CPI vs. "Real" Inflation vs. Gold

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

Post by BRUTE »

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.

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

Post by Riggerjack »

@ 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...

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

Post by Fish »

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

George the original one
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Re: CPI vs. "Real" Inflation vs. Gold

Post by George the original one »

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.

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

Post by Riggerjack »

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?!?

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

Post by ThisDinosaur »

@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/

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

Post by BRUTE »

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.

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

Post by Riggerjack »

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.

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

Post by BRUTE »

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.

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

Post by ThisDinosaur »

Well one lesson I remember from that book (4 pillars) was that the best investments are usually the least popular, and that diversified risk is *always* associated with higher return. So, the relevant question is whether gold is currently seen as a "safety" bet or a "risky" bet by the population at large. My impression is that its a very popular asset right now.

Early in 4 pillars he mentions that an oz of gold could buy you a nice suit in Dante's time, and ever since. Well, google tells me right now an oz of gold is a little over $1,290 and a men's business suit is somewhere around $400. How much did a suit cost the day Nixon took office? About $30. An oz of gold? $40. (Can anyone who was around then confirm those numbers?)

OTOH, where are all the unpopular assets? I've already got lots of foreign and emerging market stock. The least popular asset I can think of is long term US bonds. Those have lots of credit risk and low expected return (basically just the yield). Buying LTTs without counterbalancing with gold is essentially a bet that deflation and low-to-negative interest rates will dominate the future, yes?

BRUTE, I agree with everything you said. And yes, I am over optimizing. But asking these questions will hopefully help me figure out WTF is going on. (Off topic: which Austrian economics book was it that gave you the warm fuzzies?)

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

Post by BRUTE »

ThisDinosaur wrote:
Sun Apr 16, 2017 3:37 am
which Austrian economics book was it that gave you the warm fuzzies?
Human Action by Ludwig von Mises. also good: Man, Economy, And State by Murray Rothbard. Rothbard got kicked out by Ayn Rand for being too Libertarian. for a different train of thought leading to similar ideas (except re central banking), anything by Milton or David Friedman.

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

Post by Dragline »

ThisDinosaur wrote:
Sun Apr 16, 2017 3:37 am

OTOH, where are all the unpopular assets? I've already got lots of foreign and emerging market stock. The least popular asset I can think of is long term US bonds. Those have lots of credit risk and low expected return (basically just the yield). Buying LTTs without counterbalancing with gold is essentially a bet that deflation and low-to-negative interest rates will dominate the future, yes?
If you are looking for "the most hated" asset at a particular time, go find interviews of Jim Rogers, whose whole theory of investing revolves around accumulating such things until they become popular again and then selling them. But note that he recognizes that his timing is often poor and his investments can take years to play out.

Right now he is recommending Russia, oil, agricultural commodities and places like Kazahkstan and North Korea, although he admits that he has not found any way to invest in North Korea at this time. See https://www.youtube.com/watch?v=KXyuUN9rCwk and https://www.youtube.com/watch?v=ZM9bokmUr0w

I tend to look at these things on their 52-week ranges. Oil (XLE, XOM) is definitely in the lower quartile. LTT are down there, but have recently made gains. Some REITS are down (healthcare, some commercial property).

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

Post by Riggerjack »

where are all the unpopular assets
As I said above. Agricultural commodities that just had bumper crops and companies with insane amounts of debt, and losses, and projected dividend cuts. IE, JJG and FTR.

In this environment, about the only unpopular assets are extremely risky assets. Now, once you accept this, think of how "safe" the standard assets are currently.

Then start looking around for a bet you are comfortable making. Or put your cash under your matress. Now is the time to get used to risk. If you don't, this agonizing you are doing over what is "best", will be with you until you do.

If it helps, I think if it as points. I buy 401k points, and real estate points. When I have enough points, I can retire. In the end, it is all just points.
is Riggerjack investing the entirety of his FIRE money at this particular point in time
I have real estate that I am keeping, some I am preparing to sell, and my 401k. The 401k is usually fully invested. Currently, I have some in cash accounts, and some in index funds, and some in JJG and FTR. Which is functioning as a long term short of the indexes I would normally be investing in.

But for some reason, when I test for risk tolerance, I test off the charts. So, please factor that in, when looking at my choices. ( I think this is a side effect of watching " Rudy" too many times. Eventually the underdog will rule! Right?)

@ this dinosaur: In the end, it is only points. Fear is only relevant to real life. As you get older, and see that your choices to optimize X resulted in less optimal results for Y, and in the end Y was more important than you realized, you will start to understand that optimal is still not ideal.

You are buying experience, the sooner you start buying it, the less it will cost, since your pool of points is smaller. But find something you are comfortable with. Do that before it loses half its value, so you can stick with your strategy, rather than lock in your loss by selling low.

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

Post by ThisDinosaur »

Ludwig von Mises wrote:A tendency prevails to make a sharp distinction between such purely
speculative ventures and genuinely sound investment. The distinction
is one of degree only. There is no such thing as a nonspeculative
investment. In a changing economy action always involves speculation.
Investments may be good or bad, but they are always speculative.
A radical change in conditions may render bad even investments
commonly considered perfectly safe.
https://mises.org/sites/default/files/H ... tion_3.pdf
A convergence of the point Brute has been making with the point I have been making. So, so I'll rephrase this way:
Is gold's diversifying role in a portfolio Dependent or Independent from its trajectory after the time of purchase?
IOW, what evidence is there that a portfolio with a large allocation to gold can outperform a similar portfolio without it *under the condition that the gold is over priced at the time of purchase*.
Dragline wrote:Right now he is recommending Russia, oil, agricultural commodities and places like Kazahkstan and North Korea
Jim Rogers. Perfect. It's comforting to find successful authorities to confirm what I'm already thinking.
Riggerjack wrote:In this environment, about the only unpopular assets are extremely risky assets. Now, once you accept this, think of how "safe" the standard assets are currently.
That's pretty much what Bernstein would say, I think.

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

Post by BRUTE »

it seems intuitive that a portfolio with a large part invested in gold, bought at a high price, wound perform worse than the same portfolio with the gold part invested in another asset, given that the other asset performed better than gold during the same period. gold is only good to balance portfolios if it counters the fall in the other asset classes better than what it substitutes for.

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

Post by Riggerjack »

So, you play on portfolio charts. Why not just model the portfolio you want, without the gold to see the results?

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

Post by ThisDinosaur »

@Riggerjack
I have. Its not as good. ie, lower withdrawal rate. I'm comparing all stock (TSM/DM/EM) to a 5 way allocation (TSM/DM/EM/GLD/LTT). The benchmark calculator shows the all-stock version outperformed the 5 asset version most years. So if I disregard the Nixon shock, all-stock might be better. Portfoliocharts doesn't offer a way to correct for starting CAPE, interest rate, and gold price relative to historical average. My question is whether that is relevant or not. Can we depend on these assets to remain anti correlated (and the portfolio CAGR to be high) if they are all currently correlated and expensive?

@BRUTE
If I understand you, you're saying I need to pick the asset that *will* be anti correlated to the rest of my portfolio, instead of the one that *was* historically.

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

Post by BRUTE »

correct. unfortunately, that includes speculation. history is a guide post in how assets might behave in the future, but brute has been told that past performance is no guarantee of future results.

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

Post by ThisDinosaur »

What does BRUTE base his investmemt decisions on?

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

Post by BRUTE »

brute picks a portfolio he likes intuitively and then makes up rationalizations after the fact by looking at Portfolio Charts.

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