TopOfDaMornin wrote:For those reasons I am considering selling the above 7 funds/trackers and moving into to safer alternatives like cash.
What are your views? Anyone else moving into cash until this ‘big crash’ happens?
Stocks tend to see prices rise broadly with inflation (in a volatile manner) and pay dividends, profits out of business activities.
A home tends to (again broadly) see prices rise with inflation and avoids having to find/pay rent.
Gold tends to see prices broadly rise with inflation (again in a very volatile manner) and pays interest or benefits from volatility capture/trading.
Diversification reduces concentration risk, one of the greatest risk factors.
In the light of the above, transitioning from a diversified portfolio to a concentrated portfolio such as all-cash scales up risk, potentially significantly.
Of the above three many have most difficulty in understanding the value of holding gold within a diverse portfolio.
Pre 1972 US and gold/money were pegged at a fixed rate. Made more sense to hold cash deposited and earning interest that could be swapped for fixed priced gold at any time, and were the interest meant you ended up with more ounces of gold than at the start. Since 1972 that policy has been dropped and gold free-floats, varies relative to cash. To earn the 'interest' element you can either trade it (volatility capture) or use gold-lending type practices.
Cash at times can see its purchase power of each/any of the above vary considerably, in some years cash may buy 50% more shares than a year earlier for instance. At other times however cash can see large declines in its stock purchase power.
When you target a fixed % weighting to gold in your portfolio you can provide liquidity to others in return for some interest that broadly compares to cash interest rates. Similar broad rewards to the pre-1972 era, but different.
1.
A trader who own no gold but opines that gold prices are headed lower may look to short gold, sell gold to use the proceeds to buy another asset that they opine will rise more in value/price. In not owning any gold to short gold they in effect have to borrow gold in return for payment of interest for that 'debt' sell that borrowed gold, use the proceeds to buy whatever. Later they liquidate the position, buy back gold and then return the borrowed gold. Alternatively they might borrow cash to buy what they though might rise, but the potential rewards from doing that is the cash/asset spread, not the gold/asset spread that if gold did decline as they expected would be greater than the cash/asset spread.
2.
A investor who own gold as part of their portfolio might opine that gold is expected to yield little, better opportunities lay elsewhere but where their investment policy depicts that they keep gold on their books. They lend their gold in exchange for cash, and pay a cash type interest rate for that. A cash loan using gold as collateral. They invest the cash elsewhere and later liquidate back to cash and repay the cash in exchange for getting their gold back again.
For both the above cases the holder of gold who wasn't a speculator, was just content to maintain a target weighting/exposure but that accepted providing others with liquidity in return for interest can enhance their overall gold gains by amounts comparable to cash interest rates. Similar to when on the gold standard. Barriers to that are for 1. above you can't sell that gold whilst it had been lent to another, and the other barrier is that it involves counter party risks, so cash interest rates are more reflective of the counter-party being very trustworthy. For less trustworthy the interest rates you'd expect would be higher for taking on the additional risk.
Rather than lending/borrowing gold, you can alternatively opt to trade gold, work its volatility. In 1980 for instance a little over a ounce of gold bought the Dow. In 1999 it took around 40 ounces of gold to buy the Dow. A simple 50/50 of Dow and gold periodically rebalanced is like trading the volatility of the two using a fixed mechanical trading method with a tendency to add-low/reduce-high and capture volatility trading gains.
You'll find that many opt for concentration of their focus/investments. Some may opt primarily/largely for properties/rentals, others may be all into stocks, yet others may solely trade futures/options/swaps/gold. Diversifying across all broadly tends to see comparable rewards as if any one alone was consistently the best then investors would tend to all concentrate into that 'optimal'. Diversifying helps lower overall volatility, so broadly the same reward, with less volatility = better risk adjusted reward (Sharpe Ratio). Its also more diverse to have some of gains arising out of each of price appreciation, income and volatility trading. Big firms for instance might do that by having a stock desk, a bond desk and a Options/Futures desk. Each year one of those will prove to have been the most profitable, another the worst. The broader average across all three over a number of years will tend to be 'satisfactory'. A director of such a firm who made one or even two of the desks redundant would be seen to be speculating and might even be handed a bonus if that paid off, or fired if deemed to have been a poor decision. Or just straight up fired straight away in having exposed the firm to greater (concentration) risk. Given that stocks are broadly up since the OP date ... moving to cash, and/or gold (that is down since then) ... you're sacked!