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Phaedrus

Risk Premium

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Hi all,

First post on this part of the forum so be gentle. As some of you may know, my personal circumstances changed recently and I've a "bit more" spare cash. I've always saved at least 10% of my salary and always put a proportion of this int a FTSE-All Share tracker, wrapped up in an ISA. Reasons being, low charges, pound cost averaging, low-medium risk in the medium to long term, no need to keep a hawk-like eye on it and relatively liquid in an emergency.

With my new found "wealth" I'd like to diversify a little, however. My main aim will be to protect a portion of my money from the effects of inflation. I am looking at a number of asset classes and was wondering how people gauge the various risk premiums they would expect? I know this is a bit of an inexact science, but good investors will have some general rules they follow. How do investors keep up to date with what is going on relative to their investments and what would trigger a move out of a particular asset class?

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Phaedrus,

It's simple. Risk premium scarcely exists in todays investment climate. If it does it's so skinny that it's completely out of whack with the actual risk.

Take housing. IMO there is actually a risk discount. silly silly silly

Cheers

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Phaedrus,

It's simple. Risk premium scarcely exists in todays investment climate. If it does it's so skinny that it's completely out of whack with the actual risk.

Take housing. IMO there is actually a risk discount. silly silly silly

Cheers

Good point. Are you saying that currently there is nothing worth investing in?

Holding cash still carries a risk, esp GBP.

How about gold(Come on Bubb, enter the debate!), is there still some way to go, or has the risk premium become too great?

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Good point. Are you saying that currently there is nothing worth investing in?

Holding cash still carries a risk, esp GBP.

How about gold(Come on Bubb, enter the debate!), is there still some way to go, or has the risk premium become too great?

The max risk in gold is 30% of your capital. IMO there is no way that gold will ever be below $400/£200 again.

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The max risk in gold is 30% of your capital. IMO there is no way that gold will ever be below $400/£200 again.

Thanks for your reply. I don't understand the 30% figure. Where does this come from? Why do you think gold will never drop below £200. This surely does not also apply to gold shares? It would be possible to lose it all on them, would it not?

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Gold does not have a risk premium because it does not return anything. One MUST rely on cap gains which is a different thing.

One would have to construct option strategies around the core position to get a return for holding.

This way it is possible to then get a risk premium....but this requires extra work and knowledge.

It's worth aquiring the knowledge, but it is somewhat of an apprenticeship.

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Thanks for your reply. I don't understand the 30% figure. Where does this come from? Why do you think gold will never drop below £200. This surely does not also apply to gold shares? It would be possible to lose it all on them, would it not?

Yes, with Gold shares as with any share the company can go bankrupt.

The reason that I suggest 30% is that many mining companies produce gold at c400$ per ounce. There is a proven and growing demand for physical so even if the speculative market collapsed then supply/demand would dictate a minimum of $400. Otherwise supply would dry up.

Of course, i don't see $400 or £200 gold. Try kitco, 321gold and there is a mass of commentary and resource there. Make your own choice.

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Try kitco, 321gold and there is a mass of commentary and resource there. Make your own choice.

Thanks for those references. How independent are they though? Have they not got a vested interest in ramping the price of gold?

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Thanks for those references. How independent are they though? Have they not got a vested interest in ramping the price of gold?

Yes, they do have vested interests but their news blog compiles global articles and often has bearish pieces.

What they will give you is insight into the rationale of a 'gold bug'.

If having done your research you are interested in exposure to commodities including gold, oil etc then FTSE:REI is a good bet (One of DR.B spots) they give you a broad global and sector diversity and are still trading at a big discount to NAV.

Off skiing now for a week!

Good luck.

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  • 302 Brexit, House prices and Summer 2020

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      • down 5% +
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