Sunday, December 30, 2018

Asset allocation of a die-hard Gold Bug

One of the questions I always have regarding doom predicting gold bugs is, what then in this doomsday scenario is your allocation? 100% gold and gold mining?  Well, Jim Rickards, one always warning for the doom from a fiat money crisis and $10,000 gold shared in one of his videos what his asset allocation was and it surprised me. Here it is:
1.       10% precious metals

2.       30% cash

3.       10% government bonds

4.       20% real estate

5.       20% private equity

6.       10% Equity in natural resources and gold mining

Not surprising, there are virtually no banks or other financial sector components. With this allocation, you may expect 0% return on 40% (cash and gold) of the portfolio and 2 to 4% on government bonds (unless you are trading for capital gains). Real Estate, in my books returns between 6 to 8% without leverage and 12-14% with leverage but it is very uneven. For 20% private equity I estimate an annual return of at least 10%, and so do I also for natural resources and mining. The latter returns are a lot more uneven.
This suggests a total annual return based on Jim’s asset allocation of 5%. This is just my estimate; not Jim Rickards. Small investors you create a private equity in your stock portfolio by investing in companies such as Brookfield Asset Management, Blackstone, Fairfax Financial and Onex. If you restrict holdings with each of these companies to 5% you may also have taken care of risk management. If you want smaller positions, you will have to find more companies like these. Maybe start with Berkshire Hathaway. 
As Canadians, you can easily build equity in gold mining and other natural resources, but because of the current political climate it may be prudent to also include U.S. companies. Many gold mining companies listed in the world’s financial capital of mining – Vancouver, are in fact operating in non-Canadian jurisdictions thus, you don’t have to go far for those.
To my great surprise the Jim Rickard’s asset allocation is not that different from my own (if you break out all components). I am much heavier in Financial Services and in Real Estate though. However, those real estate holdings are far away from risky Toronto and Vancouver. Never consider Canada as a single real estate market. Regional markets and Real Estate class (commercial, hospitality, residential, Alberta, Vancouver, the rest of B.C.) provide a lot of diversification. If you own real estate in a time-share in Florida, Hawaii or Mexico consider that too part of your diversification.
My take away is that these ‘gurus’ emphasize the monetary dooms day scenarios a lot, but they are at heart very conservative investors rather than the high rolling gold speculators you might expect them to be. But then, Jim is only one of the crowd and others, such as Doug Casey, may be a lot more speculative.

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