Commodities/Gold needed for true diversification

masonic

tranquility1 said:

Alexland said:

tranquility1 said:

We are a due a flat decade soon then...

US valuations seem perfectly setup for another lost decade as they were in the late 90s. So you either accept that a large proportion of your portfolio will likely generate a lower return, look elsewhere or a mix of both.

What is elsewhere? 

There are plenty of companies even within the US trading at lower valuations than the S&P500. Expand your view globally and there are no shortage of options. It is always best not to tie all of your fortunes to any single index.

NedS

It's easy to make money in a vibrant bull market and index trackers have done particularly well as pretty much everything went up. If we have a flat decade, then active funds with good stock pickers/managers may again be the way to go to outperform an otherwise flat market. Or income could outperform growth if there is no growth.

Albermarle

By all means underweight US shares a bit (but still hold some of them), if you worry they may be overvalued. I've been doing that since 2014, and it's been reducing my returns all that time! One day, it will be the other way around

Join the club. I cut back my US exposure three years ago, but luckily not too drastically .

Alexland

Deleted_User said:
Phrases like "seem perfectly setup" are rather treacherous. They hint that we have a pretty good idea what might happen, without saying it too directly. In reality, we have no idea at all!

Over the medium to long term fundamental valuation methods have been a reasonably good indicator of future returns so I don't accept your defeatist position. The higher prices seen in the US in recent years have been pulling forward on expectations of future earnings growth and you can't eat the same cake twice.

JohnWinder

Linton said:

Is anything available today a guaranteed hedge against inflation?

Yes, I think index linked government bonds are. Both the coupons and the principal move with inflation.

tranquility1

Deleted_User said:

Alexland said:

Deleted_User said:
Phrases like "seem perfectly setup" are rather treacherous. They hint that we have a pretty good idea what might happen, without saying it too directly. In reality, we have no idea at all!

Over the medium to long term fundamental valuation methods have been a reasonably good indicator of future returns so I don't accept your defeatist position. The higher prices seen in the US in recent years have been pulling forward on expectations of future earnings growth and you can't eat the same cake twice.

Well, I would agree that higher valuations in the US might reasonably lead us to adjust our expectations of future returns downwards. But the range of plausible outcomes for returns over the next decade is always so large that that doesn't tell us very much at all. Much more positive outcomes can't be ruled out. I thought the way you put it might give the impression that we know more about future returns than we really do. Perhaps I went on to overstate how little we know in reaction

Shifting some of our holdings in US shares to shares in other countries may or may not help, when global stock markets are increasingly correlated. Though I have no objection to trying it, and as I said I do it myself.

Shifting away from shares to other asset classes seems like a much less good idea, because returns may well be even lower there. (Unless you hardly need any real returns at all.)

I don't think the shift of some of your money to gold/commodities is about return.  It's a hedge against a massive crash that will send stocks down and gold/commodities up.


Gold/commodities are for a doomsday scenario.  

tranquility1

Deleted_User said:

tranquility1 said:

I don't think the shift of some of your money to gold/commodities is about return.  It's a hedge against a massive crash that will send stocks down and gold/commodities up.


Gold/commodities are for a doomsday scenario.  

Doomsday scenario, or shares crashing? Shares crashing is normal; you should expect it every so often. In a doomsday scenario, all your investments might be worthless.

Depending on the nature of the crash, gold/commodities may or may not rise when shares crash. But probably the commodity most likely to rise in a crash in gold. Because it is not primarily priced based on its uses in industry. Most commodities are priced based on their industrial use, and if the equities crash is linked to an economic downturn, then demand for them may be down.

Long-term, high-quality bonds (i.e., for a UK investor, long-term gilts) also have a strong tendency to rise when shares crash.

Perhaps you'd be interested in something like the "Permanent Portfolio", which consists of (in a UK version):

25% global equities

25% long-term gilts

25% cash

25% gold

This portfolio has a decent long-term record. What would make me very uncomfortable about it is the incredibly high percentage of gold. There is no point in holding it unless you would be prepared to stick with it for decades, always rebalancing back to the target weights once a year (or on some other set schedule). Remember that that could involve buying more every year of a asset that has been underperforming, and losing real value, for a decade or more (as e.g. gold did between c. 1980-2000, losing c. 75% of its real value).

I've read that gold has a strong inverse correlation with "real interest rates", which I am assuming is the BoE base rate?

Ie, when the base rate is low, gold price goes up. And when rates are high the price of gold goes down (presumably because people would rather pay off their debts than have money sitting in a non-income asset like gold. 

What are your thoughts on the choice between real gold in your safe as oppose to a gold ETC such as the iShares physical gold ETC?

With actual gold, you do lose money at the purchase and sale ends, which isn't the case with an ETC. But I guess is banks/the financial system collapses then you may not be able to sell/liquidate your gold ETC...?

masonic

tranquility1 said:

Deleted_User said:

tranquility1 said:

I don't think the shift of some of your money to gold/commodities is about return.  It's a hedge against a massive crash that will send stocks down and gold/commodities up.


Gold/commodities are for a doomsday scenario.  

Doomsday scenario, or shares crashing? Shares crashing is normal; you should expect it every so often. In a doomsday scenario, all your investments might be worthless.

Depending on the nature of the crash, gold/commodities may or may not rise when shares crash. But probably the commodity most likely to rise in a crash in gold. Because it is not primarily priced based on its uses in industry. Most commodities are priced based on their industrial use, and if the equities crash is linked to an economic downturn, then demand for them may be down.

Long-term, high-quality bonds (i.e., for a UK investor, long-term gilts) also have a strong tendency to rise when shares crash.

Perhaps you'd be interested in something like the "Permanent Portfolio", which consists of (in a UK version):

25% global equities

25% long-term gilts

25% cash

25% gold

This portfolio has a decent long-term record. What would make me very uncomfortable about it is the incredibly high percentage of gold. There is no point in holding it unless you would be prepared to stick with it for decades, always rebalancing back to the target weights once a year (or on some other set schedule). Remember that that could involve buying more every year of a asset that has been underperforming, and losing real value, for a decade or more (as e.g. gold did between c. 1980-2000, losing c. 75% of its real value).

I've read that gold has a strong inverse correlation with "real interest rates", which I am assuming is the BoE base rate?

Ie, when the base rate is low, gold price goes up. And when rates are high the price of gold goes down (presumably because people would rather pay off their debts than have money sitting in a non-income asset like gold.

A basic sanity check would show the statement about the strong inverse correlation to be wrong. The past 10 years have been relatively static for interest rates and inflation (both very low), and yet there have been periods where the gold price has risen significantly, fallen significantly, and everything in between. It has a weak correlation with inflation, if held for very long periods of time (centuries), and a weak inverse correlation with other asset classes such as equities, but something like the base rate (in some unspecified country) is going to tell you nothing about what the gold price will do in the short term.

Linton

JohnWinder said:

Linton said:

Is anything available today a guaranteed hedge against inflation?

Yes, I think index linked government bonds are. Both the coupons and the principal move with inflation.

As discussed several times before, at current prices governemnt inflation linkeed bonds are guaranteed to underperform inflation. And to get any guarantee at all you need to hold them to maturity.   But if you want a solid guarantee they are the best option available to hedge against high levels of inflation.