Long time reader here and at other blogs. I apologize in advance if this is an annoying request, but here it is.
I feel I'm prepared for deflation if that's the route we're headed. I don't feel so good about my preparation for inflation. I have some gold and a small amount of TIPS. Can you address how concerned you are currently about inflation and what you have done to prepare for it.
I'm not looking for investment advice per se. I have come to respect your views and analysis, however, and any time you could give to the topic would be much appreciated.
I'm a stay-at-home parent trying to protect the nest egg, and I trying to learn as quickly as possible.
Again, sorry in advance if this comes across as seeking investment advice. I have a fee-only investment advisor, and while I respect his views, I believe it’s my responsibility to educate myself as best I can.
I believe it is imperative in LT portfolios to diversify so that these eventualities are addressed AS BEST THEY CAN. (I am assuming you are not a short term trader.)Diversification is not obtained by splitting up pieces of the equity pie into smaller slices, ie small value, large value, large growth, international small, emerging markets and on and on and on. These pieces all carry something in common. They are all equities and they are all highly correlated! Especially these days! So in my opinion it is imperative that the LT portfolio be composed of NON-CORRELATED asset classes. Bonds are a good example although many types of bonds show a high degree of correlation to inflation, that equity killer. So TIPs I believe are a unique form of bond and probably deserving of an asset class as are Treasury Strips (Zeroes) for their quality of protectiing against DEFLATION. All others have problems in correlation to equities. Other non-correlated asset classes: Gold (although now perverted by the leverage crowd), utilities ( although run to the moon here), commodities including energy (same problem) REITs (damn, same problem again although becoming less so by the day), hedged equities or inverse ETFs, health care (seems to care more about regulatory environment and permitting--kind of like utilities).
But you asked about inflation. Well, in the ST I am not concerned about inflation. The slowing economy will keep it relatively anchored although I believe the Fed is going to have a little problem for the rest of the year in the headline numbers. However, LT I am very concerned about it. I believe The Great Disinflationary Period ends soon, perhaps first by a bout of deflation but more likely will be followed by a short period of price stability/instability and then an upward move into an inflationary cycle.
I'm going to go back and do some thinking about true non-correlated assets.
Deflation now, inflation later makes a lot of sense. I guess I just got the jitters that inflation was going to whip up just like that (talk of rate cuts and all). That's probably not very realistic.
Again, I appreciate the thinking that you and Lisa share here and elsewhere.
Aouple more points. You talk about being prepared for deflation and then mention TIPs. Just to be sure, TIPS are a hedge against INFLATION, right? Also, anything that relies on return that is SKILL-BASED, not market or value based, such as absolute return strategies, venture capital or private equity, is also not correlated of course. These are not widely available to individual investors but are found in institutional portfolios. That is why Yale's portfolio, for instance, can get 17% returns annually but only be 16% exposed to the US market.
BT: I'm a huge believer in being in the right sectors at the right time in the economy. The backdrop of the economy will tell you whether things are inflationary/deflationary.
I would highly recommend your getting some education on these. You'll optimize your returns by weighting your portfolio among well performing stocks in sectors that make sense. Look only to the pillage in basic materials to see how devastating being in the wrong sector can be.
I highly recommend G. Dagnino's book How To Profit in Bull and Bear Markets. Dagnino's modeling is based on the economy. If you've not visited his website (Peterdag.com) has lots of free information on this. Do go there.
Now, I'm not saying it is easy to know where we are in the cycle--heck you see continuous argument on that. Personally, I believe the global economy is slowing down.
That really only scratches the surface. Reduced to its simplest elements, the goal is to combine asset classes with high (relative) rates of return together IF they are not correlated to each other. If you can do that, the standard deviation of your portfolio drops and your returns are smoothed. Because of the smoothing effect, compound returns become much closer to the average return of the portfolio. It's volatility and negative returns that kill compound returns, the only measure that is of any sense to a LT holder. "You can't spend average annual returns"- M
10 comments:
Ahem!
See below.
http://tinyurl.com/2zyhc4
M
Leisa and MarkM,
Long time reader here and at other blogs. I apologize in advance if this is an annoying request, but here it is.
I feel I'm prepared for deflation if that's the route we're headed. I don't feel so good about my preparation for inflation. I have some gold and a small amount of TIPS. Can you address how concerned you are currently about inflation and what you have done to prepare for it.
I'm not looking for investment advice per se. I have come to respect your views and analysis, however, and any time you could give to the topic would be much appreciated.
I'm a stay-at-home parent trying to protect the nest egg, and I trying to learn as quickly as possible.
Again, sorry in advance if this comes across as seeking investment advice. I have a fee-only investment advisor, and while I respect his views, I believe it’s my responsibility to educate myself as best I can.
Thanks
Happy Birthday, Leisa!
Ahem..
http://tinyurl.com/2bwjqg
2nd_ave
bt-
I believe it is imperative in LT portfolios to diversify so that these eventualities are addressed AS BEST THEY CAN. (I am assuming you are not a short term trader.)Diversification is not obtained by splitting up pieces of the equity pie into smaller slices, ie small value, large value, large growth, international small, emerging markets and on and on and on. These pieces all carry something in common. They are all equities and they are all highly correlated! Especially these days! So in my opinion it is imperative that the LT portfolio be composed of NON-CORRELATED asset classes. Bonds are a good example although many types of bonds show a high degree of correlation to inflation, that equity killer. So TIPs I believe are a unique form of bond and probably deserving of an asset class as are Treasury Strips (Zeroes) for their quality of protectiing against DEFLATION. All others have problems in correlation to equities. Other non-correlated asset classes: Gold (although now perverted by the leverage crowd), utilities ( although run to the moon here), commodities including energy (same problem) REITs (damn, same problem again although becoming less so by the day), hedged equities or inverse ETFs, health care (seems to care more about regulatory environment and permitting--kind of like utilities).
But you asked about inflation. Well, in the ST I am not concerned about inflation. The slowing economy will keep it relatively anchored although I believe the Fed is going to have a little problem for the rest of the year in the headline numbers. However, LT I am very concerned about it. I believe The Great Disinflationary Period ends soon, perhaps first by a bout of deflation but more likely will be followed by a short period of price stability/instability and then an upward move into an inflationary cycle.
M
Mark,
Thanks for taking the time to put that down.
I'm going to go back and do some thinking about true non-correlated assets.
Deflation now, inflation later makes a lot of sense. I guess I just got the jitters that inflation was going to whip up just like that (talk of rate cuts and all). That's probably not very realistic.
Again, I appreciate the thinking that you and Lisa share here and elsewhere.
bt-
Aouple more points. You talk about being prepared for deflation and then mention TIPs. Just to be sure, TIPS are a hedge against INFLATION, right? Also, anything that relies on return that is SKILL-BASED, not market or value based, such as absolute return strategies, venture capital or private equity, is also not correlated of course. These are not widely available to individual investors but are found in institutional portfolios. That is why Yale's portfolio, for instance, can get 17% returns annually but only be 16% exposed to the US market.
M
BT: I'm a huge believer in being in the right sectors at the right time in the economy. The backdrop of the economy will tell you whether things are inflationary/deflationary.
I would highly recommend your getting some education on these. You'll optimize your returns by weighting your portfolio among well performing stocks in sectors that make sense. Look only to the pillage in basic materials to see how devastating being in the wrong sector can be.
I highly recommend G. Dagnino's book How To Profit in Bull and Bear Markets. Dagnino's modeling is based on the economy. If you've not visited his website (Peterdag.com) has lots of free information on this. Do go there.
Now, I'm not saying it is easy to know where we are in the cycle--heck you see continuous argument on that. Personally, I believe the global economy is slowing down.
M - Thank you for your detailed explanation of non-correlated assets. I daresay it helped a lot of us.
GS-
That really only scratches the surface. Reduced to its simplest elements, the goal is to combine asset classes with high (relative) rates of return together IF they are not correlated to each other. If you can do that, the standard deviation of your portfolio drops and your returns are smoothed. Because of the smoothing effect, compound returns become much closer to the average return of the portfolio. It's volatility and negative returns that kill compound returns, the only measure that is of any sense to a LT holder. "You can't spend average annual returns"- M
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