How to invest without knowing the future(compoundadvisors.com)
compoundadvisors.com
How to invest without knowing the future
https://compoundadvisors.com/2021/how-to-invest-without-knowing-the-future
126 comments
Invest in companies that will benefit from inflation. Ones with low capital and debt requirements. This happens to be most of the S&P500 these days already.
Companies that have a large amount of fixed rate debt on their books may benefit as well.
Probably depends on the duration of the bonds? I'd have thought anyone holding long term bonds when interest rates rise is going to be hurting.
You're right that holding debt through an interest rate rise will hurt, but I think the parent poster meant companies that issue debt, not ones that hold it.
Well diversified (international) index funds seem like the best option to me. Companies can increase prices with inflation.
Is this assuming Inflation is isolated in US only?
What happen if there is a global inflation?
If cost of living is high in the US; one can just pick up and leave (for the FIRE/Single digital Nomad).
No, I'm not assuming that - Europe is experiencing a higher inflation too.
Diversification is generally a good idea in investments, many say it's the only free lunch you can get :)
I’ve had the same questions. I found a surprisingly balanced and reasonable discussion here-
https://www.reddit.com/r/fatFIRE/comments/qrjh02/how_are_fat...
Another great resource I use is https://inflationchart.com
You can change parameters and get actual data to look at what did well and how cyclical the nature of everything is and how much of a needle point the sp500 is currently at.
https://inflationchart.com/spx-in-gold/?show_adjuster=1
https://www.reddit.com/r/fatFIRE/comments/qrjh02/how_are_fat...
Another great resource I use is https://inflationchart.com
You can change parameters and get actual data to look at what did well and how cyclical the nature of everything is and how much of a needle point the sp500 is currently at.
https://inflationchart.com/spx-in-gold/?show_adjuster=1
The funny thing about that thread is that the best answer is "by not holding cash."
Inflation hurts cash. Conversely anything denominated in cash is "helped" (nominally) - debt, equities, etc. If you, like parent comment, have "most of my money is in index funds and FAANG companies" then you have benefited from inflation (NASDAQ is up 35% from a year ago). On the other hand, people who are hurt the most by inflation are low net-worth savers and wage earners.
It might be counterintuitive at first but while you are exposed to a potential crash by holding equities, by holding cash you are guaranteed to lose purchasing power equal to the current rate of inflation (and it's worse than the official CPI makes it seem).
For your cash positions, which should be kept as small as possible (examples being upcoming purchases, dry powder for investing ideas, emergency fund, etc), liquid US dollar alternatives exist that you can consider diversifying into. These include other currencies, some crypto, precious metals, etc.
Inflation hurts cash. Conversely anything denominated in cash is "helped" (nominally) - debt, equities, etc. If you, like parent comment, have "most of my money is in index funds and FAANG companies" then you have benefited from inflation (NASDAQ is up 35% from a year ago). On the other hand, people who are hurt the most by inflation are low net-worth savers and wage earners.
It might be counterintuitive at first but while you are exposed to a potential crash by holding equities, by holding cash you are guaranteed to lose purchasing power equal to the current rate of inflation (and it's worse than the official CPI makes it seem).
For your cash positions, which should be kept as small as possible (examples being upcoming purchases, dry powder for investing ideas, emergency fund, etc), liquid US dollar alternatives exist that you can consider diversifying into. These include other currencies, some crypto, precious metals, etc.
Go back to the lost decade before and is what you are saying true when SP500 traded flat for ten years?
https://inflationchart.com/spx-in-cpi/?time=20%20years&show_...
You had to wait until 2013 to have what you had in 2001, which is awful. Better than cash for 13 years yes haha but a diverse portfolio with other things like gold which went nuts over that time would be way ahead.
https://inflationchart.com/spx-in-cpi/?time=20%20years&show_...
You had to wait until 2013 to have what you had in 2001, which is awful. Better than cash for 13 years yes haha but a diverse portfolio with other things like gold which went nuts over that time would be way ahead.
> Another great resource I use is https://inflationchart.com
Thank you for the great resource! However I have a small comment.
What the site is using is actually M2 - https://fred.stlouisfed.org/series/MABMM301USM189S
The real M3 money supply report was discontinued - https://fred.stlouisfed.org/series/M3
See here for the ShadowStats estimation of M3: http://www.shadowstats.com/alternate_data/money-supply-chart...
Thank you for the great resource! However I have a small comment.
What the site is using is actually M2 - https://fred.stlouisfed.org/series/MABMM301USM189S
The real M3 money supply report was discontinued - https://fred.stlouisfed.org/series/M3
See here for the ShadowStats estimation of M3: http://www.shadowstats.com/alternate_data/money-supply-chart...
I'm the maker of https://inflationchart.com and I use the M3 for the U.S. from the Fed which is active:
https://fred.stlouisfed.org/series/MABMM301USM189S
Please correct me if I'm wrong!
https://fred.stlouisfed.org/series/MABMM301USM189S
Please correct me if I'm wrong!
That chart shows what the Fed wants you to use in place of the M3.
Note that the values are the same as M2:
https://fred.stlouisfed.org/series/M2SL https://fred.stlouisfed.org/series/MABMM301USM189S https://www.federalreserve.gov/releases/h6/discm3.htm
Your site should say M2 instead of M3.
Note that the values are the same as M2:
https://fred.stlouisfed.org/series/M2SL https://fred.stlouisfed.org/series/MABMM301USM189S https://www.federalreserve.gov/releases/h6/discm3.htm
Your site should say M2 instead of M3.
Just wanted to say thank you for making your awesome site! I know it was probably a lot of work, but it is one of the easiest to use and best resources I know of for quick, easy to understand comparisons. The world looks different once you have seen it through inflationchart.com.
So nice to hear, thanks a lot!
Buy hard assets, land, houses, condo, PM's, etc. You can try finding investment vehicles that will do that for you but at the end of the day you're better off physically owning them.
Disclaimer: I am not qualified to give Investment advice.
Disclaimer: I am not qualified to give Investment advice.
Prime ministers?
Are any of those undervalued right now? The problem is that I can buy a condo and then have the bubble pop and still lose 50% in its value
With the FED/Gov actively destroying the value of the USD, there is nothing undervalued now. With RE you can at least put it to work (long term lease or AirBnB) and cover costs/small return/preserve the value of capital.
You probably need to do nothing, except maybe diversify.
Inflation will happen to also the goods and services offered by the companies in your portfolio.
It is not inflation itself that scares the market; it is the feds reaction to it, which will raise interest rates.
If interest rates rise, the yield you can receive from buying “risk-free” assets (ie treasury bonds) also rises.
When your risk free rate rises; the risk-on returns (especially of a high CAPE environment!) of being in the market are a lot less enticing.
So money flows from the market into bonds, and then the market drops.
If your portfolio drops along with the market at large, you’ve not really lost anything, it’s just the numbers changing (assuming you’re not retired or soon to be!).
Beyond waiting-and-seeing, taking out fixed interest loans to buy assets is probably a good move; unless the performance of those assets is tied to the interest rates (ie probably a wash to buy a home now if you expect interest rates to rise)
Inflation will happen to also the goods and services offered by the companies in your portfolio.
It is not inflation itself that scares the market; it is the feds reaction to it, which will raise interest rates.
If interest rates rise, the yield you can receive from buying “risk-free” assets (ie treasury bonds) also rises.
When your risk free rate rises; the risk-on returns (especially of a high CAPE environment!) of being in the market are a lot less enticing.
So money flows from the market into bonds, and then the market drops.
If your portfolio drops along with the market at large, you’ve not really lost anything, it’s just the numbers changing (assuming you’re not retired or soon to be!).
Beyond waiting-and-seeing, taking out fixed interest loans to buy assets is probably a good move; unless the performance of those assets is tied to the interest rates (ie probably a wash to buy a home now if you expect interest rates to rise)
Avoid cash savings, own shares in companies and debt.
Debt is a promissory note to the future, at which point the debt will be worth far less than it is now.
The unfortunate consequence of being heavy assets though is that you are then exposed if the current overconfidence recedes and markets crash, so perhaps consider whether the companies you invest in rely on this free money environment (growth companies don't tend to do well with high interest rates, which tend to follow high inflation). Personally I'd avoid US assets at this moment because of this - indexes are very heavily skewed to tech right now, even VWRL is 3% Apple alone at this point and > 50% US.
Debt is a promissory note to the future, at which point the debt will be worth far less than it is now.
The unfortunate consequence of being heavy assets though is that you are then exposed if the current overconfidence recedes and markets crash, so perhaps consider whether the companies you invest in rely on this free money environment (growth companies don't tend to do well with high interest rates, which tend to follow high inflation). Personally I'd avoid US assets at this moment because of this - indexes are very heavily skewed to tech right now, even VWRL is 3% Apple alone at this point and > 50% US.
This is what really bothers me.
Everyone is being forced to put their money into an extremely overvalued market. What is a crash going to look like when main street is sitting on assets just like wall street is? Is my stock portfolio FDIC insured against a run on the market?
I hate that my new savings account is shares in multibillion dollar corporations that have never made a penny of profit. And when they crash they'll tear down all the solid companies too. It's a damned if you do, damned if you don't situation.
Everyone is being forced to put their money into an extremely overvalued market. What is a crash going to look like when main street is sitting on assets just like wall street is? Is my stock portfolio FDIC insured against a run on the market?
I hate that my new savings account is shares in multibillion dollar corporations that have never made a penny of profit. And when they crash they'll tear down all the solid companies too. It's a damned if you do, damned if you don't situation.
You can invest in companies that make money though. There are lots of them chugging along just fine and providing returns, dividends even. The high flying meme stocks get majority of the attention, but they’re not the majority of the market.
It’s true they’ll get pulled down in a bear markets, but not nearly as much as meme stocks.
It’s true they’ll get pulled down in a bear markets, but not nearly as much as meme stocks.
One direct way to hedge against inflation is to buy a house with a fixed rate mortgage. Any inflation will directly decrease the real amount of your mortgage debt.
That sword could have two edges though, if the fed increases the interest rates to curb the inflation, you will end up with an asset that depreciate regardless of your fixed mortgage because a significant number of people will default on their mortgage payment driving down the cost of housing as the banks do repossessions.
Also banks are already increasing their fixed rate significantly to make sure that they don't end up holding the bag.
Also banks are already increasing their fixed rate significantly to make sure that they don't end up holding the bag.
> the fed increases the interest rates to curb the inflation, you will end up with an asset that depreciate regardless of your fixed mortgage
Only if it is stagflation (inflation without underlying strong economic activity), which is rather exceptional in the US. If it is (more normal for the US) activity-driven inflation, Fed tight money policy to constrain it isn't going to do more to reduce real home prices than the underlying activity is to drive them.
Only if it is stagflation (inflation without underlying strong economic activity), which is rather exceptional in the US. If it is (more normal for the US) activity-driven inflation, Fed tight money policy to constrain it isn't going to do more to reduce real home prices than the underlying activity is to drive them.
That's fair, but it assumes that a lot of people who took mortgages that only "worked" because of the low rates won't go bankrupt once the rates increase. Strong economic activity and inflation simply does not translate to higher wages for a significant proportion of the population.
In other words, if you want to shelter your money from inflation the best approach might not be to tangle your money with assets that are currently overpriced because of the low interest rates.
In other words, if you want to shelter your money from inflation the best approach might not be to tangle your money with assets that are currently overpriced because of the low interest rates.
Most people have fixed rate mortgages these days. Ninja loans were mostly regulated out of existence. Most institutions are expecting home prices to revert to the mean inflation of about 2% per year.
So we won't likely experience mass defaults due to arms this time around.
I personally think it's more likely that rising rates (if it ever happens (hate you, fed!)), will more significantly impact businesses with heavy, non fixed debts. They would need to refinance at increased rates which is more expensive, likely dampening their economic activity and potentially forcing layoffs.
That may lead to consumers cutting back and push us into a recession/deflationary cycle, and that would perhaps put downward pressure on the housing market.
But I don't trust the fed. They refuse to do their job. If the above happens they'll probably instantly cut rates again just like in 2018 (I think?) when they raised them by about 25bps and then immediately caved to the market decline.
It's sickening. They're not doing their job. We've needed to raise rates for a long time (and cut gov spending). But we're a sick beast that is slowing dying of infection.
So we won't likely experience mass defaults due to arms this time around.
I personally think it's more likely that rising rates (if it ever happens (hate you, fed!)), will more significantly impact businesses with heavy, non fixed debts. They would need to refinance at increased rates which is more expensive, likely dampening their economic activity and potentially forcing layoffs.
That may lead to consumers cutting back and push us into a recession/deflationary cycle, and that would perhaps put downward pressure on the housing market.
But I don't trust the fed. They refuse to do their job. If the above happens they'll probably instantly cut rates again just like in 2018 (I think?) when they raised them by about 25bps and then immediately caved to the market decline.
It's sickening. They're not doing their job. We've needed to raise rates for a long time (and cut gov spending). But we're a sick beast that is slowing dying of infection.
I am surprised no one has replied something like : "Buy bitcoins. Contrary to fiat money Bitcoin can't be printed by governments and as a result there is no inflation with Bitcoin" yet.
Bitcoin also tends to lose value as inflation rises, so it's just a more convoluted way of advocating for BTC over traditional stocks.
I think it would suffer from the gold problem though, where what you are buying is _interest_ in the underlying asset. So it peaks before the anticipated inflation, and then during the inflation it actually doesn't keep up as people offload it but don't buy more. Ex-
https://www.cnbc.com/2021/06/08/gold-as-an-inflation-hedge-h...
Bitcoin is extremely volatile and isn’t directly correlated with inflation, it has the same problem with inflated asset values that everything does right now.
Or ETH2 as you can stake it for 4-5% ARP of ETH which is also deflationary these days and has basically no power consumption
> So assuming this is the start of a sustained inflation, how do I protect my portfolio? Most of my money is in index funds and FAANG companies.
Potentially nothing? Inflation is like 6-7% over last year. The S&P 500 is 24% over last year.
Potentially nothing? Inflation is like 6-7% over last year. The S&P 500 is 24% over last year.
At the start of the stagflation of the 70's, the S&P 500 rallied nearly 36% from June 1970 to June 1971. In proceeding decade, the nominal value of the S&P 500 went from $73 to $114, a respectable 56%. However, cumulative inflation during this same period was approximately 100%. That healthy 56% nominal gain became a real 39% loss.
https://www.macrotrends.net/2324/sp-500-historical-chart-dat...
https://www.macrotrends.net/2324/sp-500-historical-chart-dat...
Think about what your actual cash outflow categories really are. 5-10% increase in the price of food or household items is nothing when so much of our income is already going to housing costs (like 30-50% housing), which have in large costal cities been YOLOing to the moon for the last couple years.
This actually brings up a really inconvenient point for the FIRE/All in VTSAX crowd IMO--when real estate is drastically beating the market how exactly does your FIRE plan work if you don't own a home and want to live in the same place?
Having 1.5MM in VTSAX is nothing when you want to buy a house but that is 50% of your total assets. The workaround is to just work longer and fatFIRE, so 1.5MM is no longer ok, it needs to be more like 3-4 to be able to put down a 250k downpayment if one is trying to retire in a desirable area. But then you have 250k downpayment in a 6x leveraged asset with no diversification. if you tried to trade stocks with 6x leverage and no diversification, this would be nuts but apparently it's ok to do for housing.
TL;DR I don't care if the price of cfood goes up a bit. Housing is going up 12%YOY and that is the main expense...
This actually brings up a really inconvenient point for the FIRE/All in VTSAX crowd IMO--when real estate is drastically beating the market how exactly does your FIRE plan work if you don't own a home and want to live in the same place?
Having 1.5MM in VTSAX is nothing when you want to buy a house but that is 50% of your total assets. The workaround is to just work longer and fatFIRE, so 1.5MM is no longer ok, it needs to be more like 3-4 to be able to put down a 250k downpayment if one is trying to retire in a desirable area. But then you have 250k downpayment in a 6x leveraged asset with no diversification. if you tried to trade stocks with 6x leverage and no diversification, this would be nuts but apparently it's ok to do for housing.
TL;DR I don't care if the price of cfood goes up a bit. Housing is going up 12%YOY and that is the main expense...
Great point that food/goods costs are completely overshadowed by housing in most cities. I’m not a FIRE person, but I’ve always believed the trick to early retirement is to live very very cheaply (it makes all the charts look pretty). I believe this implies you can’t live where you want as soon as your living expense requirements are exceeded by the housing costs. This could be a year or twenty years out, but the risk is there. Curious if anyone has a different take!
One very straightforward investment are Treasury Inflation-Protected Securities, or TIPS. They're adjusted to meet CPI, so that does mean trusting the BLS will be honest with their assessment. Very poor investment most of the time (their real return is typically lower than the already low return of standard Treasurys), but in an inflationary environment can prove wise to have.
Additionally, commodities will almost by definition track inflation.
Additionally, commodities will almost by definition track inflation.
I've been buying Series I Treasury Bonds (I Bonds) for the past few years. They're currently yielding a fixed rate of 0% for up to 30 years from purchase, which above the market rate for TIPS for periods from 5 to 30 years. Both TIPS and Series I bonds track CPI-U. They never lose nominal value, but can't be sold on the open market.
The main downsides of these Bonds are that they are limited to purchases of $10,000 per calendar year, they can typically only be purchased electronically from Treasury Direct, they can't be redeemed for the first year, and have a three month interest penalty if redeemed in the first five years.
I'm mainly purchasing them for a portion of my emergency fund, but they're an interesting long term investment, since they currently offer a guaranteed return significantly more than TIPS held to maturity.
The main downsides of these Bonds are that they are limited to purchases of $10,000 per calendar year, they can typically only be purchased electronically from Treasury Direct, they can't be redeemed for the first year, and have a three month interest penalty if redeemed in the first five years.
I'm mainly purchasing them for a portion of my emergency fund, but they're an interesting long term investment, since they currently offer a guaranteed return significantly more than TIPS held to maturity.
The CPI understates inflation. Do you eat out? Go to grocery stores. Calculate you personal inflation rate. For me it seems to be 10% to 15%.
Hence my caveat about the BLS having to be honest. That said, while they do massage the CPI numbers (hedonic adjustments making cars cost the same over a 20 year period being the worst example), it has been historically vaguely accurate.
> how do I protect my portfolio? Most of my money is in index funds and FAANG
I am not a financial advisor by any stretch of the imagination, but, assuming you work in tech it might be a good idea to diversify a bit.
I find it surprising how many people I know in tech keep their RSUs when they vest. Sure it has worked great for a few years but now you're tying your savings/investment and income to exactly the same organization.
If there were ever to be a tech crash not only would your income be at risk but all of your savings and investments as well. Even in the best of times diversification has been the common advice, and now more then ever it seems like a good idea to spread out your extra income to as many different places as you can.
I am not a financial advisor by any stretch of the imagination, but, assuming you work in tech it might be a good idea to diversify a bit.
I find it surprising how many people I know in tech keep their RSUs when they vest. Sure it has worked great for a few years but now you're tying your savings/investment and income to exactly the same organization.
If there were ever to be a tech crash not only would your income be at risk but all of your savings and investments as well. Even in the best of times diversification has been the common advice, and now more then ever it seems like a good idea to spread out your extra income to as many different places as you can.
As an individual investor? Chill out.
People like Ray Dalio make money on chaos and the doomsaying bullshit. We’ve been at war for 20 years and just did a massive stimulus to avoid economic collapse, inflation is a normal and healthy thing to happen. It’s bad for billionaires with most of their money in cash.
If inflation is a thing, fine, it’s not the end of the world. Don’t accelerate the pay down of debt with fixed interest rates and don’t invest in most bonds.
As an individual, you should lock in longer term interest rates on debt and move your low risk portion of your portfolio away from bonds to cash. If you have variable interest rate debt (credit cards, line of credit, etc) pay it off. If interest rates go up, start dollar cost averaging fixed rate, non-marketable government debt like savings bonds as those rates rise.
People like Ray Dalio make money on chaos and the doomsaying bullshit. We’ve been at war for 20 years and just did a massive stimulus to avoid economic collapse, inflation is a normal and healthy thing to happen. It’s bad for billionaires with most of their money in cash.
If inflation is a thing, fine, it’s not the end of the world. Don’t accelerate the pay down of debt with fixed interest rates and don’t invest in most bonds.
As an individual, you should lock in longer term interest rates on debt and move your low risk portion of your portfolio away from bonds to cash. If you have variable interest rate debt (credit cards, line of credit, etc) pay it off. If interest rates go up, start dollar cost averaging fixed rate, non-marketable government debt like savings bonds as those rates rise.
Billionaires with most of their money in cash?
I don't know of any.
I do know of a lot of retired people, or people with low-wage jobs. That's who gets hurt by inflation.
edit: Warren Buffet's wealth is in stock. Berkshire Hathaway holds the cash, for opportunity investing. (Just in case that's the billionaire you're thinking of.)
I don't know of any.
I do know of a lot of retired people, or people with low-wage jobs. That's who gets hurt by inflation.
edit: Warren Buffet's wealth is in stock. Berkshire Hathaway holds the cash, for opportunity investing. (Just in case that's the billionaire you're thinking of.)
How many companies have you run or helped run through inflationary peaks? How many households?
One way to protect against inflation is to take out a huge mortgage on a house. Interest rates are low right now, and if inflation is high, the mortgage balance will be eroded away by inflation.
Aren’t you just buying a very inflated asset with that mortgage? The median house price in the US is +200% since the previous peak in 2008
https://fred.stlouisfed.org/series/MSPUS
https://fred.stlouisfed.org/series/MSPUS
> Aren’t you just buying a very inflated asset with that mortgage?
If there is no significant inflation in the future, that's probably right.
But if there is significant inflation, that value will go way up in absolute dollars simply due to the dollar devaluing. And the mortgage balance will effectively be minimzed by the same reason.
If there is no significant inflation in the future, that's probably right.
But if there is significant inflation, that value will go way up in absolute dollars simply due to the dollar devaluing. And the mortgage balance will effectively be minimzed by the same reason.
Yes, the way to combat this is to buy a house that needs work on great property.
Except everybody thinks this way. When I was house hunting a few years ago houses that needed work on great property sold at basically 0% discount compared to houses that didn't need work. I saw bidding wars resulting in fixer-uppers going for literally more than houses that didn't need work. The only exception where houses that needed serious structural work, and even then the discount was nowhere near enough to make it really worth it.
You are right. I had to buy an absolute basket case of a house all the easy fix and flips are gone. You have to be able to take the pain/work of the deals that people without vison pass on.
Important to note that the interest rate needs to be fixed. A variable rate could be increased and cancel out that erosion.
If inflation is followed with interest rates rising, and house prices are a product of mortgage affordability (and so interest rates), will inflation (and so interest rates rising) reduce house prices?
Has anyone modelled this? If inflation is at 6% what is a "sensible" interest rate? What percentage reduction in total borrowing would the average person have in that scenario?
Has anyone modelled this? If inflation is at 6% what is a "sensible" interest rate? What percentage reduction in total borrowing would the average person have in that scenario?
> So assuming this is the start of a sustained inflation, how do I protect my portfolio? Most of my money is in index funds and FAANG companies.
The performance of the stock market in the last year or so shows that most investors see it as the safest haven for their liquid capital. Combine that with the fact that most of the dollars printed in the past 18 months have gone straight into large investors' pockets and you have a perfect storm for the usual safe-bet stocks skyrocketing.
...at least until the wheels fall off, but then we'll have bigger problems than the valuation of our nest eggs.
The performance of the stock market in the last year or so shows that most investors see it as the safest haven for their liquid capital. Combine that with the fact that most of the dollars printed in the past 18 months have gone straight into large investors' pockets and you have a perfect storm for the usual safe-bet stocks skyrocketing.
...at least until the wheels fall off, but then we'll have bigger problems than the valuation of our nest eggs.
I listen to the alpha trader podcast. Their latest interviewee suggested equities that made it through the last two big busts would probably be safe havens now. I think he said cyclicals-stuff out of the limelight. It’s a good listen.
Not financial advice, but in times of high inflation companies need to find ways to pass on costs to consumers in order to protect their margins. Companies that have strong pricing power like chemicals, materials, etc. will undoubtedly be able to pass costs onto other consumer facing companies. I dont know if Hershey's will sell more candy, but I know they have to buy sweetener.
Short answer: You can't. Inflation (by gov. money printing) is a form of taxation for everyone who has money, deals with money or deals with businesses that deal with money. That means everyone. You are going to be affected, period.
Certainly, you can reduce your exposure to USD; but it is already a dumb idea to hold USD for too long. However, don't panic reduce your USD exposure and instead expose yourself to risks that you cannot assess.
There is yet an asset that holds against inflation. (ie: goes up when the $ goes down but never goes down by itself) Such asset will be highly complex and highly in demand that it might even incur a small inflation (discount) itself. We are, after all, in a world where all currencies are inflating at best and hyper-inflating at worst.
Certainly, you can reduce your exposure to USD; but it is already a dumb idea to hold USD for too long. However, don't panic reduce your USD exposure and instead expose yourself to risks that you cannot assess.
There is yet an asset that holds against inflation. (ie: goes up when the $ goes down but never goes down by itself) Such asset will be highly complex and highly in demand that it might even incur a small inflation (discount) itself. We are, after all, in a world where all currencies are inflating at best and hyper-inflating at worst.
If you expect interest rates to increase, you should hedge your tech stocks and look at sectors that do well in high rate environments.
The only important thing is to buy assets that are likely to benefit from central bank money printing (ie, any assets). Asset owners have been reaping a totally unreasonable return for at least a decade, where the actual performance of their assets is independent of their returns. There are a terrifying number of large companies with allegedly high valuations that are making no profits or substantial losses.
As this article points out, the US share market is behaving unpredictably. There is also an argument that when GDP and energy consumption diverged that was the end of GDP as a useful measure of economic prosperity. This is a very easy investment environment - if you own assets you make money. Gold has allegedly been making long-term real returns for years now, which is nonsense.
As this article points out, the US share market is behaving unpredictably. There is also an argument that when GDP and energy consumption diverged that was the end of GDP as a useful measure of economic prosperity. This is a very easy investment environment - if you own assets you make money. Gold has allegedly been making long-term real returns for years now, which is nonsense.
> There is also an argument that when GDP and energy consumption diverged
I've not encountered this concept before, but it sounds very interesting. Can you share a good resource for reading about it?
I've not encountered this concept before, but it sounds very interesting. Can you share a good resource for reading about it?
I don't know, when I say there is an argument I mean that I would argue it to be true.
But it is a fairly easy position to follow - the real GDP/capita in the US has roughly doubled since the 1980s. A typical family doesn't have 2x as much stuff. The next generation doesn't even have enough money to consistently form a family, maybe, depending on what the stats are telling us. If anything, there are signs of political stress that would be easy to justify if people were treading water rather than seeing their lives drastically improve. It looks like people fighting over a fixed pie rather than there being enough for everyone to get more.
The counterargument is probably computers and smartphones - which are a big deal, but have a relatively minor impact compared to doubling the energy supply which is what that GDP would have historically indicated.
But it is a fairly easy position to follow - the real GDP/capita in the US has roughly doubled since the 1980s. A typical family doesn't have 2x as much stuff. The next generation doesn't even have enough money to consistently form a family, maybe, depending on what the stats are telling us. If anything, there are signs of political stress that would be easy to justify if people were treading water rather than seeing their lives drastically improve. It looks like people fighting over a fixed pie rather than there being enough for everyone to get more.
The counterargument is probably computers and smartphones - which are a big deal, but have a relatively minor impact compared to doubling the energy supply which is what that GDP would have historically indicated.
As someone who was alive in the 1980s, I'd say the typical middle class American family does have 2x more stuff. Food, electronics, and clothes in particular are dramatically cheaper. Homes outside of key urban markets are larger. Cars are a magnitude safer and more reliable.
I was born in 1968. I remember at the time thinking that homes in Southern California where I lived at the time were out of reach financially. Finally, with great struggle I managed to buy a house for $149K in 1993. Four years later after an extended period of unemployment I ended up selling the house in a short sale for $135K. I occasionally will look that house up on Redfin and last I checked the last sale was for $775K. My salary has gone up since 1993, but not by a factor of 5. Tuition, books, fees, room and board at the Claremont Colleges where I did my undergrad at the end of the 80s was around $20K all in. It's now around $80K. Again, salaries have gone up since the 80s, but not by a factor of 4. The maximum subsidized student loan amount when I was an undergrad was $2000/year so you'd end up with $8K of debt after graduation. Now the limit ranges from $3500–5500 based on year of school for a total of $19000. I had a contracting job programming right out of college at $30/hr. According to the Google, a starting salary for a computer programmer now is $55,036. That's not 2.5x more than I had, but maybe I was paid more than average back then because I was special? (On the flip side, I was stuck at that pay rate for 3 years because I didn't know any better.)
My first car in 1991 was a Mazda Protege. I paid $11,000 for it. The equivalent model today is the Mazda 3 which has a MSRP starting at $20,650 although the Google indicates that I can expect to pay at least $26K if I actually want to buy one.
My first car in 1991 was a Mazda Protege. I paid $11,000 for it. The equivalent model today is the Mazda 3 which has a MSRP starting at $20,650 although the Google indicates that I can expect to pay at least $26K if I actually want to buy one.
As someone born in 1989, you are out of touch. The average person my age has nothing and is living on dog food.
Born in the mid 70s. My (single) parent was able to provide a roof over our heads, health care, and significantly helped pay for my education, heck, eventually accumulating a few [typical boomer] toys like a second home and a boat... all on a single school teacher's salary. He retired stably and comfortably with a predictable pension.
I (roughly 20 years younger) just recently managed to gain some financial stability, and by some miracle, now own a home. High deductible health plan means I avoid going to the doctor unless limbs are falling off. When my kid is of college age, it will be $200K per semester and she'll have to go into debt slavery to afford it. The idea of owning things like a second home seems ridiculous. If I ever retire, my lifestyle will depend to a large degree on whether or not my crappy 401(k) goes up or down.
The next generation, 20 years younger than me, is utterly fucked, in basically all ways. I thank my lucky stars that I wasn't born in the late 90s.
I think we'd all be willing to give up our smartphones if it meant going back to the "easy mode" of decades past.
I (roughly 20 years younger) just recently managed to gain some financial stability, and by some miracle, now own a home. High deductible health plan means I avoid going to the doctor unless limbs are falling off. When my kid is of college age, it will be $200K per semester and she'll have to go into debt slavery to afford it. The idea of owning things like a second home seems ridiculous. If I ever retire, my lifestyle will depend to a large degree on whether or not my crappy 401(k) goes up or down.
The next generation, 20 years younger than me, is utterly fucked, in basically all ways. I thank my lucky stars that I wasn't born in the late 90s.
I think we'd all be willing to give up our smartphones if it meant going back to the "easy mode" of decades past.
Logical result of population growth plus highly regulating the home&health care markets.
The next generation's only chances for success are in newly created, (yet) unregulated markets, like IT was for us.
There is no surprise teacher salaries haven’t increase much even though parents are so eager to spend to ensure their kids success: heavy government involvement in education market.
The next generation's only chances for success are in newly created, (yet) unregulated markets, like IT was for us.
There is no surprise teacher salaries haven’t increase much even though parents are so eager to spend to ensure their kids success: heavy government involvement in education market.
> The next generation, 20 years younger than me, is utterly fucked, in basically all ways. I thank my lucky stars that I wasn't born in the late 90s.
There's good and there's bad, it's not that clear cut.
Entry level salaries today are through the roof like nothing I've ever experienced before.
I started working in the early 90s with a masters degree from a top school (CMU) for $32K and that was a good job, most of my peers started in the high $20Ks.
According to https://www.usinflationcalculator.com/ $30K then is just under $60K today.
As HN knows, starting salaries these days are way more than $60K. I've personally hired new grads for over $150K, possibly closer to $200K if the RSUs do well. That's over $100K in early-90s dollars. Even our SVP wasn't making that kind of money back then.
So the early career income potential is so high today that it actually becomes possible to implement things like FIRE and retire in your 30s.
There's good and there's bad, it's not that clear cut.
Entry level salaries today are through the roof like nothing I've ever experienced before.
I started working in the early 90s with a masters degree from a top school (CMU) for $32K and that was a good job, most of my peers started in the high $20Ks.
According to https://www.usinflationcalculator.com/ $30K then is just under $60K today.
As HN knows, starting salaries these days are way more than $60K. I've personally hired new grads for over $150K, possibly closer to $200K if the RSUs do well. That's over $100K in early-90s dollars. Even our SVP wasn't making that kind of money back then.
So the early career income potential is so high today that it actually becomes possible to implement things like FIRE and retire in your 30s.
heck, I'd consider giving up smartphones a plus!
> Born in the mid 70s. My (single) parent was able to provide a roof over our heads, health care, and significantly helped pay for my education, heck, eventually accumulating a few [typical boomer] toys like a second home and a boat... all on a single school teacher's salary. He retired stably and comfortably with a predictable pension.
This sort of story is not uncommon, or crazy to believe. That said, the market conditions of that period of the 1900s were crazy, (inflations etc), so its wild to think about just how crazy it was that this was happening.
This sort of story is not uncommon, or crazy to believe. That said, the market conditions of that period of the 1900s were crazy, (inflations etc), so its wild to think about just how crazy it was that this was happening.
> Gold has allegedly been making long-term real returns for years now, which is nonsense.
Gold can make real returns in anticipation of negative real yield bonds. If the next 5 years are guaranteed to be 2% inflation with 0% interest rates, Gold will immediately yield 10% real upfront and flatline until then, assuming no other present "anticipation" effects.
Gold can make real returns in anticipation of negative real yield bonds. If the next 5 years are guaranteed to be 2% inflation with 0% interest rates, Gold will immediately yield 10% real upfront and flatline until then, assuming no other present "anticipation" effects.
Interesting that the author assumes that US equity dominance will continue.
The US has about 60% of the global investable public equity market by market cap but only 25% of global GDP.
The US public stock market is also at the highest valuation, by any measure you can come up with, since 1929.
I personally wouldn't be undiversified
The US has about 60% of the global investable public equity market by market cap but only 25% of global GDP.
The US public stock market is also at the highest valuation, by any measure you can come up with, since 1929.
I personally wouldn't be undiversified
> The US has about 60% of the global investable public equity market by market cap but only 25% of global GDP.
GDP doesn't matter for equity valuations, excess profits captured by a company do. If 99% of companies are in intense competition and make no profit, only enough income to pay their expenses, but one company comes up with a new product no one else can make, they can charge whatever maximizes profit and that's where equity value comes from.
GDP doesn't matter for equity valuations, excess profits captured by a company do. If 99% of companies are in intense competition and make no profit, only enough income to pay their expenses, but one company comes up with a new product no one else can make, they can charge whatever maximizes profit and that's where equity value comes from.
Apples and Oranges. You are also assuming that other countries have the same level of participation in the stock market as the USA; which is far from it. Especially in emerging markets where the stock market is really insignificant.
Vanguard PAS (Personal Advisory Service) lately recommends 60/40 diversification on equities, where domestic represents 60% and international 40%. VTIAX is a low-cost fund to hold.
Well that split in inline with most world/global market cap weighted stock indices so is hardly Earth shattering.
yeah, that's vanguard standard recommendation, which has been underperforming US markets for years
Emerging markets outperformed US markets in the periods between 1988-1994, 2003-2007, and 2009-2011
But if you just bought+held, even with that those periods (which are the minority of time), you'd lose.
https://bit.ly/3n6dE6t (Citation to PV)
https://bit.ly/3n6dE6t (Citation to PV)
Sure, but if you look at the chart the 60/40 US/non-US portfolio has only really outperformed significantly since around 2011. That's the last 10 years out of the last 35 in the bottom graph.
The question now is "what happens next?" given rising rates and crazy high US valuations
The question now is "what happens next?" given rising rates and crazy high US valuations
> The question now is "what happens next?"
Historically, the rest of the world handles recessions terribly.
Japan, once an economic engine, is stalled... still.
Europe is aging and they're still stuttering after 08. Don't expect them to make any surprise economic growth jumping past the US anytime soon.
China + other emerging seem like good promises, but china specifically is a huge regulation risk since those companies operate at whim of a government scared of big co's. Also with Evergrande as example, their economy is real estate driven and highly over-leveraged which seems like a major risk to me.
All in all, i'm personally keeping investments in america unless i see real ex-us promising growth. So i think "what happens next" is the global rich keep their money in US assets while they slosh around desperate for returns and speculative investments trying to beat inflation. So... imo more of the same but more stressed this time :)
Historically, the rest of the world handles recessions terribly.
Japan, once an economic engine, is stalled... still.
Europe is aging and they're still stuttering after 08. Don't expect them to make any surprise economic growth jumping past the US anytime soon.
China + other emerging seem like good promises, but china specifically is a huge regulation risk since those companies operate at whim of a government scared of big co's. Also with Evergrande as example, their economy is real estate driven and highly over-leveraged which seems like a major risk to me.
All in all, i'm personally keeping investments in america unless i see real ex-us promising growth. So i think "what happens next" is the global rich keep their money in US assets while they slosh around desperate for returns and speculative investments trying to beat inflation. So... imo more of the same but more stressed this time :)
I believe their advice is (under agreement with their clients) is not supposed to be shared. At least how I’ve understood it.
Not a “black box” advisory service from my experiences, which cause some to underrate Vanguard’s professional services. Recommendations are publicly in whitepapers like this: https://personal.vanguard.com/pdf/ISGGEB_042021_Online.pdf
> Interesting that the author assumes that US equity dominance will continue.
The author does not assume this—rather this is held up as an assumption that might be wrong.
The article is structured as a list of 5 assumptions that would be tempting to make but could be incorrect, and this is one of them.
The author does not assume this—rather this is held up as an assumption that might be wrong.
The article is structured as a list of 5 assumptions that would be tempting to make but could be incorrect, and this is one of them.
Thanks. I was a little confused what kind of argument the author was trying to make.
I'm interested in the source/methodology on these ratios. US equity markets have deep global participation -- for example, 67% of Apple's revenue is overseas but it is a US stock.
I think by at forward PE It’s not nearly as bad.
But forward PE is making a bunch of assumptions of the type the article warns about, namely that the future will be like the past. So by using forward PE you are implicitly making the those questionable assumptions.
If you want something to justify high valuations, forward PE is a good measure. If you want a margin of safety, trailing PE and trailing dividend yield are better measures. Margin of safety is thin on the ground these days, sadly.
If you want something to justify high valuations, forward PE is a good measure. If you want a margin of safety, trailing PE and trailing dividend yield are better measures. Margin of safety is thin on the ground these days, sadly.
Fair points. On the other hand in a high growth environment, current or past PE might be too pessimistic.
"The US public stock market is also at the highest valuation, by any measure you can come up with, since 1929."
How are you defining valuation? And highest valuation relative to what (other markets, itself...some other benchmark)?
This is definitely not a true statement.
How are you defining valuation? And highest valuation relative to what (other markets, itself...some other benchmark)?
This is definitely not a true statement.
All of the above
I don’t disagree with the wider point, but I want to point out that those numbers aren’t comparable. US GDP is entirely domestic, but US equities are just US-listed companies, and many of those are multinationals with lots of foreign exposure.
GNP is similar in spirit, but it’s still not right because foreigners hold a ton of US equities.
https://seekingalpha.com/article/4146992-how-global-is-s-and...
GNP is similar in spirit, but it’s still not right because foreigners hold a ton of US equities.
https://seekingalpha.com/article/4146992-how-global-is-s-and...
The question is if it's to be better to sit in cash (and have it eaten away by the inflation) waiting for the correction or to invest now and miss the potential upsides if the correction happens.
Historically sitting on cash is a terrible decision a majority of the time, it's not even close. Without knowing you, your chance of correctly timing the peak and the bottom of the market is simply abysmal. The market may crash tomorrow, but it probably won't.
Let's say by incredible luck you manage to time both of these events perfectly, then what? There will be other crashes in the future, that's a certainty. And you won't be able to time all of them.
Let's say by incredible luck you manage to time both of these events perfectly, then what? There will be other crashes in the future, that's a certainty. And you won't be able to time all of them.
Yes, but [most of the time] historically we also didn't have an all-time high retail participation in markets, highest P/E ever, unprofitable companies skyrocketing to crazy heights, insane speculative mania.
I agree that timing the drop is very difficult, but there is going to be a drop for sure - what has been happening in markets recently is definitely not "the new normal"
I agree that timing the drop is very difficult, but there is going to be a drop for sure - what has been happening in markets recently is definitely not "the new normal"
One thing to keep in mind is that while there is indeed plenty of speculation, there's also plenty of healthy criticism of the current valuations as well as outright doomsday talk from fairly well known investors.
What this means is that for now the market continues to self correct and we haven't reached peak positive sentiment yet. Historically, massive selloffs happen because of unexpected sudden changes in sentiment (2000, 2008) or due to black swan events (2020). Given that we just went through a black swan and the markets aren't overly optimistic, I wouldn't expect a large crash in the immediate future.
What this means is that for now the market continues to self correct and we haven't reached peak positive sentiment yet. Historically, massive selloffs happen because of unexpected sudden changes in sentiment (2000, 2008) or due to black swan events (2020). Given that we just went through a black swan and the markets aren't overly optimistic, I wouldn't expect a large crash in the immediate future.
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Invest now. Buying the dip is a terrible investment strategy. [0]
[0] https://ofdollarsanddata.com/why-buying-the-dip-is-a-terribl...
[0] https://ofdollarsanddata.com/why-buying-the-dip-is-a-terribl...
This is where I am at. Watching savings from a liquidity event get eaten away. At the same time not trusting to dump into a very highly valued market. GLD, Crypto, Land, Oil, Food. Odd thing i have been buying is old steel body trucks, 1990 to 1998 - Single cab, 8' bed. My wife is not happy with this, but i see it as a great way to park 5 to 30k in a physically investment. Problem is, I don't want to store 100-300 of these.
Anybody have any other ideas?
Anybody have any other ideas?
Change your thinking: instead of targeting the largest gain, try going for the smallest loss. Take into consideration that anything you think will happen, you may be wrong. Thus, there is only one solution: diversify. Some stock, some ETFs, some real estate and keep some cash.
But what do I know?!
But what do I know?!
Good point. I recently got (for me) a lot of long term financed debt at a low fixed rate. Also buying tax liens for the first time. Just looking for items outside of the "" System.
Take a look at some conservative designed portfolios, eg. the Ivy Portfolio, the Allweather portfolio, cockroach, etc.
Many are designed to have smaller swings up/down. While they may miss booms and spikes, they draw down less during volatile markets and downturns.
I dont use it but many on internet (and coworkers) use M1 - you can just set a target ratio and the service will auto rebalance for you.
Many are designed to have smaller swings up/down. While they may miss booms and spikes, they draw down less during volatile markets and downturns.
I dont use it but many on internet (and coworkers) use M1 - you can just set a target ratio and the service will auto rebalance for you.
>old steel body trucks, 1990 to 1998
Is that an asset that will hold value? Rust never sleeps.
Is that an asset that will hold value? Rust never sleeps.
Lot of people want old trucks now as many are used for work vehicles/beaten to death, the really premium examples appreciate more. I live in a dry climate so I dont have to worry about rust, really just UV damage. Problem is I dont really want to own a field of trucks, just looking for hedges.
Why so bearish?
I struggle with being too bearish. But I am right every once and a while.... which really is all it takes to self reinforce the idea. I feel something is off is all. Companies and what make to what they are valued i just don't see as realistic right now. If you run a M+A value on almost any company in the market for instance and you had all the money in the world you would not get a good deal right now. I also think that's why WB/BH is sitting on 130+billion in cash and getting killed by inflation, they would rather take that hit than accept the risk of a bad investment.
AFAIK, historically it has always ended up better to remain invested in the market. People have been predicting a catastrophe for so long now that it's hard to take them that seriously, I just assume they are missing some important detail which explains why they are always wrong. So I keep everything but my emergency fund invested, and avert my eyes from the news stories proclaiming the end is nigh. Worst case, I end up working longer than I'd like -- unless the world really does collapse, I have marketable skills that should at least pay subsistence money.
It's better if you are OK waiting 15 years to get back to where you were if a major crash is immanent.
Or a Japan situation where it took 30 years, thanks to stagflation, which we have all the ingredients for right now.
Or a Japan situation where it took 30 years, thanks to stagflation, which we have all the ingredients for right now.
Japan has been experiencing deflation, not stagnation, for the last couple decades. Of the two, stagflation is decidedly better because you can protect yourself from it through diversification.
Deflation just means hoard cash and hope you outperform literally every asset.
Deflation just means hoard cash and hope you outperform literally every asset.
>AFAIK, historically it has always ended up better to remain invested in the market.
It always has. Historically everything goes up. What everybody forgets in this scenario is what if a sizeable chunk of your liquid assets are tied up in investments during a crash and you're 5-10 years to retirement? You're seriously going to wait another 10 years for the market to correct itself to then cash out so you don't lose any money? No you might even be dead before you even have the chance to use it.
It always has. Historically everything goes up. What everybody forgets in this scenario is what if a sizeable chunk of your liquid assets are tied up in investments during a crash and you're 5-10 years to retirement? You're seriously going to wait another 10 years for the market to correct itself to then cash out so you don't lose any money? No you might even be dead before you even have the chance to use it.
There are alternatives (mostly diversification). Eg. Bonds won't lose value when stocks do typically, and def by lower swings. But if you're really close to retirement, it may be good to hold cash - only if you actually think cash is the right way to store wealth in retirement, which may not be best.
We see a lot of retail investors being fomo’d (by media, by peers, and forum threads like this) into dumping cash into stocks, like everyone else. That will likely not end well. Cash is a call option on opportunity.
By coincidence, Nick Maggiuli wrote yesterday about it in a text titled "How to Invest Your Money When Inflation is High" [0]
[0] https://ofdollarsanddata.com/how-to-invest-your-money-when-i...
[0] https://ofdollarsanddata.com/how-to-invest-your-money-when-i...
Startup investing is going to be the most profitable form of investing over the next decade. Park your money with people who have a good product and a good team. It's easier (and more likely to be profitable) now than ever with the rise of crowdfunded equity sites like StartEngine. In the age of Kickstarter and RobinHood, these sites are going to explode in popularity.
I’ve got a decent sized portfolio, have been investing since the early 1980s and today is very different from the late 1970s. I’ve replaced bonds with crypto (80% BTC, 20% altcoins like ETH, SOL, LINK, and a few others). These represent around 10% of my holdings. I’m increasing that to 20% over the next year.
TLDR; Diversify, no one knows what will happen, best thing we can do is learn from stock market history.
Still pretty happy with VTSAX.
The trick is to overcome the "just one scenario" bug in our brains, that is there to prevent group-fracturing and civil war. This is why we prefer binary worldviews (black/white).
So, you are ready for parallel exploration- now a working capitalism can do that for you, when its not self-sabotaging by becoming monopolistic. There is no real parallel exploration in a big cooperation.
Finally, the last sub-optimal part that has to go, is the attachment to enterprises and humans. What is important is not the company or the CEO, but the technology.
A company can go bust and all you retain as shareholder is the IP - and this can become the foundation of a whole micro-cosmos. Individual Products are nothing, but the capability to produce something within resource reach- is everything.
So, you are ready for parallel exploration- now a working capitalism can do that for you, when its not self-sabotaging by becoming monopolistic. There is no real parallel exploration in a big cooperation.
Finally, the last sub-optimal part that has to go, is the attachment to enterprises and humans. What is important is not the company or the CEO, but the technology.
A company can go bust and all you retain as shareholder is the IP - and this can become the foundation of a whole micro-cosmos. Individual Products are nothing, but the capability to produce something within resource reach- is everything.
1) YOLO
2) HODL
2) HODL
I read the thing but what the author describes just pushes the problem one step down the road, it doesn't solve it.
At some point you got to assign a probability to the events that the author mentions.
You can't just assign equal probability to all the scenarios , otherwise it's not like you have solved anything.
At some point you got to assign a probability to the events that the author mentions.
You can't just assign equal probability to all the scenarios , otherwise it's not like you have solved anything.
So assuming this is the start of a sustained inflation, how do I protect my portfolio? Most of my money is in index funds and FAANG companies.