Should I switch my investments from High Growth to Conservative and why store gold personally instead of a vault?

Welcome to Finance and Fury, the Say What Wednesday Edition

Back to answering individual questions – Two questions this week – follow up to recent episodes on gold and economy

First from Mario

– just a quick one – I listened to a recent podcast you made about gold and wanted to understand why people would own gold outright and keep in their possession? Is it purely because they don’t trust keeping in a vault? Also with Gold ETFs in the case of a crisis gold ETF doesn’t really mean much do they.

Why hold gold personally over a vault?

1. The major reason to hold gold personally would come down to personal preferences and insurability, rather than not trusting a physical storage vault.
   1. The gold can be hard to personally insure and requires special additions to a standard home contents policy.
   2. The issue can come back to the valuation of gold, as the insurance policy might value up to $10,000 but the price of gold changes and might be higher than the insured value.
   3. people would need to constantly be updating their policy and paying additional premiums. When purchasing through a vault, this along with the storage is taken care of by the company (at a cost).
2. The thing to watch out for is purchasing physical gold through a financial institution, as this can be expropriated (such as the FDR gold buy backs in the USA). That is why most gold companies as non-banks.
3. Gold ETFs viability all depends on how bad a crisis gets. A market collapse like in the GFC is okay for a Gold ETF, as the price fluctuations/volatility are where losses can occur (or gains historically when looking at a share correction). If the financial system was to collapse and the financial institutions (such as HSBC) were to default and become bankrupt, then the risk of the gold held on your behalf may be at risk.
   1. This is known as counterparty risk –

Second part – Adam’s question

– I was listening to your episode about gold and precious metals just recently and it got me researching. Like you and many others have indicated there will be a correction soon and I am considering changing my super from high growth to conservative for a few years, so it’s mainly in cash and bonds as well as selling half my ETFs to keep in cash. Not asking personal advice but general advice is it a bit drastic to protect my super for a few years while the market is overheating at the moment?

It depends on what allocation is considered conservative

– Balanced portfolios have overvaluations (Twin peaks)

1. Cash and Bonds, in my opinion, won’t be the best assets, mainly due to lowering interest rates and the potential risks now associated with ‘Bonds’.
   1. Cash – Obvious – real returns aren’t good – mostly negative once inflation or tax is taken out
   2. Bonds – A lot of Industry super funds have a bit of a disingenuous description when it comes to their ‘Bond’ Allocations. These Bonds are actually invested throughout fixed interest investments that contain assets that are not considered bonds or, that conservative.
      1. Example – QSuper have the following descriptions for what their Bond fund invests in, as this investment is managed by QIC and invested in the QIC Diversified Fixed Interest Fund: Fixed interest is defined as any interest-bearing security or equivalent derivative instrument – Not just bonds
      2. Lack of transparency to where they actually invest the funds (outside of 44% to Corporate Fixed Interest), I believe that a lot of the fixed interest allocations are in Corporate Capital notes, the same ones covered in the ‘Where not to Invest’ episodes covering the bail-in legislations.
      3. There is also the increased risks of default on Semi-Government Bonds
      4. Think about the size of Debt – 315% to global GDP – US will never be able to pay back $20trn debt
      5. Options for debt – default! So bonds are worthless

2. Share allocations in indexes – Personally, I am sticking clear of ETFs, do have smaller allocations to MF index – Aus index issue is allocation of shares in the Banks/Financials – assets that I think may not survive another large correction too well
   1. Think about GFC – USA banks ran into issues – narrative our banks were solid thanks to Basel 3 – but still lost 68%
      1. NAB $41 to $17, CBA $61 to $26 – Back when banks could make money on major assets = loans – now lowering rates doesn’t help that at all
      2. Compare to WOW – $33 to $24 = 27% loss, CSL $41 to $38 = 7% loss = much lower – our index dropped due to banks
      3. Also – Now Central banks have little printing power left to Bail Out of banks – hence Bail Ins
   2. This all being said, there is no way to really time the market and if Australia enters QE territory, our share market may rally to 7,000 in which case you would miss out on gains if you held all your assets in cash.
   3. I always have some allocation of surplus cash inside my super to dump into the markets if they go down, while being allocated to shares and funds which invest in business that should remain in business if a crisis were to hit.
   4. Higher Growth investments will experience volatility but the major consideration to take is ‘what are the chances of 100% losses?’.

3. Superannuation specific – If you have a long timeframe and will be getting employer contributions along the way, additional volatility on the downside means that you are purchasing these investments cheaply.
   1. The issue with Industry Funds is that they don’t provide specialised investments outside of mostly index funds, which in Australia has an overweight position to Financials.
4. Option – I do this – hold a reserve of allocation in cash like investments in super – buy into higher growth funds if the market has a larger correction in a short timeframe.

Ask yourself the questions – What assets will survive a financial correction – it will be those that people still have confidence in and those without massive counterparty risks –

Confidence is key – Confidence in any asset is what is needed – but also confidence in the counterparty

Why is confidence important?

If a lack of confidence/panic is what causes prices on assets to drop heavily –

1. Then the solution is to be in assets that while may be impacted in prices (short term volatility) – will not go to zero
2. Asset goes down in value – so what if you have a long time horizon
   1. Depends on type of asset and what you do, and what those investments are to you
3. But – Never sell after the fact – Shares go down in value –
   1. You sell – crystallise losses
      1. Also, an issue for selling before – Losing 22.5% in tax on the gain is no worse than shares going down by the same values
   2. Worst case – shares keep going to zero – which is why confidence is important – but also diversification

Solution – Step 1 – Buy good companies, diverse business models, diverse markets and lot of different companies – diversification. Step 2 – Don’t panic sell and have enough cash (not all) to survive market corrections – easier longer your investment timeframe is

If you are worries – Buy alternative asset classes –

1. Gold/Silver/Palladium/Platinum

Types of assets to watch out for

1. Shares in Financials or FAANG/Passive index funds –
   1. Financials – Been reducing my allocation to Financials over past few weeks – NAB and WBC at $30
   2. Any Shares with Margin Loans – higher LVR levels
   3. Run up of leverage causes a lot of bubbles, then corrections
2. Property that is highly leveraged
   1. Not PPR – not forced to sell that hopefully
   2. But if people are losing jobs, rents may come down or be non-existent – your cash flow needs to cover repayments
3. ‘debt instruments’ – MBS, Managed funds marketed as ‘Income Funds’ – massive counterparty risks here – CDOs
   1. Corporate notes/hybrid securities
   2. Derivative exposure on these as hedging or absolute return funds won’t hold up if counterparties providing the hedge also default

Summary – Assets that while not retaining value like you could want (drop in price) – if you hold you can survive

1. Have a range of investments (not just bank shares or passive funds)
   1. Some physical assets – Gold, metals
   2. Shares in companies that people will still use – not fad companies or ones build on people’s discretionary spending
   3. Land values – That you can hold and not need to sell
2. Make sure they are quality assets and hold some cash reserves
   1. Cover expenses and not at margins meaning you need to sell
   2. Take advantage of market losses –

Thanks for listening – eps are for you all – if you have questions – let me know at FF.com.au on the contact page

Welcome to the first part of this intro series to “Finance and Fury”. This series is brought to you by THINKING, as thinking is where this all started! Thinking about the easiest solutions to reaching financial independence. And, in doing so, helping to give you greater value in the time you spend listening to us.

But trying to solve a problem where we would need a lot information and different perspectives to actually get to the root cause, we needed to start asking listeners and people that we deal with day to day what are the common set of problems that they face are.

Because if there’s a common set that everyone has, then that would be a pretty easy thing to focus on first to try to solve.

But like most people, most of their goals and the problems they faced to meet these were all different, and not only that, they had different ones over different time periods.

One thing though that they had in common was being frustrated that these were all still problems. So, frustration seemed like a pretty good place for us to start then because, just like a runny nose it is a symptom of an underlying cause. Frustration is a good sign that something’s wrong.

At lot of our frustrations come from knowing what can be, versus what is. Getting frustrated that we aren’t in the position of what we know can be.

I get pretty frustrated with my headphones when I get them out of my gym bag after they have been rolling around in there for a week or so, they tend to resemble a rubber band ball, and I get frustrated trying to untangling them because, I know what their functional state looks like and the longer it takes to untangle them, the more frustrating the situation becomes. But hey, if I didn’t want tangled headphones, I probably shouldn’t leave them in a gym bag.

Seeing stories of those who appear to have reached financial independence so easily has really shown a lot of society what can be. But it’s also really disheartening because for us, it’s not what is.

Especially with the majority of people that we are exposed to on TV, movies or music and just the entertainment industry, generally have little to worry about financially, and subconsciously I think we know it.

So, with these frustrations we had something to work with, and it’s a pretty good starting place to look for a common cause across all.

To kick the process off, we wanted to take a step back to look at maybe if the cause could be a macro issue, something that’s inbuilt into society affecting everyone. Because, if that is the root cause it’s going to be pretty hard to come up with a solution to it

In today’s society when we have greater access to investments, and the systems that allow us to actually accumulate wealth we have greater access than ever to laws to protect us, property rights to keep what we have, banks to save money, online access to buy a share just with the click of a button.

So, if we have the ability to purchase investments, be protected to keep what we have under the law, have places to deposit that and hold it securely, then society has the underpinnings of what it takes to actually be able to maintain and keep wealth. Obviously, this doesn’t hurt trying to reach financial independence, and especially with the fact that the world is actually becoming wealthier off the back of this.

And the proof of this comes from a study by the world bank where it shows that poverty’s been cut in half over the past 30 to 15 years depending on how they measure the time period. So, in most of our lifetimes at this point, more people have been lifted from poverty than during the whole of human history. In the last 15 years alone more than half of the world’s population has been lifted out of the standard definition of poverty so there’s more wealth being generated across the board for everyone. But is there someone who is taking the majority of this, or getting in our way?

For these people in society, we might look at the notorious 1%

But… you may know some of the people in this shadowy group.

Because the latest figures for Australia show that to make it, all you need to do (beyond learning the secret handshake) is earn above $237,000 a year. So, if you’re earning $237,000 per year, your take home pay after you pay tax is about $152,000. It’s a pretty decent income after tax. But does it really give you the wealth you need to have private jets and yachts and be this elite 1%?

And are they actually sucking up all of the wealth, as a lot of studies and publications are actually claiming?

To look at this we really need to break it down because I see two answers to the question, depending on how you view wealth is created, and more importantly, who should receive it.

Say for instance, every year a pre-set amount of money was just gifted to the population – cargo jets come in during the middle of the night and just drop trillions of dollars onto the population and the fat cat 1% dip their hands in, grab it all, grab as much as they can and by the time they’re done, we get the scraps. If that how it works, then it’s completely unfair. But, I haven’t figured out who this donor would be, or who’s piloting these big jumbo jets… because whoever is actually distributing this wealth in this system would need to generate it. Otherwise it would simply be that they’re borrowing the money to give out or they’re taking it from others to give out. Neither of those actually generates any wealth in society.

However, what if wealth is something that is created, by individuals through voluntary transactions with other willing participants for their goods or services, then that’s a different story.

Imagine that someone creates something that we all really want. Maybe an iphone, and people wanting this iphone purchase it.

This individual then is selling their product and collecting money from people buying it. The person that creates the best product and has the most amount of people buy it (giving them therefore the most amount of money) accumulates the greatest level of wealth.

How good their product is compared to everyone else’s determines the level of wealth they are able to accumulate.

To look at these people, we need to go to the top 1% of the 1%, or the Billionaires.

Is it these guys who are keeping us down?

From 1870-1890, John Rockefeller; one of the wealthiest individuals in history (you might have heard of him, if you haven’t just think about Rockefeller Square in New York – same dude). In this time period he was in charge of Standard Oil, and what he did was create oil (or petroleum) that was actually mass produced and accessible to people to a point where it was extremely affordable. So, they could now purchase oil for power for far less and they could spend their money on other things. If you have money to spend on other things, while your total level of income hasn’t gone up, your total level of technical wealth has gone up because you can now have more money to spend elsewhere.

And, here’s an example of one of the wealthiest men in history making everyone else a bit wealthier because they dropped the price of something that was an essential good for everyone. What’s also been theorized about that is now people could actually afford to light their houses for a longer period after dark especially, literacy rates rose drastically over this time.

Even for those of you environmentally concerned, because oil might not be seen as the best thing, it actually took over Kerosene as the primary fuel source for lamps. Remember, 1870 or so, cars weren’t really being mass produced yet so oil wasn’t really going towards the petrol side of the story, but instead for people to use as energy in lighting their houses.

This drop in Kerosene as the primary use created a drop in the price from the 30c to 6c a gallon. The primary source of kerosene back in the day, was whales.

This price drop reduced the US whaling fleet from 732 to 200 over the same 20 year period, after which it still continued to decline. Whaling is fairly expensive, fairly risky – not worth it compared to oil. So hey probably single handedly managed to save more whales than anyone in history.

And even in modern times, Bill Gates has made PCs affordable and accessible for everyone so not only can we all afford more than one computer in most Australian households, you now have more money to spend elsewhere thanks to that. And you’re more efficient because you can email, research things online…and think about Henry Ford and the mass production of automobiles – the amount of time he has saved us getting to places through making cars publicly available to everyone at relatively affordable prices has improved everyone’s lives.

I think that Billionaires do really improve our lives overall. We probably wouldn’t have Facebook, the iPhone, Computers or name any other thing that we use every day without most of them.

These inventions have come from individuals who want to accumulate wealth (and even if they don’t want to they end up accumulating wealth) off the back of creating something so good that people want to buy it.

Without them, as well, someone else would need to employ all the people they do from these companies that produce these goods and services. The people they employ, most of them are receiving a salary from their employment – and this is the key component in wealth accumulation for a lot of individuals.

While society portrays these billionaires as greedy hoarders, they provide massive benefits through flow on effects to everyone. It is just very, very hard to quantify and much easier to say they’re the single problem to today’s wealth inequality issue.

Sure, some may be corrupt, but that is because they are people.

People can be corrupt, greedy, violent across the board regardless of wealth. This is human behaviour.

Sure, having money can bring worse traits out in people, but it’s not the money’s fault – it’s the underlying traits of the individuals’ nature. Money just might give them the ability to start acting like a d**k.

But even though some people have become wealthy from committing crimes and ripping people off they often don’t keep it for long. They go to jail, they get caught, and that’s why we have the laws in place to protect individuals from these people stealing money and accumulating wealth from ripping other’s off.

Okay, so our access to goods and services is better than ever, there is more wealth in the economy than ever, survival has never been easier, our ability to keep what we earn has never been better…so…why hasn’t financial independence solved itself?

It’s simple – escaping poverty or becoming a billionaire are completely different to financial independence.

What the hell is financial independence anyway? And, how do you get it?