A.I.M. Users Bulletin Board

[ls7550]

AIM gold with stock as 'Cash'

As you've noted many indicators are suggesting that stocks look relatively high. However applying AIM to gold where stock total returns are its 'cash', applied to real price changes (after inflation) is recently showing gold to be considered as toppy also (85% cash indicated so 85/15 stock/gold being suggested).





So a situation where gold has made good real gains, and AIM is suggesting reduction, but where stocks are also perhaps expensive. Little wonder given all of the trillions of Quantitative easing across US, Japan, Europe, UK that yields are so low, prices high.

One or the other will break (stocks or gold), so the more neutral choice would be to 50/50 the risks. Which if all your liquid wealth, along with owning a home, is as TooFuzzy indicated a Talmud style (third each in land (home), commerce (stocks) and reserves (gold). It's also along the lines of Old Money, generational wealth that suggest 'a third, a third, a third' - land, art, gold. Cambridge University did a study of Keynes' art collection that provide a long term comparison of art versus stocks and found that in total return terms to two yielded comparable real gains, so substituting art (a very specialist field) with stocks aligns that to the Talmud advocated choice.

For a UK investor, Home in Pounds, Stocks in US Dollars, gold (global currency) is nice currency diversification. Whilst asset diversified across land, stocks and commodity assets. Concentration risk is one of the major risk so that diversification reduces that risk. Earlier years sequence of returns risk is another major risk factor and the diversify/correlations of those assets are such that SoR risk is reduced.

Put aside home value, and looking at just 50/50 stock/gold and for a newly retired investor at the end of 1999 after stocks had done well a all-stock choice with a 5% SWR (5% of initial portfolio value - where that value is uplifted by inflation each year as the amount drawn in subsequent years) might have seen like a reasonable choice.This however indicates otherwise. Click the 'inflation adjusted' tickbox in the chart and the 2003 run down (dot com bubble burst) had their portfolio more than halved. 2009 financial crisis pretty much finished off the portfolio (halved it again). But it did still manage to battle on until 2018 before totally being spent/lost. 50/50 stock/gold however was fine.

Over other periods stock/gold 50/50 and a 5% SWR failed. If for instance you'd started that back in 1980 when the Dow/Gold ratio was near 1.0 levels (gold very expensive/stocks cheap). Pick a more neutral year such as a 1985 start date and both 50/50 and all stock were OK, but where all stock netted a higher overall gain.

Lowering SWR, even a little can make a big difference. 3% is pretty safe, 2% is pretty bullet proof. My own SWR is a low % and I'm pretty much home to cover otherwise having to find/pay rent, along with a equal split between UK stocks, US stocks and gold.

For those in a accumulation phase, sequence of returns is pretty much irrelevant, large drops are opportunities for savings to buy/accumulate at cheaper prices. Low risk, even a positive benefit.

AIM gold with with stock as "cash" suggesting to be lighter on gold, and AIM of stock (or Relative Valuation etc.) suggesting to lighten up on stock, combined could be interpreted as passing it down to see cash reserves being expanded. But equally cash is at risk of being eroded by inflation/taxation. In retirement a 'beneficial' factor is that it doesn't really matter too much, as long as you have enough to see you through perhaps 20 years then beyond that it might not matter at all, where your home value might cover late life care home costs. More of a risk for heirs.

Regards. Clive.