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Why you NEED Precious Metals in your Investment Portfolio (especially in 2018)

January 19th, 2018 at 11:40 am

This is part 1 of Milly's "Precious Metals for Beginners" series. For other parts see:
Part 2: http://milly.savingadvice.com/2018/02/05/should-i-buy-silver...
Part 3: http://milly.savingadvice.com/2018/03/08/what-type-of-precio...
Part 4: http://milly.savingadvice.com/2018/03/27/where-to-buy-your-p...

Gold and Silver should be a part of anyone’s savings and investing. My personal goal is to have it represent 10% of my retirement portfolio and up to a quarter of my emergency savings.

I didn’t start out believing in gold. It gets a lot of hype in sensational language, which always makes me skeptical.

My biggest obstacle to adding precious metals to my portfolio was is it is hard for me to imagine going back to using gold and silver as currency. It is just too out of place in today’s modern society and impractical in the digital world. If there were a dollar crisis, my tools would probably be worth more than useless metals and I can use them now.

I knew their are some inherent physical properties to the metals that make them valuable in industrial and medical applications, but I still don’t think it would cost nearly as much if those were the only competitors for the metals. Only 10-12% of the gold out there is used industrially. It is mostly people just liking precious metals and speculating in the metals that keeps the prices so high. I didn’t want to invest in other people’s fancies.

Let me Change your Mind
Now I see gold and silver in a new light. A lot of the people who don’t like precious metals point to the http://milly.savingadvice.com/2018/02/13/what-to-expect-from... and show that gold isn’t going anywhere, but the stock market is. Well, it may be true that US stocks have matched or out performed gold, but not by nearly as much as we are led to believe.

Gold as an Investment
From 1971 (when the US abandoned the international gold standard) through 2016, gold has actually tied the return of the MSCI US (large and mid cap US market) at a return of 10.6% annualized. That wasn’t all in the huge gold jump that happened at the beginning either. The last 10 years has returned an average of 7.7%, lagging the US stock market by only 0.5% (https://www.gold.org/what-we-do/gold-investment/why-invest-i... with pretty pictures).

I did my own math and graphing with an exponential trenline (to avoid cherry picking dates) and came up with both the S&P 500 and the Perth Mint gold prices returning 7.3% annually.

That is not a lot of missed gains compared to the risk of a major market correction any day. You might pay the 0.5% in fees to your brokerage anyways. If you agree with Lewitinn in https://finance.yahoo.com/news/the-fed-caused-93--of-the-ent... that 93% of the stock growth since November 2008 is resultant of Federal Reserve moves, then that is a lot of risk. You could see 93% of those gains come crashing down any day, especially if the Federal Reserve isn't able to do the tightening and normalization they planned (rate hikes and unloading the balance sheet).

Precious Metals as Protection
Even with all of those investment benefits, I still see precious metals as the way to preserve wealth, not to invest. I suspect much of the gold rise is actually dollar weakening. No matter what any politicians or leaders do to the US dollar (and you know what they are going to do), precious metals will hold value. Jim Rickards once asked someone how their family preserved their wealth for 800 years. The response was a third in land, a third in art, and a third in gold. These are the things that last.

As the value of the US dollar and future dollar (treasury bonds) continues to drop, I believe one (or both) of the following two things will happen in the near future, possibly even before the 2018 mid-term elections, probably before the 2022 mid-term elections. I'm not sure how to present these without sounding like I'm using a scare tactic. If you think these are too extreme, just move on and remember all of the other great reasons to invest in precious metals.

1. QE4, or rather the fourth round of "Quantitative Easing", a disguised term for explosive money creation (eventually leading to inflation). At the end of 2008, 2010, and 2012 the Federal Reserve bought up massive amounts of mortgage-backed securities and Treasury securities through a program called Quantitative Easing or "QE". Those three rounds of easing brought the Federal Reserve balance sheet (assets purchased with money created out of thin air) from $700-800 billion to $4,500 billion, effectively adding those trillions of dollars to the money pool. One glance at this https://fred.stlouisfed.org/series/M1SL (ready to spend money) can show you how dramatic the effects were. By the time they were done at the end of 2014, the Feds had bought nearly 3 times more in assets than there was M1 money when they started QE1!

Why is this bad? Each round takes more and more money "printing" and lessens the share of each dollar on the dollar market. This lessening of dollar share hasn't led to price increases yet because the crisis also lead to a greater demand of dollars. Dollars were crucial to all of the liquidation and exchanging going on in the crisis. The problem is we are short changing all of the countries holding treasury securities who thought they were buying a larger share of future dollars. I think QE4 will cause countries to throw in the towel when it comes to buying securities. The treasury auctions are already falling and we are beginning a trade war with China. Why on earth would they keep buying our debt?!

I know I've kind of left the primary topic. I will probably move this section to a future post once it is ready, but the bottom line is this: Buy precious metals because the US Dollar and treasury securities are going down and the plummet will only increase in speed as the problems unravel.

2. Jim Rickards’ “Ice-9” prediction (https://www.amazon.com/Road-Ruin-Global-Elites-Financial/dp/...) will be realized. There could come a day when the government will be forced to freeze all digital money except for a small amount for gas and groceries, much the same way as they have done in https://www.huffingtonpost.com/2015/07/07/greece-capital-con.... Even if the money never is seen again, or http://milly.savingadvice.com/2018/01/29/inflation-a-tax-on-... to an extent that it isn’t worth anything when we get it back. Precious metals are individually and physically owned. They are a safety net when financial weapons are deployed. Precious metals will preserve.

Why 10%?
One question you might be asking: If you believe that much in gold and silver, why only 10%? One answer is I’ve seen a https://dailyreckoning.com/path-10000-gold/ of a $10.000/oz price of gold. That's in today's dollars, so if there is major inflation, the number will be higher. This isn't some fudged Wall Street chart pattern prediction either. This is a mathematical analysis done by a world expert on currency wars and is based on the required non-deflationary price of gold. If we reach $10,000, your 10% would become about 100% and even if you loose everything else, you’re insured.

Why not more than 10%? Right now we are in a very difficult time for investing. According to John Keynes, we are in a depression which is highly deflationary. Companies are laying off workers (who in turn find part-time jobs, "creating" jobs on federal reports), individuals are deep in debt, and savings are at a record low. In times like this, short term opportunities are the way to go.

At the same time, countries around the globe are cheapening their currencies with monetary easing. The US government simply cannot afford the real value of their dollar denominated debt to increase. Eventually, they will have to change course and switch back to monetary easing "money printing". http://milly.savingadvice.com/2018/01/29/inflation-a-tax-on-... at some point.

In his book, https://www.amazon.com/Big-Drop-Wealth-During-Collapse/dp/B0..., and in https://dailyreckoning.com/unprecedented-central-bank-polici..., Jim Rickards explains the thoughts and methods behind a "barbell" strategy that is loaded up on the ends as a protection against inflation AND deflation, with cash in the middle ready to pivot positions as needed. So if you put 35% of your investments in hedge funds, private ventures, angel funds, and the like for your deflation hedge, and leave 30% cash (and treasury bills) in the middle, you only have 35% to diversify into a inflation hedge. As stated earlier, those should include precious metals, undeveloped land, and fine art (try 10%, 20%, 5%). If you want to tweak those numbers you are always welcome to.

I know that was a lot of external thoughts and analysis in a beginner's precious metals post. The bottom line is you don't want to put it all into gold.

In any case, Jim Rickards recommends 10% and most precious metal companies recommend 10%. If people who do more research than me and are an even bigger believers in precious metals than me recommend 10% in gold, I should say the same.

What about confiscation?
When looking into gold as an investment, fingers are often pointed to https://en.wikipedia.org/wiki/Executive_Order_6102 signed by President Roosevelt in 1933, which required gold to be traded in to the Federal Reserve for the official gold price of $20.67 per troy oz. The criminalization of “hording gold” in the US lasted all the way until 1974, after we left the gold standard. Other gold controls have occurred in Australia and much more recently in India. I’m not going to let fear of confiscation prevent me from buying for 5 reasons:

1. There was a good reason for gold confiscation at the time. It is one thing for the government to confiscate items that cause destruction such as illegal weapons and drugs, but the confiscation of gold comes down to one thing: they needed it, so they took it. As terrible as it is to have the “land of the free” to secure themselves a discount on your savings, it was this confiscation that allowed us to keep on the gold standard for about 40 more years. Without this questionable move, we would have had a run on the gold reserves and it is impossible to say what that would have done to the American future we live in today. Was it the right thing to do? I doubt it, but I may be reaping the rewards today. (or maybe it just means it is going to be that more painful when the ungrounded financial system fails)

2. Gold owners were compensated. It is against the constitution for gold to be sized without just compensation. Sure, the government might do something sneaky like dump a bunch of gold supplies into the market to suppress the price just before they close the market so that they can buy at discounted prices. Even if they don't, you’ll still miss out on some massive gold hikes in the event of a gold crisis. Either way, you’ll probably still be better off buying gold today and selling it to the government in a few years than just holding onto dollars. The shakier things get, the more gold will go up.

3. Not all gold was confiscated. There were exceptions for industrial uses and some personal exceptions as well. Rare coins were exempt and individuals were even permitted the equivalent of 5 troy ounces of coins.

4. Owning gold is the patriotic thing to do. If there is going to be a future gold confiscation, wouldn’t it be much better for the United States to get a bunch of gold from it’s citizens than to have that gold sitting in India, China, and Russia? I don’t want to give away real money for fiat currency, especially when it is in a crisis, but at least it is going to someone who wants the United States to be strong. We want as much of the world’s supply of gold in our own borders. Owning gold is the patriotic thing to do.

5. The risk of confiscation is smaller today. In 1933, the dollar was backed by gold (http://milly.savingadvice.com/2018/01/25/what-is-money-and-t...). They had to stop a run on the gold reserves when the gold peg was strained.
Today, we live in the world of floating exchange rates.
If the US really gets into a bind, instead of confiscating gold, they can just print whatever money they want to cover their debts. Yes, creditors will be upset about taking a "haircut" when paid in a debased currency, but they took an inflation risk when they bought the government securities.

Good luck!

This is part 1 of Milly's "Precious Metals for Beginners" series
For Part 2, click here: http://milly.savingadvice.com/2018/02/05/should-i-buy-silver...

Disclaimer: I am not a licensed or certified financial coach, planner or adviser, just an enthusiast. Anything I recommend should be personally analyzed and discussed with your financial adviser.

How to Pay off your House for Much Less

January 18th, 2018 at 12:54 pm


When it comes to finances, nothing makes me more excited than seeing a ton of money leave my bank account each month. I just can’t wait to enter it into my “https://drive.google.com/open?id=1cx_lhwpqXeZ5NLX0b4kxRrYQb5...” spreadsheet, to see the amount saved go up a few hundred dollars, and be one month closer to payoff. Why does this make me so happy? Well, a lot of it is because I love numbers, but also because we made a plan to own our home in just under 7 years, 76.9% faster than the 30 years the loan was signed for.

Forget the Tax Deduction
Some people say you shouldn’t pay off your house because there are so many tax benefits. While there could be strategy in focusing on debts without tax benefits first, not paying it off for tax reasons doesn’t make any sense. Yes, you won’t get a tax deduction for the interest you are paying, but that’s because you don’t have to pay it at all! Would you rather get $100, pay the bank $100, and have Uncle Sam give you back $20 he took from the other part of your paycheck? or would you rather get $100, keep $80 and give $20 to Uncle Sam without anything extra coming out of the remaining paycheck?

Saving/Investing vs. Paying Down your House
Other people are more comfortable saving their money instead of dropping it into their house. In the current state of things, I can get as high as 1% interest on my savings, maybe 2% if I have a lot to save and can stash it away for a long time in a certificate draft (CD). My mortgage rate is 4.625%. Despite it’s phenomenal performance from 1945 to 1995 even the S&P 500 isn’t set to beat that rate (currently returning about http://milly.savingadvice.com/2018/02/13/what-to-expect-from...). In other words, unless you are in a more specialized index, the interest you save on your house is probably your biggest gainer.

If you get a higher return out of savings or dividend stocks than you are paying on your house, and it fits within your risk tolerances, you might do better with a mortgage offset account. That is, pay the minimum on your home and put the excess you could have put on your house into the high return investment. The investment account will grow faster than your house would have paid down. Once you have enough money in the account to pay off your home, you can either withdraw it and become debt free, or keep it for a few more years and pay it off with some money to spare.

Close your Mortgage in Half the Time!
(For a LOT less Money)

So how am I paying it off so quickly?  It turns out that just adding a little to your monthly payment can make a HUGE difference.  Even $5/month extra will save a few thousand dollars and a few months over a 30 year loan.  At the beginning of your loan, most of your payment goes towards all the interest you owe on the principal (the amount needing paid off), not reducing the amount you still owe.  You'll just have to pay nearly all of that interest again next month and make you feel like you're running in place.  Adding just a little straight to principal will give you much more bang for your buck.

Not sure how to find a few extra dollars?  Stay tuned for more posts.

Make sure when you add the little extra that it is explicitly marked as towards the principal.  Otherwise, it will likely go towards the next payment and not get any compounding effects.

Here’s my simplified formula to pay off your mortgage in half the time:
Because this ignores some funny exponential math, it isn’t exactly half the time, but pretty close.  If your 30 year mortgage rate is over 4.6%, you’ll pay it off a little faster.  If it less, it will take a little longer (but you'll be saving more money anyways). You’ll have to do your own math if you are in the middle of your loan or have a different length.  Click https://drive.google.com/open?id=1cx_lhwpqXeZ5NLX0b4kxRrYQb5... for my free fancy calculator so you can see what happens with YOUR numbers.

Your monthly payment has three components:

1. Principal = The principal is actually the amount of money you still owe on the house, but they make it confusing and reuse the term.  The principal payment is the money that actually goes towards paying down the house (towards the actual principal).

2. Interest = The amount charged as interest on the remaining principal.  It decreases as you have less money borrowed.

3. Escrow = This covers your home insurance and property taxes.  The lender forces you to pay it to a special account to ensure they never get stuck with back taxes or an unfunded burnt down home.  Even after you pay off your home, you will continue to pay these amounts, but directly to the insurance and government instead of escrow.

Your loan is worked out such that your monthly payments are constant despite the lowering interest.  This is done by increasing the principal payment slowly over time.  Principal payment plus Interest should equal a constant.

Here's the equation you've been waiting for.  Just look to your statement to see what your numbers are:

Escrow + 1.5 x (Principal + Interest) = amount you need to pay each month to cut your loan length in half!

Alternative way of looking at it because words and math are hard to mix: Take any statement, add the principal and interest payments together, the divide that number in half.  The result is the additional amount that you need to pay to principal each month.

Did you notice?  You add less than 50% to your payment and it counts as two (200%) payments!

Alternative Double Principal Method
My father had a different approach which also cut the mortgage length in half.  He would simply write another check for whatever the principal portion of each payment was and put it straight to principal.  The advantages of this method is that the number you need is written right on your statement and it is relatively easy to implement at the beginning when the principal portion is so small.  As the principal portion grows, theoretically so does your paycheck making it is okay that you'll be almost doubling your whole payment near the end.

You are going to be SO MUCH better off with this method in comparison to the straight 30 year loan, but I see 3 disadvantages to the Double Principal method in comparison to my half Principal + Interest method:

1. The beginning is when you have the greatest power to knock months off your loan and save money.  You won't save quite as much money with the double principal method.

2. You might make more money as you go, but your lifestyle will grow too.  I think we all know life only gets more and more expensive.  In your future you'll probably add children, catch the travel bug, demand better kitchen appliances, get more picky about food, or otherwise increase your cost of living.  Also, I wouldn't count on wages growing faster than inflation for the next decade.  We are in a currency war and, in the words of Jim Rickards, "the only way to win a currency war is to stay out of it".

3. Maybe the most significant flaw in this method is you can't automate it.  Every month you will have to look at the numbers and make a payment.  Autopay won't work.  As I learned from David Bach's book, https://www.amazon.com/Automatic-Millionaire-Expanded-Update..., the key to growing wealthy over time is automation.

As life gets more expensive and your principal portion jumps up more and more rapidly, you will need a huge amount of discipline and capital to keep this method up.  I don't trust myself that much.

Alternative 15 Year Plan
You could instead look into getting a 15 year loan from the get go.  The advantage is that they usually have a lower interest rate and they force you to stick to your early payoff plan.  This is a great idea if you need help sticking to the early pay off plan.  The only problem is you also have to hope life won't throw you any dramatic curve balls in the next 15 years. 

Worst case, you do have to drop down to a smaller payment and refinance to a 30 year loan.  You'll have to pay closing costs, but those fees will likely be added to the principal so you don't need the cash on hand in your rainy day scenario.  It will set you back, but hopefully you'll have enough years paying it off at a 15 year rate that it will make up for the loss. 

I personally like the safety net of being able to go back to a low payment for rainy day purposes.  This way, I can put the extra principal payments in the "investment" category of my https://drive.google.com/open?id=1EJGdxikiLpc92NHYzaelQPxePj... instead of "bills", effectively lowering my living costs. 

Unless you can get a substantially lower interest rate and you are confident in your other rainy day funds, I’d just go with the full 30 years and cut it in half on your own.  It won't cost much more.

The Home Improvement Pitfall
I have a friend who bought a home at the peak of the market.  He and his wife are among the most intelligent people I know, so paying his house off early was a no-brainier for them.  They set a plan to pay it off in 10 years despite the high price tag.  They stuck with the plan for a while, but as time went on, they made some trade-offs.  Instead of paying the extra towards their mortgage, they started paying it into the house with kitchen remodeling and various flooring. 

10 years later, when they would have been all paid off, they moved.  In that amount of time, the housing market had crashed and they were forced to sell for less than they still owed, even with the updated kitchen. Had they stuck with the plan, they would have come out of the transaction with the entire sale price (minus fees) as liquid money for a down payment on the next home.

Moral of the story: If you pay off your home, you can always sell it for something.  Stick to your payoff plan and get there as fast as you can.  You never know what the market or your life has in store for you.  If the market just goes up, you can always do the projects later.  It won’t hurt you to focus on payoff first.


Disclaimer: I am not a licensed or certified financial coach, planner or adviser, just an enthusiast. Anything I recommend should be personally analyzed and discussed with your financial adviser.

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