asset allocation

[SeanO]

Jim - interesting observation regarding the website's theme being: not losing money when things go bad. What I actually love about the site, and Eric, are the thoughts he has about the larger impacts beyond our investment portfolio. Perhaps it will end up yet another investment site, but I sure hope not.

If the events discussed here play out there will be huge opportunities. Where do I best allocate my assets, including my time, to best maximize on those opps?

[jk]

blaze-
i don't think of myself as having any particular time horizon. my first priority is controlling risk, my second is to make money within what i think is a reasonable risk profile. i'm not married to any of my investments -- i have within recent months moved 10% of my assets on reading something that made me look at a certain asset differently. in recent years, however, i'm more commonly moving in 1-5% re-allocations.

on the other hand my worldview evolves slowly. i'm not married to my precious metals exposure, for example, but i've had significant pm holdings since 2001. unfortunately i let the pullback of july 2002 scare me out of a chunk of it, and since that time i've traded a bit around my core position. in general my pm positions have been between 18 and 33% fof my portfolio or the last 5 years. i've taken some profits on occasion, along the way, increased exposure at other times.

i think your "equities for the long run" approach is highly dangerous at this time. yes, even if you bought at the peak in 1929 you would eventually gotten even -- about 30 years later. from 1998 to now u.s. equities have been outperformed by tbills, though of course equities were a lot more exciting. u.s. equities are overvalued by every historical metric, and a variety of studies show that holding equities at these levels lets you expect 1-2% returns over the next 10 years, though again it will be very exciting. i mentioned in another post that the dow went from 1000 in 1966 to 1000 in 1982 but lost 80% to inflation. that's 16 years of holding and down 80%. look at the japanese market, from 40000 jan 1990 to - now, after a big long rally - 17000, 16 years later. so the long run can be really, really long.

also global equity markets are not highly correlated most of the time, but during financial crises suddenly everything gets correlated. i saw that 1987, in 1998 with the asian crisis and ltcm, in 2001-2002, and i'm sure i'll see it again. so i don't think foreign equities are adequate diversification from domestic ones. i think you need entirely different asset classes.

i don't hold much with modern portfolio theory. it's based on an efficient market theory that i think is completely false and misleading [but it makes the math easier]. it assumes that there is a straight trade off of risk -- defined as volatility - for return . i think in the real world taking risks is not always rewarded even probabilistically, and that if you look hard enough you can find extra return with lower risk.

you say bonds are low risk, but in fact they have enormous volatility if you hold bonds with any significant duration. from 1980 to a couple of years ago we lived through the greatest bond market rally of all times. in a deflation they have further to go, but i think it's more likely that one day we will again call them "certificates of guaranteed confiscation," as we did in the late 70's. bonds are not boring.

i have some foreign bond funds, but i want the lowest duration possible to make it a purer currency play. [btw you say the loonie tracks the dollar, but in fact it's gone from the high 70's to 90 in the last year and a half] i have euro exposure through rywbx- that's twice the inverse dollar index, and the dollar index is 57% euros. i diversify that to other currencies because i really don't know what's going to work.

i'm neither bull nor bear. i'm a chicken.

[EJ]

Bulls, Bear and Chickens. That's really good!

More on the Shadow Fed "other" forum shortly. All shall be revealed in time. Sorry to be mysterious. Not ready to drop the other shoe just yet.

[JD_]

After removing the rose colored glasses of your typical "buy and hold" index investor circa 1998 and paying off my mortgage (completely debt free now) I'm currently sitting:

47% Cash
35% US Equities (Wilshire 5000 index)
18% Int'l Equities (MSCI EAFE+EM index)

I've actually done pretty well by buying the market from late 2000 through late 2005 but "buy and hold" seems kind of naive when there are massive imbalances going on in the global economy. At least what I've been buying which is a US Wilshire 5000 index and an international MSCI EAFE+EM index. I'm thinking what I've been doing is more akin to "buy and hold the bag!"

In the last two weeks I've sold down equities from a 100% asset allocation to the point now where I have absorbed all the capital losses I was carrying forward from tax loss harvesting I did during the 2000 to 2002 bear market. At that time I was swapping fairly well correlated indexes (S&P 500 vs Wilshire 5000) in order to realize capital losses I had incurred during the bear market while still remaining in the market. I was realizing losses for tax planning reasons. Now I have nothing but unrealized capital gains and it's kind of bugging me. Big problem, right? *lol*

I want further out of my equity positions because I still think they are risky but I'm going to get hit with 22% long term capital gains taxes (instead of 15% long term capital gains taxes) due to the Alternative Minimum Tax. The capital gains, if I take them, are also going to push me into the next highest tax bracket for this year and disqualify me for my 2006 Roth IRA contribution which I've already made (and will thus have to undo). Grrrrr...

A question I have is should I just bite the bullet and realize the capital gains, pay the higher AMT taxes, undo my 2006 Roth IRA contribution, and be glad I'm reducing my equity position before the markets tumble 40% instead of just 8%? Should I hedge my long US/Int'l equity position (and defer taxes for a while longer) by taking a leveraged position (like 200% short) on a market decline and/or dollar decline predicition which seems to be the consensus of the iTulip community? Would you do something else? An old "buy and holder" is a babe in the investment woods when he finally figures out as EJ recommends in his Bubble Cycle article that you make money by playing the bubbles not by buying and holding them. At the moment I just want to "unbubble" myself from my long equity position before I figure out my next move. It's going to cost me 22% tax on my gain to do that but isn't that better than 0% tax after a 40% equity drop? *lol*

[Jim Nickerson]

After removing the rose colored glasses of your typical "buy and hold" index investor circa 1998 and paying off my mortgage (completely debt free now) I'm currently sitting:

47% Cash
35% US Equities (Wilshire 5000 index)
18% Int'l Equities (MSCI EAFE+EM index)

I've actually done pretty well by buying the market from late 2000 through late 2005 but "buy and hold" seems kind of naive when there are massive imbalances going on in the global economy. At least what I've been buying which is a US Wilshire 5000 index and an international MSCI EAFE+EM index. I'm thinking what I've been doing is more akin to "buy and hold the bag!"

In the last two weeks I've sold down equities from a 100% asset allocation to the point now where I have absorbed all the capital losses I was carrying forward from tax loss harvesting I did during the 2000 to 2002 bear market. At that time I was swapping fairly well correlated indexes (S&P 500 vs Wilshire 5000) in order to realize capital losses I had incurred during the bear market while still remaining in the market. I was realizing losses for tax planning reasons. Now I have nothing but unrealized capital gains and it's kind of bugging me. Big problem, right? *lol*

I want further out of my equity positions because I still think they are risky but I'm going to get hit with 22% long term capital gains taxes (instead of 15% long term capital gains taxes) due to the Alternative Minimum Tax. The capital gains, if I take them, are also going to push me into the next highest tax bracket for this year and disqualify me for my 2006 Roth IRA contribution which I've already made (and will thus have to undo). Grrrrr...

A question I have is should I just bite the bullet and realize the capital gains, pay the higher AMT taxes, undo my 2006 Roth IRA contribution, and be glad I'm reducing my equity position before the markets tumble 40% instead of just 8%? Should I hedge my long US/Int'l equity position (and defer taxes for a while longer) by taking a leveraged position (like 200% short) on a market decline and/or dollar decline predicition which seems to be the consensus of the iTulip community? Would you do something else? An old "buy and holder" is a babe in the investment woods when he finally figures out as EJ recommends in his Bubble Cycle article that you make money by playing the bubbles not by buying and holding them. At the moment I just want to "unbubble" myself from my long equity position before I figure out my next move. It's going to cost me 22% tax on my gain to do that but isn't that better than 0% tax after a 40% equity drop? *lol*

Paying tax is good in that it means you are making money, as opposed to making no money because of losses and thus paying less tax.

To me all your thinking is pertinent, but if one is going to trade the markets' vicissitudes, then to me realizing gains when one has them in hand must be done. This is primary in trading it seems to me. You know you cannot make short-term trades with the tax considerations being a large part of your decision making process.

I used to gasp when an orthodontic colleague would tell me how much he paid in taxes each year--it was more than I was making, but had I reflected on how much he had to gross to pay as much tax as he did, I would have gone into V-fib. Now for all who do not know what V-fib is, it is a heart rhythm disturbance that can kill. The point of this is not everyone understands abbreviations--*lol"?

Hope you keep having to paying taxes on your short term capital gains, its good for you, and it is good for tax revenues.

[jk]

After removing the rose colored glasses of your typical "buy and hold" index investor circa 1998 and paying off my mortgage (completely debt free now) I'm currently sitting:

47% Cash
35% US Equities (Wilshire 5000 index)
18% Int'l Equities (MSCI EAFE+EM index)

I've actually done pretty well by buying the market from late 2000 through late 2005 but "buy and hold" seems kind of naive when there are massive imbalances going on in the global economy. At least what I've been buying which is a US Wilshire 5000 index and an international MSCI EAFE+EM index. I'm thinking what I've been doing is more akin to "buy and hold the bag!"

In the last two weeks I've sold down equities from a 100% asset allocation to the point now where I have absorbed all the capital losses I was carrying forward from tax loss harvesting I did during the 2000 to 2002 bear market. At that time I was swapping fairly well correlated indexes (S&P 500 vs Wilshire 5000) in order to realize capital losses I had incurred during the bear market while still remaining in the market. I was realizing losses for tax planning reasons. Now I have nothing but unrealized capital gains and it's kind of bugging me. Big problem, right? *lol*

I want further out of my equity positions because I still think they are risky but I'm going to get hit with 22% long term capital gains taxes (instead of 15% long term capital gains taxes) due to the Alternative Minimum Tax. The capital gains, if I take them, are also going to push me into the next highest tax bracket for this year and disqualify me for my 2006 Roth IRA contribution which I've already made (and will thus have to undo). Grrrrr...

A question I have is should I just bite the bullet and realize the capital gains, pay the higher AMT taxes, undo my 2006 Roth IRA contribution, and be glad I'm reducing my equity position before the markets tumble 40% instead of just 8%? Should I hedge my long US/Int'l equity position (and defer taxes for a while longer) by taking a leveraged position (like 200% short) on a market decline and/or dollar decline predicition which seems to be the consensus of the iTulip community? Would you do something else? An old "buy and holder" is a babe in the investment woods when he finally figures out as EJ recommends in his Bubble Cycle article that you make money by playing the bubbles not by buying and holding them. At the moment I just want to "unbubble" myself from my long equity position before I figure out my next move. It's going to cost me 22% tax on my gain to do that but isn't that better than 0% tax after a 40% equity drop? *lol*

first and foremost don't let a tax consideration lead you to remain exposed to an investment you want out of. either sell it or hedge it. re the taxes- you need to decide when you're going to take the hit. if your income and bracket will be lower in the future then by all means hedge instead of selling. as long as the hedge is not precise you can postpone the taxes.

[JD_]

Paying tax is good in that it means you are making money, as opposed to making no money because of losses and thus paying less tax.

To me all your thinking is pertinent, but if one is going to trade the markets' vicissitudes, then to me realizing gains when one has them in hand must be done. This is primary in trading it seems to me. You know you cannot make short-term trades with the tax considerations being a large part of your decision making process.

I used to gasp when an orthodontic colleague would tell me how much he paid in taxes each year--it was more than I was making, but had I reflected on how much he had to gross to pay as much tax as he did, I would have gone into V-fib. Now for all who do not know what V-fib is, it is a heart rhythm disturbance that can kill. The point of this is not everyone understands abbreviations--*lol"?

Hope you keep having to paying taxes on your short term capital gains, its good for you, and it is good for tax revenues.

I know the wisest thing to do is realize the capital gain (while I still have it) and pay the capital gains tax. I'm a bit surprised that when I finally need it I find out there is no such thing as the much ballyhooed 15% long term capital gains tax rate in my situation. The Alternative Minimum Tax will make sure I pay a 22% long term capital gains tax rate. Higher than even the old pre 1997 20% long term capital gains tax rate. Why I'm a bit surprised that the fine print of any government policy says 'but not for you!' would just be another case of my naivete? I guess that is why people have been complaining about the AMT! *lol* which is an abbreviation for *laughing out loud*

I've made some extreme asset allocation decisions in the last 2 weeks. Going from a 8 1/2 year long, 100% equity allocation (while buying more equities every month) basically to an all cash allocation and paying off my mortgage. It's not that a decline in the markets bothers me that much. I weathered the 2000 to 2002 bear market buying into the decline all the way down and then buying into the advance all the way up until just last month. I've taken a 40% hit to my portfolio before and continued on. What bothers me is that I've made a fundamental assumption that when it comes time to sell my equity assets in retirement they will at least be worth what I paid for them in real (not just nominal) terms. That from a long term (say 30 year) "buy and hold" perspective I didn't have to worry about market valuations or especially the persistent overvaluation of the market since 1995. What bothers me is that I haven't been paying attention to the correlation between the asset class bubbles (2000 stock market, 2005 housing market, etc) and the extreme liquidity of money supply with the multiplier effect of easy credit that has been used to reflate the last popped bubble and will be used to reflate the next popped bubble ad infinitum.

For 8 1/2 years I thought I was being smart and investing in the most well diversified global portfolio of equities I could possibly create. I thought I was minimizing my risk by investing in a global CAPM (Capital Asset Pricing Model) way. I was indexing the whole planet's best guess on asset pricing by buying a global basket of completely diversified equity indexes. Instead I find out I'm just investing my future retirement into an overvalued basket of asset bubbles due to excess monetary liquidity and a one way trip to eventual misery named 'fiat currency'. So, is your nation having a problem with long term obligations? No problem, inflate the money supply and miraculously resolve that long term obligation with newly printed money! Is your economy deflating? No problem, have the Fed fire up the helicopters! Is there too much money supply? Uh oh, that means long term inflation for you all the while that your US based labor and wages are becoming less valuable (due to globalization) and your dollar and global purchasing power is declining (due to massive US debt and extreme trade imbalances). *lol*

Anyway, after tomorrow I'm going to be about 100% long the US dollar. That is my next problem! *g* which is an abbreviation for *grin*

JD

[JD_]

first and foremost don't let a tax consideration lead you to remain exposed to an investment you want out of. either sell it or hedge it. re the taxes- you need to decide when you're going to take the hit. if your income and bracket will be lower in the future then by all means hedge instead of selling. as long as the hedge is not precise you can postpone the taxes.

I'd like to think my future tax bracket is going to be lower but a few months ago I came to the conclusion that if I'm financially successful (which is my goal) I'm going to probably be paying higher taxes going forward until my death. I also guessed (and it is just that) that we are at a low in personal income tax rates and with the unfunded future obligations the nation has promised that taxes are consistently heading upwards from here on out. So although I may move to the 2nd lowest bracket out of the 6 at retirement age instead of the 4th lowest bracket out of 6 that I'm in right now I'll be unpleasantly surprised to find out that the 2nd lowest bracket at retirement will have been raised to say 35% instead of my current 4th lowest bracket at 28%. In other words I'll be in a lower relative tax bracket but paying a higher absolute percentage because...well, we promised lots of stuff and somebody has to eventually pay. Welcome to your "lower" tax bracket, send in your check! *lol*

JD

[Jim Nickerson]

Why worry about the future?

I'd like to think my future tax bracket is going to be lower but a few months ago I came to the conclusion that if I'm financially successful (which is my goal) I'm going to probably be paying higher taxes going forward until my death. I also guessed (and it is just that) that we are at a low in personal income tax rates and with the unfunded future obligations the nation has promised that taxes are consistently heading upwards from here on out. So although I may move to the 2nd lowest bracket out of the 6 at retirement age instead of the 4th lowest bracket out of 6 that I'm in right now I'll be unpleasantly surprised to find out that the 2nd lowest bracket at retirement will have been raised to say 35% instead of my current 4th lowest bracket at 28%. In other words I'll be in a lower relative tax bracket but paying a higher absolute percentage because...well, we promised lots of stuff and somebody has to eventually pay. Welcome to your "lower" tax bracket, send in your check! *lol*

JD

I surmise you might be about 35 y/o. Assuming you make it to retirement--which some percentage of people do not--the retirement age will be older than 65, it may be greater right now. I turn 65 in about 6 weeks, but I quit working at 50, not because of great wealth, but because of great burnout with what I did. At the current bottom in 10/02, I had less than half as much nominally as I did when I quit working.

Perhaps I have learned somethings that are worth thinking about. Wise people I believe should always save as much as they can--not just what they put in their IRA's or 401K's. The notion "money is to be spent" is crap in my opinion. As far as I can determine, the more money (liquid assets) an average person has (this excludes the super-rich) the more possible control they have over their circumstances, everyday and in the future. There is no one that can tell you what things are going to be like in 25 or 30 years because no one knows. All you can do is the best one can now and until you make it 30 years down the pike with hopefully wise adjustments as needed along the journey.

Your greatest asset right now is your ability to keep earning new potential capital, but your earnings do not translate into capital unless you save some of them. I went through the high interest rate debacle of the 70's without flinching because I was too busy working to even think about the stock markets and bond markets--which was somewhat of a mistake, but I made it and lived with it and through the period. Did the same thing in 1987. Had I been working from 2000 to 2002, I might have made it though that debacle, but I wasn't working, and I definitely was flinching and all my sphincters were tight.

I have no idea what you do, but it is possible that before the next thirty years pass, you might grow to loathe whatever it is you do. If that happens and you have not spent all your money along the way, then perhaps you can tell you boss to take the job and shove it, but for sure you will not do that if you have not saved.

The other things that has enabled me to live without gainful employment is when I quit, I did so with the commitment, to which I have stuck, to live within my means--which meant a firm budget. The 13-14 years I have not worked have been countless times more valuable to me with regard to sanity than were the years spent trying to become educated and then working.

If you do not mind, what exactly did you mean when you said after tomorrow I'm going to be about 100% long the US dollar"?

[JD_]

I surmise you might be about 35 y/o. Assuming you make it to retirement--which some percentage of people do not--the retirement age will be older than 65, it may be greater right now. I turn 65 in about 6 weeks, but I quit working at 50, not because of great wealth, but because of great burnout with what I did. At the current bottom in 10/02, I had less than half as much nominally as I did when I quit working.

Hi Jim,

I'm 43 so I'm a very tail end baby boomer. I've pretty much concluded if I'm retiring it's at a minimum age of 70. I wouldn't be surprised if I'm still working at 75 if I make it that long!

Your greatest asset right now is your ability to keep earning new potential capital, but your earnings do not translate into capital unless you save some of them.

The other things that has enabled me to live without gainful employment is when I quit, I did so with the commitment, to which I have stuck, to live within my means--which meant a firm budget.

I don't have the patience to create and stick to a budget but I definitely live within (actually below) my means. I just paid off my mortgage which is the last debt I will probably ever have. I save about half my salaried income and then make about the same again in asset appreciation and dividends/income on my investments each year. All the same I'm still feeling kind of squeezed when I try to determine how I'm ever going to retire. Maybe I'm never going to!

My friends however are leveraged to the hilt. They just don't understand the risk they are taking...or don't care. I live in a pretty affluent community (I'm the poor person!) and I just can't believe the level of consumerism. I understand people can make a good living (I make a pretty good living too) but with the amount of their possessions and the constant keeping up with the Jones I think it's next to impossible that the majority are not leveraged to the maximum through HELOCs dependent on bogus house values that are about to pop. Either that or they are a mini version of the Fed with a printing press in the basement. *lol*

It's going to be an interesting time. I don't know if I'm a fool for liquidating my entire investment portfolio or if I've just sidestepped a 10 or more year asset deflation period. I know one thing, I will regret to my death bed not having liquidated if the market does tank. I will not regret having liquidated if the market continues to go up. I'm positive I was taking on way too much uncompensated risk for the return I've currently been receiving. It's time to study more and stop believing the orthodoxy of "buy and hold"!

JD

[JD_]

If you do not mind, what exactly did you mean when you said after tomorrow I'm going to be about 100% long the US dollar"?

Oh, that's just my tongue-in-cheek way of saying I'm selling the remainder of my equity positions tomorrow and realizing the capital gains. I'll be in money markets aka "100% long the US dollar" for a few weeks (maybe even longer) until I can determine how best to allocate my assets to profit from a potential Ka-Poom.

JD

[jk]

long the u.s. dollar?

jd, i think it was wise of you to liquidate. you were shouldering tremendous risk with little in prospect for compensation for at least the next 10 years. [i really recommend you visit the hussmanfunds.com website and read through some of the archives for discussions of current valuation and risks.] the u.s. market [at least the s&p] has gone nowhere since 1998, but it's been an incredibly exciting trip! the prospects are for more of the same, little gain but a lot of chutes and ladders along the way. it may well resemble the 1966 to 1982 period; 16 years when the dow went from 1000 all the way to [yes] 1000, but with a 75-80% inflation hit.

you're at an age where you really want to start controlling risk more. you may buy the "equities for the long term" line, but you have to have a really long, long timeline. otherwise you could hit 60 after experiencing a 16 year run like i described in the last paragraph, having lost 80% of the purchasing power of your investments.

your remark makes clear that you know that your next problem is to think about currencies, precious metals and the dollar. i include precious metals because i think gold is in the process of being remonetized. the problem with currencies is that no country wants a strong currency now: it's an ugly contest. i think the u.s. dollar is going to look progressively uglier, but that won't make the other currencies pretty. still, it's hard to put everything into gold -- i know i don't have the nerve. i'm about 23% in precious metals now and thinking about adding a bit more soon.

i'm impressed by the way you've handled your investments up to now. not your investment choices per se, but your fortitude in having a strategy that you were willing to live with. i'm sure you'll soon find a currency/metals stance that you'll be comfortable with.

[JD_]

jd, i think it was wise of you to liquidate. you were shouldering tremendous risk with little in prospect for compensation for at least the next 10 years. [i really recommend you visit the hussmanfunds.com website and read through some of the archives for discussions of current valuation and risks.] the u.s. market [at least the s&p] has gone nowhere since 1998, but it's been an incredibly exciting trip! the prospects are for more of the same, little gain but a lot of chutes and ladders along the way. it may well resemble the 1966 to 1982 period; 16 years when the dow went from 1000 all the way to [yes] 1000, but with a 75-80% inflation hit.

you're at an age where you really want to start controlling risk more. you may buy the "equities for the long term" line, but you have to have a really long, long timeline. otherwise you could hit 60 after experiencing a 16 year run like i described in the last paragraph, having lost 80% of the purchasing power of your investments.

your remark makes clear that you know that your next problem is to think about currencies, precious metals and the dollar. i include precious metals because i think gold is in the process of being remonetized. the problem with currencies is that no country wants a strong currency now: it's an ugly contest. i think the u.s. dollar is going to look progressively uglier, but that won't make the other currencies pretty. still, it's hard to put everything into gold -- i know i don't have the nerve. i'm about 23% in precious metals now and thinking about adding a bit more soon.

i'm impressed by the way you've handled your investments up to now. not your investment choices per se, but your fortitude in having a strategy that you were willing to live with. i'm sure you'll soon find a currency/metals stance that you'll be comfortable with.

Hi jk,

Upon your recommendation in the who do you read? who do you trust? thread I have been reading John Hussman's weekly market commentaries. I had come across John about a year ago with his hussmanfitness.org Web site and already respected his knowledge in that area. One thing stood out when I read some of his most recent market commentaries. Valuations absolutely matter and the current 16+ P/E ratio of the S&P 500 is way high historically since we are most likely at an earnings peak on the S&P and in the past most earnings peaks have had the S&P 500 P/E at 10. Earnings peaks almost guarantee P/E expansion over the next few years unless prices also fall. Neither of those outcomes would have been very good for a 100% equity allocation.

With the average dividend yield dropping below 2% from a historical average of 4% the long term holding period for equities has also moved from about 25 to 30 to ensure an almost guaranteed positive return to 50 to 60 years. That's a lot of years and a lot of risk! It's certainly getting beyond the holding period of even a new investor in his 20s. For one in his 40s it has to be a serious consideration and so once again valuations really matter.

I can't say my 100% equity allocation was very smart but at least it was consciously done. Like a number of other people I made bad financial decisions in my 20s and early 30s. I liquidated an IRA in my early 30s because I was out of work and thus erased all the savings I had done in my 20s. I wiped out the most important decade of anyone's long term retirement plan when it comes to the power of compounding returns. The past 10 years I've felt pressured to make up for that mistake and have been aggressive in my allocation. It hasn't hurt me, mostly just through dumb luck, but 100% equities is certainly way too aggressive. I have to start getting more educated about the global economy and specifically about money supply and trade/debt issues. I've been completely ignoring them up to this point so I'm going to sit in cash for a while, educate myself, and then redesign my entire asset allocation. Before I basically had 3 asset classes I worried about - stocks, bonds, and cash. Now I really have to think about commodities and currencies as well because I've been dollar denominated for a very long time. If the dollar declines my relative global purchasing power is declining too even if I have made money with my dollar denominated equity investments.

Thanks for the recommendation about John Hussman. I'm enjoying reading his commentaries.

JD

[blazespinnaker]

I too am 90% cash, however my situation is unique. I have to say though that liquididating your portfolio into cash and taking a capital gains hit seems like an interesting bet .. maybe it would have made more sense to purchase uspix or similar hedging instruments?

Anyhow, you and I are in the same boat so I sure hope you made the right choice

[jk]

holding wealth

someone sent me this excerpt a while ago. i thought it was apropos


Holding Wealth Robin Hahnel from “Panic Rules”

While most of us who live month to month don’t have to worry about it, how to hold their wealth is the chief economic concern of the tiny minority who own most of the wealth. If they hold their wealth in dollars, it :”earns” nothing and could be “eaten away” by inflation or depreciation of the dollar relative to other currencies. If they hold their wealth in stocks, they will get dividends but may suffer ‘capital losses’ if stock prices fall. If they hold their wealth in bonds, they will get yields but may suffer capital losses if bond prices fall because interest rates rise in the economies above the yields their bonds pay. If they hold their wealth in foreign currencies, foreign stocks, or foreign bonds, they have similar worries. What a headache. There’s just no foolproof way to ‘salt’ wealth away and be secure that it will not erode---even if one were willing to forswear any interest in ‘earnings’ from wealth. Even if one buys gold, diamonds, famous painting, Persian rugs, or real estate, there is no guarantee that their market prices won’t fall and wipe out a portion of one’s wealth. And leveraging wealth to increase its “earnings” only increases the downside danger of serious capital losses.

These dilemmas lead to the following rules for those with significant wealth:

 Rule 1: Get your priorities straight. Remember that how to hold your wealth should be your MAJOR economic concern, and whether or not your government is helping you preserve your wealth or making it more difficult should be your first criterion for supporting or opposing any government.

 Rule 2: There is no such thing as “salting” wealth away. You must choose to hold your wealth in some particular form.

 Rule 3: There is no way to hold wealth that does not entail some risk that it will be lost. Even governments sometimes default on bonds, and even insuring wealth is useless if the insurer goes bankrupt. There are only more or less risky ways to hold your wealth.

Financial advisors---people who advise other people how to hold their wealth draw three conclusions from all this:

 Conclusion 1: Don’t put all you wealth eggs in one basket, i.e., diversify your portfolio.

 Conclusion 2: Remember that the secret to wealth-holding is “knowing when to hold’em and when to fold’em,” i.e., when to stay with one type of asset, and when to sell that asset and buy a different one. Moreover, the “when to hold’em and when to fold’em” decisions should be guided by Rule 2 for proper behavior in credit systems: PANIC FIRST. And

 Conclusion 3: the best “sucker play” is to find high-yield investments where someone else (foolishly) assumes the risk by agreeing to pay you if your investment goes bust. (As we will see, taxpayers are often the easiest “suckers” to bamboozle.)

In March 1999 Goldman Sachs, files to sell a roughly 12 percent stake in itself to the public. In the process the firm explained to prospective buyers why the wealth-managing “industry” was a good industry to invest in .In the IPO statement Goldman explains that during the 15 years from 1983 to 1998 while worldwide economic production tripled, the market value of equity stocks worldwide had soared sevenfold, and the amount of new borrowing worldwide had rocketed twenty fold. Can there be any doubt that highly leveraged wealth- holding activity is the tail that is wagging the dog of world production