Moving On…

by FI Fighter on May 29, 2015

in Blog Update

Although I find the topic of Fear and Greed most fascinating, I believe that it’s just about time to move on. For one, I’m tired of talking about it, and two, I’m guessing you’re even more tired reading about it! 😉

So, this post will simply be a recap of everything that I’ve published over the last few weeks…

As always, I’ve never claimed to have any of the right answers. I can’t say that I know what will happen in the future, and I certainly can’t make claims that I know what I am doing… All that I do know is this: I’ve spent the last 3-4 years attempting to build up wealth, and now my main interest is in protecting it.

From the last few posts, you can obviously see that my changing strategies have elicited mixed reactions from readers. There have been some great discussions and comments… For the most part, I believe that the majority of people understand where I am coming from, but a slight few have been more negative, and emotionally charged… For anyone who still doesn’t believe that investing is emotional, just go back and read some of those threads! 😉

That’s not a bad thing. It is very tough to invest stoically and without emotion. I definitely won’t deny that emotions have an impact in the way I invest — otherwise, why I would be doing things such as running doomsday scenarios?

But in any case, I just wanted to be crystal clear on this point — I’m not trying to outsmart the market. I’m not changing up my investing approach hoping to eke out more massive returns. And I’m not encouraging anyone to invest the same way that I do…

Your goal may be to build wealth.

My goal (right now) is ONLY about preserving wealth.

It’s all about safety and defense.

You know, when it comes to sports, it’s very common for collegiate athletes to take out an insurance policy as they enter their final season prior to declaring for entry into a professional draft. In many cases, these aspiring professionals take out policies that are in well excess of $1MM.

Why? It’s not because they think they are more special than everyone else… It’s not arrogance… If anything, it’s a sign of humility… Things CAN go wrong, and things DO go wrong in this world… It is very possible for someone to have worked hard their entire lives and then lose EVERYTHING!

That’s why people buy life insurance, car insurance, fire insurance, flood insurance, earthquake insurance, etc., etc.

Do these people get ridiculed for being “speculators”? I wonder…

Most recently, I decided that I had more than enough assets under my belt. Of course, I could always chase for more, but in order to get to early financial independence, I was already set. When I started investing in stocks again, I realized that my intentions were spun out more from GREED than anything else… It wasn’t crystal clear at first, but when I finally could see that, I knew that I had to divest away from stocks and liquidate a majority of my individual stock portfolio. I still kept around $15,000 to trade in the form of Dividend Growth Trading, but for all intents and purposes, I was able to pull out the funds that were acquired via the means of two cash out refis.

By doing that, I was sitting on a lot of cash. Yes, you can NEVER have enough cash, but from an asset allocation point of view, I was sitting on more cash than perhaps I ever had on hand at any point in my life…

So, I started to consider other “cash-like” solutions.

The last post I wrote was about purchasing precious metals (gold and silver). Up to this point, I had a 0% allocation into precious metals in my portfolio. So, I asked myself, why would anyone ever “invest” in such a thing? When I conducted my research, I quickly realized that people don’t “invest” in precious metals… They do so with the expectation that their “investment” will simply store value over a long period of time.

Gold and silver are a form of insurance… Just like your car insurance.

If you don’t believe that gold or silver can store value, that’s perfectly fine and no one says you have to invest in them at all. When I asked myself the following question, it became a no-brainer to me as why I needed to at least consider it: “If you could put one item under a mattress for the next 20 years, would you rather have a dollar bill or a gold coin?

After 20 years, who knows what a $1 bill would buy you… But a gold coin should be able to purchase you the same amount of goods as it does today. Precious metals are a hedge against declining purchase power. And economic turmoil.

For me, knowing that alone was enough reason for me to ultimately conclude that I should own an allocation of precious metals in my portfolio. However, I did do more research and I posted a lot of viewpoints from others in the precious metals community to share with readers (I’m not suggesting their opinions are right and those things will actually happen!).

But as always, I think it’s important to consider all possible scenarios and to remain open minded.

I’m not an economist. I’m not a politican. I don’t work on Wall Street. I have no insider information intel… I can’t even predict with any degree of accuracy what I will have for breakfast tomorrow morning…

So what else can I do but listen and learn?

I believe that many readers appreciated the last post, as coincidentally (or not) I’ve seen a strong uptick in blog subscribers. That’s always a great thing! THANK YOU! 🙂

Again, I feel like what I am doing is best for my own particular situation; the same does NOT have to apply to you or anyone else. Further, it’s not an indictment on any other forms of investing (which is what I think ultimately stirs the pot with some people)… I see the merits of stocks. I see the value in real estate. I think those are wonderful investments and I’m still heavily invested in them!

But I also don’t have an unrelenting affinity for them. If someone were to approach me and say, “Bay Area real estate sucks! It’s totally overpriced right now!” I would nod, smile and agree… I wouldn’t feel insulted in the least bit…

On the other hand, if a new investor was just starting out and said, “I really want to start buying properties. Could you help me learn more about Bay Area real estate?” I would be delighted to help and share with that person the things that I’ve learned over the past few years.

Hey, just because buying more real estate isn’t the right move for me at this particular moment in time, does NOT mean it won’t be a good opportunity for someone else! I totally realize that… which is why I always try and put myself in someone else’s shoes… It does me absolutely no good to be so quick to judge… And as I’ve learned over the years, you make a lot more friends when you play nice too! 🙂

Anyway, in the end, I feel like we are all fighting for the same thing and on the same team anyway — We are financial freedom fighters who are doing everything we possibly can to create a better future for ourselves and our family.

And that’ a wonderful aspiration!

I’m going to support everyone who is out trying to achieve such a wonderful goal!

I’m an easy-going, optimistic guy. So, I’m done with the “doom and gloom” stuff. I did my best to stay open minded and consider all scenarios; I’m happy with the measures I’ve put in place to better protect my own portfolio. Further, I believe that readers have benefited and can appreciate hearing things from a different angle (it can’t always be sunshine and lollipops).

In the end, I just wanted to diversify my portfolio away from real estate and stocks (which I am heavily weighed), and to me, purchasing precious metals was a means of taking out an insurance policy for my overall portfolio. Holding more cash than I usually do is another way I’m attempting to protect my assets.

As always do what’s best for your own situation.

 

I will conclude with this great quote: “Greed is taking the steps UP to the top floor of a building. Fear is taking the elevator DOWN.

 

Now, it’s time to move on already!

 

I’m not actively investing in stocks or real estate right now, but if you ever want to talk shop, I’m always interested and willing to help (however I can)! 🙂

{ 31 comments… read them below or add one }

1 ambertreeNo Gravatar May 29, 2015 at 12:31 pm

Hey FI Fighter,

The last few posts you made were an interesting story. I fully understand your move towards protection. You need to find the asset allocation and risk position that makes you sleep at night.
If the goal is to protect you, I then wonder if precious metals is the right move. I do think they have some form of protection against inflation. (I have gold in my portfolio as well) On the other hand, they are traded commodities, and thus subject to strong price evolutions. How do you see this?
amber tree

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2 FI FighterNo Gravatar May 29, 2015 at 4:05 pm

ambertree,

Gold and silver fluctuate in the markets because the physical trades along with the paper contract on the Comex.

1 paper contract entitles a buyer/seller to trade 100 oz of physical gold… which may or or may not really exist.

The markets are highly manipulated by the big banks… I wouldn’t trust the prices and fluctuations at all. If you are looking into precious metals as a store of value, you can just about forget about the prices… You need fear and panic in the air for the true value to be reflected.

Here is silver on the Shanghai index which only deals i the physical… It’s more important to look at demand and supply of the PHYSICAL ONLY. And right now, nations like China, India, and Russia are loading up on physical.

http://www.silverseek.com/commentary/exchange-warehouse-silver-stocks-large-declines-across-globe-13849

Cheers!

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3 FI FighterNo Gravatar May 29, 2015 at 4:21 pm

On the point about inflation/deflation, gold surprisingly shines in both scenarios.

From Wikipedia: FDR confiscates American gold in 1933

Executive Order 6102 required all persons to deliver on or before May 1, 1933, all but a small amount of gold coin, gold bullion, and gold certificates owned by them to the Federal Reserve, in exchange for $20.67 (equivalent to $376.58 today[4]) per troy ounce. Under the Trading With the Enemy Act of 1917, as amended by the recently passed Emergency Banking Act of March 9, 1933, violation of the order was punishable by fine up to $10,000 (equivalent to $182,185 today[4]) or up to ten years in prison, or both.

The price of gold from the Treasury for international transactions was thereafter raised to $35 an ounce ($587 in 2010 dollars). The resulting profit that the government realized funded the Exchange Stabilization Fund established by the Gold Reserve Act in 1934.

So, the Fed confiscated your $20.67/oz gold and then repriced it at $35/oz immediately after! They robbed you of your gold and then jacked up prices by 70% in return!

Gold holds value, obviously in an inflationary cycle. But the Great Depression was the last time we witnessed deflation, and even in that environment, the government increased the value of gold…

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4 The DudeNo Gravatar May 30, 2015 at 2:06 pm

I think it’s important to understand the historical significance here.

During this time, it was a period of deflation as you said. Because the country was on the gold standard, the supply of gold needed to be increased in order for the money supply to be increased. Because the amount of domestic gold was not sufficient, the price of gold had to be raised in order to attract international investors to sell gold to the United States. Once sufficient gold had been acquired, the money supply was increased

Because of the increase of the money supply (M1), GNP output was increased and real growth rate returned to 8% per year for the next eight years.

Since the US is no longer on the gold standard, the Fed has other mechanisms of increasing the money supply without procuring more gold. Since abandoning the gold standard, deflation has only occurred twice in the last 60 years: once in 2009 and a slight bit of deflation in February of this year due to depressed energy prices (not structural).

Because deflationary events are so rare, I would question whether it’s even something worth protecting against. Generally speaking the goal is to have some level of inflation, by design.

Therefore it is probably incorrect to assume that gold would do well in deflation. The last time we had deflation (2009), it did not. The price fell substantially.

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5 FI FighterNo Gravatar May 30, 2015 at 8:54 pm

Thanks for sharing the details. Agreed, in a deflationary environment, cash is indeed king and will outperform just about every other asset.

In regards to the next “doomsday” many are predicting that we will first see strong deflation due to debt deleveraging and the destruction of massive amounts of debt/dollars which will only increase the purchasing power of each remaining dollar in the system…

Since the government can’t exist in a deflationary environment, like you mentioned, it may or may not be worth thinking about… I’m trying to brace myself for ANY possible scenario… In times of deflation, it will come in handy to have cash!

But the government will probably panic and stimulate another round of QE or something like it to prop up the economy, in which case we will have to worry about inflation again… where gold shines.

I did find a deflation study that concluded this:

“Gold is the number one performing asset until 2013 – despite a deflationary backdrop – and its performance over the whole 2011-2015 period compared to other asset classes is much better than in the baseline scenario. Cash, as might be expected, eventually turns out as the winner in this deflationary story with bonds also performing relatively well.”

In times of fear:
“However, the impact of political factors does seem to have been especially important in driving gold at certain times. In particular, gold appears to have been boosted in the late 1970s and early 1980s by incidents such as the Iranian revolution and the Soviet invasion of Afghanistan. Gold prices also rose sharply in the immediate wake of the September 11 2001 attacks in the US.”

Having both gold and cash seems to be a good overall hedge for both inflation or deflation…

I appreciate the discussion and I’m always looking forward to learn more since these topics are not my forte by any means… 😉

Cheers!

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6 The DudeNo Gravatar May 31, 2015 at 11:56 am

Cash is absolutely king in deflationary environments. No doubt about that. However, deflation is so extremely rare that it’s not worth worrying about. Since deflation has happened only twice in the last 60 years, both of which were temporary, it’s probably not worth hedging against. It would be like a new real estate investor coming to you and insisting on installing a hurricane proof roof on the house they just purchased in Eastern Oregon. That would probably not be worth the expense. I guess it might be possible that there could be a hurricane in Eastern Oregon at some point, but does it really warrant the expense? It’s so unlikely.

The government can exist in all environments, inflationary, deflationary, stagflationary. It really doesn’t matter.

QE or other events that effectively increase the money supply do not automatically increase inflation. Remember, inflation has two parts: the supply of money and the velocity of money. There are so many people that equate printing money with inflation. There were a lot of (largely fringe Austrian school) economists in 2010 that were predicting hyperinflation and the collapse of the dollar due to quantitative easing and the massively increased money supply. Clearly, this did not happen. The oversimplified explanation of why there was no inflation was the velocity of money was really low.

For the deflation scenario in the study you listed. The authors also state that it’s difficult to determine since deflation is so rare. They are guessing because there’s not much else you can do with N=2 (and one of those events was so minor like -0.1%). Also, this study was commissioned by The World Gold Council.

I can’t help but chuckle in the section of the paper when they outline the equation, “In addition to these variables, we also had to find it necessary to include dummy variables for the last quarter of 1979 and the first two quarters of 1980 to improve the fit of the equation” LOL!

And another, “We experimented with a number of specifications incorporating the above factors and some others, but many were found not to add explanatory power and were dropped from the equation”

I would not put much stock this report. It was commissioned by the World Gold Council and it’s clear that the economists had to call out the adjustments they needed to make in order to maintain a semblance of credibility.

“However, the impact of political factors does seem to have been especially important in driving gold at certain times. In particular, gold appears to have been boosted in the late 1970s and early 1980s by incidents such as the Iranian revolution and the Soviet invasion of Afghanistan. Gold prices also rose sharply in the immediate wake of the September 11 2001 attacks in the US.”

They seem to be cherry picking here to say the least. There have been several events even in the last four years that I would argue, should have driven gold prices higher if this theory is correct. What about the Libyan revolution, Arab Spring, the Russian Invasion of Crimea, ISIS, or the Euro crisis? With all these events occurring simultaneously, gold has still been in a four year decline. So is there a metric to quantify the level of political unrest required to move the price of gold?

Is gold about to begin a large decline as it did in 1980? We are still well below the 1980 inflation adjusted price. During this time, gold went into a 20 year bear market in which the price of gold fell from over $2000 (inflation adjusted) to $360 (inflation adjusted) in 1999? Why would something that supposedly holds its value so well, lose value consistently for 20 years?

Could we be about to enter another protracted bear market for gold?

I guess my answer to that question is why is it worth even asking? Deflation is so unlikely that it’s not even worth worrying about. If it does occur, it will be small and for a short period of time. We don’t know how gold will fare during deflationary times. There aren’t enough data points and there won’t likely be many more data points in the future.

Does gold do well in inflation? Why even ask this question. If there is inflation, you will be too busy looking at the amazing gains of your real estate portfolio to even care about the small amount of gold you’re carrying.

Hyperinflation: this is another extreme case that is also not worth worrying about. The economists who worry most about hyperinflation are mostly on the fringe and the theories they proposed about what would have happened in 2009 have been proven wrong. There are plenty of tools available to the fed to counteract inflation and hyperinflation.

Once again, I would advise looking at having a well-balanced portfolio and addressing the risk factors that are much more likely and within your control. Maintain discipline and don’t speculate. You may not think you’re speculating, but you are.

What would you tell a new real estate investor that came to you and said, “I’m going to buy a house because it’s a good investment and I’ve found the house I’m going to buy” What would be some of the questions you would ask the investor? Does it meet the 1% rule? Would you ask this and other due diligence questions? Of course. What if they said, “I’m going to buy a house in the Bay Area today because I’ve heard that houses are always great investments in all economic conditions.” Wouldn’t that make you scratch your head a bit?

You would be able to answer these questions and help guide the new investor? Of course. You could show the new investor exactly how to calculate the anticipated returns for the property.

Can you do the same for gold?

If so, what is your anticipated 3 year return rate with your gold holdings? How will the price of gold respond with a 1-2% rise in inflation? What about a 10% rise in M1? Are you familiar with M1? Based on your beliefs about how gold responds to various market conditions, do you have the economics background necessary to calculate your return?

If not, you could say, “I have no idea what the price of gold will do, but I think it’s wise to include 2% of my net worth in my portfolio.” This would be a lot more valid of an approach because at least it removes the need for highly specialized economics knowledge, but even this takes due diligence. It would still be prudent to back test it. Does the 2% addition of gold improve key metrics such as alpha, beta, standard deviation and r2? Does the back tested dividend growth trading strategy improve these key metrics?

I’m not suggesting they won’t, but what I am suggesting is that if you’re going to invest in something whether it be a house, gold, stocks, bonds, MBSs, MLPs, structured notes, options or a business venture, that you take time to do due diligence and estimate your return like you would do with real estate. If these returns can’t be estimated or you don’t understand how to calculate it, why are you investing? Every investment should require a certain level of due diligence and scrutiny. Without this, it’s speculation. It’s OK to speculate, but the danger comes when you trick yourself into thinking that you are investing when you are really speculating. If you realize this, then you should try to figure out how it happened and how you’ll correct it.

Maybe I’m wrong, but I don’t see that you’ve performed this level due diligence with either your gold investments or your dividend growth trading strategy.

In 1999, and 2007 I saw a lot of people acting without discipline, which in a hot market, is very forgiving. However as Warren Buffet said, “A rising tide lifts all boats. It’s not until the tide goes out that you realize who’s swimming naked”

I hope this doesn’t come across as harsh, but I’ve speculated in the past and have regretted it. I wish there had been someone there to at least challenge me on my assumptions to get me thinking. This is my only intent.

Take care!

7 FI FighterNo Gravatar May 31, 2015 at 12:35 pm

The Dude,

Thanks for continuing this thread and as always, you’ve given me a lot to think about. When it comes to “what if” scenarios, there is obviously a ton of literature out there and proponents who argue for deflation, inflation, hyperinflation, etc., etc. Like you mentioned, most will have an agenda so it will take a lot of time and effort to sift through the data, reports, charts, etc…

For sure, I will be spending lots more time conducting research…

Your point about “speculating” and “investing” when it pertains to gold… I will say this much — I am not purchasing precious metals with an investment mentality. To me, holding precious metals and cash is purely a defensive move.

The daily fluctuations mean little to me. In fact, I hope that those assets underperform and I never have to depend on them… Same with the cash. It does me no harm whatsoever if the markets keep soaring and stocks, real estate, etc. keep skyrocketing…

I wouldn’t misconstrue this as being undisciplined. If anything, it takes a lot of discipline and restraint to resist market highs and to refrain from more investing… Again, I don’t care if this portion of my portfolio (cash and precious metals) earns me 0% in returns; that’s not the underlying objective.

Some people are so hell bent on investing that they will do it regardless… There are real estate investors with $5MM+ in debt/liabilities and hold no more than $10,000 in cash at any given time. Why bother? The units cash flow so of course the money will keep pouring in! That sounds dangerous to me, but to each his own.

Thanks for sharing your viewpoints and experience. The “tide going out” is exactly what I’m most worried about and why I’m no long investing in this hot market.

8 george puckNo Gravatar June 1, 2015 at 1:00 am

Actually you can think of the exchange as happening because the owner of the contract has the right to take delivery on the contract. YEs they can close out the options and have them paid out etc. But one can always take physical delivery of a commodities contract.

I wouldt get too caught up in who has physical metals. those positions can be, and likely would be unwound in the crisis. IE you might well see the price of gold or silver tank in a financial crisis as China, or Russia or India dump their metals in order to buy grains, oil etc.

I think you have to consider that your portfolio because you have a ton of real estate is hedged against inflation. If inflation goes way up, or the dollar is devalued, like it did in the 70’s, then owning rental real estate is a near perfect hedge. Because your rents will go up with inflation. And your biggest cost, your mortgage would be locked it at a low rate.

Gold is mostly supposed to hedge against inflation, and you already have that hedge.

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9 Dividend BeginnerNo Gravatar May 29, 2015 at 1:46 pm

Hey FIF!

Another delightful post. I’m sorry you got so much negativity on the other; I read most of the comments. There’s nothing at all wrong with playing defensively, if anything that’s what “The Intelligent Investor” taught me a bit of. Preserving capital is of utmost importance.

If diversifying into precious metals is your thing today, go for it! I’m just glad you took the time to write so much and educate me a bit. I’m happy with my mining company for now, but we’ll see where things go. I do believe silver is a bit of a better investment than gold for now, though I haven’t done a whole lot of research.

Anyways keep it up, and do you!

DB

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10 FI FighterNo Gravatar May 29, 2015 at 4:28 pm

DB,

Thanks for the support! I appreciate it!

I absolutely agree that preserving capital is just about the most important you can do as an investor. Otherwise, what’s the point of building wealth anyway, if you aren’t going to make great measures to protect it?

Also agreed that silver looks to be the better buy right now. I like both, but silver is definitely more affordable and in a scenario of “doom and gloom” a better bargaining chip.

All the best!

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11 The DudeNo Gravatar May 29, 2015 at 4:41 pm

Glad to read the follow up.

Some thoughts:

• I’m not sure I completely buy the argument of not speculating. I can understand the insurance analogy, but I don’t think that’s entirely what you’re doing. We can shop around for insurance to find the best price, but we typically don’t say, “now’s a great time to buy insurance because the current prices are at historic lows and I believe there’s a lot of potential upside”
• I can understand adding a small amount of precious metals to your portfolio, but if you’re looking for an inflation hedge, you should have that in spades with all of your real estate. If there is any inflation, you will have huge gains with your real estate portfolio
• If you are looking for something more insurance-like for falling markets, there are probably a lot of better options than precious metal. Increasing bond allocation, protective puts, structured notes, etc.
• It is good to think about all scenarios, but IMHO it’s best to spend time on which scenarios are the most likely. In other words, I’m glad the doom and gloom is over 🙂

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12 FI FighterNo Gravatar May 29, 2015 at 5:01 pm

The Dude,

Thanks for sharing your thoughts.

For #1, yes, I do believe there’s a lot of upside but that’s not why I’m taking out the insurance policy, so to speak. I would have bought precious metals, regardless… I just find it fascinating that the price of gold and silver happen to coincide with a 4-5 year bear just as I started looking into buying… I pointed that out, but even if gold was say $1500/oz, I would be buying…

#2 Real estate should provide an inflation hedge, but I can’t say that I have a full grasp of everything that could happen in every possible scenario. All I do know is that with debt (leverage), especially with real estate, that money is illiquid for the most part…. I wanted to have lots of cash and perhaps another hard asset similar to cash as a hedge.

#3 Precious metals like gold and silver are what I believe true forms of money. They can never be rendered to zero and will always hold a store of value. Our society grows up and is conditioned to focus on stocks, bonds, mutual funds, real estate, etc… That type of thinking does not exist in other countries. In countries like China and India, they think we are crazy and feel like real wealth is in precious metals…. This whole concept took awhile for me to process as well… but again in a worst-case scenario, I have to open my mind and put myself in the shoes of others. Even if I thought gold held no intrinsic value (which I don’t) but the remainder of the world did, my opinion would mean nothing and gold would win at the end of the day… There’s a great youtube video titled “The Secret World of Gold” that is worth watching… History proves time and time again that when times are desperate, gold always prevails (and so far all fiat currencies throughout the history of the world have failed at a 100% rate).

#4 Yes, I have spent the last 3-4 years on the “most likely scenarios” which is how I got to where I am today… Now that I’ve reached this point, I’m spending a lot more time thinking about risk management. As stated in the article, I don’t need to invest in anymore assets. For my goals, I’ve already got more than enough.

Yes, I’m glad to be moving on from the doom and gloom as well! 🙂

Take care!

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13 The DudeNo Gravatar May 29, 2015 at 6:41 pm

#2 I can completely understand the desire to have more cash on hand

#3 This is where I would challenge you. Gold is not money by definition. It was used as money in the past, but it is no longer money. It is a metal. According to modern portfolio theory, gold is not even included. The reason why is that it has low return and high volatility. This is not a good combo and is why I would question whether or not it actually meets your investment objectives. I would encourage you to take another look at the data before investing. It does not appear as if you are evaluating this objectively.

#4 I also completely understand the desire to have downside protection. I would encourage you to evaluate alternate forms of insurance because based on the data, I do not think gold is going to help you achieve the downside protection you are desiring. It will add more volatility to your portfolio and lower your returns.

I hope you do not interpret these comments as inflammatory. My intent is not just to argue. I just want to encourage you to do a bit more due diligence and spend more time learning before getting emotional and making decisions based on your emotions that will inhibit your ability to meet your objectives.

Thanks!

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14 FI FighterNo Gravatar May 29, 2015 at 7:40 pm

The Dude,

Thanks for the follow up and thoughts.

#3 I realize we live in a modern age but in a “doomsday scenario” (which is the main reason for a gold hedge), I really believe that all theories will be thrown out the window. Yes, that is pretty dire, but that’s why it’s called a “doomsday scenario”. Basically, all hell breaks loose and all confidence in the system is lost. While conducting my own research, the one conclusion I could draw is that when fiat currencies fail and there is a reboot of the system, physical gold is always involved in the transition. Gold thrives when there is panic in the air… Today, all currencies around the world are fiat and there is no backing gold standard, so it’s really anyone’s guess what will happen in the event of a total economic collapse… All world currencies will simultaneously collapse… All I know is that the rest of the world is infatuated with gold, especially right now. I don’t want to be on the wrong side of the bet (and history). And when all other assets are tanking (real estate, stocks, etc.) it will be reassuring to at least hold a tangible, PHYSICAL asset in hand that you can count on.

Best wishes!
#4 Point well taken. Outside of a gold hedge, there are other forms of due diligence I can perform to come up with additional hedges and insurance. I’m fine with gold lowering my performance returns, if that happens. It’s insurance money and doesn’t factor into my overall offensive gameplan which depends on real estate and stocks.

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15 The DudeNo Gravatar May 29, 2015 at 10:28 pm

#3 I can respect that. To me, the fear of a complete economic meltdown might seem irrational, but I understand that people have different views on this topic. If you feel like this is the best hedge, go for it. My thought would be that you wouldn’t be able to count on gold if you’re living in the US. Because money is used as a medium of exchange, and it’s unlikely that most people would have physical gold coins, it would be very unlikely to function as money. Let’s say you’re lucky and you can trade a gold coin for half a deer. What happens when you run out of gold? Since it has no real intrinsic value in uses that would be top of mind during meltdown (conductivity/electronics/jewelry), I suspect other commodities that people need would be more popular. But it’s not really helpful to debate that ad absurdum because it would take an unprecedented event to take down the US, so we’d definitely be in unchartered territory. But if having some gold coins gives you confidence and helps you sleep, by all means go for it.

4) I think it’s worth looking into. There may be other forms of insurance that are better suited for your needs. If you don’t have a large position in gold (I.e. No greater than 5% as nononsense landlord suggested) and you’re trying to protect against your net worth being halved or worse yet, going bankrupt (as happened to many in 2008/2009) then the 5% position of gold is unlikely to help you in that scenario. Products such as protective puts, structured notes, shoot maybe even a hedge fund if you can find the right one, may be much better suited for you. I would just encourage you to look, because there are many other options, and decide on the best fit.

I hope you know I can empathize. I’ve been there before. I’ve been through two bad economic down cycles. They suck. But like a scary movie, often times the anticipation of the down cycle is worse than the down cycle itself. A small amount of hedging is good, but what’s better is sticking to a portfolio allocation through thick and thin and having the resolve to see it through. That is what separates the experienced from the undisciplined newbs, who, will be taught a lesson when the day of undisciplined misallocated reckoning comes. The down cycles will pass as they always do and the overwhelmingly upward bias of the market will come back in full effect. The recovery will be faster than realized and all will be swell. This may not make sense to you now, but after your first couple cycles, it will become second nature.

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16 FI FighterNo Gravatar May 30, 2015 at 9:03 pm

#3 Yes, gold is probably impractical for trading, for one it’s too valuable! In that regard, trading other goods/services for items seems most logical, and perhaps silver would also be good because it’s cheaper and people most likely have it in greater abundance.

Of course, with these doomsday scenarios we are only talking about the initial fallout… it wouldn’t be something that would be sustained for an indefinite period of time, as most likely the government will step in and do something to stop the chaos… but you never know when… they could elect to just hide out in bunkers if things start out really bad…

As was mentioned in the previous article, always a good idea to load up on supplies, food, water, etc. first and foremost.

#4 Yes, I will continue looking into alternative products and hedges. Thanks for the tips!

Thanks for the words of wisdom. I witnessed the dot com bust but was too young to really grasp it. 2008 has been my only real encounter with a market crash so far… I’m definitely hoping things won’t be so bad and all the doom and gloom is over-exaggerated. That would be a most welcomed outcome! 🙂

May fiat currency live long and prosper!

All the best!

17 FI FighterNo Gravatar May 29, 2015 at 5:06 pm
18 CashFlowDiariesNo Gravatar May 29, 2015 at 5:13 pm

Well put my friend. I could tell you had some passion writing this one. I only hope some day I get to the point where I just want to preserve my finances.

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19 FI FighterNo Gravatar May 31, 2015 at 8:33 am

CashFlowDiaries,

Thanks! Just keep at it and I’m sure you’ll get there someday soon. It definitely gets easier as time goes on and compounding starts to kick in.

All the best!

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20 TawcanNo Gravatar May 29, 2015 at 5:47 pm

Very well put together. I love this quote:

We are financial freedom fighters who are doing everything we possibly can to create a better future for ourselves and our family.

Thanks for sharing your thoughts with us. I enjoyed reading this post.

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21 FI FighterNo Gravatar May 31, 2015 at 8:34 am

Tawcan,

Thanks! Glad you enjoyed the post.

Fight on!

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22 JohnNo Gravatar May 29, 2015 at 8:43 pm

As a fellow Asian I totally agree with you that folks from India and China hoard gold for a reason 🙂

BTW here is an article endorsing your ideas on using dividends for income. http://blogs.wsj.com/totalreturn/2015/05/28/buy-dividend-stocks-for-retirement-income/

Living in the Bay area I missed the real estate opportunity because I did not have enough knowledge :(. Hope to learn more about investing in RE

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23 FI FighterNo Gravatar May 31, 2015 at 8:40 am

John,

Yes, those countries and Russia are buying up precious metals at a torrid pace. I can’t say I understand their reasons, but I also don’t believe it would be a bad hedge for someone as well.

In fact, China is even encouraging its citizens to buy:

http://www.noblecoins.com/Gold-and-Silver-Investment/Gold-investment/china-promoting-buying-of-gold.html

Bay Area real estate is very cyclical, so I’m sure you’ll have more opportunities in the future. That’s what I’m hoping for, anyway.

Cheers!

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24 Matt RNo Gravatar May 30, 2015 at 1:57 pm

This reminds me of an article I read recently on BiggerPockets about the 5 rungs of wealth:
1. Support Yourself
2. Save
3. Invest for growth
4. Reduce Risk
5. Hedge for unpredictability

Welcome to rung 5!

http://www.biggerpockets.com/renewsblog/2015/04/22/5-rung-ladder-financial-independence/

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25 FI FighterNo Gravatar May 31, 2015 at 8:42 am

Matt,

Thanks for the link! Seems like we are on the same page.

“Hedge to Provide Flexibility: The truth is that no one really knows when certain events will happen in the future. So to remain flexible, Jack liked to always have a significant portion in assets that can be easily converted to cash. This includes cash in checking/savings accounts, money markets, gold/silver, stock funds, and highly discounted real estate notes.”

This is new territory for me, so I’m glad to have read that article!

Cheers!

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26 No Nonsense LandlordNo Gravatar May 31, 2015 at 5:51 am

While you may need to protect your wealth, you need to understand that you have 50+ years left on the planet. Protecting it now, with a less aggressive approach, will leave you short in 20 years. Equities seem to be the best solution, at lease for the last 130+ years. A diversified indexed portfolio is a solution that has worked through thick and thin.

A million dollars is not a lot of money for someone to live on for 50 years. If you only had 25 years, it is a lot more money. In your case, (and mine) much is tied up, and cannot be spent. It’s hard to buy a bag of groceries with a deed to a home… Hunkering down now will only leave you broke in later years.

Equities and positive cash-flowing investments are what you need. Inflation will come at some point. The Fed wants to raise interest rates another 4-5 points. Wages are getting squeezed up by legislation and demand. Maybe that means inflation, maybe it means another recession and deflation. No one knows.

And if you really want to hedge for Armageddon, buy guns and bullets. They are the universal currency… With them, you can get gold, food, and have protection from others who are out to get your ‘stuff’.

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27 FI FighterNo Gravatar May 31, 2015 at 8:45 am

Eric,

Historically, equities have performed well which is why I continue to hold index funds in my retirement accounts.

$1MM is definitely not worth much today, I’ll agree with you on that. In terms of lasting 50+ years, that’s no concern of mine because I’m certain I will work again in the future…

As I’ve mentioned in previous posts, I would like to someday be a real estate agent, and expand an online business… That’s work… and hopefully those endeavors earn income which will help me acquire more assets.

Having $1MM is to simply allow me to walk away from Corporate America… It isn’t my plan to never earn another penny ever again.

Agreed, you will need more than precious metals if an armageddon comes… It’s a start, but not the entire solution.

Take care!

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28 kyithNo Gravatar May 31, 2015 at 7:26 am

i guess the reason there are folks critical about it have been the long time fly on the walls who have watched you evolved the narrative of being a dividend growth investor to a property rental owner and now to that of a trader.

There is a part of the message as a dividend growth investor on why doing it long term have its advantages, how you should work out the volatility to invest long term. I am sure you would have written about that. ditto for real estate.

Now imagine them seeing the message evolve that you have to protect your wealth. why now and why does what you learn previously about what work for the previous 2 doesn’t work but you have to evolved to a trading method of hedging and putting in precious metals.

Folks will be thinking how long till he changes his tune again.

I have no vested interest in being critical since i am not a long time reader. i just find it fascinating to assess the sentiments of the public investors like yourself. i can definitely see the psychology change when a person manages a sum of money that wasn’t substantial versus one that much more substantial. i do understand how much you are leveraged in your real estate stuff and the need to de-risk. I just have a feeling you are dipping your toes into a few too much areas and if you can actively manage them then power to you.

i just hope you have dive deep enough into each competency to be at a master level as a master in each kind of wealth building would hold a very different view on how they view the market and the economy we are in and whether we need more instruments to hedge our risk.

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29 FI FighterNo Gravatar May 31, 2015 at 8:50 am

Kyith,

Thanks for stopping by and sharing those insights. I can definitely understand where you are coming from…

My perspective (as it has been all along) is to document and chronicle one person’s journey to early financial independence. Unfortunately, because this is all happening in REAL TIME, whatever moves I make are subject to change in the future… I will never proclaim to have all the right answers at any given time…

I can understand the frustration one can feel to watch me shift strategies from stocks to real estate to now precious metals, but ultimately, I’m only doing what I think is best for my own situation… Those moves don’t have to apply to anyone else…

If dividend stocks are working tremendously for you, please stick to them. Ditto for real estate.

As I mentioned, my views have changed because my perspective and situation are now different. Yes, I could buy more real estate and stocks, but right now, that’s not my main focus. I am trying to get more defensive and hedge my portfolio. You could call me a speculator, sure, but to me it’s no different than a person buying insurance for an uncertain tomorrow.

I try to remain unemotional when I invest. In the end, we are all after financial freedom; getting there is what matters, not what you invest in!

If financial freedom requires me to liquidate all assets, that will be fine with me as well. Again, I have no unrelenting affinity for stocks, real estate, precious metals, or any of those tools that help a person get to early FI.

All the best!

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30 Bob TennantNo Gravatar June 1, 2015 at 1:26 am

From everything I ever read on the subject of investing, a diversified portfolio works the best, hence the “don’t put all eggs in one basket” saying. With that in mind, I’ve been thinking about allocating weight among investing alternatives.

More specifically, if I have growth-oriented investments, sustaining ones, defensive measures, short term speculations and outright gamble attempts, what percentage of my assets should go towards each of these.

1. Stocks with strong fundamentals yet not large companies thus far – growth
2. Renting rooms out and dividends issuing stocks – sustaining wealth
3. Precious metals – defensive measures
4. Day trading on volatile stocks and currencies – short term speculations
5. Putting money down on sports events and suchlike – gambling

Frankly, have not yet been in a financial position strong enough to allow me to venture in all of the above , yet I hopefully plan ahead for the time that I will be able to.

What kind of resource allocation do you reckon will yield the most benefit to a relatively inexperienced (and still in late 20s) investor?

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31 The DudeNo Gravatar July 21, 2015 at 3:53 am

Gold prices are down 8% since this writing. In that time there has been a Chinese stock market crash and a debt crisis in Europe.

Has any of this changed your viewpoint on gold?

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