Permanent Portfolio revisited

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
zeugmite
Posts: 1176
Joined: Tue Jul 22, 2008 11:48 pm

Post by zeugmite »

rmelv wrote:Also for comparison here is the 60/40.

Image
Nice charts, and remember the vertical axis is even log-scale. I don't think most people realize how horrible this picture is. In terms of volatility, I used to think that short-term volatility doesn't matter as long as the end point is "good." Then I realized that the end point is a short-term phenomenon! By that I mean your typical decumulation phase is probably 20 years or so, and therefore volatility is a significant issue for that time-frame, (as opposed to the total investment time-frame of 40-50 years).

Not only that, but imagine you ever needed to make lump-sum decisions either in or out -- having low short-term volatility makes this easy and allows greater flexibility in achieving investment goals.
Gumby
Posts: 279
Joined: Wed Mar 03, 2010 9:53 pm

Post by Gumby »

chrikenn wrote:However, to say it has a brilliant longer-term history is a bit of an overstatement:

...

Looking at the charts above, you see that PRPFX/Permanent Portfolio has massively outperformed over the past 10 years or so, but has massively underperformed over the last 30 years.
Well, PRPFX and the 4x25 Permanent Portfolio are two different things. Here is a chart comparing the 4x25 Permanent Portfolio with the S&P 500. The chart shows Total Return (i.e. dividends reinvested) and is adjusted for inflation.

Image

The chart will be updated once the BLS reports inflation next month, but you get the idea.
grayfox
Posts: 5569
Joined: Sat Sep 15, 2007 4:30 am

Post by grayfox »

Today was an odd day. All four components in the Worldwide Permanent Portfolio I am tracking on smartmoney.com were green.

36.38% GLD +430.83 +0.89%
18.67% SHY +26.58 +0.11%
19.49% TLT +78.87 +0.30%
24.96% VT -1,781 +5.63%
0.50% Cash

Total $133,903.35 +2,317.65 +1.76%

Usually at least one component is red.
User avatar
snodog
Posts: 269
Joined: Fri Dec 21, 2007 4:33 pm
Location: Pennsylvania

Post by snodog »

I am no expert but to me it appears as if the Permanent Port. is rock solid. I've been tracking it for a couple years day to day and it's just slow and steady. In fact it actually went up yesterday when the dow was down 634.

However I would not expect the nice 9% returns to continue. During the 40 year period gold has returned about 9% and bonds about 8%. That would be unlikely to continue in the future. PP is a very conservative portfolio.

I don't use the PP but I've been tempted to go with something like:

15% SCV
15% Int SCV
15% Gold
55% 5 year Treasuries

This backtests better with higher returns and lower SD.
Gumby
Posts: 279
Joined: Wed Mar 03, 2010 9:53 pm

Post by Gumby »

snodog wrote:However I would not expect the nice 9% returns to continue. During the 40 year period gold has returned about 9% and bonds about 8%. That would be unlikely to continue in the future.
It doesn't work that way. Looking at the assets in isolation will only confuse you. If gold or bonds are underperforming, that would likely mean that other assets are overperforming. The rebalancing bands automatically pull you into losing asset(s) and out of the winning asset(s) — as the chart above shows us, when gold tanked in the early 80s.

We certainly can't predict what the future holds, but the Permanent Portfolio has weathered every storm beautifully.
User avatar
snodog
Posts: 269
Joined: Fri Dec 21, 2007 4:33 pm
Location: Pennsylvania

Post by snodog »

Gumby wrote:
snodog wrote:However I would not expect the nice 9% returns to continue. During the 40 year period gold has returned about 9% and bonds about 8%. That would be unlikely to continue in the future.
It doesn't work that way. Looking at the assets in isolation will only confuse you. If gold or bonds are underperforming, that would likely mean that other assets are overperforming. The rebalancing bands automatically pull you into losing asset(s) and out of the winning asset(s) — as the chart above shows us, when gold tanked in the early 80s.

We certainly can't predict what the future holds, but the Permanent Portfolio has weathered every storm beautifully.
I still stand by what I said. I guess time will tell.
phositadc
Posts: 443
Joined: Mon Jul 26, 2010 6:17 pm

Post by phositadc »

Gumby wrote: We certainly can't predict what the future holds, but the Permanent Portfolio has weathered every storm beautifully.
It has certainly weathered every storm, but that does not mean it's always doing better than a typical 60/40 or 40/60 style boglehead portfolio. Look at the 90s. When stocks are doing awesome and gold is doing terrible, the PP will still churn out its 6-8% per year returns, but a 60/40 portfolio is probably churning out 10-12% per year.

As far as I can tell, the PP is pretty much always solid. In decades like the 90s, though, its mediocre compared to a more typical portfolio, and in decades like the 2000s (where gold rocks out), it's about as good a portfolio as you can have.

I like the PP. I like it a lot, and I have a 20% allocation of my portfolio to it. But I think a lot of the people that are so thrilled with it would be far less thrilled if we had a decade like the 90s, where it was far underperforming a more typical portfolio. You might say you are fine with slow and steady when the PP is having an amazing decade, but in a decade like the 90s, I'm guessing the PP will lose a lot of followers.
Ben24
Posts: 199
Joined: Wed Dec 29, 2010 6:14 pm

Post by Ben24 »

Noobvestor wrote:I'd like to deconstruct your comment, briefly.
Ben24 wrote:Stocks have an intrinsic value based on cash flows.
I looked up intrinsic value and pulled some definitions ...

The value of the metal(s) contained in a numismatic item. The United States issues contained their intrinsic value in metal until 1933 for gold coins and 1964 for silver coins. Today’s “sandwich” coins are termed fiat currency.
www.midsouthcoin.com/terms.html

The actual value of the precious metals contained within a bullion bar or coin.
http://www.goldbullionaustralia.com.au/ ... nsfaq.html

the value that an investor considers, on the basis of an evaluation or available facts, to be the “true” or “real” value that will become the market value when other investors reach the same conclusion. ...
www.bvresources.com/defaulttextonly.asp


"Past performance does not predict future results" - if there were not a risk of non-recovery, they would not be a risk asset. Also, "real value" doesn't exist for stocks - if it did, we would always know whether the market was over- or under-valued and sell or buy accordingly, no?


I'm at a loss here - what could you possibly mean by this? It has value insofar as I can trade it with any number of willing market participants at any time for a rate that is broadly agreed upon. How is this different? Please explain.
Intrinsic value is based off of estimates of cash flows. Google DCF analysis. The intrinisic value is an imprecise estimate. Real value for stocks exists, but its impossible to pinpoint as an exact dollar amount and fluctuates with new information. A range of values is better suited for stocks. Gold has no real value in that it doesnt generate cash, it is only worth what someone else is willing to pay for it. Its liquid and exchangeable, but in buying it youre participating in greater fool theory - buying something in anticipation of selling it to a greater fool for more.
User avatar
Noobvestor
Posts: 5944
Joined: Mon Aug 23, 2010 1:09 am

Post by Noobvestor »

snodog wrote:I am no expert but to me it appears as if the Permanent Port. is rock solid. I've been tracking it for a couple years day to day and it's just slow and steady. In fact it actually went up yesterday when the dow was down 634.

However I would not expect the nice 9% returns to continue. During the 40 year period gold has returned about 9% and bonds about 8%. That would be unlikely to continue in the future. PP is a very conservative portfolio.

I don't use the PP but I've been tempted to go with something like:

15% SCV
15% Int SCV
15% Gold
55% 5 year Treasuries

This backtests better with higher returns and lower SD.
I would split those treasuries up and barbell to be a bit more true to the PP without radically changing the risk/reward profile, but it might be splitting hairs - I do like the portfolio in general, though. Nice one.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
Gumby
Posts: 279
Joined: Wed Mar 03, 2010 9:53 pm

Post by Gumby »

chrikenn wrote:
Gumby wrote: We certainly can't predict what the future holds, but the Permanent Portfolio has weathered every storm beautifully.
It has certainly weathered every storm, but that does not mean it's always doing better than a typical 60/40 or 40/60 style boglehead portfolio. Look at the 90s. When stocks are doing awesome and gold is doing terrible, the PP will still churn out its 6-8% per year returns, but a 60/40 portfolio is probably churning out 10-12% per year.

As far as I can tell, the PP is pretty much always solid. In decades like the 90s, though, its mediocre compared to a more typical portfolio, and in decades like the 2000s (where gold rocks out), it's about as good a portfolio as you can have.

I like the PP. I like it a lot, and I have a 20% allocation of my portfolio to it. But I think a lot of the people that are so thrilled with it would be far less thrilled if we had a decade like the 90s, where it was far underperforming a more typical portfolio. You might say you are fine with slow and steady when the PP is having an amazing decade, but in a decade like the 90s, I'm guessing the PP will lose a lot of followers.
Yes. You're absolutely 100% correct. The hardest part about holding the Permanent Portfolio is during a decade of prosperity when everyone else is striking it rich with huge gains in the stock market.

Personally, I see the 1990s as the culmination of Baby Boomer spending and wealth — a once in a lifetime event. Not to say it can't happen, but our aging demographics (much like Japan) would make it extremely difficult for us to have that kind of prosperity bubble again.
Bongleur
Posts: 2276
Joined: Fri Dec 03, 2010 9:36 am

Post by Bongleur »

grayfox wrote:Today was an odd day. All four components in the Worldwide Permanent Portfolio I am tracking on smartmoney.com were green.

36.38% GLD +430.83 +0.89%
18.67% SHY +26.58 +0.11%
19.49% TLT +78.87 +0.30%
24.96% VT -1,781 +5.63%
0.50% Cash

Total $133,903.35 +2,317.65 +1.76%

Usually at least one component is red.
I don't understand the first green column of numbers. Is it 430 Hundreds? Or thousands since inception? Or what ?

And the 2nd column is % for the latest time period?
Seeking Iso-Elasticity. | Tax Loss Harvesting is an Asset Class. | A well-planned presentation creates a sense of urgency. If the prospect fails to act now, he will risk a loss of some sort.
User avatar
Snoopy
Posts: 78
Joined: Mon May 07, 2007 9:37 am
Location: The Sunny South

Post by Snoopy »

Bongleur wrote:
grayfox wrote:Today was an odd day. All four components in the Worldwide Permanent Portfolio I am tracking on smartmoney.com were green.

36.38% GLD +430.83 +0.89%
18.67% SHY +26.58 +0.11%
19.49% TLT +78.87 +0.30%
24.96% VT -1,781 +5.63%
0.50% Cash

Total $133,903.35 +2,317.65 +1.76%

Usually at least one component is red.
I don't understand the first green column of numbers. Is it 430 Hundreds?

Or thousands since inception? Or what ?

And the 2nd column is % for the latest time period?

This is the performance of the PP for today. The first column is the gain in $s: gold gained $430.83 today. The second column is the % gain for the day.

The PP sure has been kind to me during the past week. In fact it's been pretty good YTD, with a return of ~10%. :D
staythecourse
Posts: 6993
Joined: Mon Jan 03, 2011 8:40 am

Post by staythecourse »

Gumby wrote:
snodog wrote:However I would not expect the nice 9% returns to continue. During the 40 year period gold has returned about 9% and bonds about 8%. That would be unlikely to continue in the future.
It doesn't work that way. Looking at the assets in isolation will only confuse you. If gold or bonds are underperforming, that would likely mean that other assets are overperforming. The rebalancing bands automatically pull you into losing asset(s) and out of the winning asset(s) — as the chart above shows us, when gold tanked in the early 80s.

We certainly can't predict what the future holds, but the Permanent Portfolio has weathered every storm beautifully.
100% agreed. People can't seem to understand that level of beauty of the PP. When would money leave gold and LTGB? When the country is humming and we are in a strong economic expansion which will cause stocks to skyrocket. That take off of stocks will save the portfolio.

I will say there is not a long term economic situation that would prevent the portfolio from doing well. Does anyone fathom one??

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle
grayfox
Posts: 5569
Joined: Sat Sep 15, 2007 4:30 am

Post by grayfox »

Bongleur wrote:
grayfox wrote:Today was an odd day. All four components in the Worldwide Permanent Portfolio I am tracking on smartmoney.com were green.

36.38% GLD +$430.83 +0.89%
18.67% SHY +$26.58 +0.11%
19.49% TLT +$78.87 +0.30%
24.96% VT +$1,781 +5.63%
0.50% Cash

Total $133,903.35 +$2,317.65 +1.76%

Usually at least one component is red.
I don't understand the first green column of numbers. Is it 430 Hundreds? Or thousands since inception? Or what ?

And the 2nd column is % for the latest time period?
Second column is dollars. I put hypothetical $100,000.00 into this http://smartmoney.com/portfolio in early 2009 and never rebalanced, so there is a lot of gold. Interest and dividends just are in cash. The current balance is $133,903.35 I think it's up about 7.8% YTD.

With smartmomey.com/portfolio the prices are updated in real time every second. So you can watch it change. That's is what is interesting about it. On any given day, the components fluctuate a lot, but the whole portfolio fluctuates only a little. It's uncanny.
patrick
Posts: 2594
Joined: Fri Sep 04, 2009 3:39 am
Location: Mega-City One

Post by patrick »

rmelv wrote:Patrick: Unfortunately 40 years is all we have the PP, because before then gold was illegal to hold. You are correct to say that the bigger the sample the better. I wish we had more. At least the 40 years we do have have been full of diverse economic climates. This adds to my confidence in the 40 year sample size.
The fact that gold is sometimes illegal is in itself a problem with using an investment strategy that includes gold. Furthermore, the time period you reference is atypical in an important way:

Annualized real return of gold since 1913: 1.3%

Annualized real return of gold since 1970: 5.2%
Bongleur
Posts: 2276
Joined: Fri Dec 03, 2010 9:36 am

Post by Bongleur »

Is that 1913 data some sort of ex-US compilation, since its price was controlled in the US?

And is the "new" data for the US dollar, or a worldwide aggregate of some kind?
Seeking Iso-Elasticity. | Tax Loss Harvesting is an Asset Class. | A well-planned presentation creates a sense of urgency. If the prospect fails to act now, he will risk a loss of some sort.
Gumby
Posts: 279
Joined: Wed Mar 03, 2010 9:53 pm

Post by Gumby »

patrick wrote:The fact that gold is sometimes illegal is in itself a problem with using an investment strategy that includes gold.
Perhaps. No one said gold is perfect. But, even people in far more oppressive countries are allowed to own gold these days.
patrick wrote:Furthermore, the time period you reference is atypical in an important way:

Annualized real return of gold since 1913: 1.3%

Annualized real return of gold since 1970: 5.2%
Before the 1970s, each one of our dollars had gold built into its value. Everyone was essentially walking around with gold in their pockets whether they realized it or not. So, there was no need to hold gold when our dollar was directly tied to gold. The numbers you've presented above only help to prove that argument since the dollar was so stable when it was equated with gold.

Now that our dollars aren't tied to anything, we need gold to keep our portfolios from deteriorating from a dollar that is constantly being devalued.

Furthermore, looking at inflation-adjusted returns since before the closing of the gold-window is misleading, since you would be comparing a society on gold/quasi-gold standard to complete fiat money — two completely different currencies, if you will.

Most people who can't see the wisdom of the PP will often reference the "annualized real return" of an individual asset class. This is an old sell-side trick that investment advisors will often use to mislead investors towards stock-heavy mutual funds. The Wall Street Journal recently talked about this phenomenon in retail investing.

WSJ: Adjusted for Inflation, Dow's Gains Are Puny

Here's a quote from that article:
WSJ wrote:Controlling for inflation takes extra work and makes stock gains look punier, so it is easy to see why stock analysts almost never do it. The media almost never do it either. But other things do get measured in real dollars. When economists report whether the economy is growing, they account for inflation. When analysts judge long-term gains in commodities such as gold or oil, they often adjust for inflation... Because analysts almost never do the same with stocks, it leaves investors with an exaggerated view of their portfolios’ performance over time.
So, if you're going to pull out gold and tell us how it doesn't have a very large return since 1913, the least you can do is go through your own portfolio and tell us what the inflation-adjusted return of each of your own assets is since 1913 (even though it's a pointless exercise in looking at two completely different currencies). My guess is that it will make your returns seem smaller as well.

If you don't consider the wisdom of rebalancing, looking at annualized real return of individual assets will get you nowhere. But, then again, that's exactly what the retail investment world wants you to see.
User avatar
snodog
Posts: 269
Joined: Fri Dec 21, 2007 4:33 pm
Location: Pennsylvania

Post by snodog »

staythecourse wrote:
Gumby wrote:
snodog wrote:However I would not expect the nice 9% returns to continue. During the 40 year period gold has returned about 9% and bonds about 8%. That would be unlikely to continue in the future.
It doesn't work that way. Looking at the assets in isolation will only confuse you. If gold or bonds are underperforming, that would likely mean that other assets are overperforming. The rebalancing bands automatically pull you into losing asset(s) and out of the winning asset(s) — as the chart above shows us, when gold tanked in the early 80s.

We certainly can't predict what the future holds, but the Permanent Portfolio has weathered every storm beautifully.
100% agreed. People can't seem to understand that level of beauty of the PP. When would money leave gold and LTGB? When the country is humming and we are in a strong economic expansion which will cause stocks to skyrocket. That take off of stocks will save the portfolio.

I will say there is not a long term economic situation that would prevent the portfolio from doing well. Does anyone fathom one??

Good luck.
I'm sure the PP will do well, just don't expect the +9% returns going forward. I would say around 6-7% is more likely.

Here are the returns of each element of the PP the last 40 years.
LT Treasuries - 8.06%
ST Treasuries - 7.24%
Gold - 8.90%
S&P- 9.78%

(8.06+7.24+8.90+9.78)/4=8.50% Add a 1% rebalancing bonus and you get roughly the performance of the PP over 40 year period of 9.61%. And you are not even guarenteed to get a rebalancing bonus going forward. Personally I think the rebalancing bonus will be less in the future.

Now going forward: Here are the long term returns of each element which should give us the best guess of what it will do in the future.

LT Treasuries - 5.10%
ST Treasuries - 5.10%
Gold - 4.30%
S&P- 9.56%

I'll admit I don't have good historical returns for LT & ST treasuries, but I remember hearing bonds return about 5% long term avg.

(5.10+5.10+4.30+10)/4=6.02% Even if I give you a 1% rebalancing bonus we are still only at a smidge over 7% return.

I stand by what I said earlier. The excellent returns of the PP over the last 40 years have been driven largely by the higher than normal returns of gold and bonds. That does not mean I think the PP isn't a good way to invest. Like I said I think it is rock solid, just don't expect the same returns.
Last edited by snodog on Wed Aug 10, 2011 9:20 am, edited 1 time in total.
patrick
Posts: 2594
Joined: Fri Sep 04, 2009 3:39 am
Location: Mega-City One

Post by patrick »

Bongleur wrote:Is that 1913 data some sort of ex-US compilation, since its price was controlled in the US?

And is the "new" data for the US dollar, or a worldwide aggregate of some kind?
Both are the result of using the US price and then adjusting by the US inflation rate, which is the correct way to determine the real return for a US investor. If the price control was a problem, what kind of problem do you think it would be?
hsv_climber
Posts: 3971
Joined: Tue Sep 22, 2009 7:56 pm

Post by hsv_climber »

staythecourse wrote: 100% agreed. People can't seem to understand that level of beauty of the PP. When would money leave gold and LTGB? When the country is humming and we are in a strong economic expansion which will cause stocks to skyrocket. That take off of stocks will save the portfolio.

I will say there is not a long term economic situation that would prevent the portfolio from doing well. Does anyone fathom one??

Good luck.
Please define "well". With 100% in cash/CDs, you have only the risk of inflation. Is it "well"?
Yes, it is very easy to think of a case when PP would do pretty bad relative to other AA.
Simple example - medium to high inflation with rising interest rates and 4% real return from stocks with the "popping" of the gold bubble (see 80th).
Inflation would kill cash, rising interest rates would kill bonds.
Time in history to represent that: 70th.
Gumby
Posts: 279
Joined: Wed Mar 03, 2010 9:53 pm

Post by Gumby »

snodog wrote:Now going forward: Here are the long term returns of each element which should give us the best guess of what it will do in the future.
A 'best guess,' based on historical returns, is how we predict future returns of each asset class??

We just lived through a Baby Boomer wealth volcano. How can you expect the returns of each asset to do what they did in the past when the largest demographic shift in our nation's (and world) history is taking shape right now?

The purpose of the Permanent Portfolio is not to guess what future returns of each asset may be, it's simply to protect your overall wealth and investments from the ravages of inflation or deflation, while providing a moderate return. Harry Browne recommended keeping a separate "Variable Portfolio" — for speculative investments — using money you can afford to lose/risk if that wasn't enough risk for you.
Last edited by Gumby on Wed Aug 10, 2011 9:28 am, edited 1 time in total.
User avatar
snodog
Posts: 269
Joined: Fri Dec 21, 2007 4:33 pm
Location: Pennsylvania

Post by snodog »

Gumby wrote:
snodog wrote:Now going forward: Here are the long term returns of each element which should give us the best guess of what it will do in the future.
A 'best guess,' based on historical returns, is how we predict future returns of each asset class??
Know of a better way?
Indices
Posts: 1031
Joined: Sun Sep 27, 2009 11:40 am
Contact:

Post by Indices »

snodog wrote:
I stand by what I said earlier. The excellent returns of the PP over the last 40 years have been driven largely by the higher than normal returns of gold and bonds. That does not mean I think the PP isn't a good way to invest. Like I said I think it is rock solid, just don't expect the same returns.
You are trying to predict the future based on past performance. Don't.
Gumby
Posts: 279
Joined: Wed Mar 03, 2010 9:53 pm

Post by Gumby »

snodog wrote:
Gumby wrote:
snodog wrote:Now going forward: Here are the long term returns of each element which should give us the best guess of what it will do in the future.
A 'best guess,' based on historical returns, is how we predict future returns of each asset class??
Know of a better way?
No. That's the point. If you go off of past returns, you're just deluding yourself into thinking that you can predict the future. You can't. No one can.

If you asked anyone three years ago, or ten years ago, what the price of gold was going to be in 2011, I don't think anyone would have predicted that it would be approaching 1800/oz. It would have been inconceivable.
Last edited by Gumby on Wed Aug 10, 2011 9:34 am, edited 1 time in total.
User avatar
snodog
Posts: 269
Joined: Fri Dec 21, 2007 4:33 pm
Location: Pennsylvania

Post by snodog »

Indices wrote:
snodog wrote:
I stand by what I said earlier. The excellent returns of the PP over the last 40 years have been driven largely by the higher than normal returns of gold and bonds. That does not mean I think the PP isn't a good way to invest. Like I said I think it is rock solid, just don't expect the same returns.
You are trying to predict the future based on past performance. Don't.
We all do that if we are honest. Why do you invest in stocks? Why not potato chips instead?
Indices
Posts: 1031
Joined: Sun Sep 27, 2009 11:40 am
Contact:

Post by Indices »

snodog wrote:
Indices wrote:
snodog wrote:
I stand by what I said earlier. The excellent returns of the PP over the last 40 years have been driven largely by the higher than normal returns of gold and bonds. That does not mean I think the PP isn't a good way to invest. Like I said I think it is rock solid, just don't expect the same returns.
You are trying to predict the future based on past performance. Don't.
We all do that if we are honest. Why do you invest in stocks? Why not potato chips instead?
They're not diversified. But as part of my holdings in TSM I do actually invest in potato chips.

Everyone on this board who is heavy into stocks uses the last 80 years of equity returns for that basis. The problem is that in the 19th century stock and bond returns were nearly identical. There is no "equity premium" that we know of for sure. The PP prepares you for ANY market condition. A stock/bond portfolio protects you from only a few market conditions and prepares you only for a long term bull market which as Japan has shown, may never happen again.
patrick
Posts: 2594
Joined: Fri Sep 04, 2009 3:39 am
Location: Mega-City One

Post by patrick »

Indices wrote:Everyone on this board who is heavy into stocks uses the last 80 years of equity returns for that basis. The problem is that in the 19th century stock and bond returns were nearly identical.
And both of them did far better than gold.
Gumby
Posts: 279
Joined: Wed Mar 03, 2010 9:53 pm

Post by Gumby »

patrick wrote:
Indices wrote:Everyone on this board who is heavy into stocks uses the last 80 years of equity returns for that basis. The problem is that in the 19th century stock and bond returns were nearly identical.
And both of them did far better than gold.
...during the largest population and wealth boom ever recorded.

If those domestic demographics are reversing, and the currency has shifted to fiat, why exactly would you use 80 years as an indicator of future asset performance? It makes no sense.
Gumby
Posts: 279
Joined: Wed Mar 03, 2010 9:53 pm

Post by Gumby »

Furthermore, most of the stock-heavy portfolios are set up on the belief that infinite growth is possible.

But, it isn't possible.

Here's one interesting look at the absurdity of long-term growth expectations:
Jeremy Grantham wrote:Four years ago I was talking to a group of super quants, mostly PhDs in mathematics, about finance and the environment. I used the growth rate of the global economy back then – 4.5% for two years, back to back – and I argued that it was the growth rate to which we now aspired.

To point to the ludicrous unsustainability of this compound growth I suggested that we imagine the Ancient Egyptians, whose gods, pharaohs, language, and general culture lasted for well over 3,000 years.

Starting with only a cubic meter of physical possessions (to make calculations easy), I asked how much physical wealth they would have had 3,000 years later at 4.5% compounded growth. Now, these were trained mathematicians, so I teased them: “Come on, make a guess. Internalize the general idea. You know it’s a very big number.”

And the answers came back: “Miles deep around the planet,” “No, it’s much bigger than that, from here to the moon.”

Big quantities to be sure, but no one came close.

In fact, not one of these potential experts came within one billionth of 1% of the actual number, which is approximately 10 raised to the 57th power, a number so vast that it could not be squeezed into a billion of our Solar Systems.

Go on, check it.

If trained mathematicians get it so wrong, how can an ordinary specimen of Homo Sapiens have a clue? Well, he doesn’t.

So, I then went on. “Let’s try 1% compound growth in either their wealth or their population,” (for comparison, 1% since Malthus’ time is less than the population growth in England). In 3,000 years the original population of Egypt – let’s say 3 million – would have been multiplied 9 trillion times! There would be nowhere to park the people, let alone the wealth.

Even at a lowly 0.1% compound growth, their population or wealth would have multiplied by 20 times, or about 10 times more than actually happened. And this 0.1% rate is probably the highest compound growth that could be maintained for a few thousand years, and even that rate would sometimes break the system.

The bottom line really, though, is that no compound growth can be sustainable. Yet, how far this reality is from the way we live today, with our unrealistic levels of expectations and, above all, the optimistic outcomes that are simply assumed by our leaders.
Infinite growth is not possible. It's best to be prepared for the ups and downs.
Last edited by Gumby on Wed Aug 10, 2011 10:10 am, edited 1 time in total.
patrick
Posts: 2594
Joined: Fri Sep 04, 2009 3:39 am
Location: Mega-City One

Post by patrick »

Gumby wrote:Before the 1970s, each one of our dollars had gold built into its value. Everyone was essentially walking around with gold in their pockets whether they realized it or not. So, there was no need to hold gold when our dollar was directly tied to gold. The numbers you've presented above only help to prove that argument since the dollar was so stable when it was equated with gold.

Now that our dollars aren't tied to anything, we need gold to keep our portfolios from deteriorating from a dollar that is constantly being devalued.
My numbers didn't mention the dollar at all but instead only showed the inflation adjusted returns (that is, the actual purchasing power) of gold. The point was to show that looking at the last 40 years overestimates the performance of gold, not in terms of dollars (which I didn't mention) but rather in terms of actual purchasing power.
Gumby wrote:Furthermore, looking at inflation-adjusted returns since before the closing of the gold-window is misleading, since you would be comparing a society on gold/quasi-gold standard to complete fiat money — two completely different currencies, if you will.
Again, I didn't mention dollars but only the purchasing power of gold.
Gumby wrote:Most people who can't see the wisdom of the PP will often reference the "annualized real return" of an individual asset class. This is an old sell-side trick that investment advisors will often use to mislead investors towards stock-heavy mutual funds. The Wall Street Journal recently talked about this phenomenon in retail investing.
The only annualized returns I posted were for gold, not stocks, and already adjusted for inflation.
WSJ wrote:Controlling for inflation takes extra work and makes stock gains look punier, so it is easy to see why stock analysts almost never do it. The media almost never do it either. But other things do get measured in real dollars. When economists report whether the economy is growing, they account for inflation. When analysts judge long-term gains in commodities such as gold or oil, they often adjust for inflation... Because analysts almost never do the same with stocks, it leaves investors with an exaggerated view of their portfolios’ performance over time.
So, if you're going to pull out gold and tell us how it doesn't have a very large return since 1913, the least you can do is go through your own portfolio and tell us what the inflation-adjusted return of each of your own assets is since 1913 (even though it's a pointless exercise in looking at two completely different currencies). My guess is that it will make your returns seem smaller as well.
If stocks beat gold in nominal terms (as they certainly have) they also beat gold in real terms. And why does the change in currency matter when looking at the real returns, since any loss due to the declining purchasing power of the dollar is accounted for in the inflation adjustment?

Anyway, here we go:

Annualized real return on US stocks since 1913: 6.1%

As to other investments I can't easily locate a table for specific years, but if you are willing to go back to 1900 I can line up everything:

Annualized real return of US stocks since 1900: 6.1%
Annualized real return of non-US stocks since 1900: 4.9%
Annualized real return of US T bonds since 1900: 1.9%
Annualized real return of gold since 1900: 1.0%
Annualized real return on US T bills since 1900: 0.9%

At least gold isn't quite in last place here, though it certainly would be if we extended back a few more decades.
If you don't consider the wisdom of rebalancing, looking at annualized real return of individual assets will get you nowhere. But, then again, that's exactly what the retail investment world wants you to see.
My point was not to argue either way about rebalancing. I was only trying to show that PP advocates always refer only to a period where gold did much better than normal in terms of its actual purchasing power. As to rebalancing, I actually would agree that it is somewhat beneficial, though I suspect that the large size of the rebalancing bonus seen in the recent history of the PP is also likely to be anomaly (though unlike the abnormally high returns of gold it doesn't seem quite as easy to prove that).
Call_Me_Op
Posts: 9881
Joined: Mon Sep 07, 2009 2:57 pm
Location: Milky Way

Post by Call_Me_Op »

snodog wrote:I am no expert but to me it appears as if the Permanent Port. is rock solid. I've been tracking it for a couple years day to day and it's just slow and steady. In fact it actually went up yesterday when the dow was down 634.

However I would not expect the nice 9% returns to continue. During the 40 year period gold has returned about 9% and bonds about 8%. That would be unlikely to continue in the future. PP is a very conservative portfolio.

I don't use the PP but I've been tempted to go with something like:

15% SCV
15% Int SCV
15% Gold
55% 5 year Treasuries

This backtests better with higher returns and lower SD.
Ah...the beauty of back-testing. Problem is, means very little going forward.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
KyleAAA
Posts: 9498
Joined: Wed Jul 01, 2009 5:35 pm
Contact:

Post by KyleAAA »

Gumby wrote:Furthermore, most of the stock-heavy portfolios are set up on the belief that infinite growth is possible.
How so? I don't have to believe infinite growth is possible to justify a stock-heavy portfolio. I just have to believe growth will continue for the next 50 years or so. Which is more likely: that growth will or won't continue for the next 50 years? I think the answer is obviously that it will.
patrick
Posts: 2594
Joined: Fri Sep 04, 2009 3:39 am
Location: Mega-City One

Post by patrick »

Gumby wrote:Furthermore, most of the stock-heavy portfolios are set up on the belief that infinite growth is possible.

But, it isn't possible.
If you believe infinite growth is impossible, then you should believe that infinite growth in the value of gold is impossible. And you certainly shouldn't expect the (historically very abnormal) high inflation-adjusted returns of gold in the past 40 years to continue forever.

But either way, the argument you've quoted misses the point. The amount of wealth you have isn't directly proportional to the amount of space that your possession take up so limits around that don't really limit the growth of wealth. Furthermore, the rate of returns in the stock market can be much higher or much lower than the rate of change in the total value of the stock market and thus even if the wealth were limited it wouldn't limit stock market returns.
Gumby
Posts: 279
Joined: Wed Mar 03, 2010 9:53 pm

Post by Gumby »

patrick wrote:My point was not to argue either way about rebalancing. I was only trying to show that PP advocates always refer only to a period where gold did much better than normal in terms of its actual purchasing power. As to rebalancing, I actually would agree that it is somewhat beneficial, though I suspect that the large size of the rebalancing bonus seen in the recent history of the PP is also likely to be anomaly (though unlike the abnormally high returns of gold it doesn't seem quite as easy to prove that).
I think the problem is that you imagine gold behaves like other assets in that it goes up for awhile and then comes down for awhile. In fact, that's not true. Gold doesn't really do anything most of the time. It sits around, collecting dust, and pretty much buys the same things it did 100 years ago. Your numbers are simply trying to prove this, and I'm trying to tell you that I agree with that analysis.

People clearly don't hold gold because it's a good investment, it isn't. They hold it because during a crisis it spikes, big time (since the supply is so limited). When gold spikes, it triggers a rebalancing band in the Permanent Portfolio — your portfolio keeps its value, and you don't feel the crisis the way others do.

When currencies were backed by gold, that "spike" was impossible. I think you can understand why that is (i.e. dollars and gold were basically the same thing). So, I think you and I would agree that the price of gold and dollars matched each other for most of the 20th century — when the currency was actually equated to gold.

Now that the currency is pure fiat, gold spikes are on the table. And if you have five gold spikes in 100 years, or two spikes in a 100 years, and then the price of gold comes crashing back down to earth each time (as it should) then the long term annualized real return is meaningless because it will always revert back to zero in terms of purchasing power. Which is exactly what gold should do.

So, who cares what the annualized real return is? All we care about is that it spikes when we need it to. Then we rebalance out of it right on schedule and we don't experience the loss that others do.

Gold may spike one day. Or it may not. Either way, I doubt it will impact the portfolio very much.
Last edited by Gumby on Wed Aug 10, 2011 10:28 am, edited 1 time in total.
Indices
Posts: 1031
Joined: Sun Sep 27, 2009 11:40 am
Contact:

Post by Indices »

It doesn't matter if stocks go up or down. The PP will work. If we have a long bull market it will eventually trigger inflation which will trigger a bear market which will benefit the PP. But it might take awhile and the PP will underperform, but still be growing.

The point is that if we are entering a decades long bear market, the PP will work. But a stock heavy portfolio won't. For those of you who are confident that we will see another huge bull market, I am impressed. I gave up trying to predict the future a long time ago and lack your confidence.
patrick
Posts: 2594
Joined: Fri Sep 04, 2009 3:39 am
Location: Mega-City One

Post by patrick »

Gumby wrote:
patrick wrote:
Indices wrote:Everyone on this board who is heavy into stocks uses the last 80 years of equity returns for that basis. The problem is that in the 19th century stock and bond returns were nearly identical.
And both of them did far better than gold.
...during the largest population and wealth boom ever recorded.

If those domestic demographics are reversing, and the currency has shifted to fiat, why exactly would you use 80 years as an indicator of future asset performance? It makes no sense.
If you look at US economic growth the 1800s were actually better than the 1900s. It just so happens the decline in growth coincided with worse bond performance but not worse stock performance. In any case I'd think that looking at 80 years (actually it's a bit longer - the data goes back to 1926 for small value stocks, 1900 for global stacks, and 1802 for US stocks) is better than looking the PP over 40 years especially when the 40 year period has abnormally higher returns for gold in terms of its actual purchasing power after adjustment for inflation.
Indices
Posts: 1031
Joined: Sun Sep 27, 2009 11:40 am
Contact:

Post by Indices »

patrick wrote:
Gumby wrote:
patrick wrote:
Indices wrote:Everyone on this board who is heavy into stocks uses the last 80 years of equity returns for that basis. The problem is that in the 19th century stock and bond returns were nearly identical.
And both of them did far better than gold.
...during the largest population and wealth boom ever recorded.

If those domestic demographics are reversing, and the currency has shifted to fiat, why exactly would you use 80 years as an indicator of future asset performance? It makes no sense.
If you look at US economic growth the 1800s were actually better than the 1900s. It just so happens the decline in growth coincided with worse bond performance but not worse stock performance. In any case I'd think that looking at 80 years (actually it's a bit longer - the data goes back to 1926 for small value stocks, 1900 for global stacks, and 1802 for US stocks) is better than looking the PP over 40 years especially when the 40 year period has abnormally higher returns for gold in terms of its actual purchasing power after adjustment for inflation.
Stop looking at returns. The data is meaningless. In other countries how well did the stock and bond market do? In some countries they closed the stock market down for decades because of communism. There are no universal "rules" for stock and bond returns.

The only relevance of past data is to show how an asset class behaves under certain economic conditions. In inflation gold does well universally. In bull markets stocks do well universally. In deflation cash does well universally. In bear markets bonds do well universally. If the government collapse or is seen as weak, gold does well again. But no one knows how "well" is well. They simply go up in those conditions. THAT is why the PP works.
patrick
Posts: 2594
Joined: Fri Sep 04, 2009 3:39 am
Location: Mega-City One

Post by patrick »

Gumby wrote:I think the problem is that you imagine gold behaves like other assets in that it goes up for awhile and then comes down for awhile. In fact, that's not true. Gold doesn't really do anything most of the time. It sits around, collecting dust, and pretty much buys the same things it did 100 years ago. Your numbers are simply trying to prove this, and I'm trying to tell you that I agree with that analysis.
My original point here was actually something different, namely that looking at the last 40 years gives a bad picture because gold did far better than gold normally does over that 40 year period. The 40 year analysis focuses too much on the spikes and not enough on the non-spike periods.

As I mentioned the annualized return of US stocks after adjusting for inflation was about 6% since 1900 (and actually about the same if you include the 1800s too). If I tried to prove that a stock heavy portfolio is great by only looking at a period of time over which they returned 10% after inflation, would you think I was representing stock returns accurately?
Gumby wrote:When currencies were backed by gold, that "spike" was impossible. I think you can understand why that is (i.e. dollars and gold were basically the same thing). So, I think you and I would agree that the price of gold and dollars matched each other for most of the 20th century — when the currency was actually equated to gold.

Now that the currency is pure fiat, gold spikes are on the table. And if you have five gold spikes in 100 years, or two spikes in a 100 years, and then the price of gold comes crashing back down to earth each time (as it should) then the long term annualized real return is meaningless because it will always revert back to zero in terms of purchasing power. Which is exactly what gold should do.
Spikes in nominal terms were impossible but shifts in real terms (up or down) still could (and did) happen, though not to the dramatic extent they have recently. The extra volatility, by the way, would seem to indicate that gold has become riskier.
KyleAAA
Posts: 9498
Joined: Wed Jul 01, 2009 5:35 pm
Contact:

Post by KyleAAA »

Gumby wrote: I think the problem is that you imagine gold behaves like other assets in that it goes up for awhile and then comes down for awhile. In fact, that's not true. Gold doesn't really do anything most of the time. It sits around, collecting dust, and pretty much buys the same things it did 100 years ago. Your numbers are simply trying to prove this, and I'm trying to tell you that I agree with that analysis.
This is completely false. Gold doesn't just sit around doing nothing. It is HIGHLY volatile. Its price is subject to the laws of supply and demand just like any other asset. Gold may or may not buy the same thing 100 years from now as it does today, but that doesn't change the fact that during an investing lifetime you could make a lot of money or lose a lot of money, IN REAL TERMS, by owning gold.
patrick
Posts: 2594
Joined: Fri Sep 04, 2009 3:39 am
Location: Mega-City One

Post by patrick »

Indices wrote:Stop looking at returns. The data is meaningless. In other countries how well did the stock and bond market do? In some countries they closed the stock market down for decades because of communism. There are no universal "rules" for stock and bond returns.
If return data is meaningless then no one should look at the last 40 years as evidence in favor of the PP. Anyway, as I mentioned above non-US stocks averaged 4.9 percent after inflation since 1900. I don't know of any good source of foreign stock data from before then. I would agree there are no universal rules, but if the government shuts down the stock market they probably won't let you keep your gold either.
Indices wrote:The only relevance of past data is to show how an asset class behaves under certain economic conditions. In inflation gold does well universally. In bull markets stocks do well universally. In deflation cash does well universally. In bear markets bonds do well universally. If the government collapse or is seen as weak, gold does well again. But no one knows how "well" is well. They simply go up in those conditions. THAT is why the PP works.
Gold does well in inflation? Let's see ... from 1980 to 1999 US inflation averaged about 4% per year yet the gold price plummeted. On the other hand, from 1999 to the present US inflation was only 3% per year and the gold price soared. As to stocks doing well in a bull market -- that's only true because a bull market is defined by stocks doing well! If you meant that stock returns do well when the economy grows there have been studies comparing different countries that suggest otherwise (countries with better GDP growth didn't show better stock returns). Cash at least won't go down under deflation but isn't guaranteed to beat other assets. And finally, if a bear market is accompanied by inflation (think of the 1970s) bonds don't do well then.
Gumby
Posts: 279
Joined: Wed Mar 03, 2010 9:53 pm

Post by Gumby »

KyleAAA wrote:
Gumby wrote: I think the problem is that you imagine gold behaves like other assets in that it goes up for awhile and then comes down for awhile. In fact, that's not true. Gold doesn't really do anything most of the time. It sits around, collecting dust, and pretty much buys the same things it did 100 years ago. Your numbers are simply trying to prove this, and I'm trying to tell you that I agree with that analysis.
This is completely false. Gold doesn't just sit around doing nothing. It is HIGHLY volatile. Its price is subject to the laws of supply and demand just like any other asset. Gold may or may not buy the same thing 100 years from now as it does today, but that doesn't change the fact that during an investing lifetime you could make a lot of money or lose a lot of money, IN REAL TERMS, by owning gold.
We are saying the same thing. An ounce of gold buys pretty much the same thing it did 2,000 years ago (a nice suit, a belt, and a pair of shoes). The reason why the PP works is because gold is so very volatile over short term periods.

Patrick, for the life of me, I can't understand why you care about the long term performance of an individual asset in isolation. It's meaningless because all it does is define the era. Gold may not change in purchasing power very much over the long term, but it's short-term volatility is what's important.
Last edited by Gumby on Wed Aug 10, 2011 11:33 am, edited 1 time in total.
User avatar
Opponent Process
Posts: 5157
Joined: Tue Sep 18, 2007 9:19 pm

Post by Opponent Process »

Gumby wrote:
KyleAAA wrote:
Gumby wrote: I think the problem is that you imagine gold behaves like other assets in that it goes up for awhile and then comes down for awhile. In fact, that's not true. Gold doesn't really do anything most of the time. It sits around, collecting dust, and pretty much buys the same things it did 100 years ago. Your numbers are simply trying to prove this, and I'm trying to tell you that I agree with that analysis.
This is completely false. Gold doesn't just sit around doing nothing. It is HIGHLY volatile. Its price is subject to the laws of supply and demand just like any other asset. Gold may or may not buy the same thing 100 years from now as it does today, but that doesn't change the fact that during an investing lifetime you could make a lot of money or lose a lot of money, IN REAL TERMS, by owning gold.
We are saying the same thing. An ounce of gold buys pretty much the same thing it did 1,000 years ago (a nice suit, a belt, and a pair of shoes). The reason why the PP works is because gold is so very volatile.
yes but the price of gold could easily be cut in half or worse next year (for example). the men's suit story, along with everything else gold-related, only pops up after significant outperformance. recency bias. that alone doesn't make the PP a lousy idea. just that it's going to look best during miserable times and worst during prosperous times. my guess is less than 1% of investors could actually hold the PP over 40 years, making it, in my mind, a lousy idea for 99% of investors.
30/30/20/20 | US/International/Bonds/TIPS | Average Age=37
Gumby
Posts: 279
Joined: Wed Mar 03, 2010 9:53 pm

Post by Gumby »

Opponent Process wrote:yes but the price of gold could easily be cut in half or worse next year (for example).
Who cares? That would mean that other assets are doing very well. The PP provides steady gains in prosperity too.
Opponent Process wrote:it's going to look best during miserable times and worst during prosperous times.
Not sure what you mean. The chart above shows that it pretty much performs the same in both miserable times and prosperous times. It's a steady ride either way.
Opponent Process wrote:my guess is less than 1% of investors could actually hold the PP over 40 years, making it, in my mind, a lousy idea for 99% of investors.
I agree. Doesn't mean it doesn't work as intended.

But, I'm not sure why people have this idea that 100% of one's net worth be invested in a Permanent Portfolio. Using a Permanent Portfolio in conjunction with a Variable Portfolio (i.e. any speculative investment(s)) would allow an investor to regulate their own risk/reward. This is what Harry Browne recommended. Many people do this.

It helps to think of a Permanent Portfolio as a kick-ass money market fund. You simple use it as a place to store the money that you can't afford to lose. And you use a Variable Portfolio to bet on riskier investments with money you can afford to lose.
Last edited by Gumby on Wed Aug 10, 2011 11:59 am, edited 1 time in total.
Bongleur
Posts: 2276
Joined: Fri Dec 03, 2010 9:36 am

Post by Bongleur »

>my guess is less than 1% of investors could actually hold the PP over 40 years, making it, in my mind, a lousy idea for 99% of investors.
>

But a retired person might have a shorter horizon... and less need for maximizing growth.
Seeking Iso-Elasticity. | Tax Loss Harvesting is an Asset Class. | A well-planned presentation creates a sense of urgency. If the prospect fails to act now, he will risk a loss of some sort.
Gumby
Posts: 279
Joined: Wed Mar 03, 2010 9:53 pm

Post by Gumby »

I think Harry Browne said it best on the February 20, 2005 episode of his investment radio show, when he said:
HARRY BROWNE: Now there are going to be other funds that have a higher yearly return over a long period. But, they get that return with what I keep referring to as the 'roller coaster ride.' You have these wide swings where you're up one year by 30% and then the next year you're down 15%, and so on. Whereas if you could look at a graph of the Permanent Portfolio Fund or the kind of personal Permanent Portfolio that I recommend, what you'd see is just steady growth year after year, after year, of a more modest amount. In the case of the personal Permanent Portfolio that has gained 9% a year, over the last 30 years, and the Fund return has been similar with no big losing years at any time. So it's much easier to stay with that kind of a program, because you don't get into a period like 2000 or 2002 when the stock market is falling and your favorite mutual fund is doing badly and you think, 'Gosh, I gotta abandon this,' and do something else and you drop out of it right at the bottom as it starts to go back up again...And that's why stability is just as important as performance. Because a lack of stability can cause you to be anxious about it all the time. And secondly, to make poor decisions because the swings in the market affect you, and you can only ride it down so far, so you finally get out of it. And you may get out of it halfway down or you may get out of it right at the bottom.
Now, to my knowledge there is no other portfolio out there that minimizes volatility in every economic condition — while still providing a moderate return — as much as the Permanent Portfolio does. If you know of one, please let me know, because I have been looking for a very long time.

In any case, if the Permanent Portfolio interests anyone here, I recommend that you first read the unofficial FAQ:

http://crawlingroad.com/blog/category/p ... folio/faq/

...and then head on over the Permanent Portfolio forum where there's an entire community of PP investors who can help you wrap your head around how it works...

http://www.gyroscopicinvesting.com/forum/
Last edited by Gumby on Wed Aug 10, 2011 12:16 pm, edited 1 time in total.
KyleAAA
Posts: 9498
Joined: Wed Jul 01, 2009 5:35 pm
Contact:

Post by KyleAAA »

Gumby wrote: We are saying the same thing. An ounce of gold buys pretty much the same thing it did 2,000 years ago (a nice suit, a belt, and a pair of shoes). The reason why the PP works is because gold is so very volatile over short term periods.
Umm, that's a leap. How do you know what a nice suit cost 2000 years ago? What data are you basing this assumption on?
User avatar
Optimistic
Posts: 344
Joined: Tue Sep 28, 2010 5:05 pm

Post by Optimistic »

Gumby wrote:Furthermore, most of the stock-heavy portfolios are set up on the belief that infinite growth is possible.

But, it isn't possible.
Investing heavily in stocks does not require a belief in infinite growth. In fact, there is little to no correlation between the equity returns in an economy and the per capita growth rate in said economy. Larry Swedroe references this study and others discussing "conventional wisdom about investing [that] is wrong" in an April 2011 MoneyWatch post. Larry summarizes the post by essentially saying high growth rates do not equate to good returns. Instead, growth rates that are better than expected equate to good returns.
User avatar
craigr
Posts: 2696
Joined: Tue Mar 13, 2007 6:54 pm

Post by craigr »

Wow. There is just too much to respond to here. I'll hit the highlights:

1) Someone earlier said gold is worthless. Then someone else pointed out that it was illegal for US citizens to hold for a period of time. Why would a worthless metal be made illegal to own?

2) In relation to the above, why is such a worthless metal stored by the tons in the vaults of every major central bank and govt. on the planet?

3) A poster in the past summed up the allocation to gold/cash vs. bonds/stocks very well. The bonds/stocks are the "make money" side of the portfolio. The gold/cash is the "have money" side of the portfolio. When the make money side of the portfolio is having problems is almost always the same time when the have money side of the portfolio is the most useful. Gold is a diversifying asset that does in fact improve the stability and returns in the portfolio. The evidence on this is very strong at this point.

4) Re: Various predictions about the future performance of the assets. Frankly, this is just an opinion and still doesn't change the fact that the future is unknowable. But you know these same arguments were given about the portfolio design nearly 30 years ago over and over again. Asset X can't do as well going forward, etc. But you know what? They were wrong. And that's the point. If you know what is going to do so well going forward then just put 100% of your life savings into that asset and be done with it. No sense in arguing about it if you're just so sure of things.

Here is a blog post on this very subject that has a great clip from Harry Browne in 2004 about this very question:

http://crawlingroad.com/blog/2010/01/12 ... l-do-best/

http://crawlingroad.com/blog/wp-content ... DoBest.mp3

5) There is over 30 years of empirical data at this point that the portfolio works. Why should I change it when the opposing solutions have, on average, done worse for what I need a portfolio to do (stable real returns in any economic climate with strong fat tail protection)?
IMPORTANT NOTE: My old website crawlingroad{dot}com is no longer available or run by me.
Gumby
Posts: 279
Joined: Wed Mar 03, 2010 9:53 pm

Post by Gumby »

Optimistic wrote:
Gumby wrote:Furthermore, most of the stock-heavy portfolios are set up on the belief that infinite growth is possible.

But, it isn't possible.
Investing heavily in stocks does not require a belief in infinite growth. In fact, there is little to no correlation between the equity returns in an economy and the per capita growth rate in said economy. Larry Swedroe references this study and others discussing "conventional wisdom about investing [that] is wrong" in an April 2011 MoneyWatch post. Larry summarizes the post by essentially saying high growth rates do not equate to good returns. Instead, growth rates that are better than expected equate to good returns.
I don't understand your point. Are you saying that stock-heavy portfolios require a belief in infinite better than expected growth rates? Maybe I'm misunderstanding you, but that sounds like a pretty risky way to bet on the future.
Bongleur
Posts: 2276
Joined: Fri Dec 03, 2010 9:36 am

Post by Bongleur »

Is gold "tax efficient" -- and the answer may be different for something like GLD vs GTU... ???
Seeking Iso-Elasticity. | Tax Loss Harvesting is an Asset Class. | A well-planned presentation creates a sense of urgency. If the prospect fails to act now, he will risk a loss of some sort.
Locked