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Adding Gold and/or Property?

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Newroad
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Adding Gold and/or Property?

#420825

Postby Newroad » June 19th, 2021, 10:58 pm

Hi All.

All three sub-portfolio types of my family are, for purposes of discussion*, roughly of the following form

    35% Passive Global Equity (VWRL)
    35% Active Global Equity (WTAN or ATST or FRCL)
    15% Passive Global Investment Grade Bonds (VAGP)
    15% Active Global High Yield Bonds (HDIV or BIPS)

In the interests, predominantly, of decreasing correlation and hence volatility, I am thinking of adding in around 5% gold (e.g. SGLN or SGLP) and/or 5% REIT's (e.g. IWDP). It could all come from the 70% equity split, the 30% bond split, or 5% from each.

Interestingly and a little unfortunately, the correlation between the possible new additions and (say*) the SPX, is positive and moderately high over 10 years

    SGLN 0.53
    IWDP 0.78

which makes me consider that even if possibly a decent idea, it's maybe not enough of a decent idea to bother.

Thoughts?

Regards, Newroad

* The JISA's (which also have a grandparental contribution in MNP) are actually 75% equities, the ISA's and SIPP's 67% equities

** I would have slightly preferred to use VWRL for the comparison, but it doesn't have a 10 year history

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Re: Adding Gold and/or Property?

#420834

Postby JohnW » June 20th, 2021, 12:05 am

Newroad wrote:the correlation between the possible new additions and (say*) the SPX, is positive and moderately high over 10 years

Exercise care. 'Was', not 'is' for those correlation figures for the last decade. It helps one keep in mind that the future correlations can be different; probably will be, for better or worse.
SGLN has had a total return of 2% over the last decade. However favourable a correlation might be in the future, a low return is not desirable when higher returns are available, as appear for bonds now with 10 year gilts at more than 0.2%/year.
Are your sub-portfolios 70/30, with 70% equities and 15% high yield bonds which behave like shares as well as like bonds?
And yes, is 5% of anything different worth the bother, or is it just too small to fuss over?

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Re: Adding Gold and/or Property?

#420887

Postby Newroad » June 20th, 2021, 11:36 am

Indeed, JohnW.

Alas, a decade of figures (less for some of the newer instruments) is all I have - and some of the asset classes (e.g. High Yield Bonds) I'd like to compare don't really have data for similar historical periods to now, as they pre-date Michael Milken!

On whether the scale of investment is worth it, hard to say. For example, one author* late last decade targeting minimising risk for a 5% return calculated

    Investment Grade Bonds 28%
    Japanese Equities 24%
    S&P 500 23%
    EM Equities 10%
    High Yield Bonds 7%
    EM $ Debt 5%
    European Equities 3%

or targeting maximum return at 9% risk, the fairly similar

    Investment Grade Bonds 30%
    Japanese Equities 23%
    S&P 500 20%
    EM Equities 10%
    High Yield Bonds 7%
    EM $ Debt 5%
    European Equities 3%
    Gold 2%

So, it would seem, some un/less correlated stuff in small percentage holdings seems to make some difference.

Regards, Newroad

* who ran the asset allocation and risk management for $80 billion - almost as much as my ISA and SIPP combined ;)

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Re: Adding Gold and/or Property?

#421029

Postby 1nvest » June 20th, 2021, 10:55 pm

Newroad wrote:In the interests, predominantly, of decreasing correlation and hence volatility, I am thinking of adding in around 5% gold (e.g. SGLN or SGLP) and/or 5% REIT's (e.g. IWDP).

I consider our home to be enough REIT. Happy to also hold a lot more gold than just 5% that likely would make relatively little difference.

If in drawdown/retired where you have enough such that around a 1% SWR might provide enough to supplement other sources of income (pensions, annuity, whatever) then it matters relatively little where you might source that from. Likely wealth preservation might be more of a concern.

For me owning a home avoids having to find/pay rent, shelter is liability matched and its irrelevant if rents soar or collapse as owning is like being both landlord and tenant. Perhaps a third of total wealth as per the ancient Talmud advice of a third each in land, commerce and reserves.

A third stocks and a 3% SWR applied to that services the overall 1% SWR with relatively low risk (all stock is suggested as having a minimum 4% SWR historically, such that 3% is more of a perpetual withdrawal rate (PWR)).

A third gold, reserves. Should stocks totally fail, or a home is lost, then you have the reserves to carry on much as before and where perhaps the gold reserves might be replenished across better times. Historically times/events that may have led to the total loss of a home or stocks have tended to coincide with times when the price of gold has tended to be relatively high.

Land, stock, commodity assets, and for a UK investor if US stocks then that's £ based home value, $ based stocks, global currency gold. Reasonable currency and asset diversification.

Don't particularly like bonds as 'reserves' as they're like lending to someone who can print money, change tax rates, adjust interest rates or change the rules. If stocks and bonds are both in the same currency/country then that's a degree of concentration risk. UK home, US stocks, gold spread around wherever combined geopolitical risk diversification.

The common anti-gold shout is that gold earns nowt. But that fails to consider it as part of a overall portfolio and where historically the differences have been relatively small. Of the order 7% real total returns from all-stock versus 6.5% from a Talmud when you also factor in imputed rent benefit. And where those are gross figures, in net terms the Talmud can be the more tax efficient. At more extreme levels, high net wealth, stocks might be swapped out for art. All tangible portable assets bar home(s), but where multiple homes might dilute the 'fixed' risk. Three homes around the world, multiple citizenships and if one region starts looking dodgy transfer that to another, similar to how the Stones and Bowie opted for self imposed tax exile in the 1960's/70's when Labour increased taxes to 95% levels (and in 1968 even applied a retrospective taxation that increased the tax rate to 136%). Instead of increasing tax revenues that saw the flight of capital, leaving a tax hole for others to fill and that led to a IMF bailout having to be called for in the mid 1970's.

In respect to small amounts, then I have seen figures suggesting that including a small amount of gold such as to the levels you indicate can help improve overall risk-adjusted rewards.

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Re: Adding Gold and/or Property?

#421031

Postby bluedonkey » June 20th, 2021, 10:59 pm

Thank you for posting about an investment matter on lemonfool!

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Re: Adding Gold and/or Property?

#421094

Postby Wuffle » June 21st, 2021, 9:28 am

Newroad,

This looks like you inching towards a place already occupied to some extent by the 'wealth preservers'.
As such I would be inclined to have a good look at their current portfolios and what they get up to.
There is a hefty thread on Investment Trusts board titled 'Personal Assets vs Capital Gearing vs RICA' that might be worth a read.

W.

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Re: Adding Gold and/or Property?

#421152

Postby Newroad » June 21st, 2021, 1:59 pm

Hi Wuffle.

At some level, you're probably right. It's a journey that I've been on for a bit (was for a long time 100% global investment trusts).

However, I'm not that far along the curve yet and despite contemplating it, putting the "barbarous relic" into any portfolio of mine would not sit easy with me.

Anyway, no change at present - musing more than anything else. If it's marginal, then simplicity is likely to win out for me.

Regards, Newroad

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Re: Adding Gold and/or Property?

#421188

Postby 1nvest » June 21st, 2021, 4:30 pm

Newroad wrote:
    35% Passive Global Equity (VWRL)
    35% Active Global Equity (WTAN or ATST or FRCL)

Interesting "global equity" choices, thanks. I've been reading about FRCL's 150 year history recently. Seeing your WTAN and ATST options I've briefly looked up the relative performances (by eye). Looks to me that WTAN in being lighter into the US has lagged the others after recent relatively strong US (tech) gains, otherwise very similar

Image
(thumbnail image, click to enlarge)

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Re: Adding Gold and/or Property?

#421191

Postby 1nvest » June 21st, 2021, 4:39 pm

Buffett likes 90/10 stock/T-Bills, others might hold more in bonds, less in stock, i.e. Buffett instead prefers to shift risk over to the stock side.

If you count 50/50 stock/gold barbell to combine to a form of central bullet, then 95/5 stock/gold might be similar to 90/10 stock/T-Bills. And where both might still be near 100% stock total returns

Suspect that would tend to not make much difference either way PV (US) example

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Re: Adding Gold and/or Property?

#421252

Postby Newroad » June 21st, 2021, 7:39 pm

Hi 1nvest.

The Global Equity Investment Trusts are historic inertia - the SIPP's came first with ATST (it used to be held as part of Alliance Trust Savings) then FRCL with whom I invested the kids Child Trust Funds (and additions) then finally WTAN for the ISA's (it used to be held as part of Witan Wisdom). Other than not holding the same one, the goal was a big, long term global trust held through a cheap'ish vehicle.

They have all since gone their own ways so I have gradually merged them into an II account (and changed the Child Trust Funds into JISA's). However, even as I rebalance, I have been happy enough with them for the (slightly, at least) active global equity component of the portfolios. I toyed late last year with replacing WTAN with MNKS (or MNP, but I used that in the end to replace MYI for the kids grandparental monies) but, relying on some basic technical analysis, decided not to point in time - which seems to have been the right choice (by luck or judgement). I'm still considering the future of WTAN, but BNKR is now in the frame more than MNKS.

Thanks for the link to Portfolio Visualiser. One of the best free ones I've seen, but still not enough to do what I'd like. However, it is probably enough to learn some lessons from. A couple of keys ones - adding 5% gold and 5% REIT's helps based on back-testing - lower volatility and high returns. Using Large Cap US and Short Term Treasury 90-10 (a la Buffet) beats either of mine and the Vanguard Balanced one quite comfortably - with admittedly considerably higher volatility. And perhaps all the above is a historic distortion based on recent US outperformance.

Who knows? :)

Regards, Newroad

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Re: Adding Gold and/or Property?

#421638

Postby 1nvest » June 23rd, 2021, 4:06 pm

Newroad wrote:Using Large Cap US and Short Term Treasury 90-10 (a la Buffet) beats either of mine and the Vanguard Balanced one quite comfortably - with admittedly considerably higher volatility.

'Better/beats' ... is dependent upon what measure you're using :)

Some consider risk to be volatility in yearly values. For me I consider risk to be drawdowns. When you're accumulating dips are buying opportunities, savings buy more shares than might otherwise have been the case. In drawdown/retirement dips combined with withdrawals is my primary risk factor.

A decade of portfolio total real (after inflation) returns of -5% annualised along with drawing a 4% SWR (4% initial portfolio value where that amount is uplifted by inflation each year i.e. a stable inflation adjusted income stream) could pull the portfolio value down to less than 30% of the former inflation adjusted portfolio value. From there it would be sleepless nights of worry. As such I prefer a combination of lower downside risk and lower SWR.

If historically a portfolio endured relatively few bad 10 year periods

Image

in real total return terms, then that potentially has better longer term sustainability. If that means less great gains during good times then that's secondary to my objectives, additional gains above/beyond that needed just leaves more for heirs.

The above chart is for a Talmud asset allocation, home, US stock, gold (silver pre 1934) and excludes imputed rent benefits. Relative to a inflation rate of one third house prices, two thirds CPI.

In practice instead of drawing 1.5% SWR against that, as home value is illiquid its more a case of 2.25% SWR against liquid assets, 50/50 stock/gold. UK home £, US stock $, gold is a global currency. Land, stocks, commodity assets. Factor in historic 4.2% imputed rent benefit, 1.4% proportioned and that 1.5% SWR is more like 3%, and where historically that was a PWR (perpetual withdrawal rate).

Image

Historically on average that was comfortably supported and saw additional real gains on top, such that as a percentage of the portfolio value withdrawals tend to decline over time, 1.5% reduces to 1.2% to 1% ...etc., safety increases with time, or you can use discretion to top slice out some of those gains for additional spending.

If others are making 8% annualised real, I'm only making 6% real, then that doesn't really matter, my objectives were met. If others are seeing their portfolio down at 25% of former inflation adjusted values, I'm down to 66% (after income withdrawals) then likely for me that will just be a paper value dip whereas for others they might be running right up to the wire.

Stock heavy/all-stock can do very well, but can also be bad. Barclays Equity Gilt study data for instance shows drawdowns to 14% of former inflation adjusted dividend values along with large declines in capital values as well. It's tempting to go for the average historic great stock gains, but if that greed leads you into actually enduring a bad spell that could be devastating for those in drawdown/retirement.

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Re: Adding Gold and/or Property?

#421698

Postby 1nvest » June 23rd, 2021, 6:57 pm

BTW that 50/50 stock/gold even with a simplistic stochastic based measure had CAGR bolstered by 1.5%. (12.8% instead of 11.3%)

Using Dow/Gold and low of 3, high of 45 and stochastic of

( current - low ) / ( high - low )

and applied to 50%, alongside 25% core stock and 25% gold holdings (so at least 25% stock (or gold) even if the stochastic was indicating 0% stock (or gold).

1986 to recent grew £1 to £72. As a comparison I believe that Terry's TJH HYP from a year later 1987 start and dividends reinvested (accumulation) grew £1 to £29.

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Re: Adding Gold and/or Property?

#421782

Postby AshleyW » June 23rd, 2021, 10:43 pm

Difficult to give an opinion on this without knowing Newroad´s objective for the portfolio. Is he in accumulation years away from retirement so volatility isn´t an issue or approaching retirement with worries about sequence of return risk - his portfolio seems to have elements of both as I certainly wouldn´t wish to have high yield bonds in my drawdown portfolio, yet the bond content is too high for the accumulation phase. I must agree with some of the comments that 5% of something be it gold, REITS or whatever isn´t going to move the needle much. Certainly, for gold in a drawdown portfolio, I would aim for 10% to 20% in order to have a worthwhile effect. In accumulation, I don´t see the point of holding it, and as for REITS too much of my wealth is in property as it is.

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Re: Adding Gold and/or Property?

#421793

Postby 1nvest » June 23rd, 2021, 11:25 pm

36% gold indicated by this at the end of May 2021 (and rising to more recent)

Image

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Re: Adding Gold and/or Property?

#422006

Postby Newroad » June 24th, 2021, 6:30 pm

Hi AshleyW.

It's a fair question and to be honest, I don't have a clear answer. As mentioned to 1nvest earlier, they were all Global Investment Trusts - but to reduce risk/volatity, I've moved towards the classic 60/40 style portfolio. You will have seen though, that I have not quite gone all the way there - and half the bond component is high yield - and the commensurate closer to equity style risk. I'm in my early 50's in accumulation phase, for 5-10 years or so - the kids JISA's obviously for much longer. We have no mortgage or any other debt of note.

{1nvest} I must admit, I haven't taken in all the detail of the additional information you have provided. What I would note is that it is likely horses for courses. Buffet and his successors can afford the volatility of 90/10, because even if stocks halve and bond double to 45/20 of the original (or even if the bonds halve too, to 45/5) they'll be just fine. I know you're a big fan of the 1/3rd, 1/3rd, 1/3rd idea, but I doubt its a panacea or universally applicable. Further, I'm not sure a predominantly religious text of a couple of thousand years ago is an obvious source for financial advice - but then again, I'm fairly middle of the road and don't have a mishegas about such things.

Anyway, thanks both for the thoughts :)

Regards, Newroad

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Re: Adding Gold and/or Property?

#422030

Postby 1nvest » June 24th, 2021, 7:56 pm

For retirees fundamentally actual asset allocation isn't the primary risk, what does matter more is how much is being drawn from the portfolio. The likes of spend dividends runs the risk that dividends could collapse in real terms. SWR from total returns better covers inflation adjusted income increases, come what may. US data wise and 4% SWR is suggested as being pretty safe, 3% SWR being considered safe. 2% very safe - as good as a perpetual withdrawal rate. Look at a range of asset allocation to apply that to and broadly (within reason) it didn't matter which assets/blends were held if your SWR were low.

If you were offered the exact same provision of objective outcome of covering desired/required income/spending no matter what asset allocation you opted for, which assets would you actually opt to hold? Fair enough some choices might leave a larger pot for heirs than others, but in meeting your own objectives of having enough income for your spending needs the benefit/risk for heirs/legacy might be considered secondary.

Factor in broader risks and diversifying across £, $, global currencies and UK land, US stock, global commodity assets has elements of risk protection that other assets allocations might lack. It's basically the same old "don't put all eggs in one basket" proclamation. If your UK house gets bombed during a war and the insurance is denied due to being a act of war. If a Tsunami closes the US stock market for weeks on end. If you're sued and "what gold - oh I lost all of that years ago in a poker game" ... etc. then geopolitical diversification of currencies and assets is more likely to have you down perhaps just a third. Stocks alone by comparison can/do periodically lose a third but holding stocks alone is a concentration risk - it might not be just price declines that sees losses but some other Black Swan situation/event/circumstance.

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Re: Adding Gold and/or Property?

#422059

Postby Newroad » June 24th, 2021, 10:19 pm

Indeed 1nvest.

Geopolitical diversification is one thing I certainly do have (in spades).

Not just for the risk mitigation, which you rightly mention, but also to give flexibility to the "active" 50% of the portfolios - so their managers can overweight where they think the greater opportunities to be - should they judge to do so.

Regards, Newroad

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Re: Adding Gold and/or Property?

#422242

Postby 1nvest » June 25th, 2021, 12:34 pm

Newroad wrote:Indeed 1nvest.

Geopolitical diversification is one thing I certainly do have (in spades).

Not just for the risk mitigation, which you rightly mention, but also to give flexibility to the "active" 50% of the portfolios - so their managers can overweight where they think the greater opportunities to be - should they judge to do so.

Regards, Newroad

Yes thanks Newroad, you spiked my interest in IT's and since then I've looked at FCIT and PNL as a form of stock/bond pairing. Even discovered that PNL will pay all ii fees/costs if you only hold PNL within your ii account. Which led me on to reading about Freetrade as a low cost compliment brokerage. Haven't actioned any of that, at least not yet.

I guess my preferences grew out of the likes of Barclays Equity Gilt Study data that show how stock inflation adjusted price and income indexes can at times perform poorly, -75% declines in prices, -85% declines in dividends, over extended periods (20 years down-run, and continuing to stay down for decades). Along with other comments/observations such as Warren Buffett's 1979 Berkshire Hathaway Chairman Letter ...
One friendly but sharp-eyed commentator on Berkshire has
pointed out that our book value at the end of 1964 would have
bought about one-half ounce of gold and, fifteen years later,
after we have plowed back all earnings along with much blood,
sweat and tears, the book value produced will buy about the same
half ounce.

A function of money printing
..The rub has been that government has been
exceptionally able in printing money and creating promises, but
is unable to print gold

Which leads to the pondering of how one might actually feel if such situations occurred to ones own case (for real).

SWR withdrawals better ensure a regular inflation adjusted income. History also suggests that 4% SWR is relatively safe, but can lead to zero remaining after 30 years. 3% is safer ...etc. But when you look into the historic more stressful cases that does mean having to ignore capital values as at times the portfolio value can decline to 30% of former inflation adjusted value. At such times a 3% SWR is in effect 9% or more of the ongoing portfolio value, which I suspect might induce sleepless nights, even though historically from such lows recoveries subsequently occurred.

High to low 1980 to recent interest rate transition has been great for both stocks and bonds, even inflation bonds have provided 4% real type rewards. But in recently retiring that rising tide is/has peaked, for the 30/whatever years I might have remaining ???

There are many roads that can all lead to the same place, primary is taking a road that you are most comfortable with, less likely to bail out when stress levels rise/peak. All stock and drawing a low/safe SWR has great appeal, HYP as a annuity type style, treat the money as having been spent, ignore the capital and target just income production objective. All stock and a 3% SWR historically worked and more often left the most remaining at the end of 30 years, but I'm unsure as to how well or not I might actually handle a situation such as being down at 30% of former portfolio value and where drawing the next years income would push that down more toward 20% remaining. Separate cash reserves/pot to sustain you through times when stocks are down fails to recognise that cash also can be substantially down, i.e. high inflation was the culprit, in which case cash/bonds provided no protection, could even have made things worse.

A factor for me with IT's is that they can have great flexibility. PNL for instance can buy into pretty much whatever it likes in whatever amounts it likes and even add in leverage/gearing ..etc. Whilst I respect the managers abilities I however lack total trust. If for instance they deemed a low had occurred and opted to go for 200% long stock exposure in the belief that stocks only had one way to go then that's perfectly within their remit but could be disastrous. To reduce a whoops we got it seriously wrong you have to diversify, which entails overlap/duplication ..etc. Factors I may not want to or be able to manage in my dotage. Simplicity of own a home, a major accumulation index fund and some gold has the simplicity of just sell down either stock or gold each month for income according to whichever is the higher valued that likely will serve as well at sustaining income/spending objectives come what may.

I have see others mentioning their 8, 10, 20 ... whatever IT's but seeing your four spiked my interest for its relatively good balance/diversity. That does look well placed as-is to me.

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Re: Adding Gold and/or Property?

#422371

Postby Newroad » June 25th, 2021, 5:34 pm

Hi 1nvest.

Moving from the bottom up, yes - the four holding, 50% active/50% passive portfolio's of my family are very simple yet very diverse and I hope quite balanced. My instinct is to keep it that way, so not adding SGLN or IWDP unless the case is compelling. I'm not sure they've quite met that bar, so status quo for the minute.

On your lack of total trust (as well as providing a de-facto benchmark) I understand, that's one of the reasons why I have the 50% passive piece, as provided by the two Vanguard ETF's. Maybe I should switch one of either the SIPP's or the ISA's to the Blackrock equivalents (to be belt and braces) but in truth, I quite like the Vanguard philosophy.

PNL is interesting - looks a bit bar-bell like to me. Could be a good core holding for someone looking for that type of approach.

On '64 through '79, whilst the South China Sea looks a bit iffy now, I'm not sure that's likely to repeat. Having said that, maybe fighting Covid has already produced a Vietnam War like set of spending - the jury though remains out on whether the inflationary impact will be similar (and there is no gold standard to force anyone off).

Regards, Newroad

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Re: Adding Gold and/or Property?

#422397

Postby 1nvest » June 25th, 2021, 7:44 pm

Hi Newroad

Using data from a range of sources such as ...

Silver from
https://www.usgs.gov/centers/nmic/histo ... ted-states

$ price per ton
https://prd-wret.s3.us-west-2.amazonaws ... silve.xlsx

Currency conversion
https://www.measuringworth.com/datasets/exchangepound/

and from the FRED
https://fred.stlouisfed.org/series/DEXUSUK/

Gold
https://fred.stlouisfed.org/series/GOLDPMGBD228NLBM

When I looked back at bad times such as across WW1 and silver propped up the portfolio very well. Indeed something like BRK/FT250/Silver across time has tended to align with BRK/FT250/gold reasonably well. Now that we're off the gold standard either could be held to equal effect IMO. Comparing that with IT's, such as a BRK/CGT/PNL alternative and it seems to me that the IT choices do tend to lag by higher fees/costs. I did use data back to the early 1990's but then noticed that PNL was at a -30% discount back then, such that that provided a large kick as that closed down. As I understand it since 1999 IT's have been free to issue/buy shares to keep their price/NAV drift much tighter.

I consider FT250 to be small cap (in US scale), and BRK/Gold a barbell that combines to a central bond bullet type holding, so somewhat 33/67 small cap/bond Larry Portfolio'ish. I do some additional attempted alpha add in that I actually hold FT250 exposure via 2MCL, a 2x leveraged version, half weighted. That's worked out well for me, likely due to low interest rates.Along the lines of this i.e. half in 2x, half in bonds should align reasonably with 100% 1x. If the bonds earn more then that enhances rewards, and I consider BRK/Gold to be a 'bond'. Last handful of years I've also seen around a 3% alpha/enhancement. As/when interest rates rise I'll likely drop that however.

A nice aspect is that 2MCL is a total return swap, so no dividends, BRK pays no dividends, nor does gold. So makes tax reporting easy. A bad aspect is that in more recent years you have to jump through some hoops before being permitted to buy (or sell !!!) holdings. I did query why on the sell side when you already hold 2MCL and what if you 'failed' their simple test but I didn't really get a satisfactory answer - just a "phone the trading desk if you can't sell online" type scripted answer. Just the Idiocracy way of the world nowadays. Signs on the back of buses for cyclists not to undertake (wish they'd remove them to let natural selection take its course); EU induced 'click to give google permission to spy on you' on near every web page etc. :lol: Now with identity cards near-as certain I guess the next thing will be to have everyone talking in a monolithic I am a robot manner, at least until such times that AI gets up to speed.

Weekend .... yay! Oh, still in lockdown :( First year of 60 official retirement isn't turning out anywhere near what I expected. Just glad that I opted to retire 16 years+ back.


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