They split the last of the Malbec, and ready for investment year 2013. Nils's precious metals lagged behind Lars's diversified trust mix in 2012, so he feels there will be some natural catching up in the coming year. "Gold will be up 15% easy in 2013." Lars suspects he may be right; there are a lot of potentially destabilizing forces and that favors gold, but doesn't that always seem the case? He has heard the phrase "In these turbulent times..." pretty much every one of the last thirty years.
Concurring with Nils's drift, Lars says he thinks his trust did overall too well last year, and there will be a reckoning for it. Stocks may have gotten ahead of themselves but he still thinks, without any technical analysis, that they will give a 5% return in 2013. He is more wary of bonds, feeling the world is stretching for return and will pull a muscle in the process; he predicts zero net return for bonds. REITs have the unfortunate combination of having done too well (like stocks), and being interest-rate sensitive (like bonds) at least in the short run, so Lars predicts a negative 5% for REITs. All in all he guesses it should be close to a zero-return year.
So why is Lars as trustee holding tight with a portfolio he feels will do poorly? Why especially the bonds and REITs from which he expects nothing or worse? There are at least two reasons. For one, he's guessing; he knows that he doesn't know what will happen. Second, trustees are supposed to diversify, and he has done that, especially with the annual rebalancing that puts his five investments back to equal amounts.
There's some further analysis Lars would like to do, on bonds. The trust has one fixed-income fund, of intermediate term investment grade government and corporate bonds. The maturities are in the six-to-seven-year range. This has less interest-rate risk than longer bonds, and better yield than shorter ones. In a sense he is avoiding diversification into longer terms because he doesn't think they'll do well. In this limited way, then, he is letting his prediction override his obligation to spread risk. He's also failing to diversify on the shorter side, because the yields don't look very good.
With his personal fixed-income holdings Lars has gone to much briefer duration (two to three years), sacrificing less than 1% of return for safety in the short run. He thinks there will be opportunity to get back cheaper into bonds or maybe other things that have a time of falling off in the coming year or two. With the trust, though, he's sticking to the five categories: US stocks, international stocks, REITs, intermediate bonds, and Nils's metals mix. It should be an interesting year; every year is.