Asset Allocation Made Easy

To everything there is a season, and a time to every purpose under the heaven.   Ecclesiastes 3:1

Last month Bill Bonner wrote an interesting article about trading the Dow/gold ratio.  He recommended selling the Dow and buying gold when the ratio was above 15 (the Dow is too high compared to gold) and selling gold and buying the Dow when the ration was below 5 (the Dow is cheap compared to gold).   I did a quick back test and found that simple strategy yielded an 8+% yearly average over the last 100 years with only 6 swaps.  I then back tested trading the gold:silver ratio back and forth (from a ratio of 75 high down to 50 low) during those times that you held your gold position.  (See my article a couple of years ago regarding trading the gold:silver ratio.)  With only 13 trades over 100 years the final yield was over double the above at 9+% yearly average over the last 100 years.  Not a bad return over the long haul for doing little or nothing over 4 generations.  (6 of the 13 trades were during October!) 

The problem is that most people cannot sit back and let time work for them.  They just have to twist the dials and pull the levers and try to get rich quickly.  Unfortunately this usually results in a loss. 

Finding an investment strategy and sticking with it for a couple of years is difficult.  Trying to stick with one for 4+ generations is downright impossible.  Perhaps a tattoo on the back of each child’s hand as a reminder on his 18^th birthday might help but even that may not work.  Try framing the strategy and hanging it on the wall.  During the 100 year interval studied the longest time period with no activity was 27 years!  

Maybe there is an answer to the problem of wanting to trade too often.  A couple of years ago I recommended a sample portfolio as follows:

20%  real estate (income producing)

20%  stock index fund

20%  cash held inside & outside of banking system

20%  gold & silver

20%  corporate AAA bonds (short term only for now as interest rates are likely to go up)

This could possibly be modified somewhat playing the Dow: Gold ratio and still maintaining a fairly balanced portfolio.

When the Dow:Gold ratio goes below 5 then:

20% real estate (income producing only)

30% stocks (index fund with a few select individual stocks)

20% cash

10% gold & silver (trade back and forth according to the gold:silver ratio)

20% corporate AAA bonds

As the Dow:Gold ratio goes over 15 then:

20% real estate (income producing only)

10% stocks (index fund with a few select individual stocks)

20% cash

30% gold & silver (trade back and forth according to the gold:silver ratio)

20% corporate AAA bonds

In both instances use 25% of your cash or 5% of your total portfolio and go shoot for the moon.  Invest in anything that catches your interest be it crypto currency, mining stocks, real estate speculation or anything at all that interests you in the short term.  When you liquidate that position put the funds back into the cash allocation.  This allows you to move into and out of speculative positions with a portion of your cash.  If you lose it all, you have lost no more than 5% of your total position.  If you are good, perhaps these investments can boost your overall portfolio significantly.  This will allow you to scratch that certain itch so you can do something while you sit back and wait for time to do its job with the bulk of your investments.  If you are feeling lazy or do not see anything interesting then just leave your speculative funds sitting in the cash allocation and wait for a nice slow fat pitch to come along.

Semper paratus 

Larry LaBorde sells precious metals through Silver Trading Company LLC. Since 2001, Silver Trading Company has offered high volume sales of gold, silver, platinum and palladium to serious investors around the world. It also offers guidance about storage options for metals. Please visit Silver Trading Company’s website at www.SilverTrading.net.