I was visiting blogs today. Visited Rod Schulz who had an interesting poser this week. I won’t replicate. You can check it out yourself. Rod is a smart guy.

Two things became evident as they referred to people’s perceptions of my thinking on the market. Here are my responses to that “thinking.”

First, there aren’t a lot of people who should have all of their money in gold. (Of course just as you say that it could go nuts, but really, it probably won’t for a few years.)

Second, people can’t evaluate their life situation based on flawed modeling.

Planners (not Rod) want to test your risk tolerance.
Baloney.
I went in the bank the other day, and I sat down with a banker telling him to stash some of my cash in other banks around the country that were offering higher returns. All of a sudden he pulls out a risk assessment tool.

I asked him, “What the hell do you use that for?”

“We do that to assess your risk aversion.”

“Insane. Are you saying that you put people in crappy investments because of how they FEEL INSIDE?!”

“Well know, we want people to feel comfortable.”

I explained in voluminous detail that he was not cocaine. His job is to place his clients in investments that have the highest probabilty of return over the near term. Right now, that’s CD’s and maybe government bonds and bills.

“You should have most of your money in stocks.”

“Really, can I ask to see your portfolio and how you did in 2008?”

He knows how I did in 2008 because I showed him Q/A at my website for the last few years.

“Well that’s confidential.”

“Uh huh. Listen, Steve, it was great seeing you, didn’t mean to pick on you. I’m averse to people who don’t see trains coming and stand on the tracks….and there is another train coming.”

Planners need to invest your money where it is going to make you money with the highest utility value. (I’ll explain that later in the week, it basically means highest probability of best return over some period .)

I noted in a comment on Rod’s site that most people should be 10% in gold, 10% in cash in the mattress (safe in the ground), 10% in stocks with an average PE of <8 and 70% in CD’s of 6 months, 1 year and 2 year maturities.

But then that’s people with a million dollar net worth outside of their home.

But life doesn’t work on percentages. Someone with a million dollar net worth doesn’t invest and shouldn’t invest the same way as someone with a $50,000 net worth. Someone who is 80 years old MUST have their money very differently placed than someone who is 30.

If you take out your home from the picture, add up your assets, subtract your liabilities and see what’s left:

Make Rod your financial planner and have him invest logically.

Stocks are extremely expensive right now.

There is no reason to believe they will return higher than inflation for quite some time, so what is the point of being in stocks? Save the gambling for Vegas where there is a cute cocktail waitress bringing you a drink.

Your net worth outside of your home is $50,000 and you are 50 years old. You are screwed. You MUST have your own Coffee Table business. That 50 k is one years worth of income because it’s probably in a 401k and when you pull it out you’ll have $30,000 instead of the 50 that it looks like. At age 50, you need to earn $100,000 annually with your own biz, stash 30,000 of THAT income in 401 k sheltered choices. and those choices would be Certiificates of deposit at the bank for the most part. you will need cash to be safe while you invest in yourself in your small biz from home.

Does it matter if you have all of your money in cd’s or all of it in stocks or gold? Not really. You have $50,000 in the above scenario which is essentially nothing. It’s a rainy day fund….a very short rainy day. One disability, layoff, firing, medical situation for one of your kids or adult parents and that cash is flicked off the face of the earth in an instant.

A good financial planner will help you place that money at a fixed rate of say an annual 1% of assets under management.

What if you are worth 100,000 after your house?
If you are 20 that’s good. If you are 50 you have two years of stash. Again, it’s not that important. Your greatest loss probability is going to be in stocks and bonds going forward. (tough to argue platinum/gold will be lower than inflation in 10 years)

but if you have $500,000 after your home that’s different. now you can gamble some of that money on the market. find that basket of stocks that have a PE of < 8 or 9 and pop $50,000 in there. THOSE stocks might actually return OK. But to invest in the market with the PE where it’s at today, just makes no historic sense. Stash it in cash equivelants.

A note of caution: I just put a chunk of money into government bond fund. It’s 401 k money, but this is a SHORT term (3-6 month) trade in a LONG term setting. obviously keeping this money in this kind of a fund for the long haul is insane as a /billbond prices are through the roof. as soon as interest rates start to jack up your principle is going to crumble. most people don’t realize that and they think they are safe in bond funds. you’re safet buying a bill or a bond and taking the interest payment. same is true for CD’s. They don’t pay much but they aren’t supposed to. They are there to keep your money safe that you worked hard for. I will be shocked if i still have money in that specific fund in six months.

Why am I there now?

Because interest rates are under Fed control right now. They are buying bonds and bills reducing the Obama Supply, and that will force rates to stay down making some gains possible in the value of the bonds, not the interest rate. At least that’s the LIKELY scenario for the rest of 2009.

So where does gold fit in?

Well in a disaster, where currency becomes worth less or worthless that’s where gold/platinum/silver come in handy.

It’s hard to think in terms of percentages in gold. I think people should have 6-12 months of INCOME equivelant in gold. so maybe $50,000 or $100,000. That’s 10% of a net worth of a $1,000,000. If someone was worth 2,000,000, you might want to have MORE gold, say 20% in metal. but at these levels investing becomes more complex.

And of course the thinking seems to conflict right? We just said that people should have 70% in CD’s and if someone’s net worth is $50,000 and they have $35,000 in CD’s you can’t have $50,000 in gold.

so what to do?

It depends.

I’m very risk averse.

Gold has tripled in value in the last decade. Take out inflation and say it’s up 250%.

The stock market has gone down 1/3. After inflation, you have 1/2 of what you started with.

Stashing it in CD’s would have kept you even against inflation.

And inflation IS the great enemy.

For the last four years it was pretty obvious a disaster was about to occur. Everyone with an understanding of the markets was ready for it. They either got mostly in cash or gold. They are fine.

Today, as with the last two yeas, ….against inflation, the markets are likely to go down….that means they could go UP 10% per year vs. 11% and thus lose 1% even though the Dow is “up”, make sense?

Just like this morning in Coffee the market was predicted to drop. Again, it’s fairly obvious. Now, that said, you can’t predict markets short term. This week simply looked terrible at the end of last week.

It’s gambling and it’s interesitng and fun but it’s gambling. And you can’t stay invested (in stocks) for the long term because that doesn’t really pay off over time. After expenses, inflation, taxes and dividends, the best any 20 years period has done since 1900 is 4% return annual.

See www.crestmontresearch.com for the easiest to understand, literally color coded charts you’ll ever see.

Ed Easterling is the scientist who runs the site. Like most of the sharp minds he called the disaster of 08 with great precision. he indicated last month that the market was due for an uptick and there it is. The way he measures PE it’s about historically average. His assesment is a bit more optimistic than mine but one thing is for sure, if you spend an hour looking at the STOCK MARKET section of his website you will become educated in the SCIENCE of the market, and not the broker view of the market. And it’s EZ to understand because it is literally color coded.

The cool thing is that ed doesn’t care if it goes up or down. He’s a scientist. And an honest one. He prints the numbers as you have never seen them. Simple, straight forward and with no emotion, simply shows that the assumptions about big returns in the market were never warranted.

OK, it’s 2 a.m. and it’s time to call it a night.

If you have 100,000 don’t be stupid. you lost 1/3 last year…please….don’t lose another 1/3 this year….