- James Rickards apparently believes that the end is nigh for the financial system.
- Suggestions for 20% allocations to gold sound great/look good when gold is going up and hurt on the way down, as was the case in 2013.
- As the stock market goes up most of the time, it makes sense for the portfolio to look at least similar to the stock market, more often than not.
By Roger Nusbaum AdvisorShares ETF Strategist
The Millennial Invest Blog had a fun post taking a look at the Death of Money portfolio, which comes from a book by the same name written by James Rickards.
Rickards encourages large weightings in things like gold, cash, alternatives (long/short and the like), undeveloped land and a smaller slice to museum-quality fine art. Missing from the list are equities and fixed-income, although very short-term debt could be a proxy for cash.
The framing of this portfolio is an expectation of some terrible outcome; deflation, hyperinflation, a return to a gold standard or social upheaval. Rickards apparently believes that the end is nigh for the financial system.
These sorts of alternative portfolios are always fun to look at and consider. As a practical matter, the utility here is not betting that the end is indeed nigh (that's never been a sustainably winning bet), but looking at the asset classes and why some exposure might make sense.
Museum-quality art will be beyond the reach of most investors and is also difficult to analyze quantitatively. There is nothing wrong with buying art you enjoy and can afford, and if it appreciates in value, all the better, but expecting it to go up in value as part of a financial plan might be a tall order.
Alternatives, gold and cash are likely a part of most portfolios, although I would differ as to how much is suitable for the typical investor. From the start of Random Roger, I've felt that a mid-single-digit allocation would get the job done, and by get the job done, I mean offer some downside protection by way of reducing a portfolio's correlation to the equity market.
Suggestions for 20% allocations to gold sound great and look good when gold is going up and hurt on the way down, as was the case in 2013, when the iShares Gold Trust (NYSEARCA:IAU) was down approximately 28%. IAU has a standard deviation of 22.7% versus 12.4% for the iShares Core S&P 500 ETF (NYSEARCA:IVV). While the correlation between the two is low, and that can be a benefit to a portfolio, at some subjective level of ownership, the volatility introduced by gold into the portfolio starts to increase the overall portfolio's volatility, which is typically the opposite of what is intended.
It is difficult to come up with an argument against some real estate as part of the financial mix, and of course, we now collectively understand that it can go down in value like anything else, but based on Rickards' reported view, maybe farmland and livestock would be the answer.
While I have maintained that a complete societal breakdown along the lines of the many post-apocalyptic TV shows on now was never a realistic outcome, some sort of deflationary outcome is plausible. Swinging the pendulum the other way, inflation that is high enough to be uncomfortable is also plausible (hyperinflation in the U.S. is off the table, as we don't have debt denominated in other currencies), and so understanding other asset classes beyond equities and fixed income is a good idea.
As the stock market goes up most of the time, it makes sense for the portfolio to look at least similar (maybe not identical) to the stock market, more often than not. If there is too much exposure to things that are not supposed to look like stocks, the portfolio may not grow sufficiently for clients who need growth.
Source Google Finance, iShares.com
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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