patrick.net

The answer is a curve, not a single point.

X-axis is risk, Y-axis is return, and they go up together.

You need to choose some level of risk of losing your $100,000 to get the point that applies over that 1 to 2 year time frame.

Lowest risk is still probably CDs. Hyper-inflation still seems unlikely.

Highest sane risk is probably corporate bonds paying more than 5%.

There are 1. maximize return 2. perservation of capital.
The problem is the short time period means you should be doing #2.
However, I would take 50% USA large cap stocks, blue chips, etc. and 25% total bond index and 25% cash in swiss francs.
Of course, you could buy a balanced mutual fund 75% and just put that 25% into that swiss "cash".
I traveled a little bit around the time of our horrific financial problems. I saw in other countries the construction projects using Cat equipment, farming more and more using Deere, New Holland, Monsanto, Apple products, etc. etc.
My experience of living in a third world country for a while and coming back here tells me that the world is going to want more stuff, more products, will make more sacrifice to get them.
What many of these people do NOT have is: huge debt, huge mortgages. So, as their incomes slowly rise, they can afford more stuff.

This is NOT an overlay for the U.S. debt Chart.
Continuing population growth will increase demand for food. Investing in rice, corn, wheat etc. over the next several years should provide the safest return. Diversification was a prudential way to play when the market was NOT so volatile.
Confidence is now being manipulated. Reappraisal is imminent.
I recognized problems in housing in the mid eighties. (a house cost more than a 4 plex ???)(interest rates GAPPED up ???)(populace believed in shortage of land ???)
I knew local real estate was AMPING, I did not realize we tricked enough foreign countries to cause a global JONES.
I am placing 25 % of my net, on one 3X bearish etf. I am convinced gubmint can't prevent real property prices from returning to it's phenomenal value. (2.5 x Annual income) I believe there will be yet another 50% crash on the DOW, (march 2012 predicted often) certainly WHEN gubmint defaults.
What comes after TRILLION ?
Disclaimer : I felt I would always have the right to a speedy trial !

Any answer is likely going to have a personal bias associated with the allocation. The Harry Browne Permanent Portfolio allocation reduces guessing and forecasting, but still is my own personal preference and should not be construed as investment advice:

25% Broad Stock Index [VTI] ~ Prosperous Times
25% 20 to 30 year Treasuries [TLT] ~ Deflation
25% Gold (physical ideal) [GLD] ~ Inflation/Currency risk
25% Cash [SHV] [SHY] ~ Recession

Rebalance when any allocations hits 15/35% of the total portfolio. I use 20/30 to be more conservative.

Look at this allocation as a package, since having a collection of uncorrelated assets significantly helps reduce the risk and volatility of the whole portfolio.

Lower risk also translates to lower expected returns so do not expect high-flying performance from this portfolio. However, the term expected returns is a misleading term often focusing on the potential gain, rather than the potential losses.

Think of this as a tortoise vs hare. The hare kept running back and forth, while the tortoise plodded slowly forward. Not a perfect analogy since the Permanent Portfolio can suffer losses (longest period ~18 months).

My generic answer is diversification. As in a 401k, CDs, mutual funds, Roth IRA's, blue chip, red chip, big and small companies, some investment in developing economies, ect etc. In other words, plain old-fashioned, pretty un-sexy investments in a wide swath of companies and industries.

Marc Faber told this allocation last summer in a financialsense.com podcast:

25% equities
25% cash & treasuries
25% gold
25% real estate

I suppose, the 25% real estate could include "home equity". He didn't clarify on that one.

25% in physical gold? seriously?

edvard2 says

25% in physical gold? seriously?

That's some serious overkill.

edvard2 says

25% in physical gold? seriously?

Europe will have absolutely no choice except to overtly print money ahead. The only question is whether this occurs before or after a hard default. In stealth form the printing has already started. No printing means the European deleveraging cycle happens very quickly, but of course it would be accompanied by a deflationary fireball of historic proportion that would impact the entirety of the global economy quite negatively. And that is how likely to happen? The end of the global deleveraging cycle is so far from complete that in no way can it be currently “seen”, and yet the end of the gold bull can? We beg to differ. Bull markets in any asset class “breathe” as they both inhale and exhale. It’s all about rhythm. For now, gold is simply exhaling. Just remember, it ain’t over ‘til it’s over.

Full link: http://contraryinvestor.com/mo.htm

edvard2 says

25% in gold is silly.

What would you consider as a valid % in gold, as a hedge against tail risk?

uomo_senza_nome says

What would you consider as a valid % in gold, as a hedge against tail risk?

I don't own any gold so I really don't have an answer. Everything I've got is in old fashioned stocks, CDs, and cash.

edvard2 says

I don't own any gold so I really don't have an answer.

The problem with secular deleveraging + money printing (which is what we are in , as far as the eye can see) is that CDs and cash will lose value as interest rates tend to remain zero bound.

Gold is a perfect hedge against the tail risk scenarios, even Bernanke said this during one of the Fed talks. Gold is not an investment, it is a bet against the illusion that fiat currency can be used as a wealth reserve.

If you think about it 25K in physcial gold isn't, well physically, a whole lot of coins. I don't know what 1oz coins are going for at the moment but for the sake of arguement lets say a 1oz Gold Kangaroo is $1600. Thats like 15-16 coins.

I agree with uomo_senza_nome Gold is a hedge against fiat. And fiat is in big trouble. Europe and the USA both will eventaully find a reason or way to print or devalue.

DrPepper says

And fiat is in big trouble. Europe and the USA both will eventaully find a reason or way to print or devalue.

It would seem so, but on the other hand, the bond market is opposed to devaluation.

And the bond market rules the world.

short Sears.

edvard2 says

uomo_senza_nome says

What would you consider as a valid % in gold, as a hedge against tail risk?

I don't own any gold so I really don't have an answer. Everything I've got is in old fashioned stocks, CDs, and cash.

It sounds like edvard2 thinks that a valid % in gold is zero percent. I don't know what a valid % is, I was just sharing what Marc Faber said on a podcast.

Here is a link to the website with the podcast:

http://www.financialsense.com/financial-sense-newshour/guest-expert/2011/12/23/marc-faber-phd/qe3-more-inflation-coming-and-advises-buying-gold-now

the bond market is opposed to devaluation.

History is full of examples of bonds being defaulted either by haircuts or indirectly by inflation, right up to the present.

the bond market is opposed to devaluation.
And the bond market rules the world.

The Fed is the largest holder of US bonds at the moment. They hold more than China and Japan (2nd and 3rd I think). The Fed is THE HOUSE. If they want to devalue, they can do it.

I don't think they'd hesitate to do another form of easing. It all depends on how ECB wants to play the game.

B.A.C.A.H. says

It sounds like edvard2 thinks that a valid % in gold is zero percent.

edvard,

may be you can check this out:

http://online.wsj.com/article/SB10001424052970204368104577136531481564726.html

My secular outlook for the next 10-15 years is exactly the same as the Bridgewater observation.

I think we're in for more money printing, both in Euros and dollars.

uomo_senza_nome says

My secular outlook for the next 10-15 years is exactly the same as the Bridgewater observation.

Guessing as to what the future might hold is simply that- guessing. A more accurate assessment is to look at historical performance. For the past 100+ years the stock market has performed at the pace of 7-8% annually over the long term. The typical response I hear from people is "b-b-but the last 10 years hasn't moved!" Well... that's a short term outlook. Long term is more like 30-40 years.

I think most people fail to understand what the stock market is. In essence it is simply the representation of what everyone buys. Some of those things we have to buy- like gasoline, food, clothing, and shelter of some sort. No matter what you do, your life is filled with the products from a vast assortment of companies, many of whom are represented on the stock market. So the ridiculously simple idea is to buy a chunk of that demand. The world's most successful investors understand this well. Its not necessarily about chasing performance, but buying into companies that have a healthy demand for the goods and services we reliably want to or have to buy.

But in summary- can the global stock market fail? Sure. I suppose in some crazy scenario it could. But that is highly unlikely. The world goes on. Today I am going to eat lunch and on my way I will drive my gas-powered car made by Toyota and filled with parts from dozens of suppliers. I am typing this on a computer made by Apple. I could go on but my world- along with everyone else's, are filled with the products made by companies represented in the stock market. As long as people continue to buy things that will always be the case. Might as well catch a piece of the action.

edvard2 says

Guessing as to what the future might hold is simply that- guessing.

Deleveraging is not guessing, it has to happen no matter what. Just look at the debt levels of all these countries (US and Euro Zone). There is no politically feasible way to fulfill all the obligations of these countries without a) raising taxes b) cutting spending and c) kill the currency. Raising taxes is political death and cutting spending is causes severe contraction on the economy.

Guess what - everyone chooses the easiest route. I'm not kidding, there are Congressmen who have said that's the desired route.

http://www.youtube.com/embed/OeIFcuVTS3U

edvard2 says

In essence it is simply the representation of what everyone buys. Some of those things we have to buy- like gasoline, food, clothing, and shelter of some sort. No matter what you do, your life is filled with the products from a vast assortment of companies, many of whom are represented on the stock market. So the ridiculously simple idea is to buy a chunk of that demand.

You're precisely right, I'm not fully against stock market. What you say makes perfect sense.

I'm only making a case for hedging against the losses that you can potentially incur if demand falls drastically because of a severe recession (a. la 2008). There are people who have got their portfolio destroyed because of 08 recession. They would have been better off with a proper hedging strategy.

edvard2 says

As long as people continue to buy things that will always be the case. Might as well catch a piece of the action.

makes sense. thanks edvard for your reply.

uomo_senza_nome says

There are people who have got their portfolio destroyed because of 08 recession. They would have been better off with a proper hedging strategy.

That is true but of those who had their portfolios ruined, how many pulled their money? I can't tell you how many people I know who did exactly that. So yes- they lost a lot of money, but mainly because they pulled out at the absolute worst time- when the value of their investments was at their lowest.

But on the other hand I for example invested rather heavily leading up to the recession. My investments are very broad and diversified. At one point around 2009 the value of my overall investments were down 45%. A year or so later they had shot back up to within 5-10% of their peak. As of now I am back to where I started from and in the case of one investment now 13% YOY above last year. That is a dramatic swing. There are a lot of folks on this forum who swear real estate is the best investment on earth. Yet I would beg to differ because if my stock investments were performing the same as housing, then real estate would have bottomed out in 2009 and now be back to 2006 levels and gaining versus where it is now, which is still falling. But ultimately if there were people who had their portfolios ruined, it would be interesting to see what the average outcome would have been for these people as a whole if they all had left their investments alone- assuming their investments were diversified.

While my intention isn't to tell people what to do with their money or to have this be interpreted as financial advice, the recession for me at least more or less proved that the historical performance of the stock market still holds true even for today. People won't stop buying things. They didn't during the worst of the recession and neither did they during the 1930's depression.

* NOT to be taken as financial advice.

Stocks are sold in auctions, so their value at the auction is a combination of several things, one of which is the unpredictable mood of the people there.
The richest man on earth is getting dimes from millions of mexican phone customers.
The world has 20 million new consumers, they are the ones entering the workforce. They have 1. desire for junk 2. girlfriends who have more desire for junk 3. wives who fulfill their desire for junk. Apple. BMW. LVMH. etc.
Countries have growing economies even if they have a lot of poor, there are also a lot of wealthy there. I saw this in Mexico. The guys who got creamed were those who had bank accounts in pesos back in 80.

Mark D says

short Sears.

And Best Buy