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

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craigr
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Post by craigr »

DaveS wrote:I want to talk a bit about inflation which Rick quite correctly points out relates to gold prices. Right now capacity utilization is about 73 percent. unemployment is about 10%. Generally, but not exclusively, you have to have capacity utilization go up to the upper 80's and unemployment to go below 5% before there is enough pricing power to cause inflation.
Many Latin American countries have had very high inflation along with very high unemployment simultaneously. In Argentina's last episode with high inflation the unemployment rate went as high as 25% along with a peso devaluation of more than 66%. Currency problems are not stable nor predictable in how it could play out. It's also a rapidly accelerating condition that can take investors by surprise. There is no way to predict these things.
Further interest rates are at historic lows. That means that if some manufacturer wanted to raise capacity, capital to do it is plentiful and cheap.
They're low partly because the Fed wants to cause inflation. They have not been coy about saying this. We could be in a situation like Japan where LT bonds rates could fall to 2% and stay there for decades. Or the Fed could get their wish and have the inflation they are looking to get. There is an argument to be made that the markets are torn between these two outcomes during this transition. But then again, maybe everything will just kind of work out.
Inflation is not in the cards. Several hundred years ago speculators bid up the price of tulips in a speculative frenzy. That is what is happening to gold. Stay away. Dave
Nobody knows if inflation is in the cards or not. The Fed is hoping it is in the cards. So are other economists. They may get their wish. But if gold is part of your asset allocation then you need to hold it and rebalance it based on your investment strategy. You don't sell and buy in and out of assets based on what a gut feel is telling you.

The positions I see advocated on asset allocation management in these threads is puzzling. On the one hand you have favored assets like stocks and bonds that I'm sure most posters would advocate never trying to time (even in the bubble of 2000 and 2007). But for unfavored assets they are all about timing them as if the future performance can be easily gleaned. What is it about assets like LT bonds and gold that people think they can predict the future price movements? Yet, they don't advocate this position with other assets like stocks and short term bonds where they act like it can't be done?

The posters in this thread can't have it both ways. You can either time the market or you can't. If you can time the market for gold and LT bonds then you can do it with stocks as well. Stocks are trading with a PE in the 16-18 range which is not a screamingly good buy. Should we recommend that people sell them as well?
IMPORTANT NOTE: My old website crawlingroad{dot}com is no longer available or run by me.
Gumby
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Post by Gumby »

Wonk wrote:Gold's value can and does rise in deflationary environments. From 1927-1933 gold's value in real terms rose 30%
HB squashed this myth many times. The only reason Gold rose during that deflation was due to government intervention with Executive Order 6102 and the Gold Reserve Act. Without any government intervention, Gold would normally decline in deflationary environments as cash becomes more valuable.
en.wikipedia.org wrote:To deal with deflation, the nation went off the gold standard. In March and April in a series of laws and executive orders, the government suspended the gold standard for United States currency.[17] Anyone holding significant amounts of gold coinage was mandated to exchange it for the existing fixed price of US dollars, after which the US would no longer pay gold on demand for the dollar, and gold would no longer be considered valid legal tender for debts in private and public contracts. The dollar was allowed to float freely on foreign exchange markets with no guaranteed price in gold, only to be fixed again at a significantly lower level a year later with the passage of the Gold Reserve Act in 1934. Markets immediately responded well to the suspension, in the hope that the decline in prices would finally end.[18]

http://en.wikipedia.org/wiki/New_Deal#B ... ry_reforms
Wonk
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Post by Wonk »

Gumby wrote:HB squashed this myth many times. The only reason Gold rose during that deflation was due to government intervention with Executive Order 6102 and the Gold Reserve Act. Without any government intervention, Gold would normally decline in deflationary environments as cash becomes more valuable.
The U.S. was on a gold standard with public convertibility until Roosevelt's E.O. Effectively cash = gold and gold = cash. From 1927-1933 CPI was -30%, so gold's value rose in real terms. The gold reserve act devalued the dollar relative to gold in order to produce the desired inflation to accelerate growth.
citydweller00
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Post by citydweller00 »

1. Would Harry Browne think that the U.S. could ever go back on the gold standard? What would happen to the gold price if the U.S. ever went back on the gold standard?

Rick Ferri said the U.S. can only come off the gold standard once, it does not happen twice; if so, why could we not go back on the gold standard again?

2. What if the government decided to confiscate gold again? How would that affect the Permanent Portfolio?

3. Would Harry Browne say that a gold ETF or mutual fund is OK for the 25% gold portion?

4. The gold price was flat at $35 an ounce from 1935-67 while we were on the Gold Standard. Didn't gold lose value to inflation during those years, since the gold price was stuck at $35 for decades while the CPI went up 144% during that time?

I know Mr. Browne has passed away now so maybe it's hard to know what he would think, but I'd appreciate answers to the above.
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brick-house
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Post by brick-house »

detifoss wrote:
I don't hold gold, and yes it is in some stage of a bubble, but for those who follow a PP strategy that is passive, there is no reaosn to believe that holding gold will lead to their financial ruin. When it goes down some other things will go up. Will they have the highest returns for the next 30 years -I doubt it, but they could. I prefer a different strategy since I think that mine is more likely to do better in my investing lifetime, but that does not make their strategy idiotic or worthy of mockery or outright dismissal.
Great post. I hope the PP under-performs the more aggressive conventional stock/bond portfolios. I am happy with low volatility and lower than expected returns, it will provide enough.

The tired rants about gold ignore the non correlation, uncertainty hedge, and re-balancing bonus that gold adds to a diversified portfolio. If you bought gold in isolation then the tired rants make sense. You know the rants- no dividends, no earnings, storage costs, is even with inflation since Mesopotamian times, has no uses, could be artificially created, is shiny, value is dependent on a Mad Max vision of the future, etc.

The Mad Max one ignores the fact that PP investors lend 50% of their investment to the U.S. government - with 25% for a maturity greater than 20 years.

As for the strategic idiocy (strategery) and mockery. It is human nature to mock what we don't understand.
You don't need no gypsy to tell you why- Greg Allman
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craigr
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Post by craigr »

citydweller00 wrote:1. Would Harry Browne think that the U.S. could ever go back on the gold standard? What would happen to the gold price if the U.S. ever went back on the gold standard?
This is extremely unlikely that the gold standard will come back. Some people who looked at the issue suspected that gold would go to tens of thousands of dollars an ounce to accommodate all the dollars in circulation.
Rick Ferri said the U.S. can only come off the gold standard once, it does not happen twice; if so, why could we not go back on the gold standard again?
I'm not aware of any currencies that once broken from a commodity based standard ever doing this. Perhaps some historians out there can correct me. The closest the US ever came was to make good on the greenbacks printed by Lincoln after the Civil War ended when we went back to the full gold standard. Most of the time the tendency is to debase commodity based currencies (clipping coins, mixing in cheap metals to the alloys, eventually doing away with all commodity backing). The US has followed this pattern by eliminating gold coinage, then silver coinage in the 1960s. Even today they discuss making cheaper pennies and doing away with the nickel in nickels (because the metal content is worth more than the coin itself).
2. What if the government decided to confiscate gold again? How would that affect the Permanent Portfolio?
I don't know why they'd do this again as there is no gold standard. I guess if they did it though they would exchange the gold for paper money. So the portfolio would be worth in that portion what the paper money was worth. However the paper money would probably not be worth near what the gold was so this would hurt the portfolio at least as much as other portfolios that held no gold. The reason the paper wouldn't be worth what the gold was is because the official conversion rate is almost certainly going to be less than the market conversion rate would be.

If the govt. were to confiscate gold and hand you paper money in return the first thing I'd do is immediately convert it into tangible goods. Real estate, etc. The only reason they would seize hard assets like gold is if they are setting up to really do something drastic in the currency and you don't want to get caught holding the bag.
3. Would Harry Browne say that a gold ETF or mutual fund is OK for the 25% gold portion?
He addressed this in his radio shows. If it's all you've got, then use it. But if you can hold the gold more directly or even geographically diversified that is better.
4. The gold price was flat at $35 an ounce from 1935-67 while we were on the Gold Standard. Didn't gold lose value to inflation during those years, since the gold price was stuck at $35 for decades while the CPI went up 144% during that time?
Gold didn't lose value, the US Govt. simply decreed that the price would be $35 and would sell gold from their own holdings onto the market to ensure the price wouldn't rise. By the early 1970s the inflation was getting so bad that some foreign countries began demanding gold for the paper dollars they held (France if I recall). Other countries like Switzerland began to refuse to buy dollars to prop up the price as it was importing the US inflation into the Swiss Franc. There was enough demand for US gold in exchange for depreciating dollars that there was concern that the US gold reserve could be depleted. So Nixon closed the gold window to foreign holders of dollars in 1971 and so ended the gold-standard era for the Dollar.

At that point the gold price was allowed to float and it went immediately from $35 an ounce to over $100 in a year or so. Then there was a correction downward. Then, as more inflation came to the dollar in the latter part of the 1970s the price of gold recovered and finally peaked over $800 an ounce by the early 1980s. This was an inflation adjusted price of over $2000 an ounce in today's dollar. But the prime rate was over 20% back then and inflation was double digits. So there was a panic that the dollar could fall even further. Eventually the Fed did the right thing and brought inflation back under control.
I know Mr. Browne has passed away now so maybe it's hard to know what he would think, but I'd appreciate answers to the above.
I don't know what he'd say, but he addresses some of these issues in his radio shows.
IMPORTANT NOTE: My old website crawlingroad{dot}com is no longer available or run by me.
citydweller00
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Post by citydweller00 »

craigr wrote: Gold didn't lose value, the US Govt. simply decreed that the price would be $35 and would sell gold from their own holdings onto the market to ensure the price wouldn't rise.
Thanks for your great answers. I guess I still don't understand this part though. If someone had held the Permanent Portfolio from 1935-67 with gold being 25% of the portfolio, wouldn't the gold part have lost badly to inflation since the gold price was fixed at $35 while the CPI went up 144%?

By my calculations gold stuck at $35 would have lost about 60% to inflation during those years. Or am I completely wrong? If so, how much would it have lost to inflation?
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craigr
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Post by craigr »

citydweller00 wrote:
craigr wrote: Gold didn't lose value, the US Govt. simply decreed that the price would be $35 and would sell gold from their own holdings onto the market to ensure the price wouldn't rise.
Thanks for your great answers. I guess I still don't understand this part though. If someone had held the Permanent Portfolio from 1935-67 with gold being 25% of the portfolio, wouldn't the gold part have lost badly to inflation since the gold price was fixed at $35 while the CPI went up 144%?

By my calculations gold stuck at $35 would have lost about 60% to inflation during those years. Or am I completely wrong? If so, how much would it have lost to inflation?
As a US citizen, you were not legally allowed to own gold outside of Jewelry, etc. until 1974. It was even illegal to hold gold bullion overseas. So there is no use trying to figure out the inflation adjusted figures. Even if you had gold bullion to sell, the official price was $35 an ounce and is what the US Treasury would sell it for to foreign dollar holders. I doubt you would have gotten a higher price even if you could have bought and sold it legally.

If Gold = Cash then you probably would not need the cash allocation in the portfolio. It would probably look something like 33% each in LT Bonds, Gold/Cash and Stocks. But since gold and cash are not the same thing any more you need the gold for inflation protection.

Keep in mind that part of the Permanent Portfolio allocation design was because of the lack of a gold standard. Gold was held as a separate asset precisely because cash was no longer "as good as gold". The gold is there specifically to protect against currency debasement. It is not a driver of growth in the portfolio under normal conditions. For that you rely on the stocks and bonds. The gold is there as insurance against inflation (dollar depreciation) which can erode real purchasing power in your stocks, bonds and cash.
IMPORTANT NOTE: My old website crawlingroad{dot}com is no longer available or run by me.
citydweller00
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Post by citydweller00 »

craigr wrote:
citydweller00 wrote:
craigr wrote: Gold didn't lose value, the US Govt. simply decreed that the price would be $35 and would sell gold from their own holdings onto the market to ensure the price wouldn't rise.
Thanks for your great answers. I guess I still don't understand this part though. If someone had held the Permanent Portfolio from 1935-67 with gold being 25% of the portfolio, wouldn't the gold part have lost badly to inflation since the gold price was fixed at $35 while the CPI went up 144%?

By my calculations gold stuck at $35 would have lost about 60% to inflation during those years. Or am I completely wrong? If so, how much would it have lost to inflation?
As a US citizen, you were not legally allowed to own gold outside of Jewelry, etc. until 1974. It was even illegal to hold gold bullion overseas. So there is no use trying to figure out the inflation adjusted figures. Even if you had gold bullion to sell, the official price was $35 an ounce and is what the US Treasury would sell it for to foreign dollar holders. I doubt you would have gotten a higher price even if you could have bought and sold it legally.

If Gold = Cash then you probably would not need the cash allocation in the portfolio. It would probably look something like 33% each in LT Bonds, Gold/Cash and Stocks. But since gold and cash are not the same thing any more you need the gold for inflation protection.

Keep in mind that part of the Permanent Portfolio allocation design was because of the lack of a gold standard. Gold was held as a separate asset precisely because cash was no longer "as good as gold". The gold is there specifically to protect against currency debasement. It is not a driver of growth in the portfolio under normal conditions. For that you rely on the stocks and bonds. The gold is there as insurance against inflation (dollar depreciation) which can erode real purchasing power in your stocks, bonds and cash.
Thanks again. Would you say it's better to hold the gold portion in a tax-advantaged account? I'm thinking what if the government decided to tax gold at something crazy like 90% (in order to discourage gold ownership)?

Also, does silver belong anywhere in the Permanent Portfolio?
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craigr
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Post by craigr »

I would advise you optimize for the certain and not the uncertain. Right now taxes on bond income is a certainty. Same for interest on cash and dividends on stocks. So I would put those in the tax-deferred first. Gold only is taxed when it is sold and throws off no taxable income otherwise. So it should be the last thing in the tax-deferred space after all the other pieces.

There is also no need for silver in the portfolio. It doesn't work as well as gold for inflation purposes. It is more industrial metal than a monetary metal.
IMPORTANT NOTE: My old website crawlingroad{dot}com is no longer available or run by me.
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craigr
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Post by craigr »

I also want to add that you shouldn't make gold into a religious issue. Recognize that it has strengths and weaknesses. If you use it in a portfolio you need to be sure you are rebalancing when needed. Gold is unfortunately an asset that has a lot of hyperbole wrapped around it (both for and against). Try to remain agnostic about it and view it as unemotionally as all the other parts of your portfolio.
IMPORTANT NOTE: My old website crawlingroad{dot}com is no longer available or run by me.
Gumby
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Post by Gumby »

craigr wrote:The positions I see advocated on asset allocation management in these threads is puzzling. On the one hand you have favored assets like stocks and bonds that I'm sure most posters would advocate never trying to time (even in the bubble of 2000 and 2007). But for unfavored assets they are all about timing them as if the future performance can be easily gleaned. What is it about assets like LT bonds and gold that people think they can predict the future price movements? Yet, they don't advocate this position with other assets like stocks and short term bonds where they act like it can't be done?

The posters in this thread can't have it both ways. You can either time the market or you can't. If you can time the market for gold and LT bonds then you can do it with stocks as well. Stocks are trading with a PE in the 16-18 range which is not a screamingly good buy. Should we recommend that people sell them as well?
Stocks always get favorable treatment. There was an interesting article in the WSJ last December ("Adjusted for Inflation, Dow's Gains Are Puny") that talked about how stock market returns are almost never adjusted for inflation when they are reported by analysts, advisors and the media.

Here's the key quote from the article:
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.
I think that says a lot about why people give favorable treatment to stocks. It behooves the entire financial-services industry to make stock returns look good.

The article also mentions money manger, Garrett Thornburg, of Santa Fe who often includes dividends, taxes and fees when calculating real return...
Nominally, a dollar invested in the stocks of the Standard & Poor’s 500-stock index at the end of 1978 had blossomed to $22.88 at the end of 2008, including dividends, a sweet gain even after the 2008 meltdown. But once estimates of inflation, taxes, and costs are removed, he figures, the investment was worth $3.76.
That puts returns in a more realistic perspective.

(Hint... If you don't have a subscription, you can read the WSJ original article by doing a Google search for "adjusted for inflation, dow's gains are puny" and then clicking on the "cached" link under the first Google search result)
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MediumTex
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Re:

Post by MediumTex »

Rick Ferri wrote:As I have said 100 times, I am not against holding some cash and I'm not against having a little gold in the safe. That being said, I don't call these assets 'investments' because there's no reason for them to be worth more in 100 years after adjusting for inflation. By definition, an investment provides a real return in the long-term.

We'll talk again in 10 years.
I was looking through some old Permanent Portfolio posts and I saw this request to check in in 10 years.

It's only been two years, but I thought it might be fun to see how things are going 20% of the way through our ten year period.

In the two years since this discussion, gold has provided annual returns of 29.30% and 9.60% (2010 and 2011), while stocks have provided returns of 17.10% and 1.00% (2010 and 2011). 2012 YTD gold is up 6.52%, while stocks are up 6.42%.

For the PP investor who owned the yellow metal as part of a diversified portfolio, he has two more years under his belt of overall portfolio returns of 14.50% for 2010 and 10.50% for 2011, while the stock investor patiently waits for his superior long term results to show up.

Sooner or later, the stock market will come back to life, and the PP investor will enjoy that ride as well, but until that happens real diversification sure can create a relaxed investment experience day-to-day (and year-to-year).

Eight years to go.
"Early in life I noticed that no event is ever correctly reported in a newspaper." | -George Orwell
Clive
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Re: Permanent Portfolio Poll

Post by Clive »

For the PP investor who owned the yellow metal as part of a diversified portfolio, he has two more years under his belt of overall portfolio returns of 14.50% for 2010 and 10.50% for 2011, while the stock investor patiently waits for his superior long term results to show up.

Sooner or later, the stock market will come back to life, and the PP investor will enjoy that ride as well, but until that happens real diversification sure can create a relaxed investment experience day-to-day (and year-to-year).
Hi MT. But you shouldn't be investing in stocks on a day to day or even year by year basis, stocks are for the longer term (perhaps minimum of 5+ years or maybe even 10+). And if anything you want shorter term volatility, not stability, as volatility is commonly associated as being 'risk' and investors are generally rewarded for taking on exposure to that risk.

Compare the sorted gain distributions for the rolling three year average of the top 3 and bottom 3 Dow sectors with that of the Permanent Portfolio best and worst asset each year

Image

Averaging over 3 years naturally provides some smoothing, and after such smoothing the chart indicates that overall stocks are generally the more volatile (and hence likely more rewarding over the mid to longer term). Or you might alternatively hold less stock exposure for overall similar volatility (reward).

I chose that data range 1) because that's the date range available in the Callan I used to source the data and 2) it covers 8 years or so when gold (stocks) wasn't (was) in a strong bull (pre 2000) and 8 or 9 years when gold (stocks) was (wasn't) in a strong bull phase (post 2000) i.e. is perhaps more fairly/equally balanced overall.
Eight years to go
Rather than waiting, I can tell you now that if gold continues to gain 20% annualised as it has since the mid 2000's then you'll be able to proclaim how right you were and this thread will be up at or near page 1. If gold reverses back down losing -7% real annualised as it did between 1980 and 2000 then likely this thread will be deeply buried perhaps somewhere on page 100+.

A risk with buying an asset that has doubled and doubled again (and more) in the prior decade (as gold has), is that historically it can subsequently turn sour. For example look at how the Dow performed after the "Roaring 20's".

Image

Or Japan after the strong up-run in stocks during the 1980's

Image

After the last strong up-run in gold during the 1970's, gold subsequently went on to halve and halve again in real terms i.e. at times can be a pretty heavy lead ball to be dragging around.

China is forced to print Yuan like crazy, and whilst they typically buy US Treasury's with that money to suppress the Yuan and be lending to the US so that the US will buy more 'cheap' Chinese products, they also want some return on that money. With more recent negative US treasury real yields that has made alternatives such as gold more appealing to them. As soon as they can get a better real return elsewhere however (positive real yields) potentially gold will enter a sell-off period as they swap the gold they've accumulated for those alternatives.

The Chinese are at the helm and have started to allow some slippage of their currency in order for the West to have some employment/money with which to continue borrowing and buying Chinese products

Image

It's in their best interest to apply the Yuan printing press brake sufficiently enough to restore western world positive real yields.
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Re: Permanent Portfolio Poll

Post by Call_Me_Op »

It's fascinating that the PP stirs-up so much controversy. People can discuss it ad infinitum. Regardless of its potential weaknesses, it certainly does stand alone in its simplicity, symmetry, and top-down design. I think that's why many of us really want to love it.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
Clive
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Re: Permanent Portfolio Poll

Post by Clive »

It's fascinating that the PP stirs-up so much controversy
1980 to 2002 inclusive - 23 years (an investment lifetime for some), the Permanent Portfolio lagged a 5 year treasury ladder.

How many rolling 10 year periods within that did the Permanent Portfolio beat a 5 year treasury ladder - just a few, and only barely.

The Permanent Portfolio is predominately a play on gold - and gold has always been a controversial investment.
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Re: Permanent Portfolio Poll

Post by Call_Me_Op »

Clive wrote:
It's fascinating that the PP stirs-up so much controversy
1980 to 2002 inclusive - 23 years (an investment lifetime for some), the Permanent Portfolio lagged a 5 year treasury ladder.

How many rolling 10 year periods within that did the Permanent Portfolio beat a 5 year treasury ladder - just a few, and only barely.

The Permanent Portfolio is predominately a play on gold - and gold has always been a controversial investment.
In fairness to the PP, you have selected a time period that includes the greatest bond bubble in US history, and during which gold had an extended period of poor performance.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
Clive
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Re: Permanent Portfolio Poll

Post by Clive »

In fairness to the PP, you have selected a time period that includes the greatest bond bubble
That's why I also highlighted 10 year periods with that range, for example 1986 - 1996 had similar 5 year Treasury yields at the start and end, as did 1991 - 1999, i.e. subsets with no bubble, just volatility during the interim periods. And when you hold each rung of a 5 year ladder to maturity interim volatility is irrelevant.
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Re: Permanent Portfolio Poll

Post by wshang »

Clive wrote:The Chinese are at the helm and have started to allow some slippage of their currency in order for the West to have some employment/money with which to continue borrowing and buying Chinese products. . . . . It's in their best interest to apply the Yuan printing press brake sufficiently enough to restore western world positive real yields.
The Chinese leadership understands only too well Warren Buffet's "cheeseburger" analogy of buying power. I don't think they are anywhere near that point where internal consumption allows RMB strengthening. China is too fragile politically for those in power to take any chances which might induce homefront instability and they need to match the USD and EUR on their race to the bottom. In short, gold still reigns in my crystal ball.
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Re: Permanent Portfolio Poll

Post by Call_Me_Op »

Clive wrote:
In fairness to the PP, you have selected a time period that includes the greatest bond bubble
That's why I also highlighted 10 year periods with that range, for example 1986 - 1996 had similar 5 year Treasury yields at the start and end, as did 1991 - 1999, i.e. subsets with no bubble, just volatility during the interim periods. And when you hold each rung of a 5 year ladder to maturity interim volatility is irrelevant.
In choosing 5 year treasuries, you have chosen an investment that has performed remarkably well over the past 40 years. But 5 year treasuries alone don't make a very good investment strategy at the moment.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
Clive
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Re: Permanent Portfolio Poll

Post by Clive »

In choosing 5 year treasuries, you have chosen an investment that has performed remarkably well over the past 40 years
I don't have 5 year treasury yields back beyond the 1960's, but as a guide, 10 year ladder historic

Image

doesn't indicate anything particularly remarkable over the past 40 years compared to earlier years. The smoothness arises out of holding each rung to maturity such that interim price volatility is irrelevant and each years gain distils down to being the average of the (for 10 year ladder) current and past 9 years 10-year-yields (assuming you bought each 10 year treasury with a coupon yield = the then 10 year market yield - in practice that isn't the case, but it all washes - some yield less and provide a capital gain, others yield more and endure a capital loss).

I used a 5 year as the basis for comparison purely because in the UK we can buy 5+ year gilts (treasury's) and hold to maturity in tax exempt, so net=gross. Over the long term the average of 1 year and 10 year yields are very similar i.e. the average yield curve between 1 and 10 year overall average is flat. A 5 year ladder rolls quicker into higher yields should yields rise (without enduring capital losses).

Not that I'm advocating solely holding such an investment. Gold at times is an appropriate asset to over (under) weight, especially if real yields are negative or there is a world war (when holding treasury's in a single country that might not exist in its prior form becomes a risk). Stocks also have their part to play in any reasonable portfolio. As can corporate bonds that might yield better (higher) yields than comparable maturity treasury's and if wisely selected might do so with minimal additional risk.
Clive
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Re: Permanent Portfolio Poll

Post by Clive »

wshang wrote:
Clive wrote:The Chinese are at the helm and have started to allow some slippage of their currency in order for the West to have some employment/money with which to continue borrowing and buying Chinese products. . . . . It's in their best interest to apply the Yuan printing press brake sufficiently enough to restore western world positive real yields.
The Chinese leadership understands only too well Warren Buffet's "cheeseburger" analogy of buying power. I don't think they are anywhere near that point where internal consumption allows RMB strengthening. China is too fragile politically for those in power to take any chances which might induce homefront instability and they need to match the USD and EUR on their race to the bottom. In short, gold still reigns in my crystal ball.
That chart I posted earlier

Image

indicates that the Chinese have allowed some appreciation of their currency relative to USD. They're the puppeteers that can pull the strings as they desire. If they want higher US treasury yields they only have to start buying gold and selling US Treasury's to induce higher yields - but have to be wary that that could result in a negative effect on the price of their gold holdings and might be countered with the US printing to buy more Treasury's in order to combat the higher yield pressure.

Interesting times.
不要鬥爭整筆 :) (according to bing translator = "don't fight the lump" (lump apparently being colloquial name for the Yuan (originally of silver)).
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rmelvey
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Re: Permanent Portfolio Poll

Post by rmelvey »

Clive,

Would you feel comfortable investing 100% in a 5 year bond portfolio?

I would feel that my wealth was concentrated in a manner that would leave me vulnerable to risks not present in a more diversified portfolio (something like the PP). I don't think they are really comparable. Also, the PP holds bonds. You are comparing a subset of the portfolio to the portfolio as whole. It's like comparing Apple to the S&P 500 and claiming that we should all go 100% Apple.
Clive
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Re: Permanent Portfolio Poll

Post by Clive »

Would you feel comfortable investing 100% in a 5 year bond portfolio?
To reiterate, I was not advocating holding 100% in 5 year bonds, just pointing out that for 23 years the Permanent Portfolio lagged. Ditto lagged 100% TIPS. Ditto lagged 100% 2 year Treasury. Ditto lagged 100% Total Bonds. Or obviously other combinations/blends of those (25% in each of total bond, TIPS, 2 year and 5 year for instance outpaced the Permanent Portfolio by 2% annualised over those 23 years). Add some stocks and the Permanent Portfolio generally might have lagged by 4% or more. Would anyone feel comfortable with that? Maybe for a few years, perhaps even 5 years - getting on for 10 years ??? As for 15, or 20+ years - I very much doubt anyone would have felt comfortable at all.
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rmelvey
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Re: Permanent Portfolio Poll

Post by rmelvey »

Clive wrote:
Would you feel comfortable investing 100% in a 5 year bond portfolio?
To reiterate, I was not advocating holding 100% in 5 year bonds, just pointing out that for 23 years the Permanent Portfolio lagged.
But if holding 100% bonds is not on the table, why is the comparison even relevant?

If I have a diversified portfolio which included Apple, should I be mad that Apple outperformed the rest of my portfolio?

Comparing a single asset class to a diversified portfolio which includes that single asset class doesn't really make sense nor should it be very actionable to a rational investor.
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MediumTex
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Re: Permanent Portfolio Poll

Post by MediumTex »

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.

In the 1970s it was gold.

In the 1980s and 1990s, it was stocks and treasuries (long and short term, depending on the period).

In the 2000s, it was gold and long term treasuries.

It's no surprise that there are periods when short term treasuries have outperformed the overall PP. The thing to remember, though, is that there are OTHER periods when that hasn't been true at all (the last five years being the most recent example).

Every PP asset has its day in the sun (even cash in the form of t-bills) and its night in the doghouse (see t-bills in recent years). This is part of the portfolio's design.

Pointing out in retrospect that there are periods when it would have been better to overweight one PP asset over the others is simply not helpful when we are trying to decide how to be prepared for a fundamentally uncertain future.

As much as I would like to "forward test" a portfolio to see how it will do in the future, I am stuck in this mortal realm where I can ponder the future, but never predict it.
"Early in life I noticed that no event is ever correctly reported in a newspaper." | -George Orwell
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Jerilynn
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Re: Permanent Portfolio Poll

Post by Jerilynn »

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?
Cordially, Jeri . . . 100% all natural asset allocation. (no supernatural methods used)
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MediumTex
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Re: Permanent Portfolio Poll

Post by MediumTex »

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).
"Early in life I noticed that no event is ever correctly reported in a newspaper." | -George Orwell
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Re: Permanent Portfolio Poll

Post by wshang »

MediumTex wrote: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).
Contrasted with an asset parity strategy such as the BH 3 fund, PP falls into more of a risk parity category. Generally and historically speaking, risk parity strategies with higher Sharpe numbers perform better during periods of poor economic growth. High Sharpe, risk parity strategy adherents of the PP experience problems "staying the course" when the economy and equities boom.
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Re: Permanent Portfolio Poll

Post by rmelvey »

wshang wrote:
MediumTex wrote: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).
Contrasted with an asset parity strategy such as the BH 3 fund, PP falls into more of a risk parity category. Generally and historically speaking, risk parity strategies with higher Sharpe numbers perform better during periods of poor economic growth. High Sharpe, risk parity strategy adherents of the PP experience problems "staying the course" when the economy and equities boom.
Wshang,

As a PP investor I will tell you that I feel very much removed from the herd. Sometimes this feels better than others.

So, I don't think the PP is for everyone. Some people love being part of the herd because it is very safe psychologically (while risky financially). I personally have found deviating from the herd to be worth higher risk adjusted returns. If you are rationally focusing on consistent real (inflation adjusted) returns than deviation from the herd is necessary because the herds portfolios have high degrees of variability.
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Re: Permanent Portfolio Poll

Post by Call_Me_Op »

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.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: Permanent Portfolio Poll

Post by Clive »

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
During the 1980's and 90's, the gold component of the Permanent Portfolio, when using 40% rebalance bands (add 10% of total fund value when gold had declined from 25% of total fund value down to 15% of total fund value), encountered three such sequential rebalance events i.e. 55% of total fund value were deployed into gold as the price of gold declined at an average -7% real (after inflation) annualised rate.

You're reliant upon a mean reversion event to occur sooner or later. If that doesn't occur and the trend continues, then that both pulls in more of funds into the declining asset at the expense of taking from the winning asset. Consider the German Weimar years where cash, bonds and stocks all got trashed whilst gold soared. Starting with 25% in gold (collapse hedge), you'd have repeatedly taken some of those gold gains to add to assets that were crashing.

In Iceland 2008, the price of gold in US $ or Euro's remained relatively stable, but in Icelandic Krona the price of gold soared. In effect gold retained foreign goods purchase power whilst the domestic currency collapsed. In some respects that was like holding 25% of funds in another currency that maintained purchase power whilst the domestic currency failed. If you repeatedly sold some of that hedge to add to declining assets and that trend persisted, you could whittle away the hedge effect towards being little different to had you not held any of that hedge.

Providing there's mean reversion, then taking gains from winners to add to losers will come good. Assets don't always however mean revert quickly. Look at Japan since 1990 instance. In some cases mean reversion might not even have occurred over centuries

Image

Rebalancing is a risk. Rebalancing in anticipation of mean reversion relatively loses out if the prior trend subsequently continues, wins if the prior trend subsequently reverses. The historic Permanent Portfolio rebalancing events have turned out to have been favourable - but there are no guarantees that will continue to be the case in the future.
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Re: Permanent Portfolio Poll

Post by Clive »

Others have suggested that 25% gold in the Permanent Portfolio is too much and suggest lower amounts of gold holdings to be more appropriate.

The Permanent Portfolio barely kept up with cash like investments during the 1980's and 1990's when stocks performed well, but gains were very strong during the 1970s and 2000's when the price of gold rose strongly. That's perhaps indicative that there's too little stock and too much gold held in the Permanent Portfolio - at least based on historic observations since the 1970's. If in Simba's backtest spreadsheet you reduce gold down by 10% to 15% and invest that 10% in international stocks instead, then you'll see slightly better gains with lower standard deviation (a better Sharpe Ratio). That could however just be a reflection of how much time was spent in prosperity and fear over those years - which might be totally different to what might occur in future years.
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Re: Permanent Portfolio Poll

Post by grayfox »

I was just looking at the returns for HBPP and its four assets for 2011.
GLD - Gold ETF
VTI - Total Stock Market
VGLT - LT Government Bond ETF
VGSH - Short-term Government Bond ETF
HBPP - Harry Brown Permanent Portfolio with 25% in each
VBINX - 60/40 Balanced Fund as benchmark

Code: Select all

2011 Return
                   GLD          VTI         VGLT       VGSH         HBPP      VBINX
2011 Return       10.14        -0.06       29.36       1.47         10.23      3.47
2011 SD           20.47        23.95       16.41       1.26          7.06     13.58
2011 Sharpe        0.57         0.12        1.65       1.17          1.41       0.32
I ran this using 2011 daily data from Yahoo, adjusted close. In 2011, a 60/40 stock/bond portfolio, a typical Boglehead portfolio, returned 3.47% with standard deviation of 13.58%. Poor Sharpe Ratio was only 0.139

Meanwhile, Harry delivered 10.23% in 2011, with only 7.06% SD and high Sharpe Ratio 1.41. Harry killed the 60/40 in 2011, with half the volatility. :beer

All the high return came from two components: LT Government Bonds and Gold.
Three of the components are high volatility. I estimated these 12-month volatility statistics from ETF replay over the past few years:

Code: Select all

Volatility
                   GLD          VTI         VGLT      VGSH
MIN               12.6          9.5         12.3       0.8
MEAN              23.4         27.1         14.9       1.2
MAX               34.1         44.7         17.5       1.5
SD                3.6           5.9          0.9       0.1
The low volatility of HBPP came from low correlation of assets for 2011

Code: Select all

2011 Correlations
                   GLD             VTI           VGLT       VGSH
GLD                 1
VTI               -0.02              1
VGLT               0.10           -0.70            1
VGSH               0.03           -0.28           0.38        1
LT Government bonds VGLT had big negative correlation with stock VTI.
Gold GLD had about zero correlation to stocks in 2011.

:arrow: To summarize, HBPP had good return in 2011 because two of the assets, gold and LT bonds, had good returns. And the volatilty was low because of negative correlation of LT Bonds to stocks, and zero correlation of gold to stocks.

edit: I updated some of the numbers. I had figures for a different mix than 25/25/25/25
Last edited by grayfox on Wed Nov 21, 2012 11:20 pm, edited 2 times in total.
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Re: Permanent Portfolio Poll

Post by rmelvey »

Grayfox,

It is also very interesting to note that the Sharpe ratio for the PP was higher than for any of the individual components. Never look at risk adjusted returns in isolation :D
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Jerilynn
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Re: Permanent Portfolio Poll

Post by Jerilynn »

MediumTex wrote:
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.
My skepticism is based on the fact that:
1. It's used data from the past to predict future results.
2. One could pick any 4 arbitrary and diverse asset classes and it would act similar to a PP in that the winning ones will be up 100%, 200%, 300% and more over time.
Cordially, Jeri . . . 100% all natural asset allocation. (no supernatural methods used)
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Re: Permanent Portfolio Poll

Post by Jerilynn »

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.
Cordially, Jeri . . . 100% all natural asset allocation. (no supernatural methods used)
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Re: Permanent Portfolio Poll

Post by scone »

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?
"My bond allocation is the amount of money that I cannot afford to lose." -- Taylor Larimore
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wshang
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Re: Permanent Portfolio Poll

Post by wshang »

Jerilynn wrote:My skepticism is based on the fact that:
1. It's used data from the past to predict future results.
2. One could pick any 4 arbitrary and diverse asset classes and it would act similar to a PP in that the winning ones will be up 100%, 200%, 300% and more over time.
Actually, Harry Browne conceived the theory behind the 4 components and THEN constructed the portfolio. Although there were minor modifications since the formative 1970 years, his successive books, lay out the rationale. Of course, he died over six years ago. If you go read gyroscopicinvesting.com, you will find there was anxiety in 2008, followed by immense relief. Something akin to a test pilot flying the "tried and true" into a freak storm predicted, but never really tested by the designer.

You might wish to pick up an out of print, Why the Best-Laid Investment Plans Usually Go Wrong & How You Can Find Safety and Profit in an Uncertain World. William Morrow & Co. 1987 when he had solidified his portfolio.
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Re: Permanent Portfolio Poll

Post by Call_Me_Op »

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.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: Permanent Portfolio Poll

Post by MediumTex »

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.
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Re: Permanent Portfolio Poll

Post by MediumTex »

wshang wrote:
Jerilynn wrote:My skepticism is based on the fact that:
1. It's used data from the past to predict future results.
2. One could pick any 4 arbitrary and diverse asset classes and it would act similar to a PP in that the winning ones will be up 100%, 200%, 300% and more over time.
Actually, Harry Browne conceived the theory behind the 4 components and THEN constructed the portfolio. Although there were minor modifications since the formative 1970 years, his successive books, lay out the rationale. Of course, he died over six years ago. If you go read gyroscopicinvesting.com, you will find there was anxiety in 2008, followed by immense relief. Something akin to a test pilot flying the "tried and true" into a freak storm predicted, but never really tested by the designer.

You might wish to pick up an out of print, Why the Best-Laid Investment Plans Usually Go Wrong & How You Can Find Safety and Profit in an Uncertain World. William Morrow & Co. 1987 when he had solidified his portfolio.
It's important to understand this point.

Harry Browne didn't do data mining until he stumbled upon the Permanent Portfolio concept; rather, he came up with the theoretical framework of a strategy that would be tied to different economic and monetary conditions and then built the asset mix around this framework. It was first described in his writings in the late 1970s and early 1980s, and for the last 30 years it has consistently delivered on its promise to provide all-season safety for money you can't afford to lose, while delivering consistent and stable inflation-adjusted returns.

As far as predicting future results based on past data, the Permanent Portfolio actually proceeds from the opposite assumption--i.e., because the future is fundamentally unpredictable, it is vital to be prepared at all times for the full range of possible economic environments that might arise.
"Early in life I noticed that no event is ever correctly reported in a newspaper." | -George Orwell
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Re: Permanent Portfolio Poll

Post by MediumTex »

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 actually think that it's pretty easy to see if the Permanent Portfolio is right for you. Having spoken to dozens and maybe hundreds of people about it over the last few years, some people "get it" right away and find that it is exactly what they have been looking for, while others find it unsettling and could never get comfortable with it not matter how much data and performance data they were shown that validated the strategy.

I've always said that the PP was not for everyone, but I think that it can provide good service to a certain group of conservative risk-averse investors who value stable and steady inflation adjusted returns over the promise of larger gains with greater volatility (and increased exposure to the risk of large losses).
"Early in life I noticed that no event is ever correctly reported in a newspaper." | -George Orwell
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Re: Permanent Portfolio Poll

Post by wshang »

Here, maybe this will help:
Image
Image

.........Sharpe......CAGR.......Total Return........StDev
BH3.....0.25..........4.2%.......... 28.3%..............14.6
PP.......0.94..........8.8%...........65.9%...............9.0
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Jerilynn
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Re: Permanent Portfolio Poll

Post by Jerilynn »

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.
Cordially, Jeri . . . 100% all natural asset allocation. (no supernatural methods used)
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Re: Permanent Portfolio Poll

Post by Clive »

Here, maybe this will help
Image

Image
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wshang
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Re: Permanent Portfolio Poll

Post by wshang »

Clive and JerriLynn,
Basically it is all about whether you like slow and steady versus higher beta. At my stage, when I am loss adverse, slow and steady works better. I did say that PP loses adherents during boom years? You have to decide what is best for you, what kind of stomach you have for volatility and if you are a decade long forecaster - what kind of economy we might have in the next ten years.
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Re:

Post by hazlitt777 »

Rick Ferri wrote:
I speculate that gold will drop below 700 per once by 2010, and below 500 per once by 2011.
There's still 2 1/2 months to go! :lol:

Relative to ALL other assets, in ALL currencies around the world, the price of gold is already sky high. There simply is no economic justification for gold quadrupling in value since 2003, although there is a behavioral justification based on fear of Armageddon.

Couple this fear with the fact that gold is much easier to buy today than just ten years ago using ETFs , and the disdain that investors have for stocks, bonds and real estate, and I understand why the golden rocket has traveled higher into the sky than I anticipated during this fear cycle. But like all asset rockets fueled by fear and greed, this one will eventually fall back to Earth.

Rick Ferri
Rick,
What if the dollar is in a bubble instead of gold? Why do we think of holding cash and short term treasury bonds as "bedrock" or "safety?" It isn't gold that can be multiplied by the push of a button. We are struggling right now to add 2.2% to the world supply of gold. We mine around 4000 tonnes a year, a 2.2% addition to the 178,000 tonne world supply. I don't have the numbers but I do believe that the radical increase in the money supply has yet to be reflected fully in the price of gold.

I remember one analysis saying gold and the DJIA were in a one to one relationship twice in the twentieth century. He says he would only view gold as in a bubble if the dow/gold ratio were 2/1 or 1/1. Right now we are in a 12,837/1731 ratio or a 7.4/1 ratio.

Regardless, since I don't know the future, I have taken a position and will rebalance as needed.

Gold has been a serious financial asset for centuries and still is held, purchased and jealously guarded by the worlds central banks. That should mean something to today's investors.

Joe
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Re: Permanent Portfolio Poll

Post by hazlitt777 »

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
Clive
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Re: Permanent Portfolio Poll

Post by Clive »

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.
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