Following Buffet's advice re S&P 500 ETF

nagirrac

Gold is an inflation hedge. The run up in Gold post 2000 was due to the fears of inflation or even hyperinflation brought about by the Fed's various easy money policies. During this period Gold has greatly outperformed stocks. Gold declined in 2013 due to the expectation of higher interest rates which are generally correlated to the price of gold. If interest rates return to say the 4% range then the price of gold should revert to roughly $800/ounce.

What will happen to interest rates is the question. Obviously the bond market does not believe the economic growth story as yields have declined in 2014, and the bond market is generally correct on predicting the direction of the economy. The stock market can be hopelessly wrong as it is emotion driven in the short term, and was horribly wrong in 2000 and 2007.

If the doomsday scenario of stagflation plays out in the US, then gold is a good asset to have in your portfolio, maybe at 25% as the Permanent Portfolio recommends. Look at what gold did in the 1970s, the last period of stagflation in the US. If inflation picks up (it is based on two months data, noise according to Yellen) but real wages do not (they are not and have not for decades), the Fed are snookered.

Recondite49

nagirrac wrote: »

Gold is an inflation hedge. The run up in Gold post 2000 was due to the fears of inflation or even hyperinflation brought about by the Fed's various easy money policies. During this period Gold has greatly outperformed stocks. Gold declined in 2013 due to the expectation of higher interest rates which are generally correlated to the price of gold. If interest rates return to say the 4% range then the price of gold should revert to roughly $800/ounce.

What will happen to interest rates is the question. Obviously the bond market does not believe the economic growth story as yields have declined in 2014, and the bond market is generally correct on predicting the direction of the economy. The stock market can be hopelessly wrong as it is emotion driven in the short term, and was horribly wrong in 2000 and 2007.

If the doomsday scenario of stagflation plays out in the US, then gold is a good asset to have in your portfolio, maybe at 25% as the Permanent Portfolio recommends. Look at what gold did in the 1970s, the last period of stagflation in the US. If inflation picks up (it is based on two months data, noise according to Yellen) but real wages do not (they are not and have not for decades), the Fed are snookered.

Hi nagirrac,

I realise that some people believe Gold to be a good store of value (it is a good store relative to keeping money under your mattress certainly!) - based on the figures above though and given how average stock growth outstrips inflation over time wouldn't it be better to have a broad index fund?

If it comes down to it, I am sure we could find mutual funds which have outperformed the S&P500 over the past 15 years - the question is whether they like gold can do this in a consistent way over time? If you look at the charts gold is hugely volatile - do you really think this is the best way to protect against inflation?

betonit

from the graph if u bought the SPY 2000 or 2007 you wouldnt have made any profit unitl 2012..... or even if u bought around those years you would have made very little. Seems to be very few years over a 12 year period where you would have made a decent return if you sold today after holding it for a long period of time

Recondite49

betonit wrote: »

from the graph if u bought the SPY 2000 or 2007 you wouldnt have made any profit unitl 2012..... or even if u bought around those years you would have made very little. Seems to be very few years over a 12 year period where you would have made a decent return if you sold today after holding it for a long period of time

A long period in this case being 12 years?

All we can conclude from this is that the Stock Market isn't quite as good as gold if you wanted to make a fast buck over the past few years.

If it comes to that I'm sure we could also find mutual funds which beat gold hands down since 2000. However as Buffet himself says there isn't a way to outperform the market averages consistently over time.

Anyone who wants to put their money where their mouth is and invest equal amounts of gold to my index funds is welcome to send me a message - I'll send you an e-mail in twenty years' time and we'll see who's better off, even accounting for inflation.

Recondite49

While we're on the subject, those people who want to sink their hard earned cash into gold, how do you want to go about it?

Would you buy shares in a fund like GLD?

Or do you want to buy bullion and bury it in a field somewhere to be dug up?

I do have a friend who makes a habit of buying a few silver coins a month but aside from silver's volatility I do wonder ifuthis is best way forward - he must pay something dear in insurance! :-)

betonit

just making the point after 12 years there was no gain , surely you'd expect some return in whats percieved as a no brainer. Youd have been better compounding a deposit account. Whats the point in a 20 yr investment if the vast majority of those years are none productive.For eg After 20 yrs you have x + y if you started 5 years ago you have x + 3y. I think its about timing not blindly investing in x for 20yrs.

Recondite49

betonit wrote: »

just making the point after 12 years there was no gain , surely you'd expect some return in whats percieved as a no brainer. Youd have been better compounding a deposit account. Whats the point in a 20 yr investment if the vast majority of those years are none productive.For eg After 20 yrs you have x + y if you started 5 years ago you have x + 3y. I think its about timing not blindly investing in x for 20yrs.

What twenty year period are you referring to out of interest? I started buying shares in SPY in 2010, I had two grand which I'd saved from an evening job. Those shares are now worth over 3,000 -please feel free to check the historic rates if you don't believe me.

Now it's possible that a lump of gold would have done slightly better during that time but as you can see from the graph and figures above, nothing beats the market over time.

Incidentally I've started a thread on this very topic as I think it merits further discussion. I'm interested to know why the perception seems to be that gold is safer for hedging than say bonds.

See you there I hope!

nagirrac

Recondite49 wrote: »

Hi nagirrac, I realise that some people believe Gold to be a good store of value (it is a good store relative to keeping money under your mattress certainly!) - based on the figures above though and given how average stock growth outstrips inflation over time wouldn't it be better to have a broad index fund?

Hi. Absolutely a broad index fund is the best way to invest for the long term, and should make up the majority of most investor's portfolios, especially a younger investor. In terms of real returns historically (including reinvested dividends and after inflation), stocks have returned 7% and bonds about half that. The pertinent question however is how valuable is past performance in predicting future performance.

The chart by the way is misleading on 10 year treasuries, as it represents the yield on bonds which are inversely related to price. Bonds have been on a bull run since 1980 and have returned much higher real returns than historically, roughly double the historic 3% and pretty close to stocks over that period.

As for gold, I agree with the previous poster that comparing gold pre and post 1972 is meaningless as prior to 1972 it was pegged to the US dollar which is what the chart shows.

Recondite49 wrote: »

If it comes down to it, I am sure we could find mutual funds which have outperformed the S&P500 over the past 15 years - the question is whether they like gold can do this in a consistent way over time? If you look at the charts gold is hugely volatile - do you really think this is the best way to protect against inflation?

Stocks are the best way to protect against inflation in a normal economy, and over the long run, as the 7% real return demonstrates. However, when inflation surges as in early 1970s and early 1980s, gold absolutely skyrockets. Gold is an excellent hedge when inflation is high, as the only way to fight inflation is by increasing interest rates, and there is a point where higher interest rates hurt stocks (historically around 7%). When interest rates were high in the 70s and early 80s, stocks did very poorly and had essentially zero or negative real returns.

The answer as to whether gold is a good hedge against inflation right now depends on what happens in the coming years . My expectation for what its worth is for stagflation in the US in the coming decade, so I believe gold will do well over that period. Having said that, I wouldn't recommend gold above 25% of anyone's portfolio.

FURET

I'm wondering whether you're better off buying the Vanguard VOO/VUSA (S&P 500) or the VTI (Total US stock market) which has over 3,000 US companies in it, of varying sizes.

The two ETFs track each other almost in lockstep, but VTI seems a shade better in terms of growth. Both have the same TER.

Thoughts?

nagirrac

FURET wrote: »

I'm wondering whether you're better off buying the Vanguard VOO/VUSA (S&P 500) or the VTI (Total US stock market) which has over 3,000 US companies in it, of varying sizes.

The two ETFs track each other almost in lockstep, but VTI seems a shade better in terms of growth. Both have the same TER. Thoughts?

VTI incudes small and mid cap, and the Nasdaq, so over time it should grow faster than the S&P 500, while also being more volatile. A good example is the last few months when small caps had a decline, VTI declined more than VOO.

I like the combination of VTI and VYM (high dividend ETF). VYM pays almost 3%, close to 2X that of VTI.