The Survival of the Longest

10/17/2008 Safehaven The Survival of the Longest…


October 14, 2008
The Survival of the Longest
by Thomas Tan

What a week! What a month! S&P 500 started around $1,250 a month ago, was as high as $1,200 at some point two weeks ago, no one had ever imagined it could drop below $850 last Friday. I gave out $800 target in August last year at one of my old articles, which S&P 500 is on its way to test now. It was an easy target to give since it was the low of the 2001-2003 bear market. Even the market is quite oversold, and due to for a dead cat bouncing, I doubt now $800 will be the bottom for the bear market, and there is no support whatsoever in sight once $800 is decisively broken, until around $4-500.

After the 1987 crash, government has implemented the so-called circuit breaker system which they hope would prevent a one-day crash of 20%. However, people are always smarter than the system and will always find a way to get around it. Instead of dropping 20% in one day, let us do it 5% a day on average, and easily beat the 20% record in 1987 by a wide margin last week. The next thing government can try is market holiday(s) and eventually bank holidays like in 1930s.

Early this year, Jeremy Grantham of GMO predicted at his interview with Barron's that S&P 500 would drop to $1,100 by 2010. A lot of people just laughed at him, was this crazy old man out of his mind? Now it is like Hamlet's last line 'all rest is silence'. We always should listen to an old man who has experienced the nifty-fifty losing 80% of their market value in 1970s, and has studied extensively the great depression of 1930s. He probably regrets now that his $1,100 target given was too conservative. Actually now $1,100 becomes an important resistance point for the upcoming dead cat bouncing or bear market rally.

Jeremy derived his $1,100 target with a more normalized P/E of 11-12 as a norm for a very long term capital market. If I use the more representative bear market P/E value of 6-7, I would come up with a target of around $600-$700 range. At the extreme of this bear market a few years down the road, S&P 500 might very well overshoot and drop all the way to the $400 level, which is the launch pad for last leg of the past bull market after early 1990s recession. Everything is back to square one and 20 year's return of bull market turns out to be in vain.

How long will this bear market last? Well, 1930s great depression caused a bear market lasting over 2 decades, from 1929 to 1952. It was only until 1958 that market came back to the old 1929 peak, 3 decades later. And 1970s was not much better, lasting 14-16 years from 1966 or 1968 to 1982. Even bear market ended quicker for 1970s, it was until 1992 or 24 years later to reach 1968 peak. My most optimistic forecast is it will last another 4-5 years from now, or about 12 years if we count year 2000 as the starting point. If we use the commodity super-cycle by Jim Rogers, which usually runs opposite to the general equity market and lasts until 2020 as Jim predicts, it will be also a 2 decade
bear market for equities, consistent with both 1970s and 1930s. When will S&P 500 be back to last October peak? At least 24 years from 2000, or 2024. A few chart technicians today think Dow can drop all the way to $1,000, back to the 1982 level. Even it is possible, but I think it might bottom at one of the lower Fibonacci level between $14,000 and $1,000. Which one of them is yet to be seen in future years but my guess is around $4-5,000.

The current market crash is not like 1987, which recovered in a relatively short time since the fundamental was strong, stock was in an uptrend and it didn't have the economic bloodline of credit cut off then. There is another fundamental factor now supporting a long lasting bear market than 1970s. This time, it is demographic. Setting aside the whole investment banking sector being wiped out and OTC derivatives, for the public, the more important factor is that baby boomers are not comfortable with this market turmoil since last year, and want to lock in their nest eggs and to cash out, which has caused more baby boomers to do the same. They don't want to take the risk of sitting through this credit crisis and bear market, since no one knows how long it will last. What happens if it lasts as long as 2 decades? Time is not on their side. How can we blame them? With the real estate market at free-fall and no sight of its bottom, it is only natural for them to protect their only remaining nest eggs. And they will never get back into the stock market again after cashing out, due to growing risk adverse profile with increasing age. All the concern is to protect their cash. This is why you see US treasuries reaching so high these days with yield at 0%, the so-called safe haven vehicle. Maybe stocks in the future will be "undervalued" at 50% of book value, 70% of intrinsic value, P/E at 6, PEG less than 1, but who cares. Yes, inflation is gradually eating their money away, well, let us worry about that later when inflation reaches double digit.

The above discussion about baby boomers is not new, as early as 2001, Wharton professors of Andrew Abel and Jeremy Siegel have voiced concern about the herd behavior of baby boomer generation and their cashing out simultaneously will cause a stock market meltdown around 2010. What an accurate prediction that is, only miss by 2 years. At the same time, who wants to be the last one to cash out in 2010 at the lowest price by holding the bag anyway? I think 2010 bottom prediction by professors is still one of the valid bottoms, and probably the most important one in this bear market, reaching $4-500 target discussed earlier after the upcoming dead cat bouncing rally.

Here is a brief discussion on Warren Buffett's investment in both GE and Goldman Sachs. Investment in perpetual preferred stocks is usually a good way to invest in good business as long as the firms survive, and obviously Buffett thinks both will. I tend to agree too. However, even both GE and Goldman survive, not many people realize these investments are at the large expense of the existing common shareholders. In GE's case, GE is using Buffett's name and investment to raise $12 billion in a separate public offering to dilute their common shares, not counting on the $3 billion of GE warrants, causing potential more dilution. Almost all GE industrial units are doing fine since they are usually #1 or #2 in the sector and have some monopoly price power. The biggest risk for GE is their GE capital unit, which never reveals their portfolio based on illiquid asset securitization and OTC derivatives, similar to highly leverage investment banks. And unfortunately it accounts for half of the GE earning power. If GE Capital is in the same trouble, GE will likely have to shut down this division, write down large losses of their portfolio and lose half of their earning power but as a conglomerate, they will still survive. The problem is in an economic depression with decreasing revenue and much worse profit margin, GE's earning will be depressed substantially, but still has to honor the large interest payment to Buffett on the new preferreds before common shareholders see their dividends. In Goldman's case, it is even more so and a much risky investment than GE. The largest expense for investment banks is compensation, and they always issue many new shares to retain talents besides cash bonuses every year. That is typical and part of their incentive program. In an economic depression, there is likely no banking deals, not much trading activities, especially no more highly profitable structured products like before. Goldman's net income could be running less than $1 billion at its worst years (like Morgan Stanley today). However, they have to pay Buffett $500 million, 10% interest of his $5 billion investment every year. What is left for common shareholders with their shares
diluting heavily each year? The incentive program becomes a demoralized program. Both deals are really very negative to common shareholders, taking a large piece of the net income pie and shifting from commons to preferreds.

From where the stock price and credit derivative swap are trading at for Morgan Stanley, it is pointing them to be another Lehman. The original tentative discussion with Mitsubishi UFJ Financial Group by investing $9 billion for 21% stake then can buy the whole Company last Friday. No wonder people are questioning whether this deal makes any
financial sense at all. What is also interesting is that there has been a very popular blog in China, discussing in detail a high level special interest group inside China SWF and banking system, using their relationship with top managers of Morgan Stanley and Blackstone for alleged corruptions, kickbacks, abusing power, questionable investments going sour, luxurious life style, etc. Usually Chinese government would have ordered the removal of such kind of "un-harmonized" blogs right away, but not in this case. There is wide speculation of anger by some government officials toward the China SWF fund investing in Morgan Stanley, Blackstone and all the US home mortgages and derivatives, for the purpose of nurturing their own personal relationship and self-interest but letting the whole country down. It is always a bad thing to make your investors angry by losing their money, especially this time it is their boss, the Chinese government which now realizes that they would never get any return and worse at the edge of getting wiped out on their investments. There are also many angry investors in this country too, causing the House to defeat the$700 billion bail out plan initially. If without Wall St.'s creativity on structured products, subprime crisis could be easily contained, even with widespread abusive lending practices.

The problem is for $1 of subprime mortgages, Wall St. created $10 CDO products, then the math geeks at structured product groups escalated the $10 CDOs by creating another $100 OTC derivatives out of thin air (refer to my previous article "Why Wall St. Needed Credit Default Swaps?"). Now suddenly, a $700 billion default in subprime would cause $7 trillion default in CDOs and $70 trillion losses in CDSs, a crisis 100 times larger than it should be. Now you know why Wall St. is so profitable because in only past 5-10 year's time, they have already sucked the blood and "profit" of not only this generation but the next. If government is serious about bailout, the size will likely be 100 times larger than $700 billions.

Not long ago, with no market for CDOs, Merrill was forced to sell CDOs at 20 cents on the dollar by creating a market. But that was not the most interesting part, Merrill had to self finance 15 cents out of 20 themselves, leaving a suspicion that those CDOs were really only worth 5 cents. This act forced other banks to mark down CDOs in their portfolio further, however, at 20 cents not at 5 cents, helping other banks to shore up the value of their portfolio than they are really worth. Even so, any asset writedown has to be matched by equity. There is really no more equity to write down for many banks, and no way to raise new equity, only heading liquidation. Since debt stays the same, debt to equity ratio, or so-called equity ratio, has to be reduced in the current deleveraging process, not to be increased. As a result, a writedown causes more writedowns, and it becomes a death spiral of no way out situation.

In the summer of 2007 last year (not 2008 this year), Jeremy Grantham also predicted half of the hedge fund will get wiped out, and more than half of the private equity will vanish. Let us just look at private equity sector. In the boom years, they can achieve 50% return easily. Let us look at a hypothetical deal that a PE Firm A with 2+20 fee structure, purchased Company B at $4B with $2B borrowing at 6%, netting $1B in 2 years by IPO, a very typical deal in the good old days. It is 50% return ($1B/$2B investment) for the PE firm. But for you as a PE investor, your share of return is: $1B profit - $0.08B fee (2%*$2B*2 yr) - $0.2B PE profit cut - $0.24B interest ($2B*6%*2 yr) = $0.48B, or 24% return ($0.48B/$2B). Suddenly the same deal seems to achieve 50% return (for them), the real return for clients is only half of it.

Now let us use the same example above but let us say the equity market enters into a couple years of bear market as of now. The same deal now takes 5 years instead of 2 years to spin off in an IPO. What would the return for PE clients be?

The answer is ZERO. It is: $1B profit - $0.2B fee (2%*$2B*5 yr) - $0.2B PE profit cut - $0.6B interest ($2B*6%*5 yr) = zero. 5 years for nothing. The extra 3 years of interest payments and excessive 2+20 fee structure eat all the remaining profit. For all the corporate pension funds, state and local government retirement funds, endowment funds and foundations rushing to invest 10-20% of their investments into private equities, do they realize investing in 5% US treasury per year (27% for 5 years compounding) would actually offer better return and carry no risk at all (except the risk of holding US dollar)?

In the above calculation, I didn't factor in a long recession with a decade of bear market, resulting reduced revenue with deteriorating profit margin, and potentially large loss instead of profit for business they purchased. No need to show more calculations. This is why Jeremy was so confident about his prediction still in the middle of the bull market last year, with margin of safety by predicting only half of them dead. Now with time against them, no credit for any financing, and no equity market for IPO for a decade for them to cash out and dump the risk to the public, the likely scenario is the whole private equity sector will get wiped out in 2 years by 2010, just like the investment bank sector.

For a decade long recession and likely depression, the only firms that will survive are those preserving cash by cutting workforce, stopping capital expenditure, R&D and IT investments, cutting stock dividends including preferred dividends, no more stock buyback even stock prices going to zero. Things will get very nasty, only firms that can still manage to generate net cashflow during depression are survivors, like in 1930s and 1970s. Newer companies with experimental technologies will be vulnerable and regarded as nonessential, and undercapitalized private firms will be in trouble since IPO window will be shut for an unforeseeable future. Venture capital firms will have to hold on to their investments forever, at least another decade, without IPO in sight, until all their cash being burnt out. Many firms relying on bank financing will not survive. The only business will survive are likely the cashflow positive energy firms and mining producers.

Pretty soon, people will realize holding cash in US dollar is also not right due to quick deterioration of US dollar. The current rise in US dollar is due to short term disappearance of money supply since no bank wants to lend any money out. Once the government socializes the banking industry and flooding the system with worthless paper, people will downgrade US treasuries before rating agencies do, since US government is buying and holding the worst quality mortgages and CDOs dumped by the banks.

In a normal bankruptcy process for investment banks, common stocks, preferreds and subordinated debts would get wiped out, and bondholders would act as cushion and suffer some losses, but usually customers and trade partners are protected. The current bailout plan, and the previous BSC bailout, AIG bailout, are all using taxpayer's money to bail out the bondholders and perferreds which are held mostly by institutions. It is basically to wipe out the individual investors then to use taxpayer's money to protect the large institutions. Individuals have already dumped stocks, institutions have already dumped bonds, derivatives such as CDOs and CDSs, the next thing will happen is that both, especially foreign central banks, will dump US treasuries too by buying the ultimate asset everyone in the world trusts - Gold. The reason is people will realize this is worse than 1930s, at least then, fiat money was backed by gold, now US dollar is only backed by liabilities of over $10 trillion national debt and 10 times larger unfunded obligations and promises if we include Medicare, Medicaid, social securities, pension liabilities, Fan and Fred's trillion mortgages, and the future purchases of the whole defunct banking industry, auto industry, airline industry, etc. etc. Government can't only socialize the money losing sectors, and taxpayers and lawmakers have only so much patience and can't tolerate this forever. Pretty soon, government will need to take over a profit sector, such as energy firms, to offset some of the losses. It is going down the slippery path of socialism quickly. This is going to be a nuclear winter for many years to come. No wonder many years ago, George Soros has correctly predicted that there is going to be the end of globalization, and the death of capitalism. This is the payback time for all the abuses few elites have done to our whole society but the public is now footing their bills. If G7 is serious about bailing out the global economy, the only way to do it is to have double digit hyperinflation to inflate the whole world out of depression at any costs. And they have to do it now.
They can't be half-hearted either, otherwise it will end up to be the worst nightmare of hyperinflation combined with great depression. This means all commodities will skyrocket and the current slump of commodities would provide the best buying opportunity before oil goes to $200 and gold to $2000. When people lose faith in fiat money, next thing to happen is barter like Weimer Republic, where only commodities, especially gold, are treated as money.

In this difficult period, do nothing and hold nothing but gold. Only gold, the ultimate asset that has survived the longest in human history, can save us now. A specter is haunting the world - the specter of gold, while the old fiat money has lost all its powers.




Thomas Z. Tan, CFA, MBA
Those interested in discovering more about me and reading my many other blogs can visit web site at www.vestopia.com/thomast.

Disclaimer: The contents of this article represent the opinion and analysis of Thomas Tan, who cannot accept responsibility for any trading losses you may incur as a result of your reliance on this opinion and analysis and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Do your own due diligence regarding personal investment decisions.
Copyright © 2006-2008 Thomas Z. Tan



http://www.swaninvesting.com/The_Survival_of_the_Longest.pdf

Fix Your Portfolio Now!

Fix Your Portfolio Now!
By John Rosevear November 20, 2008 Comments (5)

"The world breaks everyone and afterwards many are strong at the broken places. But those that will not break it kills." -- Ernest Hemingway, A Farewell to Arms

I've never had much fondness for Hemingway, but I always loved those lines, which I freely interpret to mean something like, "Everyone gets roughed up by experience. If you learn from it, that roughing up can be of great value. If not, be prepared to get roughed up again and again."

The market roughs everyone up, too. Yes, everyone. Even Peter Lynch and Warren Buffett have taken huge lumps from time to time. Not for nothing does investment manager and author Ken Fisher refer to the market as "TGH" -- the Great Humiliator.

And wow, have we been roughed up lately. It's not over, either -- while it's possible the stock markets have found their low points, there's clearly a rough economic grind ahead. If you're an employee of Citigroup (NYSE: C), General Motors (NYSE: GM), or any other company that's discussing difficult cuts and painful reorganizations -- and not too many companies aren't -- things could get a lot rougher from here.

But even if you stay gainfully employed in a job you love until it's time to retire many years from now, your portfolio has probably taken quite a hit lately. What can we do to make the most of what we have left?

Taking a hard look at where you're at nowIf you've avoided looking at your portfolio recently, that's understandable -- but in order to take action, you need to know how much damage you've really taken. And yes -- now is the time to take action, while the markets are staggering, while other investors are demoralized.

Yes, now. Just about everything is down right now. High fliers and sturdy recession-resistant businesses alike are sitting near their 52-week lows. And while the latter have, generally speaking, fallen less than the former, they're also more likely to make you some money between now and the end of this mess. While there are a number of steps you can take right now to improve your portfolio, a move to better stocks is one that could deliver the biggest rewards.

Buys for right now

How can boring stocks make you money while the market is down? With dividends, of course! While it's true that no dividend is safe in a really deep recession, the ones paid by boring-basics businesses are less vulnerable than most. Kleenex kings Kimberly Clark (NYSE: KMB) are sporting a 4% dividend yield at current prices. Pharmaceutical cash machine Pfizer's (NYSE: PFE) yield is 8%. On the other side of the health coin, Altria (NYSE: MO) sports a yield that's also approaching 8% -- and speaking as an ex-smoker, I can attest that demand for cigarettes isn't likely to dive too much in the face of something as nerve-wracking as a massive worldwide economic meltdown.

On the other hand, there's a good argument for buying the beaten-up high fliers that are likely to fly again here, while they're cheap. As I write this, Apple (Nasdaq: AAPL) is within a few cents of lows it hasn't seen since early 2007. Marvel Entertainment (NYSE: MVL), a company thought by many to be in the early stages of a long-growth trajectory, is also closing in on 52-week lows. If those two manage to hold the line in the near term and recover their growth mojo in the longer term, buying them here could look like genius in a couple of years.

Those are big ifs, though. With so much uncertainty, it's important to step carefully.

One way to maximize your chances of a good buy in this difficult environment is to stick with opportunities vetted by experts with a good track record. The team at the Fool's flagship Stock Advisor newsletter has been through the recession wringer before, and is sifting through the post-crash rubble looking for the best buys in all corners of the market.

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Comments from our Foolish Readers
Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment icon found on every comment.

Report this Comment On November 20, 2008, at 5:16 PM, SteveTheInvestor wrote:
Stock Advisor? Oh... you mean the portfolio that's down what, 16% after 6 or 7 years? Doesn't inspire much confidence if you want some honesty. When we should have heard suggestions to pare back on stocks, all we got was "buy now" because they are "on sale" and "poised to pop". I got whacked big on Stock Advisor stocks but if I had not finally chosen to ignore the advice and sell some things, my losses would now be double or triple that.
Yeah, I know.... think long.... and here's what Warren said. Based on the history, I guess you need to be about 20 years old to have a long enough time frame, huh? And Warren? Frankly, I don't care.

Report this Comment On November 20, 2008, at 6:04 PM, PapaRossi wrote:
I fixed my portfolio, I sold off all of the MDP stocks and resigned my membership and my portfolio went from neg 8% to a pos 87%.
After numerous warnings to the MDP about the future direction of the stock market which were ignored by the team and laughed at by the fools.......Well Papa's laughing now...;-))

Report this Comment On November 20, 2008, at 6:27 PM, DefinedRisk wrote:
I wouldn't buy anything without some downside protection. What indicates that this is the bottom? How much worse can it get? I don't know, but going forward using the old fashioned 'buy & hold' or 'modern portfolio theory' (yes that is now old fashioned to me) principles is suicide. Defined Risk Strategies have proven effective since 1997. They eliminate most of the downside risk and participate in market growth.... what could be better? Learn more: http://www.swanconsultinginc.com/

Report this Comment On November 20, 2008, at 7:23 PM, fe3lixallen wrote:
comments....
This one is good:
"if you want some honesty. When we should have heard suggestions to pare back on stocks, all we got was "buy now" because they are "on sale" and "poised to pop"'
this one is good also..
"Yeah, I know.... think long.... and here's what Warren said. Based on the history, I guess you need to be about 20 years old to have a long enough time frame, huh? And Warren? Frankly, I don't care."
Hey guys.. don't you get it? Buy and hold and think "long term". Reeeeeeal long term. Ha ha.
Lots of college educations and retirements may have been ruined. But, "long term", who cares? Not TMF, apparently.
Long term.. we are all dead.
TMF should have seen what was coming ecomically. What's worse, they are seeing the confirming "data" now and still not doing anything about it. TMF had no plan for an extended bear market - and they have none now. They keep saying "no one knows which way the market will go". But, doesn't common sense tell you that in an environment of world-wide deteriorating economics the bet "down" would seem to make more logic than the bet "up".
No rocket science degree necessary.
If you don't know how to deal with another big, big drop - it's time to "get out" or seek other advise. There is a very real possibility (not high probability but real possibility) for another 200 S&P point decline. If you want to, and can afford to take the risk - do so. Otherwise, put your money in a guaranteed savings account and save what you have left.
.

Report this Comment On November 21, 2008, at 10:11 AM, TheDash9 wrote:
I'm liking Muni Bonds these days. http://www.molifeney.com/content/view/120/57/

http://www.fool.com/investing/general/2008/11/20/fix-your-portfolio-now.aspx


Comments:

Not unexpected comments.
It is difficult for investment advisors in this difficult period.
Consequences and not probabilities should determine the actions taken by each investor.

Sustainability of business performance

Sustainability of business performance

Charlie Munger once said:
Frequently, you'll look at a business having fabulous results, and the question is: ' How long can this continue?' Well, there's only one way I know to answer that, and that's to think about why the results are occurring now - and then to figure out the forces that could cause those results to stop occurring.

We have learnt that there is no mystery to measuring business performance. The numbers will tell you whether the business is good, fair or bad. Neither is there any point in hopng that things will change.

Buffett makes the point with some humour: Think of it in terms of marrying some gal that's the girl of your dreams, and having another one and saying, 'If I send her to the psychotherapist for five years and hve some plastic surgery, well maybe it will work'.

A business may have a fabulous track record of performance, and the value based on it may make the price look cheap. However, the price will only be cheap if the performance criteria used to determine the value are sustainable. We must, as Charlie suggests, 'think about why the results are occurring now - and figure out the forces that could cause those results to stop occurring'.

When researching a company, the positive glare of the highlights tends to obscure the dim glow of the negatives. We must be aware not only of the positive manner in which a company's history and prospects are protrayed by management, but also our inherent desire to encourage optimistic expectations by placing excessive weight on positives.

Conversely, one should not become paranoid about negatives. For instance, if you were looking at two great businesses such as McDonald's and The Coca-Cola Company, you might be deterred by all the publicity about how fast food and carbonated drinks are major contributors to obesity and heart problems. These are not new concerns, so examination of the accounts will tell you whether they have had any effect on revenue.

Also visit: http://whereiszemoola.blogspot.com/

Buying gold as a safe haven

Ask the Expert Retirement questions answered


Buying gold as a safe haven


By Walter Updegrave, Money Magazine senior editor
November 5, 2008 5:06 pm


Question: In the midst of the turmoil on Wall Street, I’m thinking of investing in gold, specifically bullion or gold coins. Do you think this is a good idea? —Roderick Gaerlan, Redondo Beach, Calif.



Answer: Ever since the financial markets began going haywire this year, I’ve been getting lots of emails from people who are considering buying gold as a way to weather the crisis.
That, I can understand. Investors have come to see gold as a refuge in a sea of uncertainty and volatility, an investment that will hold its value even as the world collapses around it.


What I can’t fathom, though, is how gold acquired and manages to maintain this reputation as an anchor of stability. It doesn’t make sense.


I mean, just look at a chart that tracks the price of gold so far this year. It started out at about $850 an ounce in January. As oil and gas prices started to climb and pundits began predicting that oil might hit $200 a barrel, gold quickly shot up, spiking as high as $1,011 an ounce in March.


After breaking the thousand-buck barrier, however, gold retreated and began bouncing around in a trading range of $850 to $950 in the spring and early summer. It flirted with its previous high briefly in July, hitting $986 an ounce, but then dipped back below $750 in September. It rallied again to break $900 an ounce in early October, but has since dropped below $800, closing out October at $731 an ounce.


So let’s see, that’s a 19% gain from the beginning of the year to its March peak, then a 26% drop from March to the September low, a 20% rebound to early October and then another 19% decline to the end of the month, putting gold 14% below where it began the year and 28% below its March high.


The point isn’t so much that as of the end of October gold was in the red for the year to date. It’s that if you’re looking to avoid gut-wrenching ups and downs, this isn’t much of an improvement from the stock market. It’s kind of like getting off Six Flags’ Kinga Ka rollercoaster and jumping on Coney Island’s Cyclone. The drops may not be quite as steep, but you’re still in for a white-knuckle ride.


That’s not to say that you can’t make money in gold. You can if you’re able to get in and get out at the right time (although, human nature being what it is, most people are eager to buy when gold is in the news and prices have already jumped, not when it’s unpopular and its price is languishing).


And since gold prices are not highly correlated with stock prices, you can also make a case for investing a small amount of your assets (maybe 5% to 10%) in gold as a way to diversify your portfolio.


I’m not a big advocate of this approach, but if you’re going to do it, I’d say precious metals mutual funds or a gold ETF is a simpler, cleaner and better way to go than buying coins or bullion. (I’d also add that you have to be willing to rebalance your portfolio periodically for this strategy to work.)


I don’t think it’s ever a good idea to move all of your investment stash into any safe haven or, in the case of gold, putative one. As I’ve noted before, the money you’re investing for longer-term goals like retirement should be invested in a blend of stocks and bonds that’s appropriate given your risk tolerance and how long it is until you’ll need the money.


That said, virtually all of us also need to keep some portion of our assets protected from the ups and downs of the financial markets. Here, I’m talking about an emergency fund or, in the case of retirees, an account that holds 12 to 18 months’ worth of living expenses.


But the right place for this segment of your portfolio is a totally liquid and secure investment such as a high-quality money market fund, short-term CDs or savings account, not gold. For, whatever other qualities it may have to offer, stability of principal is not one you can count on from gold.



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Filed under Uncategorized79 Comments Add a Comment

Hey Robin if gold is not a safehaven…what is? The dow? Nasdaq?Good luck, there down nearly 40%, gold down less than 10% year to date….Just watch gold when hyper-inflation takes over.
Posted By Keith S, NY NY: November 16, 2008 2:16 am

Gold as safe a haven is a bogus concept. Here we sit on the verge of the biggest economic disaster since the great depression. With two wars being fought, and gold has dropped from its March 17 high of $1030 to $730 as of todays close. I might not be a financial wizard, but I would venture to say whatever gold might be it is not a safe haven.
Posted By Robin Queens NY: November 11, 2008 6:12 pm

Hey Gaucho420 Great advice! Maybe you shoud put your portfoilio in the U.S. dollar. Like gold it cant be eaten drank or used for protection. however I bet when hyper-inflation kicks into high gear. It will make excellent toilet paper or could be used to start a fire.
Posted By Jerrod Napa Valley CA: November 11, 2008 11:48 am

Yes, excellent Gaucho420, that’s the spirit! Of course you can’t eat or drink gold or expect it to defend you. On the other hand, you can buy things with it, like food, drinks, and guns, when paper is inflated away to nothing. And guess what, you don’t have to leave the country in an economic crisis, but the last place I’d want to live would be L.A. or any other large city when all the have nots decide they want what’s yours! PM’s are a hedge against stupidity and government paper promises, and even if the price drops they are always worth more than paper. Ask anyone in Argentina, or Iceland, if they wish they had gold or silver now. PM’s are universal money, always will be.
Posted By Marc, Toronto, Ontario: November 11, 2008 11:11 am

There is a big disparity between the paper gold price, and the physical metal price by over $130 premium per ounce…Comex price is being manipulated by the Govt. Just like the lie-bor, and the dollar.
Posted By Keith S, NY NY: November 11, 2008 12:37 am

And I’ll add this tidbit…I’ve seen money runs, Argentina…and you know what people really wished? That they lived ELSEWHERE. So if you are one of those waiting for armageddon or a revaluing of currencies, perhaps into DOLEROS, a true foreseer would leave the country, go to one backed by gold or deemed safer and then wait.
Its funny to read these gold freaks, because if they truly beleived the convinctions of their arguments, they’d be packing up and heading out, and not blogging below CNN.com
I’d also advice a security detail, because gold can’t defend you either.
Posted By Gaucho420, Los Angeles CA: November 10, 2008 9:26 pm

Only the idiots and uneducated actually think that gold is somehow the miraculous savior should the Dollar fall…what they don’t realize is if the Dollar falls, so will every other currency, including gold…you can’t live, eat or drink gold, yep people treat it as if you can.
Its only worth what we beleive its worth and does not sustain human life, in the same way the dollar does. They’re many more rare & precious metals out there, but they’re not as pretty, apperently.
In tough times, the crazies come out…that’s one thing that’s been proven right during these times.
By the way, what was the Dollar backed by in the 1930s? How about during WWI? WWII? Funny, where was gold to save us then?
Get educated, not stupid.
Posted By Gaucho420, Los Angeles CA: November 10, 2008 9:18 pm

HAHAHAHAA! What a bloodbath of comments! “Ask the Expert” indeed! The commentators are the experts, with a few idiotic exceptions. Sure gold can get the bum’s rush all the way down to the $100 -$200 range, sure it can get so cheap you can pave your driveway with it, sure the sky is pink!
Boohoo! A little volatility scares the author? What do you think is causing it? Panic selling of paper gold, millions of ounces equivalent, that doesn’t even exist. When the December Comex contracts expire, watch the mad scramble for precious metals, real metals, drive the price back to a decent level. And he suggest investing in more paper assets? Those same assets backed by nothing but a promise?Walter Updegrave’s comments are a perfect example of the pandemic idiocy that pervades the gold debate. He actually only looks at gold’s performance for the last year, instead of, say, the last 5. You can paint any picture to suit your needs on a short enough timeline! Look at gold for the last month! OH MY GOD!! ITS TANKING! BAIL BAIL BAIL!! HAHAHAHAHA! Yes, please sell, I need some more.
Posted By Marc, Toronto, Ontario: November 10, 2008 6:15 pm

When the money creation policy of the Federal reserve brings an end to this deflationary period. As it most certainly will. The United States will see a period of hyperinflation. At this point in time it is reasonable to expect Gold will rise but all commodities will dramaticly increase in dollar denominated price. I say not only buy Gold, but buy silver. And while you are at it load up on can meat, rice and other non perishable food items.
Posted By Dick Stroker Superior WI: November 10, 2008 5:33 pm

Hey Jason in AustinIn a fiat money system, where money is not backed by a physical commodity (i.e.: gold). The only thing that gives the money value is its relative scarcity and the faith placed in it by the people that use it. Thanks to the Federal Reserve there is no scarcity of money, as a matter of fact there is no restrain at all on the amount of money that can be created. This allows unlimited credit creation. Hyper-inflation is the terminal stage of any fiat currency. In hyper-inflation, money looses most of its value practically overnight.The framers of the constitution had the insight to be concerned with the unrestrained creation of currency and all agreed upon limitation on the issuance of money. By backing money with gold a finite substance, as was done periodically through history. We avoid the risk of currency collapse.
Posted By Meg Olson Duluth MN: November 10, 2008 5:11 pm

Robert, you clearly don’t know what you are talking about.
In gold, open interest has fallen from 500,000 to nearly 300,000 over the past several months. Speculators have been told that they are non-economic customers and cannot demand delivery. This activity by the COMEX is clearly unethical and criminal.
Posted By Alex, Washington DC: November 10, 2008 10:43 am

Lets look at another rational: suppose you have 100K in cash to invest somewhere. So you invest that in gold coin when the market price is in your favor and you actually take delivery. Sure the price may fluctuate, but you know with some certainty that the real boogy man is hyperinflation and when that happens, (and we’re well on our way down that road) Gold being actual currency will hold its value and your money will retain its value: but the deal is you never sell it. Its loan collateral: you rcan’t really take your mutual funds to any bank (here or abroad) in times like these and turn that into instant cash. That’s the enduring value of gold.And decades hence, gold will be trading in its revalued price worth thousands per ounce in today’s (old) dollars. Or new Ameros as the case may be. Buy gold. You bet. Case closed.
Posted By Jon Ryan Seattle WA USA: November 9, 2008 9:51 pm

You can lead a horse to water but you can’t make them drink. Walter will be in those long food lines likened to the 1930’s. Too bad.
Posted By Kevin Rathdrum, Idaho: November 9, 2008 4:15 pm

The “expert” should have read the question which was related to gold coins and bullion. Instead, he wrote about paper gold, completely and utterly missing the point. Waste of time article.
Posted By Jim, Redondo Beach, CA: November 9, 2008 10:06 am

Robert, you’re confusing me. You say there’s no physical shortage…and yet dealers can command a premium of several percentages over spot, which also are several percentages less than you can get if you auction your gold coins on ebay. You also say you bought 20 bars (at 100 oz. a bar that’s 2,000 oz. at $455 per ounce that’s $910,000) and you sold the same for $850 per ounce in October. By my calculation that’s a profit of $790,000! If my figures are accurate I nominate you for gold bug of the month!
Posted By chuck, charleston, s.c.: November 8, 2008 7:58 pm

When I graduated from college and started to work 46 years ago, you could buy a house for $20,000 or roughly 600 ounces of gold.
Today, $20,000 will not buy you a house. Six hundred ounces of gold will.
Posted By Anonymous: November 8, 2008 1:45 pm

Like any investment with potential for significant gains, gold has a measure of volatility. Rather then focusing on month to month flucuations. Ride this bull market to the parabolic stage and then jump off. Gold is still incredibly undervalued, and over sold. If you cant handle the price swings maybe this is not the investment for you. However if you have the nerve, and can allocate a portion of your portfolio to gold, you will be generously rewarded.
Posted By R.Olson St.Paul MN: November 8, 2008 10:59 am

NOTHING WRONG WITH PHYSICAL GOLD
There is nothing wrong with holding physical gold, as distinguished from gold funds.
If you want to buy gold, you should buy it from a broker who sells raw gold, like gold coins. But don’t take them home with you. They have a way of “disappearing” when you hire a mover or have your druggie cousins visit overnight.
If you must, store them in a bank vault. Look, if you are in real fear of our financial system demolishing, you should be willing to spend enough to purchase a large bank deposit drawer.
But forget the gold funds. They are no better (or worse) than the regular markets.
sanjosemike
Posted By Mike Rose, San Jose, CA: November 8, 2008 10:54 am

Great responses. The commentators on this article are more knowledgeable and present better arguments than the author.
Posted By Robert F Marley, Wilmington DE: November 7, 2008 5:48 pm

gold is a sell, all the way to 650 oz, short term, maybe even beyond Q2 of 09. i dont think physical gold is the best place to put your money - why stay static? if you want physical gold, sell 600 put options on COME, ~$900 premium collected on a 100oz contract basis FEB 09. either way, the best advice should just be: “ask your financial planner if gold is right for you” followed by the disclaimer that states investing in gold my cause anal leakage, dryness of the mouth, and impodence, etc, etc.
Posted By C, CA: November 7, 2008 12:52 pm

I’ve been trying to buy gold coins (gold eagle etc) and can’t find any available! Where do you actually buy this stuff if you want physical possession?
Posted By Paul - Columbus Ohio: November 7, 2008 11:51 am

The price of gold is linked to the value of the dollar more than the value of the stock market. One can see how the Dollar has roared back against the Euro and the Pound, so it is not surprising that Gold has dropped in US dollars.
Many Precious Metals Mutual Funds are Mutual Funds of Stocks (Gold Miners) rather than of Gold itself. These stocks are not immune to the across-the-board haircut taken by the stock market this year.
But we are now in a time of “change”. Don’t be surprised if things start to move before the end of the year.
Posted By Dan, Columbus, OH: November 7, 2008 10:16 am

Why do these *financial planners* keeping advising us to buy GOLD ETF’s or Mutual Funds when most people seek advise on buying the metal, the actual piece of metal!
Does anyone see the irony in the advice?
Posted By Praveen, Tampa, FL: November 7, 2008 10:03 am

If it all falls apart, the last thing I am going to be looking for is physical gold. I think the discussion is irrelevant, if really bad times were to arrive.
Posted By B, Dallas, TX: November 7, 2008 9:14 am

Ask the Argentinians if they wish they had gold when their currency went down…
Posted By Phil, NC: November 7, 2008 6:39 am

Physical Gold and paper gold have decoupled, leading to a run on physical gold and silver from COMEX which has ONE PER CENT, not 10% to cover its paper, similar to leveraged CDO’s, a disaster in the making this Dececember.
Gold ETF’s and mines have DIVERTED cash from the gold market, since investment there drains interested investors from the “real deal”–lower demand, gold suffers.
And, investors have been selling good investments, like gold mines, to offset bad investments in their “diversified” (meaning shotgun or confused) portfolios.
FIVE TRILLION is US printed dollars alone, is set to cause hyperinflation in about 18 months. The US dollar is about to make US look like Zimbabwe.
It is true gold has declined from $1050 to its current level, the old high of about $750 the year before.
Instead of viewing this successful retest of the old high as the new low, idiots who buy high and sell low, are calling that retracement a trend, when you should be thinking, those miner stocks, and those gold bars, are “ON SALE”.
Buffet says, buy when others panic, sell, when others see the high.
Of course, what do I know, and more importantly, what does he know?
Posted By Bletsu Fatsamatta, Long Island New York: November 7, 2008 4:22 am

Gold, and many other precious metals such as silver are tremendously underinflated right now. Just try to go out and buy the actual gold coins. You are going to pay a premium over the spot price. The value of the stock doesn’t reflect the value of the metal itself. The stock price doesn’t mean anything. You couldnt’ lose with metals right now. Its WAY TOO CHEAP.
Posted By Avi LA CA: November 7, 2008 12:26 am

I am astounded that people consider gold an investment superior to any other, or that the value of the ‘dollar’ or any other currency should be tied to gold.
Gold is a commodity!
Gold is used as a raw material in electronics manufacturing, in art and jewelry.
Sure, it has had a long history as a medium of exchange due to its scarcity and its beauty.
Keeping ‘real gold’ in an investment portfolio should be viewed as keeping a commodity in a portfolio. Or a safe deposit box.
Keeping ‘gold-mining stock’ in an investment portfolio should be viewed the same as any other mining stock.
Ultimately, though, you have to remember you are expecting that you can find a sucker out there to pay you more for your ‘investment’ than you paid for it yourself.
What is interesting is how the price of gold has been sagging along with the drop in stock-market values. Something has changed.
Reading this column and some of the reader responses reminds me of football team analyses, a whole lot of hooey and speculation.
I admit that I do not own any gold coin, bullion, or mining stocks, although I have considered such due to the industrial consumption of the metal.
Posted By Jason Stoons, Austin TX: November 6, 2008 11:16 pm

Gold is not volatile the dollar is volatile. Gold is gold but what is a dollar?
The price of a dollar was fixed at 1/35 oz of gold between 1933 and 1971 when Nixon defaulted on the United States’ international gold obligations. Since then the dollar has dropped like a stone, losing about 95% of its value in terms of gold.
Posted By Goldfinger: November 6, 2008 9:53 pm

Gold is a must in protfolio. It is a hedge against the US Dollar, Oil and crisis. There are many critics of gold but as a long term investment it has its merits. In the world of Peak Oil gold will respond. If the dollar starts a reversal gold will perform but the most significant fact remains. If you bought the DOW on 30th September 2002 when it was 7591 and you bought gold on the same day when it was US$323 you would be better off today 6th November 2008. This is despite all the gold selling to cover massive losses by hedge funds , redemptions etc
Posted By Bob Williams Redondo Beach California: November 6, 2008 8:12 pm

That was a very bias and foolish response to someone who is looking for a safe haven. Gold is real money not fiat currency that is worthless. If you could be sued for such stupid comments you wouldn’t be working for CNN.
Posted By Troy King, Tempe, AZ: November 6, 2008 7:52 pm

Most Americans don’t know what it is to live through the collapse of your country’s currency, like Mexico in ‘94, Argentina in ‘02, or Zimbabwe in ‘08. Simply put, if you owned gold or dollars, you didn’t lose your wealth. The Fed’s injection of large amounts of dollars to save the economy has a diluting effect on the real value of the dollar, just like the countries mentioned. You may soon need 2 or 3 dollars to buy a Euro, or 1500 of them to buy an ounce of gold.
Posted By LC, Monterrey, Mexico: November 6, 2008 7:41 pm

You cannot compare gold prices between 1933 and 1971, remember during that time the price of gold was set by the government and ownership was restricted to artists and dentists.
Gold is also subject to vast variations based on available supply. The vast increase in available gold in 1849 led to major inflation. Whilst gold is technically in finite supply, when the price rises, so do new stocks of gold (when it costs $800 to mine a ounze of gold, only a fool would mine it it the price is $300), the point is, as price rises, so do new mining techniques.
Posted By Greg, Atlanta, GA: November 6, 2008 7:05 pm

Robert, you are right we have enough gold. but we have more than enough US dollars and we will print more in the coming years. So based on the supply and demand, do you expect people can use those US green papers to buy physical gold at a cheaper price?
Posted By Jason, LA, CA: November 6, 2008 6:12 pm

Gold is easy to find, just has a high premium due to the panic purchases of October. This whole notion of Comex price dislocating from reality is just more gold bug stupidity. Case in point, as gold trailed down in price in the last 45 days, so has the price of bullion purchases. This is clearly documented via reputable online bullion dealers. If there was such a dislocation and/or shortage of gold, the bullion dealers would NOT have dropped their prices in the last 45 days.
Those thinking that gold contract purchasers will demand delivery and break the COMEX exchange are in for a rude awakening. Just as all these brilliant masters of money think they are draining the exchange by BUYING contracts, they are just taking delivery of those SELLING their bars for profit. I took delivery of 20 bars back in 2005 at an average price of $455 per ounce. Sold 20 contracts this October for $850 ounce and know of many more who are looking to deliver on these December contracts.
Spot premiums, price paid over spot price, will subside in coming months. Don’t believe in shortages, exchange defaults, cartels, cabals, currency collapse and so on. Buy the GLD ETF at best. If the world goes to hell and the currency collapses, these gold bugs will be curled up in the corners of their homes clinging to their precious metal crying that their chat boards have disappeared.
Posted By Robert, Long Island NY: November 6, 2008 5:24 pm

The link to the Precious Metals mutual funds showed them all down over 60%. How is that a market hedge?
Posted By Lancaster, PA: November 6, 2008 5:04 pm

Mike,
What your missing here is the decoupling of physical gold/silver from it’s paper COMEX counterpart. Having $20 US gold coins would bring as much and in my case more than when gold went over $1000. Premiums are anywhere from 25 to 50% over it’s quoted COMEX prices for gold and silver which is usually around 3 to 5% on the buy and sell side. This has been caused by hedge funds selling and shorts on the COMEX by a few major players with evidence of 2 or 3 or these being big banks.
The COMEX game in over in the December contracts when investors will demand their PM’s instead of cash since there’s such a decoupling IMO. The estimates I’ve seen is they have about 10% product to cover on the gold side and 12% on the silver, that’s a big problem. Either the COMEX fails or it comes up to close the gap. Silver isn’t held in any large quantities by governments so it can’t be bailed out like gold where the IMF and Central Banks could sell to keep this afloat this time but not in the future. The real question is how much gold on the books have been leased already and is double booked, many think quite a bit of it .
Posted By Rick,Tulsa OK: November 6, 2008 4:01 pm

Just my two cents worth: Look for sound investments, and don’t get advice from people who are trying to sell you something. For example: when gold prices topped $1000, gold people said “Buy it now before it hits $2000!” When prices crash back down to earth, they say “Buy cheap gold now! Great buying opportunity!” They really have no idea what’s going to happen to the price. The only certain thing is the cash flow they receive from sales premiums.
Posted By Mike, Dayton OH: November 6, 2008 3:06 pm

A lot of comments seem to be missing the point of the article. He doesn’t say that gold shouldn’t be a part of your portfolio. He doesn’t even say that it won’t continue to go up. He’s just saying that gold is also volatile and shouldn’t be considered a safe haven. Heck, it’s the title of the article. A quote from the article, “The point isn’t so much that as of the end of October gold was in the red for the year to date. It’s that if you’re looking to avoid gut-wrenching ups and downs, this isn’t much of an improvement from the stock market.”
Posted By Pat, Las Vegas, NV: November 6, 2008 1:31 pm

Does anyone know why the price of Gold went from $35 an oz in 1971 to $850 an oz in 1975 when OPEC officially priced oil in US Dollars?
Very simple you couldn’t own gold until Nixon signed a bill in 1974 to allow gold to be owned by the general public and was placed on the free market.
Posted By Rick,Tulsa OK: November 6, 2008 1:08 pm

Josh in Denver - you are spot on…
If you can’t figure this out on your own, it’s your own fault.
If you are scared of gold; go buy bank stocks!!!
Posted By Troy - Luther, MI: November 6, 2008 12:51 pm

Wow, not a great article at all. Yeah, gold is volatile, but to bash it because it has dropped so much this year is a little disingenuous considering the drops in the Dow. The Dow was over 14,000 around a year ago and look at it now! Gold has at least held its value since a year ago. The name of the game when it comes to wealth is purchasing power. Your purchasing power has been decimated in the stock market, but preserved in gold despite the volatility.
Posted By J. Kelly Anaheim, CA: November 6, 2008 12:49 pm

The question was about physical gold not paper gold. Physical gold has a wide gap on the paper COMEX quotes. This is an apples to oranges comparsion since a common $20 gold piece is still bring well over a grand and even the bullion coins are selling for $125 over the COMEX spot price. I wonder if he’s following the Dec Comex contract which may bring down the COMEX as people take physical gold for profit.
Posted By Rick,Tulsa OK: November 6, 2008 12:39 pm

Oh that’s funny The guy asked a question about buying physical and the answer was using facts from what paper gold did this year. He needs to get out more he maybe surprised that getting over a grand for any common $20 gold piece is here and now. He should have been using his skills to give real world stats on what the physical PM’s have done and not the COMEX stats where the loss hass occured.
Posted By Anonymous: November 6, 2008 12:20 pm

TIPs are “guaranteed by the US government”. Wow! That’s an iron-clad security blanket, if I ever saw one! What happens if the government goes under? Uh…no guarantee!
Posted By gold bug, Dallas TX: November 6, 2008 12:04 pm

For those bloggers claiming that gains on the sale of gold are taxed at ordinary income rates, or even collectible rates, you are only telling half of the truth. Gold bullion is a capital asset, thus gains are taxed using the capital gains rates. Gold coins may qualify as a collectible, but you need to do some fact checking. Some recently minted coinage is being ruled a capital asset in lieu of a collectible.
Posted By Mike, St. Louis, MO: November 6, 2008 12:03 pm

Picasso,
Art actually has been hoarded in the past as a means of preserving value. However, due to changes in tastes it is more difficult to do than investing in bullion, which we can assume will have similar uses/demand over a certain period.
And yes, We are in the deepest muck you can imagine.
Posted By John, Worcester MA: November 6, 2008 11:58 am

Gold is not an investment, it is life insurance for your money. To collect the maximum, your money must die. All of the “paper gold” is sold as an investment and should be treated as such. As for protection of wealth you may as well buy watermelon futures as “paper gold”. Physical gold is something you keep and don’t tell anyone about. I would not advise anyone to break any laws but there are ways, I am told, to buy gold anonymously with cash. For a total breakdown, silver is required for daily transactions as gold is too valuable to buy dried beans and cornmeal with. One ounce silver rounds and $100 face value of 90% US silver coins will keep you alive when nothing else will.
Posted By Mike Valdosta, GA: November 6, 2008 11:55 am

On Sept 11,2001, gold was around $300 per ounce. Now it’s around $740, at the low end of the recent trading range.
Retirees are about to be put on a roller coaster ride between deflation (thanks to our currently sinking broader economy) and hyperinflation (once investors address the mega-bailouts, and the dollars Ben has been printing and dropping from his helicopter). As with many other things in life, it is all about timing. What we will need to survive this ride are cash during deflation and gold during inflation.
The only thing left holding up the stock market now is the theory of anti-gravity, that is, “things may go down temporarily, but in a short period of time, they must go up again”. That was the last 30 years. What is really happening is a black swan that will be the Mother of all paradigm shifts.
Posted By Wake Up, Burlington, VT: November 6, 2008 11:46 am

Unlike the US Dollar, Gold is limited in quanity. Generally speaking, the less there is of something,the more it is worth…..
Posted By T, Plymouth, VT: November 6, 2008 11:39 am

Does anyone know why the price of Gold went from $35 an oz in 1971 to $850 an oz in 1975 when OPEC officially priced oil in US Dollars?
Posted By Chris Cantwell Bradenton FL: November 6, 2008 11:32 am

Why not invest in Art then?
Posted By Picasso ~ Poughkeepsie, NY: November 6, 2008 11:31 am

TIPS are indexed to government-published inflation figures, which are ridiculous! TIPS are for suckers. Look for the real inflation numbers–try Shadow Government Stats.
Posted By Michael, Charlottesville, VA: November 6, 2008 11:30 am

I agree with all the arguments posted regarding the long-term potential for investing in gold. Could the author please rewrite and recalculate the information regarding the price of gold and compare it with where the price of gold was 10 years ago rather than where the price of gold was at the start of this year?
Posted By Koen, Nasville, TN: November 6, 2008 11:10 am

You guys are all talking about preserving the purchasing power of your money….well im not a financial advisor but there are instruments known as TIPS (treasure inflation protected securities) that are guaranteed by the US government to hold their value.In my opinion, Gold, as the author clearly demonstrates, is just another speculative instrument that is simply fashionable in turbulent times…
Posted By Gabriel Miami Florida: November 6, 2008 11:10 am

You can tell that the author doesn’t know much about gold.
Posted By Joe, Cary, NC: November 6, 2008 11:08 am

I don’t think that the ETFs necessarily have all the gold and silver that they claim to have.
Physical is the only way to go. And get a gun, too.
Posted By Michael, Charlottesville, VA: November 6, 2008 11:07 am

Dave from Atlanta,
You still have to pay tax on gains from the sale of gold, even if it’s less than 10k. Not doing so could subject you to harsh penalties and in extreme circumstances, jail time.
Posted By Kris, Washington, D.C.: November 6, 2008 11:06 am

Gold should viewed as a savings account, but more importantly, as a sound money savings account – not a dollar denominated one.
In other words, the dollar value of your bullion will fluctuate and you won’t of course earn any interest on your bullion, but you are getting something very important in return. Gold is an inflation hedge because it preserves purchasing power over the long-term. Also, gold is a catastrophe hedge because it does not have counterparty risk. That means gold’s value is not dependent upon some bank’s promise and creditworthiness. Both of these attributes of gold are important in the best of times, but they become particularly important when you are saving for that proverbial rainy day. Right now there is a downpour on Wall Street, and this storm is spreading
Posted By John Anderson mahtowa MN.: November 6, 2008 10:46 am

I was one of the few financial planners who recommended adding gold to one’s portfolio to the tune of 10% in 2002-2003. I advised other planners to recommend this to their clients also. Now take the long view of investing - $300 per ounce (share) in 2003 to current $750 per ounce (share). Without even mentioning the money market (.5 to 2% interest rates), what other investments have done this well since 2003? Housing? Stocks? Bonds? Where are the high-quality money market funds and how secure are they? The bias against gold seems to permeate magazines such as Money Magazine (of course, look at their advertisers). The long-term purchasing power of gold versus the Federal Reserve Note monetary unit is the real crux of the argument. I don’t think this article serves its readers well.
Posted By Ken, Waynesboro, Ga.: November 6, 2008 10:39 am

I guess, Gold is the only thing on this planet that can be cashed anytime anywhere in any country. You can’t say dollar is not attached to gold. everytime dollar goes down, gold goes up. Internationally people look at dollar in terms of gold.
Posted By John, Milwaukee WI: November 6, 2008 10:33 am

I bought gold when it was less than $300. I am pretty sure I am going to make money on it. If not, I assume everything else I buy (energy, food, etc) will also be a lot cheaper. I win either way.
I find that when many money experts advocate diversification, they still tend to focus on stocks and bonds. My view is more broad than that and it has served me well. Did you know some savings bonds (series I) are earning over 8% now and have earnings since issue of over 6%?
It is a good idea to diversify, better so if over a truly broad range of instruments, not just what the finance experts say. But be wise and exercise moderation. No beanie babies and the like.
Posted By David, Albany NY: November 6, 2008 10:28 am

You talk about getting in and out at the right time.Trying to time the market isn’t too bright.Just in case you don’t know it, Banks are buying up gold…Go figure.
Posted By G.Stanicki,Penn Forest,PA: November 6, 2008 10:27 am

Dave, selling gold at a profit is taxable, whether or not the proceeds total less than $10,000. Just because it’s easier to cheat on taxes doesn’t mean it’s legal. If the IRS audits you and sees several $7k, $8k, or $9k cash deposits that you can’t explain, you’ll get socked with taxes AND penalties on every nickel. Leave the roulette for Vegas.
Posted By Bill, Rockville, MD: November 6, 2008 10:27 am

I wonder how many of you have actually invested in physical gold. Gold is not a thing like stocks - it’s much more difficult to store and haul around. You are to pay full income taxes - not capital gains tax on gold - regardless of the amount sold - you may not be reported until over $10K but you still owe taxes. Also, when physically investing in gold you pay large spreads (commissions) that can really eat into “profits” along with dealers that may not deal in fair honest pricing. Yes, gold is a great investment if you bought back when it was $238 an ounce in the Clinton age but now is it still a good investment? Now is the time to sell - not buy.
Posted By Michael B, Phoenix AZ: November 6, 2008 10:21 am

Gold has doubled in the past 10 years while the market has done nothing. This of course proves nothing as we are more concerned with what happens in the next ten years then what has occurred in the past. I personally believe 5% to 10% of everyone’s assets should be held in gold.
Posted By mark atlanta ga: November 6, 2008 10:09 am

This is a horrible argument.
If I started to buy DJ Index at 13000 at the begining of the year, where would I be now?
The price of gold is tied into the USD strength. Now, don’t look at the absolute dollar value; look at the purchasing power. In the end, that’s all we care.
Posted By Johnny, Humble, TX: November 6, 2008 10:02 am

You tell folds to think long term and then, proffer flawed advice. Over the long term, gold is an excellent store of value. Shorter term, gold is volatile because often it must be sold to cover other positions. But unlike stocks, one can rest assured that it will have some value, even when most other things have gone bus. I recommend holding gold as a long hedge, at about 5% when prices are abnormally high to 15% when prices are far below trend.
Posted By David, Watson, OK: November 6, 2008 9:56 am

You can buy and sell gold coins and bullion through dealers and you don’t pay taxes on them when you sell, unless it’s over 10k….also gold is tied to stability because once upon a time a dollar was backed by a dollar of gold in fort knox, until nixon took us off the gold standard…now a dollar is worth maybe 25 cents of what it was. while gold is valuable in any country, the dollar may not be in the future.
Posted By Dave, Atlanta, Ga.: November 6, 2008 9:52 am

gold is in a downtrend
Posted By skipper x, NJ: November 6, 2008 9:52 am

Look at gold over the long term and you will see that it is a store of value. Over any short haul, though, it can be volatile because it gets sold to cover positions, just like any other holding. Nevertheless, gold should be held as a long hedge, at about 5 per cent of any portfolio at high gold prices and 15 percent when it drops way below trend.
Posted By Anonymous: November 6, 2008 9:51 am

And Josh, I bet you have a good portion of your money sunk into gold, which doesn’t make you any more a viable resource either- or the people you listen to. You can either “listen to opinions of what is best” or be rational and look at the numbers, which this author has done….
Posted By Mike, Cedar Rapids, IA: November 6, 2008 9:49 am

Which is volatile against which - gold against the dollar, or the dollar against gold? Perhaps you should have instead mocked the dollar’s “reputation as an anchor of stability.”
Posted By tanker, new york, ny: November 6, 2008 9:45 am

I love these guys that write for major news outlets such short sided views. Telling someone they should own gold now is like telling someone right before the great depression not to buy gold. Look at the japanesse! We are doing the exact same thing as them, and 20 years later their market hasn’t even closely recovered from the highes. More money will eventually = more inflation with more inflation your current dollars will be worth less. Does anyone actually think the next president will decrease our national debt?
Posted By Nick Smith, Peoria, Il: November 6, 2008 9:39 am

I think the question was more of a hedge against the world economy collapsing. Gold is a very good place to put your money if you have minimal faith in the banking industry or are worried about any type of financial collapse. Gold has always kept its value in accordance with the economy. For example, in 1950 gold was trading at $40 per oz. A good suit cost approx $50 back then. Today a good suit can cost $750. As long as you are taking physical delivery and not playing with futures, investing in gold is a great idea.
Posted By Edward NY, NY: November 6, 2008 9:38 am

Thank you Josh. This guy mentions nothing about physical shortages or trading on the COMEX. Incredibly simple analysis. I hope no one takes it to hear. Besides you want to buy on the dips anyway. I’d say this was a dip. Inflation will reintroduce itself with fervor after all the money pumped into the economy snaps back on us.
Posted By Steve, Toledo Oh: November 6, 2008 9:37 am

Good analysis. Also, keep in mind that gold is taxed as a “collectible” at a much higher tax rate that equities (28%).
Posted By Woeful: November 6, 2008 9:04 am

A recent radio ad predicted gold could hit $2000 an ounce. By my rough calculations if you had bought at the peak around 1980 at $2000 an ounce you would be just breaking even after inflation is taken into account.
Posted By David Freiman, Philadelphia, PA: November 5, 2008 10:27 pm

This seems like a pretty naive short term opinion of gold. Gold has long term value as a form of wealth (which will be here longer Fannie or a Gold Eagle). The reason for the volatility is because it is tied up in the rest of the market. Huge Hedge funds are selling positions and short selling etc. Try to buy physical. YOU CAN’T and if you do manage to find some you are going to pay a hefty premium. Please do more research than simply reading some guy on CNN.com. He’s probably getting paid by the same hedge funds I talked about before.
Posted By Josh, Denver Colorado: November 5, 2008 5:44 pm
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How safe is too safe

Ask the Expert Retirement questions answered
How safe is too safe

By Walter Updegrave,
Money Magazine senior editor
November 10, 2008 5:18 pm

Question: Are stable-value funds a safe investment? —Rexford, Syracuse, New York

Answer: That depends on what you mean by safe.
Stable-value funds, which are available only in 401(k)s (and currently offered by more than half of such plans), invest for the most part in high-grade short- to intermediate-term bonds. The managers of these funds also buy “wrappers” - or contracts from insurance companies and banks - that guarantee principal and accumulated interest against loss.

As a 2007 study shows, the result is an investment that provides long-term returns similar to those you would get with intermediate-term bonds, but with stability comparable to a money-market fund’s.

Would I put stable-value funds in the same category as FDIC-insured bank deposits when it comes to principal protection? No. They’re not federally insured. But given the high quality of the funds’ underlying securities and the fact that they also diversify risk by purchasing wrappers from 10 or so financial institutions on average, I think it’s fair to say that stable-value funds provide a high level of security and adequate protection against losses.

So in that sense I’d say yes, they’re a safe investment.

Playing it too safe

But when it comes to investing for retirement, I believe you should to take a broader view of safety. Specifically, you’ve got to consider whether your investments are safe in the sense that they’re likely to deliver the returns you’ll need to build a nest egg large enough to support you comfortably in retirement.

And that’s where I think people who’ve been flocking to stable-value funds lately - in September alone, 401(k) investors switched $921 million out of stock funds and moved $733 million into stable-value funds - have to be careful.

Understandably everyone is freaked out about declining balances of 401(k)s. Those losses and fears that even more may lie ahead make investments that promise security especially appealing today. But you don’t want to plow too much of your money into investments that offer a refuge from market losses.

There may be few concepts you feel you can count on in the investing world today. But here’s one you can bank on: The more secure an investment is, the lower its long-term returns are likely to be. So by focusing too intently on safety in the short-term, you could jeopardize your long-term retirement security by sacrificing growth potential.

Which is why I think you shouldn’t view stable-value funds as a haven to flee to during periods of market turmoil, but as a core part of a diversified portfolio that also includes stocks and bonds. Basically, you should consider stable-value funds an investment choice for the fixed-income portion of your 401(k), along with bond funds.

As for how much of your 401(k) you should put in stable-value and bond funds, the answer largely comes down to how far along you are in your career and how much risk you’re comfortable taking. I know everyone is wary about investing in stocks right now. But if you’re young and early in your career, you don’t have to be so concerned about falling stock prices. You’ve got decades before you’ll tap your 401(k), so you should focus on getting a competitive long-term return. And that means keeping most of your money in stocks.
Although there’s no assurance stock prices won’t fall even farther from here, history shows that you’re likely to earn the best long-term returns from shares you buy in the wake of major market declines.

As you get closer to retiring, you still need long-term growth - after all, you may spend 30 or more years in retirement - but you also want more stability. You don’t have as much time to recoup losses. So you want to gradually increase the amount going into stable-value funds and bonds as you age.

So if it’s safety you’re looking for, yes, stable-value funds can be a reasonable choice. But make sure they’re part of a long-term investing strategy. Otherwise, the price of feeling safe today could be less retirement security down the road.

-----

Filed under Uncategorized16 Comments Add a Comment

Great article! Don’t worry and don’t to even bother your little head about “timing”. So many selfless professionals are dedicated to your prosperity.
Posted By M, GSO, NC: November 17, 2008 10:13 am

I agree with Charles Shaw in Liverpool NY. One way to restore confidence is for the top leadership of these failing banks and finanancial institutions to not be able to retire with massive golden parachutes, and for the average working person to see that justice really is served. Pauslon is now changing the rules midstream as to where all of our dollars will go. Why not have the wealthiest on Wall Street be forced to retire on “only” $100,000 a year and have the rest of their assets go to help those who were truly hurt by this mortgage crisis. The greed of those at the very top using mortgage debt and leveraging should be punished.
To Jonathan in Seattle: I am not sure who you were referring to in your comments, but it is not the “little guy” who is moving the market up and down these days with “panic selling.”Send your message to the big institutional investors and mutual fund managers who are the main ones moving this market.
Posted By Iris, Rochester NH: November 16, 2008 9:14 am

Inflation and taxes are unavoidable.
I would not invest my money in risky investmnts just to make a higher return. Investing is not about how much you mak, but about how much you keep.
The truth is that unless you make over $250,000 a year for 20 years or more and save at least an average of 10% a year, you are not going to be rich when you retire.
The median income is around $46,000 in America. If a person invests 10% of his gross income and makes around 5% a year, he will not have millions of dollars after 35 years.
The myth of retirement is going to terrorize many Americans in the next 20 years. Many of those who are retired and are too old to make a decent income will suffer. They will have reduced Social Security benfits to look forward to and little savings to live off of.
There is no such thing as playing it too safe. Either you have a lot of money, a little money, or no money. Those that have a lot of money or no money will get by just fine. Those with a little money, the middle class, will be taxed higher and will receive less benefits.
Posted By Yadgyu, Harkyville, TX: November 13, 2008 5:24 pm

I don’t why so call experts always keep on saying keep your money where they are or you’ll end up missing the upswing. If i had not moved my money to the stable fund, i would’ve easily lost 30-40% of my meager 401k fund. But now, I am still getting some returns and I am not throwing away monthly contributions. Wake up so called experts. It would take years for me to recoup the 30-40% I would’ve lost.
Posted By Jun, Brentwood, CA: November 13, 2008 2:53 am

People seem to lose track of the key points in these comments. 1)Stable funds are a fantastic capital preservation tool. 2)To build a 401K to the level needed to support decades of retirement(hopefully)you have to have the return rates that equities provide. There are two ways to do this. 2) a) Buy and hold. Or… 2) b) Market timing. There is a lot of literature that market timing doesn’t work. And yet… there is some evidence that you can sidestep the big drops sometimes. Not always. There have been two big market declines in the past 8 years, and foreseeing them was not very tough, if you are paying attention. The first one I didn’t have the confidence to manage. This time I slowly transitioned to my stable value fund. Always move in modest increments, because you could be wrong! In any case, I’m down 14% this year… that much only because I got over-burdened at work and home and acted later than I intended… however, I would otherwise be down 30-35% as of today. I love my stable value fund!! I’ll buy back equities slowly, maybe 5% per month, starting next year. Equities are still over-valued, given the level by which future earnings are over-stated by wall street. I may miss a few big up days… heck I missed the biggest one ever last week, but guess what? I can now buy at a lower price than before that run up. I have more to gain by misssing the big down days. I now have a 15% head start on the market, my opportunity cost is pretty small, and the beauty of it is I don’t need to ‘time’ to get back into the market. A little DCA does the trick.
Posted By John in Colorado: November 12, 2008 2:48 pm

To the first poster, commenting that he would have been better off in stable value for the last 25 years…The market is up roughly 600% over the last 25 years. How exactly would being in stable value make you better off than “riding the ups and downs” that have you up 600%?
Posted By Jon, Parsippany, NJ: November 12, 2008 9:26 am

People wake UP! There is nothing new under the sun. 8 years ago you were the same people saying we are on the brink of economic collapse. And you were saying the same thing in 1992, and during everyother economic pull back. Do yourselves (and us) a favor and put all of your money into a nice FDIC insured savings account, where you will get a negative return because of inflation. You’ll be poorer by the day but at least those of us who invest in the market won’t have to deal with your panic selling.
Posted By Jonathan Seattle, WA: November 12, 2008 2:45 am

I am not sure why we are still holding to the underlying assumption that we are going to “retire.” It may that this 20th-century invention will have to go the way of quill epns and inkwells.
Posted By Julieanne, Waterbury, CT: November 11, 2008 5:50 pm

You know what I think is safe, keeping my money, or spending it now.Why would I invest into anything in the market, when robber barons can steal my money, like they have this year? These crooks have had not one conviction, not one arrest, when any reasonable person knows this melt down was caused from insider trading and fraud.You want the return of confidence? Then somebody better start talking about the schemes that have lead to the greatest depression since 1929. The people will not feel their money is safe in any investment until we see justice done.Time to fill the jails up with the very well connected in Wall Street and Government who conspired to rob the American Citizen of their savings and retirement.
Posted By Charles L. Shaw, Liverpool, NY: November 11, 2008 4:56 pm

I have to agree with the commentor about the canned answer, but I disagree with the other commentors saying they are better off in stable income. BTW, 4.5% interest after an inflation of 3.5% (US Average) equals 1% real return; basically under the Rule of 72, it will take you 72 years to double your money after inflation.
The big problem is people are taking too much risk for their own good and thereby losing their shirts. Unfortunately people need to do their homework before investing. Face it folks a lot of the brokers out there are paid via commission and therefore may not have your best interests at heart.
I would recommend Bogle Heads Guide to Investing & Automatic Millionaire as good books to do some research about personal finance. You’ll be amazed how easy it is to save and invest after reading these two books. Just set and forget.
Another thing, do your age in bonds. If you are 30 years old, you should have 30% of your assets in bonds and/or stable income.
One other thing about stable income; remember these are insurance contracts, if the insurance company goes insolvant because too many bonds it backed turned to worthless paper, you could end up losing your cash.
Posted By Pat, Albany, NY: November 11, 2008 4:53 pm

i have made a ton on stocks in the past and of course i lost some recently, but the idea that we can only accept the good and have none of the bad will keep you poor and on the side lines, mad at those who succeed.
Posted By URB left coast CA.: November 11, 2008 4:36 pm

I’m done paying attention to all these financial “experts”….who advised me where to put my money the last 35 years. Let’s see …..one year I’ve lost 25%? Where were the experts when everything was melting down? Obviously they were pulling money out of equities while telling those of us in a 401K to “stay the course”!
Posted By Kay, Portland, Oregon: November 11, 2008 4:15 pm

Our financial system is completely broken and you are advising people, who have consistently been deceived by Wall Street, to do what now?
Posted By BxCapricorn, Vegas, NV: November 11, 2008 12:14 pm

In a diversified long-term portfolio, does it make sense to buy insurances against market losses in bonds instead of just investing directly in intermediate-term bonds to take maximum advantage of the benefits of diversification (bonds go up in many scenarios when stocks go down and vice-versa) instead of trying to guarantee a minimum level of return?
Posted By Andy from Miami, FL: November 11, 2008 11:44 am

As far as I am concerned, stable value funds are the ONLY way to go in today’s unstable market. I am 47-YO and THANKFULLY I have 100% of my 401K invested in stable value. While other funds offered in my plan are losing between 20 & 50% in value, I am getting approximately 4.1 to 4.2% return on my stable value fund. In essence, while the rest of the ‘world’ is losing the shirts off their backs, I am making money. It might not equate out to 10, 12, 15% return, but at least I am not LOSING anything that will take YEARS, and I DO MEAN YEARS to make up. Of course, I do have other SAFE Investments as well such as FDIC Insured Certificate of Deposit Accounts.
Posted By Jerry, Hagerstown, MD: November 11, 2008 10:31 am

I feel that the answer provided was too canned and does not take into consideration the historic events of the current economic crisis. Since there is nothing really to compare the current market to, saying that stable funds are “too safe” is very naive. A fund that is down 40 to 50% may take years and years to ever get back to 0, or may never. I have been investing in a 401K for over 20 years(I’m 45) and I may have been better off over those years putting the money in stable funds than riding the ups and downs of the market. Remember, it’s not “return on” any more, but “return of” our investments that we worry about.
Posted By Wesley, Richardson, TX: November 10, 2008 7:42 pm
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