Key quotes:

“US billionaire George Soros has more than doubled his investment in gold, despite calling it the “ultimate bubble” just weeks ago.”

“At the World Economic Forum in Davos last month, he said: “The ultimate asset bubble is gold.” However, he did not say whether he was investing in the precious metal.
But he also said that when he sees a bubble, “I rush out and buy.”

Perhaps he was “talking his book” in hopes to get gold prices to move momentarily down at the moment he was in the market to buy?

Here’s another quote not to pay any attention to:

Feb. 4 (Bloomberg) — Betting on declines in U.S. Treasury bonds is a “no brainer,” said Nassim Nicholas Taleb, author of “The Black Swan.”

“Every single human being should have that trade,” Taleb said at a conference in Moscow.

–

Looks like a good time to buy Treasury Bonds!

You can do a bond ladder if you feel like it. Or you can just buy them all at once and not worry about it. The biggest issue really is to make sure you sell them when they reach 20 years and buy new long bonds in the 25-30 year range to replace them. Bonds that go too short in maturity will not have the power to protect the portfolio in a serious deflation.

If you buy bonds on the secondary market, the bond desk will normally list the highest yielding ones first. The bond market is incredibly efficient, and the Treasury market probably the most efficient of them all. So there really is no difference how you buy them. The prices/yields adjust to reflect the market’s best value at the time.

Vanguard is simple to use for holding bonds. You use the Vanguard bond desk, select the bonds you want (listed highest yield/best price first). You buy the bonds and the funds clear your account a few days later. After that the bonds will show up in the Vanguard Brokerage half of your account. Interest payments are automatically swept into a money market fund you select. Prices are adjusted continuously. If you have any questions or concerns you may want to call up the bond desk and talk to them as they can answer any question you have as well as place orders. Selling bonds is just as easy. Takes about a minute or so once you know what you want to sell. As for which to sell for rebalancing, I’d sell the ones that have long term capital gains first regardless of maturity date. After that, I’d probably rebalance the shorter maturity ones first.

Re: Gold

Yes I know about the gold prices. I really don’t comment on them except to say that yes I’m aware of the publicity and I encourage readers to keep the asset rebalanced. Prices could go up to $2000 or drop to $200. I really don’t know. I’d like to make a prediction, but history has shown that I’m no better at these things than anyone else. If you are especially nervous about this asset then you can make a pact with yourself that you will buy X$ of it a month for the next X months and be absolutely fanatically religious about it and not turn it into a market timing maneuver. Otherwise just buy the stuff whole hog and don’t worry about it because over time if you are still making contributions and rebalancing it will all kind of work out. If gold drops far in price, then it’s likely that that your stocks and/or LT bonds are doing OK so the losses will be significantly dampened or maybe even not exist.

P.S. Don’t listen to George Soros or any guru. Even if he is right on the gold price, you need to remember that he made a good part of his fortune through currency speculation and could be saying things to help out his own positions. In fact, this goes for any big name investor you read about and ulterior motives. Again, Soros may be right on gold but that is a separate issue. The main issue is that Soros will be saying things to help out Soros no matter what the topic.

That link you posted has it right. Gurus cannot predict the markets. Ignore them and maintain a balanced and diversified portfolio at all times. As a doctor, look at stock gurus the way you’d look at some psychic coming in and “healing” a patient just by waving hands over them.

Great website. I’ve listened to all Harry Browne’s radio shows and read
two of his books. And after all that I still have a question about
bonds.

I’m getting ready to buy my 26+ year Treasuries through Vanguard, and
this is where I’m stuck. I have $20,000 that I’ll need to put into long
term Treasuries (its currently just sitting in a money market). Do I
make a bond ladder by buying from the secondary market? Such as getting 5 bonds that are 27 yrs old, 5 that are 28 yrs old, and 5 that are 29
yrs old from the secondary market. And then in early Feb when the new
30 year T-bond come available buy 5 of them. Or do I just wait till Feb
and get 20 of the new issue $1,000 30 yr T-bonds and save about $100
that it costs in commission fees to get the secondary market T-bonds.
Vanguard charges me a commission only on T-bonds through the secondary
market, not new issues.

Everywhere it says make a bond ladder, but it doesn’t address what you
do when first setting up your portfolio. If you buy a ladder from the
secondary market, do you try and pick the bonds with the highest rate of
return? Eventually a ladder will develop over the years as I buy more
bonds, that’s easy to grasp. But what is the benefit of buying T-bonds
through the secondary market when you are setting up the initial
portfolio. My understanding is that if the secondary market bonds have
a higher rate of return than the current 30 yr T-bond, then they will be
priced more expensive, thus negating the benefit of having the higher
rate. Or do I have this wrong. If this is so, then it would only make
sense to buy the new 30 year issues in the beginning regardless of how
much money you have to start your investment with, and as the years go
buy continue to buy new bonds thus naturally creating a bond ladder.

One other question. Once I have the bonds in my Vanguard account, is it
easy to tell then they’ve gone up in price, like when I should sell off
the excess to rebalance. And when I do rebalance (like was needed last
year when treasuries zoomed up), do I sell off the ones with the highest
prices or the ones closest to 20 yrs left. I’m pretty sure I can do
this thing myself rather than having to use the TLT fund. For crying
out loud, I made it through medical school, you’d think I could figure
this out:) Well, my wife says I can’t load the dishwasher correctly
either so I have to keep humble.

Now if you have any suggestions on how to talk to family members who
think I’m nuts for investing in gold when “Money Magazine” and George
Soros just came out and said that it’s in a bubble– that would be
helpful. But regarding the inability of most anyone to make financial
predictions, I recently came across another website that tracked the
Gurus and their predictions: http://cxoadvisory.com/gurus/

Thanks again,

Rob

But if commissions are eating you alive then this fund looks like it could be OK to use. The Fidelity Spartan class generally have low costs and are index funds which is a good thing. The other option is to pool your money perhaps quarterly or a little longer in your cash allocation and do TLT purchases at a discount broker a few times a year or less. At around $10 a trade, you can use this method to control costs but not impact portfolio performance too badly.

Talking about LT bond fund choice: do you think TLT could be replaced by Fidelity Spartan L/T Treasury Bond fund (FLBIX) for those with Fidelty? The ER is just 0.05% higher, but no need to pay buy/sell commissions.

Thanks

For some reason I didn’t see his comment. Let me offer a quick answer:

Re: “In Why The Best-Laid Investment Plans Go Wrong, Harry Browne recommended aggressive growth stock mutual funds which would beat the S&P 500 index during periods of prosperity. Why did he change his philosophy on this matter?”

I can’t be sure, but I suspect he discovered that it’s very hard to beat the S&P 500 index with actively managed funds. The S&P 500 index (just like the Total Stock Market) moves in lockstep with the general market so you have the purest play for stocks you can get. Further, you run less chance of getting into trouble if an active fund manager makes a bad call and causes you to lag the markets during very good years.

Re: “If anything, I think it makes more sense to be in a aggressive growth stock fund since its highly sensitive to economic conditions like 30 year t-bonds.”

Some people have suggested using Small Cap Value in a play to own an “aggressive” stock fund. I’m not convinced of this because value stocks can lag the market for years before outperforming. But you may want to consider it as long as you’re using an index fund with low costs.

Re: “Also, what gold bullion coins should I buy? Is it only limited to American Eagles since they are issued domestically like Treasury Bonds. I want to purchase Canadian Mapleleafs & Austrian Philharmonics but I’m not sure if these coins will negatively affect the portfolio like purchasing eurobonds will.”

I think if you stick to American Eagles, Krugerrands or Maple Leafs you’ll be fine. When you get into the less circulated foreign coins you can have a problem with them being easily recognized. The benefit of the American Eagles is they are actually legal tender in the US. So while you wouldn’t want to spend them for the face value (the gold value is worth much more than the face value on the coins), they can be held in IRA, etc. for IRS purposes if you needed. They are also most easily recognized in the US.

I am going to dial back the LT Treasuries to 20% for now and institute the full PP allocation the minute Treasury MM funds are open. I personally think a long term deflation scenario is highly possible and will be happy to have the full allocation to the long bonds.

Thanks again!

Kevin

It comes down to duration. Near term cash should be put into a Treasury MMF if you can do so (I understand the problems of this today). I also understand your desire to throttle back the LT bonds to compensate for the additional duration of the ST bonds. It’s a hard call because yes there is interest rate risk in the ST bonds, but not that much more than a typical Treasury MMF (duration of a MMF is perhaps six months and a ST Treasury fund is 1.5 years so you’re talking one year duration difference). What you give up with the lower LT bond allocation is performance if we continue to experience deflation in the markets. But since you’ll balance this out with cash held in ST Treasuries the impact may not be so bad as long as you are aware of why you are making this temporary move. However I’d try to get some cash in a Treasury MMF as soon as I could if it is for near-term living expenses.

With Treasury MM funds closed it seems like the next best choice is to put your cash into a short term treasury fund so you at least don’t have credit risk. Since that lengthens the maturity of your bonds and thus increases their volatility would one dial back the LT treasury allocation by ~5% to compensate?

Thanks for all your work!

Kevin