Permanent Portfolio Poll

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

How do you feel about Permanent Portfolio (PP) investing?

I invest following Harry Browne's PP strategy
29
9%
I invest using a PP style strategy
37
11%
I do not use a PP strategy
103
32%
I do not use a PP strategy
103
32%
I think PP strategy is a not a good strategy and avoid its principles
51
16%
 
Total votes: 323

Call_Me_Op
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Re: Permanent Portfolio Poll

Post by Call_Me_Op »

Clive wrote:
hazlitt777 wrote:You are picking as your starting point the last time gold peaked. Is that really helpful?
For single assets you might measure peak-to-peak (or trough-to-trough). For a portfolio that claims to provide consistent reasonable returns, indifferent to economic/political cycles, being aware of historical 20+ year periods of lagging cash isn't unhelpful.
Clive,

I don't know where you are getting your data. Between 1980 and 1999, the basic PP beat the pants off of cash - 8.3% CAGR versus 6.9% CAGR.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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pennstater2005
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Re: Permanent Portfolio Poll

Post by pennstater2005 »

It's amazing there is such debate over this portfolio type. If you like it use it, and if you don't….don't. Seems pretty simple to me. :share beer Happy Thanksgiving!
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Clive
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Re: Permanent Portfolio Poll

Post by Clive »

I don't know where you are getting your data. Between 1980 and 1999, the basic PP beat the pants off of cash - 8.3% CAGR versus 6.9% CAGR
Simba's backtest spreadsheet shows the Permanent Portfolio as having provided a 8.15% annualised across 1980 to 1999.

Whilst T-Bills might have averaged 6.9%, most 'cash' investors will only hold relatively small amounts of cash in T-bill like deposits, and deposit the rest in savings accounts. Perhaps something like the equivalent of 10% t-Bills, 45% 2 year treasury, 45% TIP - which yielded 8.7%
i.e. individually t-bill 6.9%, 2 year treasury 8.9%, TIP 8.72%, PP 8.15% is in my book generally comparable to PP =< cash.

Either way, hardly beating the pants off. For example a three fund portfolio (third in each of domestic stocks, foreign stocks, total bond) yielded 14.5% - which is more of a pants beaten off comparison.
Clive
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Re: Permanent Portfolio Poll

Post by Clive »

pennstater2005 wrote:It's amazing there is such debate over this portfolio type. If you like it use it, and if you don't….don't. Seems pretty simple to me. :share beer Happy Thanksgiving!
This thread is a poll. Talking of which I'm seeing some pretty odd results so far - I think its 73% against, 27% for so far after correcting for what appears to be one set of voting being double counted ???
grayfox
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Re: Permanent Portfolio Poll

Post by grayfox »

I still looking at Harry Browne Permanent Portfolio for 2011. I downloaded Yahoo daily data, adjusted close prices. I used Vanguard ETFs VTI, VGLT and VCSH plus SPDR GLD. As I reported above for 25/25/25/25 portfolio I observed 10.23/7.06/1.41 (return/SD/Sharp), compared to a lackluster 3.47/13.58/0.32 for VBINX, which is 60/40 balanced fund.

Then I wondered if stand HBPP mix was on or close to the efficient frontier for those 4 ETFs. Efficient frontier means that no portfolio has a higher return at same volatility, and no portfolio has a lower volatility at the same return.

My spreadsheet can adjust the mix and see what results you would have gotten. I ran a portfolio optimizer to maximize return at same SD as 25/25/25/25; then ran it again to minimize the volatility at same return as 25/25/25/25.

Code: Select all

Symbol	   HBPP     Max       Min
.                 Return   Volatility

GLD        25%     3.08%     1.57%
VTI        25%    31.40%    19.11%
VGLT       25%    55.25%    31.97%
VGSH       25%    10.27%    47.34%
Return    10.23   16.66     10.23
SD         7.06    7.06      4.34
Sharpe     1.41    2.22      2.26
The standard 25/25/25/25 mix was far from the efficient frontier.

Return would have increased from 10.23 to 16.66 with less gold and ST bonds, and more LT bonds and stocks.

Alternatively, standard deviation would have decreased from 7.06 to 4.34 with less gold, LT bonds and stocks, and more ST bonds.

It is interesting that even though GLD had 10% return in 2011, both optimized portfolios only allocate a small amount to GLD, 1.5% to 3%.
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MediumTex
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Re: Permanent Portfolio Poll

Post by MediumTex »

hazlitt777 wrote:
Clive wrote:
Here, maybe this will help
Image

Clive,

You are picking as your starting point the last time gold peaked. Is that really helpful?

Joe
More importantly, the time period her has selected is basically the starting point and the ending point of the greatest bull market in stocks anyone is likely to see in their lifetimes.
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MediumTex
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Re: Permanent Portfolio Poll

Post by MediumTex »

Jerilynn wrote:
MediumTex wrote:
Jerilynn wrote:
rmelvey wrote: So, I don't think the PP is for everyone.
Time will tell. It may turn out to be for everybody, or it may turn out to be for nobody. Unfortunately, there is no way to decide who it is for until after the fact.
I don't agree that there is no way to decide who it's right for until after the fact.
I guess that depends on your definition of 'right for'. [which, by the way is a term I never used in my post]

And because some people 'get it', that doesn't mean that it's necessarily a valid entity. Lots of people 'get' astrology, ghost whispering, psychic surgery, alien abductors, magic forces coming out of the Earth in Sedona, etc.
When I say that "some people get it", I just mean that the ideas resonate with some people more than others.

As far as validity of the strategy, is there any evidence that would persuade you that the Permanent Portfolio deserves to be in different company from astrology, ghost whispering, psychic surgery, alien abductions, etc.? By comparison, does anyone think that Vanguard Wellesley is based on astrology and voodoo? The Permanent Portfolio has provided about the same returns as Wellesley over the last 40 years (with less volatility and more consistent inflation adjusted performance), and yet in some quarters the PP just can't seem to get any respect.

It's peculiar to me that people (and I'm not talking about Jerilynn) will accept all sorts of Wall Street tomfoolery in the form of imagined asset class correlations, the predictive ability of models, and the general belief that everyone can somehow beat the averages, and then when they are presented with the Permanent Portfolio they suddenly become hypercritical to the point that they won't even consider that the theory might be sound and the past performance better than anything they were ever able to achieve over their own investing careers.

For me, before I found the PP I wasn't averaging anything like 9.5% over my investing career.

One of the funny things about the PP is that I sense that people looking in from the outside often view it as a strange way to invest, but once a person decides to invest his own money in the PP, a complete shift often occurs and suddenly most other investment strategies start to look even stranger than the PP ever looked. This was my own experience. Initially, I felt about the PP the way a lot of the diehard skeptics here do, but at some point I began to see the internal order in the strategy and it suddenly started to make sense. As I spent more time with the strategy and began to get better results than I had ever gotten before, I began taking a look at some of the ideas that had informed my investment decisions before I found the PP and it was clear to me why my previous results hadn't been very satisfactory.

As Harry Browne wrote, it is ironic that people who are otherwise rational, clear thinking and skeptical in other parts of their lives will accept all sorts of silly ideas when it comes to managing their investments. The PP is one remedy to this tendency to believe in leprechauns if someone promises you a pot of gold. The irony becomes multi-layered when you consider that the PP uses a literal pot of gold to help protect you from the tendency to believe in the figurative pot of gold that Wall Street offers investors as part of its subtle and never-ending quest to separate them from their money.
"Early in life I noticed that no event is ever correctly reported in a newspaper." | -George Orwell
scone
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Re: Permanent Portfolio Poll

Post by scone »

MediumTex wrote:
Call_Me_Op wrote:
scone wrote:If the function of gold in the portfolio is to protect against inflation, then why not own a basket of commodities, including gold, and get even more diversification out of the inflation-fighting component?
Because such an approach turned-out terribly in 2008.
But more to the point - a general basket of commodities is not a suitable substitute for gold in PP. Gold is not intended to simply track inflation, it is intended to act as a hedge for the entire portfolio.
Yes.
During times of extreme fear and uncertainty people don't buy pork bellies and wheat, they buy gold.
2008 taught many investors this lesson. I'm surprised that it has been forgotten so quickly.
It certainly has not been "forgotten," by me at least. The original claim seemed to be that gold protected against actual, ordinary inflation. Very well. A basket of commodities, including gold, ought to do all right in that scenario. But 2008 was not normal. It was essentially a global panic, followed by a severe recession or depression. That's a very different situation. So I take it the assertion is, gold protects against panics as well as ordinary inflation. Two different scenarios, two different assertions.
"My bond allocation is the amount of money that I cannot afford to lose." -- Taylor Larimore
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MediumTex
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Re: Permanent Portfolio Poll

Post by MediumTex »

scone wrote:
MediumTex wrote:
Call_Me_Op wrote:
scone wrote:If the function of gold in the portfolio is to protect against inflation, then why not own a basket of commodities, including gold, and get even more diversification out of the inflation-fighting component?
Because such an approach turned-out terribly in 2008.
But more to the point - a general basket of commodities is not a suitable substitute for gold in PP. Gold is not intended to simply track inflation, it is intended to act as a hedge for the entire portfolio.
Yes.
During times of extreme fear and uncertainty people don't buy pork bellies and wheat, they buy gold.
2008 taught many investors this lesson. I'm surprised that it has been forgotten so quickly.
It certainly has not been "forgotten," by me at least. The original claim seemed to be that gold protected against actual, ordinary inflation. Very well. A basket of commodities, including gold, ought to do all right in that scenario. But 2008 was not normal. It was essentially a global panic, followed by a severe recession or depression. That's a very different situation. So I take it the assertion is, gold protects against panics as well as ordinary inflation. Two different scenarios, two different assertions.
The commodities market tends to react to price increases in a given commodity with increased production, which then drives the price of that commodity back down. For a number of reasons gold doesn't react to price spikes with increased production, and thus is more of a "pure play" against both rising inflation , negative real interest rates and disasters/panics.

Whether it's platinum, natural gas, silver, oil, or pork bellies, there hasn't been a lot of reliable correlation to inflation or negative real interest rates in recent years.

To easily see the difference between a basket of commodities and gold, compare the commodity index ETF DJP with the gold ETF GLD. A DJP commodity basket investor who invested in 2008 is down almost 40% from the 2008 high, while a gold investor who bought at the 2008 high is up around 100%.

Image
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grayfox
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Re: Permanent Portfolio Poll

Post by grayfox »

Next question: What is the expected return of components of Harry Browne Permanent Portfolio?
I'm using Vanguard ETFs VTI, VGLT, VGSH plus SPDR GLD ETF.

With 2% inflation expectation:

Vanguard Total Stock Market ETF (VTI)
Using earnings yield about 4.72% real
expense ratio (e.r.) = 0.06,
expected return after inflation and e.r. = +4.66%

Vanguard Long-Term Government Bond ETF (VGLT)
SEC yield 2.44%, e.r.=0.14
expected return after inflation and e.r. = +0.30%

Vanguard Short-term Government Bond ETF (VCSH)
e.r.=0.14, SEC yield 0.18
expected return, after inflation and e.r. = -1.96%

SPDR Gold ETF (GLD)
expected to keep up with inflation
e.r. = 0.40.
expected return, after inflation and e.r. = -0.40%

Two of the components, GLD and ST government bonds have negative expected real return. A third, LT Government bonds, has slightly postive expected real return.
The only component with a significant positive expected return is stocks, which is only 1/4 of the portfolio.
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Re: Permanent Portfolio Poll

Post by Call_Me_Op »

grayfox wrote:Next question: What is the expected return of components of Harry Browne Permanent Portfolio?
I'm using Vanguard ETFs VTI, VGLT, VGSH plus SPDR GLD ETF.

With 2% inflation expectation:

Vanguard Total Stock Market ETF (VTI)
Using earnings yield about 4.72% real
expense ratio (e.r.) = 0.06,
expected return after inflation and e.r. = +4.66%

Vanguard Long-Term Government Bond ETF (VGLT)
SEC yield 2.44%, e.r.=0.14
expected return after inflation and e.r. = +0.30%

Vanguard Short-term Government Bond ETF (VCSH)
e.r.=0.14, SEC yield 0.18
expected return, after inflation and e.r. = -1.96%

SPDR Gold ETF (GLD)
expected to keep up with inflation
e.r. = 0.40.
expected return, after inflation and e.r. = -0.40%

Two of the components, GLD and ST government bonds have negative expected real return. A third, LT Government bonds, has slightly postive expected real return.
The only component with a significant positive expected return is stocks, which is only 1/4 of the portfolio.
Of course, you need to look at the portfolio as a whole. But even so - it doesn't look great going forward.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
grayfox
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Re: Permanent Portfolio Poll

Post by grayfox »

Call_Me_Op wrote:
Of course, you need to look at the portfolio as a whole. But even so - it doesn't look great going forward.
What is the expected return of the whole portfolio going forward? If I take the 25% of each, using my estimates, it sums to a meager +0.65% real return.
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Re: Permanent Portfolio Poll

Post by Call_Me_Op »

grayfox wrote:
Call_Me_Op wrote:
Of course, you need to look at the portfolio as a whole. But even so - it doesn't look great going forward.
What is the expected return of the whole portfolio going forward? If I take the 25% of each, using my estimates, it sums to a meager +0.65% real return.
You are treating the portfolio as 4 isolated investments, and ignoring any rebalancing benefits. For an extreme example, say that stocks, bonds, and bills are flat for the next 2 years but gold drops 50% next year, and returns to its previous price the following year. The overall portfolio has now increased by about 10%, even though there is no net price change in its assets.

Here is the proof. Assume we start with $100k.

After the first year, the portfolio value is 25+25+25+12.5 = $87.5k, and we rebalance.

At the end of the second year, the portfolio value is 21.875*3 + 21.875*2 = $109.375k. or an increase of 9.4%.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
grayfox
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Re: Permanent Portfolio Poll

Post by grayfox »

Re-balancing:

When I looked at HBPP using 2011 daily data, I did not rebalance and came up with 10.23% annual return
GLD/VTI/VGLT/VCSH started at 25/25/25/25 and ended at 24.98/22.67/29.34/23.01

Now along the way, about 22-Aug GLD got to 30.18%, so if you were using 20/30 rebalancing bands, you would have rebalanced.
If you were using 15/35 rebalancing bands, there would have been no rebalancing.

Also about 30-Oct VGLT hit 30.03%. So there might have been 2 re-balances in 2011 with 20/30 bands and 0 re-balances with 15/35, if you started with 25/25/25/25.
The wider you make the bands, the less often you will re-balance. Stocks can drop, LT bonds can spike up, but you will do nothing and not capture anything.
Anyway, I didn't run the numbers because too much work

But I did look at daily re-balancing, because the formulas are easy to simulate.

No Re-balancing 10.23%
Daily Re-balancing 11.12%
Rebalancing return 0.89%

A little under 1% rebalancing return in 2011 for daily rebalancing. I would guess that about 1% would be the kind of re-balancing return. It doesn't seem likely that you will get a 10% rebalncing return. Add 1% to the component returns and that's about 1.63%.
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Re: Permanent Portfolio Poll

Post by Call_Me_Op »

My example was hypothetical. Rebalancing return depends upon asset correlations and volatilities. I was making the point that treating the components of a portfolio separately does not reflect their performance as a portfolio, and since we do not know the correlations and volatilities going forward (and I would argue cannot predict them with reasonable accuracy), it is difficult to properly estimate portfolio performance.

The other issue is that some of the asset classes in PP are subject to a large speculative component of the return, further clouding the crystal ball.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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MediumTex
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Re: Permanent Portfolio Poll

Post by MediumTex »

I've been following the PP very closely now for about five years, and from the day I started following it I noticed that a common reaction was "Well, it may have worked in the past, but it's about to stop working now because the world is a much more complicated place and such a simple strategy couldn't possibly continue working that well in the future."

I took these comments into consideration, but then started to notice that they had a tendency to be almost precisely wrong in their specific criticisms of the strategy. The gold bubble that was supposed to pop never did. The interest rate spike that was supposed to be inevitable never materialized. The long term returns for stocks never seemed to match the reality that investors actually faced.

So here I am, five years down the road. My original investment from 5 years ago has seen annual returns of 10%+ per year, even with 2008, which was basically flat for a PP investor.

Will the PP stop working at some point in the future? I don't know, it might, and if it does I will be happy to abandon it and move on to something else. In the meantime, though, I'm really enjoying the ride. All you tire kickers should just jump in the pool and see how it feels. It's fun.

The way I look at it, if being a PP investor means that at some point in the future I may have to absorb a 10-20% loss on the road to discovering that the PP no longer works, I'm fine with that. I don't believe that this will happen, but if it does I will still have gotten WAY more out of the strategy along the way than it cost me in the end, and even in the end I will still have to find something that I think will work better than the PP, since historically when the PP is doing poorly, everything else is doing REALLY poorly, and since I am a conservative investor it's unlikely that I would go from the PP to a riskier strategy.

As I have said many times, I know that the PP is not for everyone, but for the people it suits, it can really provide a great investing experience. I don't engage in these endless discussions about the strategy for any reason other than I think that it can really be a great tool for a lot of regular investors who are sick and tired of unexpected volatility and promised returns that have a way of never actually materializing.

For those who are on the fence about the PP, ask yourself what you really want from your investing experience. Do you want excitement? Do you want an excuse to read the Wall Street Journal? Do you want to sound smart around others when you talk about your latest complicated investment maneuver? Do you get a rush from speculating? If these are things you like, then the PP is probably not the right investment for you. If, however, you are a conservative investor who doesn't like surprises and doesn't like having to babysit your portfolio, then the PP might be a good fit for you. Don't judge it by how it looks, though. Judge it by how it performs.
Last edited by MediumTex on Sun Nov 25, 2012 10:10 am, edited 2 times in total.
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Call_Me_Op
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Re: Permanent Portfolio Poll

Post by Call_Me_Op »

Great post, MT. My feeling is that even if one does not want to jump-into the PP, there is a great deal to be learned from it. The idea of a portfolio designed to exploit the finite number of possible economic states is, I believe, unique to the PP. My own portfolio benefited from a study of the PP. I certainly prefer it over the stock-heavy portfolios that can easily see losses of 20+ percent on a more-or-less regular basis.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
Browser
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Re: Permanent Portfolio Poll

Post by Browser »

All discussions about the PP quickly become discussions about Gold. It's all about Gold. The PP is essentially a quite conservative 2:1 intermediate-duration bond/stock allocation with a gold kicker. It's the Swedroe fat-tails portfolio with a bunch of gold. The monthly returns of the 4x25 PP correlate about .8 with the price of gold. So goes, gold so goes the PP. As Rick says, gold is a speculative asset. If you want your portfolio returns to represent speculative returns, then holding 25% gold is one way to do it. I love gold, I own gold, some of my best friends are gold. But 25%? Not too likely. There's a point of maximum efficiency for this asset in one's portfolio and it's well short of 25%.
We don't know where we are, or where we're going -- but we're making good time.
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Re: Permanent Portfolio Poll

Post by Call_Me_Op »

Browser wrote:All discussions about the PP quickly become discussions about Gold. It's all about Gold. The PP is essentially a quite conservative 2:1 intermediate-duration bond/stock allocation with a gold kicker. It's the Swedroe fat-tails portfolio with a bunch of gold. The monthly returns of the 4x25 PP correlate about .8 with the price of gold. So goes, gold so goes the PP. As Rick says, gold is a speculative asset. If you want your portfolio returns to represent speculative returns, then holding 25% gold is one way to do it. I love gold, I own gold, some of my best friends are gold. But 25%? Not too likely. There's a point of maximum efficiency for this asset in one's portfolio and it's well short of 25%.
Browser, I agree. I think 25% gold is high and can be lower - and the bond/cash in PP can be substituted with intermediate treasury - although right now I am keeping my FI very short.
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MediumTex
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Re: Permanent Portfolio Poll

Post by MediumTex »

Browser wrote:All discussions about the PP quickly become discussions about Gold. It's all about Gold. The PP is essentially a quite conservative 2:1 intermediate-duration bond/stock allocation with a gold kicker. It's the Swedroe fat-tails portfolio with a bunch of gold. The monthly returns of the 4x25 PP correlate about .8 with the price of gold. So goes, gold so goes the PP. As Rick says, gold is a speculative asset. If you want your portfolio returns to represent speculative returns, then holding 25% gold is one way to do it. I love gold, I own gold, some of my best friends are gold. But 25%? Not too likely. There's a point of maximum efficiency for this asset in one's portfolio and it's well short of 25%.
To test the theory that the PP only performs well when gold is performing well, I looked at the 20 year bear market for gold between 1981 and 2000, and the average annual PP return for this period was 8.34%. When you consider that this was a period of relatively low inflation, even though this nominal return was a bit below the portfolio's long term average return of 9.5% or so, the fact that 1981-2000 was a period of relatively low inflation means that the portfolio's real returns were probably right in that 4.5%-5% sweet spot that the portfolio seems to cling to pretty tightly.

It's true that a lot of PP discussions become gold discussions, but that's just because the PP is the only safe way to own a large allocation to gold that I have ever seen. By that logic, though, I could just as easily say that the PP is really all about long-term treasuries or stocks, because it is also one of the few safe ways to own large allocations to those volatile assets as well.

As an illustration of this point with respect to stocks, take the celebrated Wellesley fund and its 35% stock allocation as a comparison to the PP's 25% stock allocation. It would be easy to say that Wellesley is also a safe way to own stocks (and it certainly is safer than many other ways of owning stocks), but when you look at how Wellesley has performed during periods of high inflation and negative real interest rates, the PP provides a more stable ride with fewer surprises. The point I am making is that the PP is really about all three volatile assets, and it provides a method for holding all three without worrying about too many bad things happening to your money.

Gold bothers a lot of people, and even people who love gold may not like the idea of 25% of it in their portfolio (or even up to 35% leading up to a gold-driven rebalancing event), but gold does a job in the context of the overall portfolio, and historically a person who has just let it do this job would have experienced a smooth ride with only a couple of years of negative annual returns.

As Craig has pointed out many times, the greatest risk to the PP is a raging bull market for equities. During periods when stocks are providing 15-20% returns year after year, I'm sure it would be hard to stick with the PP. Note, however, that this risk to the PP investor doesn't involve losses or a failure of the strategy to "work", it just means that when the most popular asset in the PP (i.e., stocks) is performing exceptionally well it may be hard to stick with any conservative and safe investment strategy.
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Re: Permanent Portfolio Poll

Post by rmelvey »

I actually did an analysis on correlations to the PP. Gold is in the driver's seat now, but that isn't always the case.

Image

If you were tweaking you could probably move some of the gold into LTT to get more long-run balance but the 4-way split isn't very far off and the arbitrary symmetry is somewhat comforting. :) It definitely isn't a "broken" portfolio. Trying to look back and constantly adjust the portfolio based off of trailing correlation coefficients would be a lot of effort and it might not even help performance.
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Re: Permanent Portfolio Poll

Post by Roy »

MediumTex wrote: To test the theory that the PP only performs well when gold is performing well, I looked at the 20 year bear market for gold between 1981 and 2000, and the average annual PP return for this period was 8.34%...

Note, however, that this risk to the PP investor doesn't involve losses or a failure of the strategy to "work", it just means that when the most popular asset in the PP (i.e., stocks) is performing exceptionally well it may be hard to stick with any conservative and safe investment strategy.
This is old news but in 2009, everyone was still saying this about gold, and so I examined the question using Craigr's Crawlingroad chart at that time— looking solely for the bad I could find.

Over the period (since 1972), Gold had 17 down years averaging -7.84%
In those same years the Permanent Portfolio averaged +6.75%

• The worst Gold loss was -32.8%. In that year the portfolio returned -3.9%
• The second worst Gold loss was -22.7%. In that year the portfolio returned +8.3%
• The third worst Gold loss was -21.5%. In that year the portfolio returned +7.5%

Based on the way the argument felt, ex ante, and since a number of experts felt and spoke the same way (and still do), I was surprised by these findings, initially, which were readily available for anyone to examine by way of testing one's feelings towards the topic. But as with many things about the PP, it was often discussed by way of the subjective.

Now, Stocks (S&P 500) sometimes did well in Gold's worst years, but not always. And LT Bonds did very well, on average, in those years. So maybe it really is about the Treasuries. But it does seem to be about the combination of the PP volatile assets (one application of the sometimes devisive word "diversification"), and its comically symmetrical weighting among those assets. And many other common portfolio combinations really have only two broad assets and often in varying weightings (I am assuming, for purposes of this discussion, that all equity types are more similar than they are different). So maybe that is how the PP survives times when gold does its reverse alchemy thing.

Anyway, judged by the butcher's bill, the above is how the bad gold thing happened for the PP. But conviction in the strategy (or any other strategy) as one lives-through Bull and Bear moments, is what seems necessary to obtain its benefits, and such is likely more important than any dispassionate retrospective breakdown of "Xs" and "Os" can ever be. It is also the only thing that prevented me from going with the HB PP (I did hold it with some funds just to have skin in its game), even as it is suitable for my conservative bent, and I believe I fully understand how and why it works.
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Re: Permanent Portfolio Poll

Post by craigr »

The 25% allocation to each asset that people get concerned about (especially gold) is because the portfolio wants to hold enough of each asset to help the portfolio during a bull market, but not so much to get badly burned during a bear market in that asset. So the 25% figure hits this sweet spot very simply. In the Permanent Portfolio a 25% gold allocation is not risky because the other assets have a very strong tendency to move against it. Even if someone were to wake up tomorrow to see gold fell by 50% it wouldn't matter much, because it is very likely that money moved into another asset like stocks or bonds.

Someone dumping gold is probably a stock or bond buyer. Someone dumping stocks is probably a gold or bonds buyer. Someone dumping bonds is probably a gold or stock buyer. If you look at investor behavior (even your own feelings), you'll probably see this is almost always true.

The Permanent Portfolio holds all these assets all the time because it is capturing the flow of capital among the assets and this grows the portfolio with low volatility. It's very easy to go into a spreadsheet and declare what worked "best" in the past. But that doesn't mean anything about the future. The Permanent Portfolio is future agnostic. When you look at it from this perspective, you can understand why it doesn't need to overweight any particular asset.
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Re: Permanent Portfolio Poll

Post by Roy »

craigr wrote:The Permanent Portfolio is future agnostic. When you look at it from this perspective, you can understand why it doesn't need to overweight any particular asset.
Yep. Not sure what overweighting is anyway as that also can depend on various definitions. And who knows if the relative volatilities of each speedy asset class are the same, even if we agree they are all three volatile. At times, I thought it worked for something like reasons conventional ports work: extra expected returns in LT Treasuries and Stocks being realized—over time. But then there's Gold and Cash, so not sure on that either. The thing does work, though...
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Re: Permanent Portfolio Poll

Post by Browser »

Here are the returns of the 4x25 PP vs. the conservative Wellesley fund for the 20 year period, 1981-2000. Now if you think that you could have hung on while watching your portfolio losing out to the Tortoise Fund year-after-year over that two decade period then more power 2 ya. 17 out of 20 losing years is too much for me.

-13.30%
-0.15%
-13.76%
-13.59%
-8.11%
-1.76%
9.04%
-10.15%
-8.07%
-1.06%
-8.07%
-4.05%
-2.03%
1.59%
-9.60%
-4.46%
-13.39%
-1.03%
8.44%
-13.25%
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Re: Permanent Portfolio Poll

Post by rmelvey »

Bowser,

A portfolio with steady returns will have periods where it under performs other strategies with less steady returns. That is by definition.
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Re: Permanent Portfolio Poll

Post by Browser »

Just be sure you are able to handle the "underperformance" of any portfolio allocation you are contemplating. For 20 years, 1981-2000 gold lost a compounded -4.2% annually. The PP sucked just about -5% annually out of the returns you would have gotten from plain old Wellesley for 20 years because of the steady losses attributable mostly to owning gold. That 20 years could well represent most of the entire investment lifetime for many people. What the yellow dog giveth, the yellow dog can taketh away. Be careful out there.
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Re: Permanent Portfolio Poll

Post by wshang »

What Browser says cannot be denied. If I could have been in 100% large growth during the greatest bull market in history and then switch to the PP in 1999, I would be a genius! The PP suits those who can withstand feelings of avarice, or maybe the temperament fits those who have made their magic number and now are extremely risk adverse.

Oh! If I could only have had it all! But wait, maybe we needn't be so dogmatic. Hmmm, now I think about it, the economic picture in the next decade ahead looks like another repeat of the age following the invention of the personal PC, bioengineering and internet! (Yeah right!)
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Re: Permanent Portfolio Poll

Post by Call_Me_Op »

wshang wrote:What Browser says cannot be denied. If I could have been in 100% large growth during the greatest bull market in history and then switch to the PP in 1999, I would be a genius! The PP suits those who can withstand feelings of avarice, or maybe the temperament fits those who have made their magic number and now are extremely risk adverse.
Really? Over 9% CAGR seems pretty good for anyone, and is comparable to 100% stocks. Since nobody can market-time perfectly, I think PP is a pretty good option - although there are others.
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Re: Permanent Portfolio Poll

Post by Clive »

Call_Me_Op wrote:
Browser wrote:All discussions about the PP quickly become discussions about Gold. It's all about Gold. The PP is essentially a quite conservative 2:1 intermediate-duration bond/stock allocation with a gold kicker. It's the Swedroe fat-tails portfolio with a bunch of gold. The monthly returns of the 4x25 PP correlate about .8 with the price of gold. So goes, gold so goes the PP. As Rick says, gold is a speculative asset. If you want your portfolio returns to represent speculative returns, then holding 25% gold is one way to do it. I love gold, I own gold, some of my best friends are gold. But 25%? Not too likely. There's a point of maximum efficiency for this asset in one's portfolio and it's well short of 25%.
Browser, I agree. I think 25% gold is high and can be lower - and the bond/cash in PP can be substituted with intermediate treasury - although right now I am keeping my FI very short.
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Re: Permanent Portfolio Poll

Post by scone »

Actually, looking at the DBC commodities index for the past 10 years, it looks flattish, except for a blip during the panic of 2008, which is about the same time GLD started it's run. It looks to me like commodities returned to "normalcy" after the panic, but gold did not. And this is in the face of relatively low inflation. Back in the 70s, when inflation was rampant, the price of gold went way up, which makes sense if the primary purpose of this stuff is inflation protection. But the rise since 2001, at first sight at least, seems to be more about the extreme volatility of the stock market, which is a different kettle of fish altogether.
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Re: Permanent Portfolio Poll

Post by Call_Me_Op »

scone wrote:Actually, looking at the DBC commodities index for the past 10 years, it looks flattish, except for a blip during the panic of 2008, which is about the same time GLD started it's run. It looks to me like commodities returned to "normalcy" after the panic, but gold did not. And this is in the face of relatively low inflation. Back in the 70s, when inflation was rampant, the price of gold went way up, which makes sense if the primary purpose of this stuff is inflation protection. But the rise since 2001, at first sight at least, seems to be more about the extreme volatility of the stock market, which is a different kettle of fish altogether.
Since gold is the second most popular form of money (behind the US dollar), it really responds to perceived threats to the dollar's value. The actions of the Fed are perceived as a threat to the value of the dollar long-term. That's probably why gold remains elevated in price.

Gold is not something that should be expected to track inflation, since it is strongly driven by speculative forces.
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Re: Permanent Portfolio Poll

Post by MediumTex »

Call_Me_Op wrote:
scone wrote:Actually, looking at the DBC commodities index for the past 10 years, it looks flattish, except for a blip during the panic of 2008, which is about the same time GLD started it's run. It looks to me like commodities returned to "normalcy" after the panic, but gold did not. And this is in the face of relatively low inflation. Back in the 70s, when inflation was rampant, the price of gold went way up, which makes sense if the primary purpose of this stuff is inflation protection. But the rise since 2001, at first sight at least, seems to be more about the extreme volatility of the stock market, which is a different kettle of fish altogether.
Since gold is the second most popular form of money (behind the US dollar), it really responds to perceived threats to the dollar's value. The actions of the Fed are perceived as a threat to the value of the dollar long-term. That's probably why gold remains elevated in price.

Gold is not something that should be expected to track inflation, since it is strongly driven by speculative forces.
Gold responds to negative real interest rates.

Typically, negative real interest rates are present in times of high inflation, but they can also be present during times of low inflation, as we have seen in recent years.

IMHO, paying attention to real interest rates provides a more subtle understanding of what drives the price of gold than simply looking at the rate of inflation that is present during a given period.
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Re: Permanent Portfolio Poll

Post by glock19 »

Browser wrote:Here are the returns of the 4x25 PP vs. the conservative Wellesley fund for the 20 year period, 1981-2000. Now if you think that you could have hung on while watching your portfolio losing out to the Tortoise Fund year-after-year over that two decade period then more power 2 ya. 17 out of 20 losing years is too much for me.

-13.30%
-0.15%
-13.76%
-13.59%
-8.11%
-1.76%
9.04%
-10.15%
-8.07%
-1.06%
-8.07%
-4.05%
-2.03%
1.59%
-9.60%
-4.46%
-13.39%
-1.03%
8.44%
-13.25%

It's been mentioned that the period you have used is one of the best bull markets for equities in U.S. history. Who knows, it may happen again in the next 20 years, but just in case, could you show data comparing Wellesley to PP from 2000 to 2011. thanks
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Re: Permanent Portfolio Poll

Post by Browser »

Despite the historical data on the PP dating back to 1972 (when gold was liberated from the dollar), as far as I can tell it seems to be a relatively recent portfolio strategy in terms of being implemented by investors. The great decade for the PP was 1972-80, in which gold returned 33% compounded annually (pre-expenses), and the 4x25 PP would have returned about 14.5% compounded annually. But, as far as I know, nobody ever invested in the PP during that time to realize those returns. The PP portfolio concept didn't exist, and even if it had Investing in gold would have been quite a hassle, as there was no way to do it but buy bullion and store it. So the best decade for the PP is one in which the portfolio didn't exist and was virtually uninvestable. I'm a little uncomfortable with this sort of thing. It falls into the same category as referring to the imaginary returns that would have been enjoyed by investing in an S&P 500 index fund prior to 1976 when it was created by Vanguard.

My understanding is that Harry Browne introduced the concept of the PP in 1998, in his book "Fail Safe Investing." If that's the case, then practically nobody would have invested in it during the 1980s or 1990s either (which was fortunate for them). Again, even if it had existed, it would have been a rather difficult thing to implement by buying gold bullion. However, I'm unclear on the "when" and "why" of the Permanent Portfolio Fund PRPFX. One reference states that its inception was in 1996. Another states that it was in 1981, and the fund website has historical prices back to that date. If it dates back to then, the PP concept must have been out there, just in time to catch the giant bear market in gold that began in 1981 and ran for 20 years.

The GLD ETF became available in 2004 and has made it possible to conveniently implement the PP. There is a closed-end Canadian fund CEF that was around before 2004 and I think it was listed on American exchanges sometime in the late 1990s. So basically, the PP as an actionable, investable portfolio strategy has been around maybe since around 1998 at the earliest, when it was introduced by Harry Browne. Not a real long "live" track record when you think about it, just 14 years or so.

It's interesting that no-one seems to talk about the "liqudity premium" for investing in gold in the past. Before the availability of gold ETFs, it was difficult and costly to acquire and store. Some of the gold return from 1972-2004 must have represented the premium for bearing this liquidity risk.
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Re: Permanent Portfolio Poll

Post by Browser »

glock19 wrote: It's been mentioned that the period you have used is one of the best bull markets for equities in U.S. history. Who knows, it may happen again in the next 20 years, but just in case, could you show data comparing Wellesley to PP from 2000 to 2011. thanks
Not that different. PP: Avg = 8.1%, SD = 5.1%, $1 became $2.53. Wellesley: Avg=6.9%, SD=6.8%, $1 became $2.38
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Re: Permanent Portfolio Poll

Post by Clive »

MediumTex wrote:Gold responds to negative real interest rates.
...
paying attention to real interest rates provides a more subtle understanding of what drives the price of gold than simply looking at the rate of inflation that is present during a given period.
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Re: Permanent Portfolio Poll

Post by craigr »

Browser wrote:Despite the historical data on the PP dating back to 1972 (when gold was liberated from the dollar), as far as I can tell it seems to be a relatively recent portfolio strategy in terms of being implemented by investors.
The initial idea was first brought forward by Harry Browne in his newsletter in the late 1970s. It became the foundation for his book with Terry Coxon "Inflation-Proofing Your Investments" published in 1981 and eventually the mutual fund that started around the same time.

The 4x25 allocation was refined over the years and presented in 1987 in Harry Browne's book "Why the Best Laid Investment Plans Usually Go Wrong."

Later he wrote about it in "The Economic Time Bomb." Then finally in "Fail-Safe Investing" where it remained as it is even today using index funds for some parts (stocks).

So it has over 30+ years of empirical evidence at this point. It is not a theoretical or recent arrival. In fact, it's probably one of the first diversified passive investing strategies presented.
So basically, the PP as an actionable, investable portfolio strategy has been around maybe since around 1998 at the earliest, when it was introduced by Harry Browne. Not a real long "live" track record when you think about it, just 14 years or so.
This is not correct. In fact the strategy has a longer track record than most everything else you see today. It is not a Johnny-come-lately. It's been seriously battle-tested. I hear from people that have been using the strategy since the 1980s from time-to-time.
It's interesting that no-one seems to talk about the "liqudity premium" for investing in gold in the past. Before the availability of gold ETFs, it was difficult and costly to acquire and store. Some of the gold return from 1972-2004 must have represented the premium for bearing this liquidity risk.
Prior to discount brokers, fees for trading stocks and mutual funds were exorbitant. Just as bad as gold could have been. Usually minimums were hundreds of dollars to call a broker and make a trade. Then there were excess commissions over a certain trade volume to be paid. This wasn't that long ago either. Only since the mid-1990s did these things change with the arrival of online brokers. Also we shouldn't forget front-end and back-end loads, etc. that many funds possessed. Then there were fee kickbacks, etc. on funds. Individual stock purchases were likewise affected by high fees, big spreads, and other broker shenanigans. The emergence of ETFs has benefited all investors, not just the Permanent Portfolio.

However I will say that the long-term passive approach of the Permanent Portfolio would have helped avoid a lot of fees. Harry Browne received a ton of criticism for advocating a diversified passive investing approach by his readers and others. But, he was right. Passive investing with wide diversification will win over time. And yes, that means holding gold along with stocks and bonds because history can't predict the future so we don't know what asset will do best. He was way ahead of his time.
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Re: Permanent Portfolio Poll

Post by Clive »

In the mid 1970's, the GB Pound had to be bailed out by the IMF. US inflation rose from 3% levels in 1972 to 12%+ levels in 1974. Harry Browne was proclaiming hyperinflation and was a gold-bug - for instance Robert Lichello in 1976 wrote "And if gloom-prophet Harry Browne is right and a pound of beef sells for $80 Billion..."

Gold had made strong gains in 1973/1974 when inflation had run up to 12%+ levels. By 1976 inflation was back down at 4% levels and gold had given back around a third of its value. i.e. gold trebled in price and then fell back down to have doubled in price. It was around that time that Harry Browne devised a means to diversify more widely out of solely holding gold.

1978/79/80 again saw inflation surge to 13%+ levels, only to fall back down again to 3% levels in 1982

Some investors may have adopted the 'inflation Proofing Your Investments' asset allocation or bought into the mutual fund based on that 1981 publication. Few, if any would have held such a portfolio IMO prior to the 1980's. Comparing subsequent performance of the Permanent Portfolio to alternative choices of diversification common at that time, a diversified 60-40 stock/bond since the early 1980's for instance outpaced a Permanent Portfolio type asset allocation by over 5% annualised over the next two decades.

Diversification isn't a new (last few decades) concept, but rather has been around for thousands of years. For instance in ancient Talmud script text it advises investing one third in land, one third in merchandise and keeping one third in reserves (and if its not already obvious, 'reserves' at that time wouldn't have been US $ or treasury's). Jakob Fugger (Fugger the Rich) invested in the 15th century by diversifying across businesses, properties, merchandise (commodities) and loans and rebalanced whenever the weightings substantially drifted.
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Re: Permanent Portfolio Poll

Post by Browser »

craigr - thanks for the historical background on the PP. Do you know when PRPFX originated - 1982?
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Re: Permanent Portfolio Poll

Post by craigr »

Browser wrote:craigr - thanks for the historical background on the PP. Do you know when PRPFX originated - 1982?
Yes. It was the first mutual fund to incorporate hard assets along with conventional assets such as stocks and bonds from what I was told by one of the founders of the fund (John Chandler).

Harry Browne simplified the allocation further into the 25% split away from the more complicated holdings of the fund. This is what he presented in 1987 in the book Why the Best Laid Investment Plans Usually Go Wrong.

In that book, index funds were not used. I think this is because:

1) They were still not common.
2) There was still some hint of hope that active funds could produce a more volatile fund than the market itself which is what the Permanent Portfolio wants.

Then again, the Vanguard today is much different than the one 25 years ago. Indexing just wasn't widely available in many plans. Harry Browne later advocated using index funds by his last book though once it became very common.

His 1987 book also offers a blistering critique of many forms of market timing voodoo. He rips into moving averages, technical analysis, predicting the future, etc. This is the framework for why he thinks his approach of passive wide diversification is better. That particular book is still valid even today just for that content.
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Re: Permanent Portfolio Poll

Post by Browser »

The initial idea was first brought forward by Harry Browne in his newsletter in the late 1970s. It became the foundation for his book with Terry Coxon "Inflation-Proofing Your Investments" published in 1981 and eventually the mutual fund that started around the same time.
What do you make of the fact that HB put his ideas forward during the time when gold had been on a tear, inflation was ramping and people were burning their stock and bond certificates? Not exaggerating, I was there and no-one would touch stocks or bonds with a really long pole, and everyone wished they had a goldmine in their backyard. The PP was a much better idea if you'd owned it from 1972, but of course nobody did because owning a bunch of gold only started to make sense to in the mid- to late- 1970s. Sounds like the PP was formulated ex-post, but then it proceeded to dismally lag conventional stock/bond portfolios for a couple decades and everybody lost interest. Then stocks went into the tank, scared the hell out of everyone, and gold has been running up. Now there's all this interest in interacting with gold again (but doing it "safely"?) by doing the PP. Deja vu all over again?
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Re: Permanent Portfolio Poll

Post by craigr »

Browser wrote:
The initial idea was first brought forward by Harry Browne in his newsletter in the late 1970s. It became the foundation for his book with Terry Coxon "Inflation-Proofing Your Investments" published in 1981 and eventually the mutual fund that started around the same time.
What do you make of the fact that HB put his ideas forward during the time when gold had been on a tear, inflation was ramping and people were burning their stock and bond certificates?
I'd think he was very thoughtful. How many investing gurus are introspective enough to look at what they are saying and decide that they will go back and re-analyze their position? I mean he was a hard core gold bug in the midst of a massive gold bull market and he proposes a diversified portfolio that buys long-term bonds? Who does that?

I can't think of a stock bug that ever admits to the fact that stocks might not always be the best investment so someone should diversify. Ditto for gold bugs. Etc. So if someone were to be that realistic to admit that diversification is a good idea, and that diversification should be future agnostic, I'd pay attention.

In the 2000's stocks have seriously stunk. Gold didn't. So you have this decade long period outside the 1970s where the whole idea that gold is worthless in a diversified portfolio was proven wrong (yet again). When stocks turn around gold will stink. But since I don't know when that is, I hold all the assets.

It honestly is not a religious issue for me. Some people don't like gold. That's fine. I think anyone that doesn't own gold in a portfolio is making a serious mistake based upon history. But we each need to invest how we feel is best.
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Re: Permanent Portfolio Poll

Post by Call_Me_Op »

Craig,

I agree. HB was one of the few original thinkers. I have seen several people who have made thinly-veiled attempts to adopt his portfolio and claim it as their own. Regardless of how one feels about the PP, it represents an honest and objective attempt (by a financial genius) to devise a true all-weather portfolio that can be used throughout one's investing lifetime.
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Re: Permanent Portfolio Poll

Post by hazlitt777 »

Browser wrote:What the yellow dog giveth, the yellow dog can taketh away. Be careful out there.
But one must remember that what the greenback dog giveth, the greenback dog can taketh away.

In another post, someone talked about gold being speculative. But the dollar is just as speculative, moreso in fact becuase over time it has always gone down in value. And just because one can buy dollar instruments that pay a percentage in dollars on those dollars (bonds) whereas one cannot buy gold instruments that pay a percentage in gold on those gold ounces doesn't mean that this argument has no weight. Inflation can and does at times eat up all interest a bond will pay and then cuts into the principle. And so gold is something very different and complimentary to the dollar in the PP portfolio. It is in fact another form of money that diversifies ones fiat money holdings.
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Re: Permanent Portfolio Poll

Post by Browser »

hazlitt777 wrote:
Browser wrote:What the yellow dog giveth, the yellow dog can taketh away. Be careful out there.
But one must remember that what the greenback dog giveth, the greenback dog can taketh away.

In another post, someone talked about gold being speculative. But the dollar is just as speculative, moreso in fact becuase over time it has always gone down in value. And just because one can buy dollar instruments that pay a percentage in dollars on those dollars (bonds) whereas one cannot buy gold instruments that pay a percentage in gold on those gold ounces doesn't mean that this argument has no weight. Inflation can and does at times eat up all interest a bond will pay and then cuts into the principle. And so gold is something very different and complimentary to the dollar in the PP portfolio. It is in fact another form of money that diversifies ones fiat money holdings.
If you don't want to hold currency, there are other ways to do that such as owning stocks or real estate. These could be preferable to gold, as they actually produce intrinsic returns. Gold was "money" at one time - it's not money now. If you think so, try paying for your groceries with some gold dust and see what happens. If I had the financial resources and expertise, I'd much rather buy rare art or other collectibles than gold. Same idea, but this would serve the purpose of diversifying my investments much more effectively, IMO. And I think I'd enjoy looking at the art more than staring at my gold bullion.
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Re: Permanent Portfolio Poll

Post by MediumTex »

Browser wrote:
hazlitt777 wrote:
Browser wrote:What the yellow dog giveth, the yellow dog can taketh away. Be careful out there.
But one must remember that what the greenback dog giveth, the greenback dog can taketh away.

In another post, someone talked about gold being speculative. But the dollar is just as speculative, moreso in fact becuase over time it has always gone down in value. And just because one can buy dollar instruments that pay a percentage in dollars on those dollars (bonds) whereas one cannot buy gold instruments that pay a percentage in gold on those gold ounces doesn't mean that this argument has no weight. Inflation can and does at times eat up all interest a bond will pay and then cuts into the principle. And so gold is something very different and complimentary to the dollar in the PP portfolio. It is in fact another form of money that diversifies ones fiat money holdings.
If you don't want to hold currency, there are other ways to do that such as owning stocks or real estate. These could be preferable to gold, as they actually produce intrinsic returns. Gold was "money" at one time - it's not money now. If you think so, try paying for your groceries with some gold dust and see what happens. If I had the financial resources and expertise, I'd much rather buy rare art or other collectibles than gold. Same idea, but this would serve the purpose of diversifying my investments much more effectively, IMO. And I think I'd enjoy looking at the art more than staring at my gold bullion.
Art is a speculative investment.

The PP is a conservative way of investing money that you can't afford to lose.

The art-as-investment discussion has nothing to do with the PP.

I just don't want this to get too far off track. Are you suggesting that a PP investor should use art instead of gold? I assume you aren't, but I'm not sure what the point is of bringing up art speculation in a PP discussion.
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Re: Permanent Portfolio Poll

Post by Call_Me_Op »

Browser wrote:
hazlitt777 wrote: Gold was "money" at one time - it's not money now. If you think so, try paying for your groceries with some gold dust and see what happens.
When people refer to gold as a form of money, they are referring to gold as a store of value that can be readily converted into any currency. I can certainly take an ounce of gold (if I had one) and convert it to about $1700 today, which would buy me a substantial quantity of groceries.
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Re: Permanent Portfolio Poll

Post by Clive »

Call_Me_Op wrote:
MediumTex wrote:
Jerilynn wrote:
MediumTex wrote:The thing about the PP is that at any point in time one or more of the PP assets WILL be outperforming the whole portfolio. That's the idea.
Course, at any point in time, one or more of the assets will be under preforming the whole portfolio, yes?
Of course, and when you average them all together you get the steady upward grind across the whole portfolio that we have been observing for the last 40 years.

One of the keys to understanding the Permanent Portfolio is to grasp the fact that its losing assets very rarely lose more than 50% (and CAN'T lose more than 100%), while the winning assets will routinely be gaining 100%, 200%, 300% and more over time.

It's a standard line of skepticism about the PP to imagine that all of the action within the portfolio will cancel itself out with no net gains. When, however, you think about the unlimited upward movement of the portfolio's winners set against the hard barrier that -0- represents for the portfolio's losers, there is often an "aha" moment.

It can take a while to fully internalize this aspect of the inner workings of the portfolio (it did for me anyway).
That's an interesting way to view the portfolio, MT. I suppose if the assets are largely uncorrelated, it makes some sense. I would caution, however, that since the portfolio is periodically rebalanced, it is possible that any one of the four investments can theoretically deplete the overall portfolio by more than 25%. (In other words, a single investment category can effectively lose more than 100% of its value.) For example, let's say that three of the investments remain constant in value and gold goes down 50% every year. After one year, the overall portfolio loses 12.5% and is then rebalanced, the second year it loses another 12.5% and is again rebalanced, etc, etc, etc. This can go on for a long time, and can theoretically deplete the portfolio in accordance with V=(1-0.125)^n, so that after 20 years you have lost 93% of the portfolio's value. But barring this extreme scenario, the way you are suggesting to view the portfolio has merit.
Across 1983 to 1999, a Permanent Portfolio that held 2 year treasury instead of T-Bills (as some PP'ers prefer), that was reviewed once yearly and rebalanced back to equal 25% weightings if any of the assets had risen above 35% weighting or declined below 15% weighting, would have rebalanced 4 times during that period with each case adding more than 10% of the total fund value into gold. Which is a bit like having invested 25% and added a further 40% into gold (65% total investment into gold).

If the argument for the winners win more than what the loser loses were valid, then alternatives that held less stock and gold might be expected to benefit less from that effect and yield less reward overall. That doesn't however appear to be the case.

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Is a 50% allocation to barbell of STT/LTT different to a 50% allocation to a ten year treasury ladder? Whilst there will be shorter term deviations, over the mid to longer term it tends to wash. With a ten year ladder (I used Robert Shiller's ten year yield history in the above chart calculations) where each rung is held to maturity, there's no capital risk and you know exactly how much profit will be achieved from the offset. The gain each year can be simplified to the rolling average of the ten year yields. And should yields rise, you have some maturing bonds rolling into those higher yields relatively quickly.

Use something like etfreplay.com to look at how a 50% allocation to a 2x leveraged ETF with 50% invested in TIPS compares to 100% in the 1x (non leveraged) and when rebalanced yearly back to 50-50 2x/TIP weightings you'll generally find similar results. 6.25% in a 2x Small Cap Value, 6.25% in TIP - to replicate 12.5% small cap value; 4.17% 3x gold (UGLD), 7.83% TIP - to replicate 12.5% gold, and the remainder (75%) in a 10 year treasury ladder, has the potential to have provided similar overall results to a Permanent Portfolio. That's close to being a 10-90 speculative/safe type asset allocation as suggested by Nassim Taleb.

A risk with gold is that whilst it gains strongly when investors flock into gold when the alternatives are yielding negative real yields, they also flock out of gold as soon as real yields turn positive again. Real yields being positive or negative tends to be a longer term cycle event (excepting shorter term blips). Decades of boom followed by a decade or maybe more of bust. Holding (and perhaps adding to) a sizeable amount of gold over a prolonged period of prosperity can be a heavy burden to carry. Gains that might otherwise have been taken as income are in part fed into a losing/declining asset.

Using a Taleb approach and holding 4% in leveraged gold, reviewed once yearly, limits the maximum loss in any one year to that 4%. For some, 6.25% 2x SCV, 4.17% gold, 14.58% TIP, 75% 10 year Treasury ladder might be a more comfortable choice of asset allocation. Others might prefer to hold all 90% in bonds or all 90% in TIPS. Yet others might prefer to hold no gold whatsoever.

The general advice is adding some stocks to an otherwise all-bond portfolio, or adding some bonds to an otherwise all-stock portfolio, will tend to provide better risk adjusted rewards. If you consider gold as a bond that does well when real yields turn negative, lose out when real yields turn positive, then when combined with other bonds that do well when yields are positive, lose out when yields turn negative ...etc, then the Permanent Portfolio is just another Fat Tail Minimisation or Taleb 10-90 type 'a little stocks added to an otherwise all-bond' type portfolio.
hazlitt777
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Re: Permanent Portfolio Poll

Post by hazlitt777 »

Call_Me_Op wrote:
Browser wrote:
hazlitt777 wrote: Gold was "money" at one time - it's not money now. If you think so, try paying for your groceries with some gold dust and see what happens.
When people refer to gold as a form of money, they are referring to gold as a store of value that can be readily converted into any currency. I can certainly take an ounce of gold (if I had one) and convert it to about $1700 today, which would buy me a substantial quantity of groceries.
Browser and Op, there is some truth in what you are saying, but there are also countries right now that are using gold as money in trade with other countries. It is being used for much more than as a store of value. But you are right, citizens can not use it directly as money in the way fiat money can be used.

This trait of gold, that it can be used this way, also adds to its diversification value and is another reason gold adds so much to the permanent portfolio and is essential.
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