The Permanent Portfolio, Investing, Finance and Random Thoughts.
Posts tagged risk control
How Low Can the Stock Market Go?
2 months ago
by Craig Rowland
in Investing
A theme that runs on this blog is to not take anything for granted in terms what will happen while investing. In particular, I often mention the idea that any asset can fall in price very steeply at any time and for a multitude of reasons. Stocks in particular have had a very storied history in this regard.
Wade Pfau made a post aggregating the worst stock market losses by country over the past 100 years:
How Low Can the Stock Market Go?
Here are some excerpts from his post. Check the link to see the rest:
Australia 1970-74 -66%
Finland 1917-21 -85%
1943-48 -74%
1989-91 -60%
France 1943-50 -88%
Germany 1914-31 -84%
1948 -91%
Ireland 2007-08 -75%
Italy 1913-21 -68%
1944-45 -85%
1974-77 -75%
Japan 1946 -86%
1940-47 -98%
1990-02 -70%
US 1929-31 -60%
UK 1973-74 -71%
Some of these numbers were the result of WWI or WWII for certain, but others were clearly not. There is no guarantee the markets are going to perform on anyone’s particular timetable so you gotta stay diversified. I think this chart also illustrates the fallacy of time diversification in some respects as well. The fallacy of time diversification was discussed in John Norstad’s paper:
Fallacy of Time Diversification
In essence, holding stocks for a long time does not make them “safer” as commonly stated. Just because you held a stock for 20 years does not mean it can’t drop steeply on year 21 and stay there for a really long time. Investors taking a lot of stock risk and expecting quick market recoveries after these kinds of falls can be in for a nasty surprise. If an economy turns into another Japan (-70% from 1990-2002) and they need that money for retirement there could be big trouble. You gotta stay diversified!
Hat tip to Taylor Larimore on the Diehards forum for posting the link. And thanks to Wade Pfau for posting this interesting data in one place.
Gold: Not a stock and not a bond.
2 months ago
by Craig Rowland
in Investing
Just some quick notes because the “gold is worthless compared to stocks” debate has heated up again in the news.
Let’s just get this out of the way: Gold is not a stock or bond. This is not groundbreaking wisdom, it is plainly obvious. Gold will not have interest or dividends like a stock or bond. It also will not multiply on its own if left alone like a stock or bond. Some will say that is bad.
Yet I look at an asset like gold and see hundreds of years where it has maintained purchasing power. The overwhelming number of company stocks over that time are no longer here. Heck, the overwhelming number of governments over the past two centuries are no longer here so their bonds probably didn’t pay you either.
So I own some stocks, own some bonds and own some gold. I realize each has a weakness but also has a strength. Gold does not multiply in value on its own, but it’s a heck of a good place to park bond and stock profits if you want that money to be around no matter what is going on. That alone makes it unique enough to consider owning.
The anti-gold feeling I often see is really a more modern American trait. We haven’t had a serious war inside the borders for over 150 years. The currency has been fairly trouble-free. Pretty much we’re an outlier if you look at history in terms of stability and continuity. But if you talk to people in other countries that have had currency and government problems they think not owning gold is the bad idea. Just depends on your life experiences I suppose.
If you want gold, hold it in a balanced and diversified portfolio along with stocks and bonds. If not, then don’t. But pretending that stocks don’t have bouts of mania followed by long periods of bad returns isn’t realistic either. Neither is saying that gold is worthless. The idea that gold is worthless flies in the face of human history and just isn’t true. I just accept that gold is worth something historically and figure out how I can use it as an effective tool in a diversified portfolio. To that end it has worked great and I have no complaints.
Despite my postings about gold on this blog and elsewhere, people may be surprised to hear I don’t really want to see gold go up in price.
Despite my postings about gold on this blog and elsewhere, people may be surprised to hear I don’t really want to see gold go up in price. I’d rather the stock and bond markets be doing well because they are generating real growth and value to the economy. An escalating gold price usually means economic trouble and problems for many people and nobody wants that.
But sometimes what we want and what actually happen are two different things. Because of that I own some gold along with my other assets and don’t get all religious about this stuff. It’s funny reading some of the things people write about investing. Everyone has their own bias and feelings about what the future may or may not do. I suggest trying to stay neutral and own a little bit of everything so you’re protected no matter what happens.
Diversify Where You Put Your Money
5 months ago
MF Global lays out the perfect case for Rule #10 in the 16 Golden Rules of Financial Safety:
Are customer accounts at brokerage firms safe?
Until the collapse of MF Global, that’s a question I thought I’d never have to ask.
Brokerage firms are required by law to maintain segregated accounts holding all client assets, including stocks, bonds, mutual funds, money market funds and cash. The law was passed after the 1929 crash, in the depths of the Depression, to make sure that customer assets were there at all times, ready to be disbursed even if everyone asked for their money at once.
This obligation to protect customer assets “is considered sacrosanct,” Robert Cook, director of the division of trading and markets at the Securities and Exchange Commission, told me this week. “It’s considered a sacred obligation.”
Lehman Brothers may have engaged in many foolhardy practices, but even in the firm’s last days, when officials were desperate for cash, no one dared touch customer assets, which remained safely segregated despite the firm’s collapse.
And then came the revelation that an estimated $1.2 billion in customer assets had vanished at MF Global, the large brokerage and futures trading firm headed by Jon S. Corzine, the former Goldman Sachs executive and Democratic politician, that collapsed in late October after a catastrophic bet on European sovereign debt.
How could such a thing happen? I had always assumed it was impossible and that strict internal controls existed at all brokerage firms so that firm officials couldn’t tap segregated customer funds even if they were willing to break the law. Thanks to MF Global, it’s now apparent that isn’t necessarily true. “If people are determined to misuse customer funds, they will misuse them,” said Ananda Radhakrishnan, the director of the division of clearing and risk at the Commodities Futures Trading Commission. – A Risk Once Unthinkable by James B. Stewart – New York Times December 9, 2011
(Emphasis added)
Rule #10 States:
Rule #10: Don’t depend on any one investment, institution, or person for your safety.
Every investment has its time in the sun — and its moment of shame. Precious metals ruled the roost in the 1970s while stocks and bonds were in disgrace. But then gold and silver became the losers of the 1980s and 1990s, while stocks and bonds multiplied their value. No one investment is good for all times. Even Treasury bills can lose real value during times of inflation.
And you can’t rely on any single institution to protect your wealth for you. Old-line banks have failed and pension funds have folded. The company you think will keep your wealth safe might not be there when you’re ready to withdraw your life savings.
We live in an uncertain world, and surprises are the norm. You shouldn’t risk the chance that a single surprise will wipe out a large part of your holdings.
(Emphasis added)
I always recommend keeping your savings at more than one institution and not using the same fund company for all your investment money (for instance not using all Vanguard funds or all iShares or all Fidelity, etc.). It’s best to split up the assets in case something very bad were to happen with your brokerage or the company running the funds.
I know it’s more convenient to keep everything at one broker or fund provider because of unified statements, etc, but it’s really not a good idea for diversification. You’ll even notice on this blog when I recommend using ETFs, I tend to not provide tickers from all the same company (like iShares). Rather I think it a better idea to use some Vanguard, iShares, SPDRs and of course physical gold storage somewhere secure. MF Global is the poster-child why this kind of thinking is a good idea.
H/T to Ad Orientem for his link on the forum reminding me to make a comment about this latest financial industry debacle.
