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You want to diversify into uncorrelated assets (preferably uncorrelated asset classes). You want one holding that tends to zig when the others zag (although that would be negative correlation rather than non-correlation).
An old professor of mine used to say, "the ideal 2-stock portfolio is to own stock in one company that makes baby diapers and another that makes condoms."
As an aside, the problem that happened in the Great Recession was most all historically uncorrelated asset classes became correlated and went south, so that diversification didn't help.
wouldnt that diversify you into a net zero gain or loss position?
I think the best diversification is based on different industries; tech, energy, consumer, defense, etc. I might include bonds and dividends as well.
But the premise is that these are all sectors that go up. That is not the same as diversifying with things that only go up when the rest of the market goes down, especially in this market.
I don't buy "defensive" things (gold, etc) unless I actually see blood coming in the streets.
wouldnt that diversify you into a net zero gain or loss position?
No , it would not and doesn’t.if you picture a hypothetical worse case scenario the worst asset class can only go to zero. So if you have a situation that drives one asset class very low odds are it can cause others to double and triple.
In practice that is just what happens as if you look at the 4x4 permanent portfolio there are quite a few years with double digit gains . That has equal weighting’s in opposing assets classes yet each year is different and it runs typically 3-6% over inflation
I think the best diversification is based on different industries; tech, energy, consumer, defense, etc. I might include bonds and dividends as well.
But the premise is that these are all sectors that go up. That is not the same as diversifying with things that only go up when the rest of the market goes down, especially in this market.
I don't buy "defensive" things (gold, etc) unless I actually see blood coming in the streets.
By the time you see blood in the street gold would have made its move long before .the biggest gains in gold are always early on , before there are any signs gold is entering a bull
just kidding. i actually dont hold bonds but i thought that made me more unique than someone who does. i figure if i really wanted to reduce the volatility then probably better to hold more cash than to hold bonds.
Cash is making more sense if you can get a good interest rate. But bonds can help in bad times as you can get both interest and capital gains on high quality bonds when stocks are getting hit.
By the time you see blood in the street gold would have made its move long before .the biggest gains in gold are always early on , before there are any signs gold is entering a bull
Where do you come up with this nonsense. In the last decades there are only 2 periods of substantial growth in the price of gold. Gold prices increased throughout the 70s and peaked about 1980. The next growth started about 2002 and peaked about after growth of about 10 years. Since then gold prices declined again and have been largely flat in recent years.
Your crystal ball seems to be broken. You were promoting gold a year ago and nothing has changed. Meanwhile the stock markets have continued to grow.
wouldnt that diversify you into a net zero gain or loss position?
Theoretically, you're right -- perfectly negative correlation might put you in a net zero situation. That's why diversification, or "don't keep all your eggs in one basket" is really the quest for non-correlated asset classes. Explaining non-correlation can be a bit tougher than the easy to get but less accurate "zig while others zag" which is actually negative correlation.
Speaking of perfectly negative correlation, that's one of the basics of an old method of income tax deferral. We all know the "wash sale rule" for federal income tax purposes. Here's a variation that (supposedly) gets around the wash sale rule: In November, simultaneously go long soybeans and short soymeal, which are highly correlated, so the long and short positions will have high negative correlation. Then, with normal price movements, one of them will be a winner while the other will be a loser - sort of offsetting each other. Sell the loser the last trading day that will clear in December, generating a loss for income tax purposes.. and sell the winner the first trading day of January, thereby "rolling" income from one tax year to the next. Repeat every year... eventually you die, and your heirs get to deal with a massive paper income.
It all works, theoretically, until it doesn't (such as when there essentially no variation) or until the IRS audits you and decides there isn't any economic reason for your trades...
Where do you come up with this nonsense. In the last decades there are only 2 periods of substantial growth in the price of gold. Gold prices increased throughout the 70s and peaked about 1980. The next growth started about 2002 and peaked about after growth of about 10 years. Since then gold prices declined again and have been largely flat in recent years.
Your crystal ball seems to be broken. You were promoting gold a year ago and nothing has changed. Meanwhile the stock markets have continued to grow.
gold works best because of rebalancing not sitting static in a lump
gold was up 11% last year . 8% in 2016 as well . if your bond and cash money portion was diversified in gold instead of just being in cash and bonds along with your equity position you did much better than those two did .
so it is not a case of buying gold instead of equities if you want to add gold , it is in deploying some of the money allocated to bonds and cash instruments .
but gold works by rebalancing so your gains are eventually on a lot lower cost usually over time when they happen and that is an important part of using gold .
as poorly as gold did the last 10 years it still beat a mix of total bond fund and some cash even without considering the effects of rebalancing which would have improved golds return but hurt bonds return .
so your idea of how gold is used as part of a portfolio is very wrong and the numbers show that .
in your head you are looking at it incorrectly as a stock proxy and not a proxy and more diversification for some of the bond and cash money . so you may want to re-think the concept properly.
you still don't understand that when spending down it is never about the up years or how many you have . as night follows day the other half of the cycle is ALWAYS part of the deal . your balance ain't what you are looking it , that is a loaner lol .
all that matters when spending down is what is your balance when the smoke clears and how many years in real return will it take to recover while you continue to draw an inflation adjusted income ..
you may want to seriously grasp that concept too as you keep talking about the up years . those only count when not drawing an income . now sequence risk and your lowest balances rule
Last edited by mathjak107; 08-30-2018 at 04:34 AM..
Gold, or any other asset, looks like a great choice if you buy it when the prices are trending upwards. When prices are trending upwards it works as either a lump or with rebalancing. You are trying to claim something else. You are claim that volatility in gold prices will be inversely related to volatility in stock prices and short term rebalancing will take advantage of that inverse relationship. Well, you can start the analysis by overlaying gold and stock market performance. With either longer or short term volatility that inverse relationship does not appear to exist.
Have you forgotten how you were going to prove this a year or so ago. Remember setting up fake Fidelity accounts to monitor performance? The portfolio with gold did better for a few months and then fell behind. Somehow at that point you lost interest. As I remember it the comparison portfolio was a 60:40 stock:bond allocation. That is a dog at this point also. Most of us look for other non-stock assets to invest in other than traditional bonds or bond funds. One choice is real estate with sub choices of residential or commercial. I lean towards commercial. In the past when we reach then end of a business cycle and/or an event impacts the stock market, there is a more gradual decline in RE. That allows time to sell well before reaching the bottom. Anyway, I digress. I do not see that you have made the point that gold works consistently for rebalancing.
In addition to the case for rebalancing you are also making the claim that gold prices are about to increase. It seems to me you made the same claim a year ago. Is this crystal ball work or is there some analysis involved?
Over the past several years, we have seen a number of gold enthusiasts make predictions for future gold price increases. They have all vanished. I am willing to bet that you back off over the next few years.
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