What portion of savings should be in PM

[vand]

5 minutes ago, Oldun said:

15% minimum of anybody’s monthly salary should go towards retirement. So as for pms, I would recommend no more than 1.5% of your monthly income split 10% ag to 90% au...but that is just my advice.

So your advice is.. the minimum "recommended" PM allocation in the context of the minimum "recommended" saving rate? 

Not a true believer?

[Oldun]

You make £2000 a month, and after bills and food and everything else, put £300 aside for the future. I would therefore spend about  £30 of that on pms..... to clarify. That would be my “sensible” advice

[Oldun]

13 minutes ago, vand said:

So your advice is.. the minimum "recommended" PM allocation in the context of the minimum "recommended" saving rate? 

Not a true believer?

Most realistic shall we say and trying to advise according to the situation of the original poster.

[KDave]

1 hour ago, vand said:

The 5-10% figure is based on 2 things:

Firstly, the long term return in the (US) stock market is superior

I might be slightly wrong on these numbers, but I think its roughly 6.8% real growth in stocks vs 3% real growth in gold since 1971; it makes sense to put most of your money in where it earns the most

Secondly, gold is a volatile asset class

If you have 10% in gold but gold is 3 times as volatile as stocks, then in reality you have 30% of your risk in gold. This is part of the reason you see so many traditional portfolios having quite a high bond allocation, because bonds are less volatile than stocks. You can hold bonds up to quite a high percentage with a good tradeoff betweeen only slight decrease in the expected returns and and a big increase in the predictability 

 

Deciding how to structure your investments and the asset allocation you want I find is one of the most interesting areas of personal finance

 

Risk and volatility are separate concepts and are personal concepts, peoples understanding of what they are is very different. I believe many cautious investors hold so little gold yet have so many bonds because they see risk where there is only volatility. I see risk in government bonds that are not present in physical gold, volatility in gold sure, but not the same risks. It is perspective.  

Another way to say it is - risk and volatility are not the same thing. 

[Oldun]

Or just save up, buy a gold brick and forget about it and carry on life as normal...chances are that works......sometimes it is better to notoverthink things as it wastes a life.

[vand]

My response was in the context of traditional modern finance and measures of risk. Yes, risk and volatility are not the same, but most people are wise to consider portfolio characteristics like drawdown and risk adjusted return, all of which are linked into volatility of underlying constituents. It is hard to argue that concentrating 100% of your wealth in anything brings in risk in one form or another that more diversification would mitigate.

[KDave]

Gold produces 3% return a year real term over 50 years. Bonds will produce something similar? Not a lot more I would bet. Bonds have counter party risk (government default via various scenarios) and we are 5 decades into a bull market with interest rates at record lows. I see risk, others don't they think bonds are safe.

Gold produces 3% a year for 50 years - volatility is irrelevant then, we get 3% return, where is the risk. Risk of being robbed, gold being made illegal - different risks. Volatility does not increase the risks. All imo.

Yes it is overthinking agreed, we all see things differently that is what makes the market 👍

[KDave]

Ah yes I see your point, someone with shorter time horizon would not want volatility especially during draw down, it becomes a risk in that case. For long time horizon the risks are different, volatility is not even a risk hence why people are encouraged to invest more heavily towards stocks in the early years.

What did the wealth manager say, something like there is no such thing as a good investment, only appropriate investments dependant on your time horizon. Having 10% in gold, whether it is a good idea not, whether it is just a meaningless number, this is decided by context - primarily time frame. 

[Oldun]

That all went way above my head. Accumulate physical gently and in a small and economically sensible way or slowly without concern or buy a bloody great big brick without concern if you got the looolah....did I miss something ? Other investments are specialised.

[KDave]

Sure just do that if that's what you are comfortable doing, it's individual based or should be. That's why I don't like the idea of there being a set number to invest in something, there isn't a good reason for everyone to have 5-10% in gold. 

[vand]

1 hour ago, KDave said:

Ah yes I see your point, someone with shorter time horizon would not want volatility especially during draw down, it becomes a risk in that case. For long time horizon the risks are different, volatility is not even a risk hence why people are encouraged to invest more heavily towards stocks in the early years.

What did the wealth manager say, something like there is no such thing as a good investment, only appropriate investments dependant on your time horizon. Having 10% in gold, whether it is a good idea not, whether it is just a meaningless number, this is decided by context - primarily time frame. 

You may have a portfolio that you expect to generate 15% a year but if it it bounces up and down with annual troughs 60 or 70% below the peak then is it better than a portfolio that will generate you a much more consistent 1% per month to returns 12.7% a year?

One portfolio may have a better absolute return, but the other portfolio has a much better risk adjusted return.

It is an inconvenient fact that many sellers are forced sellers at just about the worst time, whether it is stocks or real estate or anything else, sometimes during the bottom of a bear market when they get made redundant. 

 

This brings us back to gold as a diversifying asset. Gold and PMs are the single asset class that most negatively correlate with equities. Bonds are not as negatively correlated, in fact they only move opposite to stocks about half the time. Given that inverse relationship,  a simple but sensible allocation strategy could be something like this: Put 15% of your portfolio in PMs, and then have a rule to rebalance back to 15% if that weighting falls below 12% or rises above 18%. This would ensure that buy more of a cheap asset and lighten up on expensive assets, so you are continually buying low and selling high.

 

[KDave]

Volatility is only a problem if it affects the return. We agree gold provides return on average of 3% regardless of peaks and troughs so why does volatility matter other than for psychological reasons perhaps based on misunderstanding. 

Why buy bonds at all then if they are not negatively correlated like gold is, the return and risk reward favours gold. Better to hold more stocks if you want higher return correlation for the same risk.

Buying low selling selling high mechanically that is one way to do it. Why not 40%. 

[KDave]

Help me out here. Absolute return or risk adjusted return, it's still expected return consistent or not, the past gives us one number for each asset over time. 3% a year in gold. Forced selling. Mechanical buying and selling. I think i get it, but what does it have to do with holding 15% in gold. Why that much and not more or less.

An ounce of gold will not go bust. Bonds and stocks do. Why would you want to take the risk for a poor return in bonds when you can get a similar return from gold, or better return from stocks, risk adjusted. Not volatility adjusted but risk adjusted. 

[Vvnewbie]

Thanks for the replies! I'll Google some of the terms you used as I'm a little lost in your arguments 😛

[Michal]

Meh, just go 90% of savings in PM, what wrong could possibly happened ? 🤣 The true is that your savings have to be considered as money lost, not existing. Keeping money in PM will save them from inflation bites in longer term, specially if you are persistent saver. 

[vand]

15 hours ago, KDave said:

Volatility is only a problem if it affects the return. We agree gold provides return on average of 3% regardless of peaks and troughs so why does volatility matter other than for psychological reasons perhaps based on misunderstanding. 

Why buy bonds at all then if they are not negatively correlated like gold is, the return and risk reward favours gold. Better to hold more stocks if you want higher return correlation for the same risk.

Buying low selling selling high mechanically that is one way to do it. Why not 40%. 

With all due respect, this is not true. The long term return or expected return does you absolutely no good if you are forced to liquidate during a selloff if you lose your job or have a serious health problem or something. That's a real risk.  

We know how volatile silver is, yet in real terms it has preserved it purchasing power in the long run, yet you would be much worse off if you had invested a big portion of your wealth in silver in 2011 and then had been forced to sell it any any point since.. volatility and downside protection matters. Silver is a volatile asset; and there are short term and medium term risks associated with that

[KDave]

56 minutes ago, vand said:

Volatility is only a problem if it affects the return. 

With all due respect, this is not true.

Thanks for the reply, it is true in some circumstances, you have provided example of circumstances when it is not true. Why is it right to recommended holding an amount in gold bonds and stocks, regardless of the circumstances? 15% in gold being the example here. I still have not had a good answer as to why it is so low, and stocks bonds are so high.  

1 hour ago, vand said:

The long term return or expected return does you absolutely no good if you are forced to liquidate during a selloff if you lose your job or have a serious health problem or something. That's a real risk.  

 

The example now is if you fall on hard times - stocks and bonds are the insurance. Fair and true. Volatility matters in this context. What about; 

If I invest in a pension for 40 years and have no way to access when I lose my job. Still 15% in gold? Still so many bonds?  

If I want to save some money for my kids, perhaps even for their retirement in 50 years, I should only put 15% of it in gold? Why?

I have read an example of circumstances when volatility matters, yes I agree it does matter in those circumstances - hard times, need to liquidate better to have less volatile assets. I have provided two examples when volatility does not matter; what matters most is the return over time and the perceived risk. I believe it is - circumstance - and - time frame - that determines how much and what type of assets you should hold, considering risk and reward as weighting. Volatility is a factor to consider as determined by time frame and circumstance.

The silver example. It is an argument for market timing and historical return. Return is determined by when you buy and how long you hold. If you buy in 2011 the volatility of silver does not change, your return based on your timing and time frame changes. Market timing comes into play as well then. 

What does history say about the return on that investment based on where it is now (timing), over your timeframe, taking into account your circumstances - this is a better way to determine weighting. Rather than looking to the financial industry for the recommended figure or x bonds, x stocks, or 15% in gold. There isn't a good reason to recommend 15% in gold as a given. 

[vand]

You can play around with different asset allocations and see what the effect is on overall performance portfolio performance, but you will see that you don't need a very high percentage allocation in gold to gain the benefits precisely because of its historic volatility and relationship with financial assets.

Also do some research into strategies like the Permanent Portfolio which advocates 25% in each of equities, gold, bond, cash. I like this strategy because of its simplicity and the diversification it provides as you are holding something that will thrive in any imaginable macroeconomic scenario. 

https://seekingalpha.com/article/4056395-permanent-portfolio

 

 

 

 

[KDave]

Excellent video that has answered my question thank you. Belangp has already thought about and answered this, almost everything we have said in the thread is in that video. 👍

To paraphrase - as we increase holding of gold to 25% of a portfolio we get increased volatility. Not increased risk. Volatility is only a problem if you are forced to liquidate to meet cash expenses. If you are not forced to liquidate, volatility is not dangerous. A debt default or loss of confidence in the currency is also risk (in the context of bonds). That risk increases as your exposure to bonds increases. So the pay off on a bond/gold portfolio is volatility offset with systemic risk.

That was my understanding, he said it better than I could.

The 5-10% figure is too low for a pension or long term investment, but perhaps for the average investor, the volatility offset against risk makes it a better amount for psychological reasons. 15% would be better. 20% has been demonstrated to be enough to cover a reset event to recoup the losses on the rest of the portfolio - that would be my minimum then for the systemic risk as I see it. More gold only increases the volatility, but not the risk (dependant upon your situation in regards to forced liquidation of course).

It is interesting that over his selected timeframe, 40% gold and 60% stocks is less volatile than a portfolio of 100% bonds. You get reduced volatility and none of the risks associated with bonds. I guess my using 40% gold back in the day instead of bonds was not so mad after all then. Not that I understood this at the time, it was more that I didn't like the risk/return on bonds. It has always amazed me that people want bonds as a safe thing to hold against stocks when something better is available, but I guess not everyone is comfortable with the volatility that comes with holding so much gold. 

[vand]

12 hours ago, KDave said:

Excellent video that has answered my question thank you. Belangp has already thought about and answered this, almost everything we have said in the thread is in that video. 👍

 

I think that video, and also his video "The Anti-Financial Asset" are essential viewing if you want to really understand the nature of gold's and its place in the world of finance. If you grasp the message he is putting out and run with it you will be able to determine for yourself what your ideal holding ratios are.

[KDave]

Thanks I will take a look.

Unrelated to this thread, another good one of his is "building the perfect system by capitalising on Gresham's law", a long one but I have listened a few times, and it has shaped my understanding of fiat and gold working together in the same system, and of the nature of both.  

[DarkChameleon]

Never more then 10% of investable money, don't replace a 401k etc...keep upto 6 months liquid capital and yo should aim at reaching 10 times earnings by your retirement, more then that is better but less is not advisable unless you have a secondary pension to look forward to.

[Abyss]

Every time the US deficit increases by a trillion dollars add another 5% of your total net worth into PMs.

[vand]

3 hours ago, Abyss said:

Every time the US deficit increases by a trillion dollars add another 5% of your total net worth into PMs.

I've had about 300% of my net worth in PMs if I did that

[Abyss]

I only stared stacking/collecting six months ago when deficit at 21 trillion and I have about 5% my total net worth in physical PM US debt clock now 22 trillion 😂 and I am on target. Also depends on the price of PMs if spot took a significant price drop below last years lows then it time to back up the truck and double down.

34 minutes ago, vand said:

I've had about 300% of my net worth in PMs if I did that