Hello all

[Rien]

I am new to the forum, so I will make a short introduction of why I am here.

It is very likely that I (that is me and my wife) will become home owners in the next few weeks. We live in Holland and prices have come down to the point we feel safe in buying a home to live in. So its not a speculative buy. We look to buy, and never sell. So far we have kept most of our money in cash, some in gold and some in stocks. No bonds. After we buy the house I will be looking to create an investment vehicle that should last the rest of our lives. The PP is one option.
I have considerable experience in stocks and gold, but none in bonds. I have used the AIM algorithm in the past, though am not using it currently. (AIM = Automatic Investment Management, www.aim-users.com)

I thus find myself looking for "the final solution" :-)

My initial opinion on PP is that:
a) it is sensitive to failure IF any one of it components goes to zero. This is an unlikely scenario but it is a theoretical possibility. (AIM has this possibility also)
b) I do not like bonds, for moral reasons as well as the fact that a 30+ year rally has to end some time. I am reasonably sure that this possibility will materialise in the next 10 years. This then gives rise to the problem mentioned under A.
c) Cash in the current environment is a "sitting duck". The governments around the world are hunting for it. How to keep one's cash save? (This is one of the reasons -though minor- to buy a house)

It may seem that I do not like the PP, but that conclusion would be premature. The problem is an absence of alternatives.
PP may very well be "the best house in a bad neighbourhood". I simply do not seen any alternatives. But maybe there are ways to reduce the PP risks that I mentioned?
How do you see those risks? I am simply too nervous?

[sophie]

Hello Rien, and welcome to the forum.

I'll just take on your first comment and let others tackle the rest.  One common theme I've noticed is that when constructing doomsday scenarios for the PP, people tend to forget that all the parts work as a whole, and they don't go up or down independently.

To examine possible scenarios of one component going to zero, or dropping drastically:

1) Cash goes to zero.  This must mean that the banking system has completely collapsed.  Traditional portfolios would all be wiped out as stocks and bonds would presumably collapse as well, but with the PP you have physical gold protecting you.  Likely its value will skyrocket.

2) Stocks go to zero.  Investors would flee to bonds and gold, whose value would then rise.  Something like this happened in 2008/2009.

3) Bonds go to zero.  In order for this to take place, there must be rising interest rates, runaway inflation, or both.  In the case of rising rates with tight money, there would be a sharp but short-lived recession.  No portfolio will maintain its value in this scenario, but your cash will help cushion the blow and also provide a reservoir for expenses.  Runaway inflation has been discussed extensively in other threads, but the upshot is that gold will come to the rescue, and more than compensate for the losses in bonds.  See 1970s for an example.

4) Gold goes to zero. This can happen in either prosperity (people pouring money into the stock market) or deflation (interest rates down, bonds up).  In either case another asset will rise to offset the gold losses.  See earlier this year and also early 1980s.

So the question isn't so much "is the PP safe" as "is the PP safer than traditional stock/bond portfolios" or even an ultra-safe all-cash portfolio.  I would say the answer is a resounding "yes", but you need to do your own research and answer the question for yourself.  Best of luck!

[Rien]

Thanks for your reaction sophie.

Yes, that would be why I see little alternatives to PP.

But at least theoretically, if an investment category (either one) goes to zero and does not recover, the PP will go to zero too. That is the inherent danger of a rebalancing algorithm. Either PP or any other (like AIM).

Especially for bonds, that is a scenario that I deem possible. Maybe even likely. Hence my dislike for bonds.
I would also suggest that IF bonds exhibit this behaviour, the purchasing power of cash would likely do the same. Generating a double whammy to the PP.

I have no simple solutions, and quite possibly there are no easy solutions.
But if I go the PP route, I will keep a close eye on the bonds part, I think that has to be managed much more carefully now as compared to normal times.

[Pointedstick]

But at least theoretically, if an investment category (either one) goes to zero and does not recover, the PP will go to zero too. That is the inherent danger of a rebalancing algorithm. Either PP or any other (like AIM).

You don't have to be a robot about it. If the writing is on the wall regarding an asset, it would make sense to exercise a little bit of judgement and exit the asset before it explodes. Having a sensible investment portfolio can't be a substitute all human judgement!

Especially for bonds, that is a scenario that I deem possible. Maybe even likely. Hence my dislike for bonds.
I would also suggest that IF bonds exhibit this behaviour, the purchasing power of cash would likely do the same. Generating a double whammy to the PP.

Thinking through this a little more, if bonds and cash go to zero, that means the economy denominated in that currency is probably getting whacked too, so stocks would do the same. This is the logic Libertarian666 follows, which leads him to have a mostly-gold portfolio, and such a portfolio makes sense if one approaches the problem from the certainty that there will be an impending currency collapse.

[Libertarian666]

But at least theoretically, if an investment category (either one) goes to zero and does not recover, the PP will go to zero too. That is the inherent danger of a rebalancing algorithm. Either PP or any other (like AIM).

You don't have to be a robot about it. If the writing is on the wall regarding an asset, it would make sense to exercise a little bit of judgement and exit the asset before it explodes. Having a sensible investment portfolio can't be a substitute all human judgement!

Especially for bonds, that is a scenario that I deem possible. Maybe even likely. Hence my dislike for bonds.
I would also suggest that IF bonds exhibit this behaviour, the purchasing power of cash would likely do the same. Generating a double whammy to the PP.

Thinking through this a little more, if bonds and cash go to zero, that means the economy denominated in that currency is probably getting whacked too, so stocks would do the same. This is the logic Libertarian666 follows, which leads him to have a mostly-gold portfolio, and such a portfolio makes sense if one approaches the problem from the certainty that there will be an impending currency collapse.

Well, the nominal value of stocks will probably go up in a currency collapse, but the real value probably won't keep pace. But essentially that is my position.

[Rien]

Thinking through this a little more, if bonds and cash go to zero, that means the economy denominated in that currency is probably getting whacked too, so stocks would do the same. This is the logic Libertarian666 follows, which leads him to have a mostly-gold portfolio, and such a portfolio makes sense if one approaches the problem from the certainty that there will be an impending currency collapse.

Well, the nominal value of stocks will probably go up in a currency collapse, but the real value probably won't keep pace. But essentially that is my position.

Libertarian666, are you familiar with the freegold theory?
If so, is that a part of your reasoning to go into gold?

[Libertarian666]

Thinking through this a little more, if bonds and cash go to zero, that means the economy denominated in that currency is probably getting whacked too, so stocks would do the same. This is the logic Libertarian666 follows, which leads him to have a mostly-gold portfolio, and such a portfolio makes sense if one approaches the problem from the certainty that there will be an impending currency collapse.

Well, the nominal value of stocks will probably go up in a currency collapse, but the real value probably won't keep pace. But essentially that is my position.

Libertarian666, are you familiar with the freegold theory?
If so, is that a part of your reasoning to go into gold?

I've read about it, but am not convinced that it makes sense.
My reasoning is that eventually there will be an epic collapse in the 100-year fiat money bubble, after which people won't accept unbacked "money" anymore but will demand gold. Obviously that would increase the purchasing power of gold by a very large factor, maybe 100-1 over today's purchasing power.

As it happens, that's the only way by which, in the right circumstances, the "little guy" can become wealthy without taking enormous risks. But that's not the reason I do it; that's just an extra fillip.

[Rien]

Libertarian666, are you familiar with the freegold theory?
If so, is that a part of your reasoning to go into gold?

I've read about it, but am not convinced that it makes sense.
My reasoning is that eventually there will be an epic collapse in the 100-year fiat money bubble, after which people won't accept unbacked "money" anymore but will demand gold. Obviously that would increase the purchasing power of gold by a very large factor, maybe 100-1 over today's purchasing power.

As it happens, that's the only way by which, in the right circumstances, the "little guy" can become wealthy without taking enormous risks. But that's not the reason I do it; that's just an extra fillip.

I think it does make sense, but that is not a guarantee that it will happen in my lifetime. Humanity shoots itself in the foot all the time...

I agree about the fiat bubble, but I do not believe that we will go back to gold backing. A barter economy seems more likely to me. Showing gold or silver in such an environment may very well be a death sentence.
After a time when a new society forms gold will likely become usable again. I see investing in gold as a way to conserve wealth from here to there, but not as very usable in between.

Having said that, I also realise that it is not predictable when the fiat bubble pops. I think it may last longer than people think and the final pop may happen faster than anticipated. As to timeframes, I think bonds may go first, probably within the next 10 years. The fiat bubble may stay alive much longer than that. This depends imo mostly on our ability to keep the economic system going. And as such it is probably driven by our energy consumption. Once that goes down, its curtains. (IMO of course)

[Libertarian666]

Libertarian666, are you familiar with the freegold theory?
If so, is that a part of your reasoning to go into gold?

I've read about it, but am not convinced that it makes sense.
My reasoning is that eventually there will be an epic collapse in the 100-year fiat money bubble, after which people won't accept unbacked "money" anymore but will demand gold. Obviously that would increase the purchasing power of gold by a very large factor, maybe 100-1 over today's purchasing power.

As it happens, that's the only way by which, in the right circumstances, the "little guy" can become wealthy without taking enormous risks. But that's not the reason I do it; that's just an extra fillip.

I think it does make sense, but that is not a guarantee that it will happen in my lifetime. Humanity shoots itself in the foot all the time...

I agree about the fiat bubble, but I do not believe that we will go back to gold backing. A barter economy seems more likely to me. Showing gold or silver in such an environment may very well be a death sentence.
After a time when a new society forms gold will likely become usable again. I see investing in gold as a way to conserve wealth from here to there, but not as very usable in between.

Having said that, I also realise that it is not predictable when the fiat bubble pops. I think it may last longer than people think and the final pop may happen faster than anticipated. As to timeframes, I think bonds may go first, probably within the next 10 years. The fiat bubble may stay alive much longer than that. This depends imo mostly on our ability to keep the economic system going. And as such it is probably driven by our energy consumption. Once that goes down, its curtains. (IMO of course)

A barter economy is completely unworkable at anything above near-subsistence. You cannot calculate profit or loss without money pricing, which eliminates all large- or even medium-scale enterprises.

And if we did have a barter economy, why would showing gold or silver be a death sentence? I don't see the logic there.

The timeframe is always the hardest to get right, but this is already the longest-lasting fiat experiment, so I think it is likely to fail within our lifetime. Obviously that depends on how old we are though. 

[Kshartle]

Fiat money is so destructive that eventually the concept will be laughed at.

Doesn't mean that only gold and/or silver will be money and that we'll actually carry it around.

The market will ultimately decide what works best as money, this might include gold, silver, bitcoin, litecoin, something else entirely.

Pretty tough to rationaly prove what is going to happen. It might be possible but what I've written is strictly my opinion.

I think the fiat currency and the dollar will continue through our lifetimes unfortunatley. I don't think they'll go the hyperinflation route but instead the dependants will be cut off and the dollar spared from total collapse. I've made the argument that this will force the government to partially default on it's debts most likely.

http://gyroscopicinvesting.com/forum/ot ... n-debt/15/

[Kshartle]

I do agree with Tech though that at current prices, interest rates, debt levels and the overall economic picture that of the four assets gold looks the safest. So I'm 50-50 gold and stocks currently give or take a couple points.

Gold has been suckin though but I'm a buyer for many many more years not a seller so it's just like it's on sale for me.

[Rien]

I think it does make sense, but that is not a guarantee that it will happen in my lifetime. Humanity shoots itself in the foot all the time...

I agree about the fiat bubble, but I do not believe that we will go back to gold backing. A barter economy seems more likely to me. Showing gold or silver in such an environment may very well be a death sentence.
After a time when a new society forms gold will likely become usable again. I see investing in gold as a way to conserve wealth from here to there, but not as very usable in between.

Having said that, I also realise that it is not predictable when the fiat bubble pops. I think it may last longer than people think and the final pop may happen faster than anticipated. As to timeframes, I think bonds may go first, probably within the next 10 years. The fiat bubble may stay alive much longer than that. This depends imo mostly on our ability to keep the economic system going. And as such it is probably driven by our energy consumption. Once that goes down, its curtains. (IMO of course)

A barter economy is completely unworkable at anything above near-subsistence. You cannot calculate profit or loss without money pricing, which eliminates all large- or even medium-scale enterprises.

And if we did have a barter economy, why would showing gold or silver be a death sentence? I don't see the logic there.

The timeframe is always the hardest to get right, but this is already the longest-lasting fiat experiment, so I think it is likely to fail within our lifetime. Obviously that depends on how old we are though. 

Maybe barter is a bit OTT. I could certainly envision local currencies springing up. But the larger currencies like the USD and EUR would go the way of the dodo. I think an energy problem will be the trigger, and depending on who you listen to, that could be as early as next year. But I do not discount the possibility that something new will come along and rescue us "one more time".

I have read Ferfal for a while, and he describes the situation in Argentine. He writes that it is dangerous to buy or sell gold unless you really trust the other party. I think a similar situation would arise once the fiat currencies break down and are replaced with local currencies and barter.

[Libertarian666]

I think it does make sense, but that is not a guarantee that it will happen in my lifetime. Humanity shoots itself in the foot all the time...

I agree about the fiat bubble, but I do not believe that we will go back to gold backing. A barter economy seems more likely to me. Showing gold or silver in such an environment may very well be a death sentence.
After a time when a new society forms gold will likely become usable again. I see investing in gold as a way to conserve wealth from here to there, but not as very usable in between.

Having said that, I also realise that it is not predictable when the fiat bubble pops. I think it may last longer than people think and the final pop may happen faster than anticipated. As to timeframes, I think bonds may go first, probably within the next 10 years. The fiat bubble may stay alive much longer than that. This depends imo mostly on our ability to keep the economic system going. And as such it is probably driven by our energy consumption. Once that goes down, its curtains. (IMO of course)

A barter economy is completely unworkable at anything above near-subsistence. You cannot calculate profit or loss without money pricing, which eliminates all large- or even medium-scale enterprises.

And if we did have a barter economy, why would showing gold or silver be a death sentence? I don't see the logic there.

The timeframe is always the hardest to get right, but this is already the longest-lasting fiat experiment, so I think it is likely to fail within our lifetime. Obviously that depends on how old we are though. 

Maybe barter is a bit OTT. I could certainly envision local currencies springing up. But the larger currencies like the USD and EUR would go the way of the dodo. I think an energy problem will be the trigger, and depending on who you listen to, that could be as early as next year. But I do not discount the possibility that something new will come along and rescue us "one more time".

I have read Ferfal for a while, and he describes the situation in Argentine. He writes that it is dangerous to buy or sell gold unless you really trust the other party. I think a similar situation would arise once the fiat currencies break down and are replaced with local currencies and barter.

It's dangerous to do ANYTHING in such a situation. I don't see that it would be more dangerous to use gold unless it has a very high value so that people would be willing to harm you to get it, but that is true for anything with high value.

[koekebakker]

It may seem that I do not like the PP, but that conclusion would be premature. The problem is an absence of alternatives.
PP may very well be "the best house in a bad neighbourhood". I simply do not seen any alternatives.

I feel the same way. There are a lot of things I don't like about the PP's 4x25 split.
But on the other hand I'm not comfortable putting 50% or more into one asset class, so what can you do?
You can create your own allocation of-course or you can call it a day and just go with the PP.

I've said before that I'll never want to put 25% of my portfolio in gold but that might just be what I'll end up doing.

[frommi]

If most companies in the world go bankrupt or to zero, what do you want to buy with your gold?
Currently most of the large US-companies are selling their stuff all over the world, so even when the dollar collapses they won`t be out of business.

Some posts in this thread really want me to sell my gold immediately, because i am not a gold bug and i am really optimistic about the future. Whats the point of being pessimistic all over your life? Is it that the PP fetches all people who have bad experiences with stocks in 2008 or 2000/2001 and sold at the bottom? We are at about historic highs in gold, and have no real inflation currently. And it won`t come without the economy recovering.

[Rien]

If most companies in the world go bankrupt or to zero, what do you want to buy with your gold?
Currently most of the large US-companies are selling their stuff all over the world, so even when the dollar collapses they won`t be out of business.

If the current companies go out of existence, there will be new ones to replace them.
But I do not think most companies would go out of existence, just the really big ones that need the current global economy to exist. Most companies take advantage of the global economy, but are not really depending upon it. Though their numbers will go quite a bit lower when the globalisation reverses. I fully expect most companies to handle the transition, at least to the extent that they will survive.

I believe that we will transition to a new economy, a new paradigm. Less global, much more local. Either that, or the singularitarians will be right. (In which case the economy will also change dramatically, but then we will enter nirvana, so you don't really need your investments anymore)
The transition will be harsh in some places, less so in others. During the transition it may be unsafe to declare your gold holdings to the world. After the transition it won't be a problem.

Anyway that is how I see it longer term.

[Libertarian666]

If most companies in the world go bankrupt or to zero, what do you want to buy with your gold?
Currently most of the large US-companies are selling their stuff all over the world, so even when the dollar collapses they won`t be out of business.

Some posts in this thread really want me to sell my gold immediately, because i am not a gold bug and i am really optimistic about the future. Whats the point of being pessimistic all over your life? Is it that the PP fetches all people who have bad experiences with stocks in 2008 or 2000/2001 and sold at the bottom? We are at about historic highs in gold, and have no real inflation currently. And it won`t come without the economy recovering.

You don't have to be pessimistic to buy gold. You just have to be realistic.
But if you want to sell, go right ahead. However, I think it is very likely that sometime in the next 5-10 years you will regret selling.

[frommi]

I believe that we will transition to a new economy, a new paradigm. Less global, much more local. Either that, or the singularitarians will be right. (In which case the economy will also change dramatically, but then we will enter nirvana, so you don't really need your investments anymore)
The transition will be harsh in some places, less so in others. During the transition it may be unsafe to declare your gold holdings to the world. After the transition it won't be a problem.

Anyway that is how I see it longer term.

And you want to base your investments on that thinking? Good luck!
You don`t have a realistic view of the world, money rules the world and every rich man on the planet will fight against such new "system" or "transition". All political decisions are ruled by the money and their lobby. If you want to win, just go with the flow and the money.

[koekebakker]

Emotional states such as optimism and pessimism shouldn't have much to do with the way you invest.
The world doesn't care if your optimistic or pessimistic and that's the way the PP is designed.