Physical Gold

[AdamA]

How important do you guys think it is to own physical gold versus gold held in something like GTU or Goldmoney.com or the Perth Mint or something?

Just curious.

Adam

[moda0306]

Though I don't myself, I can't wait to.  I think having a bit of your cash in a safe ($500-$1,000) isn't a bad idea either in low-interest rate environments.

I have a storage "cave" that I'm planning on stocking up on canned food and some other essentials.  Nothing survivalist or anything, but I think a reasonable inventory of nonparishable food (helps reduce grocery trips too) would be great.

I don't see the need to go all out, but if you're acknowledging that paper promises have the capacity to fall apart, do you really want to have an ETF be your only gold play?

[murphy_p_t]

Goldmoney.com offers geographic diversification, among other benefits (somehting to think about, esp in light of events in Tunisia, Egypt, etc)

[MediumTex]

I would own a little physical just to see what all the fuss is about.

[Gumby]

Harry Browne recommended simply using bullion coins in Fail-Safe Investing. Initially I was weirded out by the idea of ordering gold coins, but after listening to his Radio Shows, it began to make sense. When I realized that owning physical gold is one of the cheapest ways to own gold that it really became intriguing.

For instance, if you look at the price of GLD over the long term, you will notice that the Spot price of gold is pulling away from the price of GLD. This is mostly due to the expense ratio. Physical gold coins have no expense ratio (other than optional insurance and relatively low storage fees).

If you read all of the prospectuses for the Gold ETFs, you begin to realize that a lot can go wrong with Gold ETFs. They are very shady. The more you comb your way through the legal terms, the more you see that the Gold isn't really yours. You're just a spectator.

The way I see it, owning physical gold is one of the cheapest ways to hold gold as an asset over a 20+ year period. However, half of my gold allocation is in ETFs for easy rebalancing, simplicity and spreading risk around. Though, honestly, after receiving my gold coins, I wish I had less invested a little less in the ETFs initially.

[Plumbline]

Just recieved a number of 1oz Gold Eagles: held them in my hand and played with them on my desk, rearranging and stacking, listening to the sound they make against each other when dropped. 

[moda0306]

Just recieved a number of 1oz Gold Eagles: held them in my hand and played with them on my desk, rearranging and stacking, listening to the sound they make against each other when dropped. 

I pretend with pennies... copper's up this month and I'm poor.

What was it like?

[Plumbline]

Just recieved a number of 1oz Gold Eagles: held them in my hand and played with them on my desk, rearranging and stacking, listening to the sound they make against each other when dropped. 

I pretend with pennies... copper's up this month and I'm poor.

What was it like?

It felt good.  And it feels great to finally have some of the 25% physical gold part of the PP.  I am slowly easing in to the PP.  I have picked up some physical gold and TLT this month.  Have been all in cash.  Waiting a bit on VTI, as I hate to spit in the fan.  I know there are many who have suggested to plunge into the 25 x 4 , but I can't help but notice the P/E multiples of the market. 

[moda0306]

Plumbline, I like the idea of starting out the PP "Fear Biased."  Why go 4x25 if it makes you uneasy... if you think stocks are over priced and, like MT, LT bonds are a steal, why not start your PP at 25/25/30/20 (30 and 20 being bonds and stocks, respectively).

I feel like that's a great way of going "all in" but still giving yourself the flexibility to (gasp) try to time the market.

That said, you'll never do too horribly if stocks are the asset that you're hesitant to go in with.  

[Storm]

Plumbline, I would really caution you against going partially into the PP with only 2 or 3 of the 4 asset classes.  I did this when I first started my PP.  LT bonds were going to the moon, so I started there, and I already had gold.  This was after about 3 months of steady stock market losses so I wasn't to eager to jump into a falling market.

Boy, how wrong I was.  I learned pretty hard that HB really was correct: you can't predict the future.  No matter what you think right now, it will probably be wrong.  I thought bonds were going to keep going up and stocks were going to keep falling, but look at the last 6 months.  I should have gone all 4 asset classes at once.

The thing you need to understand is that if you want to ease yourself into the PP, that's fine, but you must buy equal parts of all 4 asset classes.  Feel free to invest 5 or 10% of your portfolio, but if you're going to do 10%, make sure it is 2.5/2.5/2.5/2.5.  Don't try to market time.  If you feel like stocks will keep going up and gold will fall, just avoid trying to time it.  In the end it will only cause you grief.

The lessons of the Permanent Portfolio are many, but one thing I have learned from the PP and my past investing mistakes, is that you just can't time the market.  You might be able to pick the right stocks or investments, but you probably can't pick the right stocks at the right time.

[moda0306]

Storm,

I'm going to have to disagree with you there.  I think someone's better off going all into the PP and "market-timing" by slightly skewing their initial allocation as long as it's withing the 35/25 bands (that they wouldn't be rebalancing at yet anyways).  If i were to dive into a PP now, and didn't have constraints of 401(k) options, HSA options, etc, I'd probably do a 30/20/25/25 PP: LT Treas/Stocks/Gold/Cash.  That's well within the acceptable bands, and I feel carries much less risk than trying to be perfect about my initial PP, but only going in 10%.

If you only have 10% in the PP, then you have 90% either in something that's probably not ideal... any pickiness about being off by a little bit in the measly 10% PP will probably be irrelevant.  Even if the 90% is all cash or relatively safe, I feel like going all in but acceptably biased is by far the best way to go, and really involves less hassle and market-timing than going in in 10% bits does.

[Storm]

I will agree with you moda, that going 10% in to PP and having 90% in equities, for example, is not the best portfolio.  But, I think for a lot of investors new to the PP, they're not comfortable going 100% in on day 1.  For this reason, I think if they choose to go in slowly, they should do each asset class equally.  Your allocation seems to predict that LT treasuries are underpriced, and the stock market is overpriced.  This might be the case, but the whole point of the PP is that we just don't know.  The stock market might continue to go up, and LT treasuries might continue to fall.  By skewing the allocation you might amplify your losses and dampen your winnings.

I would argue that the entire point of the PP is not to try to predict the future.  By going in with 30/20/25/25 you are doing just that.

[moda0306]

Storm,

I'm thinking of it as a lesser of two evils, even if your other 90% is in cash.

If there is little lost in letting your portfolio grow/adjust to 30/20 on two assets, then there is little lost in starting your allocation that way.  I still suggest allowing the same rebalance bands and preferred 4x25 allocation as a standard... but just starting biased to where you think things are under vs overpriced, and thus allowing one to sleep at night while still being in a perfectly acceptable PP

If that's what it takes to get someone into the PP 100%, then I say go for it.  It may even result in a greater loss by the PP or less gain, but that's not the piont.  The point is that maybe it's someone's "last chance" at timing the market as they dive into the PP, instead of tip-toing into it over 5 years and struggling all along the way with ever move they make.  Best of both worlds if you ask me.

[Gumby]

I suppose it's natural for someone to try to time the assets for a few days, but it's pointless. You have to imagine the PP as a spinning top. When the portfolio is at 25/25/25/25 the top spins very nicely, even though one or two of the assets will usually be overpriced at any given time. If you start your portfolio by moving towards one of the bands, you're starting your PP with a wobble. There's always a chance that your PP will become less wobbly because you expertly timed the assets and bought each one at a great price... but consider that this will slightly change your portfolio's performance in ways you can't imagine. Within a few weeks, your PP may still be within the official bands, but not nearly at the same proportions of a PP that was evenly split on its inception date. This will ultimately cause slightly different returns over time and may even cause you to miss a rebalancing opportunity. On the other hand, if you're wrong, you'll hit your first rebalancing band too quickly — causing unnecessary tax consequences.

For instance, last summer I was very close to rebalancing out of LT bonds, but the bond rally ended before I hit my rebalancing bands. One could easily miss a rebalancing band by trying to time their assets on their PP's inception. Overall it probably won't matter much, but all I'm trying to say is that it's pointless because you just don't know how it's going to play out.

If it takes a few days of timing to get yourself into the PP, I think that's fine. But anything beyond that makes little sense when you look at the long term consequences. It would be like baking a cake and waiting for the price of flour and/or eggs to come down.

[MediumTex]

You have to imagine the PP as a spinning top.

...or maybe a gyroscope.

[Storm]

You have to imagine the PP as a spinning top.

...or maybe a gyroscope.

I really like the gyroscope metaphor.  The stability of having 4 asset classes always brings you back to the center (real returns).

[Gumby]

You have to imagine the PP as a spinning top.

...or maybe a gyroscope.

That's great. And the analogy still works. Watch closely...

Here's a typical rebalanced PP with all axis in complete freedom.


A gyroscope in operation with freedom
in all three axes. The rotor will maintain
its spin axis direction regardless of the
orientation of the outer frame.

And trying to time the PP would make your PP look like this:


Precession on a gyroscope

[moda0306]

Gumby,

What are your rebalance bands?

Not to be sarcastic, but why don't you show me what somebody's portfolio would look like by only having 20% in the PP because they're too scared to give up their old portfolio... do you have an illustration for that?  I'm not saying it's BEST to weigh your portfolio initially....  I'm just saying that if it's all the psychological boost someone needs to dive into the PP as opposed to trickling in over 5 years, it's much better to move in slightly biased than to slowly move into a perfect PP.

The PP is pretty stable within the rebalance bands.  If what you stated was correct, people would be following 26/24 rebalance bands because it's just too darn risky to let it get out of wack.  If you're right, and you trigger a tax event by hitting the 35% trigger, 1) that means you made the RIGHT decision and are better off for having a higher allocation, and 2) could simply balance back to 30% again.  The partial rebalance is a great way to balance the tax implications of rebalancing with the risk implications of having too much allocated to any single asset.

[Gumby]

Gumby,

What are your rebalance bands?

15/35

Not to be sarcastic, but why don't you show me what somebody's portfolio would look like by only having 20% in the PP because they're too scared to give up their old portfolio... do you have an illustration for that?

I'm not sure why I would need to illustrate that. The issue isn't whether or not someone dips their toe in the water by starting with a small PP. I thought we were talking about the validity of trying to time each asset?

I'm not saying it's BEST to weigh your portfolio initially....  I'm just saying that if it's all the psychological boost someone needs to dive into the PP as opposed to trickling in over 5 years, it's much better to move in slightly biased than to slowly move into a perfect PP.

I didn't say it was bad. I just said it's probably pointless.

The PP is pretty stable within the rebalance bands.

I couldn't agree more.

If what you stated was correct, people would be following 26/24 rebalance bands because it's just too darn risky to let it get out of wack.

You misunderstood me. I never said it was risky. I just said it was probably pointless. But if it helps someone get in, I think it's probably fine. Just pointless because you could easily cause yourself to miss a nice rebalancing by starting with a wobble. Eventually things will sort itself out, but the overall returns may be slightly different. Again... there's no way to know.

If you're right, and you trigger a tax event by hitting the 35% trigger, 1) that means you made the RIGHT decision and are better off for having a higher allocation,

So, if you did it "right" you'd buy more of the asset you felt was most undervalued? And if it goes up just a little bit, you hit that rebalancing band pretty quickly (probably with a short term capital gain) before it really has a chance to run. That's not exactly a good thing. Sure, you have more of that asset, but what about when it goes out of favor? Then you have a big loss.

and 2) could simply balance back to 30% again.  The partial rebalance is a great way to balance the tax implications of rebalancing with the risk implications of having too much allocated to any single asset.

Oy vey. Now we're speculating on individual assets?

I think you've misunderstood me. I'm didn't say that the PP is too risky when it gets out of whack. I just said that you've changed the amount of time to your next rebalancing by starting and rebalancing it with a wobble. This has nothing to do with risk. You've either extended the time to the first rebalancing or shortened it. In the grand scheme of things it probably doesn't make much of a difference.

As I said... it's probably just a pointless exercise.

[moda0306]

Gumby,

The discussion veered into how someone should start into the PP.  I would say the "point" of doing it is to make you feel comfortable with the move and to actually make it, nothing more.

Your point on the possibility of a short-term gain is well-taken.

I was referring to doing a partial rebalance as a mechanical thing all the time, not to do it to one asset in particular.  I think someone, ideally, should go in 4x25, with 35/15 rebalance bands, but do a partial rebalance to 30/20 and leave anything else between alone.  I think, regardless of which asset you're dealing with, that partial rebalances blend tax considerations and balance considerations almost perfectly

[Gumby]

I would say the "point" of doing it is to make you feel comfortable with the move and to actually make it, nothing more.

Understood. I think I've done my best to say that that's probably fine if it helps people start their PP. But, ultimately they'll need to stop trying to time assets to truly feel comfortable with the PP.

I think someone, ideally, should go in 4x25, with 35/15 rebalance bands, but do a partial rebalance to 30/20 and leave anything else between alone.  I think, regardless of which asset you're dealing with, that partial rebalances blend tax considerations and balance considerations almost perfectly

That sounds like Clive's Relative Strength PP — which has backtested well. But, I believe Clive demonstrated the risks that crop up every few years when assets flip in popularity. You could put yourself in a situation where you have too much of the wrong asset for a long period of time.