CPI vs. "Real" Inflation vs. Gold

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Riggerjack
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Re: CPI vs. "Real" Inflation vs. Gold

Post by Riggerjack » Thu Apr 06, 2017 7:45 pm

Btw, I'm looking forward to seeing your foreign exchange addition. I have looked, and it's hard to find good data. I'm particularly interested in mid 20th century data. How things looked after WWII...

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Tyler9000
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Re: CPI vs. "Real" Inflation vs. Gold

Post by Tyler9000 » Thu Apr 06, 2017 7:57 pm

Riggerjack wrote:
Thu Apr 06, 2017 7:37 pm
Unless you are counting inflation. Adjusted for inflation, it comes to just over 6%.

So how does gold help?
Yes, I always account for inflation as real returns are all that truly matter. Precise numbers may vary based on the data source.

Measured over the same timeframe, adding gold to the portfolio maintained a virtually identical real return as the stock market alone but with notably less volatility. Too many people think only in terms of a risk premium where lower volatility means lower returns, but portfolio theory with volatile uncorrelated assets is more sophisticated than that. The result is admittedly unintuitive, and I think a lot of rational people get hung up on the "how" and prefer investing methods where the returns mechanism is easier to understand. Which is just fine, BTW. My goal is simply to share a different way to look at the problem.

Circling back to the primary topic, I believe the positive effect that gold has on a portfolio is about a lot more than inflation. I don't know enough to explain every factor involved, but I personally find the evidence that it works pretty compelling.

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Dragline
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Re: CPI vs. "Real" Inflation vs. Gold

Post by Dragline » Thu Apr 06, 2017 8:58 pm

Maybe its about war and other random uncertainties. Gold up sharply on Trump's missile attack in Syria.

ThisDinosaur
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Re: CPI vs. "Real" Inflation vs. Gold

Post by ThisDinosaur » Fri Apr 07, 2017 5:57 am

Tyler9000 wrote:
Thu Apr 06, 2017 4:55 pm
Picking a start date at a peak will always make a portfolio look bad. If you're going to do that, be sure to cast the same critical eye to a stock peak. ;)
Its appropriate if we are in another peak. Which we may be based on nominal and CPI corrected gold prices.

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Riggerjack
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Re: CPI vs. "Real" Inflation vs. Gold

Post by Riggerjack » Mon Apr 10, 2017 7:46 am

Tyler9000 wrote: ↑
Picking a start date at a peak will always make a portfolio look bad. If you're going to do that, be sure to cast the same critical eye to a stock peak. ;)

Its appropriate if we are in another peak. Which we may be based on nominal and CPI corrected gold prices.
Well, we are on the downhill side of gold, and my point with the inflation adjusted chart was that if history rhymes, there is a lot of room to drop.

Which isn't all that useful, by itself.

You still need to make investment choices, and as bad as gold looks to me, buying stocks at their current level seems even scarier. And I have expressed my reservations about bonds in this market on other posts.

My point wasn't don't invest in gold (though I did kind of rant like that, didn't I?). It was that every investment is looking overpriced, in general. You will need to decide what to do about that.

My solution was to put money in highly speculative plays. JJG, antipating either a crop failure, or a big correction in the stock market. Either way will jack up JJG, and/or drop stocks, and I will buy stocks then. It isn't that I like grain future markets, I was just looking for a commodity that was relatively cheap. We had bumper crops of wheat and soybeans last year. That is going to change. I will cash out when it does. As for stocks, I have bought FTR stock. It is around $2/share, down from over 8. With good reason. But there is a lot of room to gain if it turns around. These are both what I consider very risky trades. I don't post them here as a recommendation, but as an example of how I am dealing with this market. You will find your own solutions. Good luck.

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Re: CPI vs. "Real" Inflation vs. Gold

Post by ThisDinosaur » Mon Apr 10, 2017 8:14 am

I agree that gold, bonds, and US stocks are all overpriced. This has not been the case, AFAIK, at any point in Tyler's dataset. Which is why I am being all skeptical and trolly. Here are some facts I take at face value wrt investing:

--"Investing" is buying a source of income at a particular price. "Speculating" is attempting to guess what other people will pay you later for something you bought from *them* today.
--The 4% rule that supports most of the online FI community comes from the Trinity study. Tyler9000 has incorporated all that data AND a lot more, including several other asset classes. He has made it malleable for investing laymen like me.
--The results of this data set depend heavily on the stock valuation and high bond yields of the study period.
--US stocks are expensive compared to average earnings. Stocks in other countries are cheap by comparison. BUT, investing in those countries involves a long list of risks including currency fluctuations, variable accounting practices, questionable data about earnings, tax weirdness, geopolitical shenanigans, blah blah blah.
--Tyler's calculators show its easy for me to get a 5% perpetual withdrawal rate with my current portfolio IFF I add a huge percentage of Gold and LTTs. This is profoundly appealing and I would totally do it IFF both of those assets didn't look so different now than they did at any point in Tyler's data set.****<===This is a major point that has influenced my hemming and hawing so damn much about gold.

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BRUTE
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Re: CPI vs. "Real" Inflation vs. Gold

Post by BRUTE » Mon Apr 10, 2017 12:27 pm

absent a crystal ball, all sources of income that can be bought today might dry up tomorrow - so all investment is speculation to a degree. what is the degree? hard to tell without the crystal ball. the only guide is history, and it's a famously unreliable source of information.

the exact circumstances that will happen probably never happened in the past. but that doesn't mean "it'll be worse". maybe gold will experience appreciation like never seen before. ThisDinosaur doesn't think so? -> Speculation

there is also no valid null-hypothesis, like with most interesting problems in real life: it's not like ThisDinosaur can fall back to stocks "because those will repeat their historical performance". the historical performance argument is valid for everything.

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Re: CPI vs. "Real" Inflation vs. Gold

Post by ThisDinosaur » Mon Apr 10, 2017 7:44 pm

@Brute, didn't you say something like "history is all there is" when someone trashed portfolio backtesting? How reasonable is it for an investor to speculate that gold will appreciate indefinitely?

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bryan
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Re: CPI vs. "Real" Inflation vs. Gold

Post by bryan » Mon Apr 10, 2017 9:27 pm

Isn't it interesting that the US penny moved from 95% copper to 2.5% copper in 1982 and the CPI was largely tweaked in 1983? (Though copper really went wild since 2004). I didn't realize the pre-1982 penny is such a good value (melt value), especially if you consider you can't exactly buy copper near spot price for any weight less than a ton. If I'm not mistaken large spools of bare copper wire are ~3x spot price. I think I will start collecting pennies instead of throwing them away or refusing them.. if the government doesn't call them in first :/

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BRUTE
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Re: CPI vs. "Real" Inflation vs. Gold

Post by BRUTE » Mon Apr 10, 2017 10:42 pm

ThisDinosaur wrote:
Mon Apr 10, 2017 7:44 pm
How reasonable is it for an investor to speculate that gold will appreciate indefinitely?
how reasonable is it for an investor to speculate that ANYTHING will appreciate indefinitely?

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Re: CPI vs. "Real" Inflation vs. Gold

Post by ThisDinosaur » Mon Apr 10, 2017 11:12 pm

BRUTE wrote:
Mon Apr 10, 2017 10:42 pm
ThisDinosaur wrote:
Mon Apr 10, 2017 7:44 pm
How reasonable is it for an investor to speculate that gold will appreciate indefinitely?
how reasonable is it for an investor to speculate that ANYTHING will appreciate indefinitely?
Have I implied that this is reasonable for some other investment?

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BRUTE
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Re: CPI vs. "Real" Inflation vs. Gold

Post by BRUTE » Tue Apr 11, 2017 7:23 am

ThisDinosaur has asked a question akin to "has brute stopped beating his wife". no, of course it's not reasonable. at one point the sun will explode and a short while later, the universe will die a slow heat death. then, gold will definitely stop appreciating.

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Re: CPI vs. "Real" Inflation vs. Gold

Post by ThisDinosaur » Tue Apr 11, 2017 7:51 am

Yep. Poor wording on my part.
BRUTE wrote:
Mon Apr 10, 2017 12:27 pm
but that doesn't mean "it'll be worse". maybe gold will experience appreciation like never seen before. ThisDinosaur doesn't think so? -> Speculation
Noone can predict the future, but investing demands an educated guess. Sometimes black swanns happen, but the future, by and large, resembles the past. When it doesn't, its usually because you were looking at the wrong interval. Its possible that stock prices will surpass 100× the earnings of the underlying companies. Its happened once before in japan. But that was followed by a huge, long duration snap back. Its possible gold will get so expensive that a man can own more dollars worth of gold than there *are* dollars. I would not want to be that man when that wave crests.

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Fish
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Re: CPI vs. "Real" Inflation vs. Gold

Post by Fish » Tue Apr 11, 2017 9:17 am

Assuming 5% PWR is your investment goal (substitute your requirement if it is not):

1) Is there a portfolio that will sustain PWR of 5% for all possible futures? And if not, are there portfolios that will sustain 5% PWR given what will happen over the course of your lifetime (1 specific future)?

2) Can we know with certainty the composition of any such portfolio today? And if not, can we know the probability that a given portfolio will be viable?

3) What is the min/max allocation to gold among the viable portfolios? How does gold affect probability of portfolio failure?

Is it really worth it to think so hard about gold? If portfolio success is highly sensitive to gold allocation do you really want to FIRE and become dependent on it?

Maybe you would be better served by taking this energy and working on becoming post-scarcity. That is my unsolicited advice to you. But what do I know? I'm young and may be asking these same questions about gold in a few years' time. ;)

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Re: CPI vs. "Real" Inflation vs. Gold

Post by ThisDinosaur » Tue Apr 11, 2017 10:35 am

@Fish, good questions.

1)100%Small Cap Value gives a 6.1% PWR on portfoliocharts. I have a little money in vanguard's SCV fund, but I'm not counting on it making me rich. Mostly because I've learned more about the small cap premium since I bought it, and I'm skeptical that there's a reason for it to persist. Jacob, who is an active investor with far more depth of knowledge than me about the topic, advocates a 3% pwr. I think its arrogant to believe I can do better. BUT, I also think that @Tyler9000 's calculators are loaded with good, academic-economist quality data. That's the only reason I'm considering a 5% pwr a real possibility. The portfolio I'm considering would be broadly diversified with sound theory by any definition without relying too heavily on chasing past winners.

2)Nothing is certain. Probability in this sense can only be measured with past data. If the conditions of the present are reasonably similar to the conditions of the past, its also reasonable to proceed (cautiously) as though that data is applicable. My issue is whether some very relevant conditions (the relative prices of all involved assets) are significantly different than in the data set.

3)For reasons that probably only @Tyler9000 can explain, the portfoliocharts.com calculators seem to show that equal weight portfolios are better than weighted ones. I don't know enough to say more than that.

Is it worth it? It is if it saves me several more years of work.

Becoming post scarcity is an independent goal of mine. Its also probably more important for to-the-letter ERE as defined by Jacob, than me trying to optimize my portfolio. But I posted this in the "Money Questions" section.

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Re: CPI vs. "Real" Inflation vs. Gold

Post by bryan » Tue Apr 11, 2017 11:29 am

@ThisDinosaur, which historical interval do you think current->future days resemble?

I do feel like there is a risk of "this time is different" as we come closer and closer to a cyberpunk, crazy future (more of life being in the internet, digital money, cyber warfare, ever cheapening automation (mass-production AND micro-production), massive corporate powers). This is just one holistic-trend among many; you may be better served by focusing more on some other trend.

Related to above is why I am generally an advocate for having some % of your portfolio be crypto-currencies (note, Bitcoin is seen as digital gold by many).

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BRUTE
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Re: CPI vs. "Real" Inflation vs. Gold

Post by BRUTE » Tue Apr 11, 2017 5:54 pm

in short, the answer is "nobody knows". it's probably fine to go with 5% PWR. if the chosen portfolio ends up only providing 4%, being a bit more frugal or getting a part time job is probably fine.

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Re: CPI vs. "Real" Inflation vs. Gold

Post by Riggerjack » Tue Apr 11, 2017 8:19 pm

@ this dinosaur,
Have you read the books on investment Jacob recommended? The five pillars of investing got me past the index fund faith, if that helps.
I still think index funds are good if you don't want to give investment much thought or time. But honestly, if you want passive, above average returns, over decades... Well, want in one hand...

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Fish
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Re: CPI vs. "Real" Inflation vs. Gold

Post by Fish » Wed Apr 12, 2017 4:58 am

About that 5% PWR target...

If we assume that capital is created by work, and work is performed by humans, then I would expect long-term growth of capital to be primarily influenced by population growth rates and changes in productivity. As a passive investor your real returns will be mainly governed by those two factors. Secondary effects include volatility, costs due to inefficiency (fees, taxes, corporate mismanagement), and portfolio alpha due to superior allocation. But as far as I understand these secondary concerns are all zero-sum effects and for you to win someone else has to lose.

For the sake of argument, let's say that population growth and productivity will sustain a 3% PWR. To get a 5% PWR means you need to squeeze out another 2% from the zero-sum part which is getting into speculative/crystal ball territory as a passive investor. I wouldn't count on it. To me 5% PWR is something that can only be discovered in backtesting. I believe this remarkable result is due to 1) very favorable one-time historical conditions, 2) lack of correlation between asset classes, and 3) volatility. It might still be a great portfolio but none of this is guaranteed going forward.

If the desire is to shave years off of a working career, the solution is to switch to SWR. Maybe with really well-researched AA you can convince yourself to FIRE at 5% SWR, and if you were right and that SWR -> PWR, you pass that legacy to your children as part of your estate. But to expect 5% PWR from passive investments is asking a lot. Consider adding some human capital to your retirement portfolio. :D

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Re: CPI vs. "Real" Inflation vs. Gold

Post by George the original one » Wed Apr 12, 2017 9:35 am

Fish wrote:
Wed Apr 12, 2017 4:58 am
If we assume that capital is created by work, and work is performed by humans, then I would expect long-term growth of capital to be primarily influenced by population growth rates and changes in productivity.
I think you left out the growth (or decline) factor of the investor population. More people choosing (or declining) to participate in investments has an effect on the markets.

To add, for instance, lifting people out of poverty so that they have excess income, at least a few of them are going to be interested in investing. The middle ages moving into the colonial period is an example where the pool of investors greatly increased compared to the overall market.

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Riggerjack
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Re: CPI vs. "Real" Inflation vs. Gold

Post by Riggerjack » Thu Apr 13, 2017 12:24 pm

Good point, and with baby boomers retiring, thus not adding to retirement accounts, that removes some upward pressure on invest prices over the medium term.

Of course, gen X is in prime retirement plan purchasing territory, kids out, prime earning years, etc. But there is a big difference in the number of baby boomers vs gen X.

Just one more reason to be cautious buying at record highs...

PS, when did I become so fcuking bearish?!?

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Re: CPI vs. "Real" Inflation vs. Gold

Post by ThisDinosaur » Sat Apr 15, 2017 6:52 pm

@Riggerjack
I have read The Four Pillars of Investing by Bernstein, but I don't recall it being on one of Jacob's lists. And it is an extremely pro-index fund book, so either 1)how did it sour you on index funds or 2)which book are you referring to? I'm always interested in informed opinions that are different than mine.

@BRUTE
If by "5%PWR is fine" you mean just retire with 20y of expenses, then I am increasingly on board with doing that. But if it doesn't sustain principle, then its not a PWR.

@Fish
Capital is created by human work, which is fueled by food that comes from photosynthesis. Which is why a part of my plan involves going straight to the source and buying some land for food production.

And I totally agree that there is a zero sum aspect to investing. But there are two components to it. 1)The speculative component that BRUTE talks about (I buy a stock/bond/commodity at a low price and sell it to you at a higher one) and 2)The investment component (interest/dividends/earnings obtained from the consumers/borrowers).

I don't think future population growth rates can be accurately predicted. Because this forum was started with an eye toward Peak Oil, it is often assumed here that there will be a decline in world population and/or standard of living. But that *could* very well not happen until the second half of the 21st c.
1) very favorable one-time historical conditions, 2) lack of correlation between asset classes, and 3) volatility.
I started this thread because I think you might be right about #1. But if # 2 and #3 are more important, then a 5% PWR with a passive asset allocation may be possible. Without speaking for Tyler9000, I would bet he thinks its the latter.

https://portfoliocharts.com/2015/11/17/ ... ates-work/

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BRUTE
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Re: CPI vs. "Real" Inflation vs. Gold

Post by BRUTE » Sat Apr 15, 2017 8:18 pm

society could collapse in 20 years and ThisDinosaur might have to grow his own food. in that case, capital for 20 years would be sufficient - any further and it would be wasted. instead, ThisDinosaur should invest in farming skills. another possible scenario is hyperinflation or a return to localism: maybe ThisDinosaur should have learned a trade to barter for food. in yet another scenario, having built social capital instead would've been the right answer.

since the actual future is unknowable, brute recommends diversification. if nothing exciting happens and the world just continues on as usual, it's easy to cut back expenses so that principal is sustained, get a little side job to sustain it, or to find a second career. delaying FI for higher capital and changing asset allocation are not the only variables. brute thinks over-optimizing on a very narrow front for an unknowable future is futile.

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Riggerjack
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Re: CPI vs. "Real" Inflation vs. Gold

Post by Riggerjack » Sat Apr 15, 2017 8:56 pm

how did it sour you on index funds or
I'm not against index funds. I am uncomfortable buying an index at a record high. Specifically it made me look at what happens to portfolios bought at peaks. Averages hardly matter when your portfolio is diving now. So as much as I dislike market timing, and as bad as my track record of stock picking has been, I'm still trying to find ways around buying indexes at peaks. I will return to buying indexes when we get a correction.

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BRUTE
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Re: CPI vs. "Real" Inflation vs. Gold

Post by BRUTE » Sat Apr 15, 2017 10:58 pm

is Riggerjack investing the entirety of his FIRE money at this particular point in time? few humans are actually in that situation. due to the nature of being paid every month over years, investments will probably average out simply by a human being forced to dollar cost average - not out of choice, but out of necessity.

are there simulations not on investing a lump sum for every time period, but on having a 10 year career + monthly investments over every time period? brute would imagine it smoothes things out a lot.

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