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Discussion Starter #1
Hi,


I am new to investing and have excess cash sitting in various high interest savings accounts (1.5% !!)

I am in my early 30's and have no debts or property.

I am looking to take half our cash savings and hedge against weakening canadian dollar and hedge against a down turn in the stock market sometime in the next few years.

Wondering what would be the best way to do this?

Buy physical gold? or Buy gold etf in usd?



Thanks

Your input is much appreciated.
 

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buy some stocks, buy some bonds, buy some gold, buy some dollars and maybe buy some euros and keep a good size chunk in cash ...

if you find a better way, let me know

ps. what if the market doesn’t turn down but turns up ? and what if oil strengthens and we get our oil to market and the loonie soars ?
 

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You're concerned about two things in particular: falling CAD, and falling stock market.

Approach 1: a standard asset allocation between stocks and bonds is probably enough to protect you, for example 60% stocks 40% bonds. Foreign stock exposure protects you from a weakening CAD. Bonds protect you from a falling stock market. The only scenario this doesn't cover is falling CAD + falling stocks at the same time.

Approach 2: about the same as what fatcat says, take that asset allocation further by adding cash and gold. My preferred way of doing this is the permanent portfolio, described in this thread. Here you have equal allocations to stocks, bonds, gold, cash. If CAD falls, the stocks and gold protect you. For gold exposure, it doesn't matter if the ETF is in US or Canada. I prefer MNT in Canada and IAU in the US.

2008 is a good case study for your scenario. The most painful period was 2008-06-01 to year end, when the CAD fell 18% and stocks fell about 40%.

Using the 60/40 allocation (or more precisely 30% US stocks, 30% Cdn stocks, 40% bonds) the return was -15.5% overall.

Using the permanent portfolio allocation (12.5% US stocks, 12.5% Cdn stocks, 25% bonds, 25% gold, 25% cash) the return was about 0%.

I agree with fatcat. If you find a better way to protect against such disasters, let me know.
 

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Discussion Starter #4
Thanks james and fatcat for your input.


I worry about holding both stocks and bonds, as holding bonds doesn't always cover for downturns in the stock market :
-marketwatch .com /story/stock-investors-couldnt-use-treasuries-for-safety-in-the-event-of-a-crash-2016-01-14
-cnbc .com /2017/01/25/a-recession-is-overdue-heres-what-will-trigger-it-commentary


I don't mind riding the stock market out for the next few years without participating in it and wait to invest my savings when/if the market lowers and I can buy some value.

My main worry is that I would like to hedge a drop in my savings purchasing power due to falling CAD. My thinking was, when/if a recession hits, capital usually takes flight to USD and with Canada having such a large household debt/leverage things could get pretty ugly. Which means the goverment would step in and start printing.


If I am happy to wait out any gains in the market for the next few years and hedge a drop in CAD and the stock market, would 50:50 cash to USD gold be a suitable option? What would be the main downfalls of this portfolio?

Thanks
 

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Don't be too quick to dismiss the other possibilities, like: stocks go up, CAD goes up, high inflation, or heck, sharp deflation (which will hit gold as well). There are many possible futures. Maybe Trump causes an American crisis and their USD crashes, commodities and CAD soar. Who knows?

If I am happy to wait out any gains in the market for the next few years and hedge a drop in CAD and the stock market, would 50:50 cash to USD gold be a suitable option? What would be the main downfalls of this portfolio?
First just a clarification, it makes no difference what currency the gold ETF is in, as long as it's a pure bullion fund. Whether you buy MNT (CAD) or IAU/GLD (USD), you will end up with the exact same exposure to gold, and get the same gain/loss in CAD. Which one you choose is mainly due to other factors such as, do you happen to have CAD or USD lying around, and do you prefer that the fund is based in the US or Canada.

When you say 50:50 cash and gold, do you mean vs all your net worth?

I'm one of the craziest pro-gold guys on this forum. I currently have about 23% of my net worth in gold, but I would never go as high as 50%. Gold really is a very volatile asset, it will swing around like crazy. And I wouldn't even hold 23% in gold without the accompanying stocks & bonds.

The downside to your plan (if you really mean owning just cash+gold with nothing else) is that gold is a very volatile asset. It's very risky to own just gold. It could go wildly in one direction or another, and it's not a good idea to expose yourself to that.

Let's say you have 3 assets: A, B, C. Each of them on its own is volatile and can move wildly. However, A, B, C all have low correlations with each other. Holding any one of them alone is a bad idea. Say you pick asset B and nothing else. You might get lucky and B could soar, but it could also crash. It's just a dangerous activity. Same story if you just pick asset A.

However combing A + B + C is when the magic happens. Because they have low correlations with each other, the combination provides a smoothing effect. This is why both fatcat and I talk about holding gold along with stocks and bonds. These assets have low correlations with each other and are very suitable for combining.

Holding one of them alone, though, amounts to a pure gamble.
 
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