Harry Browne Permanent Portfolio question

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fishdrzig
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Harry Browne Permanent Portfolio question

Post by fishdrzig »

Which fund would you be more comfortable owning in the Permanent Portfolio for the 25% Treasury bond section
either VSBSX or VFIRX I can choose either of these in my ROTH (can't add ETF's here). I already own about 12% BIL in another tax deferred account so wanted to add one of these. Thanks for the help
FillorKill
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Re: Harry Browne Permanent Portfolio question

Post by FillorKill »

VFIRX = Vanguard Short-Term Treasury Fund Admiral Shares
VSBSX = Vanguard Short-Term Government Bond Index Fund Admiral Shares

Assuming you are talking about the 25% cash piece either of those options you presented would be adequate. VSBSX has a shorter duration so is more ‘cash’ like. Ever check our Medium Tex & Craigr’s PP site? Everything you ever wanted to know about the PP from the experts:

http://gyroscopicinvesting.com/forum/index.php
staythecourse
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Re: Harry Browne Permanent Portfolio question

Post by staythecourse »

fishdrzig wrote:Which fund would you be more comfortable owning in the Permanent Portfolio for the 25% Treasury bond section
either VSBSX or VFIRX I can choose either of these in my ROTH (can't add ETF's here). I already own about 12% BIL in another tax deferred account so wanted to add one of these. Thanks for the help
I would choose whatever has the lowest duration. You want cash or cash equivilant so by def. it would be maturation <1 yr.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle
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Re: Harry Browne Permanent Portfolio question

Post by placeholder »

T bonds in the PP are supposed to long, right? Why are people recommending short?
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Kulak
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Re: Harry Browne Permanent Portfolio question

Post by Kulak »

In the rationale of the PP, the bond slice is meant to benefit from deflation. Ideally you'd want 30-year zeros or something like that -- nominal and very long.
Depriving ourselves to boost our 40-year success probability much beyond 80% is a fool’s errand, since all you are doing is increasing the probability of failure for [non-financial] reasons. --wbern
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Re: Harry Browne Permanent Portfolio question

Post by technovelist »

Kulak wrote:In the rationale of the PP, the bond slice is meant to benefit from deflation. Ideally you'd want 30-year zeros or something like that -- nominal and very long.
30-year zeroes may actually be too volatile, skewing the risk too far towards the bond component. I believe 30-year coupon bonds are suggested, trading them in for new ones once you get to 25 years.
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Re: Harry Browne Permanent Portfolio question

Post by staythecourse »

staythecourse wrote:
fishdrzig wrote:Which fund would you be more comfortable owning in the Permanent Portfolio for the 25% Treasury bond section
either VSBSX or VFIRX I can choose either of these in my ROTH (can't add ETF's here). I already own about 12% BIL in another tax deferred account so wanted to add one of these. Thanks for the help
I would choose whatever has the lowest duration. You want cash or cash equivilant so by def. it would be maturation <1 yr.

Good luck.
I'm confused. Are you asking for the LT treasury part or the cash (treasury bills) part?? If it is the LT treasury bond part then you want the longest. As I wrote previously the LT treasury is ideally 30 yr. treasuries sold at 20 yrs. and replaced again with more 30 yr. treasuries. If you want to simplify it then get TLT or the longest duration LT treasury bond you can find.

If you talking about the cash part then you want <1 yr. duration.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle
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fishdrzig
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Re: Harry Browne Permanent Portfolio question

Post by fishdrzig »

Sorry I wasn't clear.
I was talking about the 25% cash allocation
I already have 25% TLT
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craigr
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Re: Harry Browne Permanent Portfolio question

Post by craigr »

fishdrzig wrote:Which fund would you be more comfortable owning in the Permanent Portfolio for the 25% Treasury bond section
either VSBSX or VFIRX I can choose either of these in my ROTH (can't add ETF's here). I already own about 12% BIL in another tax deferred account so wanted to add one of these. Thanks for the help

Your cash portion should be US Treasuries. One year or less maturity is best. If you have a sufficient emergency cash for at least a year's living expenses you can consider using longer short-term Treasuries of 2-3 year maturity. But this is optional and it carries more interest rate risks.

Your bond portion should be Long Term Treasuries. Ideally 25-30 years maturity. Then you hold them until they are at 20 years maturity and roll them out and buy more. If you can't setup a bond ladder to own them directly (which is best as it eliminates fund manager risk), then you can use a long-term treasury fund that is as close to 100% US long-term treasuries as possible. I don't recommend using zero coupon long term treasuries unless there are some special circumstances. They are extremely volatile and also carry significant tax costs if not sheltered.

Of the two funds you list (VSBSX or VFIRX), they would be for the cash allocation as they are short term. VFIRX is the better option because it is mostly Treasuries. VSBSX is not a good choice because it contains a lot of government agency bonds which have "implied" coverage by the US government, but may not actually be full faith and credit guaranteed the way Treasuries will be. VSBSX for instance has a lot of leeway in what it can buy and may decide to load up on mortgage agency bonds which I wouldn't want to own.

Even VFIRX is not perfect as the bond managers at Vanguard sometimes load the thing up with mortgage backed garbage. I wish they'd keep it 100% treasuries all the time, but they don't. Yet, it's better than most. Perfect is the enemy of the good!
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Re: Harry Browne Permanent Portfolio question

Post by placeholder »

If cash, then why not actual cash like CDs and such?
staythecourse
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Re: Harry Browne Permanent Portfolio question

Post by staythecourse »

placeholder wrote:If cash, then why not actual cash like CDs and such?
Mr. Browne rec. the full faith and credit of U.S. treasury. Now that being said of all he risks in the world presented to an investor to worry about something happening within one year from now so monumental to distrub your cash portion is low. CD's are fine just keep them short or as a ladder so you can roll them as interest rate/ inflation goes up. If you are going with CD's and bank accounts I would keep under the safe FDIC limits though to limit minimal risk of the bank going bust overnight.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle
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craigr
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Re: Harry Browne Permanent Portfolio question

Post by craigr »

If cash, then why not actual cash like CDs and such?
T-Bills are top of the food chain in the event of a serious economic problem. They are very liquid and easy to trade. They will be paid before any kind of CDs/FDIC funding bill is even discussed in the event of a large banking system problem.
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fishdrzig
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Re: Harry Browne Permanent Portfolio question

Post by fishdrzig »

This is what I did - all in at one time:

CASH SPDR Barclays 1-3 Month T-Bill ETF (BIL) 13%
Vanguard Short-Term Treasury Fund Investor Shares (VFISX) 7%
Vanguard Limited-Term Tax-Exempt Fund Investor Shares (VMLTX) 2%
Vanguard Short-Term Bond Index Fund Investor Shares (VBISX) 3%

I had no flexibility with the last three funds, part of my HSA and a joint account so had to keep these open and/or only good choices available


BONDS iShares Barclays 20+ Year Treasury Bond Fund (TLT) 25%

STOCKS Vanguard Total Stock Market ETF (VTI) 25%

GOLD iShares Gold Trust (IAU) 12%
ETFS Physical Swiss Gold Shares (SGOL) 13%

Everything but the VMLTX held in tax deferred accounts, all dividends and gains will be reinvested with the same fund/ETF
Any new money will go to keeping the % at the same levels.

What do you think?
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fishdrzig
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Re: Harry Browne Permanent Portfolio question

Post by fishdrzig »

craigr - any thoughts on my all in ETF Permanent portfolio?
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Re: Harry Browne Permanent Portfolio question

Post by Call_Me_Op »

fishdrzig wrote:craigr - any thoughts on my all in ETF Permanent portfolio?
I'm not Craig but I read the book (and stayed in a Holiday Inn Express last night). The all ETF is acceptable, but holding gold in ETF form is considered the least desirable way to do it for the PP.
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Re: Harry Browne Permanent Portfolio question

Post by Clive »

Call_Me_Op wrote:holding gold in ETF form is considered the least desirable way
?

The ETF option, such as 8.3% in a 3x gold ETF (UGLD) instead of 25% in non-leveraged is as equally as valid as holding physical gold.

The Permanent Portfolio generally will pay ongoing/regular insurance (lower rewards) only to see that insurance withdrawn when needed the most. Gold is no exception (1934 : withdrawn from circulation and the price ramped upwards).

Relatively low exposure to some counter-party risk (LETF) could prove better than a larger exposure to no counter-party risk (physical) - depending upon the preferred method of insurance invalidation at the time.

If a 25/75 stock/'inflation bond' is your preferred asset allocation, there's a plethora of options for the 75% 'inflation bonds'. Whichever diversified combination of such assets that have the least costs and taxes would be a good (bogglehead type) choice. Not forgetting that valuations matter (buying/holding some long dated treasury bonds in the 1980's when yields were in double digits was a reasonable choice - buying long dated bonds at more recent historic low yields - much less so. Buying gold after its made comparable real gains to stock (or more) should also instil a mental questioning of whether you might be paying a relatively high price for that asset).
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Re: Harry Browne Permanent Portfolio question

Post by Call_Me_Op »

Clive wrote:
Call_Me_Op wrote:holding gold in ETF form is considered the least desirable way
?

The ETF option, such as 8.3% in a 3x gold ETF (UGLD) instead of 25% in non-leveraged is as equally as valid as holding physical gold.
Not according to Harry Browne or Craigr. They believe that the optimal way to hold gold is in the form of non-numismatic gold coins. The idea is that you want the fewest obstacles between you and your gold. source: their books.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: Harry Browne Permanent Portfolio question

Post by Akiva »

fishdrzig wrote:Which fund would you be more comfortable owning in the Permanent Portfolio for the 25% Treasury bond section
either VSBSX or VFIRX I can choose either of these in my ROTH (can't add ETF's here). I already own about 12% BIL in another tax deferred account so wanted to add one of these. Thanks for the help
I'm not entirely clear on why the PP recommends splitting the fixed income allocation into a short-term "cash" part and a longer-term "bond" part instead of just using one intermediate fund with an equivalent duration (and hence equivalent interest rate risk). Maybe one of the PP people can explain this to me.
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Re: Harry Browne Permanent Portfolio question

Post by Call_Me_Op »

Akiva wrote:
fishdrzig wrote:Which fund would you be more comfortable owning in the Permanent Portfolio for the 25% Treasury bond section
either VSBSX or VFIRX I can choose either of these in my ROTH (can't add ETF's here). I already own about 12% BIL in another tax deferred account so wanted to add one of these. Thanks for the help
I'm not entirely clear on why the PP recommends splitting the fixed income allocation into a short-term "cash" part and a longer-term "bond" part instead of just using one intermediate fund with an equivalent duration (and hence equivalent interest rate risk). Maybe one of the PP people can explain this to me.
Not sure I am considered one of "the PP people", but the reason for the split is that the strategy is based upon having at least one investment that does very well for each of the four purported economic states. Thus, long treasury bonds are chosen for deflation and cash for recession. While you might get similar results with a single intermediate fund, you would not have access to the distinct asset class categories for rebalancing purposes - which is a fundamental aspect of the portfolio concept. For example, in a recession, you would not have "dry powder" (i.e., cash) available to buy depressed assets - you would have to sell intermediate bonds - which may be underwater.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: Harry Browne Permanent Portfolio question

Post by Akiva »

Call_Me_Op wrote:
Akiva wrote:
fishdrzig wrote:Which fund would you be more comfortable owning in the Permanent Portfolio for the 25% Treasury bond section
either VSBSX or VFIRX I can choose either of these in my ROTH (can't add ETF's here). I already own about 12% BIL in another tax deferred account so wanted to add one of these. Thanks for the help
I'm not entirely clear on why the PP recommends splitting the fixed income allocation into a short-term "cash" part and a longer-term "bond" part instead of just using one intermediate fund with an equivalent duration (and hence equivalent interest rate risk). Maybe one of the PP people can explain this to me.
Not sure I am considered one of "the PP people", but the reason for the split is that the strategy is based upon having at least one investment that does very well for each of the four purported economic states. Thus, long treasury bonds are chosen for deflation and cash for recession. While you might get similar results with a single intermediate fund, you would not have access to the distinct asset class categories for rebalancing purposes - which is a fundamental aspect of the portfolio concept. For example, in a recession, you would not have "dry powder" (i.e., cash) available to buy depressed assets - you would have to sell intermediate bonds - which may be underwater.
I'm not seeing how this answers the question. The return on a 50/50 long/short bond portfolio is basically the same as the return on 100% intermediate. So you'd be in the same overall position in terms of assets either way. Except that by doing it my way, in your hypothetical scenario, combining the two funds into one makes your rebalancing more tax efficient.
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Re: Harry Browne Permanent Portfolio question

Post by Call_Me_Op »

Akiva,

I am simply giving you the rationale of PP proponents. You are using back-testing to make your arguments. The PP is forward-looking, in that it holds 4 asset classes, each designed to excel in one of the 4 purported economic states. That's the way it is designed. By combining 2 of the asset classes into 1 fund, you are not following the portfolio's intended construction.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: Harry Browne Permanent Portfolio question

Post by Akiva »

Call_Me_Op wrote:Akiva,

I am simply giving you the rationale of PP proponents. You are using back-testing to make your arguments. The PP is forward-looking, in that it holds 4 asset classes, each designed to excel in one of the 4 purported economic states. That's the way it is designed. By combining 2 of the asset classes into 1 fund, you are not following the portfolio's intended construction.
In fact it seems that you fundamentally misunderstand my point. This has nothing to do with back-testing. The mathematics of fixed income investments is such that your risks and returns are accounted for entirely by the duration of the portfolio. So whether you put half in long term and half in short term or you put all in intermediate, you get the same duration which means that they give you the same interest rate sensitivity and the same returns.

So given that the two investments are actually identical, why do you chose to use two different funds where one fund will suffice? Trying to ignore the reality of the situation by pretending that these two things aren't equivalent isn't an answer.
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Re: Harry Browne Permanent Portfolio question

Post by technovelist »

Akiva wrote:
Call_Me_Op wrote:Akiva,

I am simply giving you the rationale of PP proponents. You are using back-testing to make your arguments. The PP is forward-looking, in that it holds 4 asset classes, each designed to excel in one of the 4 purported economic states. That's the way it is designed. By combining 2 of the asset classes into 1 fund, you are not following the portfolio's intended construction.
In fact it seems that you fundamentally misunderstand my point. This has nothing to do with back-testing. The mathematics of fixed income investments is such that your risks and returns are accounted for entirely by the duration of the portfolio. So whether you put half in long term and half in short term or you put all in intermediate, you get the same duration which means that they give you the same interest rate sensitivity and the same returns.

So given that the two investments are actually identical, why do you chose to use two different funds where one fund will suffice? Trying to ignore the reality of the situation by pretending that these two things aren't equivalent isn't an answer.
You are saying that $1 million in 30 year T-bonds and $1 million in T-bills will always have the same investment results as $2 million in 15 year T-bonds (or whatever the equivalent duration is)? I find that hard to believe, but I'm willing to see the proof. Of course, there can be no counter-example in history, as that would disprove the assertion.
In theory, theory and practice are identical. In practice, they often differ.
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Re: Harry Browne Permanent Portfolio question

Post by Akiva »

technovelist wrote:
Akiva wrote:
Call_Me_Op wrote:Akiva,

I am simply giving you the rationale of PP proponents. You are using back-testing to make your arguments. The PP is forward-looking, in that it holds 4 asset classes, each designed to excel in one of the 4 purported economic states. That's the way it is designed. By combining 2 of the asset classes into 1 fund, you are not following the portfolio's intended construction.
In fact it seems that you fundamentally misunderstand my point. This has nothing to do with back-testing. The mathematics of fixed income investments is such that your risks and returns are accounted for entirely by the duration of the portfolio. So whether you put half in long term and half in short term or you put all in intermediate, you get the same duration which means that they give you the same interest rate sensitivity and the same returns.

So given that the two investments are actually identical, why do you chose to use two different funds where one fund will suffice? Trying to ignore the reality of the situation by pretending that these two things aren't equivalent isn't an answer.
You are saying that $1 million in 30 year T-bonds and $1 million in T-bills will always have the same investment results as $2 million in 15 year T-bonds (or whatever the equivalent duration is)? I find that hard to believe, but I'm willing to see the proof. Of course, there can be no counter-example in history, as that would disprove the assertion.
It's probably closer to 7 years since the duration on a 30 year bond isn't nearly 30 years. I don't really understand why you guys find this so incredible. Except for some really tiny convexity effects (that in practice cut in favor of what I'm doing), the duration of your portfolio determines your interest rate sensitivity. And since there's no credit risk, that's the only risk factor this portfolio is exposed to. Fama even has an old paper showing that interest rate sensitivity and credit risk are basically completely explanatory of a bond portfolio's returns. So I don't see why this is remotely controversial.
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Re: Harry Browne Permanent Portfolio question

Post by Ranger »

The effect will be similar to portfolio with barbell strategy vs portfolio of bullet strategy of same duration. Barbell strategy probably will be slightly better in rising rate environment.
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Re: Harry Browne Permanent Portfolio question

Post by Call_Me_Op »

Akiva wrote:
Call_Me_Op wrote:Akiva,

I am simply giving you the rationale of PP proponents. You are using back-testing to make your arguments. The PP is forward-looking, in that it holds 4 asset classes, each designed to excel in one of the 4 purported economic states. That's the way it is designed. By combining 2 of the asset classes into 1 fund, you are not following the portfolio's intended construction.
In fact it seems that you fundamentally misunderstand my point.
I think you are missing the point for the bond barbell ion the PP. You need to look at the portfolio as a whole. If stocks and bonds both take a big hit, I can use cash to buy more of each. You cannot tell me that I can do the same with all intermediate bonds and always obtain the same results. If, for example, there were a sharp rise in interest rates, I would be better-off with the barbell, because I can buy both stocks and bonds on the cheap, without selling anything at a loss.
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Re: Harry Browne Permanent Portfolio question

Post by Akiva »

Ranger wrote:The effect will be similar to portfolio with barbell strategy vs portfolio of bullet strategy of same duration. Barbell strategy probably will be slightly better in rising rate environment.
Well that's the question. I get why you would want to barbell with say small caps or value stocks (it gives you more exposure to the risk factor). But what does the barbell achieve when you are holding US treasuries? If the durations of the portfolios are the same, then so is the interest rate sensitivity and everything else. So how does the barbell help you here?

From looking around the web, it seems that the reasoning is that the convexity for the barbell ends up being better (which means my intuition about it above was wrong). But this should be a small effect unless interest rates have some kind of major shock. So it would seem like you are getting some protection from a major interest rate shock in return for lower yield. Is that the entire benefit or is there some other reason to barbell?
Call_Me_Op wrote:
Akiva wrote:
Call_Me_Op wrote:Akiva,

I am simply giving you the rationale of PP proponents. You are using back-testing to make your arguments. The PP is forward-looking, in that it holds 4 asset classes, each designed to excel in one of the 4 purported economic states. That's the way it is designed. By combining 2 of the asset classes into 1 fund, you are not following the portfolio's intended construction.
In fact it seems that you fundamentally misunderstand my point.
I think you are missing the point for the bond barbell ion the PP. You need to look at the portfolio as a whole. If stocks and bonds both take a big hit, I can use cash to buy more of each. You cannot tell me that I can do the same with all intermediate bonds and always obtain the same results. If, for example, there were a sharp rise in interest rates, I would be better-off with the barbell, because I can buy both stocks and bonds on the cheap, without selling anything at a loss.
My question is why does the barbell help you. And the explanation being given strikes me as a giant hand-wave.

Let's set aside the convexity effect for a moment. Now sans that, the two portfolios with identical durations are the same. So in either case you lost the same amount on your bonds when the interest rates went up. So you are buying the same amount in either case. Absent a convexity effect, you are no better or no worse off.

So it seems like the *only* reason this might help is because of convexity. But convexity isn't the reason any of the PP people are citing and the gains from the convexity seem like they'd be offset by the fact that the yield curve goes down at longer durations.

And this convexity effect only matters for some kind of huge interest rate shock. (Say they jump by 4% in a short span of time.) Then you are better off, but not because you "can buy both stocks and bonds on the cheap" but because you lost less money to the rise in interest rates and thus have more money to invest.

Hence my confusion.
Last edited by Akiva on Mon Nov 11, 2013 3:39 pm, edited 1 time in total.
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Re: Harry Browne Permanent Portfolio question

Post by Ranger »

I don't hold PP. Probably craigr can answer it. Only reason I can see is in rising rate environment maturing T-bills will be replaced with the higher interest rate T-bills giving some boost to the portfolio compared to the bullet portfolio.
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Re: Harry Browne Permanent Portfolio question

Post by Buddtholomew »

1/1/2008-12/31/2008

SPY 144.93 90.24 -37.7% $10,000.00 -$3,773.55
GLD 85.57 86.52 1.1% $10,000.00 $111.02
TLT 94.38 119.35 26.5% $10,000.00 $2,645.69
SHV 109.71 110.39 0.6% $10,000.00 $61.98
$40,000.00 -$954.86 -2.39% loss with long-term treasuires and cash


SPY 144.93 90.24 -37.7% $10,000.00 -$3,773.55
GLD 85.57 86.52 1.1% $10,000.00 $111.02
ITE 55.2 59.32 7.5% $20,000.00 $1,492.75
SHV 109.71 110.39 0.6% $0.00 $0.00
$40,000.00 -$2,169.77 -5.42% loss with intermediate-term treasuries
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.
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Re: Harry Browne Permanent Portfolio question

Post by Clive »

Call_Me_Op wrote:You need to look at the portfolio as a whole. If stocks and bonds both take a big hit, I can use cash to buy more of each. You cannot tell me that I can do the same with all intermediate bonds and always obtain the same results. If, for example, there were a sharp rise in interest rates, I would be better-off with the barbell, because I can buy both stocks and bonds on the cheap, without selling anything at a loss.
A bullet and barbell with the same duration would be valued the same (near as). Yes - same result.
With the barbell however you'd subsequently have extended the duration of the barbell in having removed some of the shorter dated to buy whatever with those proceeds.

Arbitrarily adjusting the bond barbell duration (according to whether stocks or gold or ... having risen/fallen in price such that you were looking to buy/sell some) overall washes (neutral). In contrast a bullet tuned/adjusted to the sweet spot - as might reasonably be expected from the manager of the fund, is repeatedly adjusting to the more better valued and has a positive bias.
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Re: Harry Browne Permanent Portfolio question

Post by Clive »

Buddtholomew wrote:1/1/2008-12/31/2008

SPY 144.93 90.24 -37.7% $10,000.00 -$3,773.55
GLD 85.57 86.52 1.1% $10,000.00 $111.02
TLT 94.38 119.35 26.5% $10,000.00 $2,645.69
SHV 109.71 110.39 0.6% $10,000.00 $61.98
$40,000.00 -$954.86 -2.39% loss with long-term treasuires and cash


SPY 144.93 90.24 -37.7% $10,000.00 -$3,773.55
GLD 85.57 86.52 1.1% $10,000.00 $111.02
ITE 55.2 59.32 7.5% $20,000.00 $1,492.75
SHV 109.71 110.39 0.6% $0.00 $0.00
$40,000.00 -$2,169.77 -5.42% loss with intermediate-term treasuries
And for 2009?
PP with barbell (25% SHV, 25% TLT) +7.2%
PP with bullet (50% ITE) +11.8%

Just noise!
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Re: Harry Browne Permanent Portfolio question

Post by Buddtholomew »

Clive wrote:
Buddtholomew wrote:1/1/2008-12/31/2008

SPY 144.93 90.24 -37.7% $10,000.00 -$3,773.55
GLD 85.57 86.52 1.1% $10,000.00 $111.02
TLT 94.38 119.35 26.5% $10,000.00 $2,645.69
SHV 109.71 110.39 0.6% $10,000.00 $61.98
$40,000.00 -$954.86 -2.39% loss with long-term treasuires and cash


SPY 144.93 90.24 -37.7% $10,000.00 -$3,773.55
GLD 85.57 86.52 1.1% $10,000.00 $111.02
ITE 55.2 59.32 7.5% $20,000.00 $1,492.75
SHV 109.71 110.39 0.6% $0.00 $0.00
$40,000.00 -$2,169.77 -5.42% loss with intermediate-term treasuries
And for 2009?
PP with barbell (25% SHV, 25% TLT) +7.2%
PP with bullet (50% ITE) +11.8%

Just noise!
Thanks Clive. The data set was not intended to show that a barbell strategy outperformed a bullet one over the 2008 time frame. It was only an illustration to show that in the "real world", there was a difference between the two approaches in annual results (significant even though duration is somewhat similar).
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.
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Re: Harry Browne Permanent Portfolio question

Post by Clive »

Hi Budd.

Convexity washes. Sweet spot doesn't (positive bias through rotation into the better valued).
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Re: Harry Browne Permanent Portfolio question

Post by Akiva »

Buddtholomew wrote:1/1/2008-12/31/2008
It seems like the problem here is that your durations aren't even remotely matched. So you had less interest rate sensitivity in a year when interest rates were strongly down. ITE has a duration of 3.65 years. TLT has 16.17 and SHV has .4, so the average would be 8.29 which is over 2.25x as much interest rate sensitivity.

So this comparison isn't apples-to-apples. You'd need something with a duration in-between TLH and IEF to make a fair comparison. In 2008 those funds returned 10.88% (IEF) and 11.33% (TLH), which is well above the 7.5% you used above.
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Re: Harry Browne Permanent Portfolio question

Post by Call_Me_Op »

Akiva wrote: Hence my confusion.
Not sure what you are confused about. The PP was developed based upon a model of the economy as being in one of four states at any one time. An investment was chosen that would do well - perhaps very well, for each state. That's it.

Now you are asking why two of the investments can't be combined. Nobody is saying they can't - but that's not the way the portfolio was designed. It was designed to hold, in effect, an extreme bond barbell - cash and long-term treasuries. There are pros and cons to doing this - but that's the way the PP was designed. You are free to modify it any way you want, but the result is not the PP.
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fishdrzig
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Re: Harry Browne Permanent Portfolio question

Post by fishdrzig »

This is the poster that asked the original question----guess we all got sidetracked.
I have another question though, maybe Craigr is still here?

Would VT be a logical substitute for VTI for the stock portion of the PP? Any thoughts. Thanks
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Re: Harry Browne Permanent Portfolio question

Post by Akiva »

Call_Me_Op wrote:
Akiva wrote: Hence my confusion.
Not sure what you are confused about. The PP was developed based upon a model of the economy as being in one of four states at any one time. An investment was chosen that would do well - perhaps very well, for each state. That's it.

Now you are asking why two of the investments can't be combined. Nobody is saying they can't - but that's not the way the portfolio was designed. It was designed to hold, in effect, an extreme bond barbell - cash and long-term treasuries. There are pros and cons to doing this - but that's the way the PP was designed. You are free to modify it any way you want, but the result is not the PP.
I'm confused because your explanation doesn't ever answer the question. You guys keep saying that the barbell does well in each of the four states, but you never explain why you believe this or why the bullet wouldn't. It seems to me that the only situation where the barbell is better is if interest rates rise very rapidly, and that in all other cases it would do worse.

Is that the point? Or is there some other reason for doing this that I'm not aware of?
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Re: Harry Browne Permanent Portfolio question

Post by Call_Me_Op »

Akiva wrote:
Call_Me_Op wrote:
Akiva wrote: Hence my confusion.
Not sure what you are confused about. The PP was developed based upon a model of the economy as being in one of four states at any one time. An investment was chosen that would do well - perhaps very well, for each state. That's it.

Now you are asking why two of the investments can't be combined. Nobody is saying they can't - but that's not the way the portfolio was designed. It was designed to hold, in effect, an extreme bond barbell - cash and long-term treasuries. There are pros and cons to doing this - but that's the way the PP was designed. You are free to modify it any way you want, but the result is not the PP.
I'm confused because your explanation doesn't ever answer the question. You guys keep saying that the barbell does well in each of the four states, but you never explain why you believe this or why the bullet wouldn't.
I never made any such statement. I simply pointed-out the philosophy behind the Permanent Portfolio.
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Re: Harry Browne Permanent Portfolio question

Post by Akiva »

Call_Me_Op wrote:
Akiva wrote:
Call_Me_Op wrote:
Akiva wrote: Hence my confusion.
Not sure what you are confused about. The PP was developed based upon a model of the economy as being in one of four states at any one time. An investment was chosen that would do well - perhaps very well, for each state. That's it.

Now you are asking why two of the investments can't be combined. Nobody is saying they can't - but that's not the way the portfolio was designed. It was designed to hold, in effect, an extreme bond barbell - cash and long-term treasuries. There are pros and cons to doing this - but that's the way the PP was designed. You are free to modify it any way you want, but the result is not the PP.
I'm confused because your explanation doesn't ever answer the question. You guys keep saying that the barbell does well in each of the four states, but you never explain why you believe this or why the bullet wouldn't.
I never made any such statement. I simply pointed-out the philosophy behind the Permanent Portfolio.
A "philosophy" which other people have already mentioned and that I already asked a question on. Simply repeating the thing that caused me to ask the question doesn't answer it.

Do you have an actual answer?
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Re: Harry Browne Permanent Portfolio question

Post by Call_Me_Op »

Perhaps you can concisely restate your question.
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Re: Harry Browne Permanent Portfolio question

Post by Kulak »

Harry Browne's portfolio was informed by his general mistrust of government. Are you sure the convexity effect wouldn't get much bigger in extreme monetary events like the Volcker recession or the 1930-32 deflation?
Last edited by Kulak on Tue Nov 12, 2013 1:06 pm, edited 1 time in total.
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Re: Harry Browne Permanent Portfolio question

Post by Akiva »

Call_Me_Op wrote:Perhaps you can concisely restate your question.
Is the point of barbelling your bonds to take advantage of a convexity effect alone or are there other reasons for doing this?
Kulak wrote:Harry Browne's portfolio was informed by his general mistrust of government. Are you sure sure the convexity effect wouldn't get much bigger in extreme monetary events like the Volcker recession or the 1930-32 deflation?
I don't know. But if convexity is the reason for doing this and if it does get a big effect in those cases, then why can't the PP people say that instead of handwaiving about some philosophical points that don't really seem to make sense?
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Re: Harry Browne Permanent Portfolio question

Post by Ranger »

Kulak wrote:Harry Browne's portfolio was informed by his general mistrust of government. Are you sure sure the convexity effect wouldn't get much bigger in extreme monetary events like the Volcker recession or the 1930-32 deflation?
During the deflation one is better off with bullet portfolio rather than barbell portfolio, since the short end falls faster than the replacement bonds.
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Re: Harry Browne Permanent Portfolio question

Post by gulliver »

Akiva wrote: I'm not entirely clear on why the PP recommends splitting the fixed income allocation into a short-term "cash" part and a longer-term "bond" part instead of just using one intermediate fund with an equivalent duration (and hence equivalent interest rate risk). Maybe one of the PP people can explain this to me.
Not a follower of the PP but the reason you are having trouble getting an answer to your question is because the question is flawed.

Browne most certainly did not envision the 25% cash portion of the portfolio as "fixed income." He meant cold hard cash like the stuff you put in your mattress or a savings account. To understand the PP, you really have to understand Browne's politics (off limits in this forum) and I think it's very safe to say that Browne would have considered putting half the portfolio in the hands of the US (or any) government as anathema.

Of course, your question is quite logical from the point of view of portfolio theory but in the context of Browne's methodology, it's a non-starter.
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Re: Harry Browne Permanent Portfolio question

Post by linenfort »

fishdrzig wrote:This is the poster that asked the original question----guess we all got sidetracked.
I have another question though, maybe Craigr is still here?

Would VT be a logical substitute for VTI for the stock portion of the PP? Any thoughts. Thanks
Yes, fish. A lot of people use VT.
In general, if you live in the States, you invest in the American market, so VTI, or the S&P 500. Nothing wrong with some VT for your stock portion, though.
Discussions here.
Last edited by linenfort on Tue Nov 12, 2013 1:25 pm, edited 1 time in total.
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Re: Harry Browne Permanent Portfolio question

Post by Call_Me_Op »

Akiva wrote:
Call_Me_Op wrote:Perhaps you can concisely restate your question.
Is the point of barbelling your bonds to take advantage of a convexity effect alone or are there other reasons for doing this?
With respect to the PP, while it is true that barbelling the bonds increases the convexity relative to a bullet strategy, Harry Browne was not explicit in justifying the portfolio design on that basis. As I have said, he wanted something that provided a strong return in each of the four postulated economic environments. The fact that the barbell strategy has higher convexity is incidental to his stated motivation.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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fishdrzig
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Re: Harry Browne Permanent Portfolio question

Post by fishdrzig »

Thank you linenfort that link was exactly what I was looking for. Much appreciated.
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Re: Harry Browne Permanent Portfolio question

Post by Akiva »

gulliver wrote:
Akiva wrote: I'm not entirely clear on why the PP recommends splitting the fixed income allocation into a short-term "cash" part and a longer-term "bond" part instead of just using one intermediate fund with an equivalent duration (and hence equivalent interest rate risk). Maybe one of the PP people can explain this to me.
Not a follower of the PP but the reason you are having trouble getting an answer to your question is because the question is flawed.

Browne most certainly did not envision the 25% cash portion of the portfolio as "fixed income." He meant cold hard cash like the stuff you put in your mattress or a savings account. To understand the PP, you really have to understand Browne's politics (off limits in this forum) and I think it's very safe to say that Browne would have considered putting half the portfolio in the hands of the US (or any) government as anathema.

Of course, your question is quite logical from the point of view of portfolio theory but in the context of Browne's methodology, it's a non-starter.
Well, that was at least helpful.

Is there a way of explaining, without getting into Browne's politics, why a savings account or other "cash" type thing (that is backed by the FDIC and hence the federal government) isn't the same thing to him as holding government debt?
Call_Me_Op wrote:
Akiva wrote:
Call_Me_Op wrote:Perhaps you can concisely restate your question.
Is the point of barbelling your bonds to take advantage of a convexity effect alone or are there other reasons for doing this?
With respect to the PP, while it is true that barbelling the bonds increases the convexity relative to a bullet strategy, Harry Browne was not explicit in justifying the portfolio design on that basis. As I have said, he wanted something that provided a strong return in each of the four postulated economic environments. The fact that the barbell strategy has higher convexity is incidental to his stated motivation.
See, this is why I'm confused. On the one hand, the barbell's convexity is just "incidental". On the other hand, absent a convexity effect, the returns will be identical to the bullet strategy. So what do these "four postulated economic environments" have to do with anything? Why should it matter to me that the bullet is down 5% while the barbell has cash down 0% and bonds down 10%? In either case I lost 5%!
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Re: Harry Browne Permanent Portfolio question

Post by Call_Me_Op »

Akiva wrote: See, this is why I'm confused. On the one hand, the barbell's convexity is just "incidental". On the other hand, absent a convexity effect, the returns will be identical to the bullet strategy. So what do these "four postulated economic environments" have to do with anything? Why should it matter to me that the bullet is down 5% while the barbell has cash down 0% and bonds down 10%? In either case I lost 5%!
OK, I'll bite. Let's say I have a barbell with $1000 in cash and $1000 in LT bonds, versus a bullet bond allocation with $2000 in IT bonds. In your scenario, let's say I decide to take $100 out of my fixed-income allocation to buy stocks (after a market decline). In case 1 (barbell), prices of LT bonds decline by 10% and I subtract $100 from cash, leaving me with $1800. When bond prices return to even, I will have $1900 in my fixed income allocation.

In case 2 (bullet), when the bond market declines by 5% and then I deduct $100, I will have $1800. When the bond market returns to even, I will have $1894.74 in my FI allocation. So I benefit by $5.26 using the barbell.

Note that in both cases, I purchased $100 in stocks during the down market.
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Re: Harry Browne Permanent Portfolio question

Post by ogd »

Call_Me_Op wrote:In case 1 (barbell), prices of LT bonds decline by 10% and I subtract $100 from cash, leaving me with $1800. When bond prices return to even, I will have $1900 in my fixed income allocation.
By "selling" from cash, you lengthened average duration, which meant extra interest rate risk, which happened to be rewarded in the following upturn. Rewarded by about 5%, unsurprisingly. It could have gone the other way. You can do this with the IT portfolio if you really think it's a good idea by adding a sprinkle of LT after a downturn.

The real reasons to use a barbell is 1) if you think the yield curve is mispriced (not me), 2) if on the short end you have unusually good deals like CDs and saving accounts (me, 6 months ago). But rebalancing magic is not it.
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