As Benjamin Graham has stated “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.” In this article, I hope to convince you that because of repeated changes to the definition of “the dollar” one cannot ever be 100% satisfied that the lending of “dollars” is an investment operation. This inflation in the currency supply may not affect the prices of all goods and services uniformly, and many goods will not climb at a rate of 7.5% per year due to enhancements in productivity, but the inflation effect is very real leading to the conclusion that the only truly valid unit of account in today’s world are ounces of gold and ounces of silver, s,o should gold and silver in hand be considered the default position for any holder of wealth?
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Given this short-term uncertainty, a logical question arises: “how much of my portfolio should I keep in cash?” This is an excellent question and one that can be informed by some mathematical evaluation. I say “informed” because mathematical models cannot precisely predict the future. They can, however, help guide our decision-making. Today I am going to discuss how I view the cash vs. stocks decision. I’m going to leave out the discussion of gold (for now). The benefit of this article to you should be to give you some ideas of a general framework you can use to shape your own decision-making.
How to generate safe returns in a world where it seems the central banks want to push us into risky assets. I think you’ll agree with me that with a little creativity some decent inflation-busting returns can be generated without risking taking a bath in the next bear market in stocks or real estate crisis (without a doubt the next crisis is coming, we just can’t predict when or how severe).
In this post, I am going to compare the results of withdrawal policies applied to two different portfolios consisting of equities and gold. The first portfolio will center around one of the largest positions in my portfolio, VYM, which is the Vanguard ETF that tracks the FTSE US High Dividend Yield Index.