Posts tagged risk tolerance

If you want some no-nonsense ways to own Gold you can read my FAQ:

Gold FAQ

People are wondering about the gold price. Is it going to go higher? Is it going to go lower? Etc. Well the unexciting answer is nobody knows. That’s right, nobody at all knows. I don’t care how pretty their charts are or what logical arguments they have for or against. What I do know is that too many people are talking about the stuff.

If you own gold as part of your Permanent Portfolio allocation then you should stick to your plan and rebalance when it is needed. However, I would not go out and buy gold for my speculative Variable Portfolio bets right now.

I don’t think any particular asset class looks like a great buy for a Variable Portfolio speculation. So personally I’d just stick to the four way Permanent Portfolio split and not do much gambling with my money.

Now if you own gold in your Permanent Portfolio again I’d say to stick to the plan. That means you have a rebalancing band of either a low of 15% and high of 35% or a low of 20% and high of 30%, etc. If you are at or above your band then you should sell down your gold and rebalance the proceeds into your lagging assets.

Yes, I know it’s hard when you read all the doom and gloom but you have to do it. The point is you take an asset everyone wants and sell it to buy something that less people want.

The Permanent Portfolio is designed to limit risks and perform contrary buys and sells in the market. At any one time you probably are going to have an asset doing very poorly and another doing very well. This is how it is designed to work. But you need to be sure you do your part. That means selling down assets when they are doing great and using the money to buy the things people don’t want to touch at the time.

You hear that term “Bubble” being overused a lot now? “Gold Bubble”, “Stock Bubble”, “Bond Bubble”, “Bubble Bubble”. Well the way you limit losses due to “bubbles” is by rebalancing. No elaborate market timing is needed. If you own too much, you sell it down until you own less of it and buy something else. Simple stuff.

Are you nervous about the rise in gold prices and all the hype? Well I know some people are because I’ve heard about it. Here’s my advice:

If you have a rebalancing band that is 35% and your gold has risen to, for example, 33% of your allocation then perhaps you can sell it down early to 25% and re-deploy the money. I don’t think selling early in your rebalancing bands is going to hurt you much if it makes you sleep better at night. Perhaps in the future you make your rebalancing bands the 20%/30% thresholds so you keep a tighter control over how much money you have at risk in each asset. This can incur added tax and brokerage fees you need to be aware of, but it’s not terrible if it makes you feel comfortable. Remember, this isn’t a science so there are no precise answers to be had.

The one thing I would not do though is let any allocation slice rise above 35%. If you sell out too early and harvest those profits you will be OK. Sure you’ve not milked out the very top of something. But, as they say, only liars sell out at the very top and buy at the very bottom. But if you wait and let an allocation go to 40%, 45%, 50%, etc. you can set yourself up to take a tremendous loss if the markets turn suddenly. This isn’t just a warning for gold, it’s a warning for any asset class you hold.

This is just a reminder to not make gold a religion and use it intelligently in a portfolio. I don’t know what the gold price is going to do, but I don’t think you should listen to all the hype in the news about it either. Stick to your plan and don’t take risks with money you can’t afford to lose.