Gumby wrote:Before the 1970s, each one of our dollars had gold built into its value. Everyone was essentially walking around with gold in their pockets whether they realized it or not. So, there was no need to hold gold when our dollar was directly tied to gold. The numbers you've presented above only help to prove that argument since the dollar was so stable when it was equated with gold.
Now that our dollars aren't tied to anything, we need gold to keep our portfolios from deteriorating from a dollar that is constantly being devalued.
My numbers didn't mention the dollar at all but instead only showed the inflation adjusted returns (that is, the actual purchasing power) of gold. The point was to show that looking at the last 40 years overestimates the performance of gold, not in terms of dollars (which I didn't mention) but rather in terms of actual purchasing power.
Gumby wrote:Furthermore, looking at inflation-adjusted returns since before the closing of the gold-window is misleading, since you would be comparing a society on gold/quasi-gold standard to complete fiat money — two completely different currencies, if you will.
Again, I didn't mention dollars but only the purchasing power of gold.
Gumby wrote:Most people who can't see the wisdom of the PP will often reference the "annualized real return" of an individual asset class. This is an old sell-side trick that investment advisors will often use to mislead investors towards stock-heavy mutual funds. The Wall Street Journal recently talked about this phenomenon in retail investing.
The only annualized returns I posted were for gold, not stocks, and already adjusted for inflation.
WSJ wrote:Controlling for inflation takes extra work and makes stock gains look punier, so it is easy to see why stock analysts almost never do it. The media almost never do it either. But other things do get measured in real dollars. When economists report whether the economy is growing, they account for inflation. When analysts judge long-term gains in commodities such as gold or oil, they often adjust for inflation... Because analysts almost never do the same with stocks, it leaves investors with an exaggerated view of their portfolios’ performance over time.
So, if you're going to pull out gold and tell us how it doesn't have a very large return since 1913, the least you can do is go through your own portfolio and tell us what the inflation-adjusted return of each of your own assets is since 1913 (even though it's a pointless exercise in looking at two completely different currencies). My guess is that it will make your returns seem smaller as well.
If stocks beat gold in nominal terms (as they certainly have) they also beat gold in real terms. And why does the change in currency matter when looking at the real returns, since any loss due to the declining purchasing power of the dollar is accounted for in the inflation adjustment?
Anyway, here we go:
Annualized real return on US stocks since 1913: 6.1%
As to other investments I can't easily locate a table for specific years, but if you are willing to go back to 1900 I can line up everything:
Annualized real return of US stocks since 1900: 6.1%
Annualized real return of non-US stocks since 1900: 4.9%
Annualized real return of US T bonds since 1900: 1.9%
Annualized real return of gold since 1900: 1.0%
Annualized real return on US T bills since 1900: 0.9%
At least gold isn't quite in last place here, though it certainly would be if we extended back a few more decades.
If you don't consider the wisdom of rebalancing, looking at annualized real return of individual assets will get you nowhere. But, then again, that's exactly what the retail investment world wants you to see.
My point was not to argue either way about rebalancing. I was only trying to show that PP advocates always refer only to a period where gold did much better than normal in terms of its actual purchasing power. As to rebalancing, I actually would agree that it is somewhat beneficial, though I suspect that the large size of the rebalancing bonus seen in the recent history of the PP is also likely to be anomaly (though unlike the abnormally high returns of gold it doesn't seem quite as easy to prove that).