Changing to global stocks and gold only

[Austen Heller]

I like the idea of a 50/50 global stocks/gold portfolio.

I think the pp can be improved in other ways too. From a profit optimization standpoint it is unwise to allocate the same amount of capital to events that have a high and low profitability of happening.

I agree with you, Marc, that the current probability of investment success is higher with stocks & gold than with bonds & cash.  Even William Bernstein, in his new book "Deep Risk" agrees with this assessment (Check out the chapter called Deflation: Going Going....).  So then why not just allocate a smaller % of your portfolio to the bonds and cash instead of leaving them out altogether?  A 0% allocation to bonds & cash only seems appropriate if you have a crystal ball and are CERTAIN about what the future will bring.  For me, a closely-monitored 5-10% allocation to bonds feels about right (by closely-monitored, I mean that if yields on long-term bonds should keep dropping to 3% or below, the position can be trimmed to smaller levels or even exited completely, and if rates rise back to more "normal" levels of 4-6%, the position can be expanded to as high as 25%).

I have worked hard to make this forum a friendly and courteous place.  If you would like to hang around, please tone down the strident and aggressive tone of your posts.  If you feel that this is the only way you can make your points, please move on to another forum.

Thanks, MediumTex for all your hard work in moderating this place.  I don't post a lot here unless I have something to say, but I read the forum almost everyday.  This forum has definitely evolved over the years, and the incivility has slowly increased, but I guess it is to be expected since the folks here bring a lot of passion and emotion to the discussions.  Got to take the fleas along with the dog sometimes.

[Rien]

The intrinsic value is zero. And so is the intrinsic value of gold zero.

Exactly.
I always have great difficulty with the words 'intrinsic' and 'value'. Especially when used together
Value only exists in the mind while intrinsic wants to bestow an external property to value. For me, that simply does not work.

[MediumTex]

The intrinsic value is zero. And so is the intrinsic value of gold zero.

Exactly.
I always have great difficulty with the words 'intrinsic' and 'value'. Especially when used together
Value only exists in the mind while intrinsic wants to bestow an external property to value. For me, that simply does not work.

It always seemed to me that the only types of items with real intrinsic value were things like food, shelter, and fuel.

[Marc De Mesel]

So then why not just allocate a smaller % of your portfolio to the bonds and cash instead of leaving them out altogether?  A 0% allocation to bonds & cash only seems appropriate if you have a crystal ball and are CERTAIN about what the future will bring.  For me, a closely-monitored 5-10% allocation to bonds feels about right (by closely-monitored, I mean that if yields on long-term bonds should keep dropping to 3% or below, the position can be trimmed to smaller levels or even exited completely, and if rates rise back to more "normal" levels of 4-6%, the position can be expanded to as high as 25%).

Good argument.

I think the question should be reversed though: why keep them in?

Harry Browne justified long term bonds to be necessary as to be protected against deflation (defined as a climate where interest rates drop).

However, they are not necessary. In all the deflationary climates I have seen, Japan 1990-2010 and USA 1980-2008, you did not need long term bonds in order to be protected. Global stocks and gold were sufficient.

I estimate  that even during the great depression in the US 1930-1940 where interest rates also went down from 4% to 2% a portfolio with global stocks and gold would have been sufficient. Global stocks taking a hit, gold going up. 

So based on backtesting there is no evidence that long term bonds were ever necessary anywhere, to my knowledge. Using logic reasoning, is it possible that in the future they might be the only asset rescuing you? So global stocks failing, gold failing, and long term bonds going up as only one? That means the market would flee (globally) from stocks, and from gold to gov bonds? Everything is possible but since it never happened in the history of mankind, we can say chances are negligible. 

So that means, bye bye long term bonds.

Unless anyone has a counterargument or backtests that disproves or neutralizes mine?


Cash is trickier. First of all, the word cash is poorly chosen by Harry Browne and today still confusing when trying to explain the pp. It is not cash, it is short term bonds. When you say cash people think physical bills where I live. They don't think short term bonds, they don't even think savings accounts. And since long term bonds are for me out of the picture I will simply use the correct name 'bonds' to refer to short term bonds.

Are bonds required? Well they do lower the volatility, that is proven in all backtests. Drawdowns are much less. However they also lower the long term returns, also proven in all backtests. If lower volatility does not cost money, it is a no brainer and good. However if lower volatility costs a lot of money there is always a point where it is not worth it anymore.

Bonds today yield 0%. Can the returns be any lower? What are the chances that we get negative interest? Historically this has only happened very briefly and very minor. Sure the future can write new history but chances are negligible that interest rates will go negative for more then a few decimals for a long period.

I estimate true inflation around 5%, so you lose 5% per year with bonds. You do that 10 years and you lost 40% of your purchasing power. That is a high price in return for lower volatility.

But it does not end there. Harry Browne was again wrong to suggest that bonds defaulting in a fiat currency regime is not going to happen. As Kshartle pointed out many governments have defaulted eventhough they had fiat currencies. So there is credit risk as well. The lowest credit risk? Not perse. Depends on the climate. Rating agencies are not to be trusted. Logic rules. If you can't pay back, it's inflate or default. Indicators are flashing red here that the big governments of US and EU are unable to pay back. So credit risk is high today.     

But in contrast to long term bonds that are never needed, the short term bonds do have value in other climates. It does happen that bonds offer more interest than true inflation, even in a fiat currency system. It does happen that credit risk for short term bonds is extremely low. So I think you are right that they should be kept, though applying a scaling system seems not risky but prudent.

So I'm changing the idea to global stocks/ gold / bonds. But also apply a scaling system so that the bond part is today smaller than the global stocks / gold part.

Thanks so much for your valuable feedback Austen.

[Coffee]

The intrinsic value is zero. And so is the intrinsic value of gold zero.

Exactly.
I always have great difficulty with the words 'intrinsic' and 'value'. Especially when used together
Value only exists in the mind while intrinsic wants to bestow an external property to value. For me, that simply does not work.

It always seemed to me that the only types of items with real intrinsic value were things like food, shelter, and fuel.

Even fuel is subjective.  I would probably place medicine and tools before fuel.  But I understand the argument.

[MediumTex]

So then why not just allocate a smaller % of your portfolio to the bonds and cash instead of leaving them out altogether?  A 0% allocation to bonds & cash only seems appropriate if you have a crystal ball and are CERTAIN about what the future will bring.  For me, a closely-monitored 5-10% allocation to bonds feels about right (by closely-monitored, I mean that if yields on long-term bonds should keep dropping to 3% or below, the position can be trimmed to smaller levels or even exited completely, and if rates rise back to more "normal" levels of 4-6%, the position can be expanded to as high as 25%).

Good argument.

I think the question should be reversed though: why keep them in?

Harry Browne justified long term bonds to be necessary as to be protected against deflation (defined as a climate where interest rates drop).

However, they are not necessary. In all the deflationary climates I have seen, Japan 1990-2010 and USA 1980-2008, you did not need long term bonds in order to be protected. Global stocks and gold were sufficient.

Remember 2008?  You needed long term bonds.

I estimate  that even during the great depression in the US 1930-1940 where interest rates also went down from 4% to 2% a portfolio with global stocks and gold would have been sufficient. Global stocks taking a hit, gold going up.

Gold went up because of government mandated devaluation.  This is hardly something that investors could depend on happening again.  You need long term bonds in a depression.

So based on backtesting there is no evidence that long term bonds were ever necessary anywhere, to my knowledge. Using logic reasoning, is it possible that in the future they might be the only asset rescuing you? So global stocks failing, gold failing, and long term bonds going up as only one? That means the market would flee (globally) from stocks, and from gold to gov bonds? Everything is possible but since it never happened in the history of mankind, we can say chances are negligible.

Sorry, where is this backtesting?  Long term bonds were never necessary anywhere?

What kind of "logic reasoning" are you using?  This sounds like complete gibberish to me.  Go look at the returns of each PP asset by year for the last four decades on Craig's website and you will see that long term treasuries both reduce the volatility of the whole portfolio, AND provide a boon to returns when the other assets are not performing well.

So that means, bye bye long term bonds.

Maybe for you, but not for me and any other prudent PP investor.

Unless anyone has a counterargument or backtests that disproves or neutralizes mine?

As PS pointed out (pardon the pun), if you want to make a wild claim, the burden isn't on me to disprove it, the burden is on you to prove it.  I don't see how you have proven anything if your claim is that long term bonds are not necessary in a PP.

Actually, I would say that a PP without gold has probably been a more stable ride than a PP without long term bonds, if you want to play the portfolio tweaking game.

Cash is trickier. First of all, the word cash is poorly chosen by Harry Browne and today still confusing when trying to explain the pp. It is not cash, it is short term bonds. When you say cash people think physical bills where I live. They don't think short term bonds, they don't even think savings accounts. And since long term bonds are for me out of the picture I will simply use the correct name 'bonds' to refer to short term bonds.

Why don't you just say that you have decided to tweak the PP to suit your own idiosyncratic investment preferences and leave it at that? 

The fact that you and people where you live don't think of t-bills as cash is utterly irrelevant to the soundness of the PP's structure.

Are bonds required? Well they do lower the volatility, that is proven in all backtests. Drawdowns are much less. However they also lower the long term returns, also proven in all backtests. If lower volatility does not cost money, it is a no brainer and good. However if lower volatility costs a lot of money there is always a point where it is not worth it anymore.

When you say "bonds", I assume that you are talking about cash-like instruments with complete liquidity at all times and zero principal risk, right?

Bonds today yield 0%. Can the returns be any lower? What are the chances that we get negative interest? Historically this has only happened very briefly and very minor. Sure the future can write new history but chances are negligible that interest rates will go negative for more then a few decimals for a long period.

I'm assuming that you mean t-bills when you say "bonds."  Note, however, that in the context of the PP, a t-bill is not a bond.  I just don't want anyone trying to follow your logic to get confused.

I estimate true inflation around 5%, so you lose 5% per year with bonds. You do that 10 years and you lost 40% of your purchasing power. That is a high price in return for lower volatility.

If you held only t-bills in the current economic environment and your inflation estimates were correct, you would be right.  The reality, however, is that the real rate that t-bills pay varies over time.  Sometimes they pay positive real yields, and sometimes they pay negative real yields.  In the context of the PP, though, they are needed for multiple reasons unrelated to their yield. 

With respect to your beliefs about inflation being 5%+, this is just your belief and isn't supported by any official data or any anecdotal evidence presented by anyone here.  It would be really nice if inflation HAD been 5%+ over the last 10 years because it would mean that I would be making 50% more money than I was making 10 years ago and it would mean that the economy was probably very healthy, given the strong downward pressure on prices exerted by the offshoring of jobs and productive capacity over that same period.

But it does not end there. Harry Browne was again wrong to suggest that bonds defaulting in a fiat currency regime is not going to happen. As Kshartle pointed out many governments have defaulted even though they had fiat currencies. So there is credit risk as well. The lowest credit risk? Not per se. Depends on the climate. Rating agencies are not to be trusted. Logic rules. If you can't pay back, it's inflate or default. Indicators are flashing red here that the big governments of US and EU are unable to pay back. So credit risk is high today.

Really?  So you're saying that Marc is right and the treasury bond market AND Harry Browne are wrong because of some theoretical default risk that you believe exists?

But in contrast to long term bonds that are never needed, the short term bonds do have value in other climates. It does happen that bonds offer more interest than true inflation, even in a fiat currency system. It does happen that credit risk for short term bonds is extremely low. So I think you are right that they should be kept, though applying a scaling system seems not risky but prudent.

So you think that some kind of scaling system of the bond allocation MIGHT be appropriate in a PP.

How would an investor know which bond laddering system to use?  Will you be putting out a newsletter?

So I'm changing the idea to global stocks/ gold / bonds. But also apply a scaling system so that the bond part is today smaller than the global stocks / gold part.

You mean the same gold that is "history"?

Your thinking on investments has more twists and turns than a Mexican soap opera.  There isn't anything wrong with this by itself.  In fact, I would say that most investors spend their entire investing careers doing exactly what you are describing.  I get that you are on a high right now because your bitcoin speculation turned out favorably.  The problem is that you will likely be in the dumps next year or the year after that after you have one or two more bad speculative experiences like you have had in recent years.

Try to understand that people come to the PP to get off of the merry-go-round that you are on now.

The world is full of people who think they can win at the speculation game.  Some do, but most don't.  I would caution you to get more than one win under your belt before deciding that you can consistently speculate profitably.

If you want to tweak the PP to satisfy the mood you happen to be in on a given day, that's up to you, but it's not what the PP is about. 

[Marc De Mesel]

So then why not just allocate a smaller % of your portfolio to the bonds and cash instead of leaving them out altogether?  A 0% allocation to bonds & cash only seems appropriate if you have a crystal ball and are CERTAIN about what the future will bring.  For me, a closely-monitored 5-10% allocation to bonds feels about right (by closely-monitored, I mean that if yields on long-term bonds should keep dropping to 3% or below, the position can be trimmed to smaller levels or even exited completely, and if rates rise back to more "normal" levels of 4-6%, the position can be expanded to as high as 25%).

Good argument.

I think the question should be reversed though: why keep them in?

Harry Browne justified long term bonds to be necessary as to be protected against deflation (defined as a climate where interest rates drop).

However, they are not necessary. In all the deflationary climates I have seen, Japan 1990-2010 and USA 1980-2008, you did not need long term bonds in order to be protected. Global stocks and gold were sufficient.

Remember 2008?  You needed long term bonds.

You are right, looking on a yearly basis there are several years you can point to that showed LT bonds were needed.

However, looking on 3-5 year basis, to my knowledge, there are no periods where you needed the long term bonds to preserve your purchasing power compared to global stocks/gold/ST bonds portfolio.

So it depends on your time horizon. If it is important you keep your purchasing power short term, you want to keep them, if it is only important you keep your purchasing power long term, and you want to optimise profits, you don't want to have them from what I can see.

[Gumby]

You are right, looking on a yearly basis there are several years you can point to that showed LT bonds were needed.

However, looking on 3-5 year basis, to my knowledge, there are no periods where you needed the long term bonds to preserve your purchasing power compared to global stocks/gold/ST bonds portfolio.

So it depends on your time horizon. If it is important you keep your purchasing power short term, you want to keep them, if it is only important you keep your purchasing power long term, and you want to optimise profits, you can kick them out.

Please. Most people were freaking out in 2008. Very few people had the ability to stomach much of a drawdown.  It's very unrealistic to believe that people will be able to stomach short term losses when major banks and Fortune 500 companies are failing left and right.

We have people here who can barely stomach a 3% short term loss, let alone a 15% or 40% short term loss.

If you're going to design a portfolio, at least design one that people can actually stick to when the sky is falling.

[Pointedstick]

You are right, looking on a yearly basis there are several years you can point to that showed LT bonds were needed.

However, looking on 3-5 year basis, to my knowledge, there are no periods where you needed the long term bonds to preserve your purchasing power compared to global stocks/gold/ST bonds portfolio.

[shadow=red,left]UPDATE: this post is slightly inaccurate since my backtest did not include enough US stocks to fully approximate a global stock fund like VT. The gist is still correct, but updated numbers and graphs are available at[/shadow] http://gyroscopicinvesting.com/forum/pe ... /#msg82591

Allow me to add to your knowledge. Here are the historical results of a portfolio consisting of 20% short-term bonds, 40% international stocks, and 40% gold. The 5-year rolling returns that would have reduced your purchasing power in real terms are shown in red. I calculated these real returns for both CPI as well as CPI+2, which I'm using as a placeholder for your estimated "true inflation" figures. If you believe your own numbers, the portfolio you're talking about had 13 years that experienced rolling 5-year negative real returns compared to 8 if you believe the U.S. government's CPI numbers (and only two and one for the PP, respectively). Needless to say, if CPI+2 is even too low, this portfolio becomes even worse…

Have a look:



Investment return data from http://www.riskcog.com/portfolio-theme2.jsp#5bdjbd85pe
CPI data from http://www.usinflationcalculator.com/in ... ion-rates/

[Pointedstick]

By the way, here's the 4x25 PP with the same conditions:



Personally, I'll take the PP.

[Marc De Mesel]

Thanks so much for calculating this Pointedstick. That is very interesting.

Indeed you do get 2% more per year on average but the volatility is a lot higher.

If you take bitcoin, I'm happy to tip you.



Adding the other idea I think would drastically reduce this volatility though.

When gold is high vs stocks, have less gold than stocks and vice versa.

Equally when ST bonds have a positive real return have more and when negative real return have less.

And for this to be profitable the balancing may not be done continuously but only when milestones are reached.


I didn't work this out yet so I'm just thinking out loud here.

[Pointedstick]

If you take bitcoin Pointedstick, I'm happy to tip you

Why thank you, Marc! Much appreciated. Here's a bitcoin address:

Code: Select all

1J9kReEPQZSfB8ZzwNvxXamJ9S9YsRe3Ty

The idea of tactically reducing certain assets when conditions not favorable to them are present is an idea I've thought a bit about as well. I think there are a few threads on this in the VP section, too. For example: http://gyroscopicinvesting.com/forum/va ... t-classes/

Melveyr produced some interesting graphs and showed that the idea is not altogether without merit. But of course, there's no way of knowing if it will work as well in the future, as with all things.

[Marc De Mesel]

If you take bitcoin Pointedstick, I'm happy to tip you

Why thank you, Marc! Much appreciated. Here's a bitcoin address:

Code: Select all

1J9kReEPQZSfB8ZzwNvxXamJ9S9YsRe3Ty

Cool done

Has bitcoin tipping been done here before?


Thanks for the link.

[moda0306]

You are right, looking on a yearly basis there are several years you can point to that showed LT bonds were needed.

However, looking on 3-5 year basis, to my knowledge, there are no periods where you needed the long term bonds to preserve your purchasing power compared to global stocks/gold/ST bonds portfolio.

So it depends on your time horizon. If it is important you keep your purchasing power short term, you want to keep them, if it is only important you keep your purchasing power long term, and you want to optimise profits, you can kick them out.

Please. Most people were freaking out in 2008. Very few people had the ability to stomach much of a drawdown.  It's very unrealistic to believe that people will be able to stomach short term losses when major banks and Fortune 500 companies are failing left and right.

We have people here who can barely stomach a 3% short term loss, let alone a 15% or 40% short term loss.

If you're going to design a portfolio, at least design one that people can actually stick to when the sky is falling.

Also, while we all think of gold as a pretty good asset to have during a crisis, gold's price movements have been driven almost eerily predictably by the level of real interest rates.

If 2008 had been worse, and had been able to trigger a true price-deflation spiral event, gold could have been hit hard in real terms as even 0% rates or cash gave people real return. 

You take default risk spirals, stock market crashes and real gains on cash driving gold down and bonds could have given us some serious long-term protective value.

[MediumTex]

Has bitcoin tipping been done here before?

I'm pretty sure the answer is "no", but it sounds like fun.

[Marc De Mesel]

Has bitcoin tipping been done here before?

I'm pretty sure the answer is "no", but it sounds like fun.

Can I share the love with you too?

To make up a little for working on your nerves

[MediumTex]

Has bitcoin tipping been done here before?

I'm pretty sure the answer is "no", but it sounds like fun.

Can I share the love with you too?

To make up a little for working on your nerves

I really appreciate the gesture, but I'm not in the bitcoin business yet.

If you really want to make me happy, just be friendly and courteous in your posts.  That has a bitcoin balm-like effect on me.

[Rien]

Marc, I think I understand what you are trying to do. But having listened to the HB broadcasts recently I have the impression that he did not design the PP as an investment vehicle. I believe he designed the PP so that he had a "fail safe" way of keeping his purchasing power of money that he earned otherwise intact. I can imagine him being absolutely content even when the PP yield would be negative in successive years, if there was an offsetting price deflation going on at the same time.

Having followed the discussions here I have come to the conclusion that I am looking for an investment vehicle, not a way to maintain my purchasing power. Maybe that also typifies you.

Personally I do not believe that there is a way to ensure that purchasing power is kept. There may be methods (like PP) that work for long periods of time, but I also expect all such methods to break down at some point in time.

As such, I look behind the reason to want to maintain purchasing power. I believe that humans want to maintain their purchasing power in order to be able to assure our self of continued existence. I.e. we ache for certainty. Unfortunately HB never got to write the book "How I found certainty in an uncertain world"
Such certainty means access to the primary necessities of life. I now believe that this can never be achieved through investing in financial products. It can however be achieved through relations and self-sufficiency. Hence my (well, me and my wife) decision to buy a house now and try to get at least partly on the road to self-sufficiency.

That then leaves me free to turn my financial attention to investing for gain, or dare I say, even speculating. Though not leveraged high level gambling 

I have not made up my mind conclusively. But at present I will probably not turn to the PP. Based on past experience I will likely turn to the AIM investing algorithm in selected area's of the stock market. Most probably energy. I am internally debating if PMs have a place here as well.

Anyway, this post was more about clarifying my own thoughts than anything else, but if somebody wants to shoot holes in this,  fire away ....

[Pointedstick]

Personally I do not believe that there is a way to ensure that purchasing power is kept. There may be methods (like PP) that work for long periods of time, but I also expect all such methods to break down at some point in time.

Even comparing it against official inflation +2, the PP has historically not just maintained your purchasing power, but grown it by an average of 3.2%. Even if you think inflation has been much higher and compare it to CPI + 4, the PP has still returned an average of a 1.2% real increase in purchasing power. See the charts I made up a few posts ago for the details.

Now, these figures aren't very high, especially if you believe inflation has been much more damaging than reported. And it's possible, of course, to speculate and achieve much higher returns if one is clever and lucky enough. Personally, I find that Harry Browne's prescription to speculate with your business and invest your money conservatively fits me much better. When investing, you're overjoyed if you can make 10 or 15%, but in business those are on the low end of the kinds of profit margins that are possible. A service-based business or consultancy or blog or iPhone app can have yearly return figures of 100% or more, and these types of enterprises are totally possible to achieve through hard work more than luck.

Essentially, the way I feel is that if I'm going to take a risk and go off the beaten path in the hopes of making more money, I want to do something that can sustainably yield me returns of at least 30% or more with the possibility of increasing this through hard work, not something where I'll be ecstatic to gain 15% and hope that I don't lose 40% the next year.

[Libertarian666]

...
When investing, you're overjoyed if you can make 10 or 15%, but in business those are on the low end of the kinds of profit margins that are possible. A service-based business or consultancy or blog or iPhone app can have yearly return figures of 100% or more, and these types of enterprises are totally possible to achieve through hard work more than luck.
...

I'm sorry, but that claim is (still) incorrect. If such returns were available, the number of entrants would be so high as to drive the returns down to the "market rate" of return. This is a tenet not only of Austrian economics but of every other school that I'm aware of.

[frommi]

I'm sorry, but that claim is (still) incorrect. If such returns were available, the number of entrants would be so high as to drive the returns down to the "market rate" of return. This is a tenet not only of Austrian economics but of every other school that I'm aware of.

These markets have an entry barrier and that is education. The same can be said for the stock market and most other markets. Those with experience and knowledge make the money, those without not.

[Pointedstick]

...
When investing, you're overjoyed if you can make 10 or 15%, but in business those are on the low end of the kinds of profit margins that are possible. A service-based business or consultancy or blog or iPhone app can have yearly return figures of 100% or more, and these types of enterprises are totally possible to achieve through hard work more than luck.
...

I'm sorry, but that claim is (still) incorrect. If such returns were available, the number of entrants would be so high as to drive the returns down to the "market rate" of return. This is a tenet not only of Austrian economics but of every other school that I'm aware of.

This time I didn't say anyone can do it, which I'll admit was rather optimistic. It's a lot like speculation in the financial markets in that way. But for those few who can succeed in these extremely difficult fields, the kinds of returns I listed are indeed possible. Because again, most people can't do these things.

Now, we see the margins being driven down in iPhone apps as per your skepticism because there really was a crazy gold rush with people getting rich overnight, which made other people want to pile in and get a piece of the pie because it seemed so fast and easy. But unlike many other fields where most of these people would fail, my reading of that situation is that by lowering the barriers to entry and creating such a rich platform, Apple made it easy for many of these people to actually succeed, which has indeed driven down the margins due to the greatly increased competitive pressure. I mean, there are now more than a million apps. That level of competition is crazy.

With other fields that are harder to get into and harder to succeed at, and for which there aren't instant platforms you can easily leverage, competition is substantially reduced, allowing the skilled entrepreneur to stand out more easily and defend their margins.



I also think human psychology plays a part here in frustrating the standard economic analysis. We do the things we do for more reasons than just money, otherwise everyone who went to college would go into petroleum engineering. But many actually study comparative world religions and queer theory and east Asian history and other economically valueless subjects. Why? Because the money they could make if they became oil rig inspectors doesn't matter to them. There's a huge opportunity out there that most don't make use of because they're not in fact cold, profit-maximizing rational actors but rather emotionally-driven dreamers or traditionalists who do what their tribe tells them works best.

[frommi]

I also think human psychology plays a part here in frustrating the standard economic analysis. We do the things we do for more reasons than just money, otherwise everyone who went to college would go into petroleum engineering. But many actually study comparative world religions and queer theory and east Asian history and other economically valueless subjects. Why? Because the money they could make if they became oil rig inspectors doesn't matter to them. There's a huge opportunity out there that most don't make use of because they're not in fact cold, profit-maximizing rational actors but rather emotionally-driven dreamers or traditionalists who do what their tribe tells them works best.

Ha! And thats the reason markets are not efficient! Because humans with emotions are involved and that will never change. 

[moda0306]

I also think human psychology plays a part here in frustrating the standard economic analysis. We do the things we do for more reasons than just money, otherwise everyone who went to college would go into petroleum engineering. But many actually study comparative world religions and queer theory and east Asian history and other economically valueless subjects. Why? Because the money they could make if they became oil rig inspectors doesn't matter to them. There's a huge opportunity out there that most don't make use of because they're not in fact cold, profit-maximizing rational actors but rather emotionally-driven dreamers or traditionalists who do what their tribe tells them works best.

Ha! And thats the reason markets are not efficient! Because humans with emotions are involved and that will never change. 

It's a little arrogant of us to decide who's using their emotions correctly, though, is it not?

Who in here was piling into i-bonds when they were offering 3% real yields guaranteed for decades?  We would have told the old lady doing that for her grandkids that she was crazy, and playing it too safe.

Who's laughing now?

When judging things for the likelihood of potential future outcomes, this can all get a bit tricky, and considering how close our banking system was to collapse, I don't think we can blame a lot of people for getting out of the market in 2008.  Fundamentally, they probably should have at that point.  They hadn't saved enough and were dropping below a threshhold of minimum acceptable performance.

[LC475]

I estimate  that even during the great depression in the US 1930-1940 where interest rates also went down from 4% to 2% a portfolio with global stocks and gold would have been sufficient. Global stocks taking a hit, gold going up. 

But we must always ask: why?  There is no reason for gold to go up during a deflationary depression, is there?  Can you explain to me why gold absolutely must go up in value in every deflationary depression?  I do not think there is any such reason.

I can explain to you why gold absolutely must go up in times of high and accelerating inflation.  I can explain why bonds must go up in times of deflation or decelerating inflation.  But there is no causal link between gold and depressions, between gold and "bad times".  What if during the bad times, people do not want to buy as much gold?  Why would they?  Is there something about gold that says during bad times people absolutely must increase their demand for it?  I do not think so.

Furthermore, the reason for gold going up during the 1930s in the US is very, very clear and straightforward.  We do not need to speculate about it.  The Federal Government changed the set price of gold.  That's it.  It was not the depression that made the price go up.