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Ghost of Cutten
Registered: Aug 2009
Posts: 2632 |
04-29-12 05:40 PM
Quote from atticus:
Yeah, but it was a period of low-vol due to the US fixing.
For US residents. For most of the rest of the world, gold was not low-vol, there were numerous devaluations and sometimes currencies just totally disappeared.
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Ghost of Cutten
Registered: Aug 2009
Posts: 2632 |
04-29-12 06:09 PM
Quote from Daal:
This argument would be almost the same as saying that float in the insurance industry is bad. Yes you COULD be hit by a lighting but the vast majority of that time you will be fine. I simply won't accept that idea that one can't build a conservative portfolio with positive expectation with that cash
You could hold a basket of develop world gov bonds with 1-3 year maturies or basket of currencies earning money market rates,etc. But even in T-Bills, they won't be 0% forever and your portfolio is supposed to be about the very long-term. Its extremely likely that the next 30y returns in T-Bills will be something nice, probably the inflation rate minus taxes or something along those lines
No, this argument would be saying that the float in the insurance industry, like every other form of enhanced yield, comes at a cost in terms of risk. It is not free money. Insurance companies can and have gone bankrupt because they invested their float too aggressively, or miscalculated the profitability of the premiums they wrote.
Your argument is far more untenable - you are trying to say that you can get extra yield without any extra risk. But where is your evidence that the higher (but still pathetic) yield from the 1-3 year G7 basket (big change from Brazilian t-bills or 5-8 year bonds) is not simply an efficiently priced compensation for the extra risk you take by going out the yield curve and risking default?
There's also the risk of margin calls - if gold falls significantly, you will not be able to just sit on it, you will have to meet it by selling your 1-3 year treasuries at the market price, which may well be below what you paid for them.
Since a conservative portfolio will already have cash and fixed income, it is counter-productive to take on extra tail risk by margining gold futures and collateralising with a bond investment, instead of just owning it cash-paid (either physical, or through a fund). You'll already have 20-25% in bonds, another 20-25% in short-term notes, why risk disaster in a default scare just to grind out 0.5% more per year? And if you make it 'safer' by going down to 1-3 years, or even 3 months, your return falls commensurately and you *still* have 100% of the tail risk if there's a default, or if real rates stay negative. In most cases, every basis point in extra yield you reach for is ultimately 'paid' for in terms of extra risk.
The target goal of a conservative investor is to minimise the chance of a really bad outcome, whilst still getting good returns; not to maximise the total return in the majority of scenarios, at the risk of getting screwed in a minority of scenarios. The latter is inherently a speculative investment policy. Yet even if you want to speculate and take on extra risk to get another 0.5%-1% per annum, you are more likely to get it efficiently by increasing the risk in your risky assets i.e. stocks. For example, owning more stocks, or keeping the total stock portion the same but increasing the % allocated to small-cap or emerging/frontier market or deep value stocks. That will boost your risk-adjusted return more than by owning some more government bonds or t-bills, and the extra tail risk will be less (a 25% gold holding can only fall 25%. A 25% margined gold futures position plus a 25% bill/bonds portfolio can fall 50%).
So, if you want to increase total return in exchange for extra risk, then own a bit more in stocks, or own slightly more risky higher-return stocks. Don't go to a leveraged 125% total exposure so that you can have an extra 20-25% in 3rd world t-bills or long-term Treasuries, that's totally nuts.
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Debaser82
Registered: Aug 2008
Posts: 3477 |
04-29-12 08:02 PM
Quote from Ghost of Cutten:
IMO you want something like this as a neutral portfolio:
20% gold
20% domestic stocks
20% foreign stocks (total 40% in stocks)
20% long bonds
20% cash
Do you buy individual stocks/bonds or index?
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Daal
Registered: Oct 2002
Posts: 8999 |
04-29-12 08:40 PM
Quote from Ghost of Cutten:
No, this argument would be saying that the float in the insurance industry, like every other form of enhanced yield, comes at a cost in terms of risk. It is not free money. Insurance companies can and have gone bankrupt because they invested their float too aggressively, or miscalculated the profitability of the premiums they wrote.
Your argument is far more untenable - you are trying to say that you can get extra yield without any extra risk. But where is your evidence that the higher (but still pathetic) yield from the 1-3 year G7 basket (big change from Brazilian t-bills or 5-8 year bonds) is not simply an efficiently priced compensation for the extra risk you take by going out the yield curve and risking default?
There's also the risk of margin calls - if gold falls significantly, you will not be able to just sit on it, you will have to meet it by selling your 1-3 year treasuries at the market price, which may well be below what you paid for them.
Since a conservative portfolio will already have cash and fixed income, it is counter-productive to take on extra tail risk by margining gold futures and collateralising with a bond investment, instead of just owning it cash-paid (either physical, or through a fund). You'll already have 20-25% in bonds, another 20-25% in short-term notes, why risk disaster in a default scare just to grind out 0.5% more per year? And if you make it 'safer' by going down to 1-3 years, or even 3 months, your return falls commensurately and you *still* have 100% of the tail risk if there's a default, or if real rates stay negative. In most cases, every basis point in extra yield you reach for is ultimately 'paid' for in terms of extra risk.
The target goal of a conservative investor is to minimise the chance of a really bad outcome, whilst still getting good returns; not to maximise the total return in the majority of scenarios, at the risk of getting screwed in a minority of scenarios. The latter is inherently a speculative investment policy. Yet even if you want to speculate and take on extra risk to get another 0.5%-1% per annum, you are more likely to get it efficiently by increasing the risk in your risky assets i.e. stocks. For example, owning more stocks, or keeping the total stock portion the same but increasing the % allocated to small-cap or emerging/frontier market or deep value stocks. That will boost your risk-adjusted return more than by owning some more government bonds or t-bills, and the extra tail risk will be less (a 25% gold holding can only fall 25%. A 25% margined gold futures position plus a 25% bill/bonds portfolio can fall 50%).
So, if you want to increase total return in exchange for extra risk, then own a bit more in stocks, or own slightly more risky higher-return stocks. Don't go to a leveraged 125% total exposure so that you can have an extra 20-25% in 3rd world t-bills or long-term Treasuries, that's totally nuts.
Couldn't disagree more. Its positive expectation to invest that cash EVEN WITH FAT TAILS
Say 2 people have $10K in the turkish lira
One of them buys 10K worth of gold coins
The other buyer buys $10K worth of gold futures. He can invest up to $7K in conservative fixed income which should be PLENTY to cover fluctuations and make a margin call extremely rare
The Turkish government goes nuts and TRY is worthless overnight. Both investors are in the SAME situation, their gold holdings will soar. The 2nd investor will have worthless fixed income investments but who cares, he lost nothing compared to the 1st guy(They will both have a gold portfolio that now is worth say $10M). 99.99% of the time though, he will have an additional few % every year
A scenario where he COULD be hurt would be if
-The fat tail occurs(Hyperinflation)
-The fixed income investment becomes worthless(ALL the investments he made were destroyed by the hyperinflation)
-AND he gets a margin call due a increase in the margin requirements on gold futures which he can't meet through other means(Which will NOT be the case that we are talking here since there will be plenty of fully paid stocks, bonds and other stuff proving margin) AND he misses a further gold run due that
What is the proper price of an option that would pay off in this extremely rare event?I believe its highly likely that the few percentage points earned a year will more offset the risk of this event
But this even won't even happen because the margin increase would have to be bigger the margin provided by other parts of the portfolio(Which will include stuff like international stocks and other currencies exposures). We are talking about a black swan within a black swan
As I said 99.9%+ he will at LEAST earn the risk-free rate every year, maybe even a risk premia if he is comfortable with the swings
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Daal
Registered: Oct 2002
Posts: 8999 |
04-29-12 08:46 PM
One can't dismiss having FREE FLOAT by saying 'well, markets have fat tails'. The whole point of investing is to earn premia which gives you a return even though there are fat tails
The magin call thing is simply not a concern, we are not talking about a guy with $100K getting $1M in free float. But just a little less than 20% in FREE FLOAT
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Daal
Registered: Oct 2002
Posts: 8999 |
04-29-12 09:12 PM
Also, with regards to domestic default, if that is really a concern he can simply invest in foreign short-term bonds and get additional diversification due that. I will not answer the argument of 'but yields are low' you keep making. 0% rates is NOT the norm its the exception. Your long-term return projections conveniently went away in this scenario
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