The Permanent Portfolio -- A Gem

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The Permanent Portfolio -- A Gem

Postby Taylor Larimore » Tue Oct 16, 2012 9:59 pm

Bogleheads:
The Permanent Portfolio is the creation of the late Harry Browne. It was designed to overcome the pitfalls and surprises that have ruined many investors. Authors Craig Rowland and J.M. Lawson have written an excellent book about this very unusual but sophisticated portfolio. Bogleheads will recognize Jack Bogle's wisdom in many of these quotes:
“The Permanent Portfolio is an investment strategy designed to grow and protect your life savings under any set of economy conditions.”

“According to Browne, the Permanent Portfolio should provide three features: safety, stability, and simplicity. 25% in U.S stocks; 25% in long-term U.S. Treasury bonds; 25% in cash; and 25% in gold.”

“The goal of each of the Permanent Portfolio’s assets is not to beat the market, it’s simply to own the market.”

“Over the last 40 years the strategy has returned between 9% and 10 % a year. The worst loss in any year was around -5% back in 1981. -- There is no 10-year period where the portfolio failed to beat inflation by at least 3%.”

“Recovering from a 50% loss can be very difficult because an investor will need a 100% return to just get back to where he started!"

“The truth is that smart investing is easy. -- It will do it with less risk, less management, lower costs, and more profits to compound. – Complexity kills returns.”

“We believe that most investors are better off putting their money into low-cost index funds.”

“The Permanent Portfolio is a strategy to embrace uncertainty in the markets.”

“The cash allocation provides an investor with a place to store interest, dividends, and capital gains from the other assets, and provides ‘dry powder’ for rebalancing purposes during market declines.”

“Where an investor has a plan, the speculator only has hope.”

“Market timing doesn’t work and it doesn’t matter who is doing it or how scientific it sounds..”

“Using leverage in your investments is the single fastest way to lose everything you own.”

“The mirage of easy riches conceals a long history of ruined investors.”

“Investing can seem complicated because the financial industry spends millions each year trying to convince you it is.”

“The more complicated an investment is, the more likely it is to lead to losses due to unknown or poorly understood risks.”

“If you don’t understand how an investment works within about five minutes, walk away.”

“Keep some assets outside the country in which you live.”

“Don’t ever let your emotions lead you to do something with your life savings that you will later regret.”

“So many people are now are able to invest in small-cap value funds it is likely that the return bonus (if present) will have been arbitraged away.”

“In investing there are many good ways to make money and a multitude of ways to lose it all.”

“Be cautious about drawing any firm conclusions about an invest strategy based solely on backtesting data.”

“It is an unusual investor who can calmly sit thought a -30% or worse decline in the value of his portfolio.”

“In the United States the rate of inflation has averaged around 4.4% a year since the early 1970s.”

“Complex strategies provide more opportunities to conceal fees, commissions, and other expenses that increase investment professionals’ income, while reducing their clients’ returns.”

“Very few investors are able to withstand large fluctuations in a portfolio’s value without eventually abandoning a strategy (often at the worst possible time and locking in those losses).”

“Since long-term investment success is related to the ability to stay the course and not try to outguess the markets, a stable portfolio will help you emotionally to stick with the plan.”

“Passive investing is the opposite of the active asset management that is typically offered on Wall Street.”

“Think of survivorship bias as going into your school records, erasing the course you took where you received a bad grade, and then recalculating your GPA.”

“Ironically, just trying to get the market average means over time you will beat most investors and investment professionals.”

“Properly measured, the average actively managed dollar must underperform the average passively managed dollar, net of costs. Empirical analyses that appear to refute this principle are guilty of improper measurement.” -- William Sharpe, Nobel Laureate.

“If you reduce your annual costs from 1.5% a year to 0.20% a year you instantly gain a 1.3% performance improvement with no effort and no additional risk. It’s the closest thing to free money an investor is ever going to get.”

“The Permanent Portfolio seeks to increase volatility in each asset class in order to achieve stability across the whole portfolio.”

“One of the largest obstacles for investors to overcome is the tendency to focus on individual assets in isolation within a portfolio instead of looking at the complete package."

“No matter how much anyone wants to believe that investing can be quantified and reduced to a set of equations, investing is an inherently uncertain activity.”

“The past is not guaranteed to repeat into the future. Without realizing it, many investors are essentially driving forward by looking in the rearview mirror.”

“Investing should be simple. Not only does simplicity make portfolio management easier, it will often also make it more profitable.”

“Investors are strongly encouraged to get the idea out of their heads that their favorite asset is always going to perform well going forward.”

“Taking too much risk in one asset class is gambling, not investing.”

“Simply relying upon historical asset class correlations is dangerous. Depending on what time period is selected, the correlation numbers can be radically different. -- In the market crash of 2008 large company stocks, small company value stocks, technology stocks international stocks and emerging market stocks all fell sharply in value. The diversification investors thought they had turned out to be illusory.”

“When it comes to economic matters, the future is simply unpredictable.”

“The only asset that can be relied upon during a recession is cash.”

“Owning stocks is the best way for investors to have ownership in the productive capacity of a prosperous economy.”

“Unfortunately, the term ‘index fund’ has been used in recent years to describe all kinds of investment products, some of which bear little resemblance to a true index fund.”

“Jack Bogle stated it best when he said: ‘The shortest route to top quartile performance is to be in the bottom quartile of expenses.”

“Investors have been surprise to see many companies that were considered safe disappear almost overnight (Enron, Lehman Brothers, etc.). – A broadly based index fund protects you from disaster.”

“Index funds are the most tax-efficient stock fund you can own. They do not have managers actively trading stocks and generating unnecessary taxes behind the scene.”

“Skip the idea of using Morningstar’s rating stars to buy funds. – Simply buy a broad-based index fund with the lowest expense ratio you can find.”

“Over the 29 years ending in 2009, actively managed funds trailed their benchmarks by an average of one percentage point a year.” Wharton Business School

“Nearly 9 out of 10 trades happening each day on Wall Street are between professionals.”

“The indexing paradox is that by trying to be average you end up well above average in long-term returns.”

“Use your work to generate money and take that money and invest it elsewhere. Failing to do so risks the loss of both your job and stock profits at the same time.”

“The beauty of the total stock market index is that you will own everything with simplicity and no regrets.”

“The bond market is probably one of the most complex pieces of the investing world to understand.”

“Bond risks may include, interest rate risk; default risk; credit risk; call risk; currency risk; political risk; tax risks; and manager risk.”

“Markets are simply not predictable and popular storylines such as ‘stocks always beat bonds’ often yield to the more sobering reality.”

“High turnover is common (in bond funds) because as bonds mature they are cycled out of the fund and replaced with new bonds of longer maturity.”

“In a sense junk bonds are one of the worst investments you can own—you get all of the volatility and the risk of stocks but little of the upside potential.”

“It came as a great surprise to many investors at the end of 2008 to find that long-term U.S. Treasury bonds were easily the best performing asset class of the year.”

“The yield of a bond is only one piece of the puzzle. The capital appreciation can also be used to provide protection and growth in the portfolio.”

“Every financial crisis seems to prove than in an emergency U.S. Treasuries are viewed as one of the safest places to be.”

“The first money market fund ever created, the Reserve Fund, broke the buck and locked up investor’s assets for years.”

“Putting money in a shaky bank is like getting into a car with a drunk driver because you think the air bags are going to save you if it wrecks. The better strategy is not to go for the ride.”

“Gold is the last asset an investor should put into a retirement account. Fill these accounts first with stocks, bonds, and some cash.”

“Some investors believe that a basket of commodities will work just as well (or better) than holding gold. They won’t.”

“Avoid any type of numismatic (collectible), rare, or antique coins.”

“Don’t let the search for the perfect portfolio keep you from implementing a portfolio that is good enough.”

“All diversified portfolios will experience unbalanced growth. -- One asset is going to be doing great and another will be in the dog-house much of the time. -- Eventually it becomes necessary to rebalance the whole portfolio in order to maintain its safety and stability.”

“Rebalancing ensures that you are never too exposed to any one asset in the portfolio. A second by-product is that it allows you to capture additional returns over time by selling a portion of your winning assets and buying more of the losers.”

“The truth is that smart investing is easy.”

“We believe that most investors are better off putting their money into low-cost index funds.

“Every penny you pay in taxes today is one less penny that can compound over time.”

“Using simple passive investing avoids managers and strategies that can churn a portfolio and generate unnecessary taxes.

“Unfortunately, disasters don’t provide notice for you to contact your broker before they occur.”

“Having as much of your bond holdings as possible in a tax-deferred account is a good idea.”

“When you have to do a sale, pick transaction lots you've owned the longest to get favorable long-term capital gains tax treatment.”

“Gains from the sale of gold in the United States are currently taxed either at an investor’s marginal tax rate or the collectibles tax rate, whichever is lower.”

“You want to have your funds invested mostly where you actually live, earn, and spend your money.”

“Individual Retirement Accounts and 401(k) plan accounts provide some protection from the claims of creditors.”

“Tax-loss harvesting is based on the concept that if you have a loss in an asset, you can sell the asset and recognize the loss for tax purposes.

“There are risks to your wealth outside of what the markets are doing. These risks can show up in the form of institutional failures, manager incompetence and outright fraud to name just a few.”

“Sadly, identity theft often doesn't even happen with anonymous criminals but with relatives, caregivers, and others with close intimate knowledge of the victim.”

“The last thing you want is to put your money in some tiny, offshore haven only to find that if it goes missing you have no legal recourse (and the judge hearing your case is the uncle of the person who took it).”

“Keeping some gold outside of the country where you live provides geographic diversification against natural or man-made disasters and other emergencies like government confiscation of private property.”

“It is an unfortunate fact of life that most speculators eventually go broke, and many of them do it repeatedly.

The investing markets can be risky, but they don’t need to be terrifying. The ability to grow and protect your savings means you can enjoy life and stop worrying about your nest egg.”

Thank you Craig and J.M.

Best wishes.
Taylor

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Re: The Permanent Portfolio -- A Gem

Postby Barry Barnitz » Wed Oct 17, 2012 6:34 am

Hi Taylor:

We have added your latest gem to our wiki page: Taylor Larimore's Investment Gems - Bogleheads

I have also posted a link to your Gem's post over on the Permanent Portfolio Discussion Forum. Here is the link: Taylor Larimore's "Gems": The Permanent Portfolio

Thanks,
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Re: The Permanent Portfolio -- A Gem

Postby Clive » Wed Oct 17, 2012 7:55 am

Try cutting glass with a piece of coal (badly timed (diamond) gemstone) viewtopic.php?f=1&t=56308#p1514344
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Re: The Permanent Portfolio -- A Gem

Postby hpowders » Wed Oct 17, 2012 8:18 am

The Permanent Portfolio Fund gives you bang for the buck if gold is in a bull market. If not, the fund hardly appreciates. Also, the expense ratio of 0.71% is rather high for what amounts to a passive fund. All the manager seeems to do is rebalance the AA. Easy money.... for the manager.
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Re: The Permanent Portfolio -- A Gem

Postby FinanceFun » Wed Oct 17, 2012 8:39 am

hpowders wrote:The Permanent Portfolio Fund gives you bang for the buck if gold is in a bull market. If not, the fund hardly appreciates. Also, the expense ratio of 0.71% is rather high for what amounts to a passive fund. All the manager seeems to do is rebalance the AA. Easy money.... for the manager.



It's simple enough to build it yourself with very low expenses. It cuts off the fat tail risk, but is likely to put-put along near inflation without a tailwind from gold and long treasuries. Gold is well above its historical mean. Long treasuries are at an all time high (or low if looking at yield). For someone in retirement or with no need for real returns, it could be appropriate, as could a number of lazy style portfolios.

What irks me about this PP hoopla is the recentcy bias of its advocates. :oops:
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Re: The Permanent Portfolio -- A Gem

Postby hpowders » Wed Oct 17, 2012 9:27 am

FinanceFun wrote:
hpowders wrote:The Permanent Portfolio Fund gives you bang for the buck if gold is in a bull market. If not, the fund hardly appreciates. Also, the expense ratio of 0.71% is rather high for what amounts to a passive fund. All the manager seeems to do is rebalance the AA. Easy money.... for the manager.



It's simple enough to build it yourself with very low expenses. It cuts off the fat tail risk, but is likely to put-put along near inflation without a tailwind from gold and long treasuries. Gold is well above its historical mean. Long treasuries are at an all time high (or low if looking at yield). For someone in retirement or with no need for real returns, it could be appropriate, as could a number of lazy style portfolios.

What irks me about this PP hoopla is the recentcy bias of its advocates. :oops:


The Permanent Portfolio is billed as a conservative allocation fund. However, when gold is in a bear market, the fund builds up losses in a hurry. The other asset classes do not seem to offer adequate protection against this. I know. Been there. Done that. The fund is terrific when gold seems to go up every day as it did a while back. Then Permanent Portfolio was terrific. But otherwise, is getting 3-5% a year worth a 0.71% expense ratio?
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Re: The Permanent Portfolio -- A Gem

Postby pincognito » Wed Oct 17, 2012 9:58 am

hpowders wrote:The Permanent Portfolio is billed as a conservative allocation fund. However, when gold is in a bear market, the fund builds up losses in a hurry. The other asset classes do not seem to offer adequate protection against this. I know. Been there. Done that. The fund is terrific when gold seems to go up every day as it did a while back. Then Permanent Portfolio was terrific. But otherwise, is getting 3-5% a year worth a 0.71% expense ratio?


It seems like you are conflating the Permanent Portfolio and the Permanent Portfolio Fund.
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Re: The Permanent Portfolio -- A Gem

Postby MediumTex » Wed Oct 17, 2012 10:21 am

pincognito wrote:
hpowders wrote:The Permanent Portfolio is billed as a conservative allocation fund. However, when gold is in a bear market, the fund builds up losses in a hurry. The other asset classes do not seem to offer adequate protection against this. I know. Been there. Done that. The fund is terrific when gold seems to go up every day as it did a while back. Then Permanent Portfolio was terrific. But otherwise, is getting 3-5% a year worth a 0.71% expense ratio?


It seems like you are conflating the Permanent Portfolio and the Permanent Portfolio Fund.


We do cover the Permanent Portfolio mutual fund (PRPFX) in the book and address the ways in which it differs from Harry Browne's core PP strategy. We also discuss the more recently offered Permanent Portfolio ETF, PERM, that more closely tracks the HB PP strategy.

While these two funds are more convenient for some investors than the basic PP strategy covered in the book, they each have drawbacks.

Please don't confuse PRPFX with the strategy on which it is loosely based. PRPFX has had good returns in recent years, but its high expense ratio, actively managed stock portfolio, and overall tilt toward inflation are all departures from the basic Harry Browne Permanent Portfolio strategy.

***

Taylor,

Thank you for the nice comments above and for posting the excerpts. I think that they provide a good sense of what the book is about.
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Re: The Permanent Portfolio -- A Gem

Postby hpowders » Wed Oct 17, 2012 10:32 am

MediumTex wrote:
pincognito wrote:
hpowders wrote:The Permanent Portfolio is billed as a conservative allocation fund. However, when gold is in a bear market, the fund builds up losses in a hurry. The other asset classes do not seem to offer adequate protection against this. I know. Been there. Done that. The fund is terrific when gold seems to go up every day as it did a while back. Then Permanent Portfolio was terrific. But otherwise, is getting 3-5% a year worth a 0.71% expense ratio?


It seems like you are conflating the Permanent Portfolio and the Permanent Portfolio Fund.


We do cover the Permanent Portfolio mutual fund (PRPFX) in the book and address the ways in which it differs from Harry Browne's core PP strategy. We also discuss the more recently offered Permanent Portfolio ETF, PERM, that more closely tracks the HB PP strategy.

While these two funds are more convenient for some investors than the basic PP strategy covered in the book, they each have drawbacks.

Please don't confuse PRPFX with the strategy on which it is loosely based. PRPFX has had good returns in recent years, but its high expense ratio, actively managed stock portfolio, and overall tilt toward inflation are all departures from the basic Harry Browne Permanent Portfolio strategy.

***

Taylor,

Thank you for the nice comments above and for posting the excerpts. I think that they provide a good sense of what the book is about.


Okay. Good to know. Looks like there is an ETF for everything these days!
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Re: The Permanent Portfolio -- A Gem

Postby Clive » Wed Oct 17, 2012 11:04 am

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Re: The Permanent Portfolio -- A Gem

Postby MediumTex » Wed Oct 17, 2012 11:44 am

Clive wrote:Expecting that right tail to persist however :oops:


Clive,

When you were running the Permanent Portfolio with a significant portion of your own wealth, how did you determine when to enter the strategy and when to exit?

If you are concerned about a reversion to the PP's historical mean, it seems like you both started and stopped using the strategy at a time when it was somewhat above its historical mean.

Can you provide more information about how you decided when to enter and when to exit the strategy? During the time you were using it, did you feel like it provided the types of returns you were anticipating when you started using it?
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Re: The Permanent Portfolio -- A Gem

Postby craigr » Wed Oct 17, 2012 1:07 pm

hpowders wrote:Okay. Good to know. Looks like there is an ETF for everything these days!


Additionally, there is the Variable Portfolio piece that I think isn't mentioned enough. Meaning that you can run a Permanent Portfolio for your core holdings of money you really don't want to lose. Then you can try to shoot the lights out with the Variable Portfolio by investing in whatever you want (if you can afford to lose some or most of it potentially).

There is nothing wrong for instance with this if you think the stock market is a good bet:

80% - Permanent Portfolio
20% - Variable Portfolio invested in the Total Stock Market/Global Stock Market Index

The above would give you an actual allocation of:

20% - Cash Treasury Money Market
20% - Long Term Treasury Bonds
20% - Gold
40% - Stocks (half Permanent Portfolio/ half Variable Portfolio bet)

Volatility to the stock market is increased of course, but potential gains would be better if you hit a bull market. But if you don't hit that bull market, you still have a lot of your capital protected and growing in the other assets.

It's not an either/or proposition if an investor doesn't want it to be.
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Re: The Permanent Portfolio -- A Gem

Postby hpowders » Wed Oct 17, 2012 2:00 pm

craigr wrote:
hpowders wrote:Okay. Good to know. Looks like there is an ETF for everything these days!


Additionally, there is the Variable Portfolio piece that I think isn't mentioned enough. Meaning that you can run a Permanent Portfolio for your core holdings of money you really don't want to lose. Then you can try to shoot the lights out with the Variable Portfolio by investing in whatever you want (if you can afford to lose some or most of it potentially).

There is nothing wrong for instance with this if you think the stock market is a good bet:

80% - Permanent Portfolio
20% - Variable Portfolio invested in the Total Stock Market/Global Stock Market Index

The above would give you an actual allocation of:

20% - Cash Treasury Money Market
20% - Long Term Treasury Bonds
20% - Gold
40% - Stocks (half Permanent Portfolio/ half Variable Portfolio bet)

Volatility to the stock market is increased of course, but potential gains would be better if you hit a bull market. But if you don't hit that bull market, you still have a lot of your capital protected and growing in the other assets.

It's not an either/or proposition if an investor doesn't want it to be.


Thanks for the detailed information! :happy

Recovering from a 50% loss in 2008. Never want to go through that again, Craig! :oops:
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Re: The Permanent Portfolio -- A Gem

Postby hpowders » Wed Oct 17, 2012 2:07 pm

pincognito wrote:
hpowders wrote:The Permanent Portfolio is billed as a conservative allocation fund. However, when gold is in a bear market, the fund builds up losses in a hurry. The other asset classes do not seem to offer adequate protection against this. I know. Been there. Done that. The fund is terrific when gold seems to go up every day as it did a while back. Then Permanent Portfolio was terrific. But otherwise, is getting 3-5% a year worth a 0.71% expense ratio?


It seems like you are conflating the Permanent Portfolio and the Permanent Portfolio Fund.


Yes. I did. :oops:
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Re: The Permanent Portfolio -- A Gem

Postby hpowders » Wed Oct 17, 2012 2:12 pm

MediumTex wrote:
pincognito wrote:
hpowders wrote:The Permanent Portfolio is billed as a conservative allocation fund. However, when gold is in a bear market, the fund builds up losses in a hurry. The other asset classes do not seem to offer adequate protection against this. I know. Been there. Done that. The fund is terrific when gold seems to go up every day as it did a while back. Then Permanent Portfolio was terrific. But otherwise, is getting 3-5% a year worth a 0.71% expense ratio?


It seems like you are conflating the Permanent Portfolio and the Permanent Portfolio Fund.


We do cover the Permanent Portfolio mutual fund (PRPFX) in the book and address the ways in which it differs from Harry Browne's core PP strategy. We also discuss the more recently offered Permanent Portfolio ETF, PERM, that more closely tracks the HB PP strategy.

While these two funds are more convenient for some investors than the basic PP strategy covered in the book, they each have drawbacks.

Please don't confuse PRPFX with the strategy on which it is loosely based. PRPFX has had good returns in recent years, but its high expense ratio, actively managed stock portfolio, and overall tilt toward inflation are all departures from the basic Harry Browne Permanent Portfolio strategy.

***

Taylor,

Thank you for the nice comments above and for posting the excerpts. I think that they provide a good sense of what the book is about.


I already know the drawbacks of PRPFX, having invested in it for years, but what's the negatives for PERM? I see it's a new ETF, so there's no performance history to review.
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Re: The Permanent Portfolio -- A Gem

Postby craigr » Wed Oct 17, 2012 2:16 pm

hpowders wrote:Recovering from a 50% loss in 2008. Never want to go through that again, Craig! :oops:


I was badly burned in the 2000 tech crash so I understand completely. Growth is fine, but I also want capital protection features in how I invest in case things don't go according to plan.

When I was doing network security work I had the chance to see the insides of the big trading houses on Wall St. It is an impressive display of technology and people. They have the best information, the fastest computers, the most up to date research, the most sophisticated trading algorithms, etc.

It was then that I decided I had absolutely no business trying to trade against those guys. It was also then that I decided the only way to beat them is to invest passively and be widely diversified at all times no matter what I may think may be going to happen. Even Wall St., with all their technology and information, gets things wrong about the markets constantly.
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Re: The Permanent Portfolio -- A Gem

Postby craigr » Wed Oct 17, 2012 2:20 pm

hpowders wrote:I already know the drawbacks of PRPFX, having invested in it for years, but what's the negatives for PERM? I see it's a new ETF, so there's no performance history to review.


Here are some negatives with PERM that we discuss in the book:

1) It's new so nobody knows how long it may stick around.
2) It's new so nobody knows how they will handle tax impacts.
3) It's still lightly traded so liquidity issues could show up.

The Pros though are:

1) It's passively indexed under the covers. No active stock trading is going on.
2) It rebalances for you.
3) It hides the volatility of the individual assets so you only see a single number at the end of the year and not some assets with potential losses.
4) It's relatively cheap.

I would personally only consider it for a tax-deferred account right now until it gets some more time to show how tax efficient it will be and if it will get enough assets to stick around. The benefit of building your own DIY portfolio with ETFs is you can use funds that are huge and not likely to go away. The drawback is the slight extra work involved, plus you may see the assets weaving all over and that can make some people very uneasy.
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Re: The Permanent Portfolio -- A Gem

Postby Clive » Wed Oct 17, 2012 2:22 pm

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Re: The Permanent Portfolio -- A Gem

Postby hpowders » Wed Oct 17, 2012 2:37 pm

craigr wrote:
hpowders wrote:I already know the drawbacks of PRPFX, having invested in it for years, but what's the negatives for PERM? I see it's a new ETF, so there's no performance history to review.


Here are some negatives with PERM that we discuss in the book:

1) It's new so nobody knows how long it may stick around.
2) It's new so nobody knows how they will handle tax impacts.
3) It's still lightly traded so liquidity issues could show up.

The Pros though are:

1) It's passively indexed under the covers. No active stock trading is going on.
2) It rebalances for you.
3) It hides the volatility of the individual assets so you only see a single number at the end of the year and not some assets with potential losses.
4) It's relatively cheap.

I would personally only consider it for a tax-deferred account right now until it gets some more time to show how tax efficient it will be and if it will get enough assets to stick around. The benefit of building your own DIY portfolio with ETFs is you can use funds that are huge and not likely to go away. The drawback is the slight extra work involved, plus you may see the assets weaving all over and that can make some people very uneasy.


Thanks, Craig. It's too risky for me, being new and lightly traded. I won't touch it. But as you say, it's easy to construct a reasonable facsimile with well established ETF's for each segment of PERM.
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Re: The Permanent Portfolio -- A Gem

Postby hpowders » Wed Oct 17, 2012 2:48 pm

craigr wrote:
hpowders wrote:Recovering from a 50% loss in 2008. Never want to go through that again, Craig! :oops:


I was badly burned in the 2000 tech crash so I understand completely. Growth is fine, but I also want capital protection features in how I invest in case things don't go according to plan.

When I was doing network security work I had the chance to see the insides of the big trading houses on Wall St. It is an impressive display of technology and people. They have the best information, the fastest computers, the most up to date research, the most sophisticated trading algorithms, etc.

It was then that I decided I had absolutely no business trying to trade against those guys. It was also then that I decided the only way to beat them is to invest passively and be widely diversified at all times no matter what I may think may be going to happen. Even Wall St., with all their technology and information, gets things wrong about the markets constantly.


I agree. It's foolish to think average Joe can trade against Wall Street. I don't know how many times I got fleeced on the spreads, buying and selling individual issues. Purchasing and holding benchmark index funds with low expense ratios and rebalancing once a year helps us not only to stay in the game, but to actually win! It's boring, but it works.
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Re: The Permanent Portfolio -- A Gem

Postby bogleblitz » Wed Oct 17, 2012 6:12 pm

So is the 3 fund portfolio that is in the sticky of this forum better or this permanent portfolio? I'm confused.
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Re: The Permanent Portfolio -- A Gem

Postby MediumTex » Wed Oct 17, 2012 6:21 pm

bogleblitz wrote:So is the 3 fund portfolio that is in the sticky of this forum better or this permanent portfolio? I'm confused.


Using a 3 fund approach of 33% LT treasuries/33% stocks/33% gold has historically provided a slightly higher return than the 4x25% approach, with slightly higher volatility as well.

***

Edit: I think I misunderstood the 3 fund question. The posts below seem to answer the actual 3 fund portfolio question. There is also a 3 fund PP strategy that is sometimes discussed.
Last edited by MediumTex on Wed Oct 17, 2012 9:25 pm, edited 1 time in total.
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Re: The Permanent Portfolio -- A Gem

Postby craigr » Wed Oct 17, 2012 7:18 pm

bogleblitz wrote:So is the 3 fund portfolio that is in the sticky of this forum better or this permanent portfolio? I'm confused.


Taylor's three fund portfolio in the sticky is a simple and effective strategy. I love simple. Long-term, passive strategies like Taylor's three-fund and Permanent Portfolio have a tendency to all end up at about the same place. I can't speak for Taylor, but I do agree with what he has said many times in the past: "There is more than one road to Dublin."
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The perfect portfolio?

Postby Taylor Larimore » Wed Oct 17, 2012 9:05 pm

bogleblitz wrote:So is the 3 fund portfolio that is in the sticky of this forum better or this permanent portfolio? I'm confused.


Bogleblitz:

No one can tell you today exactly what will turn-out to be the best portfolio in the future. Each of us must use our education, experience and judgement to choose our own personal portfolio that will meet our goal(s).

Let the Boglehead Philosophy be your guide:
Develop a workable plan
Invest early and often
Never bear too much or too little risk
Never try to time the market
Use index funds when possible
Keep costs low
Diversify
Minimize taxes
Keep it simple
Stay the course

Best wishes.
Taylor
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Re: The perfect portfolio?

Postby bogleblitz » Wed Oct 17, 2012 9:33 pm

Taylor Larimore wrote:
bogleblitz wrote:So is the 3 fund portfolio that is in the sticky of this forum better or this permanent portfolio? I'm confused.


Bogleblitz:

No one can tell you today exactly what will turn-out to be the best portfolio in the future. Each of us must use our education, experience and judgement to choose our own personal portfolio that will meet our goal(s).

Let the Boglehead Philosophy be your guide:
Develop a workable plan
Invest early and often
Never bear too much or too little risk
Never try to time the market
Use index funds when possible
Keep costs low
Diversify
Minimize taxes
Keep it simple
Stay the course

Best wishes.
Taylor


Thanks. I think I should just avoid reading this forum. Everyday I seem to have a different idea on my AA or what funds to buy. I think I like the simple 3 fund portfolio plus reit. I'll try stay away from any financial news or even this website so I can stay the coarse.

thanks.
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Re: The perfect portfolio?

Postby pennstater2005 » Wed Oct 17, 2012 9:39 pm

bogleblitz wrote:
Taylor Larimore wrote:
bogleblitz wrote:So is the 3 fund portfolio that is in the sticky of this forum better or this permanent portfolio? I'm confused.


Bogleblitz:

No one can tell you today exactly what will turn-out to be the best portfolio in the future. Each of us must use our education, experience and judgement to choose our own personal portfolio that will meet our goal(s).

Let the Boglehead Philosophy be your guide:
Develop a workable plan
Invest early and often
Never bear too much or too little risk
Never try to time the market
Use index funds when possible
Keep costs low
Diversify
Minimize taxes
Keep it simple
Stay the course

Best wishes.
Taylor


Thanks. I think I should just avoid reading this forum. Everyday I seem to have a different idea on my AA or what funds to buy. I think I like the simple 3 fund portfolio plus reit. I'll try stay away from any financial news or even this website so I can stay the coarse.

thanks.


If you like the 3 fund portfolio with REIT then do it. Choose your asset allocation with whatever risk tolerance you may or may not have and you're ready to go. I agree with staying away from financial news, or noise as some on here call it, but please don't feel you have to stay away from this site. Bogleheads is full of extremely intelligent folks who are willing to help you along the way with your investments.
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The three fund portfolio + REITs

Postby Taylor Larimore » Wed Oct 17, 2012 9:44 pm

Bogleblitz:

I think I like the simple 3 fund portfolio plus reit.

Get your stock/bond ratio right, and I have little doubt you should do just fine.

To help you decide on a suitable stock/bond ratio, use this link (reits are stocks):

https://personal.vanguard.com/us/funds/ ... mmendation

Best wishes.
Taylor
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Re: The Permanent Portfolio -- A Gem

Postby pkcrafter » Wed Oct 17, 2012 10:18 pm

Thanks Taylor, the gems are excellent--much more than I expected.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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Re: The Permanent Portfolio -- A Gem

Postby thebogledude » Thu Oct 18, 2012 1:13 am

First time I ever saw gold being endorsed on the Bogleheads.
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Gold in "The Permanent Portfolio"

Postby Taylor Larimore » Thu Oct 18, 2012 7:01 am

thebogledude:

My collection of Investment Gems does not "endorse" gold.

Boglehead William Bernstein wrote an excellent review of The Permanent Portfolio on Amazon and he specifically mentioned the part about gold. This is what Bill wrote:

First, I need to get my own personal biases out in the open: I think that the Harry Browne Permanent Portfolio (HBPP) is a highly unconventional but effective low-risk, low-return portfolio.

I also believe that very few of its new fans will have the long-term discipline to stick with it when two of its riskiest and least conventional components, long Treasuries and gold, underperform, as they inevitably must at some point. I'm not speculating in a vacuum here: the HBPP was similarly quite popular in the 1980s, and this caused a torrent of inflow to the Permanent Portfolio Fund (PRPFX), which uses a similar strategy. This was followed by a headlong rush out of PRPFX during the 1990s, as interest shifted back into stocks. In the wake of the recent crisis and market crash, PRPFX once again is on the receiving end of high inflows.

I'm even willing to bet that a significant number of 80s HBPP fans got reincarnated as 90s paradigmistas. We've seen this movie before, and we know how it ends, both for PRPFX and, presumably, interest in the HBPP.

With that caveat in mind, The Permanent Portfolio is a beautifully written, comprehensive guide to anyone who wants to deploy the late Mr. Browne's teachings. The author lays out the rationale and mechanics of the portfolio well enough that readers won't fall asleep (no small feat for a book on portfolio theory), and describes in detail the nuts and bolts of deploying the portfolio.Simply put, it's the best book I've seen on the HBPP, better even than Harry's 1999 classic, Fail-Safe Investing.

The chapter on the rationales for buying gold, and the mechanics specific to each goal, is worth the price of the book alone. Even if you're a gold skeptic like me, you'll learn a great deal about the global marketplaces for the yellow metal. You may even find yourself imagining you're on the last train out of St. Petersberg in 1917 or Berlin in 1939.


Best wishes
Taylor
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Re: Gold in "The Permanent Portfolio"

Postby hpowders » Thu Oct 18, 2012 8:35 am

Taylor Larimore wrote:thebogledude:

My collection of Investment Gems does not "endorse" gold.

Boglehead William Bernstein wrote an excellent review of The Permanent Portfolio on Amazon and he specifically mentioned the part about gold. This is what Bill wrote:

First, I need to get my own personal biases out in the open: I think that the Harry Browne Permanent Portfolio (HBPP) is a highly unconventional but effective low-risk, low-return portfolio.

I also believe that very few of its new fans will have the long-term discipline to stick with it when two of its riskiest and least conventional components, long Treasuries and gold, underperform, as they inevitably must at some point. I'm not speculating in a vacuum here: the HBPP was similarly quite popular in the 1980s, and this caused a torrent of inflow to the Permanent Portfolio Fund (PRPFX), which uses a similar strategy. This was followed by a headlong rush out of PRPFX during the 1990s, as interest shifted back into stocks. In the wake of the recent crisis and market crash, PRPFX once again is on the receiving end of high inflows.

I'm even willing to bet that a significant number of 80s HBPP fans got reincarnated as 90s paradigmistas. We've seen this movie before, and we know how it ends, both for PRPFX and, presumably, interest in the HBPP.

With that caveat in mind, The Permanent Portfolio is a beautifully written, comprehensive guide to anyone who wants to deploy the late Mr. Browne's teachings. The author lays out the rationale and mechanics of the portfolio well enough that readers won't fall asleep (no small feat for a book on portfolio theory), and describes in detail the nuts and bolts of deploying the portfolio.Simply put, it's the best book I've seen on the HBPP, better even than Harry's 1999 classic, Fail-Safe Investing.

The chapter on the rationales for buying gold, and the mechanics specific to each goal, is worth the price of the book alone. Even if you're a gold skeptic like me, you'll learn a great deal about the global marketplaces for the yellow metal. You may even find yourself imagining you're on the last train out of St. Petersberg in 1917 or Berlin in 1939.


Best wishes
Taylor


Low risk, yes. Low return, no. Since Bernstein mentions PRPFX, it has had returns of 11.02% and 8.70% over the last 10 and 15 years respectively. Not too shabby! :happy
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Re: Gold in "The Permanent Portfolio"

Postby thebogledude » Thu Oct 18, 2012 12:59 pm

Taylor Larimore wrote:thebogledude:

My collection of Investment Gems does not "endorse" gold.



Sorry Taylor, incorrect of me to state that. I took following gem “According to Browne, the Permanent Portfolio should provide three features: safety, stability, and simplicity. 25% in U.S stocks; 25% in long-term U.S. Treasury bonds; 25% in cash; and 25% in gold.” and the points supporting it (albeit implicitly) to be a promotion of the book and not the portfolio which holds 25% in gold. I'm assuming the gems were excerpts from the book.
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Re: Gold in "The Permanent Portfolio"

Postby Taylor Larimore » Thu Oct 18, 2012 1:22 pm

thebogledude wrote:
Taylor Larimore wrote:thebogledude:

My collection of Investment Gems does not "endorse" gold.



Sorry Taylor, incorrect of me to state that. I took following gem “According to Browne, the Permanent Portfolio should provide three features: safety, stability, and simplicity. 25% in U.S stocks; 25% in long-term U.S. Treasury bonds; 25% in cash; and 25% in gold.” and the points supporting it (albeit implicitly) to be a promotion of the book and not the portfolio which holds 25% in gold. I'm assuming the gems were excerpts from the book.


thebogledude:

This is the heading of the Investment Gems:

The gems are selected as a quick way to learn many of the best ideas from the best authors, and to help you decide if the book merits further reading.


Best wishes.
Taylor
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Re: The Permanent Portfolio -- A Gem

Postby Easy Rhino » Thu Oct 18, 2012 2:08 pm

the worst loss was -5% in 1981. If i'm not mistaken that was a time of falling gold prices and rising interest rates. Which is a scenario would could find ourselves in in the near future, yes?
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Re: The Permanent Portfolio -- A Gem

Postby MediumTex » Thu Oct 18, 2012 2:23 pm

Easy Rhino wrote:the worst loss was -5% in 1981. If i'm not mistaken that was a time of falling gold prices and rising interest rates.


And a falling stock market.

And high inflation.

And a Fed raising interest rates in the middle of a recession.

And high unemployment.

Which is a scenario we could find ourselves in in the near future, yes?


I don't see this particular scenario repeating any time soon (though it could). Does anyone think Bernanke is about to raise interest rates to 15%?

Also, think about how other popular investment strategies would do in these conditions. Under the type of conditions we faced in 1981, only cash was a safe haven (t-bills earned around 17%, while stocks and gold fell and bonds were flat).

Ironically, cash is the PP asset that many people find the least useful in the portfolio, even though in certain extreme market conditions like we saw in 1981, cash is the only thing that can protect your portfolio from large losses.

Every PP asset has its day in the sun and its night in the doghouse.
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Re: Gold in "The Permanent Portfolio"

Postby FinanceFun » Thu Oct 18, 2012 3:14 pm

Taylor Larimore wrote:thebogledude:

My collection of Investment Gems does not "endorse" gold.

Boglehead William Bernstein wrote an excellent review of The Permanent Portfolio on Amazon and he specifically mentioned the part about gold. This is what Bill wrote:

First, I need to get my own personal biases out in the open: I think that the Harry Browne Permanent Portfolio (HBPP) is a highly unconventional but effective low-risk, low-return portfolio.

I also believe that very few of its new fans will have the long-term discipline to stick with it when two of its riskiest and least conventional components, long Treasuries and gold, underperform, as they inevitably must at some point. I'm not speculating in a vacuum here: the HBPP was similarly quite popular in the 1980s, and this caused a torrent of inflow to the Permanent Portfolio Fund (PRPFX), which uses a similar strategy. This was followed by a headlong rush out of PRPFX during the 1990s, as interest shifted back into stocks. In the wake of the recent crisis and market crash, PRPFX once again is on the receiving end of high inflows.

I'm even willing to bet that a significant number of 80s HBPP fans got reincarnated as 90s paradigmistas. We've seen this movie before, and we know how it ends, both for PRPFX and, presumably, interest in the HBPP.

With that caveat in mind, The Permanent Portfolio is a beautifully written, comprehensive guide to anyone who wants to deploy the late Mr. Browne's teachings. The author lays out the rationale and mechanics of the portfolio well enough that readers won't fall asleep (no small feat for a book on portfolio theory), and describes in detail the nuts and bolts of deploying the portfolio.Simply put, it's the best book I've seen on the HBPP, better even than Harry's 1999 classic, Fail-Safe Investing.

The chapter on the rationales for buying gold, and the mechanics specific to each goal, is worth the price of the book alone. Even if you're a gold skeptic like me, you'll learn a great deal about the global marketplaces for the yellow metal. You may even find yourself imagining you're on the last train out of St. Petersberg in 1917 or Berlin in 1939.


Best wishes
Taylor



Good to see Bill Bernstein agrees with me. :beer
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Re: The Permanent Portfolio -- A Gem

Postby Clearly_Irrational » Thu Oct 18, 2012 4:45 pm

hpowders wrote:I agree. It's foolish to think average Joe can trade against Wall Street. I don't know how many times I got fleeced on the spreads, buying and selling individual issues. Purchasing and holding benchmark index funds with low expense ratios and rebalancing once a year helps us not only to stay in the game, but to actually win! It's boring, but it works.


The only exception, and it's a pretty small one, is if you trade in securities that are too small for them to invest in. Some companies they'd majorly move the price if they tried to buy any meaningful position. I still don't recommend it.
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Re: The Permanent Portfolio -- A Gem

Postby hpowders » Thu Oct 18, 2012 7:10 pm

Clearly_Irrational wrote:
hpowders wrote:I agree. It's foolish to think average Joe can trade against Wall Street. I don't know how many times I got fleeced on the spreads, buying and selling individual issues. Purchasing and holding benchmark index funds with low expense ratios and rebalancing once a year helps us not only to stay in the game, but to actually win! It's boring, but it works.


The only exception, and it's a pretty small one, is if you trade in securities that are too small for them to invest in. Some companies they'd majorly move the price if they tried to buy any meaningful position. I still don't recommend it.


My stock trading days are over. BND and VTI: I am completely in your hands. :happy

Anyhow, I was invested in PRPFX for many years and did well. It had some dull years to try one's patience, but rewarded those investors who held on. I still believe the expense ratio of 0.71% is too high since all the portfolio manager seems to do is rebalance assets back to the original percentages and write reports to shareholders twice a year. A great gig if you can get it!! :mrgreen:

Anyone interested in doing a PP should probably try to set it up himself through ETF's and bypass PRPFX.
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Re: The Permanent Portfolio -- A Gem

Postby Clearly_Irrational » Thu Oct 18, 2012 7:53 pm

hpowders wrote:Anyone interested in doing a PP should probably try to set it up himself through ETF's and bypass PRPFX.


My portfolio has PP influence but isn't constituted the same.

30% Small Cap Value
20% Emerging Market
30% Long Treasuries
20% Gold (rotated with cash based on real interest rates)
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Re: The Permanent Portfolio -- A Gem

Postby Clive » Thu Oct 18, 2012 8:00 pm

Clearly_Irrational wrote:
My portfolio has PP influence but isn't constituted the same.

30% Small Cap Value
20% Emerging Market
30% Long Treasuries
20% Gold (rotated with cash based on real interest rates)

Have you considered :

Gold rotated with TIPS according to real yields
Long dated T's with Short dated T's according to yields
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Re: The Permanent Portfolio -- A Gem

Postby hpowders » Thu Oct 18, 2012 8:07 pm

Clearly_Irrational wrote:
hpowders wrote:Anyone interested in doing a PP should probably try to set it up himself through ETF's and bypass PRPFX.


My portfolio has PP influence but isn't constituted the same.

30% Small Cap Value
20% Emerging Market
30% Long Treasuries
20% Gold (rotated with cash based on real interest rates)


Sounds a lot better than being 100% in GOOG which lost 8% today! :oops:
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Re: The Permanent Portfolio -- A Gem

Postby pennstater2005 » Thu Oct 18, 2012 8:24 pm

This is an intriguing portfolio to say the least. The .71% expense ratio for PRPFX is an immediate turnoff for myself though. That, and I just can't bring myself to invest in gold.
Last edited by pennstater2005 on Thu Oct 18, 2012 8:50 pm, edited 1 time in total.
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Re: The Permanent Portfolio -- A Gem

Postby MediumTex » Thu Oct 18, 2012 8:39 pm

pennstater2005 wrote:This is an intriguing portfolio to say the least. The .71% expense ratio for PRPFX is an immediate turnoff myself though. That, and I just can't bring myself to invest in gold.


Just to clarify, PRPFX is to the Permanent Portfolio what Alex Rodriguez is to Major League Baseball. He's good and he gets paid well, but you can't depend on him under all conditions.

PRPFX engages in stock picking, tilts toward inflation generally, and does have high expenses. It's a great fund, but shouldn't be mistaken for what Craig and I have written about.
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Re: The Permanent Portfolio -- A Gem

Postby pennstater2005 » Thu Oct 18, 2012 8:55 pm

MediumTex wrote:
pennstater2005 wrote:This is an intriguing portfolio to say the least. The .71% expense ratio for PRPFX is an immediate turnoff myself though. That, and I just can't bring myself to invest in gold.


Just to clarify, PRPFX is to the Permanent Portfolio what Alex Rodriguez is to Major League Baseball. He's good and he gets paid well, but you can't depend on him under all conditions.

PRPFX engages in stock picking, tilts toward inflation generally, and does have high expenses. It's a great fund, but shouldn't be mistaken for what Craig and I have written about.


Thanks for clarifying that. I should've read the entire thread a little more closely. How does the ETF follow HBPP more closely?
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Re: The perfect portfolio?

Postby hpowders » Fri Oct 19, 2012 10:54 am

bogleblitz wrote:
Taylor Larimore wrote:
bogleblitz wrote:So is the 3 fund portfolio that is in the sticky of this forum better or this permanent portfolio? I'm confused.


Bogleblitz:

No one can tell you today exactly what will turn-out to be the best portfolio in the future. Each of us must use our education, experience and judgement to choose our own personal portfolio that will meet our goal(s).

Let the Boglehead Philosophy be your guide:
Develop a workable plan
Invest early and often
Never bear too much or too little risk
Never try to time the market
Use index funds when possible
Keep costs low
Diversify
Minimize taxes
Keep it simple
Stay the course

Best wishes.
Taylor


Thanks. I think I should just avoid reading this forum. Everyday I seem to have a different idea on my AA or what funds to buy. I think I like the simple 3 fund portfolio plus reit. I'll try stay away from any financial news or even this website so I can stay the coarse.

thanks.


You make a good point. If you already have a passive benchmark index AA in place, the last thing you want to do is be tempted, disassemble it and go with something else. Nobody knows the future. Stay the course. 8-)

Having said that, the PP sounds like a good AA strategy for folks who don't already have a plan in place. I backtested the 3 ETF PP consisting of long term treasuries, gold and stocks. The results were impressive. Of course, past results are not predictive of future performance.
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Re: The Permanent Portfolio -- A Gem

Postby Clearly_Irrational » Fri Oct 19, 2012 12:10 pm

Clive wrote:Have you considered :

Gold rotated with TIPS according to real yields
Long dated T's with Short dated T's according to yields


I looked at TIPS, but you end up overpaying for the inflation protection. I hold leveraged direct ownership rental real estate, which tends to give me pretty good inflation indexing.

I did some investigating over whether I should be doing more bond duration control, but so far I don't have any good data to suggest that I should. Currently my portfolio automatically shortens duration in response to rising real interest rates because it rotates me out of gold and into cash, however that's response not predictive. I'm not trying to predict the yield curve and don't think that's a good way to go.
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Re: The Permanent Portfolio -- A Gem

Postby hpowders » Mon Oct 22, 2012 12:01 pm

I put the PP to the real time test today: bought 25% each of VTI, TLT, IAU and SHV. Expense ratio 0.1525%.

Thanks craigr and Medium Tex. :sharebeer
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Re: The Permanent Portfolio -- A Gem

Postby craigr » Wed Nov 07, 2012 3:28 pm

I made a short video discussing the book. It's kind of a shotgun overview of the strategy:

http://www.youtube.com/watch?v=PG80yVqDy-M
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Re: The Permanent Portfolio -- A Gem

Postby elgob.bogle » Wed Nov 07, 2012 10:13 pm

"Shotgun Overview" :beer

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Re: The Permanent Portfolio -- A Gem

Postby MediumTex » Thu Nov 08, 2012 12:41 am

elgob.bogle wrote:"Shotgun Overview" :beer

elgob


I heard that shooting the video was a real blast. 8-)
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