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aaaah , it makes money because generally the worst hits an asset class takes is about 50% and most of the time never goes that low . but the upside on the other classes can double , etc , etc .
on top of which there is a cash position which acts as stock options but with no expiration date that is used to load up on whatever does take that hit .
so for 40 years the strategy has worked fine . so in the case of a recession as an example 98% of the time gold has a positive real return in the recession part of the cycle , the cash portion which acts as an option has a positive return , equities get hit hard and traditionally long term treasuries soar .
The one odd behavior of gold lately though is it does not seem to be as much a safe haven as it used to be it seems. That may change again but gold does not act in direct contrast to equities lately. By the way you are simply using portfolio diversification right? Thats all it really is. Protection against the bear. Decent returns on the bull. You will never hit a home run, but you will get a lot of singles and rarely strike out.
as long as the dollar is strong gold is a competitor to the dollar and gold will not be much of a safe haven .
gold moves opposite the dollar almost daily ....
it was interesting that the night of trumps surprise win , the typical safe haven , long term treasuries were not much of a safe haven that night when stocks were down 1000 points . it was gold that was up 50 bucks and the haven of choice .
the stratagy is a bit more than just regular diversification which is typically some index funds and a total bond fund .
in this case each asset used responds very powerfully to parts of the economic cycle and the dollar . except for the cash , each asset is as powerful as equities are when it is it's day to shine . you would need 3x the total bond fund to move equities equally up in a downturn . that would be silly . plus unlike treasuries a total bond fund may or may not be positive . my total bond fund was down a bit in 2008 .
so these asset classes are carefully chosen for their reliability during the different parts of the business cycle .
but remember you only bullet-proof what is near and dear to you that you want to protect . whatever amount you choose can be in whatever you like . i am sliding over to the 100% equity fidelity insight growth model for that portion so that portion is still swinging for the fences.
the stock allocation is the same 40-50% i always had when you look at everything , but the ability to make money and protect in the down part of the cycle is far greater .
this not something i came up with , this has been done for more than 40 years now as a strategy ,especially towards the later years in a bull run to protect those gains yet still make money or in times of extra uncertainty ..
Last edited by mathjak107; 07-26-2018 at 02:24 PM..
as long as the dollar is strong gold is a competitor to the dollar and gold will not be much of a safe haven .
gold moves opposite the dollar almost daily ....
it was interesting that the night of trumps surprise win , the typical safe haven , long term treasuries were not much of a safe haven that night when stocks were down 1000 points . it was gold that was up 50 bucks and the haven of choice .
cycle and the dollar . except for the cash each asset is as powerful as equities are when it is it's day to shine .
Ah..ok that makes sense. I always forget the dollar factor
I don’t see a crash anytime soon just because I think the 2007 recession and market drop is still on everyone’s minds and they are cautious and people are already trying to predict another big drop in the next 1-2 years. I am cautious waiting for a recession and big drop in the next 1-2 years and I am always wrong.
Typically there are business cycles that are well understood, characterized, and almost predictable. Lately the pattern seems to have been broken. For the Great Recession, we did not have a typical cycle. We did not go through a phase of overexpansion, inflation, irrational exuberance and then a collapse. Instead mortgage and lending practices touched off the recession. The recovery was also atypical. Many businesses went through the recession doing fairly well and with the recovery they continued to make decent profits. Instead of expansion and investment, businesses have been cautious and growth has been slow.
The big tax cuts were supposed to change the dynamic. Typically those cuts would have stimulated the economy, stimulated investment and moved us to a period of growth, inflation, overinvestment with an eventual end to the cycle with retraction and possible recession. Toward the end of last year I would have predicted a booming stock market at or well on its way to a DJIA of 30,000. What happened is clear: Trump's trade war and tariffs. What is not clear is how this is going to end. If he can claim victory and save face, he might try to reverse course. Even under the best of circumstances that might not be possible. Without some change in policy the future looks very bleak.
things can always defy logic so we never know which is why i am always invested . but i do change strategy from time time to time to avoid steep losses . lately i have been shifting more back towards the butterfly/ permanent portfolio with some of the funds but over all maintaining the 40-50% equities i typically hold .
the difference is you give up some potential bull gains for making a lot more gains when things turn downward with equities . one thing is for sure , the business cycle is still alive and well and the dollar still runs strong and weak so those assets like gold and long term treasuries will always get their day in the sun .
the fed's only weapon is lower rates when it is recession time .
Typically there are business cycles that are well understood, characterized, and almost predictable. Lately the pattern seems to have been broken. For the Great Recession, we did not have a typical cycle. We did not go through a phase of overexpansion, inflation, irrational exuberance and then a collapse. Instead mortgage and lending practices touched off the recession. The recovery was also atypical. Many businesses went through the recession doing fairly well and with the recovery they continued to make decent profits. Instead of expansion and investment, businesses have been cautious and growth has been slow.
The big tax cuts were supposed to change the dynamic. Typically those cuts would have stimulated the economy, stimulated investment and moved us to a period of growth, inflation, overinvestment with an eventual end to the cycle with retraction and possible recession. Toward the end of last year I would have predicted a booming stock market at or well on its way to a DJIA of 30,000. What happened is clear: Trump's trade war and tariffs. What is not clear is how this is going to end. If he can claim victory and save face, he might try to reverse course. Even under the best of circumstances that might not be possible. Without some change in policy the future looks very bleak.
I like some of what you said, in that 2008 was atypical...i'll also add a bad accounting rule affecting 5 trillion dollars in lending had a lot to do with it
However, there is and never was a "trade war"..that was a media narrative that got traction and people just poured gasoline on that fire....we have an 87 trillion dollar global economy....any proposed tariffs, even IF they all went through and they won't/wouldn't would be a few hundred billion which is a rounding error! Pure false fear....dont buy into it!
we will likely just get in to a currency weakening war if push comes to shove . lowering your countries currency offsets the tariff increases . china is already doing it and trump wants to do it .he said that the other day when he lashed out at the fed for raising rates. my gold holdings would love that move .
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