My cognitive dissonance with Gold, or Why am I scared of Butterflies?

[phwadsworth]

  I recently read up on the Golden Butterfly and then spent some time last night reading this awesome discussion (thank you Interest Compound,Tyler, and others that was a good read!).  And now, I'm having some really heavy messed up thoughts about my portfolio.  I will try to express my cognitive dissoance, just to see if anyone else has had similar issues and managed to dig themselves out of the murk, one way or the other.
  Some of my aversion to gold is social, I don't want to have my investments at all associated with those late night TV hucksters.  But really I don't like Gold because it doesn't do anything.  Why would I put my money is something that is objectively worthless, and only carries subjective value?  The fluctuations in the price of gold seems to me to run purely on fear and speculation, which are not things that I want controlling a portion of my life.  I mean, would I buy .22LR ETF, or a 5gal Prepper-Soup Tracking Fund? (I kid, mostly, wait, is there any ammo tracking fund!?)
  So, I don't believe in investing in gold because I don't believe in its value and I think that people who get wrapped up in it are silly.  But wait, don't I think that about a lot of things in our economy?  I mean, I invest in Large Cap equities, and most of those are companies that sell oil to run clown-cars, product companies making plastic crap we don't need, and retailers that merchandise said-crap so people can drive their clown-cars there and use the financial companies' products to in-debt themselves for consumer junk.  But, I have no problem investing in those things because I understand that's just how our world economy works - a huge amount of it is junk that *I* don't value, but others do, and I can put my money to work in that system and reap rewards so I can go do the things I value and at least live my life better.
  Is Gold so different?  Sure, a lot of morans are pitching gold as an investment, but that doesn't mean that gold doesn't work as intended, right?

  So, I detach myself from my personal value judgement of the asset and the people most-often pitching it, and just look at its historical performance.  I consider its ability to act as a counter-weight to both stocks and bonds in times of economic nastiness (even if I don't agree with the reasons why it acts that way).  I look at the historical SWR of the Permanent Portfolio and the Golden Butterfly (longest draw down of only 2 years?!?!!?) and consider what this could mean for my own impending FIRE.  And I consider my ability to sleep at night during year 9 of a 10 year draw down in equities.  This all makes me want to just accept Gold for what it is and use all the tools available to me (which is obviously a bet that it will continue in the future to act like it did in the past).

  Up until fairly recently my asset allocation has been almost entirely US equities.  I have accepted the high risk because I believe in the long term prospects of US businesses, and because I have the ability to make a fairly big 'stache in the next few years that will enable a rich life with a 4% SWR.  But man, the prospect of maybe getting decent returns AND avoiding looooong draw down periods, that sounds so nice!  So, here I am, drinking coffee wondering why I place different value judgments on a bunch of different assets that subjectively I actually think the same about.  dissonance.
How do I learn to stop worrying and learn to love the gold like I love the rest of the market?

[Retire-Canada]

I'm no expert on commodities like gold. I don't own gold directly at the moment. Once I accumulate enough $$ for FIRE it had occurred to me to buy a small % of gold...say 5%.

To keep things simple say I am after $40K/yr and I accumulate $1M using the 4% SWR guideline.

5% gold = ~$50K or a little more than a full year's WR or possible a little less than two year's reduced WR in a financial crisis. Possibly more if gold jumps up due to the fear around the crash.

The purpose of the gold would not be to earn a return, but would be there to provide assets to liquidate to ride out a market crash.

I'd also hold some bonds. Say 10% so that would be another $100K - say 2.5yrs to 4yrs of WRs in a crash.

The rest of my money would be in a set of globally diversified stock indexes.

If the bonds and gold do their job that's something like 6yrs of reduced WRs to get me through a crisis without liquidating my stocks. Holding gold and bonds would seem to diversify that defensive portion of my portfolio a bit without reducing returns a ton.

I was also thinking that if I got lucky hit a fortunate sequence of returns such that my portfolio grew to say $2M I would not keep growing the stocks and bonds as a %. I'd settle on some value...say 10yrs of reduced WRs where I was comfortable not needing more "defenses".

[Enough]

I enjoy researching the different portfolios on portfolio charts and the golden butterfly is definitely interesting, but I had the exact same discomfort with investing even just a small portion of my assets in gold.

I ended up modifying my investment plan to allow me to take a portion of my investments and break it up into a simplified merriman portfolio: Large Cap Blend, Small Cap Value, International Value, International Small Cap Blend, & Long Term Treasury (20% each).  It will be fun to see how this portion of my investments performs (looking at both volatility and returns) against the more standard 70/30 split stock/bond investments over the next 10-15 years.

Portfoliochart comparison of the simplified merriman portfolio vs the golden butterfly portfolio attached.

[steevven1]

Gold is just MONEY that's not subject to inflation long-term.

It is not really an investment; it's money, a store of economic value. If you accept that dollar bills have value, even though they are "useless," then regard gold in much the same way, except that it can't be "printed" at will like cash, so its value in dollars will tend to rise with inflation over the very long term.

...and gold does have some real applications as well, as a material. But I think that's mostly unimportant to this conversation.

[JZinCO]

Signing on to hear more.

I've had similar thoughts. I have had thoughts that if I was in a withdrawal phase and my portfolio were large enough for stock volatility to start nagging me, I would add in a some real return fund (TIPS, commodities, RE, a mixture or ?) for inflation tracking and smoothing out the ride. Given the volatility of gold-based paper assets, I don't believe gold is a stable inflation hedge over periods less than a decade (see: http://www.cfapubs.org/doi/abs/10.2469/faj.v69.n4.1)

[Retire-Canada]

Stolen from: http://www.mining.com/200-year-shares-vs-gold-price-chart-shows-breakout-nearing-60967/

Can we rely on gold to rally when stock crash in the future?

What is the opportunity cost of holding a small portion of your portfolio in gold to take advantage of in FIRE for WR during crashes vs. just holding stocks or bonds or some other asset class?

[Scandium]

Gold is just MONEY that's not subject to inflation long-term.

It is not really an investment; it's money, a store of economic value. If you accept that dollar bills have value, even though they are "useless," then regard gold in much the same way, except that it can't be "printed" at will like cash, so its value in dollars will tend to rise with inflation over the very long term.

...and gold does have some real applications as well, as a material. But I think that's mostly unimportant to this conversation.

Then I see TIPS as a better option to achieve the same thing

[effigy98]

I rather have gold despite what Bernanke says: https://www.youtube.com/watch?v=2Dj9v9s9buk

[Scandium]

I rather have gold despite what Bernanke says: https://www.youtube.com/watch?v=2Dj9v9s9buk

I thought Bernanke's answer was pretty good. What the heck we Paul's point? He just want us back on the gold standard?

And the dollar has been devalued 50%? Lol, what?