Bogleheads

[SquawkIdent]

Great post. This is one of the reasons I just use PRPFX. I'm not sure I could handle all of the moving parts of the portfolio and its volatility. I don't see the day to day movements of the gold, stocks, etc. I just see the overall outcome. Maybe something to consider??

[6 Iron]

I am getting started with a permanent portfolio. I do have a nuts and bolts question for monthly additions to the portfolio. Should additions be made evenly with a 25% distribution to each asset category, waiting to rebalance when an asset exceeds the 20-30 % triggers, or should I add in each month buying those asset categories that are low, bringing them up to or closer to 25%?

[macclary]

[facmit]

[MediumTex]

[facmit]

[MediumTex]

[MediumTex]

[MediumTex]

Anyone see that PIMCO is opening a zero coupon treasury ETF?

Symbol: ZROZ.

Bill Gross is a smart guy. For whatever reason he believes that there is going to be some action in the future in long term treasuries with yields below where they are today.

I just like the zero coupons because you get more bang for your buck.

I haven't done the math, but I wonder what a PP would look like with 30% cash and 20% zero coupon treasury bonds? That would give you plenty of punch in the lt bond portion and perhaps more income and stability from the higher cash allocation.

Just more PP "Inside Baseball" stuff.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[facmit]

[facmit]

another stupid question. this pp is for retirement account (right?). what is the similar thing for non-retirement account? HB discussed it? (I guess the most important factor is tax).
thanks!

[MediumTex]

[Roy]

[MediumTex]

[Roy]

[bog]

Investing 25% in a single commodity, like investing 25% in a single stock, is a very bad idea.
Earth to gold-bugs: The world is never going back to a gold standard.
Anybody who doesn't like TIPS is unqualified to give advice to anybody.
(Oh, I forgot, it's all a plot.)

[macclary]

[macclary]

I see that we have a troll. I will give a serious answer anyway

[bog]

Yes, some here are gold bugs, per Investopedia:
"An individual who is bullish on gold. Gold bugs believe that gold is still a stable source of wealth like it was during the years of the gold standard international currency system. A gold bug invests in gold for what he or she perceives as financial security in the event of a currency devaluation, and often also believes that the price of gold will continue to rise in the future. The term also refers to analysts who consistently recommend gold buys. A gold bug is anyone who believes that the world should be on the gold standard."

What's a troll? Somebody who doesn't agree with your "analysis".
So you expect stocks to go to 0? What would you say about stock index that returned at best -90% real over the last 30 years? That's gold. Yes, people have "valued" gold for centuries. But not so much, since all the world went off the gold standard. Now it's a refuge for paranoids who expect a "redesigned" currency system based on gold.

What do you mean about TIPS "working correctly"? What if gold doesn't "work correctly", which by the way is much more likely (whether the government is plotting against you or not)?

Keep "backtesting". But I have already debunked the gold bug nonsense in another thread.

[MCSquared]

[Kevin K]

Thanks MCSquared and Maclary.

I've yet to see anyone on this thread, which I've carefully followed from the beginning, who remotely qualifies as a gold bug. bog you might start your education about the PP by reading the superb recent post by Craig R. on gold in the PP:

http://crawlingroad.com/blog/2....#more-1782

This has been an amazingly thoughtful, high caliber thread and you're not in a position to add anything if you don't take the trouble to learn a little before jumping in.

[macclary]

[brick-house]

Investopedia wrote:

[MediumTex]

[smsnead1]

...

[helmut]

[macclary]

[Maestro G]

[Lbill]

Has anyone taken a look at the "risk parity" approach to asset allocation and applied it to the PP?
_________________
"Whenever you find yourself on the side of the majority, it is time to pause and reflect." ~ Mark Twain
"A foole and his money is soone parted." - J. Bridges, 1587

[Roy]

[MCSquared]

Hi MT,

I have also been intrigued by the new PIMCO offering, as well as Vanguard's EDV for sometime now. However, Vanguard's description of these long duration coupons suggests that EDV may only be suitable for institutional investors with "very long liabilities." Clearly, because of the duration and volatility, "you will get more bang for your buck." My concern would be perhaps too much bang and possibly other characteristics of zeroes that don't quite fit into the PP philosophy:?: How did HB feel about zeroes for individuals
Do you know

Thanks as always,
Maestro G[/quote]


Maestro, below is a post from cdgoldin from earlier in the thread (in bold). He does a great job of explaining HB's point of view on zero coupons. I remember reading/hearing HB also suggest the zeros were appropriate for the PP in certain situations where one needs the "additional bang for the buck". A small portion of my long bond allocation is in zeros (I bought a 17 year maturity as it was closest to the 30 year nominal duration) and I bought the bond directly in my tax deferred account. I like the fact that there is no reinvestment risk with the zeros. I have not looked up the Pimco offering but EDV has longer maturities than I desired so the interest rate risk was greater. Then again, the volatility will really enhance the allocation if we remain in a prolonged deflationary environment.


Although Harry Browne initially suggested the use of zero coupon bonds for [part of] the long term treasury bond allocation, he later recanted ("Why Zero Coupon Bonds Aren't What They Seem", October 29. 1992, Harry Browne's Special Reports, Issue 154 Page 15).

He points out that "zeros provide extra power during periods of falling interest rates, but they provide no extra leverage when yields are steady! At such times, a zero will increase in price at a rate roughly equivalent to the interest you would have earned on Treasury bonds. So the smaller investment in Zeros will lag behind the return you would have obtained with a full budget for conventional T-bonds."

He further states, "As we've seen, there's no way to know how much volatility zeros will add to a bond investment. When interest rates fell in 1985, the gains in zeros were roughly twice those of conventional bonds of similar maturities. But the next time interest rates drop, zeros may show more -- or less -- leverage."

Another distinct disadvantage to zeros is that the imputed coupon interest is taxable each year, even though it is not received. Thus, zeros are more appropriate as an IRA investment, where the income tax is deferred -- but then you lose the advantage of capital gains treatment of profits.

After presenting a great deal of detail in regard to the actual vs. theoretical performance of T-bonds and zeros, he concludes, "I don't think it's a good idea to use zero coupon bonds for the Permanent Portfolio -- except for a few investors in special circumstances. Zeros are attractive for someone whose wealth is so tied up in illiquid assets that only a small part is available for diversification and balance. Zeros are an imperfect substitute for Treasury bonds, but for such an investor they can help to achieve a degree of safety....The additional leverage of zeros might be useful for a Variable Portfolio speculation...Benham Target Maturity Trusts are a valid substitute for zeros...and more convenient to work with.

The concept of having a "permanent portfolio" and a "variable portfolio" was "invented" by Harry Browne AND Terry Coxon (who went on to found the Permanent Portfolio Fund, with Harry as one of the advisers). The PPF sticks closer to the original allocation formula designed by the two. However, Harry and Terry disagreed as to whether silver and Swiss Francs belonged in the portfolio. Eventually, Harry presented a simpler portfolio to his readers, which performed as well (based on studies of the past 25-year's performances) as the original formula.

Another significant difference is that the PPF adjusts the Portfolio far more frequently. I believe an adjustment is made when there is a 1% deviation from the target allocations. For an individual investor to do so would result in profits being eaten up by trading commissions, as well as the need for the investor to monitor their portfolio much more closely. Harry's computer studies of 25-years' performance led him to believe that an annual adjustment (coupled with an unscheduled adjustment any time one of the four categories doubled in value) was sufficient, and would yield virtually the same result. Thus, one could effectively ignore the portfolio, except for the annual adjustment, once it was set up.

I am amazed when I do an Internet search, and find so many people who claim to base their portfolio and/or advice on Harry's concept, without understanding the very basics of it. For example, one wag tells us that he wouldn't feel comfortable with investing in long-term bonds, because they wouldn't mature in his lifetime. So he suggested much shorter term bonds as an alternative, ignoring the very reason that Harry and Terry selected long-term bonds for the portfolio. In another example, the "adviser" suggested radically modifying the portfolio percentages based on speculations as to what the market would do in the near future -- which is precisely what the permanent portfolio was designed to alleviate.

I miss receiving Harry's newsletter (which he stop writing when he "retired" and went into politics). Harry was one of the few "investment advisers" who didn't mind admitting he was wrong, didn't mind changing his mind when new facts became available, or when old theories didn't pan out, and didn't boast about his past achievements (except in occasional jest).

I wonder what he would have advised as a substitute when the Treasury stopped issuing 30-year bonds, and I wonder why he recommended TLT (which is a 20-year bond fund) as a valid substitute for direct purchase of treasury bonds.

[MediumTex]

RE how to allocate PP holdings between taxable and non-taxable accounts, here are some thoughts:

1. I believe in keeping enough of each asset class in non-taxable accounts to allow some rebalancing without triggering a taxable event. Thus, I think it makes sense to keep a little GLD (or whatever ETF you are using, assuming you are using ETFs at all) in a nontaxable account so that you will have something to sell on a tax-free basis if and when the time comes to do so. For example, you might have 20% of your gold holdings in an IRA.

***

2. Keeping an HB PP allocation in an IRA and holding PRPFX in taxable accounts is an approach that isn't unreasonable.

***

3. Perhaps the most overlooked option for the cash portion of the PP is I-series U.S. savings bonds. I have made the case before, but I will make it again.

First, with I-bonds you have no interest rate risk and no risk to principal no matter when they are redeemed.

Second, you can earn a return that is greater than virtually any other cash-equivalent investment out there (composite rate for November 2009-April 2010 is 3.36%).

Third, you are investing in a debt instrument that is backed by the full faith and credit of the U.S. government (which means it meets the PP test for a cash holding).

Fourth, they are completely liquid (you may forfeit a few months of interest depending upon when you redeem them, but you can turn them into cash at most banks).

Fifth, and this is the one I like the most, you get complete tax deferral on ALL earnings until redemption (which may be up to 30 years from when they are purchased). Plus, if you use the proceeds for higher education they are tax-free (read up on this topic for more details).

The important thing to understand with I-bonds is that it isn't necessary that the government accurately track inflation. If the government figures are even in the ballpark I-bonds will do fine (since you are not actually using your I-bonds as an inflation hedge in the PP).

I believe that the treasury will stop issuing I-bonds when investors figure out what a great deal it is as part of a larger portfolio, so if you want some I would get them now ($5,000 annual limit + another $5,000 if you go through treasury direct). I don't see anything else out there for the cash part of the PP that even comes close to offering what I-bonds offer. As for I-bonds compared to TIPS, I-bonds make TIPS look like a cruel prank (i.e., TIPS have bad tax treatment, interest rate risk and potential loss of principal if purchased in an ETF or mutual fund).

***

4. When using a 401(k) plan for the PP, normally you will only be able to accommodate 50% of the PP within your account by using an index fund for the stock holdings and the "stable value" fund for the cash holdings (since a normal 401(k) lineup won't have LT treasuries or gold). However, many 401(k) plans have a "brokerage window", which allows you to treat your 401(k) account just like a regular brokerage account, allowing you to buy whatever you want. Normally, the brokerage window option is not advertised because it is not suitable for most 401(k) participants (actually, participant directed investments in general are not suitable for most 401(k) participants), but for the PP investor the brokerage window can be a great tool.

My employer has a brokerage window and if someone were to just look at my 401(k) account they would probably say I was crazy (all I have in my 401(k) account is IAU and TLT), but that's because I have other accounts, including a Vanguard IRA that I use for my equity holdings, along with a portion of my cash and LT treasury holdings.

If you are going to approach your employer about a PP-friendly 401(k) plan fund lineup change, I suggest you ask them to include PRPFX. From a traditional fund evaluation perspective, it is very appealing.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[macclary]

[Lbill]

One thing I like about the risk-parity approach is that the Sharpe ratio of your portfolio (i.e., risk-adjusted returns) should be better than the Sharpe of each of the individual assets. Otherwise, your portfolio has not diversified risk. On that count, it's notable that a traditional allocation of 50% stocks and 50% bonds does not have a Sharpe ratio greater than the bond component. This indicates that such a portfolio actually does not diversify risk at all. In fact, over 90% of it's returns are attributable to the stock component. All the bonds do is the "dilute" returns by reducing overall portfolio volatility. Of course the PP does have a Sharpe ratio greater than any of its components indicating that it is an effective diversifier of risk - which was HB's main point in the first place.
_________________
"Whenever you find yourself on the side of the majority, it is time to pause and reflect." ~ Mark Twain
"A foole and his money is soone parted." - J. Bridges, 1587

[Roy]

[Maestro G]

[Roy]

[MCSquared]

Thanks much MCSquared for the detailed information regarding HB's thoughts on zeroes! Although, I would keep them in a IRA, it's clear to me that HB's qualifications and reconsideration of them as PP vehicles outweigh any significant benefits over LT T-Bonds. I'll stick with TLT. Have a good weekend! [/quote]

Maestro, TLT is a great choice for the long bond allocation. Makes it real easy to rebalance as well. You enjoy the weekend as well.

[MCSquared]

[Clive]

[MediumTex]

[MediumTex]

[mumbler]

A quick question -
I don't have very many options in my non-taxable retirement account.
Currently I have it as a pretty conservative 50% S&P 500 and 50% Stable Value Fund (John Hancock).
I recently came into a large sum of money (not from Nigeria!) and am wondering how to move towards a the PP, using my taxable brokerage account only.

My question is this : How would that stable value fund fit into the PP - is it more like bonds, or cash ? Or should I switch out the stable value to a bond fund (if there is one?).

I don't think it has a ticker symbol, although remember can find a link somewhere to what it is made of (I think a large part of it is mortgage securities) and it has paid around 4% over the years.

Also if this belongs in the Personal investments thread my apologies, it's really a PP question though.

[Lbill]

Here are Roubini's latest comments on gold. He sees a carry-trade bubble:

[MediumTex]

[Roy]

[MediumTex]

I would love for gold to go down because that would mean that the integrity of the economic system was improving. It might happen at some point. Obviously, gold won't go up forever, but guessing where it might stop is a foolish exercise IMHO.

As for Roubini, he is one of my favorite performers in the circus that our economy has become. I love listening to him talk in that Count Dracula voice sketching deliciously doomer scenarios. (I hear the ladies love him too, and that doesn't surprise me at all.)

The problem is that Roubini is an entertainer. His views are entertaining. They don't bring him on CNBC and Bloomberg because he has a crystal ball, they bring him on because he is a good interview, and he has made a few good calls recently.

I find doomer pundits immensely interesting. I love listening to Prechter, Roubini, Taleb, Faber, Tice and the rest. It's a bit like watching a horror movie--sometimes it's just fun to get scared.

But I try to be mindful of the fact that these guys don't have any more idea what will happen tomorrow than the rest of us.

The important thing to remember about pundits is that some of them will always be right because there are a near-infinite number of pundits making a near infinite number of predictions at all times; some of them will appear to be shockingly accurate in their projections.

The question is how to know WHICH pundit is correct before the predicted event occurs, and to be able to decide the probability that one good prediction will lead to more.

HB made two of the greatest calls of all time when he recommended buying gold at the beginning of the 1970s and selling it near the top in 1980. While his call to buy gold in the early 1970s was a good call that was supported by persuasive fundamental analysis, his call to sell at the end of the bull run was nothing more than luck, and HB was the first to admit this.

In many ways, I think it was HB's outstanding luck in the 1970s that made him want to come up with an investment strategy like the PP that didn't require one to be so lucky in order to have good investment returns.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[brick-house]

Roy wrote:

[Lbill]

I just know this has been asked and answered but I'm too lazy to scroll back through this massive thread to find the answer (it's all I can do just to keep up). If you hold gold coins or bullion, are there any tax consequences if it goes up in value? Or, are you able to enjoy your profits "tax-free" when, and if, you choose to "spend" your gold? I know, I know - it's a dumb question that I should know the answer to. But, so far, I've been investing in gold via the GLD ETF. I've started wondering if it would make sense to close out GLD in my Roth IRA and buy gold coins instead. Since I avoid tax in the Roth, I don't want to incur tax if I do this.
_________________
"Whenever you find yourself on the side of the majority, it is time to pause and reflect." ~ Mark Twain
"A foole and his money is soone parted." - J. Bridges, 1587

[MediumTex]