Replies to post #31806 on A.I.M. Users Bulletin Board (AIMUSERS)

[ls7550]

Congrats Tom. I suspected as much and instantly thought of you :)

I was on the Jerry side. All mousetraps having been turned off when I moved out mostly to cash a few weeks back :(

I had guessed as much about the hung parliament but not the Greek crisis, so at least its worked out quite well for me so far on that front.

In the past I've endeavoured to keep traps open for such events and just when ...... Murphy's Law.

Have you seen how well Long dated Treasuries are continuing to do the mirror of stocks recently? For efficient rebalancing we need to hold assets that both provide real gains over time, but zigzag ideally in a totally inverse like manner. LT's and stocks do a good job of that, but stocks are more volatile so a blend of 50/50 stocks + cash (to lower volatility) on one side and LT's on the other fits reasonably well



That coupled with gold - which acts as a domestic currency crisis hedge, is the core concept behind the Permanent Portfolio. i.e. if each $75 of funds invested in stocks/LT's/Cash crash down in value then the gold rise counters those losses.

You can replace gold with foreign currency and still maintain much of the domestic currency risk protection i.e. using a blend of 50% LT's, 25% stocks, 25% cash across a range of currencies (this next chart is UK based and has Yen and Dollar exchange rate adjustment)



Where it gets interesting however is if you take a classic PP of 25% in each of stocks, LT's, gold and cash, but then reduce the gold down to perhaps 15% with a mind to counter than by holding some foreign currency based stocks, and reduce the cash down in mind of a diverse range of stocks requiring less of a cash damper, and then invest the rest in a range of stocks that include some foreign currency exposure. When you do so the returns are much higher than the PP (around 2.5% p.a. more since 1972) for a bit more risk.

Using Simba's backtest spreadsheet (http://passive-investor.googlegroups.com/web/Backtest-Portfolio-returns-rev9a.xls?gda=oLBY6lYAAABmzwdzvbUJkn6i4I-f5nHShKw8P0BFHPsfBYnYHCYfq5IDFsFh6mk-LFgXcLPmvNGCNzLMZl9X0F_VOK6oY1_I_GAQBRkI_C95zVGsnHe1DxPhGuxsWDLdLep2NLleRSE&gsc=X9Dm6QsAAABoHC7z9BFxSD3OEkZ4LYqJ) for US data since 1972 a PP allocation of 25% in each of stocks, LT, gold, cash produced a 9.5% annualised. A blend of 25% LT, 15% gold, 10% cash and 10% in each of LCV, SCV, SCG, EM and International Value produced a 11.8% annualised. With around a 128% gain (8.6% annualised) between 2000 and 2009 inclusive.

2008 was more of a down year (losing -13%), but that was countered by reasonable gains in the years either side (up 13% in 2007 and up 21% in 2009). Whilst the 2008 down was worse than classic PP, its still not excessive and to my mind the swapping out of some gold holdings for foreign currency based investments provides even greater potential protection.

Take Argentina 2002 or Iceland 2008 for example. Domestic currency crisis results in stocks and bonds all crashing down 90% or more whilst gold in domestic currency rises 3.5 times or so. 25% in gold therefore sees each $25 rise to $100 whilst cash might remain level ($25 stays around $25) and stocks and bond $25 investments both crash down to $2.50. Total $117.50 value relative to each $100 starting amount (whilst all-stock investors are down from $100 down to $10).

If you drop some of the gold and instead hold a bit more foreign currency based investments, then reducing gold down from $25 to $15 but perhaps adding in $20 more foreign currency has $35 in non domestic, so if that gains 3.5 times = $122.50 value from that 35% alone.

I'll be using this form of PP variant when I start re-entering the market over coming weeks. So it looks like I might be pretty well aligned with your IRA in many respects, but with some gold and LT's thrown in on top (or rather LT's in lieu of bonds).

The gold and LT purchases are a bit of a stress though given recent rises and I've deliberated on that quite a lot. But as recent evidence suggests even from 0% base rates and 4.5% LT yields there's nothing to stop that longer term government debt level of 4.5% declining further (Japan's down at 2%). Similarly on a long term historic inflation adjusted basis, gold might equally still double or more. Generally the PP has served well over time, so just have to have faith in the concept and take the plunge.

Best regards. Clive.

[The Grabber]

Re: Working Mousetraps

Hi Tom. Congrats on taking advantage of the one hour 'Silly Season' on Thursday. Interesting but understandable that you got a few Sells on bonds. I know they don't come around very often, so I guess 'when opportunity knocks'...

Look at my previous post to see how my Thursday turned out.

Of course this correction has pulled GIEW -5.7% for the month, but still +9.5% YTD and way ahead of the market indices (Dow, S&P and Nasdaq are all down year to date, and the Wil5k is only +0.5%).

Cash @ 31.6% after the 8 Buys so far this month, so I still have some dry powder should this situation continue. Of course 30 day rule is now in effect (unless another huge drop convinces me otherwise on selected holdings).