Why don't people use the Permanent Portfolio?

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Re: Why don't people use the Permanent Portfolio?

Postby letsgobobby » Sun May 12, 2013 3:47 am

Long bonds, stocks, and gold are all at or near all time highs. I just can't get excited about the future return prospects of PP from current levels.
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Re: Why don't people use the Permanent Portfolio?

Postby tadamsmar » Sun May 12, 2013 6:26 am

RyeWhiskey wrote:Craigr's post is excellent but I just want to emphasize a portion of it which is often overlooked (hence the repeated HBPP vs. Boglehead threads).
The Permanent Portfolio has a much different objective than a lot of stock heavy portfolios.


This is the real point. The Permanent Portfolio is, according to Browne's own words, 'for money that you cannot afford to lose.' It is not built to return the kind of numbers that Boglehead portfolios are because it is built to suffer minor losses in years when most conventional stock/bond portfolios take bigger hits. It is built to be conservative because, as Craigr elaborated well, it is assumed that the folks involved will be making the majority of their money through their careers (I think this is somewhere in the beginning of Harry Browne's book, maybe even the first chapter).

So the debate isn't really accurate as the premises are totally different. I, being a 27 year old with no real income (artist), use a very stock-heavy Boglehead portfolio. My parents, being retired with a steady monthly income, use the Permanent Portfolio. I explained both Boglehead wisdom and the HBPP to them and they chose it because it made them feel better about their financial future.

All these HBPP vs. Boglehead arguments miss the point, or so it appears to me. We should be happy that both Bogleheads and HBPP use low-cost, diversified, investment strategies and tune out the noise. This is what really matters in the long run.


Not all Bogleheads have stock-heavy portfolios. Tools like the efficient frontier calculation allow a Boglehead to set his/her risk and return low levels if they want to. Funds like Vanguard Target Retirement Income Fund (VTINX) are not stock heavy. Older Bogleheads who follow age in bonds will not have stock heavy portfolios.

Also, the PP is pitched to all investors at all age level. Pitched as one size fits all, and that would include all Bogleheads. The very name "Permanent" implies one size fits all age levels.

Bogleheads don't think there a single permanent portfolio, because investors have different risk requirements depending on age and other factors.
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Re: Why don't people use the Permanent Portfolio?

Postby Clive » Sun May 12, 2013 9:21 am

PP : 'for money that you cannot afford to lose.'

Define loss?

No loss in nominal value might still endure a sizeable real (inflation/purchase power) loss. The PP drew-down -20% in real terms during 2008/9

No loss relative to other alternatives : for all 30 year periods since 1972 the PP relatively lost to the Coffee House (diverse 60-40 stock/bond asset allocation) with the Coffee House providing on average 2.3 times more than the PP - a relative 'loss' of around -55%

Year to date I'm up +15%, year on year +27%. Had I been holding a PP I'd barely be breaking even.

1980 to 2000 the PP consistently lagged 5 year Treasury by nearly 2% annualised.
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Re: Why don't people use the Permanent Portfolio?

Postby TO39 » Sun May 12, 2013 11:28 am

Quasimodo wrote:Responding to the original poster:

Some reasons why I like the Permanent Portfolio:

The plan recognizes uncertainty in financial markets, and doesn't try to predict outcomes.

The plan has uncorrelated assets that can do well during times of prosperity, inflation, deflation and recession.

Every alternative stock and bond asset allocation I have seen has a history of higher volatility, which would discourage me from staying the course.

Except for some good luck during the 1970s, I personally have a poor history of investment planning and implementation. This plan offers a clear way to allocate funds for positive returns in a way I am likely to be able to live with.

Some methods for implementing this plan:

1) Buy low cost Vanguard ETFs for the stock and bond portions, and Central Gold Trust (symbol GTU) for the gold portion. (Purists would hold at least some physical gold instead of a fund)

2) Buy the Permanent Portfolio mutual fund (symbol PRPFX) which includes the various elements of the portfolio and rebalances them periodically for you.

3) Buy the Permanent Portfolio ETF (symbol PERM) which follows the neutral 4 x 25% allocation more closely than the mutual fund PRPFX.

Some drawbacks to plans 2) and 3):

PRPFX is slanted toward protection from inflation, and invests in growth stocks and natural resource stocks instead of a broad stock index. It also includes Swiss franc assets and does not hold 25% in long term treasury bonds. Although the fund did well during the early 2000s, its performance was very mediocre during the 1980s and 1990s. A suggestion I have seen to offset these drawbacks is to allocate 90% to PRPFX and 10% to an ETF that invests in long term US Treasury bonds.

Although so far it seems to track the 4 x 25% allocation better than the mutual fund PRPFX,
PERM was introduced early in 2012 and doesn't yet have much of a track record.

Expense ratios for PRPFX and PERM are higher than for plan 1).

1) above is my personal implementation, and my comments are not represented as an authoritative review.

John


As far as # 1 above GTU ia a CEF , not an ETF, and as such suffers from high premiums and discounts. I don't think you should use CEFs with out an understanding of the difference. I could see using IAU or GLD.

GTU is at a discount now BTW.
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Re: Why don't people use the Permanent Portfolio?

Postby TO39 » Sun May 12, 2013 12:06 pm

Clive wrote:
PP : 'for money that you cannot afford to lose.'

Define loss?

No loss in nominal value might still endure a sizeable real (inflation/purchase power) loss. The PP drew-down -20% in real terms during 2008/9

No loss relative to other alternatives : for all 30 year periods since 1972 the PP relatively lost to the Coffee House (diverse 60-40 stock/bond asset allocation) with the Coffee House providing on average 2.3 times more than the PP - a relative 'loss' of around -55%

Year to date I'm up +15%, year on year +27%. Had I been holding a PP I'd barely be breaking even.

1980 to 2000 the PP consistently lagged 5 year Treasury by nearly 2% annualised.



This is from an article about Harry Brown portfolio where the PP outperforms a 50/50 portfolio. Does the 60/40 portfolio outperform the 50/50 by as much as your post would suggest compared to what this article says? or are you and the article using different assumptions?


1972-2011

Permanent Portfolio 9.7% CAGR $401,903 Growth of 10K

100% Total Stock Market 9.7% CAGR $403,271 Growth of 10K

100% Total Bond Market 7.7% CAGR $197,596 Growth of 10K

50% Total Stock Market/ 50% Total Bond Market 9.1% CAGR $328,000 Growth of 10K

Here is a link to the article

http://crawlingroad.com/blog/2008/12/22 ... l-returns/

edited to look nicer
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Re: Why don't people use the Permanent Portfolio?

Postby Quasimodo » Sun May 12, 2013 12:35 pm

TO39 wrote:
Quasimodo wrote:Responding to the original poster:

Some reasons why I like the Permanent Portfolio:

The plan recognizes uncertainty in financial markets, and doesn't try to predict outcomes.

The plan has uncorrelated assets that can do well during times of prosperity, inflation, deflation and recession.

Every alternative stock and bond asset allocation I have seen has a history of higher volatility, which would discourage me from staying the course.

Except for some good luck during the 1970s, I personally have a poor history of investment planning and implementation. This plan offers a clear way to allocate funds for positive returns in a way I am likely to be able to live with.

Some methods for implementing this plan:

1) Buy low cost Vanguard ETFs for the stock and bond portions, and Central Gold Trust (symbol GTU) for the gold portion. (Purists would hold at least some physical gold instead of a fund)

2) Buy the Permanent Portfolio mutual fund (symbol PRPFX) which includes the various elements of the portfolio and rebalances them periodically for you.

3) Buy the Permanent Portfolio ETF (symbol PERM) which follows the neutral 4 x 25% allocation more closely than the mutual fund PRPFX.

Some drawbacks to plans 2) and 3):

PRPFX is slanted toward protection from inflation, and invests in growth stocks and natural resource stocks instead of a broad stock index. It also includes Swiss franc assets and does not hold 25% in long term treasury bonds. Although the fund did well during the early 2000s, its performance was very mediocre during the 1980s and 1990s. A suggestion I have seen to offset these drawbacks is to allocate 90% to PRPFX and 10% to an ETF that invests in long term US Treasury bonds.

Although so far it seems to track the 4 x 25% allocation better than the mutual fund PRPFX,
PERM was introduced early in 2012 and doesn't yet have much of a track record.

Expense ratios for PRPFX and PERM are higher than for plan 1).

1) above is my personal implementation, and my comments are not represented as an authoritative review.

John


As far as # 1 above GTU ia a CEF , not an ETF, and as such suffers from high premiums and discounts. I don't think you should use CEFs with out an understanding of the difference. I could see using IAU or GLD.

GTU is at a discount now BTW.


For those interested, here are links to two discussions about pros and cons of the closed end fund GTU as a way to invest in gold:

http://gyroscopicinvesting.com/forum/in ... pic=4477.0

http://gyroscopicinvesting.com/forum/in ... pic=2565.0

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Re: Why don't people use the Permanent Portfolio?

Postby craigr » Sun May 12, 2013 12:55 pm

At any moment, there is some investment somewhere that is going to outperform the Permanent Portfolio. It's like nailing jelly to the wall trying to defend against every possible permutation of things that could do better. But the design of the portfolio is not to chase the latest hot returns. It's just designed to be simple and provide decent inflation adjusted returns over time (historically about +3-5% over inflation) with reduced chance of big losses. If the portfolio is doing that then it's working as designed.

The Permanent Portfolio holds four assets and one of which at any moment people usually really love or really hate. So no matter what is going on, someone is slinging arrows at it. But in a way that probably is a good sign. I'd hate to think what it would mean if everyone I was talking to thought the assets I owned were great and they wish they could lever their own positions up some.

As for the Permanent Portfolio and not changing the allocation due to risk, etc. Actually I think the allocation handles risk really well and has very strong downside protection so I don't touch it much myself. But you can always put on a variable portfolio to suit your needs. If someone wants more cash, that's fine. If someone wants to go with more stocks, that's fine as well. The Permanent Portfolio idea is really to serve as a standalone core. But there is nothing set in stone that it needs to be the only thing an investor uses. I know plenty of people that use the Permanent Portfolio core and bolster it with wider and heavier stock exposure like other Boglehead portfolios. There's nothing wrong with that if they are OK with the additional risk being taken.
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Re: Why don't people use the Permanent Portfolio?

Postby TO39 » Sun May 12, 2013 1:43 pm

to craigr

What do you think is the best way to rebalance the PP? bands? how big?

edited for misspelling
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Re: Why don't people use the Permanent Portfolio?

Postby TO39 » Sun May 12, 2013 1:53 pm

Quasimodo wrote:
TO39 wrote:
Quasimodo wrote:Responding to the original poster:

Some reasons why I like the Permanent Portfolio:

The plan recognizes uncertainty in financial markets, and doesn't try to predict outcomes.

The plan has uncorrelated assets that can do well during times of prosperity, inflation, deflation and recession.

Every alternative stock and bond asset allocation I have seen has a history of higher volatility, which would discourage me from staying the course.

Except for some good luck during the 1970s, I personally have a poor history of investment planning and implementation. This plan offers a clear way to allocate funds for positive returns in a way I am likely to be able to live with.

Some methods for implementing this plan:

1) Buy low cost Vanguard ETFs for the stock and bond portions, and Central Gold Trust (symbol GTU) for the gold portion. (Purists would hold at least some physical gold instead of a fund)

2) Buy the Permanent Portfolio mutual fund (symbol PRPFX) which includes the various elements of the portfolio and rebalances them periodically for you.

3) Buy the Permanent Portfolio ETF (symbol PERM) which follows the neutral 4 x 25% allocation more closely than the mutual fund PRPFX.

Some drawbacks to plans 2) and 3):

PRPFX is slanted toward protection from inflation, and invests in growth stocks and natural resource stocks instead of a broad stock index. It also includes Swiss franc assets and does not hold 25% in long term treasury bonds. Although the fund did well during the early 2000s, its performance was very mediocre during the 1980s and 1990s. A suggestion I have seen to offset these drawbacks is to allocate 90% to PRPFX and 10% to an ETF that invests in long term US Treasury bonds.

Although so far it seems to track the 4 x 25% allocation better than the mutual fund PRPFX,
PERM was introduced early in 2012 and doesn't yet have much of a track record.

Expense ratios for PRPFX and PERM are higher than for plan 1).

1) above is my personal implementation, and my comments are not represented as an authoritative review.

John


As far as # 1 above GTU ia a CEF , not an ETF, and as such suffers from high premiums and discounts. I don't think you should use CEFs with out an understanding of the difference. I could see using IAU or GLD.

GTU is at a discount now BTW.


For those interested, here are links to two discussions about pros and cons of the closed end fund GTU as a way to invest in gold:

http://gyroscopicinvesting.com/forum/in ... pic=4477.0

http://gyroscopicinvesting.com/forum/in ... pic=2565.0

John


I read the links. What do you think of the idea of selling IAU and buying GTU when there is a -3% discount? and doing the reverse when there is a +3% premium?
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Re: Why don't people use the Permanent Portfolio?

Postby Clive » Sun May 12, 2013 2:17 pm

TO39 wrote:1972-2011 Permanent Portfolio 9.7% CAGR
50% Total Stock Market/ 50% Total Bond Market 9.1% CAGR

Those figures overstate Harry Browne's 4x25 and understate the 50-50.

Also its better to compare averages using the average of multiple time periods rather than between two single time points, otherwise you may be comparing a more right tail event with a more left tail event - as I suspect is the case for those figures.

If an article is accompanied with an advertisement to sell you something associated with that article :oops:
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Re: Why don't people use the Permanent Portfolio?

Postby Quasimodo » Sun May 12, 2013 2:20 pm

TO39 wrote:

"I read the links. What do you think of the idea of selling IAU and buying GTU when there is a -3% discount? and doing the reverse when there is a +3% premium?"

It sounds like a reasonable strategy.

Personally, I'd rather not try it because once I start doing market timing I'm afraid of getting carried away, and also I like GTU because it seems a purer and easier way to hold gold than many of the alternatives.

Incidentally, my retirement investments are all in a rollover IRA.

Good luck whatever you decide!

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Re: Why don't people use the Permanent Portfolio?

Postby craigr » Sun May 12, 2013 3:23 pm

TO39 wrote:to craigr

What do you think is the best way to rebalance the PP? bands? how big?

edited for misspelling



Harry Browne advised splitting the assets 25% into each. You would rebalance when one asset fell to 15% or less, or rose to be 35% or more. I find these are reasonable figures to use because:

1) It allows you to capture momentum in the assets without selling out too early.
2) Limits downside risk because the largest slice is not so large that you get killed if it drops sharply in value.
3) The smallest slice is not so small that it does nothing appreciable for the portfolio if it goes up in value.
4) It is not transaction intensive so you save a lot on fees, bid/ask spread, taxes, etc.
5) It's simple and requires very little monitoring so it's better for investor psychology and avoids market timing voodoo.

With these rebalancing bands, most investors can look only once a year or if they hear about something *really* big happening in the markets to check on things. Otherwise, they can pretty much ignore the portfolio and focus on other things (which is what I recommend).
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Re: Why don't people use the Permanent Portfolio?

Postby Quasimodo » Sun May 12, 2013 5:30 pm

letsgobobby wrote:Long bonds, stocks, and gold are all at or near all time highs. I just can't get excited about the future return prospects of PP from current levels.


I think you make a good point. Is there a portfolio plan you do feel optimistic about?

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Re: Why don't people use the Permanent Portfolio?

Postby glock19 » Mon May 13, 2013 8:46 am

letsgobobby wrote:Long bonds, stocks, and gold are all at or near all time highs. I just can't get excited about the future return prospects of PP from current levels.


As a new investor where should I put my money? The S&P is at an all time high. Bonds have had a long bull run and may well be at highs. What are your predictions for the future?
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Re: Why don't people use the Permanent Portfolio?

Postby Reubin » Mon May 13, 2013 11:41 am

glock19, I would recommend the Permanent Portfolio to you providing that you do the research first. Harry Browne's basic premise is that the future is unknowable and timing doesn't work. He also believed in diversification and keeping expenses low. Please bear in mind that the 4 asset classes work in tandem and should not be looked at separately. If you are worried about stocks and bonds both being near highs then you might want to dollar cost average in over a period of months (or even years). Furthermore, if you are extremely risk averse, there is nothing wrong with FDIC insured CD's or even a large mattress.
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Re: Why don't people use the Permanent Portfolio?

Postby wesleymouch » Mon May 13, 2013 11:52 am

A good way to evaluate portfolios is to see how they did during the 1966 to 1981 stretch. This was a poor time to have just entered retirement. The Permanent Portfolio survived this and delivered real returns which many other portfolios did not. The jist is that the PP does well when the stock market does not and trails when the stock market does well. I use a variant of the PP with the following allocation:
10% S&P/10% Small cap value/10% EFA/15% Gold/50% 5 yr treasuries and 5% cash. Backtested it delivered real positive returns during the 1966 to 1981 market but also performed well during the subsequent bull market which the classic PP did not. Any negative years were small with less than 5% loss. Since everyone is naming portfolios (the Larry, etc) I will call it the Wesley (not to be confused with Wellsley)
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Re: Why don't people use the Permanent Portfolio?

Postby Browser » Mon May 13, 2013 12:20 pm

I have a couple reactions to craigr's post. First, it is not prudent for any long term investor to have a portfolio allocation that he/she won't be able to stick with over the long term, including the bumps in the road. You don't want to be forced to liquidate a significant portion of your port sooner than you expected. So -- you need to figure out what your planned horizon is and your ability to stick to your plan over that period of time. That said, really bad unexpected stuff can still happen despite your best laid plans. That doesn't necessarily mean, however, that you should pursue a very conservative portfolio strategy since you have to consider the tradeoff between cutting left tail risk against the cost of truncating potential portfolio gains. The PP might be an appropriate strategy for someone who wishes to pursue a conservative portfolio strategy, but many people feel that a somewhat less conservative strategy might be more appropriate for them, and is one they can stick with over the long run. For example, over rolling 15-year periods since 1972, you would have given up an averaged annual return of 2% real if you had followed the 4x25 PP vs. a 50/50 stock bond portfolio allocation. Over all 15-year rolling return periods, your worst annualized real return for a 50/50 allocation would have been 2.6% vs. 3.5% for the PP and your best annualized return would have been 9.9% vs. 5.7% for the PP. If you are someone who is highly sensitive or vulnerable to your short term portfolio returns, perhaps the PP is in your wheelhouse. If you are less susceptible to short term returns, then perhaps a less conservative strategy would be more appropriate. You have to make your own best judgment about that, taking into consideration that you should never exceed a level of risk that might force you to abandon your portfolio allocation or liquidate your portfolio prematurely.

The second bone I have to pick is the notion that it makes sense for an investor to split their fixed-income investment in order to have a cash or t-bill "bucket" they can draw from during the bad times. This bucket theory has been discredited numerous times. Simply stated, it doesn't work because - as you deplete your cash bucket - you are systematically increasing the riskiness of your portfolio. You don't want to to that, particularly when the going gets rough; you want to maintain a consistent level of portfolio risk by maintaining your target allocation. Having 50% in intermediate bonds is a more efficient way of doing that because it has one less moving part in your portfolio. The arguments for the bond barbell are just pretty weak as far as I can see. Historically, it hasn't made any difference despite all the nice word-smithing around it. KISS.
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Re: Why don't people use the Permanent Portfolio?

Postby wesleymouch » Mon May 13, 2013 12:33 pm

I use the Wesley variant of the PP (see above) precisely because both gold and long term bonds can get killed under the right condition. The Wesley delivers similar returns to the PP but does better during stock bull markets. The lack of long term bonds and smaller gold allocation (best in coins since you will less likely sell these) prevents gut wrenching declines. Stocks are volatile enough
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Re: Why don't people use the Permanent Portfolio?

Postby rmelvey » Mon May 13, 2013 1:23 pm

Some more data to chew on...

A portfolio of 20% stocks, 20% gold, and 60% total bond market has a 0.97 correlation with the PP. A lot of people get thrown off by the bond barbell (LTT and cash), but the PP is very similar to a conservative boglehead portfolio but with some gold tossed in.

If one is a believer in stocks for the long run (or the idea that young people should take equity risk), one could easily merge the core PP drivers with some of the other traditional bogleheads strategy. You could do age in bonds/gold (kept in the proportions highlighted earlier).

So a 40 year old could have 10% gold, 30% bonds, and 60% stocks. It really just comes down to whether or not you think gold reduces portfolio risk or not. I personally think it does and so I see value in passively holding/rebalancing with it :happy

I think even if the 4x25 split isn't appropriate for you, you can still learn from the PP framework because it emphasizes a macro based approach to diversification that I haven't seen anywhere else with the exception of certain risk parity funds.
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Re: Why don't people use the Permanent Portfolio?

Postby wesleymouch » Mon May 13, 2013 1:37 pm

I keep going back to the 1966 to 1981 market. Gold in small amounts helps create a positive real return in portfolios.
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Re: Why don't people use the Permanent Portfolio?

Postby rmelvey » Mon May 13, 2013 1:42 pm

wesleymouch wrote:I keep going back to the 1966 to 1981 market. Gold in small amounts helps create a positive real return in portfolios.


Yes. Gold only begins to make sense when you are looking at graphs of inflation adjusted returns for portfolios. Portfolios with some gold get you closer to a straight line, through multiple macro environments, which is what many of us are after. A supply shock inflation is the achilles heel of a stock/bond portfolio and I am not sure if TIPS have enough firepower to protect more than themselves. They are also such a new instrument and I view the uncertainty of how future CPIs will be calculated as a form of counter party risk.

With all of this said, indexing your stocks and bonds and not timing the market are 90% of the game. The data indicates to me that holding gold makes a lot of sense, but it is only advised for someone who sees it as a hedge, someone who has the discipline to focus on total portfolio value. You also have to be comfortable rebalancing into it on the downside. Since gold doesn't have a dividend yield or interest yield that gets larger as it drops, that is harder to stomach for some investors. For many, rebalancing into a dropping stock market is hard enough.
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Re: Why don't people use the Permanent Portfolio?

Postby Browser » Mon May 13, 2013 6:42 pm

Yes. Take the classic 50/50 stock-bond portfolio. Then peel off half the stock allocation and put it in gold -- voila, the Permanent Portfolio. It's essentially a tradeoff of higher expected portfolio returns for lower portfolio volatility because the returns of gold and stocks tend to be negatively correlated (good), but the long term mean returns from gold tend to be lower than for stocks (bad). You can't eat lower volatility, so it's a matter of determining how much portfolio volatility you can stand over a given time horizon vs. what you're willing to forego in terms of expected portfolio returns. For someone early in their portfolio accumulation phase, the foregone returns are likely to make a huge difference in the size of their nestegg at retirement, and the ability to tolerate portfolio volatility is probably much higher. For someone nearer to retirement or in retirement, there is some real importance to reducing portfolio volatility at the cost of lowering expected portfolio returns; but there are other options for doing this besides the PP. There are things like annuities, for example. You really shouldn't be retiring until you will be able to stop playing the stock market game anyway, or at least have sufficient financial resources that you can dial way back.
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Re: Why don't people use the Permanent Portfolio?

Postby TO39 » Mon May 13, 2013 6:53 pm

Browser wrote:The second bone I have to pick is the notion that it makes sense for an investor to split their fixed-income investment in order to have a cash or t-bill "bucket" they can draw from during the bad times. This bucket theory has been discredited numerous times. Simply stated, it doesn't work because - as you deplete your cash bucket - you are systematically increasing the riskiness of your portfolio. You don't want to to that, particularly when the going gets rough; you want to maintain a consistent level of portfolio risk by maintaining your target allocation. Having 50% in intermediate bonds is a more efficient way of doing that because it has one less moving part in your portfolio. The arguments for the bond barbell are just pretty weak as far as I can see. Historically, it hasn't made any difference despite all the nice word-smithing around it. KISS.



Why would this theory not work? If stocks, LTTs, and gold are all down 10 to 15%, and you needed dollars from your portfolio, you would take some from your short term treasuries. This would indeed increase your risk level, back to what you thought was appropriate in the first place.

Where's the problem?
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Re: Why don't people use the Permanent Portfolio?

Postby linguini » Mon May 13, 2013 6:58 pm

To deal with unexpected supply-side shocks, why gold as opposed to some sort of diversified commodities basket?
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Re: Why don't people use the Permanent Portfolio?

Postby Clearly_Irrational » Mon May 13, 2013 7:06 pm

linguini wrote:To deal with unexpected supply-side shocks, why gold as opposed to some sort of diversified commodities basket?


My personal research suggested that most commodities are pro-cyclical rather than counter-cyclical the way gold is.
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Re: Why don't people use the Permanent Portfolio?

Postby Browser » Mon May 13, 2013 7:14 pm

Why would this theory not work? If stocks, LTTs, and gold are all down 10 to 15%, and you needed dollars from your portfolio, you would take some from your short term treasuries. This would indeed increase your risk level, back to what you thought was appropriate in the first place.

Where's the problem?

I would say that one problem would appear to be that the theory of the PP isn't working if all three are down together. In which case, taking money from the cash bucket may be the least of your problems. Of course you can rebalance to your original target by withdrawing from the asset that has gone above target, but that's not likely to be cash unless things have really gone off the tracks.
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Re: Why don't people use the Permanent Portfolio?

Postby TO39 » Mon May 13, 2013 7:21 pm

Browser wrote:
Why would this theory not work? If stocks, LTTs, and gold are all down 10 to 15%, and you needed dollars from your portfolio, you would take some from your short term treasuries. This would indeed increase your risk level, back to what you thought was appropriate in the first place.

Where's the problem?

I would say that one problem would appear to be that the theory of the PP isn't working if all three are down together. In which case, taking money from the cash bucket may be the least of your problems. Of course you can rebalance to your original target by withdrawing from the asset that has gone above target, but that's not likely to be cash unless things have really gone off the tracks.



My understanding is according to the theory there are four asset classes, and at any time one or two will be doing good. It is possible that cash is the only asset class doing well, in which case that is the asset class you would use for any needed funds. This would give the more volatile fund a chance to regain to their higher levels. I see where it works.
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Re: Why don't people use the Permanent Portfolio?

Postby LFKB » Mon May 13, 2013 7:44 pm

boggler wrote:
LFKB wrote:OP, FWIW I was new to the board about 6 months ago and was deciding on an AA. I came across the PP and thought it was a winning strategy. After doing more research, I decided against it and went with a typical stock/bond strategy. I have owned some gold since 2008 outside of my Vanguard account but it is a small percentage of my overall portfolio. I think you will come to the conclusion after reading more about it.


LFKB,
Why did you decide against it?


Because gold has performed spectacularly since the price controls were removed but it may not in the future. The PP also has had a more limited time period to prove itself. Also, I don't like the idea of holding cash in excess of an emergency fund.
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Re: Why don't people use the Permanent Portfolio?

Postby Clearly_Irrational » Mon May 13, 2013 8:16 pm

LFKB wrote:Also, I don't like the idea of holding cash in excess of an emergency fund.


By holding both long term treasuries and "cash" you're basically getting an average duration around 8.7 or so. Is that higher than AGG at 4.8? Sure, but it's not a crazy as it looks at first glance.
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Re: Why don't people use the Permanent Portfolio?

Postby hazlitt777 » Mon May 13, 2013 10:40 pm

linguini wrote:To deal with unexpected supply-side shocks, why gold as opposed to some sort of diversified commodities basket?


One reason I chose gold instead of a diversified commodities basket, as part of a stock/bond/gold portfolio; is that holding physical gold, also diversifies my investments away from being 100% paper financial assets. I can't do this with a diversified commodities basket. It too is a paper claim to financial assets.

I know this isn't important to everyone, but that is how I would answer your excellent question.
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Re: Why don't people use the Permanent Portfolio?

Postby rmelvey » Tue May 14, 2013 2:35 am

Clearly_Irrational wrote:
LFKB wrote:Also, I don't like the idea of holding cash in excess of an emergency fund.


By holding both long term treasuries and "cash" you're basically getting an average duration around 8.7 or so. Is that higher than AGG at 4.8? Sure, but it's not a crazy as it looks at first glance.


Yeah the barbell really throws people off. It's not that different from holding a bullet portfolio of the same duration. The real difference is that it might have a slightly lower expected return, but you are protected from unexpected yield curve inversions and you have greater liquidity. I also think that Treasuries are nice to have vs. the agg because Treasuries like fat tail events, where as corporate bonds like mild recessions but hate depressions. Treasuries are so much simpler to think about in terms of risk allocation: the worse the depression the better they will do. It's kind of like why Larry doesn't like HY, they let you down the moment you need them most, making them hard to carve out in your risk allocations.
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Re: Why don't people use the Permanent Portfolio?

Postby Clive » Tue May 14, 2013 6:51 am

Browser wrote:Take the classic 50/50 stock-bond portfolio. Then peel off half the stock allocation and put it in gold -- voila, the Permanent Portfolio. It's essentially a tradeoff of higher expected portfolio returns for lower portfolio volatility...

Or assume 25% stock and for the 75% 'bonds' split equally between STT, LTT and Gold

SInce 1972 both LTT and Gold have both provided considerably more than their longer term expected rewards. Gold was in effect IPO'd (and subsequently boomed) and LTT's had the benefit of relatively quickly rising to exceptionally high yields and then a prolonged slow downward trend in yields.

Prior to the 1970's money could be converted to gold at a fixed price - but where that fixed price was infrequently revised upwards. At the time of being floated and left to the markets to price, the price was relatively low (due for a upward revision), so the price initially soared after being 'IPO'd'. For a fairer comparison I'd suggest those earlier years should be ignored as the IPO was a one- off event.

Compare how a portfolio where the 'bond' allocation comprised of a third each in 2 year T, LTT and gold to that of other forms of bond holdings (TIPS perhaps) and post 1974 you'll generally see similar results.
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Re: Why don't people use the Permanent Portfolio?

Postby Rodc » Tue May 14, 2013 8:08 am

Not relevant to the PP, but:

for all 30 year periods since 1972


This is ONE 30-year period (pretty much).

90 years of data gives all of three 30-year data points. Rolling periods may give more numbers, good for making pretty scatter plots, but all of them are just remixes of three honestly independent data points (at best, as the the second is dependent on the particular history that led to point one, and point three is dependent on the particular history that led to points one and two, so even here they are not really independent).

There are also various unfortunate artifacts that arise in using rolling periods.

Historical data are not worthless, but it are worth far less than many believe based on the use of rolling periods (hey, use rolling 365-day periods and I can make a nice looking graph from 5 years of data!)
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Re: Why don't people use the Permanent Portfolio?

Postby Browser » Tue May 14, 2013 10:33 am

Excellent point Rodc. Just one 30-year period that is being touted to prove the benefits of the PP. Just use your head -- there is no way that you can have an equal allocation to stocks and gold that has an expected return that is as large or larger than allocating that amount to stocks (25/25 gold-stocks vs. 50% stocks). There is no free lunch being paid for by Mr. Gold. Gold has an expected long term return that is equal to the inflation rate (zero real), while stocks have a positive expected real return. The difference will be the volatility of the returns, since gold and stocks tend to be negatively correlated. Yes, you might find some time periods in which the 25/25 split does have equal or higher returns than having all 50% in stocks. But that proves nothing because it has no statistical significance, and represents "noise" in returns. For example, the CAGR of the 4x25 PP from 1972-2012 was 9.2% vs. 8.9% for 50/50 with SD of 7.7% vs. 9.8%. But begin at 1975 instead of 1972, and the CAGR of the PP is 8.7% vs. 9.9% for the 50/50, while SD of the PP is still lower at 7.8% vs. 9.2%. The comparative cumulative returns are quite dependent on the time period selected; while the comparative volatility is less so. It seems evident to me that what you are likely to get with the PP is a portfolio with lower volatility and most likely lower returns as well. If that's OK with you, then go for it. However, if you want higher expected returns, the PP may be unnecessarily tame for you. The tradeoff between long term returns and portfolio volatility needs to be carefully weighed by each investor according to his/her own needs, ability, and willingness to assume investment risk. The PP is only one of many portfolio allocations along the risk-reward continuum. It may be appropriate for some, but it is certainly not a "one size fits all" solution that absolves anyone of the responsibility to carefully design and manage their portfolio allocation.
If we have data, let’s look at data. If all we have are opinions, let’s go with mine. – Jim Barksdale
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Re: Why don't people use the Permanent Portfolio?

Postby craigr » Tue May 14, 2013 12:07 pm

I don't disagree with what RodC is saying. I've said it many times myself that a lot of investing advice derives its proof from a very tiny sample set. Historical data can't be used to "prove" anything going forward. It can though be useful to disprove ideas.

I am fond of saying:

Investing is not a science.

When you look at the Permanent Portfolio and how it came about you can see that some backtesting was used (as many use), but also there was a lot of research and intuitive sense applied based on financial history. This is why it advocates some rather non-Boglehead positions like keeping some assets outside of the country where you live. That is a rather unusual position to take if one thinks the past will repeat into the future. It also advocates holding a balanced allocation just in case the rosy stock bull market of the 1980-2000 timeframe doesn't repeat again. And it recommends those certain of the death of the dollar hold stocks and bonds in case they are wrong. Finally, it advocates holding enough cash that the investor has some padding to deal with life emergencies that everyone faces. In other words, it really tries very hard to be future agnostic and also consider extraordinary events. It is not driving by looking in the rearview mirror.

And frankly, if any group is using the past to justify investing advice it's probably those advocating unquestioning devotion to the stock market. When you go outside the U.S., the stock markets of the world have been notoriously unreliable ways to grow and protect wealth by themselves. Maybe that will be the future of the U.S. Who knows? So yes own stocks by all means. I'm a pretty diehard capitalist myself and this would be my personal bias. But at the same time investors should stay well diversified in case the future doesn't work out the way they think it will.
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Re: Why don't people use the Permanent Portfolio?

Postby Browser » Tue May 14, 2013 12:56 pm

The PP or any other investing formula can't be "proved" or "disproved" in a technical sense, so I like the idea about being "agnostic" regarding one's portfolio strategy. But what does being "agnostic" entail? Is there any reason to presuppose that including a large chunk of gold to one's stock-bond portfolio is being agnostic? That assumes that all the primary colors of the risk rainbow have been dealt with by holding this simple portfolio with equal portions of US stocks, gold, long duration US treasury bonds, and cash. If I wanted to be agnostic, why not try to hold the world market portfolio with every asset type in proportion to it's world market weighting? That would entail dozens of assets, not fully achievable but you can get closer than the PP does to that objective. And, as Larry S has already pointed out, the PP does not incorporate major risk dimensions as it is a play on just market risk - or beta. How can that be agnostic? Agnosticism is in the beholder's eye.
If we have data, let’s look at data. If all we have are opinions, let’s go with mine. – Jim Barksdale
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Re: Why don't people use the Permanent Portfolio?

Postby craigr » Tue May 14, 2013 1:08 pm

Browser wrote:And, as Larry S has already pointed out, the PP does not incorporate major risk dimensions as it is a play on just market risk - or beta.


I'd just point out that most market portfolios that incorporate academic perceptions of risk often ignore two of the biggest: Political and currency risk. Those two risks can do remarkable damage in a short amount of time when they show up.

Gold handles political risk and currency risk. The remaining assets can do the lifting in the other areas. Gold has a very specific purpose that is different than stocks and bonds. Based on my understanding of financial history, I wouldn't sleep well at night knowing all I owned in my portfolio were stocks and bonds. But each person needs to decide what's best for them.
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Re: Why don't people use the Permanent Portfolio?

Postby allsop » Tue May 14, 2013 1:14 pm

Rodc wrote:90 years of data gives all of three 30-year data points. Rolling periods may give more numbers, good for making pretty scatter plots, but all of them are just remixes of three honestly independent data points (at best, as the the second is dependent on the particular history that led to point one, and point three is dependent on the particular history that led to points one and two, so even here they are not really independent).


Why do you think those three data points are independent?
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Re: Why don't people use the Permanent Portfolio?

Postby allsop » Tue May 14, 2013 1:19 pm

craigr wrote:Gold handles political risk and currency risk.


Depends what you means with "handles".
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Re: Why don't people use the Permanent Portfolio?

Postby Browser » Tue May 14, 2013 1:43 pm

There certainly have been some times in history when it would have been very beneficial to have owned a stash of gold, as a consequence of hyperinflation or currency collapse in particular. It wasn't that long ago that investors had great difficulty diversifying their country and currency risk by owning foreign equities and bonds, so precious metals were one of the few ways to diversify single country and single currency risk. Is gold as important nowadays for that purpose? - guess that's open to some debate. However, it's probably still true that, if you're going to own it at all to diversify your currency and political risks, gold should be held in physical form outside the reach of governments to fully serve that purpose. In the event of hyperinflation or currency collapse, governments are probably coming after your gold just as they have in the past, so you'll need to have it well-hidden. And when you really, really need it, will you be able to spend it w/o the government confiscating it? I tend to agree with those who suggest that if you want to own gold to protect from financial Armageddon you might also want to set up a survivalist camp and stock it with food and ammunition. The perfect hedge against financial collapse will probably turn out to have one fatal flaw in the end -- everybody else will be trying to take it from you when they realize their mistake in not owning it themselves.
If we have data, let’s look at data. If all we have are opinions, let’s go with mine. – Jim Barksdale
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Re: Why don't people use the Permanent Portfolio?

Postby craigr » Tue May 14, 2013 1:54 pm

Browser wrote:The perfect hedge against financial collapse will probably turn out to have one fatal flaw in the end -- everybody else will be trying to take it from you when they realize their mistake in not owning it themselves.


There are plenty of cases where currency risk showed up but the zombie apocalypse did not happen. Just a couple years of a really bad economy and then things kind of settled out. Think Iceland 2008, Argentina 2001, etc.

So the point is not so much to go into the bunker with the beans and bayonets. It's more to just drag your feet and stall as long as possible with assets that are not easy pickings. It wasn't necessary for someone in Argentina/Iceland to head for the hills when their currencies started to wobble (Argentina is repeating this today). All they needed to do was make sure all of their money wasn't within easy reach. And more importantly, wasn't all held in the country when the bank freezes started happening.

These are extreme scenarios, but not unheard of even in very developed countries.

Frankly, if the government is kicking down doors and stealing property then all bets are off for anything you own gold or not. As worthless as gold could be in that kind of situation, it's going to be a heck of a lot better than TIPS.

And again, this isn't really even the main concern but it's where people jump to. There is a lot of room between the extremes and that is where the problem usually remains.
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Re: Why don't people use the Permanent Portfolio?

Postby Rodc » Tue May 14, 2013 2:23 pm

allsop wrote:
Rodc wrote:90 years of data gives all of three 30-year data points. Rolling periods may give more numbers, good for making pretty scatter plots, but all of them are just remixes of three honestly independent data points (at best, as the the second is dependent on the particular history that led to point one, and point three is dependent on the particular history that led to points one and two, so even here they are not really independent).


Why do you think those three data points are independent?


Over-lapping periods share data: thus they are dependent by definition.

Non-overlapping periods do not share data, thus could be independent (are given some simplifying assumptions that probably are not quite true in the real world, see parenthetical comment in the quote). Historical data suggest even non-overlapping periods do not give complete independence, but are still far preferable to over-lapping periods.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Re: Why don't people use the Permanent Portfolio?

Postby allsop » Tue May 14, 2013 2:44 pm

Rodc wrote:
allsop wrote:
Rodc wrote:90 years of data gives all of three 30-year data points. Rolling periods may give more numbers, good for making pretty scatter plots, but all of them are just remixes of three honestly independent data points (at best, as the the second is dependent on the particular history that led to point one, and point three is dependent on the particular history that led to points one and two, so even here they are not really independent).


Why do you think those three data points are independent?


Over-lapping periods share data: thus they are dependent by definition.

Non-overlapping periods do not share data, thus could be independent (are given some simplifying assumptions that probably are not quite true in the real world, see parenthetical comment in the quote). Historical data suggest even non-overlapping periods do not give complete independence, but are still far preferable to over-lapping periods.


I'm, sort of, sorry to prod you into a qualifier about your claim of data independence. Several other posters on this forum have made similar claims but not explaining the claimed independence.

I think that those three data points spanning 90 years are not independent, unless given some very unrealistic assumptions, making statistical tests more than dubious.
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Re: Why don't people use the Permanent Portfolio?

Postby Rodc » Tue May 14, 2013 2:59 pm

allsop wrote:
Rodc wrote:
allsop wrote:
Rodc wrote:90 years of data gives all of three 30-year data points. Rolling periods may give more numbers, good for making pretty scatter plots, but all of them are just remixes of three honestly independent data points (at best, as the the second is dependent on the particular history that led to point one, and point three is dependent on the particular history that led to points one and two, so even here they are not really independent).


Why do you think those three data points are independent?


Over-lapping periods share data: thus they are dependent by definition.

Non-overlapping periods do not share data, thus could be independent (are given some simplifying assumptions that probably are not quite true in the real world, see parenthetical comment in the quote). Historical data suggest even non-overlapping periods do not give complete independence, but are still far preferable to over-lapping periods.


I'm, sort of, sorry to prod you into a qualifier about your claim of data independence, which several posters are making similar claims on this forum.

I think that those three data points spanning 90 years are not independent, unless given some very unrealistic assumptions, making statistical tests more than dubious.



Personally I don't think you are saying anything materially different than I am saying. Seems like violent agreement or near-agreement. I think if I dropped one word from the original we would not be having this back and forth (I said "truly" then explained why it was not actually truly, could have been better written). Just exactly how independent or not adjacent non-over lapping periods are is hard to know as the same lack of enough solid data problem infects that as well.

I also don't think your point has any bearing on my point that using rolling periods to generate stats is a bad idea.

I'm not really interested in a contest as to who is the most skeptical. You can win. :)
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Re: Why don't people use the Permanent Portfolio?

Postby Clive » Tue May 14, 2013 4:07 pm

Gold is akin to a undated zero coupon inflation bond. Form a barbell by blending gold 50-50 with long term undated conventional treasury bonds and compare to a 5 year bullet, or a 5 year/gold combination, or a 20 year/5 year T combination and

longtermreturns.com Historic Investment Returns
(can take a while for the chart to load as I believe its served from googledocs)


longer term you'll see somewhat similar results. Over interim periods you may see differences, no different to how at times inflation bonds might have performed better than conventional bonds and visa versa.

A shorter term bullet has the benefit that you can hold to maturity and be repaid par, perhaps to roll those proceeds into new higher yielding bonds if yields had risen. With barbell's you have more volatility and may have to sell before maturity for a sizeable capital loss.

Inflation bonds provide the added benefit of tracking real yields, so you can target the best value (shorter or longer dated) according to whichever might be the better value at the time, without having to worry about inflation.

If you count gold, LTT, STT, TIPS and combinations of such as broadly all being much the same, the PP is a 25/75 stock/bond type asset allocation - not too dissimilar to Larry's Fat Tail Minimisation (30/70) that prefers tax efficient TIPS for the bond allocation.

Compare 25% stocks/75% 5 year T with 25% in each of stocks, 20 year T, 5 year T and gold
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Re: Why don't people use the Permanent Portfolio?

Postby avalpert » Tue May 14, 2013 4:25 pm

Clive wrote:G

If you count gold, LTT, STT, TIPS and combinations of such as broadly all being much the same, the PP is a 25/75 stock/bond type asset allocation - not too dissimilar to Larry's Fat Tail Minimisation (30/70) that prefers tax efficient TIPS for the bond allocation.


If you ignore the type of equity he uses for that 30% sure - but that is kind of missing the point of his portfolio construction.
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Re: Why don't people use the Permanent Portfolio?

Postby Browser » Tue May 14, 2013 4:26 pm

There are plenty of cases where currency risk showed up but the zombie apocalypse did not happen. Just a couple years of a really bad economy and then things kind of settled out. Think Iceland 2008, Argentina 2001, etc

In those cases, don't you think a traditional portfolio diversified across international currencies and markets wasn't sufficient for the Argentine or Icelander? Did they really need to own gold to survive their currency problems? Before jumping to the conclusion that gold was the answer, I'd like to see an analysis of how things went for an Argentine or Icelander who was well-diversified internationally in their stock and fixed-income investments. The real point of owning gold is to hedge extreme financial event risks that cannot be adequately hedged by simply owning an internationally diversified portfolio of stocks and fixed-income investments. What would that be? I suppose a world-wide meltdown of stocks, bonds, and major currencies would qualify. But I don't think I'd be putting up 25% of my investable wealth into insurance against such low-probability events, but I guess it depends on how nervous you are.
If we have data, let’s look at data. If all we have are opinions, let’s go with mine. – Jim Barksdale
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Re: Why don't people use the Permanent Portfolio?

Postby rmelvey » Tue May 14, 2013 4:30 pm

Clive,

In many ways I think the blend of LTT and gold was a way of creating a TIPs like investment before they existed. The combination is a "risk off" asset that is relatively agnostic about the price level because they two asset classes fundamentally benefit from opposite ends of the inflation/deflation spectrum. I think a blend of 75% TIPS is reasonable, but why not have the gold and LTT in there as well. The more diversification the better right?
I have toyed around with 20% LTT, 20% Intermediate TIPS, 20% gold, and 40% stocks. Slightly more levered (no cash) so a yield curve inversion could be quite painful, but it has the same principles as the PP but with some TIPS folded in.
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Re: Why don't people use the Permanent Portfolio?

Postby rmelvey » Tue May 14, 2013 4:34 pm

Browser wrote:
There are plenty of cases where currency risk showed up but the zombie apocalypse did not happen. Just a couple years of a really bad economy and then things kind of settled out. Think Iceland 2008, Argentina 2001, etc

In those cases, don't you think a traditional portfolio diversified across international currencies and markets wasn't sufficient for the Argentine or Icelander? Did they really need to own gold to survive their currency problems? Before jumping to the conclusion that gold was the answer, I'd like to see an analysis of how things went for an Argentine or Icelander who was well-diversified internationally in their stock and fixed-income investments. The real point of owning gold is to hedge extreme financial event risks that cannot be adequately hedged by simply owning an internationally diversified portfolio of stocks and fixed-income investments. What would that be? I suppose a world-wide meltdown of stocks, bonds, and major currencies would qualify. But I don't think I'd be putting up 25% of my investable wealth into insurance against such low-probability events, but I guess it depends on how nervous you are.


Globally, central banks are holding rates close to or below the inflation rates. Historically when real rates a low, gold has experienced long bull runs. Its a simple logical argument, when real rates are low the opportunity cost of holding gold is low so more buyers come out of the woodworks. I never quite understood why so many try and link gold with the end of the world, gold has had two bull markets that benefited a stock/bond portfolio, both occurred without the world ending at all.
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Re: Why don't people use the Permanent Portfolio?

Postby allsop » Tue May 14, 2013 4:51 pm

Rodc wrote:I'm not really interested in a contest as to who is the most skeptical. You can win. :)


You are taking all the fun out of this :)
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