Five questions I would love to know the answer to (but don’t)

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To follow on from When the Rules Change.

Should investors use more leverage? Usually avoided with an allergic aversion, but CALPERs recently put the cat among the pigeons with their strategic decision to use 20% leverage to meet performance targets. Clearly it all depends on the terms of the leverage. But if a foundation or pension fund can borrow 50 year paper at sub-1% interest rates is this such a bad thing to increase returns instead of cutting back spending or requiring stretched budgets to increase contributions? Should investors accept what Donald Trump describes as “the gift of negative interest rates”?

Should gold, commodities (and even bitcoin) be considered as strategic alloctions? Now that government bonds basically yield nothing this takes away one of the classic arguments against gold, and inflation is an obvious risk associated with current policy mix which might be mitigated by allocating to commodities. The issue is there is scant evidence that commodities actually are a long-term source of return. Here’s a good piece that dives into the merits of gold alongside equities, finding that over the last 30 years the diversification has been amazingly additive.

Can investors take more risk with a “Fed put”? Should 75/25 be the new 60/40 as recently suggested by Jeremy Siegel. Is it right to think there is now a safety net under everything (whether or not you agree with it).

Is BTFD always the right thing to do? This year’s falls have been as large as one might expect of equity bear markets but much, much faster and the rally too has been far quicker than what we would expect from history. In a world of unlimited supporbuying dips might be right, but it could also be one of those things that works right up until it dosn’t. As usual, it’s probably a question of degrees, recommended in modest size.

Is inflation really the risk to be worried about? It has become such a well-worn argument to say that the huge stimulus we’ve seen from central banks will inevitably create inflation. And it fits with conventional economic and monetary thinking. But we don’t always live in a conventional world and where we are today inflation looks no closer than it was a decade ago – the opposite in fact. How much should we really fear inflation and how much of our portfolio should we allocate to protecting or hedging against it?

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