Should I Add Vanguard Precious Metals MF to Asset Allocat.?

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JAIrwin
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Should I Add Vanguard Precious Metals MF to Asset Allocat.?

Post by JAIrwin » Fri Mar 22, 2013 10:00 am

In Bernstein's book, 4 Pillars of Investing, he talks about adding a Precious Metals mutual fund (like the one at Vanguard) to your asset allocation after you reach a point where you have a sufficient asset base to be easily able to add it in given the investment minimums. I believe he recommends about 3% asset allocation target.

In you all's experience, is a Precious Metals fund a good addition to a person's asset allocation? Any thoughts about appropriate target % to use? (please forgive me if this topic's been discussed before, I'm just starting to navigate my way around the forums :sharebeer )
Jacob Irwin, graduate student/PF blogger

wesleymouch
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Re: Should I Add Vanguard Precious Metals MF to Asset Alloca

Post by wesleymouch » Fri Mar 22, 2013 10:05 am

You are better off with a pure silver/gold mining fund. The Vanguard fund has base metals miners also.

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Re: Should I Add Vanguard Precious Metals MF to Asset Alloca

Post by dbr » Fri Mar 22, 2013 10:06 am

I think it is unnecessary and therefore the answer to "should" is definitely not a "should."

In addition, it absolutely escapes me why anyone would recommend bits and pieces of 3% of anything being added to a portfolio.

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Re: Should I Add Vanguard Precious Metals MF to Asset Alloca

Post by nisiprius » Fri Mar 22, 2013 10:35 am

It would help if you articulated your purpose for doing this.

I think precious metals equity might be William J. Bernstein's personal "thing." You might want to read his more recent books to see if he still feels the same way. Note the general feeling of raised eyebrows in his his 1996 essay, Precious Metals Equity and his 2005 essay, The Longest Discipline. There are a couple of big red warning flags here that suggest this is not something for everyone, and that it's not the sort of thing to commit to until you've given it a good long look yourself and are doing it based on personal conviction, not someone's recommendation. Read these two quotations carefully a couple of times--yes, of course I've picked out the most negative things he says--before going back to read what else he says.
In order to fully reap the portfolio benefits of PME the investor must be able to ignore its substantial nonsystematic risk. She must also be able to endure long periods in which PME will be an albatross around the portfolio's neck.
and
You think that value and small-stock exposures were a tough row to hoe in the 90s? Have Japanese stocks given you fits for the past 15 years? You ain’t seen nothin’: since 1963, the precious metals equity (PME) series has lost more than 35% five different times and, on one occasion, nearly 70%. Between October 1980 and August 1998, it lost a total of 53.8%, or 4.2% annualized—a 7.7% annualized loss after inflation. For the more than 24 years between October 1980 and December 2004, the real return of PME was –0.3%.

That’s nearly a quarter century of zero real returns, pilgrims. How hard was it hard to keep the faith? To quote Klaus von Bulow, You’ve No Idea.
If I substitute the question, "is this a popular investment among people who call themselves 'Bogleheads,'" I think the answer is no. The typical "Boglehead" portfolio is probably a Three-fund portfolio of the kind championed by Taylor Larimore, and, in fact, currently exemplified by most of Vanguard's target retirement and LifeStrategy funds-of-funds. The most common departures from that are probably in the direction of the Bill Schultheis "Coffeehouse Portfolio" and the sorts of investing style exemplified by fund company DFA, and involve tilts toward value, small-cap, and small-cap value, with REIT Index also being popular.

In this forum, the people who are interested in precious metals tend to be advocates of holding the metal itself, including followers of the Harry Browne "Permanent Portfolio." For their purposes, stocks in gold-mining companies don't have the desired characteristics of gold itself.
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Re: Should I Add Vanguard Precious Metals MF to Asset Alloca

Post by ruralavalon » Fri Mar 22, 2013 7:00 pm

Vanguard Precious Metals and Mining Fund (VGPMX) is extremely volatile, Nisiprius gives some of the numbers. So it offers a lot of reabalancing opportunities. But you must be disciplined enough to sell when it is doing well (e.g. x% over your target allocation)and buy when it is doing poorly (e.g. x% below your target allocation).

My impression is that not many here own this fund or anything similar. We do use this fund, at 05% of portfolio.
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Re: Should I Add Vanguard Precious Metals MF to Asset Alloca

Post by JAIrwin » Fri Mar 22, 2013 7:11 pm

Thanks so much to everyone for excellent insight! Lots of good things to think about!

Regarding my reason for looking at adding precious metals to my portfolio, I would be looking to add it as a long term addition to my asset allocation, not some short term thing to try to make some money hoping to spot the write price movement.

I have done some previous research on the correlation coefficient between the precious metals fund with Vanguard and the total market mutual fund, and it appears there is some good opportunity for diversification benefit.

I am 27 years old with around 200k liquid net worth assets, so I can afford to take some risks.

However, I was just curious if adding the precious metals fund would give enough of a shift to efficient frontier curve to warrant the effort in adding the fund and the risk/price movement it features.
Jacob Irwin, graduate student/PF blogger

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Re: Should I Add Vanguard Precious Metals MF to Asset Alloca

Post by momar » Fri Mar 22, 2013 8:51 pm

JAIrwin wrote:Thanks so much to everyone for excellent insight! Lots of good things to think about!

Regarding my reason for looking at adding precious metals to my portfolio, I would be looking to add it as a long term addition to my asset allocation, not some short term thing to try to make some money hoping to spot the write price movement.

I have done some previous research on the correlation coefficient between the precious metals fund with Vanguard and the total market mutual fund, and it appears there is some good opportunity for diversification benefit.

I am 27 years old with around 200k liquid net worth assets, so I can afford to take some risks.

However, I was just curious if adding the precious metals fund would give enough of a shift to efficient frontier curve to warrant the effort in adding the fund and the risk/price movement it features.
You're 27 and already thinking about changing up your portfolio so it's sexier.

Everyone says "oh, it might not be right for everyone, but I am investing for the long term!" I don't think people quite realize exactly how long that long term is; it's longer than you've been alive!

I can buy that some or even many people will stick with the small/value tilts for the long term, since those at least will show positive returns even if they are underperforming. But sticking with something that loses money over a near 30 year period? You may be the one in 1,000 that sticks that out and dutifully rebalances. But what is the potential upside from adding this at 5 or 10 or even 20%? Compared to the downside if you decide 5 years from now "You know, I'm bored reading bogleheads.org everyday and I want something simpler"? And that assumes you don't change your mind based on another book or article!

I'm not sure from your post whether you are new to investing or to passive investing or just new to this forum. But hold off on buying more than the core 3 or 4 funds until the newness wears off.
"Index funds have a place in your portfolio, but you'll never beat the index with them." - Words of wisdom from a Fidelity rep

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Re: Should I Add Vanguard Precious Metals MF to Asset Alloca

Post by JAIrwin » Sat Mar 23, 2013 6:44 am

Thanks so much for the insight Momar! Very much appreciated. I have been a passive investor for about 4-5 years now, so I know a few things, but compared to you all here, I admit I am very much a newbie to investing and still learning.

My portfolio consists of the following asset allocation, using the Vanguard index funds whenever possible (70/30 asset allocation split between fixed income / equity):

1. Cash (Target 10%)
2. Short Term and Total Bond Market (Target 15%)
3. TIPS (Target 5%)
4. International Equity (Target 10%)
5. International Emerging Markets (Target 11%)
6. Domestic Large Cap (Target 7%)
7. Domestic Small Cap (Target 7%)
8. Domestic Small Cap Value (Target 13%)
9. Domestic Large Cap Value (Target 12%)
10.REIT (Target 10%)

So far, this has worked pretty well for me and I've stuck with it with no problems for the 4-5 years I've been investing. As you can see, it's a little bit more than the simple 4 index fund portfolio that I'm beginning to learn about works very well for folks here at Bogleheads.

Are there any good discussions that you all could direct me to regarding the benefits of holding a portfolio of 4 funds vs. an expanded set of value/small/REITs index funds, etc like the one above?

Thanks!

Jacob
_________________________________________
[/quote]
You're 27 and already thinking about changing up your portfolio so it's sexier.

Everyone says "oh, it might not be right for everyone, but I am investing for the long term!" I don't think people quite realize exactly how long that long term is; it's longer than you've been alive!

I can buy that some or even many people will stick with the small/value tilts for the long term, since those at least will show positive returns even if they are underperforming. But sticking with something that loses money over a near 30 year period? You may be the one in 1,000 that sticks that out and dutifully rebalances. But what is the potential upside from adding this at 5 or 10 or even 20%? Compared to the downside if you decide 5 years from now "You know, I'm bored reading bogleheads.org everyday and I want something simpler"? And that assumes you don't change your mind based on another book or article!

I'm not sure from your post whether you are new to investing or to passive investing or just new to this forum. But hold off on buying more than the core 3 or 4 funds until the newness wears off.[/quote]
Jacob Irwin, graduate student/PF blogger

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Re: Should I Add Vanguard Precious Metals MF to Asset Alloca

Post by lapac1 » Fri Mar 29, 2013 4:17 pm

I too have been thinking about PME. For about, oh, the past 10-15 years. I read wbern's articles a long time ago, and considered it as a portfolio diversifier back then but passed. Obviously missed the big 2000s run up in PME. And the big move down over the past 2-5 years. But then last August, I invested a small amount in VPGMX, more out of curiousity than anything else, to see what would happen and how I'd react to it. Six months later, I'm down perhaps 10% or more, but adding more to PME, perhaps building up gradually a 3-4% position in my equity portfolio. But instead of VGPMX, I would recommend taking a look at the other PME ETFs like RING, GDX, GDXJ, or GGGG. The ER on all of these is higher than VGPMX, but they offer a more pure play investment in PME than VGPMX. RING and GDX are very similar, and RING has an ER of .39 bpts (.10 higher than VGPMX). I think wbern's logic back in the 1990s and 2000s remains sound - an equity asset class with tremendous volatility and modest correlation is a unique diversifier, more so than REITs or any other equity class you can think of (perhaps only small cap EM comes close). The rebalancing bonus I believe is real and additive for disciplined investors who can envision a portfolio running out 20, 30 or 40 years or more. At 27, you're young enough to be in that category. Certainly not for everyone, but on the basis of your current portfolio construction and comments you appear to understand the inherent mathematical logic and benefit of a smallish (5% or less) position in PME.

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Re: Should I Add Vanguard Precious Metals MF to Asset Alloca

Post by bottomfisher » Fri Mar 29, 2013 5:27 pm

I own Vg Precious Metals and Mining fund (and the Vg Energy fund) as my non-Bogleheadish assets in my otherwise well diversified primarily index funds portfolio. This fund was previously 3-4% of my portfolio. I’ve reconsidered its place in my portfolio. With its recent underperformance and the broader markets respectable performance, its down to less than 2% of my portfolio. Its simply clutter at this point. I don’t mind the volatility of the fund since I have a long term perspective. However, I don’t care for the relative lengthy periods of underperformance it tends to exhibit. And the less than 2% allotment is not enough to make a meaningful contribution to a portfolio even if it repeats one of its stellar run ups. I’m hoping it recovers a bit when the worldwide economy recovers. I’ll likely sell it and use the funds to return to fundamentals.

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