The only free lunch in investing
This is a chart of two ETFs, COMT and VT, representing respectively an index of commodities and an index of the world stock market. But I’m posting it here not to compare investments but to make a point about portfolio construction.
Notice that these two funds have almost the same total return over the past five years. But the distributions of those returns over time were quite different.
An investor could have chosen either one five years ago and ended up with about the same portfolio value today. But by blending the two, say, putting 25% into commodities and 75% into stocks, the returns would have been much steadier and more certain. And if the investor had occasionally rebalanced along the way, the total return of the two fund portfolio would have been greater than the returns of either of its two components. How this works is illustrated in detail in Invest With A Demon.
This view of correlation and diversification is statistically based; that is, it’s based on past patterns of performance. It’s essential to look at it from a fundamental point of view too. What are the sources of performance? For instance, although they occupy different positions in the capital structure, corporate bonds and stocks both depend on the financial health of the same issuers, corporations. This is one reason our model portfolios use only government treasuries for bonds; not only are the correlations with stocks lower but the sources of return are distinct too. The same applies to the stock and commodity funds we opened with.
A good investment portfolio is about much more than a collection of good assets … it’s about how they work together. Investors commonly make the mistake of selecting handful of investments all of which they believe will have high returns, without regard for how they interact with and complement each other. But looking for sources of return that have low correlations with each other helped make Ray Dalio one of the world’s most successful investors. Diversification isn’t just for safety … properly executed combining and balancing of assets boosts returns too.
This principle is woven into the Financology Model Portfolios as well. Each of the funds is selected to have investment merit on its own, but the combinations are like recipes. Good quality flour, sugar, eggs and other ingredients are necessary to bake a cake, but too much or not enough of any one, no matter how carefully selected on its own, will fall flat.
Live from Kitco
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London no longer setting the price……………..
RED ALERT
British PM now addressing the nation!
So Far a load of waffle but hints to get ready energy prices are going UP.
Back later
Mike
OK, Lots of “US our true friend” stuff…………but he is unwilling to give way on Greenland.
Also………just in passing “We looking at how we can protect children on line”……in other words they want to pull freedom off the internet.
In other news:-
Royal Navy leaves the Middle east………..
Britain to recall armed forces people up to the age of 65 (was 50)
I’m all for protecting children on line.
Parents don’t give them phones.
Europe can wield this $8 trillion ‘sell America’ weapon as Trump reignites a trade war over his Greenland conquest ambitions
Trump offered to pay for Greenland; he might have not realized how. His open mouth strategy is raising the price.
https://finance.yahoo.com/news/live/trump-tariffs-live-updates-trump-links-greenland-threats-to-nobel-peace-prize-snub-eu-discusses-108-billion-in-retaliatory-tariffs-152657413.html
“China and Russia want Greenland, and there is not a thing that Denmark can do about it. They currently have two dogsleds as protection, one added recently,” Trump wrote.”
Not any more. They’re sending troops; you having shown your cards prematurely. Art of the deal?
Should EU follow through on its threat to dump US paper, damage to economies on both sides could be severe. The Fed would be likely to pick up at least some of the slack to keep treasury yields from rising excessively. This would transmute the corresponding fall in bond prices into a fall in the USD and spike in inflation.
Don’t sell yer gold yet!
US financial markets are closed today in observance of the Martin Luther King holiday, but in futures trading, the S&P is off sharply while the metals are on even more sharply. Treasuries are down modestly. The USDX is down, favoring XS over US stocks.
As with previous episodes, the stock selloff is likely transitory. But it’s apt to deepen before it eases. Recall SS has tipped a first quarter stock selloff, and the pieces are falling into place.
Just been watching a “Vid” about Humanoid robots in car factories ……..It a lot closer than i thought. Cars & car parts are now being designed to be handled/produced/fitted…..given that EV’s are vasty simple next to ICE cars……with Cheap SB or SSB the cost of production will fall BIG time
Expect a jobs Bloodbath in the next few years…..
I recently saw an old episode of the Twilight Zone, circa 1964, “The Brain Center at Whipple’s”. Workers were being replaced by technology. The same story comes up with every new advance, and we’re still waiting.
Yes lots of jobs will go away, but new ones will take their places. If there is mass unemployment, it will be because we’ve rigidified our institutions and refused to adapt. Meanwhile, it will be a very long time before AI can fix a leaky faucet or roof. Youngsters going into trades will enjoy lifetime security.
And cheaper cars can’t come soon enough!
But there’s another threat from AI that’s much worse. Just like it was with the internet, it will come to be controlled by a few giant corporations and government. Unless we are more vigilant, instead of serving us, it will be used to watch us and control us. It’s 2026 and 1984 is not far off…
Live from Kitco
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Gold continues to make new highs. Silver seems determined to break $100. Platinum and copper are in the zone. The dollar is in the pits. Trump has made it known he wants a lower dollar … he seems to be good at getting that.
Stocks are still near their highs in terms of dollars, but are extending one of the deepest bear markets on record in terms of gold:
Investing legend Howard Marks questions gold as a store of value and says there’s no fair price for the metal
Warren Buffett Said Gold Is ‘Just About the Last Thing’ He’d Want to Own — He’d ‘Much Prefer’ Acres of Land, an Apartment or Candy Over the Precious Metal
Marks is looking at it backwards. The question should be how to value the alternatives … currency, bonds, stocks … Without an answer to that question, why would you hold them instead of gold?
And despite his rhetoric, Buffett has actually left billions on the table by choosing to own TBills instead of gold.
And all theory aside, the fact is that gold has trounced stocks … not only the last year or so, but so far this century.
The numbers are right here:
The First Twentyfive Years
And those are just through the beginning of 2025 … they don’t include 2025’s spectacular 69% increase.
The question is why should you own stocks!
The answer to that is when they present good value. If they don’t, you own gold instead. Looking for a reason to own gold is asking the wrong question … it’s the default asset … it’s what you own until you find a reason to own something else. Marks and Buffett, smart as they are, can err by overlooking the most basic things.
The single most important factor in getting the right answer is asking the right question.
You would think being wrong about something for 26 years would prompt some deeper reflection.