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Revisiting - How Much PMs should you hold?


vand

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"How much PMs should one hold?" is one of those "how long is a piece of string?" questions. The answer will be very different for everyone depending on factors such as your age, income, debt, free cashflow, your net assets, your expectation, and understanding of PMs. Holding no PMs at all leave you open to many political and economic risks that have been well discussed, yet putting 100% of your wealth into PMs is also not smart, as the fortunes of PMs can wax and wane wildly also.

There are different ways you to measure your PM holdings, and this is important. Firstly and most easily you can consider the outright number of Oz of gold/silver that you have accumulated. An oz of gold is an oz of gold, after all. However, I believe that a better and more rounded way of looking at this is to also consider how much this represents of your net assets. 

For a young person just out of college who maybe has some debt and no working history to have accumulated any savings, pension or property, they have zero or even negative net asset. Does it make sense to  start accumulating 30oz of silver a month for this person, as much as it does to someone who has been working for 20 years, has a decent pension pot and home equity, and wishes to diversify with PMs? I would argue their priorities are different. The true price of any investment is the opportunity cost of buying and holding it. Ploughing a sizeable chunk of your salary into PMs takes away a lot of resources that might be needed for more pressing matters. PMs can and should be bought by far more people than they currently are, but it has to be proportional to each person's circumstance. Aggressively accumulating 1000oz of silver may be far too much for our newly graduated debt-laden student, but it may be far too little for our hypothetical middle-aged higher-income manager who has steadily built up his net assets throughout his working life.

Personally, as someone who has always been a saver/investor with 20 years of working history behind me, and probably at least 20 more still ahead of me, I ran the sums for my own situation and it altered the way I think of my stack. Having accumulated well over triple-digit oz of silver, I was beginning to ask myself if I was putting too much into an "unproductive asset." However, when I recalculated it all as simply a part of my overall net asset (housing equity + cash + shares + pension + car) it only came to about 7%. For me, it makes more sense to think of my PM holdings in this way than simply to think about how many ozs are in my stack, and I've decided that I'm very comfortable holding up to 20% of my wealth in PMs. 

As an aside, repaying high interest debt is by far the most useful thing that anyone can do with their monthly paycheque. Anyone who has credit card debt should not even think about investing in PMs or anything else until they fully pay off this crippling burden. You will never find a better risk/reward profile on any investment venture that matches the interest savings that you can make from just paying off high interest debt - it doesn't exist. 

For most people then, credit card & possibly personal loan debt should be prioritized before buying PMs.
 

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Great topic.

I used to wrestle with this as well though now I treat precious metals as my long term cash equivalents given where we are in regards to the bond market. Basically I supplant bonds with gold. This means I am happy to hold up to 40% in gold. This may be right or wrong, but it is where I am comfortable and it has done me right so far. 

Debt - in most cases absolutely don't be investing in anything until it's paid off if it's going to cost money servicing it. That said it is possible to service debt for no cost for long periods of time with the right vehicles and a plan in place. I did this to renovate the house, couple of credit cards, regular saver to pay it off, 30 months interest free. Will be paid off well before it yields interest. It's a monthly outgoing like a bill, but costs nothing extra. The only thing is I can't use that money to buy precious metals in the mean time which isn't fun :D

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Important Edit: In reality PM exposure is more than 7% as I also trade PM and PM-derived markets which increases my effective position, so I would say that it's probably in the region of 11-12%. While this is several thousand£££s of exposure that might keep me up at night normally when a 1-2% move can result in a few hundred £££ change in my trading position, I can sleep very easy with this level risk as it fits in nicely with my overall investment philosophy. Being able to sleep easily on your position is a very important pat of being a good trader. 

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@KDave I did the same thing and took out 6k on a credit card in 2016 because I knew I would pay it all back at 0%. Obviously the system relies on the indiscipline of the majority in order to be viable. if you are smart and disciplined then you can make offers work in your own interest. 

 

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Its a question I love to debate, no matter how many times!

 

Everyone has a different view on this. My own view is you should stack somewhere between 10 - 20% of your savings total i.e If the value of all your savings is say £20,000, at least £2000 of that should be in PMs.

Having said that, I have never really made sure I stick to that number religiously, rather I stack on an instictive feeling that my portfolio is becoming unbalanced. Let me just work this out....

 

Ok, my net worth is split as follows:

Cash savings: 70% (45% raw savings and 30% ISA)

PMs: 16%

Cryptos: 10%

Other: 4%

 

Interesting that Im almost on the money with my suggested PM allotment just through gut feeling. You might be wondering why I have such a large portion in cash savings. Well, fact of thr matter is that I have some pretty big purchases coming up over the next two years and unfortunately for us, most people dont accept silver bars or tiny gold coins as payment, regardess of whether they should or not.

 

As an aside, the very first thing I did after finishing my education was pay off my debts in one lump sum. That move has saved me many hundreds of pounds already and I would advise everyone to rid yourself of debt before you start investing. I dont buy Robert Kiyosakis mantra of getting yourself into productive debt. Unless of course you have something to back the debt up, like a nice pile of PMs for example!

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4 minutes ago, StackerNoob said:

Ok, my net worth is split as follows:

Cash savings: 70% (45% raw savings and 30% ISA)

PMs: 16%

Cryptos: 10%

Other: 4%

Interesting, and thanks for sharing. Out of curiosity, do you include pension fund in your calculations?

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22 minutes ago, PansPurse said:

Interesting, and thanks for sharing. Out of curiosity, do you include pension fund in your calculations?

My pension is included in my "other" category. I dont put alot into it as I believe most pension funds wont be around when I retire in 40 odd years time. I'm reluctant to put my money into something long term that I dont believe in.

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5 minutes ago, StackerNoob said:

My pension is included in my "other" category. I dont put alot into it as I believe most pension funds wont be around when I retire in 40 odd years time. I'm reluctant to put my money into something long term that I dont believe in.

Ooh, that's interesting. I'm pretty much the exact opposite. My pension fund is my biggest single pot. I really value the tax relief component of it and I actually see it as more important because I personally don't think there'll be a state pension by the time I retire, so I figure it's something I need to take care of myself.

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3 minutes ago, PansPurse said:

Ooh, that's interesting. I'm pretty much the exact opposite. My pension fund is my biggest single pot. I really value the tax relief component of it and I actually see it as more important because I personally don't think there'll be a state pension by the time I retire, so I figure it's something I need to take care of myself.

My reposte to this is that essentially my PM stack is my pension, save for an explosion in PM prices that I cant resist cashing in on. Should the PMs climb steadily with inflation over time and no obvious sell signals come to pass, Ill hold on to them into retirement.

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Just now, StackerNoob said:

My reposte to this is that essentially my PM stack is my pension, save for an explosion in PM prices that I cant resist cashing in on. Should the PMs climb steadily with inflation over time and no obvious sell signals come to pass, Ill hold on to them into retirement.

On many levels, yes that sounds like a really solid plan. I know that long-term PMs tend to do much better than cash equivalents and seeing as my pension fund is basically sitting in an account somewhere (ok strictly speaking someone's investing it but if they can do better than pot luck I'll be surprised). I guess the only uncertainty is whether that out performance is enough to counter the siren song of the 20% (or maybe 40 or 45%) tax relief :rolleyes:

As an aside, I'm now feeling slightly less at sea when I compare my monthly PMs budget to other folks :lol:

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15 minutes ago, PansPurse said:

On many levels, yes that sounds like a really solid plan. I know that long-term PMs tend to do much better than cash equivalents and seeing as my pension fund is basically sitting in an account somewhere (ok strictly speaking someone's investing it but if they can do better than pot luck I'll be surprised). I guess the only uncertainty is whether that out performance is enough to counter the siren song of the 20% (or maybe 40 or 45%) tax relief :rolleyes:

As an aside, I'm now feeling slightly less at sea when I compare my monthly PMs budget to other folks :lol:

Haha I know what you mean, had I not neglected my "pension" so much my budget would be vastly reduced. Still, I can only dream of playing with the big boys of the PM world any time soon :-(

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You should certainly include your pension in your net asset calculation even if you believe they will be defaulted on, because the event that causes the pension default is also th event that sends PMs into the stratosphere.

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I need to look into this further, but I think there are different risk profiles between a private pension, a government or employer pension. If your pension is equivalent of a SIPP then it's shares in a special wrapper and of no counter risk other than the holding company/bank and a future chancellor moving the goal posts, but a default isn't as likely as with say, the state pension or government pensions. A default is likely there and as we saw a few years ago the government will force people to take hair cuts when necessary, those type of pensions are promises paid from borrowing and tax take. Those who worked for bhs store (think that's the one) on an employer pension also know about default when the company goes bust. I think what pension type you have changes the risk and needs to be considered when choosing gold allocation. 

I wouldn't go all in on either gold or a pension though, a mix is required. 

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It's quite eye opening that 70% of my net wealth is tied up in my home, and yet:

- I think property prices have considerable downside risk that will play out to some extent over the next few years
- I consider myself financially astute and actively save & invest in other vehicles

For most people who are buying their own home, I don't think its too far fetched to  suggest that at least 90% of the net wealth is tied up in their homes. Imagine what even a 20% fall in house prices across the board would do to peoples' perceptions of "how well am I doing". I've always been of the opinion that Britain's housing market and overall economy are inextricably linked.

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I would say anything you were going to hold literally in cash long term that wasn't in forex would be a good candidate.  You wouldn't want it to be cash short term because of the transaction fees, and you couldn't want it to be anything other than strictly cash because you won't earn any interest or dividends on it.

I'd also say that a certain amount of PM is prudent in any case, as preparation for uncertainty.  PM is like food that is easy to transport.

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