Real ASSETS

[frugal]

Hello everyone!

I've been studying these lazy strategies but I found that we are too much exposed to the Financial MARKET.

This means that one day if anything bad happens to the financial World we will be in bad situation.

What REAL assets can we invest?

Real stuff, land, timber, silver, gas, etc

Please give me IDEAS

[Kriegsspiel]

IF, in this hypothetical world, the financial strategies I think you're talking about (holding government bonds, fiat currencies, etc etc the whole doomsday platter) "goes to hell" or whatever, the only INVESTMENT that would make sense, to me, is something that functions as currency.  So that's silver and gold, just like all the doomsday apocolypse people have figured. 

Like, you are talking about an investment that lets you buy stuff that you don't have or make yourself, or whatever, correct?  If you invested in gas, or timber, what do YOU know about those things?  Are you planning on selling them, and if so, what would you be paid in?  In this doomsday world, that would be other real stuff, so that you, in turn, can buy whatever you were wanting... why go through all that hassle when you could just own the "currency" that people will predictably use?

[Pointedstick]

Exposing yourself to real assets like land, timber, and fossil fuels only opens you up to another set of risks: natural disasters, resource depletion, poor stewardship of the underlying asset, and even price manipulations originating in the financial markets anyway.

I think the solution is diversification, and that's why 25% of the PP is in fact invested in a very important real asset: gold.  And unlike other real assets, you can take it with you!

If you want to get into real estate, I think it's best to own it directly as a landlord.

[melveyr]

Education is a real asset that you can keep between your ears. It is the most portable and it is much for difficult for it to get "taken" from you. For most people, it is the highest returning investment they make in their lifetimes. So my answer would be to read a lot of books that interest you, specifically books that help you navigate society.

[Pointedstick]

I've been studying these lazy strategies but I found that we are too much exposed to the Financial MARKET.

This means that one day if anything bad happens to the financial World we will be in bad situation.

Perhaps you could expand a little on what this means to you, because it's one of the situations that the PP is meant to protect you against. In fact, we just had a near-meltdown of the financial markets in 2008 and the PP performed splendidly. Are you worrying about even worse ones? And if so, what makes you think that the PP would fail to protect you against them? Are you worrying about a Euro breakup or something?

[frugal]

IF, in this hypothetical world, the financial strategies I think you're talking about (holding government bonds, fiat currencies, etc etc the whole doomsday platter) "goes to hell" or whatever, the only INVESTMENT that would make sense, to me, is something that functions as currency.  So that's silver and gold, just like all the doomsday apocolypse people have figured. 

Like, you are talking about an investment that lets you buy stuff that you don't have or make yourself, or whatever, correct?  If you invested in gas, or timber, what do YOU know about those things?  Are you planning on selling them, and if so, what would you be paid in?  In this doomsday world, that would be other real stuff, so that you, in turn, can buy whatever you were wanting... why go through all that hassle when you could just own the "currency" that people will predictably use?

Hi,
I understand but here in europe and portugal i have doubts. Where would you buy real gold and silver?

Education is a real asset that you can keep between your ears. It is the most portable and it is much for difficult for it to get "taken" from you. For most people, it is the highest returning investment they make in their lifetimes. So my answer would be to read a lot of books that interest you, specifically books that help you navigate society.

Hi, this i didnt understand. Its difficult to spend savings only in books

I've been studying these lazy strategies but I found that we are too much exposed to the Financial MARKET.

This means that one day if anything bad happens to the financial World we will be in bad situation.

Perhaps you could expand a little on what this means to you, because it's one of the situations that the PP is meant to protect you against. In fact, we just had a near-meltdown of the financial markets in 2008 and the PP performed splendidly. Are you worrying about even worse ones? And if so, what makes you think that the PP would fail to protect you against them? Are you worrying about a Euro breakup or something?

Yes maybe about euro problems or portugal going out of euro or putting almost all savings in foreign countries + ETFs and after be screwed by political decisions.
I want to put money safe and beat inflation at least.
Here i can get CD at 4%, can i consider the 25% CASH here in portugal?

My best regards to all you.

Tks

[k9]

IF, in this hypothetical world, the financial strategies I think you're talking about (holding government bonds, fiat currencies, etc etc the whole doomsday platter) "goes to hell" or whatever, the only INVESTMENT that would make sense, to me, is something that functions as currency.  So that's silver and gold, just like all the doomsday apocolypse people have figured. 

Like, you are talking about an investment that lets you buy stuff that you don't have or make yourself, or whatever, correct?  If you invested in gas, or timber, what do YOU know about those things?  Are you planning on selling them, and if so, what would you be paid in?  In this doomsday world, that would be other real stuff, so that you, in turn, can buy whatever you were wanting... why go through all that hassle when you could just own the "currency" that people will predictably use?

Hi,
I understand but here in europe and portugal i have doubts. Where would you buy real gold and silver?

I don't understand this part. How harder is it to buy gold in Europe as opposed to USA ? If you're wondering about how to use gold in a bad economic situation, just look at Argentina or Zimbabwe. Either you directly pay with your gold / silver (Zimbabwe), so you "buy" it with other valuable goods, or you exchange it with a local, official currency at an unofficial change office before you buy actual stuff (Argentina).

As for owning gold rather than real estate, timber, land, cows, etc : I don't agree. Sure, gold can be used to buy stuff, but it does not produce stuff to "buy" gold. Once your gold stash is empty, it's over. Chicagobear, from the bogleheads, has a nice formula about that : he talks about make-money assets and have-money assets, the former (stocks, bonds, real estate, forests) producing the latter (cash or gold), the latter making it possible to buy the former. If you only have have-money assets, your stash will be, sooner or later, depleted.

Having only gold is the finance-free equivalent of having only (low yielding) cash : why own businesses (stocks) when you can just use money to buy the goods they produce ?

A finance-free portfolio might look like the Talmud one :
- gold aka "reserve", a cash equivalent,
- productive assets (land, cows, forest, etc.) you rent someone else for him to exploit, aka "land", mostly a corporate bond equivalent,
- productive assets you exploit yourself as a farmer, forester or craftsman, or rent someone as sharecropping, aka "businesses", mostly a stock equivalent.

Debt-free, physical housing (for you or a renter) falls into the second category, of course.

[LifestyleFreedom]

Barton Biggs wrote a book called Wealth, War, and Wisdom (http://seekingalpha.com/article/183977- ... rton-biggs).  Biggs was a Wall Street big shot and an amateur armchair historian who studied World War II.  His book is not without controversy.

Bigg's recommendation is to own a small farm in the country and a global equities index fund as the way to preserve wealth.  But again, his book is not without controversy.

[frugal]

IF, in this hypothetical world, the financial strategies I think you're talking about (holding government bonds, fiat currencies, etc etc the whole doomsday platter) "goes to hell" or whatever, the only INVESTMENT that would make sense, to me, is something that functions as currency.  So that's silver and gold, just like all the doomsday apocolypse people have figured. 

Like, you are talking about an investment that lets you buy stuff that you don't have or make yourself, or whatever, correct?  If you invested in gas, or timber, what do YOU know about those things?  Are you planning on selling them, and if so, what would you be paid in?  In this doomsday world, that would be other real stuff, so that you, in turn, can buy whatever you were wanting... why go through all that hassle when you could just own the "currency" that people will predictably use?

Hi,
I understand but here in europe and portugal i have doubts. Where would you buy real gold and silver?

I don't understand this part. How harder is it to buy gold in Europe as opposed to USA ? If you're wondering about how to use gold in a bad economic situation, just look at Argentina or Zimbabwe. Either you directly pay with your gold / silver (Zimbabwe), so you "buy" it with other valuable goods, or you exchange it with a local, official currency at an unofficial change office before you buy actual stuff (Argentina).

As for owning gold rather than real estate, timber, land, cows, etc : I don't agree. Sure, gold can be used to buy stuff, but it does not produce stuff to "buy" gold. Once your gold stash is empty, it's over. Chicagobear, from the bogleheads, has a nice formula about that : he talks about make-money assets and have-money assets, the former (stocks, bonds, real estate, forests) producing the latter (cash or gold), the latter making it possible to buy the former. If you only have have-money assets, your stash will be, sooner or later, depleted.

Having only gold is the finance-free equivalent of having only (low yielding) cash : why own businesses (stocks) when you can just use money to buy the goods they produce ?

A finance-free portfolio might look like the Talmud one :
- gold aka "reserve", a cash equivalent,
- productive assets (land, cows, forest, etc.) you rent someone else for him to exploit, aka "land", mostly a corporate bond equivalent,
- productive assets you exploit yourself as a farmer, forester or craftsman, or rent someone as sharecropping, aka "businesses", mostly a stock equivalent.

Debt-free, physical housing (for you or a renter) falls into the second category, of course.

"Let every man divide his money into three parts, and invest a third in land, a third in business and a third let him keep by him in reserve." So it is written in the Talmud, a record of debates among rabbis about Jewish law dating back as early as 200 B.C. And so it is written on Page 1 of Asset Allocation: Balancing Financial Risk by Roger Gibson, first published in 1989.

We quoted the above from a recent Financial Planning Magazine article The Tamud Strategy. Roger Gibson quoted this saying on the first page of his classic asset allocation book and further illustrated how effective this strategy and its fine-tuned version has worked.

This strategy divides a portfolio into 3 parts: Equity (stocks -- business), Real Estate Invetment Trusts (REITs -- land) and Fixed Income (bonds & cash -- reserve). We formed an ETF version of this strategy in the plan Talmud Strategy 3 Core Asset ETF.

QUESTION:
Here i can get CD at 4%, can i consider the 25% CASH here in portugal?


Regards

[k9]

The problem in the text you quoted is that you now converted it back to a purely financial portfolio (stocks + REITs + bonds)

As for 4% CDs : the problem is that CDs are not the safest asset ; they are a (relatively low) risk bond between you and the bank. In a tight-money recession, if the bank fails, you loose your cash when it is most wanted. That is the reason why it yields 4% : if the bank was as safe as the German government, why couldn't it borrow money at the same, near-zero rates ? Those CDs are speculative assets, they don't have a place in the PP I think (but rather in the VP). They have liquidity issues, too, but that's another problem.

If you want to use CDs rather than low-yielding cash, keep in mind that you are taking some risks for a potential bigger reward. That's up to you.

[frugal]

The problem in the text you quoted is that you now converted it back to a purely financial portfolio (stocks + REITs + bonds)

As for 4% CDs : the problem is that CDs are not the safest asset ; they are a (relatively low) risk bond between you and the bank. In a tight-money recession, if the bank fails, you loose your cash when it is most wanted. That is the reason why it yields 4% : if the bank was as safe as the German government, why couldn't it borrow money at the same, near-zero rates ? Those CDs are speculative assets, they don't have a place in the PP I think (but rather in the VP). They have liquidity issues, too, but that's another problem.

If you want to use CDs rather than low-yielding cash, keep in mind that you are taking some risks for a potential bigger reward. That's up to you.

K9,

you studied well the HB PP subject.

In a tight-money recession the GERMAN yields will go up? To about which %? Where can I find a CHART with this CASH PERFORMANCE?

Once more THANK YOU for your kindness.

[k9]

Cash is not often useful, but it can be in two different scenarios.

Scenario 1

Suppose the LT bonds yield something like 3% with 2% inflation, i.e. 1% real. Suppose stocks yield a 5% dividend, i.e. 3% real, gold goes up 4% up per year, i.e. 2% real, and ST bonds provide 1%, i.e. -1% real. Hmm, cash doesn't look attractive at all.

Now suppose interest rates go suddenly up : LT bonds provide 10% and ST bonds 5%. Who's going to own gold ? A lot of people will sell most of there yield-free gold to buy these nice juicy bonds (either LT or ST). Who wants to take risks with a 5% dividend on stocks while riskless cash gives you the same yield ? I want at least 12% on my stocks now, and since actual dividends won't change, the stock price has to go down : a stock with a dividend of 2,5 € that was sold 50 will now sell for 21 €. The same for LT bonds : who wants your 3% bonds while the new ones yield 10% ? I'm okay to buy them back, but I'l pay them 30 € instead of the 100 € you bought them, so as to get that 10% yield.

Everything went down. Well, not cash actually, since cash is, well, cash, so its yield is close to 0 in any case. Well, you're a lucky owner of cash, so YOU can buy these amazing LT bonds and these generous stocks and this cheap gold. Lucky you. Some didn't have cash as it is a loser's asset.

That's a real scenario, it happened in 1981.

Scenario 2

Imagine a debt crisis. Debt levels are very high, either from governments, companies or even people, and the economy is slow. Earnings are not as high as expected, it's getting hard to pay back debts. The central bank does not want to print tons of money to pay back with cheap money, leading to hyperinflation, it wants people to pay back their debts at any cost.

Now money is getting scarce. You don't earn as much as you thought, because your employer fired you and you can't find another job, or your salary decreased, or the items you're selling as a company owner are hard to sell. But you have to pay back your debts. The only solution is to sell your assets so as to get cash, since cash is king. So everybody is selling their stocks and gold, and even their LT bonds, despite the guaranteed income (you need a lot of cash NOW, not it 10 or 30 years when you'll get back your principal).

So the winner is once again the cash owner. But wait ! If you have cash in a high yielding account in a not-that-safe bank, well... That bank may default and disappear with your cash when you need it so much !

It didn't happen yet (at least since 1972, the fiat-money era), but it doesn't look like Sci-Fi in Europe currently, does it ? In this scenario, that 4% CD does not look so gorgeous, does it ?

[frugal]

k9,

fantastic explanations!

a) Well, Portugal ever had higher yields than richer countries, we are used to it. Now we are being helped by IMF and BCE.
    In this case the cash should be where? ALL in a foreign country, is it safe?

b) You all PP lovers, make 80-90% allocation in US-PP of your total savings.
I think I will have to diversify more.
Like:
35% EUR-PP
15% US-PP
35% CD's maybe in Portugal
15% VP

Can I have your comments pleeeeeaaaase.

Thank you again.

[smurff]

Frugal, are you able to buy gold coins (Austrian Philharmonic, American Eagle, Canadian Maple Leaf, etc.) at Portuguese banks?

[k9]

If I lived in Portugal, based on my current knowledge of Portugal, here's what I would do :

First, 75% in something close to the PP, that is :
- 33% gold, of course, in gold coins adapted to the local market : 20 francs, sovereigns, maybe krugerrands, and that's all, I guess.
- 33% international stocks, with an MSCI ACWI (all country world index).
- 33% LT german bonds (maybe diversify with another safe euro country, say Finland, but I'm not even sure).

Then, the 25% remaining in a VP consisting in high-yielding CDs.

And, of course, the equivalent of at least 3 months of leaving expenses in pure, easy to access cash in a bank account where you can access it in less than 48 hours, since your overall portfolio dosen't provide you with this yet.

That would give us, in the global portfolio :
- 25% gold,
- 25% stocks,
- 25% LT euro bonds from the German government,
- 25% cash in CDs.

Well, that's close to your original idea, and close to the "official" PP, provided you don't take money from the PP to recover losses or lack of performance from the VP, as advised by HB : if your cash in CDs is the winning asset (PP provided less than 4%), you can invest some of that cash in the other assets. But if the PP generated more than 4%, you are not supposed to take money out of it and inject it in the CDs.

[frugal]

Frugal, are you able to buy gold coins (Austrian Philharmonic, American Eagle, Canadian Maple Leaf, etc.) at Portuguese banks?

Hi,
I'll check what they sell. What do you recommend?
I'm not very happy to buy over internet and pay before seeing the gold.

If I lived in Portugal, based on my current knowledge of Portugal, here's what I would do :

First, 75% in something close to the PP, that is :
- 33% gold, of course, in gold coins adapted to the local market : 20 francs, sovereigns, maybe krugerrands, and that's all, I guess.
- 33% international stocks, with an MSCI ACWI (all country world index).
- 33% LT german bonds (maybe diversify with another safe euro country, say Finland, but I'm not even sure).

Then, the 25% remaining in a VP consisting in high-yielding CDs.

And, of course, the equivalent of at least 3 months of leaving expenses in pure, easy to access cash in a bank account where you can access it in less than 48 hours, since your overall portfolio dosen't provide you with this yet.

That would give us, in the global portfolio :
- 25% gold,
- 25% stocks,
- 25% LT euro bonds from the German government,
- 25% cash in CDs.

Well, that's close to your original idea, and close to the "official" PP, provided you don't take money from the PP to recover losses or lack of performance from the VP, as advised by HB : if your cash in CDs is the winning asset (PP provided less than 4%), you can invest some of that cash in the other assets. But if the PP generated more than 4%, you are not supposed to take money out of it and inject it in the CDs.

Big k9,
you removed the US-PP and the VP where I would consider other type of assets like reits, silver, emerging markets ...
Can you explain me why not diversify more?
Thanks for your help.

[k9]

As for US PP : if you hold a global, worldwide stock index, you will hold US stocks ; more precisely, you will hold a percentage of US stocks that will be on par with US' weight on the worldwide economy. No guessing involved about how much US stocks you shuld include. I think it's the best move to do, at least for a non-US investor (US investors seem not to like that much "international" stocks, I'm not sure I know why). A good index is MSCI world index (developed countries) or MSCI ACWI (all country world index, developed + emerging countries ; once again, the importance of emerging markets depends on their overall weight in the economy, I think they can be included in the PP). Thus, the stock portion of a US or a EU PP would be the same.

Gold is gold, it is geography-neutral, so once again the EU & US PP are the same on this asset.

The only difference would be with bonds (both ST and LT). For US (or other foreign money) bonds, you have to be careful as that money will not necessarily behave like yours (euros). If there's a deflation in Europe and US choses the inflation path (that's far from unlikely ; Bernanke at the Fed hates deflation, Germany hates inflation), the euro will be worth more dollars and the dollar will be worth less euros. Thus you will be in a situation where your bonds will be worth less & less in euros : they would not help you during the deflation or recession, while its the reason why they are included in the PP ! You can include US bonds if you like, of course, but I think they belong to the VP rather than the PP.

As for the VP, well, I only put CDs in my proposal as a simplification (and to emphase the fact I think they don't really have their place in the PP) but of course other assets could go there : silver, REITS, other commodities, stock picking, US bonds, etc. It's hard to give you advice on this part, I think it is very personal and depends on your feelings, your competence, your favorite pet assets, the risk you're ready to stomach, etc.

[frugal]

Just another fantastic answer.

k9 to president!

[k9]

Before voting me for president, wait to read what others have to say. I might be wrong on some points

[Thomas Hoog]

almost agree with K9

You can make the cash asset out of:
Eonia: Euro OverNight Index Average (Marc de Messel) uses this one
or
iShares Barclays Euro Treasury Bond 0-1
performs almost close to zero, but riskfree as intented