Replace Bond Allocation with Permanent Portfolio?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.

Replace Bond Allocation with Permanent Portfolio?

Postby Dogs » Tue Jan 29, 2013 5:51 pm

It sounds like the role of bonds in a three-fund portfolio is stability, and to provide a separate asset class for rebalancing purposes. The PP should theoretically be more stable than bonds, since it is designed specifically to weather all economic conditions. It is also not correlated with stocks, so it should be just as suitable as bonds for rebalancing.

The only downside I can think of is that the ER will be higher due to the gold, but if some of the gold is held as ETF's it will cut back on most of the bullion transaction costs. The added expense over a single total bond fund shouldn't be too significant.

Does this make sense?
Dogs
 
Posts: 41
Joined: Fri Oct 26, 2012 6:56 pm

Re: Replace Bond Allocation with Permanent Portfolio?

Postby wesleymouch » Tue Jan 29, 2013 6:02 pm

I use the PP and it has worked great. Some Gold ETF's have an expense ratio of about 0.34% which is kind of high. If you buy coins and take delivery they have a roundtrip cost of 1.8% but if you own them a long time it becomes more reasonable. A safety deposit box is only about $20 to $50 per year so the storage costs can be low.
Expenses
Gold 0.34% per year (GTU as your ETF)
VTI (stocks) 0.06 % per year
T bonds no expense with treasury direct account or buying via Fidelity
Cash (CDs) no expense
Total expenses 0.10% per year
Definitely Boglehead
wesleymouch
 
Posts: 237
Joined: Wed Dec 05, 2012 3:24 pm

Re: Replace Bond Allocation with Permanent Portfolio?

Postby Call_Me_Op » Tue Jan 29, 2013 7:00 pm

Dogs wrote:It sounds like the role of bonds in a three-fund portfolio is stability, and to provide a separate asset class for rebalancing purposes. The PP should theoretically be more stable than bonds, since it is designed specifically to weather all economic conditions. It is also not correlated with stocks, so it should be just as suitable as bonds for rebalancing.

The only downside I can think of is that the ER will be higher due to the gold, but if some of the gold is held as ETF's it will cut back on most of the bullion transaction costs. The added expense over a single total bond fund shouldn't be too significant.

Does this make sense?


Not to me. The PP is allocated equally among 4 asset classes. If you have a 50/50 stock/bond portfolio and replace bonds with PP, you will end-up with a portfolio that is 62.5% stocks, 12.5% bonds, 12.5% gold, and 12.5% cash. Now there's nothing wrong with this portfolio - if it's really what you want. But it seems like a messy way to construct a portfolio.
Best regards, -Op

"In the middle of difficulty lies opportunity." Einstein
Call_Me_Op
 
Posts: 4570
Joined: Mon Sep 07, 2009 3:57 pm
Location: Milky Way

Re: Replace Bond Allocation with Permanent Portfolio?

Postby SpaceCommander » Tue Jan 29, 2013 7:14 pm

Call_Me_Op wrote:
Dogs wrote:It sounds like the role of bonds in a three-fund portfolio is stability, and to provide a separate asset class for rebalancing purposes. The PP should theoretically be more stable than bonds, since it is designed specifically to weather all economic conditions. It is also not correlated with stocks, so it should be just as suitable as bonds for rebalancing.

The only downside I can think of is that the ER will be higher due to the gold, but if some of the gold is held as ETF's it will cut back on most of the bullion transaction costs. The added expense over a single total bond fund shouldn't be too significant.

Does this make sense?


Not to me. The PP is allocated equally among 4 asset classes. If you have a 50/50 stock/bond portfolio and replace bonds with PP, you will end-up with a portfolio that is 62.5% stocks, 12.5% bonds, 12.5% gold, and 12.5% cash. Now there's nothing wrong with this portfolio - if it's really what you want. But it seems like a messy way to construct a portfolio.


Not so messy if you use the Permanent Portfolio ETF (PERM). That would make it easy. 50% stock/50% PP

But the exp ratio is sort of high (0.48). There's also one or more Permanent Portfolio mutual funds out there. An interesting idea, nonetheless IMHO.
I honor my personality flaws, for without them I would have no personality at all.
User avatar
SpaceCommander
 
Posts: 441
Joined: Thu Nov 08, 2007 5:13 pm
Location: Seattle

Re: Replace Bond Allocation with Permanent Portfolio?

Postby Dogs » Tue Jan 29, 2013 7:27 pm

Thanks wesley, it is good to know that the ER won't be an issue.

Call_Me_Op wrote:Not to me. The PP is allocated equally among 4 asset classes. If you have a 50/50 stock/bond portfolio and replace bonds with PP, you will end-up with a portfolio that is 62.5% stocks, 12.5% bonds, 12.5% gold, and 12.5% cash. Now there's nothing wrong with this portfolio - if it's really what you want. But it seems like a messy way to construct a portfolio.


It is kind of messy. I wish PERM or PRPFX had more reasonable ERs (and actually adhered to the PP).

It may be that in the end there won't be enough of an effect on the portfolio to justify the added complexity. That is one thing I am trying to figure out.
Dogs
 
Posts: 41
Joined: Fri Oct 26, 2012 6:56 pm

Re: Replace Bond Allocation with Permanent Portfolio?

Postby Call_Me_Op » Tue Jan 29, 2013 7:56 pm

I did not mean messy in terms of the number of funds, but in terms of transparency. You really want to understand and control your allocation to the basic asset classes - stocks, bonds, cash, gold, etc. I am a purist, in the sense that I want to define an asset allocation in terms of the basic asset classes, implement that asset allocation using low cost vehicles, and rebalance as defined by my IPS. That approach yields maximum transparency, organization, and control, as well as rock-bottom costs.
Best regards, -Op

"In the middle of difficulty lies opportunity." Einstein
Call_Me_Op
 
Posts: 4570
Joined: Mon Sep 07, 2009 3:57 pm
Location: Milky Way

Re: Replace Bond Allocation with Permanent Portfolio?

Postby Dogs » Tue Jan 29, 2013 8:28 pm

Call_Me_Op wrote:I did not mean messy in terms of the number of funds, but in terms of transparency. You really want to understand and control your allocation to the basic asset classes - stocks, bonds, cash, gold, etc. I am a purist, in the sense that I want to define an asset allocation in terms of the basic asset classes, implement that asset allocation using low cost vehicles, and rebalance as defined by my IPS. That approach yields maximum transparency, organization, and control, as well as rock-bottom costs.


I am not sure what you mean by this. The portfolio I am considering is defined in basic asset classes and can be implemented in low cost vehicles. I do have an IPS that controls my allocations.
Dogs
 
Posts: 41
Joined: Fri Oct 26, 2012 6:56 pm


Return to Investing - Theory, News & General

Who is online

Users browsing this forum: hftrader, TomatoTomahto, TX_TURTLE and 30 guests