Why don't people use the Permanent Portfolio?

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

Postby Browser » Tue May 14, 2013 5:11 pm

Before accepting the common rationales for owning gold, it might be wise to examine the definitive study conducted by Erb & Harvey: The Golden Dilemma

> We find little evidence that gold has been an effective hedge against unexpected inflation whether measured in the short term or the long term.

> The gold as a currency hedge argument does not seem to be supported by the data.

> We suggest that the argument that gold is attractive when real returns on other assets are low is problematic. Low real yields do not mechanically cause the real price of gold to be high.

> We also parse the safe haven argument and come up empty-handed. We examine data on hyperinflations in both major and minor countries and find it is certainly possible for the purchasing power of gold to decline substantially during a highly inflationary period.

As Mark Twain said: "It's not what we believe that gets us in trouble -- it's what we believe that ain't so."
Get your facts first, and then you can distort them as much as you please. ~ Mark Twain

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

Postby Clive » Wed May 15, 2013 6:06 am

rmelvey wrote:In many ways I think the blend of LTT and gold was a way of creating a TIPs like investment before they existed. .... 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?

In more 'normal' times maybe yes as under such conditions there's not that much difference between inflation and conventional bonds. In the current era however its different. Would you buy a bond from a company that for each bond it sold to you it printed another and gave it freely to itself? Collecting taxes on the interest it paid to you as well as collecting a yield from the free bond it held itself.

Of all investment grade gold, around twice as much is held by central banks as by private investors.

If the central bank of Melv had 10 bonds outstanding of which the central bank of Clive held 5, but then Melv opted to double up the number of outstanding bonds by printing another 10 to give to himself (at no cost), then Clive is also going to print more of his own bonds, selling some and using the proceeds to buy more of Melv's, and keeping some for himself. Both will see their currency devalue, but in lockstep to each other, gold rises, but if both Melv and Clive own two-thirds of all gold between them anyway (and gold accounts for only 2% of total world investment assets (stocks, bonds, gold))!! The end game is that neither Melv nor Clive lose out, only those that privately bought Melv's and Clive's bonds. Clive still receives a similar yield from his Melv bond holdings, except perhaps instead of 4% from 5 bonds he receives 2% from 10 bonds.

With TIPS the yield you receive is depicted by the rate of inflation, not by how many free bonds the issuer might have printed to give to itself. A risk with the above game is that Clive might reach a point when he is unable to sell any more bonds at a reasonable price/yield, in which case Clive's inflation rate might suddenly soar. Whilst gold in Clive's currency terms might soar under such conditions, in Melv's currency gold might remain unchanged (as was the case during the Icelandic crisis in 2008. In their own currency gold soared, in Euro's gold remained level). 25% gold holdings for an Icelandic saw no greater benefit than had they held 25% in US$ or Euro's.

Potential gold and treasury bond self interest manipulation by major/majority holders is a risk that is perhaps best avoided until more normal times resume. Marginally negative real yields from each TIPS bond bought can be countered by marginally decreasing TIPS weighting and increasing stock weighting to compensate. Or by diversifying into inflation-bond like alternatives.

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

Postby tadamsmar » Fri Jun 28, 2013 12:50 pm

Time to get out the old wheelbarrow and buy some and cart some over to your lockbox to rebalance, PPers!

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

Postby ps56k » Sat Jul 06, 2013 8:57 pm

Here's my simple view on how things should work/look - with any kind of diversity -

The simple bond fund - VBMFX - just kinda plods along, until recently of course,
but the major swings are shown between Gold/GLD and the total stock market VTSMX.

So the question becomes, what other Vanguard fund would mimic the contra-stock curves like gold - but not a "short" fund ?

BTW - I was surprised that my Perm Portfolio fund - PRPFX - did not do more to balance out the drop in stocks,
and was itself, pretty negative in this 2 year example of ups/downs.
After holding it long term, just looking at the chart doesn't convince me to keep holding my PRPFX fund.


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

Postby technovelist » Sat Jul 06, 2013 10:11 pm

I believe PRPFX has done considerably worse than the simple 4x25 Harry Browne Permanent Portfolio (HBPP) over the long term. PRPFX has too much active management, and the expense ratio is pretty high too, especially compared to the simpler HBPP.
In theory, theory and practice are identical. In practice, they often differ.

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

Postby ps56k » Sat Jul 06, 2013 11:47 pm

here's some of the PRPFX fund perf info -

or from their website

still, hard to decide.... hold or fold -

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

Postby stemikger » Sun Jul 07, 2013 9:51 am

I don't believe gold should be part of a portfolio.

I totally agree with what Charlie Munger says about it here:

“civilized people don’t buy gold”. They are not simply involved in a zero-sum game in which the goal is to outsmart the computer system in the trading markets. They invest in productive businesses that add value to society.
Stay the Course!

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