Any opinions on what to hold for the next 5 to 15 years to hedge against the possibility of severe inflation? (Double-digit or low-triple-digit percentage per year for a number of years, let's say: not necessarily civilization-collapse but harsh compared to what most of us in the USA are used to.)
Central Fund of Canada (CEF)? Silver and Gold
Greenhaven Continuous Commodities ETF (GCC)? Commodities Futures divided among 17 commodities and spread out among several months of contracts
Global X Fertilizers/Potash ETF (SOIL)? Maybe food price increases would drive this up more than anything else?
EuroPac Hard Assets Mutual Fund (EPHAX)? Peter Schiff's inflation-hedging fund.
I am particularly interested to know what people's opinions are regarding how effective GCC would be in a high-double-digits or low-triple-digits commodities-led inflation scenario, as compared with CEF, EPHAX, and/or SOIL: clearly superior; clearly inferior; probably comparable? I currently own a little bit of all of them, and am wondering whether or not it would be wise to dump the GCC and use the proceeds to buy more CEF, EPHAX, and/or SOIL. ("Wise" from the inflation-hedging standpoint, not necessarily "wise" from the median-probable-outcome standpoint.)
If somebody wants to suggest TIPs, I suppose he or she is free to do so: but I am not interested in them myself.
Did some basic analytical study on these four investments. My suggestion: Get out of them.
After adjusting for risk (using the Treynor Method since I had no idea how you put your portfolio together asset allocation wise), this is what I found:
Ephax, CEF, GCC, SOIL are not compensating for the amount of risk you're taking by investing in them, compared to if you invested in the S&P 500. The biggest reason for this (because the average beta of these four things, if evenly invested in is .32) is because your returns suck:
I put these in arithmetic/geometric avg. format: Ephax with -.66%/-1.01 CEF with .85%/.38% GCC with -1.24%/-1.38% SOIL with -.52%/-.95%
This is compared to the S&P 500:
Arith: .47% Geo: .37%
The only one that comes close to being comparable is SOIL with a Treynor return (adj. for risk) of -2.35% (beta .43). Looking at the rest of the Treynor returns we can see that they are not compensating for risk at all (I just used the geometric avg here):
Looking at alpha, there is only one stock that produces an excess return over the market--with a positive alpha--CEF produces an annualized excess return of 12.88% over the market, this is to be expected bc it has a negative beta of -.13 and a return of .38% v. S&P's return of .37%. All the others have negative alphas:
Ephax with -12.31% annualized excess return. GCC with -17.36% annualized excess return. SOIL with a relatively moderate -14.14% annualized excess return.
You can't really hedge inflation for 5-15 years, well you can. But not accurately, because good luck forecasting anything >1y/r, either you're not going to hedge enough or you're going to spend too much and kill what returns you have. You can invest in a way that will meet inflation (and pass it) and that is: equity. CF's go up with inflation, equity goes up with CF (kind of).
Plus, what you're trying to accomplish here is tactical asset allocation. Basically putting your money in front of certain equity stuff that's going to increase more than the rest of the group of equity. Which is fine, but I wouldn't bet the farm on it.
My current asset allocation is broken down like this (simply):
70% Equity 30% Debt
Equity is broken down into the following categories: Domestic (30%) Foreign developed-market stock funds (15%) Emerging-market stock funds (10%) Real Estate Investment Trusts (15%)
Debt is broken down into the following categories: U.S. Treasuries (if you want a little TAA, go with short term) (15%) U.S. Treasuries Inflation Protected (15%)
And, then I hold less than 5% cash.
Disclaimer: My specific portfolio isn't sexy at all. My friends won't even talk to me about my portfolio, because of how unsexy it is (it gets excited every start of a new quarter, because I reallocate my asset to the correct %'s, but I usually don't even sell anything, I just take the cash that is sitting in the portfolio and invest it.
That's cool that my portfolio isn't sexy, but my portfolio gave me a return this past year of .57% (it's done that after a bad week in the past quarter, though the market gave a return of .73% this past quarter) with the market returning .37%. So, definitely not sexy. But did me alright in the past year.
I probably used the term "hedge" in a technically incorrect manner. What I really mean is, what investments have the best likelihood of keeping up with or exceeding the increase in the cost of food, energy, and other basic necessities, should we experience high double digit or low triple digit annual percentage inflation for a number of years, sometime within the next 15 years? Even if those investments are likely to sustain moderate losses in the absence of double digit inflation? i.e. "inflation insurance", where the losses in the absence of severe inflation would be viewed by me as the equivalent of insurance premiums.
Thank you for your thoughtful answer. But for these particular investments, I am not actually interested in likely returns under normal circumstances, as long as the likely returns are no worse than moderate losses. I am more interested in how well they would do in a severely inflationary environment, relative to the rising costs of necessities. I think I might have misled you by my improper usage of the term "hedge".
I probably made a mistake using the term "hedge". Also, I suspect that if we have severe inflation within the next 5 - 15 years, the general stock market will not keep up; although I suppose it would probably even out over the next 100 years.
I am trying to put part of my net worth in front of certain equity stuff that's going to increase more than the rest of the equities, in the event of severe inflation. If there is no severe inflation, I am willing to lose some of this money and/or do poorly relative to the general market; but I don't want to be throwing it away on stuff that would not be much help in the event that there is severe inflation.
here is a question out of left field- it may be silly, presumptious or just plain stupid, but:
is there a sound manor, or any manor at all, in which one can invest in such things that are likely to go sky high in the next few years? Food, energy production, fuels? I have 0 idea and am probably making a fool of myself just by asking, but I am honestly interested.
Would it make sense to do so? Would the "stock" of such things "go up"? I dont know if the words in quotes are the proper words to use. If the question makes no sense, I will try to reword it.
I'll check out 'Reminiscences' when I get more time, but I noticed in the philosopy section 'A Course in Miracles' is listed first. That seems very odd, or is it intended to be a joke? What does 'A Course in Miracles' have to do with trading probability?
I think probably there is, at least to some extent. I am just not sure whether or not I have the best stuff for that purpose. (Also not sure whether the necessities are "likely" to go sky-high, but it seems like a realistic possibility.)
Jim Rogers seems to believe the commodities themselves will do better than the commodity producers over the next decade or so, which would seem to be an argument in favor of owning one or more funds that track commodities futures in some manner. (The commodity producers' profits and most likely their share prices would be affected by both the costs of their inputs and the pricing power of their products, not just the latter.)
A study accessible via this link http://papers.ssrn.com/sol3/papers.cfm?abstract_id=560042 seems to show that commodities futures did very well during the stagflation of the 1970s, which in my non-expert, possibly wrong opinion would also seem to be an argument in favor of owning one or more funds that track commodities futures in some manner (as insurance against a severe form of stagflation, if one perceives that to be a priority at the current time).
But commodities futures funds either (A) have problems with tracking slippage, if they actually hold commodities futures contracts and they have to keep selling "near" contracts and buying "far" contracts; or (B) they have concentrated counter-party risk if they are just shares in a promise by one entity to pay off on the value of a basket of commodities at a certain date, where you have to hope that issuing party does not go bankrupt. GCC fits "A"; and I wonder whether or not the tracking slippage would get worse in the event of severe inflation. I also wonder how large a proportion of the futures contracts' counterparties would default in the event of severe inflation, although to me that seems less risky than the situation in "B" where the investor is relying on the one note issuer to stay solvent. The concerns in this paragraph might suggest that it would be better to invest in equities that are likely to do well in a severely inflationary environment, rather than commodities futures. (I think the equities held by SOIL and by EPHAX are likely to fit the preceding sentence.)
A fund that holds mostly physical precious metals might make sense as inflation protection. CEF, for example.
But gold and silver are already pretty high; and what if food runs up the most, as some experts seem to think is likely to happen? SOIL and possibly GCC might be better than CEF, in that case.
Alternatively, one might suppose that the experts working for Peter Schiff know better than you or I, so why not just buy EPHAX for inflation protection and be done with it.
But I think Peter Schiff was surprised by the rising dollar in 2008; so that makes me wonder if trusting EPHAX as my sole protection against inflation would be prudent.
So, considering all of the above, I currently have some GCC, some CEF, some SOIL, some EPHAX.
But if I understood Brother Chris correctly, three of the above have unfavorable values for one standard measure of reward vs. risk, while all four have unfavorable values for another standard measure of reward vs. risk. That might be an argument against owning any of them: although I am not sure whether those particular measurements should be extrapolated to the possible circumstances I have in mind where I think owning these might be beneficial; or if they should, I don't know what would be better to own that would be comparably beneficial in those particular circumstances.
I USED to own it too. (I'm sure that doesn't suprise you) I thought it was really interesting at first, but it soon started babbling like a brook.
Then, I experienced two rather painful life-changing experiences (about 2 years apart) and became a little superstitious about having it around. I ended up donating it to a church book sale. But not without a few prayers of blessings and protection for the next owner!
Anyway, back to my original question. What does CM have to do with the probabilities in trading. I don't get the connection.