Thanks!J4B, long time reader, big fan. for many years i have had an AA that looks very similar to yours.
Checking if I understood your concern... Considering that equities and gold are the traditional assets for safety against currency destruction, you're wondering if the 50% in these is enough to offer protection, when the other 50% is in fixed income -- and therefore vulnerable.in recent years i began to really worry about currency debasement and that worry has not abated (lol). i view it as a risk in both deflationary (policy response) and inflationary environments. how are you thinking about this -- the gold and then equity making up 50% meant to suffice?
. . .
i think these things are now more than tail risks on anything longer than a 1-2 year timeline (and possibly even in the short term) and the consequences severe enough that for me they justify revisiting the AA, moreso than other attempts at market timing. very interested to hear your thinking on this.
I was going to respond "yes I think it's OK" when I first saw your post, but I decided to take some time to do a bit of studying before posting.
For this, I think Argentina is a very useful case study. Let's look at Argentina, from the perspective of an Argentinian investor in their local currency. The numbers below are a bit rough, but reasonably accurate.
~ Case Study: Argentina ~
Their currency has been disintegrating over the last 10 years. Using the USD as a reference, the Argentine Peso has been depreciating at a rate of 28% per year. The currency has lost 92% of its value: it's basically been wiped out.
Here are the 10 year annual returns of each of the asset classes in their local currency. Note that stocks includes domestic & foreign, analagous to "XIC and XAW" for us.
Stocks: 33% cagr
Gold: 43% cagr
Bonds: 10% cagr
Clearly, this is a total disaster for fixed income investors. This is the horror scenario that people like Dalio sometimes talk about. The net return in USD (which we're using as a stable reference) is 10% less 28% depreciation = -18% per year.
Losing money at 18% per year is catastrophic. This is a great illustration of the danger of bonds during high inflation / money printing / devaluation. Just three years of that and you've lost half your capital!!
My asset allocation is 20% gold, 30% stocks, 50% bonds. How would that work out for an Argentinian?
The overall return would have been roughly 24% annually. The NET return after considering currency destruction is: 24 - 28 = -4%
Losing money at 4% is not quite as catastrophic. In fact this result is probably within the "noise" considering that I calculated all of this pretty crudely. This is almost a ZERO result.
~ Argentina Result ~
So is "20% gold and 30% stocks" enough to preserve capital during extreme currency destruction?
The Argentina case study shows that it's pretty darn close to a zero result, which means capital is mostly preserved.
One might be tempted to look at these numbers and say, oh boy, I should weigh much more in stocks and gold (and get rid of bonds). But think of what would have happened if this currency destruction happened while stocks also crashed (globally) which is a possibility!
Balancing these risks is VERY hard. If you weigh more into stocks or reduce bonds, you might get better preservation of capital, but you also might catch a weak stock market -- that would give a much worse result.
I think the 20/30/50 allocation does reasonably well in all the economic conditions, including currency destruction.