Sources of diversification

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rockstar
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Re: Sources of diversification

Post by rockstar »

What do you hope to gain by diversifying? Much easier to think about if you have a specific goal in mind.
Logan Roy
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Re: Sources of diversification

Post by Logan Roy »

toddthebod wrote: Sun May 12, 2024 8:19 pm
Logan Roy wrote: Sun May 12, 2024 6:58 pm
toddthebod wrote: Sun May 12, 2024 4:06 pm
Logan Roy wrote: Sun May 12, 2024 3:04 pm A more practical demonstration, I think, is how something like 75:25 stocks/gold has improved risk-adjusted returns of stocks while maintaining a total return comparable to 100% stocks. We can say it's dependent on start and end points, but PortfolioCharts' rolling start and end points demonstrate the same consistency in providing diversification at about the right times.

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Change the starting year to 1975.
Read my post.
I did, your comparison was meaningless. Nobody invests one time at the beginning of their career and never saves another penny. Add annual contributions, and no matter what year you start your analysis, the 75:25 portfolio falls substantially behind the 100% stock portfolio, to the tune of having a third less money after 30 years. Even more telling, switch gold for 10 year Treasuries, and you end up ahead as well.
Meaningless, because you've edited out the context of the comparison – which was a demonstration that gold has often spiked when equities dip. So it's possible to create this demonstration in which 75% stocks beats 100% stocks over two multi-decade periods. This is a conversation about diversifiers.

What you're doing is creating a new scenario of your own, in which an investor's regularly saving, and putting 25% of their contributions into gold. Which was never suggested and isn't relevant to the conversation you've jumped in on.
toddthebod
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Re: Sources of diversification

Post by toddthebod »

Logan Roy wrote: Mon May 13, 2024 11:51 am Meaningless, because you've edited out the context of the comparison – which was a demonstration that gold has often spiked when equities dip. So it's possible to create this demonstration in which 75% stocks beats 100% stocks over two multi-decade periods. This is a conversation about diversifiers.

What you're doing is creating a new scenario of your own, in which an investor's regularly saving, and putting 25% of their contributions into gold. Which was never suggested and isn't relevant to the conversation you've jumped in on.
You haven't created a demonstration in which 75% stocks beats 100% stocks over multi-decade periods. You've demonstrated that 75% stocks beat 100% stocks over 3 years, 1972-1975.

So what scenario are you proposing, that you save a bunch for retirement in equities, then, predicting the perfect time to rebalance, you move 25% of your savings into gold?
Gecko10x
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Re: Sources of diversification

Post by Gecko10x »

I like the rare violin idea, but I know nothing about violins and do not wish to store them myself.

Guns
Ammunition
Art
Other Collectibles (wouldn't suggest beanie babies though)
Land
Alcohol
life_force_prana
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Re: Sources of diversification

Post by life_force_prana »

There seem to be many definitions of diversification, and what goal someone is looking to solve with diversification. Sounds to me like OP is one of them that has narrow view, essentially looking for ideas within what they seem to consider good diversifiers - stocks, bonds and cash. I am not one to go much broader than that, but I do consider physical gold, directly owned rentals, land and foreign currency as additional diversifiers. They all serve different purposes but each their own.
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Re: Sources of diversification

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I removed an off-topic post. As a reminder, see: General Etiquette

At all times we must conduct ourselves in a respectful manner to other posters. Attacks on individuals, insults, name calling, trolling, baiting or other attempts to sow dissension are not acceptable.
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seajay
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Re: Sources of diversification

Post by seajay »

rockstar wrote: Mon May 13, 2024 11:21 am What do you hope to gain by diversifying? Much easier to think about if you have a specific goal in mind.
Volatility/risk reduction
toddthebod wrote: Mon May 13, 2024 12:21 pm You haven't created a demonstration in which 75% stocks beats 100% stocks over multi-decade periods. You've demonstrated that 75% stocks beat 100% stocks over 3 years, 1972-1975.

So what scenario are you proposing, that you save a bunch for retirement in equities, then, predicting the perfect time to rebalance, you move 25% of your savings into gold?
67/33 stock/gold (precious metals) and whatever might drive stocks to halve could see the price of gold double. At other times carrying gold might serve as a lag factor, Less extremes than all-stock.

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Which also reflects into the likes of 30 year SWR periods. In that chart 67/33 TSM/PM had a better outcome in around a third of start year cases, and where the worst case was less worse than TSM.

In broad real CAGR/stdev terms 67/33 had 6.4% CAGR 14.6% stdev, compared to TSM 6.9% with 19.7% stdev, 67/33 had the higher/better Sharpe Ratio.

So based on that history, all-stock during accumulation, switching to 67/33 stock/PM at retirement and applying a 5% SWR was inclined to maximize the portfolio value at retirement and yield a higher income than another who used a 4% SWR

Comparing 5% SWR outcomes
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and predominately TSM was better in the mid 1970's to mid 1990's and early 1930's to late 1940's start year cases i.e. after prior large declines in stocks (Wall Street Crash, and after President Nixon ended the US dollar gold peg as a means to pay down the cost of the Vietnam war).

If TSM is inclined to win-big after start dates following deep declines then that is a relatively infrequent case for many. A few winning big - that uplifts the broader average is inclined to have many under-perform that average, more often relatively lose.

Another factor is that whilst TSM had the higher broad gross CAGR for some gold might have been held more cost/tax efficiently than TSM, no regular dividends/interest for instance being taxed, that might have closed down that gap in net terms. Here in the UK for instance and during times of economic stress so also have taxes tended to be increased, 1960's/1970's for instance and even the most common basic rate of tax was near 40% (that aligned with a time when dividend yields/interest rates were relatively high in reflect of high inflation).
seajay
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Re: Sources of diversification

Post by seajay »

life_force_prana wrote: Mon May 13, 2024 5:16 pm There seem to be many definitions of diversification, and what goal someone is looking to solve with diversification. Sounds to me like OP is one of them that has narrow view, essentially looking for ideas within what they seem to consider good diversifiers - stocks, bonds and cash. I am not one to go much broader than that, but I do consider physical gold, directly owned rentals, land and foreign currency as additional diversifiers. They all serve different purposes but each their own.
Directly owned rental(s) here. Rent to myself. Liability matched rent, irrelevant whether rents soar or collapse. Fewer issues with the tenant as well, although you can still end up having arguments :)

Pensions for 'bonds'. Like a TIPS ladder that precisely exhausts the day you die

Which leaves ... just stocks, or for additional diversity perhaps art and/or collectibles and/or gold. Not really into collecting or art myself and with gold I can typically buy or sell the same day.

Value a inflation adjusted pension that ends the day you die as a 5% SWR asset, and your house value might compare to that. If additionally you have twice that amount in residual liquid asset wealth then you might split that 50/50 stock/gold. Add the home value to that as 'equity' value, where house price + imputed might broadly compare to stock + dividends, and you have a 67/33 equity/gold asset allocation, combined with some 'bonds' in the form of pension(s). Multiple assets, currencies and income sources (pension/dividends/SWR/imputed rent) and concentration risk, a major risk factor, is more diluted. Lose your land/house and a 25% portfolio hit is no different to what a portfolio value might decline in some year through natural price movements. Or .... no home, no pension, retire with everything in stocks and hope that covers your rent and spending, concentrated risk - that if you go to that extreme - might perhaps put it all in a single stock.
seajay
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Re: Sources of diversification

Post by seajay »

Florida Orange wrote: Mon May 13, 2024 9:04 am
seajay wrote: Mon May 13, 2024 8:33 am
Florida Orange wrote: Mon May 13, 2024 4:27 am
watchnerd wrote: Mon May 13, 2024 1:07 am
Florida Orange wrote: Sun May 12, 2024 7:06 pm Gold has no internal rate of return. To make money with gold you have to rely on the greater fool theory. You have to find somebody who is an even greater fool than you are and who will pay even more for it than you did.
This is also true for Picasso paintings.
True, but at least some people enjoy looking at Picasso paintings. Gold has no utility.
However a Picasso painting isn't divisible or fungible. Near instant moving physical gold from one country vault to another may end up with different actual gold - but makes no difference. Each diversifier may have different characteristics (risks/benefits) to others, that's a primary reason to diversify, concentration risk is a major risk factor that's easily diluted.
Diversification is important up to a point. But that doesn't mean there's no such thing as a bad investment. Something like stocks or bonds which have an internally generated source of revenue or land and buildings which can be used for practical purposes, strike me as a much better way to diversify than gold which only has value because everybody thinks that everybody else thinks it has value and they therefore assume that people will continue to pay more for it than can be rationally justified. The same can be said of rare stamps. What if everybody lost interest in rare stamps and no one was willing to pay anything for them? They have no inherent value. They're only worth a lot because some people are willing to pay an irrational amount for them. When you use gold as a diversifier you're betting that people will continue to honor the polite fiction that it's a valuable commodity.
When central banks around the world opt to stop holding gold, major buyers/holders, then yes. Until then gold is fungible, divisible, solid rather than gas/liquid, doesn't harm you, doesn't rust ...etc. and as such across time has been favored/valued as a form of money and there's a tendency that in future others will buy from you for similar reasons as why you bought it, and broadly be inclined to pay a inflation adjusted price for that gold (but like art tends to wax and wane). In part golds 'dividend' arises out of the high volatility of other assets priced in gold. For instance in 1980 a Dow stock index share costing near 1 ounce of gold, later being sold in 1999 for 40 ounces of gold (extreme/with-hindsight selective example).
Mr. Buzzkill
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Re: Sources of diversification

Post by Mr. Buzzkill »

I try to not overthink diversification for my portfolio. I think I originally read from Bill Bernstein that diversification can fail us when we need it most. So I stick to equities and US government bonds.

Additional thoughts here:
https://awealthofcommonsense.com/2014/0 ... ification/

In a complex adaptive system like free markets, extrapolating past correlations to future behaviors is not a guarantee.

As the great financial economist Y. Berra said, it’s difficult to make predictions, especially about the future”
A strategy that works only in bull markets isn’t much of a strategy. Anyway, four dollars a pound.
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TimeIsYourFriend
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Re: Sources of diversification

Post by TimeIsYourFriend »

Gold, if chosen to be part of a portfolio, should be a small part only as its price is entirely dependent on speculation assuming you are not a market timer who knows better than everyone else. Being a small part, let's say 5%-10%, it isn't going to make or break your financial life.

Gold hasn't been an easy thing to hold in the last 50 years. It has a drawdown period of 26 years in there meaning that your gold allocation peaked and then that peak was never seen again for 26 long years. We all think that we'll dutifully rebalance into the underweight asset and ignore the noise but many cannot stomach that kind of loss/volatility for that period of time. Some are already jumping ship on intermediate/long bonds after 2 years. If they think of gold as this safe asset, like they do bonds and often gold is talked about as a replacement for bonds, then this reaction is even more likely.
"Time is your friend; impulse is your enemy." - John C. Bogle
Florida Orange
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Re: Sources of diversification

Post by Florida Orange »

seajay wrote: Tue May 14, 2024 12:21 am in future others will buy from you for similar reasons as why you bought it
Exactly. That's why it's called the greater fool theory. You anticipate that someone will buy it from you for the same reason that you bought it from someone else. Namely, that most people think that most other people think it's worth paying money for. That mutually reinforcing belief among gold buyers could continue for a long time, but gold's value is based on nothing more than the assumption that people will continue to believe that gold has value. It's like celebrities who are famous for being famous. Sometimes they stay famous for a long time, but ultimately it isn't based on a real foundation. It's almost like a mass delusion that people are happy to go along with as long as it keeps working.

OP's question was about diversification. Investments that have inherent value are better portfolio diversifiers than gold, art, rare stamps and other options that belong more in the category of speculation. Presumably, one diversifies to make one's portfolio more safe, not less. Stocks produce income because companies are profitable. Bonds produce income because they pay interest. Gold doesn't do either.
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Re: Sources of diversification

Post by seajay »

Florida Orange wrote: Tue May 14, 2024 9:20 am
seajay wrote: Tue May 14, 2024 12:21 am in future others will buy from you for similar reasons as why you bought it
Exactly. That's why it's called the greater fool theory. You anticipate that someone will buy it from you for the same reason that you bought it from someone else. Namely, that most people think that most other people think it's worth paying money for. That mutually reinforcing belief among gold buyers could continue for a long time, but gold's value is based on nothing more than the assumption that people will continue to believe that gold has value. It's like celebrities who are famous for being famous. Sometimes they stay famous for a long time, but ultimately it isn't based on a real foundation. It's almost like a mass delusion that people are happy to go along with as long as it keeps working.

OP's question was about diversification. Investments that have inherent value are better portfolio diversifiers than gold, art, rare stamps and other options that belong more in the category of speculation. Presumably, one diversifies to make one's portfolio more safe, not less. Stocks produce income because companies are profitable. Bonds produce income because they pay interest. Gold doesn't do either.
A British Pound originally was formed in the mid 750's as value of a Saxon pound weight of silver. A Pound invested in bonds back then and rolled until the present day would have paid interest whereas the silver didn't pay interest but neither would it have rolled through years such as the 1960's when the Beatles were singing about their 95% taxation rates (Taxman).

In the 18th and 19th centuries stocks were considered as being speculations, and broadly rewarded no more than bonds but did so with considerably more volatility/variance. Gold/silver were money. Stocks have primarily been more widely adopted due to changing circumstances - as money (gold/silver) that previously was lent tended to see broad 0% inflation (finite money) and borrowers paid interest (real rate of return) in order to borrow money (gold/silver) - has transitioned to more a case of where bonds broadly just negate inflation (currency debasement) after costs/taxes. In order to secure the potential for real gains investors have had to take on the additional risk of holding speculative assets such as stocks.

Legal tender gold coins to this day have inherent value, the legal tender value allocated to the coin. If the metallic commodity value fell below that then the coins could be spent as per any other legal tender coin. A single stocks inherent value is potentially zero - is a speculation that you'll be able to sell it on (greater fool).
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Re: Sources of diversification

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Florida Orange wrote: Tue May 14, 2024 9:20 am Exactly. That's why it's called the greater fool theory. You anticipate that someone will buy it from you for the same reason that you bought it from someone else. Namely, that most people think that most other people think it's worth paying money for. That mutually reinforcing belief among gold buyers could continue for a long time, but gold's value is based on nothing more than the assumption that people will continue to believe that gold has value. It's like celebrities who are famous for being famous. Sometimes they stay famous for a long time, but ultimately it isn't based on a real foundation. It's almost like a mass delusion that people are happy to go along with as long as it keeps working.
Yes, money is also a social construct.

Cowry shells, wampum, and the French franc were once money, too.

That doesn't mean they were valueless at the time.
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watchnerd
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Re: Sources of diversification

Post by watchnerd »

Florida Orange wrote: Tue May 14, 2024 9:20 am OP's question was about diversification. Investments that have inherent value are better portfolio diversifiers than gold, art, rare stamps and other options that belong more in the category of speculation.
If one is diversifying in order to increase risk-adjusted returns, gold actually has done this pretty well in the past.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
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Re: Sources of diversification

Post by seajay »

TimeIsYourFriend wrote: Tue May 14, 2024 5:56 am Gold, if chosen to be part of a portfolio, should be a small part only as its price is entirely dependent on speculation assuming you are not a market timer who knows better than everyone else. Being a small part, let's say 5%-10%, it isn't going to make or break your financial life.

Gold hasn't been an easy thing to hold in the last 50 years. It has a drawdown period of 26 years in there meaning that your gold allocation peaked and then that peak was never seen again for 26 long years. We all think that we'll dutifully rebalance into the underweight asset and ignore the noise but many cannot stomach that kind of loss/volatility for that period of time. Some are already jumping ship on intermediate/long bonds after 2 years. If they think of gold as this safe asset, like they do bonds and often gold is talked about as a replacement for bonds, then this reaction is even more likely.
Many private investors profit chase, jump into what has done well, selling out of their prior was doing well until they bought assets ... to the extent that they'd have been better off in a cash deposit. Their loss is anothers gain. Investing is mostly about averaging in/out, keeping costs/taxes low and staying the course for many years. 1980 to 1999 and the price of gold declined in nominal terms (around halved), so even more in real terms. 50/50 rebalanced with stocks and that accumulated 6 or 7 times more ounces of gold without having added a single cent. In the 2000's when stocks faltered so ounces of gold reduced, additional stock shares were accumulated (similar as per the 1970's).

Consider a simple model of in 1972 (PV data date range limit) to 1979 you had half in gold, half in stocks, and you left the stocks as-is to accumulate, drew a 8% SWR from the gold. That was more than comfortably accommodated. Same for the 2000 to 2009 decade. Do the same for 1980's and 1990's but leaving gold as-is, drawing 8% SWR from stocks and again that was comfortably accommodated. In practice 50/50 stock/gold can form two separate sub-portfolios of anywhere between 100/0 and 0/100 ... one 65/35 stock/gold the other 35/65 stock/gold for instance. And where you might draw SWR in varying amounts from either of those such that they collectively sum to a 4% overall SWR. There's a optimal pairing in their somewhere, but there's no need to actually identify it, its automatically integral.
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Re: Sources of diversification

Post by CloseEnough »

Florida Orange wrote: Tue May 14, 2024 9:20 am
OP's question was about diversification. Investments that have inherent value are better portfolio diversifiers than gold, art, rare stamps and other options that belong more in the category of speculation. Presumably, one diversifies to make one's portfolio more safe, not less. Stocks produce income because companies are profitable. Bonds produce income because they pay interest. Gold doesn't do either.
Fine and rare violins have returned 6-7% on average since the 1960s, and have proven resilient to inflation and stock market downturns. Some of the best makers have appreciated 10-15% annually since 2000. Old Italian violins have shown more stable growth than the stock market over long periods.

I also think that introducing more risk into an allocation of a portfolio that is added for diversification can make it more "safe".

All that said, my investments are in stocks and bonds :happy
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HanSolo
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Re: Sources of diversification

Post by HanSolo »

adave wrote: Sun May 12, 2024 5:05 pm I am sitting on about 1.2M in cash I can invest and considering muni bonds vs just dump into VTI and increase cash reserves
VTMFX (Vanguard Tax-Managed Balanced Fund) may be useful in this situation.

Commodities and gold are used by some as diversifiers. Based on the above, sounds like not what you're looking for.
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Logan Roy
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Re: Sources of diversification

Post by Logan Roy »

CloseEnough wrote: Tue May 14, 2024 11:37 am
Florida Orange wrote: Tue May 14, 2024 9:20 am
OP's question was about diversification. Investments that have inherent value are better portfolio diversifiers than gold, art, rare stamps and other options that belong more in the category of speculation. Presumably, one diversifies to make one's portfolio more safe, not less. Stocks produce income because companies are profitable. Bonds produce income because they pay interest. Gold doesn't do either.
Fine and rare violins have returned 6-7% on average since the 1960s, and have proven resilient to inflation and stock market downturns. Some of the best makers have appreciated 10-15% annually since 2000. Old Italian violins have shown more stable growth than the stock market over long periods.

I also think that introducing more risk into an allocation of a portfolio that is added for diversification can make it more "safe".

All that said, my investments are in stocks and bonds :happy
The problem with violins is how easily they're stolen or damaged .. If you sell at auction, there's a huge cut .. If you sell in a shop, customers will be taking your violin out, largely uninsured, maybe dozens of times before it eventually sells .. And even if insurance covers people picking it up to play, the chances of getting anything like a current top auction value are probably low.

My best investments have been instruments. But they're a pain to sell. And online selling services (eBay, Reverb) put the customer so far first, you can lose your item and not get compensated at all if you get the wrong buyer. Plus huge commissions they take. I like my real asset exposure in large closed-end funds or TIPS.
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Re: Sources of diversification

Post by seajay »

Florida Orange wrote: Tue May 14, 2024 9:20 am OP's question was about diversification. Investments that have inherent value are better portfolio diversifiers than gold, art, rare stamps and other options that belong more in the category of speculation.
One retiree has half their wealth in their home, the other half all-in stock. Another has 25/25/50 in home/gold/stock. Both "spend" their imputed rent and stock dividends.

Lifestyle choices where both have the same disposable income (stock dividends), both have half their wealth in-hand (50% home value or 25% home, 25% gold). One (all else being equal) lives in a smaller home (maybe a similar sized home in a cheaper area)), has less imputed rent 'benefit', but where the one with gold can instantly move that value. The one with 25% gold might consider the one who holds no gold as being the riskier/more-speculative.

Disposable income wise and there's not a ocean of difference between 50% in stocks (dividend/disposable income) and 33%, maybe with the latter being supplemented with pension income (that might be considered as being a form of 'bonds') its more diversified to have assets of around equal measures of land/house, stocks, gold and 'bonds' (pensions).

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