Until 2007 I was always geared toward capital gains by speculation and by investing. That's normal, I think, for people who are professionals or are employed and have a source of continuing income to live on and save "from". I had never thought of asset allocation in any real or thorough sense, only asset accumulation. When I started to think about it I reluctantly accepted the traditional concept of progressive reductions in US stock exposure and increase in US bond exposure as one got older. After all I would need dollar income to spend.

Actually I had never been a stock investor in the usual sense. I had been more intested in commodity futures speculation, having lived through the inflationary era of the 1960;s and 70's as a young adult, a time much like the present. From the 1960's to early 80's, US stocks and bonds went nowhere but down, or sideways at best. Metals, grains, and foreign currencies went up. In the 1980's and 90's that all changed, and I had to learn to short futures and buy stocks and bonds. That was a great time for our elders to retire on 14% 20-30 year old US Treasury bonds and rising stocks. But now that I have retired we are back in the inflationary patterns of the 60's and 70's, and it's becoming less clear that relying on US stocks and especially on US bonds is going to work out as it did from 1980 to 2000.

Fortunately I retained my interest in gold and commodities and currencies, although I really do need steady income as well. When I see what has happened to highly regarded balanced US stock and bond funds this year, such as Dodge and Cox's DODBX, which I had owned, and many others, now down over 15% already this year, I'm happy I got suspicious last year. I felt like a wimp for cutting stock funds and growing negative or at least cautious in my posts here while stocks were going up last year. I got down to mainly bond funds and Vanguard's Wellesley Income (balanced) Fund VWINX/VWIAX and First Eagle Global SGENX and a gaggle of inflation beneficiary funds. Late last year and early this year I even cut out SGENX and VWIAX as they lost strength. I had expected to own them forever, but they suddenly faltered in a way I had not observed historically. I have the service of Investors FastTrack http://www.fasttrack.net/ which has a data base of the total returns of mutual and closed end and ETF funds back to 1988, so I knew what all US funds had done under all sorts of conditions since 1987. It costs about $300 per year but is well worth the cost if you are choosing your own funds. They don't tell me what to buy or sell, they just give me the data and graphs of their fund records and an ability to analyze it and them.

Thanks to FastTrack and my commodity background I was able to unload the faltering stock funds gradually, keep the income producing funds and hedge away the inflationary and currency devastation. I am still only up about 5% this year, but I could have been down 15% very easily. For a retired person early in retirement a 15% down year is a killer. I mainly did this all by feel and by hunch, although my bias toward the economic long wave helped me greatly as well. "Generic" or index stocks do not do well during inflation, nor do bonds. Actually, bonds have done pretty well and much longer than have stocks. So much so that I had many doubts about the primary economic direction, although looking at gold and oil and the rest of the commodity spectrum told me the tale.

Gradually I have been shortening the duration or spectrum of the bonds funds since I do believe that interest rates will be going up in the US as they are in Europe and elsewhere. This is painful if one is retired since  short term rates have been devastated by the US Fed action. In 2007 we could make 5.2% in the Vanguard money market fund with no hazard of capital loss. In July 2008 it is paying 2.2%! Nevertheless I have cut back from 5-7 year bonds to 1-2 years in both tax-free municipals and in taxables. I still own my favorite LSBDX, Loomis Sayles Bond Fund, but I have greatly increased the shorter term Vanguard Federal VSGDX and the Ginnie Mae VFIJX with stock fund sales proceeds. Gold, metals funds and energy funds and PIMCO's PCRIX and Hussman's HSTRX have provided the inflation hedging and some income as well as the natural gas and oil trusts I have written about.This is my blog and my story, and I'm not an investment professional, for better or worse. I have felt my way and explained how. And I may just have been rather lucky.

I have developed a healthy appreciation for PIMCO management over the past few years, and this week I read an interview http://www.allianzinvestors.com/commentary/frm_PIMCO_sec06012008.jsp with Mohamed el Erian who is now PIMCO's joint chief of operations with Bill Gross after coming back to PIMCO from two years running Harvard University's endowment fund. This interview is necessarily subtle and not a barn burner or Bible thumper, but if you read it thoughtfully you will get a much better picture of where and how we need to be investing over the next three to five years. It's a logical and concise layout of why and how and where to invest given current and expected conditions. Given that PIMCO is primarily a fixed income shop, the advice is particularly acute and meaningful for retired investors. One needn't even use PIMCO funds to accomplish what they see. But I think they are correct.

I have absolutely no connection with PIMCO, or any other financial enterprise, except that I own several of their funds. Read el Erian's interview. Print it out and read it until you understand it completely. I'll talk about it more another time and don't want to prejudice your views further until you have read it yourself.