How can I invest almost entirely in real assets?

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How can I invest almost entirely in real assets?

Postby Browser » Sat Dec 15, 2012 10:28 am

I just read a short piece by Rob Arnott, entitled "Death of the Dollar".

http://advisorperspectives.com/commentaries/research_121412.php

The endgame is coming. It doesn’t matter who is in the White House or which party controls Congress; when the markets lose confidence in our currency, it happens very fast. When confidence in the world’s dominant currency plunges, the consequences can be very disruptive to every business and consumer around the globe. The coming decade will be a doozie.

Whenever I read something like this, especially from a "mainstream" kind of financial guy and not some fringe type, it reminds me what a desperate state we're in and I start asking how I can protect my retirement assets. I've got everything in IRAs, and ask myself if I should be getting out of U.S. TIPS as well as equities and into real assets that might survive a collapse of the dollar. What would I buy? Gold, commodities, real estate? Who is worried about this scenario too, and what are you doing with your retirement assets?
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Re: How can I invest almost entirely in real assets?

Postby livesoft » Sat Dec 15, 2012 10:33 am

I think you should invest in tin foil. You know, the kind to make hats.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: How can I invest almost entirely in real assets?

Postby Johm221122 » Sat Dec 15, 2012 10:35 am

Browser wrote:I just read a short piece by Rob Arnott, entitled "Death of the Dollar".

http://advisorperspectives.com/commentaries/research_121412.php

The endgame is coming. It doesn’t matter who is in the White House or which party controls Congress; when the markets lose confidence in our currency, it happens very fast. When confidence in the world’s dominant currency plunges, the consequences can be very disruptive to every business and consumer around the globe. The coming decade will be a doozie.

Whenever I read something like this, especially from a "mainstream" kind of financial guy and not some fringe type, it reminds me what a desperate state we're in and I start asking how I can protect my retirement assets. I've got everything in IRAs, and ask myself if I should be getting out of U.S. TIPS as well as equities and into real assets that might survive a collapse of the dollar. What would I buy? Gold, commodities, real estate? Who is worried about this scenario too, and what are you doing with your retirement assets?

Not worried at all,the US economy may be running slow and in debt but what's new?world seems like its going crazy, what's new?
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Re: How can I invest almost entirely in real assets?

Postby Calm Man » Sat Dec 15, 2012 10:46 am

OP, in all seriousness, even if the dollar does have trouble, or the economy or whatever, I do not foresee a realistic possibility that people will walk around with pieces of gold to go to the grocery store. The fraud would be rampant and it just wouldn't work. Or go to buy a house with a few pounds of gold. I would ignore this and proceed as though the US will continue to exist in some semblance of what we are now..
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Re: How can I invest almost entirely in real assets?

Postby Valuethinker » Sat Dec 15, 2012 10:58 am

I think it is worth at this point drawing breath and noting:

- natural gas prices in the US are now *one fifth* of world levels. And this has already attracted at least $80bn of new investment in basic industries by the likes of Dow Chemical. Further although they have risen from $2 to $3/ mmcf, they are unlikely to go up to say even $8 in the next few years-- shale gas is that big

- the US might become self sufficient in oil, as a result of greater automotive efficiency and 'tight oil' production. US oil production has risen faster in the past year than it ever has in history in one year, I believe

The Holy Grail of oil self sufficiency, pursued by every US president since at least Richard Nixon, may in fact be upon us in the next few years.

There are risks-- for example a failure to seize efficiency opportunities because 'energy is cheap'-- if it's not cheap somewhere else, then by consuming a barrel of oil/ mmcf of gas, the US is losing the opportunity to export that to that other place-- the economic cost of consuming something is the opportunity cost of what else you might do with it. Even if you are Saudi Arabia, it's worth conserving gasoline (instead they almost give it away free as a political bribe to their own people-- Iran is in the same mess).

I could go on, for example US demographics are pretty close to the most favourable of any developed country.

The housing market has turned.

California is lurching towards a budget surplus.

At this point, gloom and doom stories about the US and the USD don't really do it for me.

A prudent investor recognizes that there is a risk of higher inflation, and owns TIPS, ibonds, possibly commercial property (if it can be directly held), foreign equities etc. But she does not throw out the baby with the bath water on some 'big picture macro' story of the US economy that might well be wrong.
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Re: How can I invest almost entirely in real assets?

Postby FinancialDave » Sat Dec 15, 2012 2:47 pm

OP,
Before you go off the deep end investing in all of one type of asset (of course then again aren't all assets REAL?) you may want to read a book by Robert Schiller called "Irrational Exuberance." In this book he explores (or at least tries) the psychological affects on people from the news of events which get magnified usually out of proportion. More and more people then get drawn into the investment, over what I call "neighbor envy."

So I might ask is this tendency due in part to NEWS you have heard, or is it based on some long term facts that you have analyzed on your own?

fd
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Re: How can I invest almost entirely in real assets?

Postby backofbeyond » Sat Dec 15, 2012 3:48 pm

Is it me or does it seems that whenever I read mainstream news or watch mainstream TV, they are always trying to scare their audience? Something big and bad is always coming and it's going to change everything. I know its sensationalism to generate interest but do they really want their viewers to hunker down in the basement with ammo waiting for the end of times? :shock:

That's why I LOVE this form. Bogleheads by nature, are calm, cool and collective under pressure. We know that this time it really ISN"T different. Not saying things can't get bad, but this form takes a measured, disclipline approach and that in itself is comforting. :beer
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Re: How can I invest almost entirely in real assets?

Postby LAlearning » Sat Dec 15, 2012 3:53 pm

livesoft wrote:I think you should invest in tin foil. You know, the kind to make hats.


+1

As an alternative investment, you may send your money to me so that I may enjoy the end of the world in a new yacht.
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Re: How can I invest almost entirely in real assets?

Postby chaz » Sat Dec 15, 2012 4:03 pm

I don't know of any unreal assets.
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Re: How can I invest almost entirely in real assets?

Postby Jebediah » Sat Dec 15, 2012 4:15 pm

First of all this article doesn't really say anything. He needs to up his game when it comes to bringing the doom.

Doom scenarios are possible, but how likely? Don't make the mistake of confusing possible with likely, scary with inevitable. Still I think it is prudent to not invest 100% of assets in financial products. Find the balance that works for you.
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Re: How can I invest almost entirely in real assets?

Postby Call_Me_Op » Sat Dec 15, 2012 4:20 pm

Browser,

You should add a statement to your IPS that goes something like "I will make no changes to my portfolio based upon any new information for a period of at least 30 days after said information is acquired." That will allow time for the noise filter to settle.
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Re: How can I invest almost entirely in real assets?

Postby RyeWhiskey » Sat Dec 15, 2012 4:29 pm

Browser wrote:I just read a short piece by Rob Arnott, entitled "Death of the Dollar".

http://advisorperspectives.com/commentaries/research_121412.php

The endgame is coming. It doesn’t matter who is in the White House or which party controls Congress; when the markets lose confidence in our currency, it happens very fast. When confidence in the world’s dominant currency plunges, the consequences can be very disruptive to every business and consumer around the globe. The coming decade will be a doozie.

Whenever I read something like this, especially from a "mainstream" kind of financial guy and not some fringe type, it reminds me what a desperate state we're in and I start asking how I can protect my retirement assets. I've got everything in IRAs, and ask myself if I should be getting out of U.S. TIPS as well as equities and into real assets that might survive a collapse of the dollar. What would I buy? Gold, commodities, real estate? Who is worried about this scenario too, and what are you doing with your retirement assets?


A couple things:
- There are always doomsday reports, collapse of the dollar, collapse of the equity market, decades of rock-bottom interest rates, etc... always. So keep that in mind.
- It is prudent to diversify your holdings anyway, and you are probably already more diversified than you think. If you own a house, there's your real estate exposure. If you buy stuff, you've got commodities all around you. Furthermore, your equity holdings will respond to commodity prices in their own way, and since you (hopefully) own the entire market, you will get the benefits there as well as the losses.
- Owning precious metals has it's place in many portfolios (you may wish to explore the Harry Browne Permanent Portfolio) but only when you fully understand the risks of this investment. Precious metals offer no dividends and few distributions at all, and their price fluctuates greatly and often with the hysteria of the market rather than a rock-solid index to inflation. Furthermore, there is the issue of owning/storing/insuring the metals, and what to buy, where to buy, spot prices, mark-ups, etc.. It's much more complicated that a simple, low-cost, basket of index funds.
- You may also consider international bonds which are held in the local domestic currencies as a hedge against the decline of the US dollar. But again, this comes with its own risks as well.

So, in short, there are different investment options to research and understand. And when you've done that and feel comfortable with your level of knowledge, that would be a good time to come back and re-assess your opinion of the US dollar and the possibilities of changing your investment strategy.

Just my thoughts. :beer
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Re: How can I invest almost entirely in real assets?

Postby Phineas J. Whoopee » Sat Dec 15, 2012 6:30 pm

Hi Browser,

I won't repeat the points others have already made, although I agree with most of them.

I'm not sure what you're asking. "Real" property means land with any improvements. Everything else is personal property, and there are important legal distinctions. The non-land options you mention are sometimes called "hard" assets, but they are personal property like any other.
http://wiki.answers.com/Q/What_is_the_difference_between_real_property_and_personal_property

If you want to go to all real assets, it's easy. Sell all your personal property now and use the proceeds to buy land. On the other hand, ownership of real property depends just as much on bits of paper and on a government to enforce its laws as ownership of personal property does.

If you really feel the US is about to collapse I recommend emigration. That's not a facile "love it or leave it" statement. The US depends on industrialized agriculture. If the financial system collapses, so will that. In the ensuing famine do you think you will survive, or is it more realistic that you will die of disease or starvation, even if clutching your shotgun to defend your store of whiskey and ammunition?

Before anyone asks, should such a scenario play out I fully expect to be one of the casualties, and I would have a lot of company. I stay here anyway.

PJW
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Re: How can I invest almost entirely in real assets?

Postby DaveS » Sat Dec 15, 2012 6:56 pm

He says the dollar might go down. Then you want to have an allocation to foreign stocks. Frankly I am not impressed with the article even though I am pessimistic about the dollar. The fed can shrink the money supply as quickly as they can expand it. All they have to do is sell the long bonds and pay off the short term debt they are presently incurring to expand it. The article is noise that your supposed to tune out. Dave
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Re: How can I invest almost entirely in real assets?

Postby docneil88 » Sat Dec 15, 2012 8:35 pm

Browser wrote:I just read a short piece by Rob Arnott, entitled "Death of the Dollar".

http://advisorperspectives.com/commentaries/research_121412.php

The endgame is coming. It doesn’t matter who is in the White House or which party controls Congress; when the markets lose confidence in our currency, it happens very fast. When confidence in the world’s dominant currency plunges, the consequences can be very disruptive to every business and consumer around the globe. The coming decade will be a doozie.

Whenever I read something like this, especially from a "mainstream" kind of financial guy and not some fringe type, it reminds me what a desperate state we're in and I start asking how I can protect my retirement assets.

In 2006 and 2007, I voiced concerns that treasury rates didn't fully reflect the credit risk of the US. Since then, US debt has been downgraded, yet interest rates have dropped several percentage points. Far more variables go into rates than just credit risk.

According to the CIA world factbook, US public debt as a percentage of GDP was 67.8% in 2011, but in Japan it was 205.5% (sources: https://www.cia.gov/library/publication ... os/us.html , https://www.cia.gov/library/publication ... os/ja.html ). For Japan it has been above 150% since 2001 (source: http://www.indexmundi.com/japan/public_debt.html ), and, for the US, it has been at or below 67.8% from 2001 to 2011. Yet the yen has gained over 20% against the dollar since 2001 ( http://fxtop.com/en/historical-exchange ... 16&LANG=en ). Go figure.

One can have very good reasons for a prediction about global markets, and still find the prediction has not come true by the time you believe it will. That said, I think the most rational course is to stay widely diversified geographically, and by security issuer, and by asset class, including equities, bonds, precious metals (e.g. physical precious metals, IAU or GDX ), agricultural commodities (e.g. DBA or JJA ), merger arbitrage (e.g. merfx or arbfx ), currencies, real estate, and lots of cash. The reason I say "precious metals, and agricultural commodities" instead of just commodities, is that I believe diversified equity indexes include adequate exposure to most commodities except precious metals and agricultural commodities.

The following Talmud advice about asset allocation is worth considering as a starting point: "Let every man divide his money into three parts, and invest a third in land, a third in business, and a third let him keep by him in reserve." If real estate (land) or equities (business) appears to be in a bubble to you, you could tilt somewhat toward reserves, but don't go overboard. I count precious metals, agricultural commodities, cash, and bonds as reserves, though I'd focus primarily on cash and short to intermediate bonds since they are so much less volatile than precious metals, ag. commodities, and long bonds. I would not recommend putting the majority of one's reserves in US treasury bills, notes, and bonds. As for currency exposure, one can get that by leaving one's international equity and international real estate holdings without a currency hedge.
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Re: How can I invest almost entirely in real assets?

Postby Call_Me_Op » Sat Dec 15, 2012 8:46 pm

docneil88 wrote:I would not recommend putting the majority of one's reserves in US treasury bills...


Why not in T-bills?
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Re: How can I invest almost entirely in real assets?

Postby docneil88 » Sat Dec 15, 2012 9:33 pm

Call_Me_Op wrote:
docneil88 wrote:I would not recommend putting the majority of one's reserves in US treasury bills...

Why not in T-bills?

I wouldn't put the majority of my reserves in US treasury obligations (broadly speaking), partly because I believe in diversifying my credit risks within my reserve portfolio. Another reason is that I believe that the credit risk of the average bond issued by a company in the Dow Jones Industrials is better than the credit risk of the US government. Certainly the average balance sheet statement and average income statement of those companies is each stronger than the respective statement of the US government. I'm less concerned with GNMAs and FDIC insured deposits than I am direct US government obligations, because GNMAs and FDIC insured deposits have two lines of defense: first the debt obligation of a homeowner or bank, then the guarantee of the US government of that first obligation.
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Re: How can I invest almost entirely in real assets?

Postby stlutz » Sat Dec 15, 2012 9:59 pm

Governments that borrow their own currency cannot "run out of money" or experience a debt crisis. That only occurs in countries that borrow in a foreign currency (e.g. Greece) or when the currency is "pegged" to another (e.g. Argentina when it pegged against the dollar).

While QE sounds scary, we've all been waiting quite a while now for the hyperinflation to take off.

For more on the subject: http://pragcap.com/understanding-quantitative-easing

To step back from the brink of getting your thread locked, let me just say that making investment decisions based on person X's economic projections is always an iffy proposition. That is actually why we diversify--we don't know what the future holds. "Diversification" may include "real" assets for some people; for others it doesn't, but making such decisions should be made in the context of an overall long-term portfolio plan for bad times and good, not based on a forecast of what is "sure to happen" if the government doesn't pursue policy XYZ.
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Re: How can I invest almost entirely in real assets?

Postby bberris » Sat Dec 15, 2012 11:07 pm

docneil88 wrote:
Call_Me_Op wrote:
docneil88 wrote:I would not recommend putting the majority of one's reserves in US treasury bills...

Why not in T-bills?

I wouldn't put the majority of my reserves in US treasury obligations (broadly speaking), partly because I believe in diversifying my credit risks within my reserve portfolio. Another reason is that I believe that the credit risk of the average bond issued by a company in the Dow Jones Industrials is better than the credit risk of the US government. Certainly the average balance sheet statement and average income statement of those companies is each stronger than the respective statement of the US government. I'm less concerned with GNMAs and FDIC insured deposits than I am direct US government obligations, because GNMAs and FDIC insured deposits have two lines of defense: first the debt obligation of a homeowner or bank, then the guarantee of the US government of that first obligation.


I guess you don't know how the US pays its debts. They change numbers on a spreadsheet. The government has a warehouse full of numbers. There is no government balance sheet, but if there was, you would have to add up all the value of its land, water rights, and mineral reserves. I am sure it would be quite solvent.
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Re: How can I invest almost entirely in real assets?

Postby Watty » Sun Dec 16, 2012 12:50 am

You seem to be implying that you want to invest in something that will preserve your assets if the dollar collapses.

I think that is asking the wrong question and you should be asking what could make you a lot of money if the dollar collapses. If you add on a caveat that you also want something that will likely do pretty well if the dollar doesn't collapse then you are risking a lot less than betting everything on like gold or silver.

The first thing that crosses my mind is that if you live in an area where real estate is selling for around its replacement cost or less is that buying real estate could be a good choice. Buying a house with a 30 years fixed rate loan, then renting it as soon as that is allowed under the terms of your mortgage has a lot of possible upside either with or without high inflation. If you have a large enough down payment so that it gets good positive cash flow then you can keep it for decades if needed. If there is high inflation then your low interest rate mortgage will be very valuable. This will of course require the work of being a landlord. REITS would provide similar coverage but you would have much less control.
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Re: How can I invest almost entirely in real assets?

Postby docneil88 » Sun Dec 16, 2012 5:37 am

bberris wrote:I guess you don't know how the US pays its debts. They change numbers on a spreadsheet. The government has a warehouse full of numbers. There is no government balance sheet, but if there was, you would have to add up all the value of its land, water rights, and mineral reserves. I am sure it would be quite solvent.

Hi, bberris, The US government pays its debts with tax revenues, other revenues, and by issuing new debt to replace the expiring debt. The new debt includes not just T-bills, T-notes, and T-bonds, but also IOUs to Social Security for money borrowed from Social Security to pay for costs borne outside Social Security. As for an income statement and a balance sheet for the US government, see http://www.gao.gov/financial/fy2011/11frusg.pdf , especially p. 42 and 45. "Solvent" is not the first word that comes to my mind when I read that balance sheet. :) This contributes to my wariness about putting the majority of my reserves into US Treasury obligations. Best, Neil
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Re: How can I invest almost entirely in real assets?

Postby bUU » Sun Dec 16, 2012 7:16 am

I doubt gold or silver will be all that valuable after whatever event causes stocks and bonds and notes to no longer be valuable. More likely, anything that causes stocks and bonds and notes to no longer be valuable would be such that would place casual disregard for the lives of others as the only "asset" of any substantial worth. I'm not built to live in a world of that sort, so I go forward based on the premise that such an event won't occur.
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Re: How can I invest almost entirely in real assets?

Postby dkturner » Sun Dec 16, 2012 9:22 am

[quote="stlutz"]Governments that borrow their own currency cannot "run out of money" or experience a debt crisis. /quote]

They won't run out of inflation either. In this regard see Argentina at the present time. They might be able to fool a Boglehead, but they can't fool the man on the street. :wink:

What has, historically, been the best investment when seeking to counteract the effects of inflation? That's right, real assets.
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Re: How can I invest almost entirely in real assets?

Postby Call_Me_Op » Sun Dec 16, 2012 9:47 am

docneil88 wrote:
Call_Me_Op wrote:
docneil88 wrote:I would not recommend putting the majority of one's reserves in US treasury bills...

Why not in T-bills?

I wouldn't put the majority of my reserves in US treasury obligations (broadly speaking), partly because I believe in diversifying my credit risks within my reserve portfolio. Another reason is that I believe that the credit risk of the average bond issued by a company in the Dow Jones Industrials is better than the credit risk of the US government. Certainly the average balance sheet statement and average income statement of those companies is each stronger than the respective statement of the US government. I'm less concerned with GNMAs and FDIC insured deposits than I am direct US government obligations, because GNMAs and FDIC insured deposits have two lines of defense: first the debt obligation of a homeowner or bank, then the guarantee of the US government of that first obligation.


Neil,

This is an interesting position. You are essentially saying that T-bills are not the safest investment, contrary to the way the market sees them. There is a fundamental difference between the US Government and all other debtors - which is that the Government can print its way out of debt. This is a HUGE distinction.
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Re: How can I invest almost entirely in real assets?

Postby nisiprius » Sun Dec 16, 2012 11:28 am

1) Like many heads of companies that sell or advise investments, Rob Arnott seems to enjoy making colorful, attention-getting, shoot-from-the-hip statements. They're not particularly consistent with each other. For example, how can you connect the vague freefloating FUD (fear, uncertainty, and doubt) about the dollar in this one with his assertion that target retirement funds ought to increase, rather than decrease equity allocation with time? You can't. There's nothing coherent here.

2) The problem with real assets is that as nearly as I can tell they are all a) wildly speculative, and b) have little or no long-term real return. They may have, I think probably do, have the characteristic of being less likely to lose 100% of their value in a "black swan" crisis, but that doesn't mean they couldn't lose a lot--and it is expensive insurance.

3) If I were seriously going to approach "investing entirely in real assets," I think it would be direct investments in local real estate. I don't have the knowledge to do that, and I don't have enough capital to do that, but there, at least, you have some chance of really understanding the property you're buying, some chance of getting some real returns (rental income). It's so much not my thing that I couldn't possibly do it myself, and diversification is a huge problem. But I'd be less skeptical about someone who told me their portfolio of $50,000,000 was all invested in rental properties they personally made regular visits to, than someone who told me they had $500,000 invested in some random assortment of oddball stuff they could buy in a brokerage account, or Krugerrands in their safe deposit box, or something. Of course, investing heavily and directly in local real estate is more like "running a small business" than "making an investment."
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Postby maddyken » Sun Dec 16, 2012 12:21 pm

I would stay broadly diversified, going 100% real assets doesn't seem like a balanced approach from an asset allocation perspective.

I don't see Arnott as prone to wild speculation or scare tactics, he's a smart guy and a good manager. I have about 25% of my retirement assets in his All Asset All Authority fund, and he's not close to 100% real assets. I do think an allocation to real assets should be a permanent part of one's portfolio.

I have exposure to many asset classes, with good income and growth potential. I also have a lot of inflation protection. I think I've done about as much as I can do to prepare for retirement, I now have to rely on forces beyond my control to play ball.
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Re: How can I invest almost entirely in real assets?

Postby nedsaid » Sun Dec 16, 2012 4:36 pm

The dollar has been dying my entire work life. Books on this subject were being printed while I was still in college.

A diversified portfolio is a good hedge against inflation. I use TIPS and REITs and have owned them for years. Unfortunately, TIPS and REITs have been pretty well bid up and are not undervalued assets. US and International Stocks also beat inflation over time.

Precious metals and commodities might be worth while as portfolio insurance, maybe 5 percent of your portfolio. These assets have performed really well in recent years and are not undervalued assets either.

Real Estate took a big tumble in the financial crisis. Individually owned real estate is not very liquid and you can have pretty large transaction costs.

"Real assets" might cause bigger problems than the inflation problem you are trying to solve.

Keep a diversified portfolio and don't listen to the doom and gloom.
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Re: How can I invest almost entirely in real assets?

Postby mlewis » Sun Dec 16, 2012 4:43 pm

I've read that its pretty well established that after a market downturn (and before the full recovery) the bookstore shelves are filled with volumes predicting the next big collapse. After a boom (and before a downturn) the shelves are filled with volumes predicting long term prosperity.

Stay the course.

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Re: How can I invest almost entirely in real assets?

Postby nedsaid » Sun Dec 16, 2012 5:01 pm

You could use bookstore bookshelves and Jim Cramer as contrary indicators and probably do pretty well.. :happy
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Re: How can I invest almost entirely in real assets?

Postby stlutz » Sun Dec 16, 2012 5:37 pm

They won't run out of inflation either. In this regard see Argentina at the present time. They might be able to fool a Boglehead, but they can't fool the man on the street. :wink:

What has, historically, been the best investment when seeking to counteract the effects of inflation? That's right, real assets.


Japan has been running large deficits, had extremely low interest rates, and has had various versions of QE for 20 years--still waiting for inflation to take off. They might say that you can fool a Boglehead but you can't fool the man on the street. :wink:

Again, to get back to investing, if whoever is promoting "real assets" at any point in time because of impending doom should be asked to explain the situations where doom didn't arrive. Otherwise, stay diversified.
stlutz
 
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Re: How can I invest almost entirely in real assets?

Postby maddyken » Sun Dec 16, 2012 5:54 pm

Just asking...how's economic growth been over that period...one way to suppress inflation is to stifle growth, to the point few want to take risk.
maddyken
 
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