Analyste de Boston's  Instablog

(Work in progress.)

With Gold setting record prices and concerns about the USD$ mounting,  many investors are wondering about this unfamiliar and too-long ignored asset class.  For the hypothetical investor retiring at Age 65 in 2010, I would like to consider illustrate how a gold allocation impacts portfolio returns, using the annualized real returns for three (3) investments for 10 year- and 20 year-periods and factoring the real inflation rate (as recorded on John William's ShadowStats.) 

For simplicity sake, three investment represent Commodities, Equities & Fixed Income.  Accumulated gold bullion is hypothetically purchased with a one-time 3% commission), held without storage cost and neither traded nor sold within any period.  Two no-load mutual funds, Vanguard 500 Index Investor (VFINX) and Vanguard Total Bond Market Investor (VBFMX) are hypothetically held in a no-cost tax-deferred account, shares sold/bought to rebalance along a familiar risk-adjusted glide path towards an increasingly conservative allocation. 

For the past 10 years, Gold is UP +247% in nominal terms (+13.3% /annualized), but in REAL inflation terms (-8.9%/ ann.) that's just +3.2% per annum.  

In the same time-frame, the S&P500 (VFINX) is DOWN -11.6%, ann., the real inflation-adjusted total return.

For the past 20 years Gold is UP +188.5% in nominal terms (+5.4% /annualized), but in REAL inflation terms (-7.8%/ ann.) that's -2.8% per annum.  With gold prices suppressed.

The S&P500 (VFINX) is DOWN -0.71%, ann. total return, again factoring that same real inflation after 1989.  In the frothiest, bubblicious of markets!   

Even if you don't believe gold prices were artificially suppressed and equities ridiculously inflated, there's obvious benefit to holding significant allocations of each longer term.

Once upon a time, Morningstar and all the other fund services prominently reported something called a “10 Year Return,” shown either as a large compounded total return or as an annualized number.  Among other stats, extended performance is useful to evaluate and compare the record of fund managers for investment selection.  Investors were duly instructed at every 401k enrollment or IRA rollover, in nearly every financial article, on teevee programs or by pop-finance books to “Buy & Hold” and “Invest for the Long Term!”  For the simple 401k participant, Ten Year Return was – if no guarantee of future performance – at least a reminder of how far you'd worked towards your retirement savings.   Despite the Market's normal ups &downs, “10 Year Return” illustrated the steady long term gain earned by diligent “retirement savers” - that's what the 401k was all about, after all.  Long term performance was marketed as validation that “Buy & Hold” works and that was the tacit emphasis of fund company & plan provider reps.

Until recently.

Lately, the “10 Year Return” has disappeared from the front pages of many reports, frustrating those who wish to see the big picture at a glance.  Coincident with the Great Bear Market (10/9/07-3/9/09), wretched stats, like “12 month Return” or that pesky Bear Market number are now buried with esoteric beta metrics, intentionally omitted from those pages investors see first and foremost.  You almost get the sense that sites like Morningstar & Yahoo Finance are trying to scrub these numbers from the record.  And why does everyone need to see useless stats like 2006's annual return for the next two years, how is that even relevant now?  (Better yet, why don't you call Morningstar and ask them.)  It's a simple game: out of sight, out of mind. The long-term performance is catastrophic but only gets worse under scrutiny and later on. This is the truth that shills don't want you to see or understand: “Buy & Hold” crushed retail investors.

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Investors are wondering what impact, if any, a major global influenza pandemic might have on the US stock market in 2009-10.   Looking more closely at the DJIA price movement during the lesser influenza pandemic of 1968-69 and "Swine Flu Scare" of 1976, it's not at all certain that influenza epidemics must move the Market negatively.

The Hong Kong Influenza of 1968-69

Beyond the expected annual flu mortality, the 1968-69 pandemic caused an estimated extra 33,800 US deaths, which was far longer than expected at the time.  The normal range of US flu-deaths is currently between 20,000 > 55,000; an average estimated 36,000 Americans die annually from flu-related causes (0.1%).  Adjusted simply for US population growth, an equivalent # of ADDITIONAL influenza deaths for 2009-10 would be +65,000, although that doesn't factor radical advances in health care and life-expectancy.  If mortality rates are similar to the 1968-69 Pandemic, we might conservatively anticipate between 45,000 - 90,000 additional influenza deaths will occur. 

According to the CDC, a 'medium level' influenza pandemic could kill 90,000 - 210,000 US residents.

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Many investors are wondering what impact, if any, a major global influenza pandemic might have on the US stock market in 2009-10.   Looking more closely at the DJIA price movement during the last major influenza pandemic (1957), we can see how one deadly flu season probably triggered a -19% decline in a roaring secular Bull Market. 

The Pandemic of 1957

As the last major worldwide influenza pandemic, 1957 Kweichow strain (H2N2) arrived in the USA by June 1957. Although there may have been isolated minor outbreaks in the summer, it was not until Sept-October 1957 that flu deaths spiked dramatically.  This exceptionally early, virulent & deadly flu season coincided with children  returning to school.   Although school-age children and young adults experienced the lowest increased mortality of any age demographic, these carriers brought deadly germs home to grandparents & infant siblings.  Mortality remained high through February 1958; although flu season historically runs through April in N.America, influenza deaths had begun declining by March.  

Beyond the expected annual flu mortality, the 1957-58 pandemic caused an estimated 70,000 extra US deaths.  The normal range of US flu-deaths is currently between 20,000 > 55,000; an average estimated 36,000 Americans die annually from flu-related causes (0.1%).  Adjusted simply for US population growth, an equivalent # of ADDITIONAL influenza deaths for 2009-10 would be +123,000, although that doesn't factor radical advances in healthcare and life-expectancy.  If mortality rates are similar to but not higher than the 1957 Pandemic (0.39), we might conservatively anticipate between 60,000 - 177,000 additional influenza deaths in the USA.  

The DJIA in 1957-58

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