Bogleheads

[meckaneck]

Trev,
Can you kindly chart the following performance and include annual return data for comparison purposes? thanks

25% Total US Market, 25% Gold, 25% ST Treasuries, 25% LT Treasuries
12.5% Total US Market, 12.5% Int'l Total Market, 25% Gold, 25% ST Treasuries, 25% LT Treasuries
6.25% LCB, 6.25% SCV, 6.25% ILV, 6.25% ISC, 25% Gold, 25% ST Treasuries, 25% LT Treasuries

[b007er86]

Hello!

How do you go about tracking your Treasury Bond values for rebalancing purposes? Is there software or a spreadsheet or something else? I've not been able to find much online info on this.
It would be nice to be able to set up Quicken to keep track of the entire PP, but I don't know how to input and adjust prices on the gold coins and bonds. Any suggestions?

[MediumTex]

[james22]

And Trev? How about SV+ILV vs LV+ISB?

Thanks.
_________________
Please assume my post refers to my Bogle-approved 15% Tactical Asset Allocation or 5% Funny Money.

[Trev H]

On this request...

==
Trev,
Can you kindly chart the following performance and include annual return data for comparison purposes? thanks

25% Total US Market, 25% Gold, 25% ST Treasuries, 25% LT Treasuries
12.5% Total US Market, 12.5% Int'l Total Market, 25% Gold, 25% ST Treasuries, 25% LT Treasuries
6.25% LCB, 6.25% SCV, 6.25% ILV, 6.25% ISC, 25% Gold, 25% ST Treasuries, 25% LT Treasuries
==

Results below...


_________________
22.5% US LCB, 22.5% US SCV, 10.0% US REIT, 22.5% Intl LCV, 22.5% Intl SCB

"As you can probably tell by now, my sympathies lie with the splitters"

Trev H

[Trev H]

Below shows the annual returns side-by-side for the 3 listed above.
Each includes 25% Gold, ST Treasury, LT Treasury - but the equity changes from TSM only to TSM/ILB to USB&H type slice/dice.




_________________
22.5% US LCB, 22.5% US SCV, 10.0% US REIT, 22.5% Intl LCV, 22.5% Intl SCB

"As you can probably tell by now, my sympathies lie with the splitters"

Trev H

[MediumTex]

Thanks Trev.

One thing that jumps out is that the PP is on track to have its worst two year performance since the early 1970s (basically flat for two years in a row). Unless, of course, the second half of 2009 has some surprises (which it probably will).

Here is an interesting idea: I wonder what would happen if an investor had held Berkshire Hathaway stock for the 25% stock piece of the PP since 1970.

***

Another thing that bothers me more than perhaps anything else about the PP is the ideal rebalancing bands. HB recommended 15% and 35%, and said that 20% and 30% are okay. Another valid approach is to just rebalance annually no matter what.

Anyone have any thoughts on the optimal rebalancing strategy? Since I am still contributing a significant amount to my PP, there is the added challenge of allocating new contributions, which is sort of a rebalancing each time you make a contribution. HB recommended adding new contributions to the cash piece and rebalancing when the cash reached 35%, which is certainly a simple and workable approach, though with the recent market volatility we have all had the opportunity to buy all three of the volatile pieces of the PP at good prices at different points in time. Right now, both stocks and LT bonds may be priced attractively. I would hate to be building up my cash right now, only to see either bonds or stocks take off from where they are right now (though it's hard to see both of them doing well, given that LT bonds have mostly been a fear trade lately).

For the compulsive trader or returns chaser, the PP offers some protection in the form of allowing the investor to buy whichever of the three volatile asset classes he thinks is poised to "pop". If he is wrong, which he often will be, the PP allocation will keep him from hurting himself too badly, so long as he respects his rebalancing bands.

***

For all the negative talk about "paper gold" in the form of GLD, IAU and others, I really think that the availability of these ETFs has made the PP strategy available to many more investors than it would have otherwise been. Obviously, these instruments are far from ideal, but at the same time are much better than nothing. As I have said before, so long as GLD and IAU are trading more or less in lockstep, it suggests to me that the gold ETF game is more or less clean (though that could obviously change, and probably will at some point). PRPFX holds some GLD shares, so Cuggino apparently feels the same way.

I wonder if Cuggino reads this thread. Considering that it is the only place on the whole internet with an intelligent and in-depth discussion of the PP strategy (+craigr's blog), I would be surprised if he didn't.

I heard Cuggino on Kudlow the other night, and I would SO love it if just once when they asked him what allocation he liked he would say: "well, Larry, we think that the exact same allocation has been appropriate since 1982 and will be until the end of time."
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[Roy]

[craigr]

[craigr]

A blog reader sent me a spreadsheet and this comment where he tested rebalancing strategies:

[meckaneck]

[MediumTex]

RE the rebalancing bands issue, the one thing that just bugs me is that by going with the 15%/35% rebalancing bands, if you start at 25% for an asset and runs up 35%, stays there awhile, and then drifts back to earth, you haven't captured any gains.

Ultimately, this is probably a style and temperament issue, but I look at the beautiful spike in LT treasuries last year and I realize that little or none of that gain might have been captured in a 35% rebalancing scheme for someone who started 2008 with close to 25% in each asset.

As for HB's recommendation to put new contributions into cash until rebalancing time, that was in Fail Safe Investing, and probably just reflected his desire for investors not to use their new money to chase returns in whichever of the three volatile asset classes was doing well at the time.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[craigr]

[MediumTex]

[billb]

Many apologies if this has already been asked (I don't believe there is anyway to search a single topic), but does the TSM number include dividends?

[freeman]

Hi all,

I know craigr is planning a Gold FAQ on his blog and I can't wait for it. IMHO the gold part is the least user-friendly part of the PP to invest in. I am therefore trying to improve overall understanding.

In this post, I'd like to focus on the 2nd best way according to HB to own gold after direct possession of bullions: owning gold via storage in a Swiss bank. HB recommends "Other Banks" for this in Why the Best-Laid Investment Plans Usually Go Wrong. I found a current description of the various types of banks operating in Switzerland on the Swiss Bankers Association's website at http://www.swissbanking.org/en....gemein.htm, and a list of the banks per se at http://www.swissbanking.org/en....ist=banken (with another at http://www.swissbanking.org/en....te_app.htm listing "Non-banks", wonder which type those are?) though cannot find a list of just the "Other Banks". Would anyone have (a link to) a list of the "Other Banks" to share? Reading their website, I have the impression it is perfectly legal to open and manage a Swiss bank account today. Reporting income on such account to the IRS appears to be like reporting income on any bank account held outside both the U.S. and Switzerland. What would the potential risks be, if any?

While looking at this, I found that someone willing to access the Swiss exchange (which is possible from the U.S.) could also buy shares of gold ETFs from Zurich Kantonalbank (ZKB) and Julius Baer (JBGOUA). If I'm not mistaken both invest directly in stored gold, which I believe is not really the case of GLD or IAU. JBGOUA comes in two share classes "A" and "AX. "A" allows redemption in gold (though with a high minimum) while "AX" doesn't. I would appreciate if one of you could take a good look at prospectus information (available at http://www.jbfundnet.com/web/c....rrency=USD, and http://www.jbfundnet.com/web/c....rrency=USD, respectively) to confirm my first impressions those ETFs don't come cheap even if their expense ratio if the classic 0.40% (or is it 0.50% based on section 36A?). Section 35A seems to indicate a max 5% "issuing commission" and max 3% redemption commission: any idea how one determines the real commissions, not just the max?

Thank you,
Freeman

[MediumTex]

Let me try to simplify some of the gold issues a bit.

First, regarding the gold ETFs, I don't care at all about their internal management structure and fees (other than having the amount of gold they say they do, which their auditors indicate is the case), so long as the ETFs more or less track the price of gold, which they do reasonably well. There appears to be some slippage, but not much. Thus, I think that the gold ETFs can simply be taken at face value and used as a way of holding a portion of the PP gold holdings in a highly liquid and convenient form. I understand that there are a lot of people who are uneasy about these ETFs, but when you look at the number of dollars in these funds (and the political influence that many of those institutional investors' assets represent), I believe that this is a built in protection against unexpected government action in the U.S. (Note that PRPFX has significant holdings in GLD.) I am not an especially trusting or optimistic person, but I think that holding 20% or so of your gold in GLD, IAU or both, is probably a low risk approach.

Regarding Swiss gold storage, I think that this is a complete waste of time. I'm not saying it's a waste of time for everyone, but it would be for me. When you look at the storage costs, the recent bad press that offshore investments have received (which will lead to unpredictable regulatory changes) and the number of hands that your gold will be passing through as it travels to and from Switzerland, I view it as a huge PITA with no corresponding benefit that exceeds the hassle.

As I understand, there is currently no tax in Switzerland on gold bullion that enters the country (many countries do have such a tax), but once your gold is in Switzerland, there is the issue of whether future Swiss tax policy might impose a tax on your gold to discourage it from leaving the country. This sort of tax policy is typical of a country trying to prevent the flight of capital or just to find a little extra revenue by screwing foreign investors who don't vote.

One measure people like to cite regarding a country's economic health is the external debt to GDP ratio. As of a few months ago, the U.S. external debt to GDP ratio was 84%, while Switzerland's was 433%. If I had to pick between the two for economic stability and protection of foreigner's property rights, I would probably pick the U.S.

Link to statistics here: Debt to GDP Article

Remember Iceland--prosperous, stable, friendly to foreign investors....and then overnight it fell apart. For anyone who has listened to Nassim Taleb tell the story of the turkey where the first 1,000 days of its life are dramatically poor predictors of the 1,001st day of its life, so it was with Iceland.

When you read up on what is actually involved in storing gold in Switzerland, step by step and dollar by dollar, and think about all of the fingers that might get stuck in your pie, it strikes me as not nearly as good an idea today than it might have been in the past before the world got globalized and Blackberried.

To the issue of taxes and Swiss gold storage, I don't see that there is really any issue there, since merely holding a non-income producing asset normally creates no taxable event until sale. Upon sale, I would just pay the applicable U.S. and Swiss taxes on the transaction, which should be fine with the U.S. and Swiss tax authorities (sort of like when Scooby gets a Scooby Snack--no complaints).

One thing that is safe to say is that the Switzerland and Austria of Harry Browne's day no longer exist. The kind of privacy for custodial assets that used to be available in these countries is simply not possible in the world today.

If anyone has any personal experience with Swiss gold storage and how well it actually works, please share.

To those who just cannot do GLD or IAU and also cannot do physical gold stored within the U.S., I would probably look into the Perth Mint, a Canadian gold fund, or maybe something like GoldMoney.

As I have mentioned in earlier posts, once the U.S. government got into the business of minting bullion coins and allowing them to be placed in IRAs, unwinding personal gold ownership in this country got WAY harder than people appreciate.

In fact, for those who are looking for a safe place to store gold in the U.S. without prohibitive storage costs, a gold IRA is actually a quite attractive option. Here's why: the trustee/custodian of a gold IRA has the normal fiduciary duties of a trustee under state law and federal law (since it is an IRA), but the custodian is also storing an asset that has not yet been subject to federal taxation, so the IRA custodian is also sort of storing the IRS's money as well (let this one sink in for a moment). Thus, any monkey business with your assets is also viewed by the IRS as monkey business with its money as well. As a result, you've got an 800 pound gorilla keeping an eye on your gold at all times, which is ironic, since many people are concerned about the government taking their gold, as opposed to protecting it.

Whichever way you go, I would just try to keep it as simple as possible.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[dumbmoney]

I don't understand why people are so paranoid about the gold ETFs. They are big funds run by big companies with reputations to protect, the same companies running trillions of dollars in stock and bond funds. Obviously nothing is as safe as direct ownership, but the ETFs seem like the next best thing.
_________________
I am pleased to report that the invisible forces of destruction have been unmasked, marking a turning point chapter when the fraudulent and speculative winds are cast into the inferno of extinction.

[Kevin K]

Back to the stock allocation discussion if you don't mind. I have limited access to Vanguard funds through Schwab and it'll be awhile before I can get switched to Vanguard. I can buy VFINX, VISVX and VTRIX but can't access VFSVX (I think these are the funds for the LB/SV/ILV/ISB split).

Alternatively I could just buy VT (Total World Stock ETF) but if I understand that index there's no small cap or value tilt. Sure like the simplicity of it though.

Any thoughts?

[DP]

Hi,

[Kevin K]

Hi Don,

I have read all of the previous posts in both threads carefully. The FTSE All World Index used for VT covers domestic, developed international and emerging markets according to their market caps so it's not directly comparable with the other allocations mentioned. I guess one would need to run the numbers on an allocation of TSM U.S., total international index and emerging markets with no value or small caps and I don't know how to to that.

Getting obsessed about backtesting on my part certainly does violate the letter and spirit of the PP! The simplicity and comprehensiveness of VT meanwhile seems generally in keeping with it. I'll investigate further. Thanks for your comments.

Kevin

[DP]

Hi,
I was thinking equal parts total US and total Int'l would be pretty close to Total World.

You can test many allocations here:
http://www.assetplay.net/finan....ktest.html

And the backtest spreadsheet, which has been updated thru 2008 with gold added has a few more assets that can be backtested. It can be downloaded from this thread:
http://www.bogleheads.org/foru....highlight=

It can calculate results similar to what Trev has produced .. but without the pretty graphs.

Don

[Lbill]

There is something about the gold ETFs that I couldn't put my finger on and I finally realized what it is. David Swensen at Yale made his mark by pursuing a different institutional investment approach in which he included a large portion of non-liquid investment vehicles, such as oil & gas partnerships, direct investment in timber and real estate, private hedge funds, and the like. He realized that there were greater potential returns available in non-liquid investments, as well as greater diversification opportunities, that a large endowment would have access to.

It is well worth remembering that most of the research that looks at the correlations and diversification benefits of things like commodity futures and gold bullion is based on historical time periods in which only non-liquid investment opportunities existed. It is only in the last few years that commodity ETFs and precious metals ETFs, which are highly liquid, have become available to Joe and Jolene Sixpack (aka - you and I). That means that every investor on the planet now has ready access to these and that these sorts of investments are no longer restricted to a small investor "elite" who had the means to play. Going forward that could mean that these investments don't perform like they have in the past and might not provide the same gains or diversification benefits that they have. By "commoditizing" these asset classes, their fundamental characteristics might be changed in unknown ways. We won't know for sure until at least another decade or two have passed and we have sufficient data. Judging by the strange behavior of commodities over the last couple of years it seems as though these haven't done a thing for investors in commodity ETFs except give them more sleepless nights. So far, gold has escaped that fate but stay tuned. . . Even though I still feel OK about gold, I have enough concern that I think I'll lighten up smaller than the classic 25% portion in 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

[MediumTex]

I would say that the liquidity that ETFs such as GLD provide cuts both ways.

It gives everyone the opportunity to both get in and get out easily.

The legacy may just be increased volatility, which has certainly been the theme in the broader market as an ETF for every season has emerged.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[craigr]

Re: Gold and overseas storage.

The primary reason Browne advocated this was he wanted some geographic diversification of the portfolio and storing gold overseas seemed to be the best way to achieve this. This show he talks about his reasons:

http://www.crawlingroad.com/fi....-09-05.mp3

Admittedly, achieving his ideal today is getting very difficult for American Citizens. I wish I had better advice, but I don't.

[freeman]

MediumTex:

Thank you so much for your well thought out answer, especially for very valid, documented arguments shedding a new light on some topics (e.g. on gold IRA)! I'm not so much concerned with government action as I am with paper gold and the risks this entails in the wake of the major collapses we've seen on Wall Street as of late (see my answer to dumbmoney below).

On Switzerland I agree with you regarding privacy. I feel too many have preconceived but not necessarily verified ideas regarding managing accounts there: as long as you pay taxes and follow regulations in all concerned jurisdictions there shouldn't be any concern (except for those you listed re. the country as a whole).

Regarding transferring gold in/out of Switzerland, I don't consider this as a necessity: I would think you could simply have your Swiss banker buy bullions for you (and yes that's one more hand in the bag) and sell them directly there for you whenever you need to rebalance or redeem.

Switzerland and Austria may no longer be the ones HB knew but I'm not sure the former can be compared with Iceland 100%. I would look at external debt to GDP ratio overtime, as it wouldn't surprise me if Switzerland always had a high ratio due to their relative economic isolation outside the E.U. and possibly weak population growth. Maybe those well-versed in economy could shed some more light on the subject. Also, there may be other countries today offering the conditions HB liked Switzerland for.

I agree though that keeping it simple has tremendous value. Simpler than going abroad would be to rely on physical possession either directly on property or in a safety deposit box. Of obvious concern regarding the latter is the risk of having the bank mistakenly declaring the box as dormant and seeing the content taken by the state. I heard about this over the years and just don't know which safeguards and recourses there might be to either prevent or deal with this. Any thoughts?

dumbmoney:

[meckaneck]

Mike Shedlock ("Mish") has written about gold in the past and strongly endorses the ownership of bars over coins and also endorses goldmoney.com. Please note that Mish advises that the "markup" on gold coins is ridiculous and advocates bars. These links are well worth the read, IMHO.

Check out the following comments:

http://globaleconomicanalysis.....ation.html

http://globaleconomicanalysis.....-gold.html

http://globaleconomicanalysis.....-2009.html

http://globaleconomicanalysis.....ponse.html

[meckaneck]

[meckaneck]

A reader comment in reference to the goldmoney article...

"Even if untrue, allegations of money laundering with GoldMoney and eGold have been around a long time. BullionVault is strictly an investment tool, and really can't be accused of working as anything else, including a money laundering instrument."

http://www.bullionvault.com/from/ne12as

[meckaneck]

Thought to ponder regarding gold...

Hyperinflation occurs and there is chaos everywhere, people in the streets, and Congress is debating a slew of new legislation to restore order in the cities, and in the economy- one of which has to do with gold/silver confiscation, and another with detaining rioters and terrorist suspects. You figure maybe its time to go, while you still can, but how are you going to get your gold stash out with you?
Fortunately for you, you put one quarter of your wealth in an offshore acct. You leave most your stash in a "safe" place for now, use some Eagles to get your family to Germany, and have the metals in your offshore vault holdings transferred to Swiss francs, Euros, or Yen online and wired to a bank there.

Point is, we don't know where the pressure will hit first. So diversification is a good bet!

[MediumTex]

[Clive]

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[Clive]

--deleted--

[Clive]

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[Clive]

-- deleted --

[meckaneck]

Note I have not been able to confirm this report for accuracy however thought I would share:

"A GoldMoney competitor called BullionVault, which appears to be a respectable operation, offers ‘allocated storage’ has this restriction: ”Excepting only duly authorized shipments to another BV gold storage location – such as might be requested by customers in response to an international crisis – BV undertakes that on no single day shall any amount exceeding both 25 kilograms and 5% of the bullion vaulted at a BV location be authorized for removal."

For full review click here:
http://www.runtogold.com/goldmoney/comment-page-1/

[Clive]

--deleted--

[Lbill]

I was playing around with different percentage allocations to TSM, LTT, STT, and Gold using Simba's spreadsheet data. I used the following assets respectively: VTSMX, VUSTX, VFISX, and GOLD. For the period of 1972-2008, I was interested in how each of the 4 individual assets affected PP performance. To do this I compared the 25%x4 performance over this period to the 33.3%x3 performance with each of the 4 assets missing. For example, to evaluate the effect of STT, I compared the performance of the 25x4 portfolio to the 33.3x4 portfolio with STT taken out. This would allow me to get a handle on the effect of adding STT to an equal mix of TSM, LTT, and Gold, and so forth. Here's a summary of my findings:

________ADD LTT_____ADD STT______ADD TSM______ADD GOLD

AAR........(-2.5%)...............(-7.4%).................3.8%.................7.1%

SD.........(-22.5%)..............(-23%)...............19.3%.................1.4%

CAGR.......(-0.7%)..............(-5.8%).................5.6%...............13.8%

(note: AAR=average annual return, SD=standard deviation of annual returns, CAGR=compound annual growth rate)

Assuming my methodology was OK, here's what I conclude from this analysis:

LTT: The primary effect of adding LTT is to dampen volatility of the PP. Even though it reduced average annual return by 2.5%, the outsized impact on reducing portfolio volatility (from 11% w/o LTT to 8.5% with) resulted in a fairly small impact on CAGR over the 1972-2008 time period. Consider the main benefit of adding LTT to be to smooth the ride and reduce drawdowns but not to increase CAGR over the long run.

STT: As expected, the primary effect of STT is to dilute both annual average return and volatility. It has a similar effect to LTT in smoothing portfolio returns, at the cost of reducing average returns by 7.4% and CAGR by 5.8%. Consider the main benefit of adding this "riskless" asset to dampen both returns and volatility.

TSM: This asset increases both returns and volatility. The positive effect on returns is slightly greater than the negative effect on volatility resulting in an increase in CAGR by 5.6%. Consider this asset to be important to improve returns, but at the cost of more unpleasant ups and downs.

GOLD: Somewhat unexpectedly, the primary effect of adding gold was to increase average annual returns without increasing overall portfolio volatility. It actually increased returns almost twice as much as adding TSM, at the same time having a negligible effect on portfolio volatility. Thus the most volatile asset in the mix actually had no effect on overall volatility while raising returns. CAGR improves by 13.8%, more than for any other asset. I suspect this was due to two things: the persistent negative correlation of gold to the other 3 assets, particularly TSM, and the strong returns provided by gold during the initial years of the time period studied in the 1970s. As has been shown by others such as Milevsky, portfolio performance in the first few years, either postive or negative, has an outsized impact on performance over the entire time period. The famous Magellan Fund run by Peter Lynch is an often cited example of this. Get lucky at the start and you end up looking like a genius, and vice versa.

Based on these results, I'd want to hold both TSM and Gold to increase returns. Gold seems especially important, at least over the 1972-2008 time period. Both STT and LTT are equally effective at reducing portfolio volatility and smoothing the ride (as you would expect from bonds), while the higher average annual returns of LTT resulted in reducing annual PP total return and CAGR less than STT.

Based on these data, if I had to eliminate one of the 4 assets and hold a 3x33.3% portfolio instead of the 4X25% PP, which one is best and which one is worst? It looks like the best alternative would be the 3x33% portfolio with STT removed. This portfolio had a CAGR of 10.2% (vs. 9.6% for PP) with an SD of 11% (versus 8.5% for PP). You get a higher return at the cost of higher volatility, but with a similar risk-adjusted return to the PP. The worst alternative would have been the 3x33% with no stocks. In this case you would have gotten a CAGR of 9.1% (vs. 9.6% for PP) with an SD of 10.5% (vs. 8.5% for PP), with the lowest risk-adjusted return. Lower return with higher volatility = not good. The 3x33% with gold removed has the lowest CAGR (8.95%) but with the lowest volatility (8.4%) - slightly lower than the 4x25 PP. This would have been the smoothest portfolio by a very slight amount, but you would have given up about 0.7% in CAGR to get a negligible reduction in volatility. This seems to show that it is particularly important to hold both stocks and gold in the PP because of the negative correlation between them. If you want to eliminate or reduce the weight of any of the 4 components it should probably be either LTT or STT, probably the latter.
_________________
"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

[DP]

Hi,
Lbill, thanks for posting the results. I've always been more convinced of the benefits of gold then that of LT Bonds ... simply because I believe the probability of inflation to be higher then that of deflation. Since your analysis seems to show the impact of STT and LTT is not as significant as the other components, I was curious how the portfolio would do if they were replaced by styles more commonly recommended on this forum, namely Total Bond market and Tips. The performance is nearly identical to the original portfolio in terms of CAGR (9.3 vs. 9.2) and StdDev (8.35 vs. 8.36), and worst year (-7.5 vs. -5.2).

Clearly the original PP would do better if we had significant deflation, but otherwise the portfolio's are nearly identical.

Don

[Lbill]

Another observation from looking at the Simba data is that there is a negligible difference for AAR, SD, and CAGR whether you hold the 50% bond portion split between VUSTX and VFISX or hold it all in 5-year treasuries (VFITX). This is true for the 1972-2008 or 1985-2008 time periods.

[The following section is incorrect and been edited for corrected data]
"For the 1972-2008 time period, the 33x3 portfolio with LTT removed has the 2nd best CAGR and this is also true for the 1985-2008 time period. However, STT is different. For 1972-2008, removing STT produced the highest CAGR (10.2% vs. 9.6% for the 4x25 PP). However, for the 1985-2008 time period removing STT resulted in the 2nd worst 3x33 CAGR (7.4% vs. 8.2% for the 4x25 PP).

In other words, including STT hurt CAGR over the full 1972-2008 time period, but it helped CAGR over just the 1985-2008 time period. Including LTT actually reduced CAGR over both time periods. However, over the full 1972-2008 period, LTT also reduced overall portfolio volatility providing a smoother ride. But over the 1985-2008 period LTT actually increased overall portfolio volatility (7.6% with LTT vs. 6.1% without), but some of that was "good" volatility, as in 2008, when the strong spike in LTT "saved" the PP."

Added corrections and edits:
In reporting my results, I inadvertently switched the data for STT and LTT. The correct interpretation is that during the full 1972-2008 time period, adding LTT resulted in a small decrease in CAGR, (0.07%) behind the decrease from adding STT (0.6%). The decrease in average annual returns when LTT was added was largely offset by a reduction in average portfolio volatility (1.5%). For the period of 1985-2008, adding LTT actually increased (rather than decreased) CAGR by the second largest amount (0.8%) behind adding TSM (1.0%). CAGR was increased because average annual return improved by 0.8% while SD also decreased (not increased) by 0.6%. So, it looks as though adding LTT can be expected to generally reduce overall portfolio volatility when it is added to the PP, while perhaps not having a consistent positive or negative effect on average annual returns. In contrast to LTT, adding STT consistently decreased both average annual returns and volatility for both the full 1972-2008 period as well as the 1985-2008 period. Therefore, STT seems to play a "diluting" role in the PP - decreasing both average returns and volatility, as you would expect.

One might question the long term value of holding LTT in the PP. I guess that would depend on the importance to the investor of having a specific hedge for falling interest rates in the portfolio [edit added: as well as the expected effect of reducing portfolio volatility] . In this case the 25/25 split between LTT and STT would make good sense.
Since there hasn't been much difference in actual investment results since 1972 between holding 50% in ITT or splitting it between LTT and STT, I'm considering doing the latter - if for no other reason than to save trading costs by holding only one ETF rather than two. However, since CAGR is the same whether you hold only ITT, or split between STT and LTT there is little cost to the investor other than the added trading costs for carrying LTT as deflation insurance.
_________________
"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

[stratton]

[Lbill]

stratton - When looking at longer periods of time such as 1972-2008, which encompasses both a large bear and bull markets in stocks, LTT didn't have much long-term benefit as far as CAGR is concerned. It did reduce portfolio volatility and that was important. You can't always count on LTT and Stocks moving inversely, as they did in 2008. During the 1970s, both stocks and LTT took a hit because of severe inflation and sharply rising interest rates. Only Gold came to the rescue. LTT will only help in a deflationary scenario, such as experienced in late 2008.
_________________
"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

[craigr]

[MediumTex]

LTT may not have given the PP a lot of juice in the 1972-2008 period because we didn't have deflation and deflation fears during that period (other than 2nd half of 2008).

However, if we were to have a nasty and prolonged Japan-style deflation going forward--which is VERY plausible--I think that the LTT portion would prove vital.

I guess what I am saying is that the fact that LTT may not have been necessary for good PP returns in the past doesn't mean it won't be necessary in the future for the PP to continue fulfilling its role as a PERMANENT allocation.

I'm probably preaching to the choir on this one, though. [edit: apparently craig and I were thinking the same thing, based upon his post above.]

***

On a different topic, and for those who are interested in the PP but don't actually do it, it is something that takes a little practice and mental conditioning. Believe it or not, it can be difficult to get out of the mode of worrying about what the markets are doing from day to day. It took me a long time of looking at my investments frequently just to make sure that the PP hadn't stopped working the day I started using it. For those who start using it, it's probably not uncommon to still fall off the wagon from time to time and overweight one asset that you are sure is about to go up. With practice, though, you get comfortable with it and a peace of mind begins to take hold which is quite pleasant.

It's very ironic that people who don't use the PP approach often look at it with worry and uneasiness, making the typical qualifications about how they might use the concepts at some point, but not exactly as HB recommended, etc.

As I have suggested before, for someone who is thinking about doing the PP but hasn't, try setting aside a small amount of your investment funds, allocating it exactly as HB recommended--25% x 4--and just let it ride for 3 months and see how it goes. You are very unlikely to lose much, if any, of your funds, and you might see a nice gain. Importantly, however, at the end of this period you will have experienced the day to day reality of this allocation for yourself, and you will be in a position to judge whether it is for you based upon firsthand experience. This may sound obvious, but it may be helpful to some who are thinking about doing it.

In my view, the key is to set up the PP the way HB recommended if you really want to get the full benefit of the safety and peace of mind the PP offers.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[Lbill]

I hope my suggestions weren't taken as trying to show that not including LTT would be a better idea. As a matter of fact, my data putzing actually helped to reassure me that it would be a bad idea to avoid LTT, even in the face of concerns about inflation and rising interest rates. Over the 37-year period beginning in 1972 until th end of 2008, LTT helped to reduce portfolio volatility. Overall, you got about the same compound annual return with less bumps along the way. More recently, LTT has helped to reduce portfolio volatility, as well as improving average annual returns. Of course, long rates began to decline from 14% in 1981 until they bottomed out last year at about 3% - an event not likely to be repeated, but who knows? Actually, some research by Pimco showed that you would have done as well with 20-year treasuries as stocks over most of that period with less volatility. Who needed stocks? Also, if one chooses to hold Gold or perhaps commodities, which are inflationary hedges, it would be foolish not to balance the risk of unexpected deflation with long treasuries. If anything might be varied in the PP, it might be the allocation to STT. Dumbmoney, who pointed out the data error I corrected in a personal communication, made the interesting observation that the PP can be viewed as an equally-weighted portfolio of stocks, LTT, and Gold that is "diluted" with STT to produce lower volatility (at the offsetting "cost" of lower average returns). LTT hedges unexpected deflation, Gold hedges unexpected inflation and economic/monetary event risk, and Stocks perform well when there is stability and economic growth facilitated by restrained inflationary and deflationary expectations. Cash or STT really does nothing but cushion or dilute volatility while preserving similar risk-adjusted returns. So, if you can tolerate more than the fairly low volatility of the 4x25 PP and desire somewhat higher returns, you can dial back the allocation to Cash or STT, even all the way to zero. Even then, you would have experienced only 2/3 of the volatility of equities while generating similar annual returns around 10%. Conversely, if you desire even less volatility than the 4x25 PP you can increase the allocation to Cash/STT above 25%.
_________________
"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

[craigr]

[Clive]

--deleted--

[WileECoyote]

TMF is a really interesting find - thanks for posting that! I was looking for something similar to this. I have to get comfortable with how the 3x leverage works but that could be nice in a 50/50 split with TLT to get 2x leverage on Treasuries or free up some space in my tax sheltered accounts.

edit:
Clive would you mind sharing the data or a chart of TLT vs TMF so we could see how they moved in relation to one another? I have heard the argument of how the 3x DAILY leverage can skew the longer term correlation with the base asset.

[MediumTex]

Remember the slippage in the leveraged ETFs. Nothing "permanent" about an ETF with slippage and tracking error.

If you want LT bond juice without leverage, get some EDV.

EDV: Rocket fuel for treasury lovers.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[Lbill]

IMO, the classic PP is more of a "defensive" than an "offensive" strategy. Over the long run, the CAGR is respectable because volatility is so well-controlled, relative to the average annual returns. The average annual returns per se are not all that exciting - around 8% or so. Minimizing investment expenses is particularly helpful here. If you were to have average costs in the neighborhood of 1%, that would cost you 12% of the annual returns. So, the lower the better. Fewer funds means lower trading costs to rebalance also. Annual expenses of .15% with TLT (and I think Pimco now has one that is even lower) is a good way to go. That's one reason that I don't like using funds like TMF with a 0.95% expense ratio. GLD is .40% and that's too high.
_________________
"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