asset allocation

[jk]

I would like to initiate a discussion about applying the ideas discussed at itulip to the task of portfolio construction. If you want to put your money where your mouth is, where exactly do you put it? I will mention my own allocations and am interested in critiques and suggestions, as well as stimulating discussion of the underlying issues.

background- i am currently not using much leverage. in the early and mid 1980's i got my equity exposure with s&p contracts; a few years ago i was trading the gsci commodity index while hedging out part of its energy overweight with crude futures, but i want a more tranquil life these days. nonetheless, i am open to leveraged/commodity options or alternatives. i am not currently in any hedge funds, nor do i have any cta accounts. i run my own money. i've generated 12.3% compounded annually over the last 209 weeks with my greatest drawdown being 8%..


question 1. how much in precious metals and how to allocate within that area? I have 26% these days. Is this high or low? It's pretty conservative with 58% in gld, 15% in slv, 12% tgldx, 7% paas, 5% nem.

question 2 currencies? i have 22% nominal, but 35% with leverage. the leverage is in rywbx- 2 for 1 inverse dollar index, czj- 5 to 1 exposure to 5 asian currencies. the other antidollar positions have no leverage - gim, plmdx, pfbdx. in addition to the above i'm carrying 11% in canadian income trusts -- some energy specific, some broader. this investment has a lot of moving parts- currency, interest rate, business cycle, commodity. it has been my hope that these various parts will essentially cancel out and let the position generate income in about the 8% range in loonies which i expect to appreciate.

question 3. any exposure to equities? if so how and which? i have 30% in hsgfx. hussman did very well during the bear market a few years back, but is doing less well in recent years because he has been fully hedged most of the time, as well as investing in value and quality while the market has been rewarding flash and trash.

question 4. shorts? i have about 8% shorts as well as some long term put positions.

question 5. bonds? i have about 4% in 20 yr zeros and about 4% in a fund which is short junk bonds.

sense? nonsense?

[blazespinnaker]

Oersonally, I think that is a very risky and long term low growth portfolio. but others here will no doubt tell you otherwise. I always seem to be odd man out when investing, of course, but contrarian pays I think.

Contrarian is global investing, but not through etfs. Indexing (dumb money) is all the rage, so stay out of anything that is indexed.

Also, what is your time horizon? If you need access to all your funds in the next short little while (like I do) I can sort of see what you're trying to do and have some sympathy.

However, if you're just looking for reasonably good growth, then your portfolio seems needleslly risky.

I like bonds, but I am in a unique situation which is very unlikely to apply to anyone here.

I think a good portfolio is one which is nicely diversified in a way that an index is, but in equities which don't get a lot of index exposure. I'd go about half/half, global / us. I'd stay out of China / Japan / US and anything that is tied to the US economy.

If you can swing a solid portfolio like that, I'd probably go 50-70% equities depending on how happy you are with your choices. I'd put another 10-30% in bonds, depending on how much you put into equities, and then I'd throw the rest into precious metals.

I am looking into wheat commodities lately, because I've heard good things about them, but I have a feeling that there is a reason that they are priced so low.

[Jim Nickerson]

JK:

I cannot find any information on CZJ, can you point me to something that describes it?

thanks.



Jim

[Jim Nickerson]

9.93% URPIX
15.62% UCPIX
17.67% USPIX

1.06% DBC
3.21% CEF
3.01% SLV
2.93% OIH & XLE

2.91% RYWBX
1.31% FXE

6.20% RRPIX

36.12% CASH

Jim

[SeanO]

Great thread. I've bought in, but am struggling to figure out what to do.

I want to move a portion of my portfolio to PM's but not sure how to. The ETF's that JK suggests seem like the easy answer, but the sentiment Blaze echos with "stay out of anything indexed" has held me back. Blaze... can you suggest some alternatives. I'd extend this to commodites in general and equities too. Lack of intellect isn't the primary draw to indexing, it 's the lack of time. Depsite my best intentions, truly taking the time to research a nicely diversified portfolio never seems to happen. At the moment I'm still heavily weighted towards equities with a mix of index and global funds. Looking to change this immediately.

I'm also still heavily invested in real estate (see report from the front - housing correcting in nor cal), but am now more heavily weighted in commercial then residential. Commercial remains strong, especially as "smart" money moves out of residential and looks to 1031 exchange to something "safer". I expect this movement will result in some nice short term gains, followed by a similiar fate as predicted here for housing. Yes, it is a high-risk bet.

I don't get investing in bonds given the outlook here at iTulip. My simple understanding is that bond prices go down as interest rates go up. I suppose you can hold to maturity to get historically low returns, but there must be better alternatives. I currently hold no bonds. I also have no shorts, puts or currency positions. Primarily due to a lack of knowledge and comfort in these areas.

My largest investment is my time. I don't have sufficient capital to live on reasonable annualized returns, no matter how much time I spend to achieve them. Fortunately I'm a jack of all trades, and rode the tech and real estate bubbles nicely. So more than anything I'm most interested in where to spend my time. What industry's will benefit most from the events contemplated at iTulip?

[jk]

blaze: what are the risks you see in my portfolio?

i have no net equity exposure since my shorts hedge my canadian trusts.

you suggest a lot of equities, but i think that has enormous risk. i think there are high odds of another leg down in the u.s. markets that will bring down every other equity market in sympathy. yet you suggest so much in equities? obviously you are working from a different scenario. what is it?

also you talk about avoiding indexing, but the only index exposure is rywbx's inverse dollar index construction. usually indexing refers to equities and i have no such exposure. or was your reference to avoiding indexing a general remark about what to put in a portfolio? [in which case i wholeheartedly agree.]

the interesting thing about your comment is that i see my portfolio as very low risk. i'm concerned about the dollar so i have a fair amount of pm's and other currencies. on the other hand i'm concerned about equity market crashes and a possibility of deflation. in those scenarios i know hussman at least won't get killed, and my 30% exposure there will probably make money, and at least will maintain, so it's like cash in that scenario.

in general i use a scenario based approach. e.g. what are the odds of dollar diminution, how much of portfolio should i allocate to that, and what investment will respond positively in that environment? what are the odds of an equities crash and what will thrive? what are the odds of deflation? my zeroes will do well and my short junk bonds will also do well in that scenario.

so i see myself hedging a myriad of risks and think i'm using a mostly defensive approach. i understand, however, that some people will look at pm's and see great risk. i look at them and see defense against the debauching of the dollar.


re czj: if you email <Clinton.Clark@amex.com> he'll email a prospectus. there's another similar instrument, caq, you might want to look at as well. they are both structured products from citibank. they are principal guaranteed to return $10/share at maturity in 2008. czj gives you 5:1 upside exposure to the singapore dollar, taiwan dollar, s. korean won, thai baht and indian rupee. it returns not the average but the sum of the changes in the 5 currencies. the only downside i can see is that if citibank blows up, your claim is that of an unsecured creditor. it's hard to imagine citi blowing up quite that badly.

[jk]

the system deleted the email i had posted.for czj and caq info

it's

clinton.clark@amex.com

[jk]

jim-
you are a man of strong convictions, and have the courage to carry them out! i've lost too much money over the years going short too early that i've become a little gun shy. that's why about half my shorts or just jan 07 or 08 leap puts and overall i'm not that short. i'm figuring that if equities tank it's pretty likely my precious metals will benefit [although they didn't in 2002 when the gold stocks went down with the market as a whole] i also figure that a flight to tbonds might help my zeroes and that my short junk bonds would benefit. but you'll make a lot more money than i if the market goes down in the next 2 quarters, as i and many others appear to expect.

blaze- re time horizon. i'm at a stage where my main concern is avoiding a big hit [including a big but slow hit by inflation].

[Jim Nickerson]

JK;

You wrote

i think there are high odds of another leg down in the u.s. markets that will bring down every other equity market in sympathy.

on the other hand i'm concerned about equity market crashes and a possibility of deflation. in those scenarios i know hussman at least won't get killed, and my 30% exposure there will probably make money, and at least will maintain, so it's like cash in that scenario.

I am not worried about a market crash, but if it does, and if you are really worried about it, then the easiet way (for me) to cover that possibility is to buy some of the bear mutual funds, the ones I listed US, UC, UR -PIX are all 200% inverse to the NDX, RUT, and SPX, but there are other less aggressive short funds.

I have gradually increased those positions since the middle of Jan. and I am down in them, but so far for the year I am up a fractional percent.

If you are really bearish and worried, put 5% in each of the -200% funds and
you will be equally hedged and have 15% in cash for something else or something more.

What I am worried about is that the equity markets don't go down, but take off again like 1999.

Jim

[Jim Nickerson]

JK;

What has it been, about 26 years since interest rates were in the clouds? So there has been a 26 year bear market in bonds. Almost everything I read, and perhaps I am really, truly reading the wrong things, suggests interest rates are going up over some longer period, and undoubtedly they will go up and down along the way. If that is true, then being long US gov't bonds of any ilk doesn't make sense to me.

What are good arguments that deflation will occur? I don't know any. I have read some, but they did not seem valid, so I guess I did not keep them in my brain.

I am not convinced the market is going down, but that is how I am betting at the moment and for some few past months, and I have been wrong, but what are the better odds, from where it is now ,of going up or going down?

Thank you for the info. on the CZJ AND CAQ.

I have been managing my investments about 20 years, and in no way am I a sophisticated investor, if that isn't already apparent. It sticks in my mind as some sort of dictum that the best hedge against inflation is to be long in the equity markets. If that continues to be true, assuming it was true, then it worries me that I am not long anything in equities, as least to any serious degree.

I guess if inflation by virtue of more money being put into the system, could fuel the equities to get back into a bubble like in 2000. That worries me, and the only protection I have is pick a stop loss point and get out if I hit it, then see what I think.

What you suggested as my "courage" was nice, but it could be my ignorance.




Jim

[jk]

jim
bonds have indeed for many years been rising in value as interest rates declined. under what i think are the most likely scenarios i think my tbond zeros will continue to lose value. that's why my position in them is small.

on the other hand i can imagine a deflationary scenario: the economy slows and people with debt up to their gills begin going bankrupt in large numbers. as the recession deepens monetary velocity slows down so much that the fed can't pump fast enough to compensate. daisy chain debt revulsion proceeds. in that scenario my tbonds will shine, and my short junk will also.

i don't invest based just on what i think is the most likely scenario, i try to take alternative possibilities into account.

i think if the equities markets tank there will be a flight to safety, which might benefit my tbonds, will benefit my short junkbonds, and might benefit my precious metals. i'm thinking that i'll also make more on my shorts and leap puts than i lost on my canadian income trusts which, after all, have some yield to protect them somewhat.

as for equities being a good hedge against inflation, i recall people saying that during the 70's but it didn't work out that way. equities travelled from 1000 in 1966 to 1000 in 1982 but lost something like 80% to inflation over that time.

although i think that the stock markets will go down, i'm also trying to account for the possibility of the huge sea of liquidity going back into the stock market as it leaves real estate. marc faber has written that he could see the dow hitting 36,000, like in that book. but he also says that in that scenario he sees gold hitting at least 6000.

[blazespinnaker]

Again, it depends on your time horizon. If you're looking at a short term investment (over the next year or maybe two) and needed your money out right away I can see why you'd go with the metals.

However, long term, your investment doesn't make sense historically. Equities have always provided the best return in the long run.

Bonds are very low risk / low return, but my thought is to purchase foreign bonds (I am buying euro/uk bonds). Yeah, that is even lower return, but there is some currency speculation in that as well.

I admit, my portfolio is pretty risky too, but these are crazy times.

That being said, of course, I am not an professional investment advisor so take everything I say with a grain of salt. My intention here is not to change your mind but rather inspire you to investigate your decisions further.

Quite possibly you might be right and I might be wrong, but I believe your portfolio requires significant due diligence and even professional analysis.

[blazespinnaker]

And don't forget modern portfolio theory, which I think your portfolio is missing. You need stuff that goes up when other parts of your portfolio go down. I see a lot of overweighting, which means you are exposed to a binary outcome: either up or down.

[blazespinnaker]

One last comment: the loonie tracks the USD. It may appreciate, but only slowly. If you want a good currency hedge, I'd go Euros.

[Jim Nickerson]

JK:

I appreciate your comments, and this is a great topic, and a great website.

All of this--your concerns and website's--seems to me to be about one main theme and that is not losing money when things go bad.

The first time I looked at the website there was already a discussion about actionable hedging. but I do not have the wherewithal to access it. It seems that since unknown experts are discussing hedging, it would add to everyone's knowledge to be able to access the forum.

I've considered why does anyone operate a site like this? It doesn't seem to be profit motivated, but rather it is an educational site, and as such it begs the question of why there is limited access to the actionalble hedging forum?

No one seems willing to tell what the rules are to access it.

Jim

[SeanO]

Jim - interesting observation regarding the website's theme being: not losing money when things go bad. What I actually love about the site, and Eric, are the thoughts he has about the larger impacts beyond our investment portfolio. Perhaps it will end up yet another investment site, but I sure hope not.

If the events discussed here play out there will be huge opportunities. Where do I best allocate my assets, including my time, to best maximize on those opps?

[jk]

blaze-
i don't think of myself as having any particular time horizon. my first priority is controlling risk, my second is to make money within what i think is a reasonable risk profile. i'm not married to any of my investments -- i have within recent months moved 10% of my assets on reading something that made me look at a certain asset differently. in recent years, however, i'm more commonly moving in 1-5% re-allocations.

on the other hand my worldview evolves slowly. i'm not married to my precious metals exposure, for example, but i've had significant pm holdings since 2001. unfortunately i let the pullback of july 2002 scare me out of a chunk of it, and since that time i've traded a bit around my core position. in general my pm positions have been between 18 and 33% fof my portfolio or the last 5 years. i've taken some profits on occasion, along the way, increased exposure at other times.

i think your "equities for the long run" approach is highly dangerous at this time. yes, even if you bought at the peak in 1929 you would eventually gotten even -- about 30 years later. from 1998 to now u.s. equities have been outperformed by tbills, though of course equities were a lot more exciting. u.s. equities are overvalued by every historical metric, and a variety of studies show that holding equities at these levels lets you expect 1-2% returns over the next 10 years, though again it will be very exciting. i mentioned in another post that the dow went from 1000 in 1966 to 1000 in 1982 but lost 80% to inflation. that's 16 years of holding and down 80%. look at the japanese market, from 40000 jan 1990 to - now, after a big long rally - 17000, 16 years later. so the long run can be really, really long.

also global equity markets are not highly correlated most of the time, but during financial crises suddenly everything gets correlated. i saw that 1987, in 1998 with the asian crisis and ltcm, in 2001-2002, and i'm sure i'll see it again. so i don't think foreign equities are adequate diversification from domestic ones. i think you need entirely different asset classes.

i don't hold much with modern portfolio theory. it's based on an efficient market theory that i think is completely false and misleading [but it makes the math easier]. it assumes that there is a straight trade off of risk -- defined as volatility - for return . i think in the real world taking risks is not always rewarded even probabilistically, and that if you look hard enough you can find extra return with lower risk.

you say bonds are low risk, but in fact they have enormous volatility if you hold bonds with any significant duration. from 1980 to a couple of years ago we lived through the greatest bond market rally of all times. in a deflation they have further to go, but i think it's more likely that one day we will again call them "certificates of guaranteed confiscation," as we did in the late 70's. bonds are not boring.

i have some foreign bond funds, but i want the lowest duration possible to make it a purer currency play. [btw you say the loonie tracks the dollar, but in fact it's gone from the high 70's to 90 in the last year and a half] i have euro exposure through rywbx- that's twice the inverse dollar index, and the dollar index is 57% euros. i diversify that to other currencies because i really don't know what's going to work.

i'm neither bull nor bear. i'm a chicken.

[EJ]

Bulls, Bear and Chickens. That's really good!

More on the Shadow Fed "other" forum shortly. All shall be revealed in time. Sorry to be mysterious. Not ready to drop the other shoe just yet.

[JD_]

After removing the rose colored glasses of your typical "buy and hold" index investor circa 1998 and paying off my mortgage (completely debt free now) I'm currently sitting:

47% Cash
35% US Equities (Wilshire 5000 index)
18% Int'l Equities (MSCI EAFE+EM index)

I've actually done pretty well by buying the market from late 2000 through late 2005 but "buy and hold" seems kind of naive when there are massive imbalances going on in the global economy. At least what I've been buying which is a US Wilshire 5000 index and an international MSCI EAFE+EM index. I'm thinking what I've been doing is more akin to "buy and hold the bag!"

In the last two weeks I've sold down equities from a 100% asset allocation to the point now where I have absorbed all the capital losses I was carrying forward from tax loss harvesting I did during the 2000 to 2002 bear market. At that time I was swapping fairly well correlated indexes (S&P 500 vs Wilshire 5000) in order to realize capital losses I had incurred during the bear market while still remaining in the market. I was realizing losses for tax planning reasons. Now I have nothing but unrealized capital gains and it's kind of bugging me. Big problem, right? *lol*

I want further out of my equity positions because I still think they are risky but I'm going to get hit with 22% long term capital gains taxes (instead of 15% long term capital gains taxes) due to the Alternative Minimum Tax. The capital gains, if I take them, are also going to push me into the next highest tax bracket for this year and disqualify me for my 2006 Roth IRA contribution which I've already made (and will thus have to undo). Grrrrr...

A question I have is should I just bite the bullet and realize the capital gains, pay the higher AMT taxes, undo my 2006 Roth IRA contribution, and be glad I'm reducing my equity position before the markets tumble 40% instead of just 8%? Should I hedge my long US/Int'l equity position (and defer taxes for a while longer) by taking a leveraged position (like 200% short) on a market decline and/or dollar decline predicition which seems to be the consensus of the iTulip community? Would you do something else? An old "buy and holder" is a babe in the investment woods when he finally figures out as EJ recommends in his Bubble Cycle article that you make money by playing the bubbles not by buying and holding them. At the moment I just want to "unbubble" myself from my long equity position before I figure out my next move. It's going to cost me 22% tax on my gain to do that but isn't that better than 0% tax after a 40% equity drop? *lol*

[Jim Nickerson]

After removing the rose colored glasses of your typical "buy and hold" index investor circa 1998 and paying off my mortgage (completely debt free now) I'm currently sitting:

47% Cash
35% US Equities (Wilshire 5000 index)
18% Int'l Equities (MSCI EAFE+EM index)

I've actually done pretty well by buying the market from late 2000 through late 2005 but "buy and hold" seems kind of naive when there are massive imbalances going on in the global economy. At least what I've been buying which is a US Wilshire 5000 index and an international MSCI EAFE+EM index. I'm thinking what I've been doing is more akin to "buy and hold the bag!"

In the last two weeks I've sold down equities from a 100% asset allocation to the point now where I have absorbed all the capital losses I was carrying forward from tax loss harvesting I did during the 2000 to 2002 bear market. At that time I was swapping fairly well correlated indexes (S&P 500 vs Wilshire 5000) in order to realize capital losses I had incurred during the bear market while still remaining in the market. I was realizing losses for tax planning reasons. Now I have nothing but unrealized capital gains and it's kind of bugging me. Big problem, right? *lol*

I want further out of my equity positions because I still think they are risky but I'm going to get hit with 22% long term capital gains taxes (instead of 15% long term capital gains taxes) due to the Alternative Minimum Tax. The capital gains, if I take them, are also going to push me into the next highest tax bracket for this year and disqualify me for my 2006 Roth IRA contribution which I've already made (and will thus have to undo). Grrrrr...

A question I have is should I just bite the bullet and realize the capital gains, pay the higher AMT taxes, undo my 2006 Roth IRA contribution, and be glad I'm reducing my equity position before the markets tumble 40% instead of just 8%? Should I hedge my long US/Int'l equity position (and defer taxes for a while longer) by taking a leveraged position (like 200% short) on a market decline and/or dollar decline predicition which seems to be the consensus of the iTulip community? Would you do something else? An old "buy and holder" is a babe in the investment woods when he finally figures out as EJ recommends in his Bubble Cycle article that you make money by playing the bubbles not by buying and holding them. At the moment I just want to "unbubble" myself from my long equity position before I figure out my next move. It's going to cost me 22% tax on my gain to do that but isn't that better than 0% tax after a 40% equity drop? *lol*

Paying tax is good in that it means you are making money, as opposed to making no money because of losses and thus paying less tax.

To me all your thinking is pertinent, but if one is going to trade the markets' vicissitudes, then to me realizing gains when one has them in hand must be done. This is primary in trading it seems to me. You know you cannot make short-term trades with the tax considerations being a large part of your decision making process.

I used to gasp when an orthodontic colleague would tell me how much he paid in taxes each year--it was more than I was making, but had I reflected on how much he had to gross to pay as much tax as he did, I would have gone into V-fib. Now for all who do not know what V-fib is, it is a heart rhythm disturbance that can kill. The point of this is not everyone understands abbreviations--*lol"?

Hope you keep having to paying taxes on your short term capital gains, its good for you, and it is good for tax revenues.

[jk]

After removing the rose colored glasses of your typical "buy and hold" index investor circa 1998 and paying off my mortgage (completely debt free now) I'm currently sitting:

47% Cash
35% US Equities (Wilshire 5000 index)
18% Int'l Equities (MSCI EAFE+EM index)

I've actually done pretty well by buying the market from late 2000 through late 2005 but "buy and hold" seems kind of naive when there are massive imbalances going on in the global economy. At least what I've been buying which is a US Wilshire 5000 index and an international MSCI EAFE+EM index. I'm thinking what I've been doing is more akin to "buy and hold the bag!"

In the last two weeks I've sold down equities from a 100% asset allocation to the point now where I have absorbed all the capital losses I was carrying forward from tax loss harvesting I did during the 2000 to 2002 bear market. At that time I was swapping fairly well correlated indexes (S&P 500 vs Wilshire 5000) in order to realize capital losses I had incurred during the bear market while still remaining in the market. I was realizing losses for tax planning reasons. Now I have nothing but unrealized capital gains and it's kind of bugging me. Big problem, right? *lol*

I want further out of my equity positions because I still think they are risky but I'm going to get hit with 22% long term capital gains taxes (instead of 15% long term capital gains taxes) due to the Alternative Minimum Tax. The capital gains, if I take them, are also going to push me into the next highest tax bracket for this year and disqualify me for my 2006 Roth IRA contribution which I've already made (and will thus have to undo). Grrrrr...

A question I have is should I just bite the bullet and realize the capital gains, pay the higher AMT taxes, undo my 2006 Roth IRA contribution, and be glad I'm reducing my equity position before the markets tumble 40% instead of just 8%? Should I hedge my long US/Int'l equity position (and defer taxes for a while longer) by taking a leveraged position (like 200% short) on a market decline and/or dollar decline predicition which seems to be the consensus of the iTulip community? Would you do something else? An old "buy and holder" is a babe in the investment woods when he finally figures out as EJ recommends in his Bubble Cycle article that you make money by playing the bubbles not by buying and holding them. At the moment I just want to "unbubble" myself from my long equity position before I figure out my next move. It's going to cost me 22% tax on my gain to do that but isn't that better than 0% tax after a 40% equity drop? *lol*

first and foremost don't let a tax consideration lead you to remain exposed to an investment you want out of. either sell it or hedge it. re the taxes- you need to decide when you're going to take the hit. if your income and bracket will be lower in the future then by all means hedge instead of selling. as long as the hedge is not precise you can postpone the taxes.

[JD_]

Paying tax is good in that it means you are making money, as opposed to making no money because of losses and thus paying less tax.

To me all your thinking is pertinent, but if one is going to trade the markets' vicissitudes, then to me realizing gains when one has them in hand must be done. This is primary in trading it seems to me. You know you cannot make short-term trades with the tax considerations being a large part of your decision making process.

I used to gasp when an orthodontic colleague would tell me how much he paid in taxes each year--it was more than I was making, but had I reflected on how much he had to gross to pay as much tax as he did, I would have gone into V-fib. Now for all who do not know what V-fib is, it is a heart rhythm disturbance that can kill. The point of this is not everyone understands abbreviations--*lol"?

Hope you keep having to paying taxes on your short term capital gains, its good for you, and it is good for tax revenues.

I know the wisest thing to do is realize the capital gain (while I still have it) and pay the capital gains tax. I'm a bit surprised that when I finally need it I find out there is no such thing as the much ballyhooed 15% long term capital gains tax rate in my situation. The Alternative Minimum Tax will make sure I pay a 22% long term capital gains tax rate. Higher than even the old pre 1997 20% long term capital gains tax rate. Why I'm a bit surprised that the fine print of any government policy says 'but not for you!' would just be another case of my naivete? I guess that is why people have been complaining about the AMT! *lol* which is an abbreviation for *laughing out loud*

I've made some extreme asset allocation decisions in the last 2 weeks. Going from a 8 1/2 year long, 100% equity allocation (while buying more equities every month) basically to an all cash allocation and paying off my mortgage. It's not that a decline in the markets bothers me that much. I weathered the 2000 to 2002 bear market buying into the decline all the way down and then buying into the advance all the way up until just last month. I've taken a 40% hit to my portfolio before and continued on. What bothers me is that I've made a fundamental assumption that when it comes time to sell my equity assets in retirement they will at least be worth what I paid for them in real (not just nominal) terms. That from a long term (say 30 year) "buy and hold" perspective I didn't have to worry about market valuations or especially the persistent overvaluation of the market since 1995. What bothers me is that I haven't been paying attention to the correlation between the asset class bubbles (2000 stock market, 2005 housing market, etc) and the extreme liquidity of money supply with the multiplier effect of easy credit that has been used to reflate the last popped bubble and will be used to reflate the next popped bubble ad infinitum.

For 8 1/2 years I thought I was being smart and investing in the most well diversified global portfolio of equities I could possibly create. I thought I was minimizing my risk by investing in a global CAPM (Capital Asset Pricing Model) way. I was indexing the whole planet's best guess on asset pricing by buying a global basket of completely diversified equity indexes. Instead I find out I'm just investing my future retirement into an overvalued basket of asset bubbles due to excess monetary liquidity and a one way trip to eventual misery named 'fiat currency'. So, is your nation having a problem with long term obligations? No problem, inflate the money supply and miraculously resolve that long term obligation with newly printed money! Is your economy deflating? No problem, have the Fed fire up the helicopters! Is there too much money supply? Uh oh, that means long term inflation for you all the while that your US based labor and wages are becoming less valuable (due to globalization) and your dollar and global purchasing power is declining (due to massive US debt and extreme trade imbalances). *lol*

Anyway, after tomorrow I'm going to be about 100% long the US dollar. That is my next problem! *g* which is an abbreviation for *grin*

JD

[JD_]

first and foremost don't let a tax consideration lead you to remain exposed to an investment you want out of. either sell it or hedge it. re the taxes- you need to decide when you're going to take the hit. if your income and bracket will be lower in the future then by all means hedge instead of selling. as long as the hedge is not precise you can postpone the taxes.

I'd like to think my future tax bracket is going to be lower but a few months ago I came to the conclusion that if I'm financially successful (which is my goal) I'm going to probably be paying higher taxes going forward until my death. I also guessed (and it is just that) that we are at a low in personal income tax rates and with the unfunded future obligations the nation has promised that taxes are consistently heading upwards from here on out. So although I may move to the 2nd lowest bracket out of the 6 at retirement age instead of the 4th lowest bracket out of 6 that I'm in right now I'll be unpleasantly surprised to find out that the 2nd lowest bracket at retirement will have been raised to say 35% instead of my current 4th lowest bracket at 28%. In other words I'll be in a lower relative tax bracket but paying a higher absolute percentage because...well, we promised lots of stuff and somebody has to eventually pay. Welcome to your "lower" tax bracket, send in your check! *lol*

JD

[Jim Nickerson]

I'd like to think my future tax bracket is going to be lower but a few months ago I came to the conclusion that if I'm financially successful (which is my goal) I'm going to probably be paying higher taxes going forward until my death. I also guessed (and it is just that) that we are at a low in personal income tax rates and with the unfunded future obligations the nation has promised that taxes are consistently heading upwards from here on out. So although I may move to the 2nd lowest bracket out of the 6 at retirement age instead of the 4th lowest bracket out of 6 that I'm in right now I'll be unpleasantly surprised to find out that the 2nd lowest bracket at retirement will have been raised to say 35% instead of my current 4th lowest bracket at 28%. In other words I'll be in a lower relative tax bracket but paying a higher absolute percentage because...well, we promised lots of stuff and somebody has to eventually pay. Welcome to your "lower" tax bracket, send in your check! *lol*

JD
I surmise you might be about 35 y/o. Assuming you make it to retirement--which some percentage of people do not--the retirement age will be older than 65, it may be greater right now. I turn 65 in about 6 weeks, but I quit working at 50, not because of great wealth, but because of great burnout with what I did. At the current bottom in 10/02, I had less than half as much nominally as I did when I quit working.

Perhaps I have learned somethings that are worth thinking about. Wise people I believe should always save as much as they can--not just what they put in their IRA's or 401K's. The notion "money is to be spent" is crap in my opinion. As far as I can determine, the more money (liquid assets) an average person has (this excludes the super-rich) the more possible control they have over their circumstances, everyday and in the future. There is no one that can tell you what things are going to be like in 25 or 30 years because no one knows. All you can do is the best one can now and until you make it 30 years down the pike with hopefully wise adjustments as needed along the journey.

Your greatest asset right now is your ability to keep earning new potential capital, but your earnings do not translate into capital unless you save some of them. I went through the high interest rate debacle of the 70's without flinching because I was too busy working to even think about the stock markets and bond markets--which was somewhat of a mistake, but I made it and lived with it and through the period. Did the same thing in 1987. Had I been working from 2000 to 2002, I might have made it though that debacle, but I wasn't working, and I definitely was flinching and all my sphincters were tight.

I have no idea what you do, but it is possible that before the next thirty years pass, you might grow to loathe whatever it is you do. If that happens and you have not spent all your money along the way, then perhaps you can tell you boss to take the job and shove it, but for sure you will not do that if you have not saved.

The other things that has enabled me to live without gainful employment is when I quit, I did so with the commitment, to which I have stuck, to live within my means--which meant a firm budget. The 13-14 years I have not worked have been countless times more valuable to me with regard to sanity than were the years spent trying to become educated and then working.

If you do not mind, what exactly did you mean when you said after tomorrow I'm going to be about 100% long the US dollar"?

[JD_]

I surmise you might be about 35 y/o. Assuming you make it to retirement--which some percentage of people do not--the retirement age will be older than 65, it may be greater right now. I turn 65 in about 6 weeks, but I quit working at 50, not because of great wealth, but because of great burnout with what I did. At the current bottom in 10/02, I had less than half as much nominally as I did when I quit working.

Hi Jim,

I'm 43 so I'm a very tail end baby boomer. I've pretty much concluded if I'm retiring it's at a minimum age of 70. I wouldn't be surprised if I'm still working at 75 if I make it that long!

Your greatest asset right now is your ability to keep earning new potential capital, but your earnings do not translate into capital unless you save some of them.

The other things that has enabled me to live without gainful employment is when I quit, I did so with the commitment, to which I have stuck, to live within my means--which meant a firm budget.

I don't have the patience to create and stick to a budget but I definitely live within (actually below) my means. I just paid off my mortgage which is the last debt I will probably ever have. I save about half my salaried income and then make about the same again in asset appreciation and dividends/income on my investments each year. All the same I'm still feeling kind of squeezed when I try to determine how I'm ever going to retire. Maybe I'm never going to!

My friends however are leveraged to the hilt. They just don't understand the risk they are taking...or don't care. I live in a pretty affluent community (I'm the poor person!) and I just can't believe the level of consumerism. I understand people can make a good living (I make a pretty good living too) but with the amount of their possessions and the constant keeping up with the Jones I think it's next to impossible that the majority are not leveraged to the maximum through HELOCs dependent on bogus house values that are about to pop. Either that or they are a mini version of the Fed with a printing press in the basement. *lol*

It's going to be an interesting time. I don't know if I'm a fool for liquidating my entire investment portfolio or if I've just sidestepped a 10 or more year asset deflation period. I know one thing, I will regret to my death bed not having liquidated if the market does tank. I will not regret having liquidated if the market continues to go up. I'm positive I was taking on way too much uncompensated risk for the return I've currently been receiving. It's time to study more and stop believing the orthodoxy of "buy and hold"!

JD

[JD_]

If you do not mind, what exactly did you mean when you said after tomorrow I'm going to be about 100% long the US dollar"?

Oh, that's just my tongue-in-cheek way of saying I'm selling the remainder of my equity positions tomorrow and realizing the capital gains. I'll be in money markets aka "100% long the US dollar" for a few weeks (maybe even longer) until I can determine how best to allocate my assets to profit from a potential Ka-Poom.

JD

[jk]

jd, i think it was wise of you to liquidate. you were shouldering tremendous risk with little in prospect for compensation for at least the next 10 years. [i really recommend you visit the hussmanfunds.com website and read through some of the archives for discussions of current valuation and risks.] the u.s. market [at least the s&p] has gone nowhere since 1998, but it's been an incredibly exciting trip! the prospects are for more of the same, little gain but a lot of chutes and ladders along the way. it may well resemble the 1966 to 1982 period; 16 years when the dow went from 1000 all the way to [yes] 1000, but with a 75-80% inflation hit.

you're at an age where you really want to start controlling risk more. you may buy the "equities for the long term" line, but you have to have a really long, long timeline. otherwise you could hit 60 after experiencing a 16 year run like i described in the last paragraph, having lost 80% of the purchasing power of your investments.

your remark makes clear that you know that your next problem is to think about currencies, precious metals and the dollar. i include precious metals because i think gold is in the process of being remonetized. the problem with currencies is that no country wants a strong currency now: it's an ugly contest. i think the u.s. dollar is going to look progressively uglier, but that won't make the other currencies pretty. still, it's hard to put everything into gold -- i know i don't have the nerve. i'm about 23% in precious metals now and thinking about adding a bit more soon.

i'm impressed by the way you've handled your investments up to now. not your investment choices per se, but your fortitude in having a strategy that you were willing to live with. i'm sure you'll soon find a currency/metals stance that you'll be comfortable with.

[JD_]

jd, i think it was wise of you to liquidate. you were shouldering tremendous risk with little in prospect for compensation for at least the next 10 years. [i really recommend you visit the hussmanfunds.com website and read through some of the archives for discussions of current valuation and risks.] the u.s. market [at least the s&p] has gone nowhere since 1998, but it's been an incredibly exciting trip! the prospects are for more of the same, little gain but a lot of chutes and ladders along the way. it may well resemble the 1966 to 1982 period; 16 years when the dow went from 1000 all the way to [yes] 1000, but with a 75-80% inflation hit.

you're at an age where you really want to start controlling risk more. you may buy the "equities for the long term" line, but you have to have a really long, long timeline. otherwise you could hit 60 after experiencing a 16 year run like i described in the last paragraph, having lost 80% of the purchasing power of your investments.

your remark makes clear that you know that your next problem is to think about currencies, precious metals and the dollar. i include precious metals because i think gold is in the process of being remonetized. the problem with currencies is that no country wants a strong currency now: it's an ugly contest. i think the u.s. dollar is going to look progressively uglier, but that won't make the other currencies pretty. still, it's hard to put everything into gold -- i know i don't have the nerve. i'm about 23% in precious metals now and thinking about adding a bit more soon.

i'm impressed by the way you've handled your investments up to now. not your investment choices per se, but your fortitude in having a strategy that you were willing to live with. i'm sure you'll soon find a currency/metals stance that you'll be comfortable with.

Hi jk,

Upon your recommendation in the who do you read? who do you trust? (www.itulip.com/forums/showthread.php?t=99) thread I have been reading John Hussman's weekly market commentaries. I had come across John about a year ago with his hussmanfitness.org (www.hussmanfitness.org) Web site and already respected his knowledge in that area. One thing stood out when I read some of his most recent market commentaries. Valuations absolutely matter and the current 16+ P/E ratio of the S&P 500 is way high historically since we are most likely at an earnings peak on the S&P and in the past most earnings peaks have had the S&P 500 P/E at 10. Earnings peaks almost guarantee P/E expansion over the next few years unless prices also fall. Neither of those outcomes would have been very good for a 100% equity allocation.

With the average dividend yield dropping below 2% from a historical average of 4% the long term holding period for equities has also moved from about 25 to 30 to ensure an almost guaranteed positive return to 50 to 60 years. That's a lot of years and a lot of risk! It's certainly getting beyond the holding period of even a new investor in his 20s. For one in his 40s it has to be a serious consideration and so once again valuations really matter.

I can't say my 100% equity allocation was very smart but at least it was consciously done. Like a number of other people I made bad financial decisions in my 20s and early 30s. I liquidated an IRA in my early 30s because I was out of work and thus erased all the savings I had done in my 20s. I wiped out the most important decade of anyone's long term retirement plan when it comes to the power of compounding returns. The past 10 years I've felt pressured to make up for that mistake and have been aggressive in my allocation. It hasn't hurt me, mostly just through dumb luck, but 100% equities is certainly way too aggressive. I have to start getting more educated about the global economy and specifically about money supply and trade/debt issues. I've been completely ignoring them up to this point so I'm going to sit in cash for a while, educate myself, and then redesign my entire asset allocation. Before I basically had 3 asset classes I worried about - stocks, bonds, and cash. Now I really have to think about commodities and currencies as well because I've been dollar denominated for a very long time. If the dollar declines my relative global purchasing power is declining too even if I have made money with my dollar denominated equity investments.

Thanks for the recommendation about John Hussman. I'm enjoying reading his commentaries.

JD

[blazespinnaker]

I too am 90% cash, however my situation is unique. I have to say though that liquididating your portfolio into cash and taking a capital gains hit seems like an interesting bet .. maybe it would have made more sense to purchase uspix or similar hedging instruments?

Anyhow, you and I are in the same boat so I sure hope you made the right choice :)

[jk]

someone sent me this excerpt a while ago. i thought it was apropos


Holding Wealth Robin Hahnel from “Panic Rules”

While most of us who live month to month don’t have to worry about it, how to hold their wealth is the chief economic concern of the tiny minority who own most of the wealth. If they hold their wealth in dollars, it :”earns” nothing and could be “eaten away” by inflation or depreciation of the dollar relative to other currencies. If they hold their wealth in stocks, they will get dividends but may suffer ‘capital losses’ if stock prices fall. If they hold their wealth in bonds, they will get yields but may suffer capital losses if bond prices fall because interest rates rise in the economies above the yields their bonds pay. If they hold their wealth in foreign currencies, foreign stocks, or foreign bonds, they have similar worries. What a headache. There’s just no foolproof way to ‘salt’ wealth away and be secure that it will not erode---even if one were willing to forswear any interest in ‘earnings’ from wealth. Even if one buys gold, diamonds, famous painting, Persian rugs, or real estate, there is no guarantee that their market prices won’t fall and wipe out a portion of one’s wealth. And leveraging wealth to increase its “earnings” only increases the downside danger of serious capital losses.

These dilemmas lead to the following rules for those with significant wealth:

 Rule 1: Get your priorities straight. Remember that how to hold your wealth should be your MAJOR economic concern, and whether or not your government is helping you preserve your wealth or making it more difficult should be your first criterion for supporting or opposing any government.

 Rule 2: There is no such thing as “salting” wealth away. You must choose to hold your wealth in some particular form.

 Rule 3: There is no way to hold wealth that does not entail some risk that it will be lost. Even governments sometimes default on bonds, and even insuring wealth is useless if the insurer goes bankrupt. There are only more or less risky ways to hold your wealth.

Financial advisors---people who advise other people how to hold their wealth draw three conclusions from all this:

 Conclusion 1: Don’t put all you wealth eggs in one basket, i.e., diversify your portfolio.

 Conclusion 2: Remember that the secret to wealth-holding is “knowing when to hold’em and when to fold’em,” i.e., when to stay with one type of asset, and when to sell that asset and buy a different one. Moreover, the “when to hold’em and when to fold’em” decisions should be guided by Rule 2 for proper behavior in credit systems: PANIC FIRST. And

 Conclusion 3: the best “sucker play” is to find high-yield investments where someone else (foolishly) assumes the risk by agreeing to pay you if your investment goes bust. (As we will see, taxpayers are often the easiest “suckers” to bamboozle.)

In March 1999 Goldman Sachs, files to sell a roughly 12 percent stake in itself to the public. In the process the firm explained to prospective buyers why the wealth-managing “industry” was a good industry to invest in .In the IPO statement Goldman explains that during the 15 years from 1983 to 1998 while worldwide economic production tripled, the market value of equity stocks worldwide had soared sevenfold, and the amount of new borrowing worldwide had rocketed twenty fold. Can there be any doubt that highly leveraged wealth- holding activity is the tail that is wagging the dog of world production

[blazespinnaker]

it basically boils down to this:

your standard of living is not a zero sum game, but being rich certainly is.

When it comes to money, if you're not taking it from someone else, then someone else is taking it from you.

This doesn't apply to things like longevity or education or whatever, but it definitely applies to your money!

Why is this relevant? Simple... *indexing* or *diversifying* .. nothing will save your money. There is no sure fire investment.

The only thing that will save your money is if you are actively trying to win while others are losing.