Preparing for the “what if” scenarios

[qcomer]

Hi,

I had been thinking about this for sometime and wanted people to share their thoughts. I share the sentiment with most folks here that housing bust is going to continue coming years with price declines of atleast 30% expected. Also, this bust will cause a recession in spring or summer of 2007 (some folks have now shifted this to Jan 2008 now). I agree that there is a high probability of the above senario folding out but was wondering if we have prepared ourselves for the “what if it doesn’t fold out our way” scenarios. I am humble enough to admit that there is a possibility of that happening and I am interested in knowing how the portfolie should be diversified for this scenario.

So what do you guys think the strategy should be to prepare for the scenario that a soft landing does happen (for whatever X reasons and I am not interested in why) and US avoids recession and contunues to motor along the growth route by end of next year. What is home sales start to pick up again next year as interest rates plunge to 3%? How should the portfoli look (give percentage) to cushion or hedge against this scenario.

I feel 10% commodities, 10% precious metals, 20% domestic stocks, 10-15% international or emerging market stocks and 50% cash (swiss franks, euros, Yen, US dollars) is a suitable portfolio right now.

[(former)FormerSanDiegan]

I prefer all-weather diversification.

Take your net worth and divide equally …

1/3 cash
1/3 equities (2/3 US , 1/3 International)
1/3 property

I know this is very boring, but it held up after the Tech bubble burst and likely will hold up through the current burst as well as whatever comes next.

[powayseller]

Regardless of hard or soft, you can’t go wrong in cash right now: FDIC insured CD’s, US Treasuries, eurozone government bonds (esp. Germany and Switzerland), euros and swiss francs. When gold comes down more, get some of that (buillon or GLD or gold miners), some PM.

[qcomer]

Poway,

With interest rates stalling or possibly coming down next year in the US as well as Eurozone, earning interest on cash is not the best option for me. Also remember that by doing so, you are just keeping up with inflation and not making any real money and we invest to make money not to keep it. You seem to be concerned about preservation of capital but the other side is to make money out of it as well.

With 100% cash, there are lot of ways you can go wrong. In case of soft landing where economy slows causing inflation to come down and so interest rates will come down too. Gold will decline as inflation goes down so your precious metal positions and cash positions will both get a beating.

Now to gold and precious metals. It may have been a good argument to buy precious metals 4 years back because of price stability of gold back then. Now the volatility there is worse than S&P500. Let me ask you, gold today hit the lows of $575. Did you buy some gold via ETFs or bullion? What percentage of your portfoli is in gold right now? Most people I know didn’t buy gold today because they are just scared of volatility. All money is going from high volatility commodities to low volatility blue chip equities.

I think this is not a matter of knowledge or intelligence. This is a matter of perspective and personal risk tolerance that varies from person to person. I try to be balanced in my investment strategies and that is what this thread is all about.

[powayseller]

qcomer, you make very good points, and I don’t own any gold, because both investment services to which I subscribe are saying it is too high priced. Chris Johnston is also confirming this for us.

iTulip.com, one of the premier blogs on the asset bubbles, is bullish on gold long-term. The founder is a rich venture capitalist, who went public with the tech bubble in late 1990’s. Read his KaPoom Theory, about the hyperinflation and deflation, and reasons for holding gold. It’s compelling, and convincing to me.

I’m also getting an options account, so I can buy QQQQ puts, and I want to get an inverse fund. Do you know anything about Rydex funds? I know that Profunds Inverse funds are a scam, as they track the index that they are supposed to “un-track”. How they get away with that, is beyond me!

So while you think inflation will fall, I think it will rise. The Fed controls inflation via interest rates AND money supply. Money supply is growing, both because Fed is printing lots of it to pay off interest on the debt, entitlements, war, and second because foreigners are investing lots of dollars back into our economy.

The Fed will lower interest rates, but they will keep printing money, just as they are doing now. As long as they print money, inflation will rise. I can’t prove they are printing money, because they stopped publishing money supply this spring. How convenient for them!

[Author]

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