix left you with more than you started with and 67% of the time ended with more than double what you started with .

it can never be apples to apples comparisons since the term safe withdrawal rates were based on just two assets and specific worst case years . you may have a "withdrawal rate using other time frames " but by definition it is not a "safe withdrawal rate "

you could do a bit of quantifying though . michael kitces did the math for us so today we know in order to sustain a 4% inflation adjusted withdrawal rate we need to maintain at least a 2% real return over the first 15 years .

so mathematically every worst case scenario period i listed above had it's failure written in stone in the first 15 years of a 30 year period .

you could also end the 30 years with only a buck left and pass so just a 2% real return average the first 15 years may not do it for you .

but it does give you a benchmark to monitor . if you are 5 or 6 years in and are not seeing at least a 2% real return average , perhaps it is time to cut spending .

[mathjak107]

suppose you were so unlucky to retire in one of those worst time framess ,what would your 30 year results look like ? : actually very normal ones . equity's returned over 10% in even the one the 4% safe withdrawal rate is based on 1966.

1907 stocks returned 7.77% -- bonds 4.250-- rebalanced portfolio 7.02- - inflation 1.64--

1929 stocks 8.19% - - bonds 1.74%-- rebalanced portfolio 6.28-- inflation 1.69--

1937 stocks 10.12 - - bonds 2.13 - rebalanced portfolio -- 7.24 inflation-- 2.82

1966 stocks 10.23 - -bonds 7.85 -- rebalanced portfolio 9.56- - inflation 5.38

for comparison the 140 year average's were:

stocks 8.39--bonds 2.85%--rebalanced portfolio 6.17% inflation 2.23%

so what made those time frames the worst ? what made them the worst is the fact in every single retirement time frame the outcome of that 30 year period was determined not by what happened over the 30 years but the entire outcome was decided in the first 15 years.

so lets look at the first 15 years in those time frames determined to be the worst we ever had.

1907--- stocks minus 1.47%---- bonds minus .39%-- rebalanced minus .70% ---inflation 1.64%

1929---stocks 1.07%---bonds 1.79%---rebalanced 2.29%--inflation 1.69%

1937---stocks -- 3.45%---bonds minus 3.07%-- rebalanced 1.23%--inflation 2.82%

1966-stocks minus .13%--bonds 1.08%--rebalanced .64%-- inflation 5.38%

it is those 15 year horrible time frames that the 4% safe withdrawal rate was born out of since you had to reduce from what could have been 6.50% as a swr down to just 4% to get through those worst of times.

while 6.50% to 4% does not sound like a lot 1 million at 4% is an initial draw rate of 40k , at 6.50% you could have had 65k . that is a whopping 60% more .

so what it boils down to is any time you fall below a 2% real return average over the first 15 years you run the danger of 4% not holding. but even a 1/2% cut in spending will make you whole again over the next 15 years or longer.


which is why i always say if you have little discretionary spending you can cut from then you should not be in equities in retirement .

[blue_ruin17]

gold has been more about timing the markets than time in the markets.

This is only true if you just buy a bunch of gold and sit on it. If you also hold an equally-weighted, negatively co-related asset in your portfolio, you can harvest capital gains from gold through re-balancing.

[mathjak107]

odds are in the long run you lost more holding the gold to rebalance with vs just having the money sitting in the equity's over the long haul . so nah i don't agree . rebalancing generally hurts you gain wise since equity's are up 2/3's of the time and down only 1/3 . you really need to be a good market timer to have rebalancing beat buying and holding equity's over long periods of time like a typical accumulation stage .

what i do think is that if 100% equity's are your allocation , there is little going to top that over a typical accumulation time frame of many many years. but i do think gold can add value as a floor that tends to hover around inflation in the bigger down turns if 100% equity's are not your vehicle of choice .

remember , for a very long term investor interested in growing money there is no logic in to diversifying in to assets with long term records of less growth potential .

mitigating temporary drops in the short term that permanently reduce long term gains has little logic to it for long term investors . this is a point many don't get .. why we may choose to mitigae short term dips can be for mental reasons but that is another reason altogether . .needing the money in the shorter term makes you not a long term investor in this context as well .

so if you have no stomach for that volatility or shorter term needs for the money than that is where lessor growing assets make sense .

so gold does help in the drops and it can mitigate the damages in a down blast but that is only if you care to mitigate short term dips by using gold or bonds ..

in fact if rates keep rising equity's and cash may be the best allocation . cash is like owning stock options for stocks at lower prices with no expiration that won't take a hit from rising rates .

i am retired so yes i do want to temper those dips and at times use gold as well as an assortment of different types of bonds depending on the bigger picture . .

.

.

[Tyler]

if we eliminated those dates from the picture a safe withdrawal rate for 40% equity or higher would have been 6.50%.

I appreciate the work you put into your posts, Mathjak. And I also respect your position on gold when it comes to SWRs even if I disagree. You're right -- we've discussed this many times. (anyone not familiar with previous conversations should read this for my perspective: https://portfoliocharts.com/withdrawal-rates-faq/).

I just want to point out that the above quote is based on a misinterpretation of Kitces' comments and may confuse people. People should read his article fully, which I agree is quite good. https://www.kitces.com/blog/what-return ... ased-upon/ Pay particular attention to the lowest SWR on his own chart after 1970.

[Libertarian666]

Passive investing != active investing.

How many people actually outperform passive investing by active trading? The % must be below 50% because of the higher costs of active trading, since all traders must on average match all passive investors before costs.

Note that I'm not saying no one can outperform...

[mathjak107]

active trading is very different from nudging things to fit the bigger picture . the newsletter i use fidelity insight has averaged 10.90% the last 30 years in the growth model just making slight shifts in holdings .

as an example last year we sold off some corporate and total bond bund shares and added about 20% high yield instead . the high yield market got beaten up like 1/2 of all the bonds were going to default . it was nonsense and the high yield was a great proxy for stocks but at a beta of .56 it had far less risk and close to the same gain potential .little did we know we would actually beat stocks c locking it with a 16% gain on the high yield .

it is just small dynamic changes that need to be done and you just need more right than not .

this year the high yield is gone and gold is in its place . gold was oversold and represented a decent buy at the recent lows especially as the uncertainty unfolds . gold is my best performer now .

most of the newsletters that cater to fidelity or vanguard do the same thing . just fund swaps to better keep things on track and most if not all have had no problem tuyrning 9in respectable returns and many times with a lower beta .

[mathjak107]

if we eliminated those dates from the picture a safe withdrawal rate for 40% equity or higher would have been 6.50%.

I appreciate the work you put into your posts, Mathjak. And I also respect your position on gold when it comes to SWRs even if I disagree. You're right -- we've discussed this many times. (anyone not familiar with previous conversations should read this for my perspective: https://portfoliocharts.com/withdrawal-rates-faq/).

I just want to point out that the above quote is based on a misinterpretation of Kitces' comments and may confuse people. People should read his article fully, which I agree is quite good. https://www.kitces.com/blog/what-return ... ased-upon/ Pay particular attention to the lowest SWR on his own chart after 1970.

if the 6 worst dates are eliminated the swr is a 6.50% average . 90% of the time even with the dates you ended 30 years later with more than you started . 6.50% would be okay without those dates .but is would be a draw rate , not a safe withdrawal rate .

[Tyler]

if the 6 worst dates are eliminated the swr is a 6.50% average .

Read it again. Kitces states that the average SWR since 1871 is 6.5% including all of those dates. He then correctly points out that the average SWR is irrelevant, and only the worst years matter. He also shows a chart displaying the SWRs calculated for every start year since 1871. You can easily see that the worst year since 1970 supported a SWR of about 4.8%, only 0.3% higher than the worst start year over the entire period.

So you're correct that the smaller data set makes a measurable difference in SWRs, but you greatly overstate the magnitude.

[mathjak107]

the term safe withdrawal rate does not mean all dates were passed . 100% success rate means all dates are passed . 90% is also considered a safe withdrawl rate and that eliminates some dates.

so if were eliminaing the 6 worst dates and using the new data set then not every time frame in the new set has to pass to be at 90%.

kitces is saying the average swr would be 6.50% in that article with the lowest being 4.80 .

[Tyler]

the term safe withdrawal rate does not mean all dates were passed . 100% success rate means all dates are passed . 90% is also considered a safe withdrawl rate and that eliminates some dates.

so if were eliminaing the 6 worst dates and using the new data set then not every time frame in the new set has to pass to be at 90%

That's only true for the Trinity study. The original Bengen SAFEMAX methodology (which I also use) is more conservative and reports the single worst SWR. Also note that Kitces never references 90% in his article, as he's talking exclusively about the worst cases.

[mathjak107]

correct . the real textbook definition of safe withdrawal rate is a passing grade of 100% against those 5 or 6 dates . the trinity does not use 1907 .

which gores back to what i said , that just stress testing tough times like the 1970's does not mean that because a draw passed it is a safe withdrawal rate and it also means that balances have to be looked at to . because 90% of the time 4% has been to conservative . stress testing some portfolio and going look i got 5% out of it and not just 4% is really meaningless since 4% could have been a lot more in 90% of the cases .\

but you get the point so we don't have to beat it to death , but i am not so sure others do when they do their comparisons .

[Tyler]

kitces is saying the average swr would be 6.50% in that article with the lowest being 4.80 .

Exactly. His exact quote:

The point of the chart, though, is not that the average safe withdrawal rate has been about 6.5% over the years (which is almost the same as the safe withdrawal rate you get simply assuming long-term average returns), nor that the safe withdrawal rate has peaked in the double digits a few times over the years. The point of safe withdrawal rates is the low points – the worst case scenarios.

But that's very different from your original statement: "if we eliminated those dates from the picture a safe withdrawal rate for 40% equity or higher would have been 6.50%." Taken out of proper context, that's very misleading.

[Tyler]

...it also means that balances have to be looked at to . because 90% of the time 4% has been to conservative . stress testing some portfolio and going look i got 5% out of it and not just 4% is really meaningless since 4% could have been a lot more in 90% of the cases .\

but you get the point so we don't have to beat it to death , but i am not so sure others do when they do their comparisons .

I agree! People should consider not only the worst cases but also the portfolio balances when thinking about withdrawals. There's a tool for that, too. https://portfoliocharts.com/portfolio/r ... -spending/

[mathjak107]

here is a better kitces explanation : eliminating the worst dates has a "median " swr of 6.50%


The fundamental purpose of the so-called “4% rule” is to determine an appropriate “income” or spending floor that is low enough to survive potential sequence-of-return risk – at least, based on the worst return sequences that can be found in the historical data. If market returns going forward turn out to be as bad as scenarios like the Great Depression or the stagflationary 1970s – from which the 4% rule originated – the portfolio is still anticipated to sustain inflation-adjusted spending to the end of the 30-year time horizon. If returns are better, there will simply be “extra” money left over.

Yet the reality is that in the overwhelming majority of scenarios, returns are not so bad as to necessitate a 4% initial withdrawal rate in the first place. In fact, by applying the 4% rule, over 2/3rds of the time the retiree finishes with more than double their wealth at the beginning of retirement, on top of a lifetime of (4% rule) spending! Half the time, wealth is nearly tripled by the end retirement, as retirees fail to spend their upside!


The Surprising Upside Of A 4% Safe Withdrawal Rate
The origin of the safe withdrawal rate was actually rather straightforward – it’s simply the initial withdrawal rate that would have sustained inflation-adjusted spending in the worst case scenario in (US) history. In point of fact, the historical initial withdrawal rate that would have worked for a 60/40 portfolio over any particular 30-year time horizon has varied between 4% and 10%, and the median is close to 6.5%. But since we don’t necessarily know up front whether the next 30 years will be more like the average, the highs, or the lows, the idea of the safe withdrawal rate was simply to treat every time period as though it might turn out to be the worst.

[mathjak107]

by the way , i think these times now are perfect for your golden butterfly .

i think gold can see a nice lift , i think trumpmania has greater expectations and inflation fears then we will see so long term bonds may do well and of course if things do pan out and rates rise because of growth , stocks are weighted such that the growth may over come the losses in gold and bonds .


i think it is an excellent mix for today , vs what i felt for bonds and gold pre election