PP-like alternative portfolio for conservative retiree

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seajay
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Re: PP-like alternative portfolio for conservative retiree

Post by seajay » Fri Nov 19, 2021 3:57 am

D1984 wrote:
Fri Nov 19, 2021 1:14 am
2. Gold returns during the early years (1972 to 1974) were possibly artificially inflated due to gold coming off the decades long fixed price of $35 an ounce (i.e. some of the returns that likely would've happened from the early or mid-1960s onward all instead got shoved into 1971-1974 since from 1960 to early 1968 gold was artificially kept fixed at $35 per ounce). Solution? Backtest this using the "nerfed gold from 1970 to 1974" series I mentioned elsewhere on this board; I did annual backtesting on this SCV/gold/10-year Treasuries combo using that series and the returns were still pretty good for 1972 to 1974.
Alternatively assume silver was held from 1933 onward given that investment gold was outlawed. The US geological survey site has silver value data from 1900. Pre 1933 however I assume investors would have held treasury bills/notes/bonds instead, as money was pegged to gold - made more sense to hold treasury bills that paid interest as that was like the state paying you for it to securely store your gold, convertible at any time. On that basis I assume investors might have held 50/50 stock/T-bills pre 1933. In my non-US case gold was still legally available to be held from the 1930's so I use gold in my backtests for those years, but when I compare that to holding silver instead and the characteristics/outcomes were broadly similar/same. Gold somewhat plateau/stepped up whilst silver was more consistently price volatile. That plateau/step type gold value progression even continued into the post 1970's years, 1980 to 1999 for instance saw the price of gold decline in nominal terms to then catch up with inflation again in 2011. Such down-slope enabled more ounces of gold to be accumulated at progressively deeper discounts, a conventional PP for instance accumulated around 11 times more ounces of gold across 1980 to 1999.

A primary risk with gold is that of interest. Generally we see interest and prices decline, interspaced with periods when interest is rekindled and its price is restored to pacing inflation typically at times of distress/decline in the fiat system or other geopolitical risks. Those with surplus capital look to preserve the purchase power of their capital and may buy the likes of art/paintings, silver/gold ...etc., scarce/finite assets that are broadly more inclined to at least pace inflation albeit in a sporadic manner. Others who require capital sell some of those scarce assets to others who have additional surplus capital and where physical/portable in-hand assets are part of the buyers consideration. Alternative currencies, similar to how cigarettes can be legal tender within prisons.
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Re: PP-like alternative portfolio for conservative retiree

Post by seajay » Fri Nov 19, 2021 4:37 am

Different assets that each broadly pace inflation but in a volatile manner and its better to hold such assets in equal measure and rebalance than it is to hold a single asset alone. Stocks price only, bonds, gold have such qualities. Stocks additionally pay dividends, are more like a worked farm, whereas bonds and gold are more like just a land purchase alone (left idle). The cost-averaging/trading of the volatilities however can yield rewards comparable to dividends especially when there are inverse correlations between the assets.

If one asset drops 33%, later rises 50% to compound to 0% overall, and another rises 50% but then drops 33% to also compound to 0%, then 50/50 of both rebalanced captures the simple average (0.667+1.5) / 2 = 8.35%, a benefit that the buyer of just one or the other alone foregoes.

There is the argument that even just stock/gold 50/50 alone can be productive enough. Both tend to have multi-year inverse correlations. Whilst gold pays no dividends if the volatility trading benefits are attributed to gold then that might compare to all-stock rewards, which for 1972 to recent has been the case. If dividends or volatility capture benefits were consistently dissimilar then investors would concentrate into the consistently better choice, Traded Options traders who focus on volatility capture and stock investor who focus upon dividends would converge into the consistently better of the two. That isn't the case so broadly we can assume that dividends are comparable to trading volatility capture benefits.

A factor however is that both stocks and gold do at times correlate and when to the downside you need some cash to carry you through (or otherwise have to sell-low to release some capital). Less of a issue for relatively low % yearly withdrawals, but more of a issue if perhaps a severe storm had seen asset values dive along with you also needing to make a large expenditure such as paying for a new roof. Buffett suggests setting 10% aside for such situations and investing the rest 100% into stocks in order to maximize the potential legacy/wealth. A factor there however is that many buy high, sell low and end up worse off than if they'd simply deposited their money into cash accounts. Despite many opining they wouldn't fall for such buy-high/sell-low actual outcome, time and time again people do get caught out in practice, buying when greedy, selling/capitulating when fearful. A more equally balanced portfolio leaves you nowhere else to go other than into a unbalanced alternative, and as such is more inclined to not see the big hit that bad behavior can induce.
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