Different way of defining PP

[Hal]

After watching a few videos of belangp on youtube, I was interested if this interpretation of the PP is correct:

1. The cash, bonds and share components are all investments. That is, funds are lent, and a return in addition to the capital is expected. (Dividends, interest)

2. The gold component is actually just savings, no additional return occurs. Eg: You buy 1 coin, come back in ten years and you still have one coin.

So if this view is correct, then the PP consists of 25% savings and 75% investments. Which then leads to......

Should the savings component be increased as age increases? That is, if you are 90 years old, would you really need 75% of your portfolio in investments generating additional income?

Any and all thoughts welcome!

[Ad Orientem]

While it is true that there is no expected return on gold, its value fluctuates wildly.  So I'm not sure how useful it is to view gold as "savings" when what you can actually purchase with the gold can change drastically over time.

The main appeal of the PP is that it consistently, and with low volatility, provides returns that are 3-5% above the rate of inflation.  If the asset allocation is changed from 4X25 to something that is gold-heavy, this will no longer be the case.

I agree. Cash is pretty much your zero (or damn close) return asset. Gold's volatility makes it an investment.

[Stunt]

If you consider stocks, bonds and cash all investments, then most retirees have 100% of their portfolio in investments. I think a gold component at 25% is hugely unique, inceeasing it would be overkill - you are already further ahead than the vast majority.

[Hal]

Thanks for the input.

I must admit this is a purely conceptual exercise as I am happy with the PP.

However in the interest of learning more about economics......

Using the following definitions:

Risk: The probability of not getting your capital returned (as mentioned in the Black Swan book)

Volatility: The variation in value.

Savings: No return on capital. Eg Dollar note in sock drawer (?), gold coin

Investment: Funds placed for a return on capital. Eg Deposit in interest bearing account in bank.

So here we go:

1. I would imagine that if you get a return on your investment (cash, bonds, shares), there must be some risk.

2. The older you are, the more difficult in would be to recover from a serious loss of capital.

3. Hence, the older you are, the less risk you would wish to take. Hence the ratio between savings to investments would increase.

So for a practical example, albeit extreme one, lets think of an Icelandic PP.

The financial system fails, and the value of the investments plummet. ie You cannot get your capital back.

The 90 year old pensioner opens the sock drawer and pulls out a bag of gold coins and is happy.

The 18 year old looks at their investments and has a massive loss. However as they have another 70 years in front of them, they can recover.
Also at 18, a near 100% loss of very small portfolio is not a great disaster.

Am I missing something in this thought exercise?

Also from the Talebs writings: Risk is not the same as Volatility

Any further thoughts?

[MachineGhost]

You may find this useful:

http://gyroscopicinvesting.com/forum/pe ... hedged-pp/
http://gyroscopicinvesting.com/forum/pe ... %27s-risk/