Gold is sinking. Don't look!

[Tyler]

Discussing the PP with others lately, I've come to appreciate just how much psychology affects investing satisfaction.  No matter what facts you can present to support the PP performance, if an individual has any inclination whatsoever that they have the ability or inside info to predict market bahavior, they will drive themselves crazy thinking they can do better than the market-agnostic PP (even while it's doing well). 

Of course, that's exactly the message that the entire professional investing world is built upon - "it's possible to beat the market" - and people get drunk on the fantasy of perpetual world-beating returns. So much so that even if their own home-grown actively managed portfolio underperforms in the long-run (which most do), simply the possibility that "the big score is within my ability to attain" will still make them happier investors.

In contrast, an investor that rationally accepts the future is unpredictable can find peace even while their investments underperform. That's a rare mindset, however, that rejects most maintream for-profit advice. Like sobriety, too many only come to that way of thinking after hitting a personal rock bottom.

[Pointedstick]

I am extremely loss averse, but do want to achieve a positive real return with the "money I cannot afford to lose."

It seems like you want a guarantee that the PP will always achieve at least a >0% real return. I'd like that too. Unfortunately, it's just not possible. Even though the PP nearly always achieves that goal, it will have down years every once in a while. This may be one of them. But we don't really know that yet, and it's waaaaaay too early to panic. We're talking about half the portfolio losing about 7% over the past 3 months while a quarter of it has risen 14% and the remainder has been flat:



There's really nothing here that's all that terrible. The PP has been flat. You haven't actually experienced any losses, just failed to gain... which is exactly what a more conservative portfolio of CDs and medium-term treasuries would be doing.

[Tortoise]

I am extremely loss averse, but do want to achieve a positive real return with the "money I cannot afford to lose."

Correction: You want a positive real return every day. Harry Browne never said the PP could deliver that.

He did indeed say the PP was for "money you can't afford to lose," but he wasn't interpreting a daily dip as a loss. He was referring to losses that occur over an investor's time horizon, which for a PP should be at least a few years.

If you were in a stock-heavy or gold-bug portfolio and looked at it every 3 years, historically you would often see a loss. That's never happened with the PP, to my knowledge. That's the difference.

[annieB]

Alert!
Gold is on sale today....

[Tortoise]

Alert!
Gold is on sale today....

Thanks for the heads up! I took advantage and bought some SGOL on sale just now. It's nice to take advantage of good deals while they last

[Ariadne22]

I am extremely loss averse, but do want to achieve a positive real return with the "money I cannot afford to lose."

You will.  It is early days, yet, this year.  I track the PP from 6/1/2012 - which is when I first set mine up with about 15% of my available assets - just to test the waters.  Turns out 6/1 was pretty much the bottom of the stock market.  Never have had a red day in the portfolio, since.    I'm using 33/33/33 -  since I have GNMAs (minimally volatile) and 5% CDs outside of the portfolio coming due in fall of this year.  I don't have any cash earning 0%.  I just can't bring myself to leave a big chunk of change idle. 

The 3 assets alone have returned to date 4.6%, or 6.48% annually.  I am retired, but have no need of this money for 20 years or more.  So, I just watch it and wonder about rebalancing.  I set it up last year in one of the worst days of the market.  It has been green from day one. 

Yeah, gold had a big runup, far more than stocks.  Now it's fallen, but stocks are up nicely. 

This trader thinks when gold couldn't break 1700 in Jan, it was headed for a correction:

http://www.cnbc.com/id/100458259

I think gold may be a good buy, soon.  Wild guess.

[AdamA]

Thanks for the heads up! I took advantage and bought some SGOL on sale just now. It's nice to take advantage of good deals while they last

It's also a good time to buy PRPFX, if you're into that.

[MediumTex]

Thanks for the heads up! I took advantage and bought some SGOL on sale just now. It's nice to take advantage of good deals while they last

It's also a good time to buy PRPFX, if you're into that.

I wonder if PRPFX will ever get decisively past that $50 mark.

[AdamA]

It's also a good time to buy PRPFX, if you're into that.

I wonder if PRPFX will ever get decisively past that $50 mark.

Me too.  I suspect it will, but I can't figure why it's been sideways for such a long time.

A bit of silver and a few Swiss Francs shouldn't really cause this, and might even help sometimes.

I'm guessing it's just been held up for the past couple of years because there's of it's lack of true long term bonds...(???)

[dualstow]

With gold below $1600, I'm tempted to buy...and then I look and see that it's still 24% of my pp.
I'm not really into buying the lagging asset ever since Sophie did that test. It's got a long way to fall before I start buying coins again.

[MachineGhost]

With gold below $1600, I'm tempted to buy...and then I look and see that it's still 24% of my pp.
I'm not really into buying the lagging asset ever since Sophie did that test. It's got a long way to fall before I start buying coins again.

What did Sophie conclude about the best way to rebalance?  I forget.

[dualstow]

With gold below $1600, I'm tempted to buy...and then I look and see that it's still 24% of my pp.
I'm not really into buying the lagging asset ever since Sophie did that test. It's got a long way to fall before I start buying coins again.

What did Sophie conclude about the best way to rebalance?  I forget.

If I remember correctly, buying the lagging asset was nowhere near the top. In fact it was second to last or dead last, a surprise. What I don't remember is the details of the backtesting. Specific instruments bought, date range, etc. I'll edit it in if I find it.
Edit: See #12 and #18. http://gyroscopicinvesting.com/forum/ht ... ic.php?t=2
Of course, the devil is in the details and even Sophie remarks that it's not a *huge* difference, depending on how you look at it.

[dualstow]

Meanwhile, I'm enjoying Craig's post over at bogleheads.
http://www.bogleheads.org/forum/viewtop ... 0&t=111314

[MediumTex]

Meanwhile, I'm enjoying Craig's post over at bogleheads.
http://www.bogleheads.org/forum/viewtop ... 0&t=111314

That's a good discussion.

Craig is like a samurai facing down a mob of slow-thinking villagers.

[dualstow]

It annoys me that an intelligent person like nisiprius continues to bring up gold prices from before the decoupling with the dollar and employ them in his argument. I guess a case could be made that government intervention could again change the playing field, but come on!

[dragoncar]

It annoys me that an intelligent person like nisiprius continues to bring up gold prices from before the decoupling with the dollar and employ them in his argument. I guess a case could be made that government intervention could again change the playing field, but come on!

I was wondering when someone would point that out.  But the first reply was actually agreement.

[MachineGhost]

I believe that is a screenshot from Yojimbo, one of the many classics from Kurosawa.  It is well worth watching!  http://www.imdb.com/title/tt0055630/

[dualstow]

It annoys me that an intelligent person like nisiprius continues to bring up gold prices from before the decoupling with the dollar and employ them in his argument. I guess a case could be made that government intervention could again change the playing field, but come on!

I was wondering when someone would point that out.  But the first reply was actually agreement.

I suppose that one unspoken reality is that a rise in the price of gold is more likely to bring more flighty investors over to the pp strategy from bogleheads, and vice versa. If we could all maintain calm like Toshiro Mifune* maybe we'd never switch strategies. I was a happy Boglehead, and I certainly would not have even considered the pp if stocks had kept rising and gold had plummeted, so I will admit that I joined for all the wrong reasons.

However, and this is the important part, I'm not going to be that guy that jumps ship if gold goes down, even down to $450 an oz. I'll rebalance into it like I'm supposed to. And if I die of old age without seeing gold come back up, my heirs are going to love their uncle's foresight. Gold is weird. It's bound to disappoint us at some point and I knew that going in.

*Toshiro Mifune is the actor who plays the samurai above. I liked to say his Japanese name and my Chinese-speaking companion naturally read the characters in a Chinese way (the same way we pronounce P-A-R-I-S our way, English, and not the French way, even though it's written the same). Finally, we compromised and started both using the English "translation" of the characters: Three Ships Sensitive Man. So, that samurai will always be Three Ships Sensitive Man to me. ;-)

[rocketdog]

Don't think of it as "sinking"... think of it as "going on sale". 

Also, remember that the different parts of a portfolio are like planets, each with its own orbit.  At times those orbits will converge in seemingly strange ways where they appear to be aligning.  At other times they will diverge as if being repelled by one another.  In the end, the only thing you can be certain of is the certainty of change. 

Patience, grasshopper.

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[notsheigetz]

Well, if you're in a situation like mine and have been putting off the transition from ETF to physical gold because of the capital gains tax implications, this might be the "golden" opportunity to make the move.

[kapoios]

Some at that boglehead thread have worst understanding of survivorship bias than my skills at English grammar. Yes cash and bonds have better real returns from 1800 to 2012 if you didn’t invest in confederate bonds – notes, you didn’t live in Austria or Germany after ww1 or ww2 etc. etc. . As a Greek citizen I know a few things about risk of default and the real return on bonds. For first you have to invest money to get yield and second the issuer of the money must not default on them. Gold is money at hand and without an issuer so no real yield is expected because no risk of investing is taken by you to deserve it.

Another thing that one must note about gold is the statistical properties of its price. If an asset has no real return but enough volatility to have a net positive arithmetic return (what I mean by this is that 2*0.5 has zero growth but 0.25 positive arithmetic return when you rebalance) then it can have its position on a portfolio because it produces positive growth through rebalancing even if it doesn’t have growth by itself.

Anyway though I don’t follow as an investment strategy a permanent portfolio allocation, I find that a 10% or 20% allocation in gold is advantageous for any portfolio.

Best regards.

[Pointedstick]

Outstanding first post, kapoios. Welcome to the forum! I think many here (myself included) would be very interested in hearing your perspectives given the unfortunate situation your country finds itself in. Would you be comfortable sharing your investment portfolio?

[charliemckelvey]

Yes.  Fantastic first post kapoios.  I face planted on my first post.    But now I'm all better. 

[kapoios]

Thank you both.

As for my investing portfolio I have a more active approach and I don’t hold any bonds because I agree with Buffett’s view that at these levels they are priced to deliver “return-free risk”? instead of risk free return. So I am aprox. 20% gold, 20% stocks, 60% cash. I don’t know if the deleveraging on the balance sheets worldwide on one hand plus QEs and fiscal stimulus on the other hand will be inflationary or deflationary but I think there will be volatility like the 1970’s and opportunities to allocate more cash at stocks at lower prices.

Anyway, if someone was "brave" enough for holding a permanent portfolio only with Greek assets and rebalanced annually the returns would be (assuming I didn't make a mistake) something like

stocks bonds cash gold portf (starting value = 1)
2008 -65.51% 4.00% 5.00% 9.00% 0.88123
2009 22.96% 4.00% 5.00% 25.00% 1.006709
2010 -35.66% -50.00% 5.00% 37.00% 0.896838
2011 -51.88% -80.00% 5.00% 15.00% 0.646002
2012 33.38% 300.00% 5.00% 4.00% 1.198952

[buddtholomew]

That's remarkable volatility, both positive and negative in each of the individual assets. The max drawdown over the period was 35% and the investor recouped losses and had a 20% gain after bonds rose 300% in 2012. There are quite a few of Browne's philosophies bourne out in these returns - namely that an asset can have returns of 100,200 or even 300% to offset losses incurred in the other assets. The winners gain more than the decliners lose.

If you didn't rebalance into LTT at the end of 2011 to restore to 4x25, the PP value could have been significantly less. The question is whether one had the intestinal fortitude or means to rebalance into an asset that had already fallen 50 and 80% on consecutive calendar years.  Stocks were no bed of roses either. Cash steady at 5% throughout all this turmoil seems a little awkward.