Fool's Gold

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Topic Author
larryswedroe
Posts: 16022
Joined: Thu Feb 22, 2007 7:28 am
Location: St Louis MO

Fool's Gold

Post by larryswedroe »

http://www.cbsnews.com/news/investment- ... investing/

and no registration needed (:-))

Larry
User avatar
Higman
Posts: 229
Joined: Wed Aug 20, 2008 7:51 pm

Re: Fool's Gold

Post by Higman »

Larry,

A statement in your article brought back memories of my former stock broker especially:

“…when prices are low — you would think investors who were buying gold at $1,900 should certainly welcome the opportunity to buy at $1,230 — if you liked it at $1,900, you should love it at $1,230!

He would always use that line whenever his recommendations tanked! Buy more! There is some truth to that but not for me.

Nice article.
fishndoc
Posts: 2327
Joined: Wed Apr 11, 2007 11:50 am

Re: Fool's Gold

Post by fishndoc »

In one of my favorite Seinfeld episodes, George Constanza has an epiphany that all of his instincts have been wrong, and that he would be best served by doing the opposite. It seems that many, if not most, investors would benefit from the same epiphany.
Excellent article Larry. I believe those last two sentences pretty well summarizes all an individual investor really needs to know about the field of Behavioral Finance.
" Successful investing involves doing just a few things right, and avoiding serious mistakes." - J. Bogle
User avatar
ofcmetz
Posts: 2465
Joined: Tue Feb 08, 2011 7:09 pm
Location: Louisiana

Re: Fool's Gold

Post by ofcmetz »

Very well written Mr. Swedroe. Thanks for the article. It is sad that so many investors earn less than their underlying investment funds do because of when they get in and out. Your comment about George Costanza had me ROFL.
Never underestimate the power of the force of low cost index funds.
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: Fool's Gold

Post by dbr »

larryswedroe wrote:http://www.cbsnews.com/news/investment- ... investing/

and no registration needed (:-))

Larry
Thank you!
Leeraar
Posts: 4109
Joined: Tue Dec 10, 2013 7:41 pm
Location: Nowhere

Re: Fool's Gold

Post by Leeraar »

Larry,

I believe Vanguard showed data at the recent Bogleheads' Conference that returns for individuals trail the returns of the funds they invest in. I think nisiprius pointed out that Morningstar also tracks investor returns, which also generally show a deficit.

It's not just gold that people are chasing.

L.
Last edited by Leeraar on Thu Dec 19, 2013 4:57 pm, edited 1 time in total.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
Calm Man
Posts: 2917
Joined: Wed Sep 19, 2012 9:35 am

Re: Fool's Gold

Post by Calm Man »

Nice article, thank you. I am confused by the large decrease in assets under management which you point out is not due only to the price decline but actual reduction of the # of shares. This, in itself does not show (I don't think) anything about buying and selling behavior or does it? Shares are created and retired by some mechanism in units by large buyers and sellers, no?
User avatar
Rick Ferri
Posts: 9708
Joined: Mon Feb 26, 2007 10:40 am
Location: Georgetown, TX. Twitter: @Rick_Ferri
Contact:

Re: Fool's Gold

Post by Rick Ferri »

Yep, those Gold Bugs were Swatted Again today! My long-term target is $600. Gold is already off more than 1/3 from it's high - only 1/3 more to go. How's that Harry Browne portfolio treating you these days? Ouch!

Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: Fool's Gold

Post by Browser »

Yep. Investors should be dumping U.S. stocks and buying bonds, commodities (including gold) and emerging market equities. I am -- are you?
We don't know where we are, or where we're going -- but we're making good time.
Professor Emeritus
Posts: 2628
Joined: Mon Aug 13, 2012 6:43 am

Re: Fool's Gold

Post by Professor Emeritus »

Higman wrote:Larry,

A statement in your article brought back memories of my former stock broker especially:

“…when prices are low — you would think investors who were buying gold at $1,900 should certainly welcome the opportunity to buy at $1,230 — if you liked it at $1,900, you should love it at $1,230!

He would always use that line whenever his recommendations tanked! Buy more! There is some truth to that but not for me.

Nice article.
The statement while cute does not actually make sense. If I bought gold at $1400 i might be very pleased when it is at 1900 but I am not necessarily "buying" at that price. I might be the seller. The buyers at $1900 have already lost their shirts. Those who bought on the way down have already committed the funds. they own "under water" gold. Unless buyers have other sources of funds those buyers cant buy at 1230. What market clearing does is find that level at which remaining buyers will buy the product. If you believe that gold functions like the stock market (i don't) an index buyer buys at whatever price the market gives you. The idea that investments have some other value than what an efficient market gives you is one of the great lures to the sucker born every minute.
Dude2
Posts: 1780
Joined: Fri Jun 08, 2007 3:40 pm
Location: FL

Re: Fool's Gold

Post by Dude2 »

Rick Ferri wrote:Yep, those Gold Bugs were Swatted Again today! My long-term target is $600. Gold is already off more than 1/3 from it's high - only 1/3 more to go. How's that Harry Browne portfolio treating you these days? Ouch!
Rick Ferri
Thanks for asking. Not too bad. For example, PRPFX is at -2.41% YTD. Does that scare anybody?
User avatar
nisiprius
Advisory Board
Posts: 52219
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Fool's Gold

Post by nisiprius »

Image

Actually, this throws into sharp focus the ambiguity of what it means to "rebalance."

Suppose, hypothetically, an investor who holds Total Stock, VTSMX, buys the gold ETF, GLD in 2007, to the extent of 10% of his portfolio. Say, $10,000 GLD, $90,000 Total Stock.

Time marches on. It is now March 2009, he now holds $14,847 in GLD and $49,110 in VTSMX. He is now 23% GLD. Of course he ought to rebalance, but let's say he doesn't.

Time marches on. It is now today. He now holds $18,300 in GLD and $137,700 in VTSMX. He is now 11.7% in GLD. He decides to rebalance.

What should he rebalance TO?

Should he buy GLD and rebalance to 23% GLD?
Should he sell GLD and rebalance to 10% GLD?

Well, of course, you will say, he should have been rebalancing frequently. But if he hasn't been, talking about "rebalancing" now is sort of meaningless, isn't it? There's no operational definition of what it would mean to rebalance "now."

And there's another problem. Since I am not a gold investor it is hard for me to put myself into the gold investor's mindset, but the opinion that has been frequently expressed in this forum is that gold is a kind of insurance policy against inflation. You put a small amount of your portfolio into gold, and don't worry too much about it, confident that if inflation suddenly occurs, gold will deliver a powerful spike at exactly the right time to offset the effect of inflation in the rest of your portfolio. IF that is the theory, then presumably you should not buy OR sell gold until the sharp, unexpected inflation occurs... which, so far it hasn't. To rebalance continuously over the last ten or fifteen years would be gradually frittering away most of your insurance policy, and then slowly build just a little of it back.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
bhsince87
Posts: 2914
Joined: Thu Oct 03, 2013 1:08 pm

Re: Fool's Gold

Post by bhsince87 »

Good article. Thanks for sharing!

If I ruled the world, I would ban the use of the word “investment” with respect to commodities.

A more accurate word is “speculation”.
Time is what we want most, but what we use worst. William Penn
Topic Author
larryswedroe
Posts: 16022
Joined: Thu Feb 22, 2007 7:28 am
Location: St Louis MO

Re: Fool's Gold

Post by larryswedroe »

bhsince
Well we will disagree on that, although I do agree that many if not most are speculating--but used the "right" way IMO it's portfolio insurance against both unexpected inflation and supply shocks that hurt stocks
larry
bhsince87
Posts: 2914
Joined: Thu Oct 03, 2013 1:08 pm

Re: Fool's Gold

Post by bhsince87 »

Larry S, I agree that as part of a larger investment plan, they can make sense as a diversification component.

But I'm pretty sure very few people understand or use them that way.
Time is what we want most, but what we use worst. William Penn
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: Fool's Gold

Post by Browser »

The "ouch" part of the Permanent Portfolio is that gold is down about 30% YTD. We all know that gold was "trashed" in 1981 when the Fed started raising rates to kill double-digit inflation, but that year gold *only* lost 32.9%. So, we're on track for one of the worst years ever for gold returns based on negligible rate increases -- what will happen if rates really head up? I'm glad that I didn't sign up for a ride on the PP train when things were rolling along a short while back.
We don't know where we are, or where we're going -- but we're making good time.
bhsince87
Posts: 2914
Joined: Thu Oct 03, 2013 1:08 pm

Re: Fool's Gold

Post by bhsince87 »

An interesting take. Not sure about their sources, but it does make sense.

http://ftalphaville.ft.com/2013/12/19/1 ... dity-bets/
Time is what we want most, but what we use worst. William Penn
Leeraar
Posts: 4109
Joined: Tue Dec 10, 2013 7:41 pm
Location: Nowhere

Re: Fool's Gold

Post by Leeraar »

Browser wrote:The "ouch" part of the Permanent Portfolio is that gold is down about 30% YTD. We all know that gold was "trashed" in 1981 when the Fed started raising rates to kill double-digit inflation, but that year gold *only* lost 32.9%. So, we're on track for one of the worst years ever for gold returns based on negligible rate increases -- what will happen if rates really head up? I'm glad that I didn't sign up for a ride on the PP train when things were rolling along a short while back.
Browser wrote:Yep. Investors should be dumping U.S. stocks and buying bonds, commodities (including gold) and emerging market equities. I am -- are you?
I suppose someone can discern a message here.

L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
User avatar
czeckers
Posts: 1082
Joined: Thu May 17, 2007 3:49 pm
Location: USA

Re: Fool's Gold

Post by czeckers »

It's true, I haven't heard much about GLD, the Harry Browne PP, nor commodities lately. I wonder if commodities have returned to normal backwardation.
The Espresso portfolio: | | 20% US TSM, 20% Small Value, 10% US REIT, 10% Dev Int'l, 10% EM, 10% Commodities, 20% Inter-term US Treas | | "A journey of a thousand miles begins with a single step."
User avatar
tadamsmar
Posts: 9972
Joined: Mon May 07, 2007 12:33 pm

Fool's GLD

Post by tadamsmar »

Larry,

Somebody bought half of GLD's assets at a lower price, they just bought in a manner that removed the asset from GLD's assets.

Perhaps it should be called Fool's GLD. The GLD cohort of gold investors is different from the non-GLD cohort. The non-GLD cohort tend to be contrarians, or they are longer term holders of gold (perhaps in the PP) that are rebalancing, or demand for the commodity is up, or...?

Tom
Topic Author
larryswedroe
Posts: 16022
Joined: Thu Feb 22, 2007 7:28 am
Location: St Louis MO

Re: Fool's Gold

Post by larryswedroe »

tadamsmar
Of course that is true, the gold didn't disappear
But retail investors aren't the owners any longer
Larry
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: Fool's Gold

Post by Browser »

Leeraar wrote:
Browser wrote:The "ouch" part of the Permanent Portfolio is that gold is down about 30% YTD. We all know that gold was "trashed" in 1981 when the Fed started raising rates to kill double-digit inflation, but that year gold *only* lost 32.9%. So, we're on track for one of the worst years ever for gold returns based on negligible rate increases -- what will happen if rates really head up? I'm glad that I didn't sign up for a ride on the PP train when things were rolling along a short while back.
Browser wrote:Yep. Investors should be dumping U.S. stocks and buying bonds, commodities (including gold) and emerging market equities. I am -- are you?
I suppose someone can discern a message here.

L.
The message is that you should buy when stuff is low and out of favor. If you believe in owning some gold it is a much better buy now than it was when everyone was chattering about the Permanent Portfolio. But I'd never put 25% of my portfolio into gold, as the PP suggests. Maybe 5% - 10%.
We don't know where we are, or where we're going -- but we're making good time.
User avatar
tadamsmar
Posts: 9972
Joined: Mon May 07, 2007 12:33 pm

Re: Fool's Gold

Post by tadamsmar »

larryswedroe wrote:tadamsmar
Of course that is true, the gold didn't disappear
But retail investors aren't the owners any longer
Larry
Some of the accumulators might be retail investors maintaining an AA who held gold before GLD existed and continue to buy the old way, for instance those who were in the PP before GLD existed.

I agree that GLD is a proxy for the typical retail investor behavior, but perhaps it's also a bit of a proxy for new money behavior.
technovelist
Posts: 3611
Joined: Wed Dec 30, 2009 8:02 pm

Re: Fool's Gold

Post by technovelist »

Rick Ferri wrote:Yep, those Gold Bugs were Swatted Again today! My long-term target is $600. Gold is already off more than 1/3 from it's high - only 1/3 more to go. How's that Harry Browne portfolio treating you these days? Ouch!

Rick Ferri
So I assume this means that you are ready to take me up on my bet as to whether we see $2000 before we see $600. Right?
In theory, theory and practice are identical. In practice, they often differ.
technovelist
Posts: 3611
Joined: Wed Dec 30, 2009 8:02 pm

Re: Fool's Gold

Post by technovelist »

larryswedroe wrote:http://www.cbsnews.com/news/investment- ... investing/

and no registration needed (:-))

Larry
Good article, with no bashing of "gold bugs".
In theory, theory and practice are identical. In practice, they often differ.
User avatar
Rick Ferri
Posts: 9708
Joined: Mon Feb 26, 2007 10:40 am
Location: Georgetown, TX. Twitter: @Rick_Ferri
Contact:

Re: Fool's Gold

Post by Rick Ferri »

technovelist wrote:
Rick Ferri wrote:Yep, those Gold Bugs were Swatted Again today! My long-term target is $600. Gold is already off more than 1/3 from it's high - only 1/3 more to go. How's that Harry Browne portfolio treating you these days? Ouch!

Rick Ferri
So I assume this means that you are ready to take me up on my bet as to whether we see $2000 before we see $600. Right?
I don't speculate: I invest.

Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.
technovelist
Posts: 3611
Joined: Wed Dec 30, 2009 8:02 pm

Re: Fool's Gold

Post by technovelist »

Rick Ferri wrote:
technovelist wrote:
Rick Ferri wrote:Yep, those Gold Bugs were Swatted Again today! My long-term target is $600. Gold is already off more than 1/3 from it's high - only 1/3 more to go. How's that Harry Browne portfolio treating you these days? Ouch!

Rick Ferri
So I assume this means that you are ready to take me up on my bet as to whether we see $2000 before we see $600. Right?
I don't speculate: I invest.

Rick Ferri
Ok, then you should be shorting gold, since you have a long term target way below the current price. How can you lose with such a well-thought-out plan?

Or to be more serious, anyone can make a prediction or pick a target, as long as their money isn't at stake. It's just a parlor game at that point.
In theory, theory and practice are identical. In practice, they often differ.
RadAudit
Posts: 4387
Joined: Mon May 26, 2008 10:20 am
Location: Second star on the right and straight on 'til morning

Re: Fool's Gold

Post by RadAudit »

larryswedroe wrote:
http://www.cbsnews.com/news/investment- ... investing/

and no registration needed (:-))

Larry


Good article, with no bashing of "gold bugs".
I didn't take it as gold bug bashing. I just thought it was just an example of an asset class that has tanked recently and resulting / recommended / opined investor behavior. Same thing could of been said about stocks in late 2008 or early 2009 I suspect.
Last edited by RadAudit on Fri Dec 20, 2013 11:08 am, edited 1 time in total.
FI is the best revenge. LBYM. Invest the rest. Stay the course. Die anyway. - PS: The cavalry isn't coming, kids. You are on your own.
User avatar
FNK
Posts: 1360
Joined: Tue May 17, 2011 7:01 pm

Re: Fool's Gold

Post by FNK »

nisiprius wrote:Suppose, hypothetically, an investor who holds Total Stock, VTSMX, buys the gold ETF, GLD in 2007, to the extent of 10% of his portfolio.

What should he rebalance TO?
Uh... nisi... you out of all people... of course he should rebalance back to his original target of 10%. He could've picked up a bit of extra return by rebalancing at the bottom, but he was either too scared, or too inattentive, or simply didn't set up his rebalancing bands. Missed opportunity, sure, end of the world, no.
nisiprius wrote:To rebalance continuously over the last ten or fifteen years would be gradually frittering away most of your insurance policy, and then slowly build just a little of it back.
Now that's a good point! It applies to any rebalanced portfolio: if one asset class gradually goes to zero, you will drain all other asset classes by rebalancing into it. Got to implement some kind of a circuit breaker (e.g., limit rebalancing out of gold to 1/2 of peak holdings).
technovelist
Posts: 3611
Joined: Wed Dec 30, 2009 8:02 pm

Re: Fool's Gold

Post by technovelist »

RadAudit wrote:I didn't take it as gold bug bashing. I just thought it was just an example of an asset class that has tanked recently and resulting / recommended / opined investor behavior. Same thing could of been said about stocks in late 2008 or early 2009 I suspect.
Larry's article was fine, as I had commented. It's just Rick's chortling about the losses sustained by "gold bugs" that gets old. Does anyone come here and laugh about the losses sustained by "stock bugs" when the stock market tanks? If they do, I haven't seen it.
In theory, theory and practice are identical. In practice, they often differ.
User avatar
LadyGeek
Site Admin
Posts: 95703
Joined: Sat Dec 20, 2008 4:34 pm
Location: Philadelphia
Contact:

Re: Fool's Gold

Post by LadyGeek »

For those needing some background info, the Permanent Portfolio is in the wiki: Permanent Portfolio
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
natureexplorer
Posts: 4207
Joined: Thu Sep 03, 2009 10:52 am
Location: Houston

Re: Fool's Gold

Post by natureexplorer »

What will happen to you portfolio if that asset you have allocated 5% to, drops gradually 99% in value, and you you continue to rebalance into it?

Anyone with math skills?
User avatar
cfs
Posts: 4154
Joined: Fri Feb 23, 2007 12:22 am
Location: ~ Mi Propio Camino ~

Re: Fool's Gold

Post by cfs »

Here is one of the comments by part of the Sage of Omaha on investing on gold:

"Now, for $7 trillion, there are roughly a billion of farm— acres of farmland in the United States. They're valued at about $2 1/2 trillion. It's about half the continental United States, this farmland. You could have all the farmland in the United States, you could have about seven ExxonMobiles, and you could have $1 trillion of walking around money. And if you offered me the choice of looking at some 67-foot cube of gold and looking at it all day, you know, I mean touching it and fondling it occasionally, you know, and then saying, you know, `Do something for me,' and it says, `I don't do anything. I just stand here and look pretty.' And the alternative to that was to have all the farmland of the country, everything, cotton, corn, soybeans, seven ExxonMobiles. Just think of that. Add $1 trillion of walking around money. I, you know, maybe call me crazy but I'll take the farmland and the ExxonMobiles"

More here: http://www.cnbc.com/id/41867379

Thanks for reading and have a Merry Christmas
~ Member of the Active Retired Force since 2014 ~
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: Fool's Gold

Post by Browser »

natureexplorer wrote:What will happen to you portfolio if that asset you have allocated 5% to, drops gradually 99% in value, and you you continue to rebalance into it?

Anyone with math skills?
Insurance premiums, but you never needed the insurance. But it can still be worthwhile to pay the premiums. I hate to think what I've paid State Farm in auto insurance premiums for decades, thankfully never had to collect. I don't feel that bad about continuing to pay the premiums just in case my accelerator sticks some day and I run over a few people.
We don't know where we are, or where we're going -- but we're making good time.
Professor Emeritus
Posts: 2628
Joined: Mon Aug 13, 2012 6:43 am

Re: Fool's Gold

Post by Professor Emeritus »

technovelist wrote:
RadAudit wrote:I didn't take it as gold bug bashing. I just thought it was just an example of an asset class that has tanked recently and resulting / recommended / opined investor behavior. Same thing could of been said about stocks in late 2008 or early 2009 I suspect.
Larry's article was fine, as I had commented. It's just Rick's chortling about the losses sustained by "gold bugs" that gets old. Does anyone come here and laugh about the losses sustained by "stock bugs" when the stock market tanks? If they do, I haven't seen it.
IMHO Gold is promoted by the most shameless charlatans in the financial world. You lie down with dogs, you get up with fleas :happy

FWIW I always love how gold bars are treated in movies. I mean those suckers are heavy. a 400 troy oz a good delivery bar weighs over 27 pounds
Buddtholomew
Posts: 1059
Joined: Thu Mar 01, 2007 2:29 pm

Re: Fool's Gold

Post by Buddtholomew »

I would like to offer another perspective on the HBPP, annual returns on the allocation to gold and the overall portfolio performance.

From my perspective, it is comforting to observe that a portfolio heavily allocated to GLD (25%) and LTTs (25%) would only experience a 2.5% decline YTD in this economic climate. Although I am not pleased with this minor loss given the recent performance in equities, I am not dissuaded from staying the course and plan to re-balance when a tolerance band is breached.

It is often mentioned on this forum not to look at investments in isolation and I would request that you broaden this suggestion to include the permanent portfolio as well. The PP returned 1.53% in 2008 (not rebalanced) with equities incurring a loss of 36.97%. The philosophy does not overweight equity, gold, fixed income or cash and will undoubtedly have an asset that performs poorly during any given year. This year it is gold and to a lesser extent fixed income.
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.
Professor Emeritus
Posts: 2628
Joined: Mon Aug 13, 2012 6:43 am

Re: Fool's Gold

Post by Professor Emeritus »

Browser wrote:
natureexplorer wrote:What will happen to you portfolio if that asset you have allocated 5% to, drops gradually 99% in value, and you you continue to rebalance into it?

Anyone with math skills?
Insurance premiums, but you never needed the insurance. But it can still be worthwhile to pay the premiums. I hate to think what I've paid State Farm in auto insurance premiums for decades, thankfully never had to collect. I don't feel that bad about continuing to pay the premiums just in case my accelerator sticks some day and I run over a few people.
Insurance for what? against what peril?
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: Fool's Gold

Post by dbr »

natureexplorer wrote:What will happen to you portfolio if that asset you have allocated 5% to, drops gradually 99% in value, and you you continue to rebalance into it?

Anyone with math skills?
I did a kind of quick exercise in a spreadsheet. The method I used was to assume the loss of 5% of the current value in each successive period and rebalance after each period, or not. At that rate of exponential decay it takes 89 periods for an initial value of the losing asset to lose 99% on its own.

The result is that starting with a 5% asset and not rebalancing one ends up with a portfolio worth 95.05% of original. If one did rebalance at each interval the ending portfolio value is 80.03%. The result is not exact because 89 periods does not produce a reduction to exactly 1%. If one had a 50/50 portfolio the respective numbers would be 50.5% left vs 10.5% left had one rebalanced 89 times on the way down.

The better answer is probably to devise a differential equation to represent continuous rebalancing and solve for the function of time and evaluate when an original investment would have reached 99% loss.
User avatar
Phineas J. Whoopee
Posts: 9675
Joined: Sun Dec 18, 2011 5:18 pm

Re: Fool's Gold

Post by Phineas J. Whoopee »

technovelist wrote:...
Larry's article was fine, as I had commented. It's just Rick's chortling about the losses sustained by "gold bugs" that gets old. Does anyone come here and laugh about the losses sustained by "stock bugs" when the stock market tanks? If they do, I haven't seen it.
Kindly help me with a reference to heal my ignorance. Who promotes shares of common stock as currency?
PJW
natureexplorer
Posts: 4207
Joined: Thu Sep 03, 2009 10:52 am
Location: Houston

Re: Fool's Gold

Post by natureexplorer »

dbr wrote:
natureexplorer wrote:What will happen to you portfolio if that asset you have allocated 5% to, drops gradually 99% in value, and you you continue to rebalance into it?

Anyone with math skills?
I did a kind of quick exercise in a spreadsheet. The method I used was to assume the loss of 5% of the current value in each successive period and rebalance after each period, or not. At that rate of exponential decay it takes 89 periods for an initial value of the losing asset to lose 99% on its own.

The result is that starting with a 5% asset and not rebalancing one ends up with a portfolio worth 95.05% of original. If one did rebalance at each interval the ending portfolio value is 80.03%. The result is not exact because 89 periods does not produce a reduction to exactly 1%. If one had a 50/50 portfolio the respective numbers would be 50.5% left vs 10.5% left had one rebalanced 89 times on the way down.

The better answer is probably to devise a differential equation to represent continuous rebalancing and solve for the function of time and evaluate when an original investment would have reached 99% loss.
Thanks. So what's a 5% drop without rebalancing, becomes a 20% with rebalancing.

How would the result change if instead of a 99% drop we assume a 100% drop? We could assume a linear or exponential depreciation.
scone
Posts: 1457
Joined: Wed Jul 11, 2012 4:46 pm

Re: Fool's Gold

Post by scone »

Not to hijack the thread, but I'm also interested in the "rebalancing into a black hole" problem. I mean, how do you know you aren't throwing money into something that is destined to stay down for the rest of your life?

Not that I'm making a prediction about gold in particular. I have no dog in this fight.
"My bond allocation is the amount of money that I cannot afford to lose." -- Taylor Larimore
User avatar
Phineas J. Whoopee
Posts: 9675
Joined: Sun Dec 18, 2011 5:18 pm

Re: Fool's Gold

Post by Phineas J. Whoopee »

scone wrote:Not to hijack the thread, but I'm also interested in the "rebalancing into a black hole" problem. I mean, how do you know you aren't throwing money into something that is destined to stay down for the rest of your life?

Not that I'm making a prediction about gold in particular. I have no dog in this fight.
Nobody ever knows.

That's why there's a risk premium.

PJW
User avatar
tadamsmar
Posts: 9972
Joined: Mon May 07, 2007 12:33 pm

Re: Fool's Gold

Post by tadamsmar »

natureexplorer wrote:What will happen to you portfolio if that asset you have allocated 5% to, drops gradually 99% in value, and you you continue to rebalance into it?

Anyone with math skills?
That's the argument against reblancing bands and frequent rebalancing. I rebalance once per year, but longer intervals might be as good or better from my reading.
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: Fool's Gold

Post by dbr »

natureexplorer wrote:
dbr wrote:
natureexplorer wrote:What will happen to you portfolio if that asset you have allocated 5% to, drops gradually 99% in value, and you you continue to rebalance into it?

Anyone with math skills?
I did a kind of quick exercise in a spreadsheet. The method I used was to assume the loss of 5% of the current value in each successive period and rebalance after each period, or not. At that rate of exponential decay it takes 89 periods for an initial value of the losing asset to lose 99% on its own.

The result is that starting with a 5% asset and not rebalancing one ends up with a portfolio worth 95.05% of original. If one did rebalance at each interval the ending portfolio value is 80.03%. The result is not exact because 89 periods does not produce a reduction to exactly 1%. If one had a 50/50 portfolio the respective numbers would be 50.5% left vs 10.5% left had one rebalanced 89 times on the way down.

The better answer is probably to devise a differential equation to represent continuous rebalancing and solve for the function of time and evaluate when an original investment would have reached 99% loss.
Thanks. So what's a 5% drop without rebalancing, becomes a 20% with rebalancing.

How would the result change if instead of a 99% drop we assume a 100% drop? We could assume a linear or exponential depreciation.
My model is exponential because I don't imagine an asset that actual goes to flat zero in a finite number of periods. Of course, don't think any real asset does that either. A more likely outcome is that an asset declines to some fraction of starting value and stops declining . Anyway, if I just add a bunch of rows to three times 89 periods the original investment has decayed to 5.63862E-06 and the rebalanced total portfolio to about 51% of original. After 999 periods the portfolio ends up at about 8% of original value. It is arithmetically possible to chase a declining asset a long ways down. I don't think any real markets actually do this.
linenfort
Posts: 2241
Joined: Sat Sep 22, 2007 9:22 am
Location: #96151D

Re: Fool's Gold

Post by linenfort »

Rick Ferri wrote:Yep, those Gold Bugs were Swatted Again today! My long-term target is $600. Gold is already off more than 1/3 from it's high - only 1/3 more to go. How's that Harry Browne portfolio treating you these days? Ouch!

Rick Ferri
Not too bad, considering. But if one follows the guidelines for Browne's portfolio s/he will avoid exactly the kind of rearview mirror mistakes Larry has outlined in his article.
technovelist
Posts: 3611
Joined: Wed Dec 30, 2009 8:02 pm

Re: Fool's Gold

Post by technovelist »

cfs wrote:Here is one of the comments by part of the Sage of Omaha on investing on gold:

"Now, for $7 trillion, there are roughly a billion of farm— acres of farmland in the United States. They're valued at about $2 1/2 trillion. It's about half the continental United States, this farmland. You could have all the farmland in the United States, you could have about seven ExxonMobiles, and you could have $1 trillion of walking around money. And if you offered me the choice of looking at some 67-foot cube of gold and looking at it all day, you know, I mean touching it and fondling it occasionally, you know, and then saying, you know, `Do something for me,' and it says, `I don't do anything. I just stand here and look pretty.' And the alternative to that was to have all the farmland of the country, everything, cotton, corn, soybeans, seven ExxonMobiles. Just think of that. Add $1 trillion of walking around money. I, you know, maybe call me crazy but I'll take the farmland and the ExxonMobiles"

More here: http://www.cnbc.com/id/41867379

Thanks for reading and have a Merry Christmas
Since the beginning of 2000, BRK.A has gone from 56,100 to 174,636. Gold has gone from $282.05 to $1202.10. Since BRK doesn't pay a dividend, they both have the same yield of 0%.

So BRK.A has gone up 211% in the last 13 years, whereas gold has gone up 326%.

You go with Buffett; I'll stick with the metal that doesn't do anything but sit there and look pretty.

(And I'm not cherry-picking dates. A comparison of the past 10 years is also very favorable to gold.)
Last edited by technovelist on Fri Dec 20, 2013 2:01 pm, edited 1 time in total.
In theory, theory and practice are identical. In practice, they often differ.
natureexplorer
Posts: 4207
Joined: Thu Sep 03, 2009 10:52 am
Location: Houston

Re: Fool's Gold

Post by natureexplorer »

dbr wrote:
natureexplorer wrote:
dbr wrote:
natureexplorer wrote:What will happen to you portfolio if that asset you have allocated 5% to, drops gradually 99% in value, and you you continue to rebalance into it?

Anyone with math skills?
I did a kind of quick exercise in a spreadsheet. The method I used was to assume the loss of 5% of the current value in each successive period and rebalance after each period, or not. At that rate of exponential decay it takes 89 periods for an initial value of the losing asset to lose 99% on its own.

The result is that starting with a 5% asset and not rebalancing one ends up with a portfolio worth 95.05% of original. If one did rebalance at each interval the ending portfolio value is 80.03%. The result is not exact because 89 periods does not produce a reduction to exactly 1%. If one had a 50/50 portfolio the respective numbers would be 50.5% left vs 10.5% left had one rebalanced 89 times on the way down.

The better answer is probably to devise a differential equation to represent continuous rebalancing and solve for the function of time and evaluate when an original investment would have reached 99% loss.
Thanks. So what's a 5% drop without rebalancing, becomes a 20% with rebalancing.

How would the result change if instead of a 99% drop we assume a 100% drop? We could assume a linear or exponential depreciation.
My model is exponential because I don't imagine an asset that actual goes to flat zero in a finite number of periods. Of course, don't think any real asset does that either. A more likely outcome is that an asset declines to some fraction of starting value and stops declining . Anyway, if I just add a bunch of rows to three times 89 periods the original investment has decayed to 5.63862E-06 and the rebalanced total portfolio to about 51% of original. After 999 periods the portfolio ends up at about 8% of original value. It is arithmetically possible to chase a declining asset a long ways down. I don't think any real markets actually do this.
Thanks for running the number.

I think there are plenty of assets/investments that have declined to a value very close to zero, zero, or even negative (Source: This time is different.).
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: Fool's Gold

Post by dbr »

natureexplorer wrote:
I think there are plenty of assets/investments that have declined to a value very close to zero, zero, or even negative (Source: This time is different.).
You are right about that. What I am thinking is that real cases of assets that become worthless don't involve a continuous decay at a rate slow enough to actually rebalance into it. More often arrival at value zero occurs with bankruptcy, devaluation, or some other catastrophic event that one would not follow down to zero. The example in this thread is gold, and that would be a case where it is not imaginable that the asset would continue to erode to a thousandth, to a millionth, to a billionth of value while we chase it down.
User avatar
FNK
Posts: 1360
Joined: Tue May 17, 2011 7:01 pm

Re: Fool's Gold

Post by FNK »

Professor Emeritus wrote:Insurance for what? against what peril?
The fall of the American Empire, of course.
natureexplorer
Posts: 4207
Joined: Thu Sep 03, 2009 10:52 am
Location: Houston

Re: Fool's Gold

Post by natureexplorer »

dbr wrote:The example in this thread is gold, and that would be a case where it is not imaginable that the asset would continue to erode to a thousandth, to a millionth, to a billionth of value while we chase it down.
It doesn't have to be imaginable to happen.

"some ... catastrophic event that one would not follow down to zero". How do you decide when to stop re-balancing into that asset? And it doesn't seem like bankruptcy is even that catastrophic of an event these days.
Locked