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Bogleheads
Investing Advice Inspired by Jack Bogle
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craigr
Joined: 13 Mar 2007
Posts: 1973
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 Posted: Tue Apr 08, 2008 2:28 am Post subject: |
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| dumbmoney wrote: | | That seems to confirm that the cash is just diluting risk, and isn't an "active" part of the portfolio. Another test you could run is with a 33/33/33 version of the portfolio (same as original, but no cash). |
The cash is neutral and does reduce risk. Harry Browne acknowledged that they didn't have an asset that did well during a recession. Since most recessions are relatively short, they had a cash allocation that buffered the losses, but wouldn't appreciate enough to take the portfolio upwards that much.
The 33/33/33 split increased returns but with higher downside risk. During 1981 for instance you would have sustained a -11% loss vs. a -5% loss for the 25% MMF split. You would have also sustained a slightly larger loss in 1994 and 2001 when the portfolio also had negative performance.
Here are the results complete with losing years from 1972-2007:
25/25/25/25 (TSM/LT Bonds/MMF/Gold)
CAGR: 9.60%
Std. Dev: 8.16%
1981: -4.98%
1994: -1.41%
2001: -0.07%
25/25/25/25 (TSM/LT Bonds/ST Bonds/Gold)
CAGR: 10.02%
Std. Dev: 8.32%
1981: -3.93%
1994: -2.51%
(2001 was up 0.89%)
Here is the 33% split:
33/33/33 (TSM/LT Bonds/Gold)
CAGR: 10.69%
Std. Dev: 10.74%
1981: -11.46%
1984: -0.01%
1990: -0.86%
1994: -3.12%
2001: -1.51%
Here is a 60/40 (TSM/TBM) split:
CAGR: 10.27%
Std. Dev: 11.02%
1973: -9.02%
1974: -14.04%
1977: -1.96%
1994: -1.83%
2000: -0.73%
2001: -3.56%
2002: -6.92%
It should be noted though that the 60/40 portfolio had a negative after-inflation return during the 1970's where the permanent portfolio had around a 5-6% real after-inflation return. This, even if I cut out the early years (1972-1974) due to the crazy gold spike from breaking the gold standard.
A 10% loss in any particular year is my pain threshold for our portfolio where I start getting concerned. A 10% or so loss two years in a row would really upset me. A 25% loss in any particular year is a serious failure in my mind. Although I acknowledge a serious loss could happen, I want to make sure it is unlikely through diversification. That's the best I can do as no investment is 100% safe. My situation and risk tolerance are obviously different than others though.
I also want a portfolio that has a proven track record to deliver real after-inflation returns within a certain range (4-6%). There is no use having positive returns that are wiped out by high inflation. The PP portfolio appears to have been able to do that in the past which I think is fairly unique. Even some more elaborate multi-asset allocations failed to do that during the 1970's high inflation for instance.
Past returns are no guarantees of the future. This is just an interesting exercise primarily to see how portfolios did under a mix of market conditions. |
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dumbmoney
Joined: 16 Mar 2008
Posts: 1312
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| Posted: Tue Apr 08, 2008 7:39 am Post subject: |
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How about this one:
20% gold
20% U.S. stocks
20% international stocks
40% intermediate term treasuries
This maintains the gold/bond balance of the original but increases the stock allocation, and splits it between U.S. and foreign. |
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snowman9000
Joined: 26 Feb 2008
Posts: 767
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| Posted: Tue Apr 08, 2008 10:34 am Post subject: |
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| dumbmoney wrote: | How about this one:
20% gold
20% U.S. stocks
20% international stocks
40% intermediate term treasuries
This maintains the gold/bond balance of the original but increases the stock allocation, and splits it between U.S. and foreign. |
No one knows. 
It's pretty good to my way of thinking. When stocks shine and gold stinks, you'll be kicking yourself. But lately you'd be happy.
To the earlier question of how to own a large amount of physical gold. You either have to take the risk of storing it yourself, or you take the risk of having someone else store it. HB advocated having allocated storage in a Swiss or Austrian bank. I gather that the banks don't really care for it all that much any more and they charge high prices.
You can get a storage account directly at the Perth Mint, or buy Perth Mint Certificates. The former is presumed to be a foreign account under US tax laws, so you need to report its existence on your tax returns. The certificates are not an account, just a claim on gold. You have to buy certificates through an approved broker. I'm sure the broker thing is a bit of a racket, but oh well.
A relatively new alternative is www.bullionvault.com. It looks quite attractive but I don't know anyone who has used it. I have read posts on forums in which people who looked into it or actually are doing business there seem to be quite satisfied.
While there is a risk in owning gold stored overseas in someone else's vault, consider the benefits. While unlikely, the US government could enact any of a variety of confiscatory policies if times get tough. They could decide to go back on the gold standard for dealings with foreign central banks. While that sounds good to gold bugs, it might mean that they once again outlaw ownership of gold and make us surrender ours. Let's say they pay $900 an ounce. Then they set the value of the dollar at $2000 an ounce. Anyone who turned in his gold just got screwed. That's what happened in the Depression. Having it overseas gives you a much improved position to decide what to do. Same with wealth taxes, things like that. |
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cdgoldin
Joined: 06 Apr 2008
Posts: 5
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| Posted: Wed Apr 09, 2008 4:32 am Post subject: Money market funds are not created equal |
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| craigr wrote: | | Two options I really like for the MMF/Short-Term bond funds are from Vanguard.... |
The Vanguard Funds are invested in "U.S. Government & Agency" issues. This is not the same, and does not provide the same security, as U.S. treasury issues. Furthermore, most U.S. Government agency issues are callable, and thus do not provide the same potential for capital gains in a recession or deflation. Harry Browne discusses this at length is several of his books.
To my knowledge, the only funds that are fully invested in (only) U.S. Treasury issues are Capital Preservation Fund (CPFXX) and the Permanent Portfolio Treasury Bill Fund (PRTBX). If you are going to gamble with U.S. Government agency issues for a slightly higher return, why not gamble with private issues which provide even higher returns? If safety is of concern, why not limit yourself to the safest possible "cash" investment?
For those who think Harry's 25% allocations are arbitrary, or that they can do better with a different set of allocations, please be reminded that the allocation percentages were arrived at by extensive statistical analysis of actual past performance, and computer modeling of future performances under a variety of economic scenarios, taking into consideration trading commissions and buy-sell spreads, as well as the inability of most investors to simultaneously buy and sell during portfolio adjustments.
Harry (Browne) and Terry (Coxen) tried various other percentages as well, and decided that the 25% allocation performed best for the individual investor. It is incorrect to say that no adjustment need be made if the allocations are between 15% and 35% of the portfolio. An annual adjustment should be made to as close to 25% as possible. If this is impossible (for example, because long-term treasury bonds are only sold in $1000 denominations) or undesirable (because of tax consequences), the portfolio performance won't be significantly harmed as long as asset allocations remain 15-35%. But this doesn't mean there are no consequences to altering the target percentages. |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Thu Apr 10, 2008 2:56 am Post subject: Re: Money market funds are not created equal |
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| cdgoldin wrote: | | craigr wrote: | | Two options I really like for the MMF/Short-Term bond funds are from Vanguard.... |
The Vanguard Funds are invested in "U.S. Government & Agency" issues. This is not the same, and does not provide the same security, as U.S. treasury issues. Furthermore, most U.S. Government agency issues are callable, and thus do not provide the same potential for capital gains in a recession or deflation. Harry Browne discusses this at length is several of his books. |
I double-checked the funds today. The funds will hold, at a minimum, 80% of their assets in non-callable Treasury Notes. They currently are at about 91% Treasury Notes as of their 1/31/2008 report. They do have the option to hold non-Treasury agency issues such as mortgages, but only in the remaining 20% of the fund at the manager's discretion. So you are correct that this is not the ideal fund.
| Quote: | | To my knowledge, the only funds that are fully invested in (only) U.S. Treasury issues are Capital Preservation Fund (CPFXX) and the Permanent Portfolio Treasury Bill Fund (PRTBX). |
I checked out these funds. The CPFXX fund has an OK expense ratio of 0.48% a year. The PRTBX fund however has a very high expense ratio of 0.92%. For a Treasury bill fund this seems too expensive with nearly 1/4th-1/3rd of your annual profits going towards management fees.
| Quote: | | If you are going to gamble with U.S. Government agency issues for a slightly higher return, why not gamble with private issues which provide even higher returns? If safety is of concern, why not limit yourself to the safest possible "cash" investment? |
I'd agree that ideally the fund should be 100% treasury issues for safety according to Harry Browne. The Vanguard fund does not fit this qualification as it is not 100% Treasury notes, but only 80% or higher based on the manager's discretion. It's advantage is the much lower costs compared to the other funds (0.22% vs. 0.48% vs. 0.92%). But for this lower cost you are taking on more risk.
The choice then comes down to having the purity of 100% treasury notes which I admit is ideal, or the much lower cost fund that is 80% Treasury notes minimum. It's too bad that Vanguard doesn't offer a straight Treasury Bond/Notes fund. Government agency bonds, even if issued with implicit US Govt backing, are not the same as pure Treasury obligations.
I've held the Vanguard bond funds for long enough that I had forgotten what was in the prospectus as it would apply to the PP strategy. Sorry for misleading anyone following the thread. 
| Quote: | | For those who think Harry's 25% allocations are arbitrary, or that they can do better with a different set of allocations, please be reminded that the allocation percentages were arrived at by extensive statistical analysis of actual past performance, and computer modeling of future performances under a variety of economic scenarios, taking into consideration trading commissions and buy-sell spreads, as well as the inability of most investors to simultaneously buy and sell during portfolio adjustments. |
As you state, the allocations are not arbitrary. In their earlier book "Inflation Proofing Your Investments" (1980) Browne and Coxon gave six portfolio allocations: Level Inflation, Rising Inflation, Runaway Inflation, Soft Landing, Deflation, Uncertain. The Uncertain portfolio was their way of being neutral on predicting the future.
In the later books it was just reduced to the 25% split and the asset types reduced to just stocks, bonds, gold and cash.
Again though to the original poster I would state that I would not change the 25% split if you are planning on following the PP strategy. The allocation percentages were reached after years of research and empirical evidence.
| Quote: | | It is incorrect to say that no adjustment need be made if the allocations are between 15% and 35% of the portfolio. An annual adjustment should be made to as close to 25% as possible. If this is impossible (for example, because long-term treasury bonds are only sold in $1000 denominations) or undesirable (because of tax consequences), the portfolio performance won't be significantly harmed as long as asset allocations remain 15-35%. |
I've heard both strategies advocated. Harry Browne in the radio shows seemed more flexible about the rebalancing bands than I had read in his books. He discusses rebalancing the PP in several shows. Here is one where he goes into it early with a question from a listener and also talks about why he came up with those 15/35 bands and why you may or may not want to change them:
ftp://radio.harrybrowne.org/05-05-01.mp3 |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Thu Apr 10, 2008 8:27 pm Post subject: |
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BTW. A compilation of great articles from Harry Browne's Special Reports was just released in PDF form. I purchased it and am reading it now (it's about 300 pages).
You can order/download it from here:
http://www.trendsaction.com/pr....1207876414
It contains classic gems such as:
| Quote: | February 23, 1988
I have written so much about the futility of forecasts that you may be sick of it by now. But I still don’t feel that I’ve said it all. I’m missing something that remains to be said.
It isn’t just forecasts. It’s 90% of what’s written about economics and investments. It’s all just talk. |
| Quote: | March 9, 1980
We act on our expectations of the future. But to confuse expectations with certainty is the road to disaster. Humility is the realization that you don’t know everything, or even everything about any particular thing, and it is an investor’s most vital asset. Arrogance eventually ruins any investor — no matter how well he’d been doing. |
| Quote: | March 2, 1982
No matter how plausible a prediction may sound, attempts to guess the future are both unrealistic and unnecessary. There are more factors affecting an outcome than anyone could hope to consider. Predictions are only parlor games — a form of entertainment. They aren’t tools for making investment profits. . . . |
| Quote: | January 27, 1994
Almost every investment advisor claims to have a profitable forecasting record. But why, then, isn’t Rupert Murdoch or Fidelity Funds beating down his door with offers? He may say that they don’t know about his talents. But why not? They have good reason to seek out someone so talented, wherever he is.
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| Quote: | THE 1987 MARKET CRASH WITH A PERMANENT
PORTFOLIO
December 16, 1987
On October 19, when the Dow Jones Industrial Average fell 22.6%, the 4-investment Permanent Portfolio lost only 4.3% of its value. As of December 11, the portfolio is down 6.3% from its high reached on August 14, but still up 3.9% for 1987. |
Definitely worth the $10 for the e-book download for those of us who didn't get his newsletter. |
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V
Joined: 14 Apr 2008
Posts: 7
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| Posted: Mon Apr 14, 2008 10:48 am Post subject: |
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This post has been VERY interesting to me and caused curiosity concerning the direct affects of the economic cycles on specific investments and the (non) correlation possibilities and details of them to consider for portfolio construction.
For someone new to this area (and this site, my first post) what are some resources to fulfill inquiry into this topic?
For instance, it was mentioned in the post the stages of inflation, deflation, bull, and bear ... would this coincide with the typical "peak, trough, recovery, prosperity" of the economic cycle??
And what might be a good consolidated source to explain cause and effect of investments that may prosper with each economic transition? For ex: Breaking down the different types of commodities, bonds, and asset classes that respond from specific economic environment, why and which to consider.... ex: when to use short term over long term bonds, what causes commodities rise and fall, historical performance in of equity classes in each stage, etc. etc.
There has been a lot of discussion concerning the Gold front which has done well as of late but why go in now when things are up?
Why not just include Gold in a good Asset Allocation program and diversify based on results of desired standard deviation rather than this 25/25/25/25 deal ?
I wonder if there actually can be an overemphasis on equaling out of non-correlated assets ... one segment has to always be a much higher driving force from the rest. (btw-Which sites have a correlation table of ALL the investment options rather than just broad classes?)
As someone once said, "I know I'm well diversified. My account never goes up or down!"
And as a side note, I am just delving into the Boglehead book but curious about one of the most common questions I'm sure comes about, (apologize ahead of time) ...
Why 100% indexing over something like a core-satellite 80/20 type allocation utilizing specific asset managers that have been proven over long periods of time such as Bill Miller, Will Danoff, Bill Gross, and funds that have shown to have good capture ratios on the up and down side?
I know this is a brain dump and really appreciate any leading towards answers. |
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Taylor Larimore
Moderator
Joined: 27 Feb 2007
Posts: 7149
Location: Miami Florida
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| Posted: Mon Apr 14, 2008 12:02 pm Post subject: Core-satellite and past-performance |
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Hi V:
Welcome to the Boglehead Forum!
| Quote: | I am just delving into the Boglehead book but curious about one of the most common questions I'm sure comes about, (apologize ahead of time) ...
Why 100% indexing over something like a core-satellite 80/20 type allocation utilizing specific asset managers that have been proven over long periods of time such as Bill Miller, Will Danoff, Bill Gross, and funds that have shown to have good capture ratios on the up and down side? |
When you finish "delving into the Boglehead book" you should have your answer.
I must agree that placing 20% of your portfolio into almost any stock or bond fund is unlikely to cause significant damage and may even enhance portfolio return (but don't forget about costs, taxes, and the value of simplicity).
By the way, you can scratch Bill Miller off your list of managers who have "proven" over a long period of time. This is a portion of a recent Bloomberg article:
| Quote: | "Bill Miller's Legg Mason Value Trust posted the biggest first-quarter drop since opening 26 years ago on losses from longtime holdings such as Sprint Nextel Corp. and newer bets including Bear Stearns Cos.
The $12.2 billion fund fell 20 percent, trailing all but four of 660 rivals that buy stocks of companies with market values of more than $15 billion, according to data from Morningstar Inc. in Chicago. Last year, Miller lost 6.7 percent, including dividends, compared with the average 6.2 percent gain among similar mutual funds.
The manager, whose 15-year record of beating the Standard & Poor's 500 Index came to an end in 2006, is lagging behind the U.S. benchmark for the third straight year. It's his longest slump since he joined Baltimore-based Legg Mason Inc. in 1981."
"Assets in Legg Mason Value Trust plunged 40 percent in the past year because of the losses and investor redemptions." |
http://www.bloomberg.com/apps/....refer=home
The one thing the SEC requires in mutual fund in mutual fund advertising is:
"Past performance is no guaranteee of future performance."
Believe it.
Best wishes.
Taylor |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Mon Apr 14, 2008 12:32 pm Post subject: |
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Hi V,
Welcome to the forum.
| V wrote: | For someone new to this area (and this site, my first post) what are some resources to fulfill inquiry into this topic?
For instance, it was mentioned in the post the stages of inflation, deflation, bull, and bear ... would this coincide with the typical "peak, trough, recovery, prosperity" of the economic cycle?? |
Honestly the only authors I've read who pays attention to this in a very agnostic way are Harry Browne/Terry Coxon. Others I've read discuss business cycles, but really focus on it from a perspective of beating the market (which I think is impossible in the long run).
| Quote: | | And what might be a good consolidated source to explain cause and effect of investments that may prosper with each economic transition? For ex: Breaking down the different types of commodities, bonds, and asset classes that respond from specific economic environment, why and which to consider.... ex: when to use short term over long term bonds, what causes commodities rise and fall, historical performance in of equity classes in each stage, etc. etc. |
I don't know of a particular book that does this. There may be some research papers on the topic but I haven't looked. The only books that talk about asset classes and economic cycles from this perspective are again the later Harry Browne Books (Why the best laid investment plans usually go wrong and Fail-Safe Investing [although not as much in this book]). Harry Browne's radio shows also go into detail on this as well.
| Quote: | | There has been a lot of discussion concerning the Gold front which has done well as of late but why go in now when things are up? |
A good point. Gold is very expensive now. But here's the problem: It can always go higher. It could also go lower, though. The problem is you just don't know and never will. If you go back through my posts on this thread I link to a few shows that go into why this matters. The Permanent Portfolio strategy is a package and not a-la-carte. Yes, gold could crash 50% in the next month. Then again, so could the stock market. Or gold could go up 25% as your stocks and bonds get ravaged from inflation. Or we could hit a nasty recession where your cash allocation is buffering the losses.
In other words, if gold is doing poorly that means inflation is under control. Your stocks and bonds are doing very well in this case and you are still making a profit.
| Quote: | | Why not just include Gold in a good Asset Allocation program and diversify based on results of desired standard deviation rather than this 25/25/25/25 deal |
Several reasons:
1) You don't know what asset is going to do the best into the future. If you balance heavily towards stocks and the next 15 years are horrible for equity you could be sorry (as it was from 1965-1981). Then again, if you balance towards bonds because you want steady guaranteed income you could get hurt if there is high inflation that destroys your purchasing power at a faster rate than your bond interest. Etc.
2) The 25% asset allocation works. There is a lot of empirical evidence showing that it worked over the past couple decades through good and bad markets. You hold enough of each asset that it can provide reasonable growth under various market conditions. Yet you don't hold enough that you can be seriously hurt if any one of them does poorly.
3) You need to hold enough of each asset to pull up the other parts of the portfolio when they are doing badly. In the Permanent Portfolio you are almost always going to have at least one asset doing poorly. You need to own enough of the other ones so the drag on the portfolio is erased.
4) Standard deviation can be misleading. If you are building a Permanent Portfolio you are seeking out volatile assets deliberately (which have high standard deviations). When combined together they actually have a low standard deviation. Standard deviation alone is a problematic measure of risk though, it can only tell you what happened in the past, not what will happen in the future. Std. deviations can also change over time depending how long of a (good/bad) run an asset class is having.
| Quote: | | I wonder if there actually can be an overemphasis on equaling out of non-correlated assets ... one segment has to always be a much higher driving force from the rest. (btw-Which sites have a correlation table of ALL the investment options rather than just broad classes?) |
You'd think that equal parts of assets would result in a canceling out of sorts, but the reality is that one asset may lose 20, 30, 40 or 50% in value but the other assets could go up 100, 200% or more. So the net result is a portfolio gain. This is one of the benefits of Modern Portfolio Theory. Any well diversified portfolio should operate in a similar manner.
When looking at correlation tables you need to be careful. For one, correlations change over time. This is not because the underlying asset changes (stocks are stocks, bonds are bonds). What you're really seeing are how those assets moved (past tense, not future) in relation to each other. But more importantly, you are seeing how the economic conditions that existed at the time affected those assets.
The biggest problem with relying on correlation tables is they can mask a serious problem: Assets can become suddenly correlated under certain market conditions. Usually this happens exactly when you don't want it to. But if you're looking at a correlation table that covers 40 years it can be hidden inside the data and masked.
For instance, I disagree with those who suggest that stock equity asset classes are uncorrelated enough to build a complete portfolio (large cap, small cap, etc.). To a degree, yes, but when the markets are bad all stocks tend to do poorly together. So if you have a 100% equity portfolio of various assets and you think you are diversified you could be in for a nasty surprise under a very bad market.
| Quote: | | As someone once said, "I know I'm well diversified. My account never goes up or down!" |
Here's my view on diversification: If all the assets in my portfolio are going up at the same time then they can all go down at the same time. That's not diversification. I expect that at least one of my assets will be doing poorly or be flat at any one time. If that is not happening then I'm not diversified.
| Quote: | | Why 100% indexing over something like a core-satellite 80/20 type allocation utilizing specific asset managers that have been proven over long periods of time such as Bill Miller, Will Danoff, Bill Gross, and funds that have shown to have good capture ratios on the up and down side? |
The market is made up of professionals. They are trading against each other. It's a zero-sum game because someone must lose for every one that wins. By indexing you are taking advantage of this by refusing to play the game. As a result, over the long run an index is going to beat perhaps 95% of all active fund managers. The 5% that "win" are probably just lucky. It's counter-intuitive, but many things in life are.
I should also add the strict Boglehead philosophy would use TIPS/I-Bonds and not Gold for inflation protection. In fact, the portfolio would probably not hold any hard assets at all. So in that sense, the Permanent Portfolio concept is different than a typical Boglehead portfolio in that it holds non-stock/bond assets.
However, I personally don't like inflation indexed products and don't use them. If inflation is really bad you want to hold hard assets (gold) for protection. It's the only asset that can move strongly enough under high inflation to pull up the rest of the losing portfolio value. IMO. |
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V
Joined: 14 Apr 2008
Posts: 7
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| Posted: Mon Apr 14, 2008 1:52 pm Post subject: |
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2 words ... "thank you"
I do really like the discussion concerning the 25 % allocations with a little modification. Different than the norm which I tend to search for, but have often found that theory and previous "look at this" attributes to be quite different in reality going forward ... so always apprehensive from the get.
I just ordered Mr. Browne and Larry Swedroe's books and will digest upon completion of the Boglehead reading.
No easy answers for sure but your response has helped funnel my efforts. |
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V
Joined: 14 Apr 2008
Posts: 7
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| Posted: Mon Apr 14, 2008 2:12 pm Post subject: |
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one more question if I may ...
I've seen much discussion about international allocation up to 20% .. i'm wondering thoughts concering the inclusion within or addition to this allocation international bonds like the Oppenheimer Intr Bd (OIBAX) - (hey ... sorry ... I'm a converting fund guy) and more specifically an International REIT but unaware of any index investment options in these arenas.
Thoughts? |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Mon Apr 14, 2008 3:14 pm Post subject: |
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| V wrote: | | I've seen much discussion about international allocation up to 20% .. i'm wondering thoughts concering the inclusion within or addition to this allocation international bonds like the Oppenheimer Intr Bd (OIBAX) - (hey ... sorry ... I'm a converting fund guy) and more specifically an International REIT but unaware of any index investment options in these arenas. |
In terms of the Permanent Portfolio these assets would be viewed as not necessary. Many asset classes may not perform the way you may think under changing economic conditions. In my opinion I wouldn't change the 25% allocations of the Permanent Portfolio if you choose to follow that strategy.
However, many think that other assets may be worth holding. As Taylor likes to say "There is more than one road to Dublin."
An important aspect is to find an asset allocation you can stick with long term. The finance industry is constantly making new asset classes available to lure in customers. Many of these offerings are of limited use in my opinion and may include hidden risks or high expenses. So make sure you are setting up an asset allocation that meets your objectives and isn't moving in a direction simply because something appears to be a hot performer today. |
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snowman9000
Joined: 26 Feb 2008
Posts: 767
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| Posted: Mon Apr 14, 2008 8:14 pm Post subject: |
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V,
I've had good luck with a portfolio that is a blend between a typical Boglehead and HB's Permanent Portfolio. Re the PP I was always scared to fully commit to one sector or the other that was at a peak. Looking back I wish I had just done it.
I've been giving it a lot of thought again lately and I'm moving to this blend:
15% US stocks
15% Intl stocks (because I already have them)
10% REITs
10% Vanguard Precious Metals & Mining (because I already have it)
10% Gold
20% Very short bonds (essentially cash)
15% Longer bonds
5% Intl bonds (because I already have them)
The 10% Mining fund and 10% gold are much closer to the PP than to any Boglehead portfolio. I have a feeling that I will gradually move closer to the PP but time will tell. Truthfully, I'm avoiding long bonds and the dollar to some extent. Not recommended but what I can I say.
No one knows what portfolio will be optimum going forward. You can spend hundreds of hours trying to perfect it on paper. At least I've had the benefit of seeing how certain things have performed in certain conditions. Because of the past few years, I'm a believer in what gold can do for you when it is needed. Your mileage may vary. |
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allenmickers
Joined: 11 Feb 2008
Posts: 427
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| Posted: Mon Apr 14, 2008 9:15 pm Post subject: |
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| snowman9000 wrote: |
10% Vanguard Precious Metals & Mining (because I already have it)
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its a terrible reason to keep it because you already have it. its a closed fund so I would keep probably $1k in it just to have it, but this doesnt replace gold itself according to Browne |
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snowman9000
Joined: 26 Feb 2008
Posts: 767
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| Posted: Tue Apr 15, 2008 9:39 am Post subject: |
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| allenmickers wrote: | | snowman9000 wrote: |
10% Vanguard Precious Metals & Mining (because I already have it)
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its a terrible reason to keep it because you already have it. |
That's true. My explanation was not really accurate. I like the funds I have and so I'm keeping them, even if they don't fit into HB's thoughts. |
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V
Joined: 14 Apr 2008
Posts: 7
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| Posted: Tue Apr 15, 2008 10:02 am Post subject: |
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I think a strong case can be made to impose some wiggle room for the inclusion of a commodity and/or energy ETF as well.
For instance ... back off a 20% allocation to Gold to 10% and split the difference ... at a minimum. |
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snowman9000
Joined: 26 Feb 2008
Posts: 767
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| Posted: Tue Apr 15, 2008 10:45 am Post subject: |
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| V wrote: | I think a strong case can be made to impose some wiggle room for the inclusion of a commodity and/or energy ETF as well.
For instance ... back off a 20% allocation to Gold to 10% and split the difference ... at a minimum. |
You have to figure out what your reason is. My reason is that I'm trying to capture the benefits of gold while getting a dividend from the metals fund instead of carrying costs for gold. However I can tell you that they don't perform the same. One will zig while the other zags. In the long view, they move pretty much in the same direction. Everything is a compromise.
The more I understand, the more I like the real PP. That hasn't stopped me from trying to beat the system, though. |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Tue Apr 15, 2008 12:32 pm Post subject: |
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| V wrote: | | I think a strong case can be made to impose some wiggle room for the inclusion of a commodity and/or energy ETF as well. |
Energy makes up about 13% of the Total Stock Market Fund already. Buying more of it would be a heavy overweighting.
As for gold vs. commodities. They have similar risk/return profiles but for the PP gold is what you want to own. Gold's advantage is it is a monetary metal primarily and does especially well during currency problems where commodities may not. Commodities can also have different bull/bear cycles that are independent of inflation. So part of your inflation protection could be compromised by owning less gold.
My notes say that Harry Browne was asked about using commodities in combination with gold in this show and he answered why he didn't like the idea:
ftp://radio.harrybrowne.org/05-02-13.mp3
In general, if you follow Harry Browne's advice you'd have your Permanent Portfolio with the four way 25% split. With money you can afford to lose you'd then setup a Variable Portfolio. This is where you'd perhaps place your bets on energy, commodities, etc. Realizing that if you underperform the market or lose a large chunk of money that you are not allowed to go into the Permanent Portfolio to replenish your Variable Portfolio. |
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Taylor Larimore
Moderator
Joined: 27 Feb 2007
Posts: 7149
Location: Miami Florida
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| Posted: Tue Apr 15, 2008 1:28 pm Post subject: Underweight in U.S. stocks |
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| Quote: | I've been giving it a lot of thought again lately and I'm moving to this blend:
15% US stocks
15% Intl stocks (because I already have them)
10% REITs
10% Vanguard Precious Metals & Mining (because I already have it)
10% Gold
20% Very short bonds (essentially cash)
15% Longer bonds
5% Intl bonds (because I already have them) |
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Allocating only 15% of a portfolio to "US stocks" (for a US citizen) seems low to me. Our capitalistic system enjoys a 200 year record of providing excellent long-term returns for shareholders.
Best wishes.
Taylor |
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snowman9000
Joined: 26 Feb 2008
Posts: 767
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| Posted: Tue Apr 15, 2008 3:10 pm Post subject: Re: Underweight in U.S. stocks |
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| Taylor Larimore wrote: | | Quote: | I've been giving it a lot of thought again lately and I'm moving to this blend:
15% US stocks
15% Intl stocks (because I already have them)
10% REITs
10% Vanguard Precious Metals & Mining (because I already have it)
10% Gold
20% Very short bonds (essentially cash)
15% Longer bonds
5% Intl bonds (because I already have them) |
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Allocating only 15% of a portfolio to "US stocks" (for a US citizen) seems low to me. Our capitalistic system enjoys a 200 year record of providing excellent long-term returns for shareholders.
Best wishes.
Taylor |
Hi Taylor,
I understand your position. Looking back, it certainly is compelling. All I can say is empires come, empires go. If that is crystal ball gazing, then so be it.
Another thing not mentioned is that I don't need to take much risk. |
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V
Joined: 14 Apr 2008
Posts: 7
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| Posted: Wed Apr 16, 2008 9:35 am Post subject: |
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I've seen a few responses in this post referring to possibilities of expanding equity portion and discussion of where to pull the needed allocation from.
Just a thought but it may be easier to just use an leveraged Rydex or Proshares fund to capture 1.5 to 2 times the desired index. This way one can keep the other portion percentages as is ... it was mentioned that Browne targeted volatility within each segment so this definitely will fit that bill within the equity portion!
Also, maybe i overlooked it but ... what is the target/expected annual ROR of the Perm Portfolio? |
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dumbmoney
Joined: 16 Mar 2008
Posts: 1312
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| Posted: Wed Apr 16, 2008 9:45 am Post subject: |
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| V wrote: | I've seen a few responses in this post referring to possibilities of expanding equity portion and discussion of where to pull the needed allocation from.
Just a thought but it may be easier to just use an leveraged Rydex or Proshares fund to capture 1.5 to 2 times the desired index. This way one can keep the other portion percentages as is ... it was mentioned that Browne targeted volatility within each segment so this definitely will fit that bill within the equity portion!
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That's not a good idea because of the high cost of those funds. Since the PP includes a cash allocation, you can boost the risk and return by simply reducing cash. |
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zhiwiller
Joined: 20 Feb 2007
Posts: 1133
Location: Orlando, FL USA
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| Posted: Wed Apr 16, 2008 11:46 am Post subject: |
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| V wrote: | | Just a thought but it may be easier to just use an leveraged Rydex or Proshares fund to capture 1.5 to 2 times the desired index. |
This doesn't work. They match the daily percentage moves, not the long term percentage moves. Search the forum for more. |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Wed Apr 16, 2008 2:11 pm Post subject: |
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| V wrote: | | Also, maybe i overlooked it but ... what is the target/expected annual ROR of the Perm Portfolio? |
First, always remember that past performance is no guarantee of future results.
The portfolio has ranged in the 8-10% range with a std. deviation around 5-8% the past 35 years or so depending on the time period selected. It performed around the 7-9% range during the go-go internet boom years (mid-late 90's), but did maintain steady growth. Of course after the bubble burst it also didn't lose any money except in 2001 where it was basically flat/hovering around 0%.
If you look from 1972-2007 it had a CAGR of approx. 10% (plus or minus a little depending on the index used). If you cut out the crazy early gold years of 1972,1973 when we broke the gold standard then the performance drops a little to the mid-9% range.
The worst losing year was in 1981 with a loss in the 4-6% range depending on what stock index you use. There were one or two other losing years in the in the 1-2% range
More importantly, the portfolio managed to maintain a positive real rate of return over this stretch of time of around 5%. This happened even during the very high inflation 1970's which were horrible for stocks and bonds alone.
The portfolio works out to have reasonable performance with the risk of a more conservative allocation. It's not designed to have large wins, but it also is unlikely to have large losses either. |
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makalu
Joined: 05 Feb 2008
Posts: 44
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| Posted: Thu Jun 26, 2008 4:34 pm Post subject: |
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Craigr,
What would be your opinion of sharing the bond portion of an ETF-built permanent portfolio with an international bond ETF like BWX (as opposed to exclusively USD denominated bonds)?
Also, Vanguard today opened up the All World ETF, "VT". What are your thoughts about holding the stock portion in that?
Finally, do you have any opinion of the GoldMoney.com organization, for holding real gold?
Thanks!
-- Matt |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Thu Jun 26, 2008 5:54 pm Post subject: |
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| makalu wrote: | Craigr,
What would be your opinion of sharing the bond portion of an ETF-built permanent portfolio with an international bond ETF like BWX (as opposed to exclusively USD denominated bonds)? |
I'd have to mirror Harry Browne's advice that you hold bonds in your own country. You want your bonds to respond to what is going on domestically. It is riskier holding foreign bonds that may be moving for reasons unrelated to your local economic conditions.
| Quote: | | Also, Vanguard today opened up the All World ETF, "VT". What are your thoughts about holding the stock portion in that? |
I don't know about this fund. Harry Browne was an advocate of holding stocks of your own country only. I personally disagreed with him on this (which I may regret) and have my equity allocation split amongst US and Intl. stocks in broad based index funds for tax efficiency.
Harry Browne recommended holding the S&P 500 index. I'm pretty sure he'd be OK with the TSM fund based on his past statements and the fact that each fund performs virtually identically (TSM has a slight performance edge and maybe better tax efficiency). The basic idea is to get exposure to the stock market in a way that most closely mirrors what the markets are doing. Index funds do that for the lowest possible costs.
| Quote: | | Finally, do you have any opinion of the GoldMoney.com organization, for holding real gold? |
I don't know anything about those folks. Harry Browne was asked a question about them in one of his shows and didn't like the idea. Harry Browne considered gold a powerful inflation hedge and an asset of last resort. Because of this, he wanted as few pieces of paper and people between the investor and the asset itself.
Here is a radio show where he gives specifics on what he thought about buying and owning gold and why you should treat it differently than other assets. He also talks about goldmoney.com (towards the end of the show):
ftp://radio.harrybrowne.org/04-12-05.mp3
Here's an episode where he discusses how gold works in a portfolio under high inflation:
ftp://radio.harrybrowne.org/05-04-17.mp3
Again I'd highly recommend taking the time to listen to all of his shows. They contain excellent information on why he does certain things in the portfolio and great insights into many economic issues. He doesn't do stock market predictions or any similar nonsense so the information he presents is timeless even though the shows were recorded about four years ago now. |
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Rose21
Joined: 27 Jul 2007
Posts: 469
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| Posted: Thu Jun 26, 2008 7:51 pm Post subject: |
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Craig, was it you who once mentioned having a topical index of Harry Browne's radio shows? If so, would it be something you'd be willing to share with the group? Many thanks for your ongoing contributions on this topic. Harry's legacy seems more relevant than ever these days!
Regards, Rose |
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makalu
Joined: 05 Feb 2008
Posts: 44
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| Posted: Fri Jun 27, 2008 12:03 pm Post subject: |
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| craigr wrote: | | Here is a radio show where he gives specifics on what he thought about buying and owning gold and why you should treat it differently than other assets. He also talks about goldmoney.com (towards the end of the show): |
Thanks for the reply, and the links to the radio shows. I'm downloading all of them now.
Another question I had: How would you go about modifying an existing portfolio to the Permanent Portfolio, ignoring for the moment any tax issues.
In particular, I'm wondering whether, if you happen to feel that *right now* wouldn't be the best time to invest in bonds, would you still go ahead and put 25% in that asset class, or would you distribute among those you felt looked good going forward in the short term? (I know that's trying to predict the future...) |
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Barry Barnitz
Librarian
Joined: 19 Feb 2007
Posts: 1299
Location: Virginia Beach
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| Posted: Fri Jun 27, 2008 12:21 pm Post subject: Browne Archives: |
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Here is a link to Harry Browne's investment radio show archives :
Investment Radio Show Archives
regards,
_________________
blb
November Birthday Celebration: Aaron Copland |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Fri Jun 27, 2008 12:37 pm Post subject: |
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| makalu wrote: | Another question I had: How would you go about modifying an existing portfolio to the Permanent Portfolio, ignoring for the moment any tax issues.
In particular, I'm wondering whether, if you happen to feel that *right now* wouldn't be the best time to invest in bonds, would you still go ahead and put 25% in that asset class, or would you distribute among those you felt looked good going forward in the short term? (I know that's trying to predict the future...) |
As much as I'd like to think I can predict what the markets are going to do I just can't. The Permanent Portfolio is a package. If you don't own all the components then it won't work.
Inflation is the big problem right now which is horrible for bonds, however it can end abruptly if certain actions are taken. High inflation ended suddenly in the early 80's when the Fed finally got serious about tackling it. Holders of gold and other inflation hedges got creamed in the aftermath. We're in an election year and the next administration may take dramatic steps to halt inflation so betting on it going forward for some time is just as much a risk as owning bonds.
Harry Browne answers a similar question from a reader who wants to change the allocations around. His response basically is "If you know that stocks (or bonds or gold) is going to do best going forward then why not just own 100% of that asset?"
ftp://radio.harrybrowne.org/05-02-13.mp3
But to answer your question, if you want to follow the strategy (or any passive investment strategy) I suggest you just buy in immediately and stop worrying about it. The future is unpredictable and you can miss gains in the portfolio by waiting around just as you can by buying at the wrong time and taking a loss.
Last edited by craigr on Fri Jun 27, 2008 12:42 pm; edited 1 time in total |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Fri Jun 27, 2008 12:38 pm Post subject: |
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| Rose21 wrote: | Craig, was it you who once mentioned having a topical index of Harry Browne's radio shows? If so, would it be something you'd be willing to share with the group? Many thanks for your ongoing contributions on this topic. Harry's legacy seems more relevant than ever these days!
Regards, Rose |
Yeah I need to get that together. Thanks for the reminder. I'll also be a mirror for the radio shows as well (already got permission to do that). |
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makalu
Joined: 05 Feb 2008
Posts: 44
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| Posted: Fri Jun 27, 2008 1:00 pm Post subject: |
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| craigr wrote: | As much as I'd like to think I can predict what the markets are going to do I just can't. The Permanent Portfolio is a package. If you don't own all the components then it won't work.
Inflation is the big problem right now which is horrible for bonds, however it can end abruptly if certain actions are taken. High inflation ended suddenly in the early 80's when the Fed finally got serious about tackling it. Holders of gold and other inflation hedges got creamed in the aftermath. We're in an election year and the next administration may take dramatic steps to halt inflation so betting on it going forward for some time is just as much a risk as owning bonds. |
I hate to admit it, but I'm so being pulled in two different directions right now.
On the one hand, everything Harry Browne (and you, for that matter  say makes such good, common sense.
On the other hand, I've just finished reading Jim Rogers's two travel books, "Investment Biker" and "Adventure Capitalist". Even ignoring the travel part, reading these books will leave you in awe. That guy has unprecedented combination of historical knowledge, global perspective and investing experience (and astounding success).
Investment Biker was written in the early 90s, and Adventure Capitalist in early 2000's. In both, he predicts an stunningly accurate picture of what's happening today. (And his successful predictions can be tracked far earlier than the 1990s.) What's he doing today? Getting out of $USD denominated anything, and getting into foreign equities, and commodities (especially agriculture).
While Browne prescribes such a solid, common-sense long term strategy, I'm just finding it so hard to ignore what Rogers's is predicting will happen over the next decade.
Grrrrrrrrr. :-/ |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Fri Jun 27, 2008 1:23 pm Post subject: |
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I've read Roger's books and he does make a very compelling case. However he's quite wealthy and can afford to make some big gambles but still have enough to sustain his quality of life if things go wrong. Also, he now lives overseas so being totally invested in the US is probably not a good strategy for him.
All I'll say is that the commodity bull has been running hot for seven years now. When it stops running it's going to be a rough landing. A diversified portfolio can allow you to take advantage of the gains but also protects you in case you are wrong. You can always do commodity speculation with money you can afford to lose. If you're right then you'll be happy, but if you're wrong then you won't lose a large part of your savings. |
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V
Joined: 14 Apr 2008
Posts: 7
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| Posted: Fri Jun 27, 2008 1:55 pm Post subject: |
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| Seeing how Gold is at a high and interest is lower than average the risk adjustment is raised based on this. I would think one could make a pretty good argument to under/over weight just a bit ........... |
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Rose21
Joined: 27 Jul 2007
Posts: 469
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| Posted: Fri Jun 27, 2008 2:16 pm Post subject: |
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As luck would have it, Harry's target allocation affords an appreciably greater weighting to commodities (i.e., gold) than the standard allocation, so his portfolio is well set to hold its own in a declining dollar environment.
I have played with the concept of modifying the basic allocation to comport with what I see developing globally. For me, that has taken the form of spreading the 25% gold component over a broader range of hard assets. Likewise, the bond component of my portfolio is concentrated on the short-term end, and primarily in non-U.S. treasuries. When I feel surer of the course the Fed is taking, and of its commitment to the dollar, I'll venture into longer term issues. For now, I think protecting principal against concrete, ascertainable threats is more important than staying true to the long-term model.
Too bad Harry's not around to address some of these issues. I suspect he was not a particularly boxed-in thinker and might well be tipping the scales one way or another. |
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DP
Joined: 17 Apr 2008
Posts: 481
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| Posted: Fri Jun 27, 2008 9:30 pm Post subject: |
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Hi,
Excellent discussion. I stumbled across Fail Safe Investing years ago and consider it one of the best books on investment. I do think that his strategy is very conservative and I agree with the comments echoed a few times in this thread:
| Quote: | | I expect inflationary periods to take up far more time than deflationary periods. And I expect bull market periods to take up far more time than bear market periods. Thus, I choose to vastly overweight real assets (as an inflation hedge) and equities. |
Being somewhat optimistic, and after looking at some different allocations in the excellent backtesting spreadsheet available here:
http://www.bogleheads.org/foru....preadsheet
I've settled on a portfolio more similar to the Scott Burns 6 Ways from Sunday, but including LT Bonds per Harry Browne.
17% US Stocks
17% Int'l Stocks
17% REITs
17% Commodities
16% US LT Bonds
16% Global Bonds
It's more aggressive but it still carries over many of the concepts from the permanent portfolio. I still have a position in the Permanent Portfolio fund but am planning to move this to my own allocation with ETF's in the future. Still not fully settled on the Global Bonds allocation and whether it's worth slicing and dicing the allocations further - in backtesting returns can definitely be improved but not sure I would select the right allocations for the future.
In my 401K I use the above allocation as the core of my portfolio and allocate 2 positions (25%) to selections based on relative strength/momentum. It works together very well.
Don |
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makalu
Joined: 05 Feb 2008
Posts: 44
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| Posted: Sun Jun 29, 2008 4:24 pm Post subject: |
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I have a couple more theoretical questions:
1. If you added an equally weighted fifth asset to the mix, a commodities index (broad, e.g. the RICI), such that you had 20% each (cash, gold, equities, bonds, and commodities). How would expect the behavior of the portfolio to change?
2. Browne suggests rebalancing once per year. My brokerage offers 30 free transactions per month. Should more frequent rebalancing offer any advantages? (say, monthly?)
Thanks again for the feedback. |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Sun Jun 29, 2008 5:02 pm Post subject: |
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| makalu wrote: | I have a couple more theoretical questions:
1. If you added an equally weighted fifth asset to the mix, a commodities index (broad, e.g. the RICI), such that you had 20% each (cash, gold, equities, bonds, and commodities). How would expect the behavior of the portfolio to change? |
I think that having 20% Gold and 20% commodities would far be too overweighted towards hard assets personally. During periods where hard assets do poorly a portfolio with 40% weighting is going to be a serious dog.
I think gold ownership is preferable over straight commodities. Their risk/return profiles are largely the same but gold gives you the ability to more closely control the asset whereas commodities futures funds are largely black boxes. I feel it's important to not invest in things you don't fully understand because many hidden risks can be waiting.
Further, I feel gold has event hedging characteristics that commodities do not because it functions still as a monetary metal to a large degree. In other words, when there is a currency problem with the US dollar people will tend to buy gold to preserve their wealth instead of, say, wheat or pork bellies.
| Quote: | | 2. Browne suggests rebalancing once per year. My brokerage offers 30 free transactions per month. Should more frequent rebalancing offer any advantages? (say, monthly?) |
The rebalancing advocated was more on rebalancing bands. If an asset is more than 35% of the portfolio it should be sold down to 25% with the proceeds being used to bring up the laggards. Assets that are 15% or less of the portfolio should be brought up to 25% with proceeds from the winners. Under this scenario you could go years without needing to rebalance.
Harry Browne generally advised not checking on the portfolio too often unless you heard something really big happening in the news (which could have moved one of your asset classes way out of balance) or once a year just to check the percentages. This is a smart move for behavioral finance reasons for many people. Rebalancing too often can cause just as many problems as not rebalancing enough. For taxable investors the less rebalancing you are forced to do the better off you are.
Looking at your portfolio too often, unless you are of the type that can really detach emotionally, can cause counterproductive thoughts to take over that could lead to frequent trading at the wrong times, etc.
Lastly, the point of the Permanent Portfolio is to have a stable growth over many years. The portfolio is not going to have blazing performance but it's also unlikely to suffer a catastrophic loss. One reason the portfolio is so low maintenance is because it just plods along with little volatility taking in its annual growth. By not messing with the portfolio too often you end up ahead of the game because it makes it less likely you'll want to market time which is always a bad strategy. |
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docneil88
Joined: 30 Apr 2007
Posts: 491
Location: Taxable
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| Posted: Sun Jun 29, 2008 6:18 pm Post subject: Gold and CCF Funds |
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| craigr wrote: | | ...when there is a currency problem with the US dollar people will tend to buy gold to preserve their wealth instead of, say, wheat or pork bellies. |
Hi craigr, I'm dubious. Before the days when exchange-traded commodity futures funds were available, CCF investments were a pain to make because they had to be rolled over so frequently. But with the advent of CCF funds, long-term CCF exposure is a mere click away. That is a major change.
Still, gold is unusual in that it is a monetary asset that doesn't represent the liability of another party. That is a good reason to own at least some gold directly. (I don't count a gold ETFs as a direct holding, because it is just another contractual piece of paper, like a CCF fund is.) Best, Neil |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Sun Jun 29, 2008 7:16 pm Post subject: Re: Gold and CCF Funds |
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Hi Doc,
| docneil88 wrote: | | craigr wrote: | | ...when there is a currency problem with the US dollar people will tend to buy gold to preserve their wealth instead of, say, wheat or pork bellies. |
Hi craigr, I'm dubious. Before the days when exchange-traded commodity futures funds were available, CCF investments were a pain to make because they had to be rolled over so frequently. But with the advent of CCF funds, long-term CCF exposure is a mere click away. That is a major change. |
I agree that CCFs are easier to buy. What I'm uncertain about is whether they are the same when it comes to preserving wealth during currency problems. Of what limited historical data we have, it is interesting to see that commodities have had bull and bear markets inside and outside of times when there was severe inflation. Gold on the other hand has had consistent performance when there was high inflation (such as the 1970's and I would argue today).
However, the longer view (thousands of years) is that gold has worked as an inflation hedge. A $20 gold coin from 1900 would have bought a nice suit and pair of shoes. That same gold coin (about one ounce of gold) would purchase those same items today.
| Quote: | | Still, gold is unusual in that it is a monetary asset that doesn't represent the liability of another party. That is a good reason to own at least some gold directly. (I don't count a gold ETFs as a direct holding, because it is just another contractual piece of paper, like a CCF fund is.) Best, Neil |
I agree. Gold has a unique history and transcends culture and language as a form of wealth. I saw an interesting story about Vietnam lately where people have been purchasing gold to protect themselves against their own inflation problems:
http://www.ft.com/cms/s/0/5541....fd2ac.html
| Quote: | Vietnam’s communist authorities have temporarily suspended all gold imports in a bid to tackle the country’s spiralling trade deficit and help support the depreciating local currency, the dong.
With Vietnamese investors rushing into gold as a hedge against skyrocketing inflation, Hanoi – which sets an annual quota for gold imports – has withdrawn licences for further imports, traders said on Monday. |
Vietnam's inflation rate is reported to be about 25%. |
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docneil88
Joined: 30 Apr 2007
Posts: 491
Location: Taxable
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| Posted: Sun Jun 29, 2008 8:10 pm Post subject: Re: Gold and CCF Funds |
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| craigr wrote: | | I agree that CCFs are easier to buy. What I'm uncertain about is whether they are the same when it comes to preserving wealth during currency problems. Of what limited historical data we have, it is interesting to see that commodities have had bull and bear markets inside and outside of times when there was severe inflation. Gold on the other hand has had consistent performance when there was high inflation (such as the 1970's and I would argue today). |
Good points craigr. Still, with about 30% of my portfolio in unhedged international & emerging markets funds, I feel I have enough of a hedge on a falling US dollar. If the world enters a full blown food crisis (e.g. due to global warming, water supply issues, increasing use of biofuels, and/or increasing world demand for grain-fed meat), I think my 10% portfolio position in the PowerShares DB Agriculture [CCF] Fund (DBA) will probably give me more protection than a 10% position in gold holdings. I nonetheless do have some direct gold holdings (but they amount to <1% of my assets). Best, Neil |
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DP
Joined: 17 Apr 2008
Posts: 481
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| Posted: Sun Jun 29, 2008 10:00 pm Post subject: |
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Hi,
My 2 cents on the gold vs. commodities question. Why not include both? Commodities is more diversified and is a good play on oil long term, gold is probably better as a currency hedge and during major (scary) events or wars. We diversify because we can't know for sure what the future will bring and what will outperform. I see value in both so for me it is really a question of what is available (my 401K offers commodities but not gold) and how many funds I want to hold.
Don |
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makalu
Joined: 05 Feb 2008
Posts: 44
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| Posted: Mon Jun 30, 2008 3:54 am Post subject: |
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It would be very interesting to find a visual timeline (starting maybe around the 1920s or 30s) marked up with the four economic conditions that Harry Browne identified--(1) Prosperity, (2) Inflation, (3) Deflation, (4) Tight Money--just to see the relative frequency of these periods.
Does anyone know if such a chart exists somewhere on the web?
I'm still thinking about a modification of the Permanent Portfolio to include broad commodities as an additional asset class. Craig wrote:
| Quote: | | I think gold ownership is preferable over straight commodities. Their risk/return profiles are largely the same.. |
Are you sure their risk/return profiles are largely the same if by "straight commodities" we're referring to a futures index (which is what AFAIR is available through ETFs like DBC/RJI)? That is probably the key in terms of answering the question of whether adding a commodities futures index to a Permanent Portfolio makes sense.
A study came out of Yale not long ago, "Facts & Fantasies about Commodity Futures", in which they make a strong argument for investment into a broad commodities index. Here's the summary section of that paper:
| Quote: | This paper provides evidence on the long-term properties of an investment in collateralized commodity futures contracts. We construct an equally-weighted index of commodity futures covering the period between July 1959 and March 2004. We show empirically that there is a large difference between the historical performance of commodity futures and the return an investor of spot commodities would have earned. An investor in our index of collateralized commodity futures would have earned an excess return over T-bills of about 5% per annum. During our sample period, this commodity futures risk premium has been equal in size to the historical risk premium of stocks (the equity premium), and has exceeded the risk premium of bonds. This evidence of a positive risk premium to a long position in commodity futures is consistent with Keynes’ theory of “normal backwardation”.
In addition to offering high returns, the historical risk of an investment in commodity futures has been relatively low – especially if evaluated in terms of its contribution to a portfolio of stocks and bonds. A diversified investment in commodity futures has slightly lower risk than stocks – as measured by standard deviation. And because the distribution of commodity returns is positively skewed relative to equity returns, commodities have less downside risk.
Commodity futures returns have been especially effective in providing diversification of both stock and bond portfolios. The correlation with stocks and bonds is negative over most horizons, and the negative correlation is stronger over longer holding periods. We provide two explanations for the negative correlation of commodities with traditional asset classes. First, commodities perform better in periods of unexpected inflation, when stock and bond returns generally disappoint. Second, commodity futures diversify the cyclical variation in stock and bond returns.
On the basis of the stylized facts we have produced, two conclusions are suggested. First, from the point of view of investors, the historical performance of collateralized investments in commodities suggests that commodities are an attractive asset class to diversify traditional portfolios of stocks and bonds. Second, from the point of view of researchers, there are clearly challenges for asset pricing theory, which to date has primarily focused on equities. |
In the case that broad-commodities futures, as an asset class, were only loosely correlated with gold, and uncorrelated with the other PP asset classes, do you think it may make sense to add this to the PP?
(As I write this, I'm wondering whether there was something special about the number of asset classes in the PP (four) being equal to the number of identified economic conditions that the portfolio has to address. If that's the case, then if one could find 10 perfectly uncorrelated asset classes, perhaps it still wouldn't necessarily be a good idea to build a PP with them?) |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Mon Jun 30, 2008 12:44 pm Post subject: |
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| makalu wrote: | It would be very interesting to find a visual timeline (starting maybe around the 1920s or 30s) marked up with the four economic conditions that Harry Browne identified--(1) Prosperity, (2) Inflation, (3) Deflation, (4) Tight Money--just to see the relative frequency of these periods.
Does anyone know if such a chart exists somewhere on the web? |
I don't. A long while back I went through the data I have to see how various assets acted during these periods. As of now, the only period where the Permanent Portfolio hasn't been fully tested under real conditions is during a 1930's style Depression. Another poster mentioned that Browne and Coxon did extensive analysis and even paid for computer simulations (this was 30 years ago) to assist in the analysis.
| Quote: | | Quote: | | I think gold ownership is preferable over straight commodities. Their risk/return profiles are largely the same.. |
Are you sure their risk/return profiles are largely the same if by "straight commodities" we're referring to a futures index (which is what AFAIR is available through ETFs like DBC/RJI)? That is probably the key in terms of answering the question of whether adding a commodities futures index to a Permanent Portfolio makes sense. |
They're not exactly the same. They have similar volatility and returns, but they can move differently for different reasons. Harry Browne talked about why he excluded commodities from the portfolio in his show on 04-10-24 (near the end of the show). A reader asks why he wouldn't want to use Rogers' commodity index instead of just gold.
From 1972-2007 the numbers are:
Commodities Index
CAGR %8.41
Std. Dev. 24.28
Gold
CAGR %8.53
Std. Dev. 31.99
Gold had a stronger reaction during the bad inflation of the late 70's. Commodities had some strong bull markets in times where there was not appreciable inflation (during the 80's and 90's). Their long term correlation is 0.62 which is the highest of any asset class in relation to either gold or commodities. That's what I mean by largely the same.
| Quote: | | In the case that broad-commodities futures, as an asset class, were only loosely correlated with gold, and uncorrelated with the other PP asset classes, do you think it may make sense to add this to the PP? |
I'm personally on the fence about this. I think that commodities have some very close similarities with gold in how they react. However I defer to Browne's wisdom on the matter because of his experience and the fact that his batting record on recognizing risks in investments, I feel, is very good.
| Quote: | | (As I write this, I'm wondering whether there was something special about the number of asset classes in the PP (four) being equal to the number of identified economic conditions that the portfolio has to address. If that's the case, then if one could find 10 perfectly uncorrelated asset classes, perhaps it still wouldn't necessarily be a good idea to build a PP with them?) |
The original portfolio had a couple more asset classes (swiss bonds, silver, etc.). Over time the portfolio was simplified. The 25% number is not scientifically based, it was just something that was balanced and worked well historically for the strategy. |
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Tramper Al
Joined: 18 Oct 2007
Posts: 2374
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| Posted: Mon Jun 30, 2008 1:11 pm Post subject: |
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| makalu wrote: | | It would be very interesting to find a visual timeline (starting maybe around the 1920s or 30s) marked up with the four economic conditions that Harry Browne identified--(1) Prosperity, (2) Inflation, (3) Deflation, (4) Tight Money--just to see the relative frequency of these periods. |
Is it really on a time scale that you want to see how these "conditions" are distributed, or rather how each one weighs on a portfolio. I could see one condition lasting a long time but having a flat or mildly deleterious effect while another could be brief in duration but quite devastating.
And what exactly is "Tight Money"? High interest rates? |
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docneil88
Joined: 30 Apr 2007
Posts: 491
Location: Taxable
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| Posted: Mon Jun 30, 2008 8:36 pm Post subject: Prosperity, Inflation, Deflation, Tight Money |
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| Tramper Al wrote: | | makalu wrote: | | It would be very interesting to find a visual timeline (starting maybe around the 1920s or 30s) marked up with the four economic conditions that Harry Browne identified--(1) Prosperity, (2) Inflation, (3) Deflation, (4) Tight Money--just to see the relative frequency of these periods. |
Is it really on a time scale that you want to see how these "conditions" are distributed, or rather how each one weighs on a portfolio. I could see one condition lasting a long time but having a flat or mildly deleterious effect while another could be brief in duration but quite devastating. |
Excellent points Tramper Al. Best, Neil |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Mon Jun 30, 2008 8:50 pm Post subject: |
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| Tramper Al wrote: | | And what exactly is "Tight Money"? High interest rates? |
Rising rates as typically seen in a recession. But not out of control rising rates like in a bad inflation. |
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makalu
Joined: 05 Feb 2008
Posts: 44
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| Posted: Tue Jul 01, 2008 5:23 am Post subject: |
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| Tramper Al wrote: | | Is it really on a time scale that you want to see how these "conditions" are distributed, or rather how each one weighs on a portfolio. I could see one condition lasting a long time but having a flat or mildly deleterious effect while another could be brief in duration but quite devastating. |
Good point. Both would be interesting!
In addition to their weighted effects on a portfolio, it'd be interesting to see whether certain conditions tend to follow (or precede) other particular conditions, the frequency of conditions with respect to other conditions (I would guess we tend to see inflation far more often than deflation), for example.
Of course, when I consider information that I'd like to have available to visualize and understand, I then ask myself "why", and have to admit that the motivation must lie in an interest to time/outperform the market. Even when faced with overwhelming data (and experience!) to the contrary, I'm finding it terribly difficult to escape the belief that I can do that.  |
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Wonk
Joined: 11 Jul 2008
Posts: 204
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| Posted: Fri Jul 11, 2008 6:00 pm Post subject: Harry Browne |
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I can't believe I found this thread. My first visit to this site, forum and thread has been something that closely resembles financial porn. Kinda creepy.
First of all I appreciate everything everyone has contributed to the discussion. It's been a fascinating read and EXACTLY what I've been searching for.
A short history on how I found this thread: doing my own AA through recommendations of The Oxford Club, read a little write up on Perm. Portfolio which lead me to read Harry's last book "Fail Safe..." while also reading Peter Schiff's "Crash Proof", did some googling and here I am.
It's a lot to take in.
I'm sure most of you know who Peter Schiff is and that the dollar is under immense pressure as everyone also knows. I'm curious to know what the potential implications of Harry's PP if Schiff turns out to be correct.
Schiff predicts a dollar crash is imminent and hyper-inflation as a result. His track record thus far has been excellent. However, I believe Harry when he says you just can't predict. So, I'd like to set up a PP that has a hedge if Schiff turns out to be right.
That being said, if the dollar does crash, as a reserve currency it would wreak massive havoc on ALL markets-regardless of what currency you are currently in. Am I right? It's not like we're talking Argentinian Pesos or German Marks here. Just about everything worldwide is priced in dollars.
So even if the dollar does crash and Schiff is right, where would that leave other currencies? And the US economy? And with it, Harry's PP?
Can we do some more brain dumping here? Please, share your thoughts. Thanks! |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Fri Jul 11, 2008 6:33 pm Post subject: Re: Harry Browne |
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| Wonk wrote: | | I can't believe I found this thread. My first visit to this site, forum and thread has been something that closely resembles financial porn. Kinda creepy. |
We're just talking plusses and minuses of the strategy. There's no timing involved, no chart reading, no prognostications, no predictions, no guessing. It's just a mechanical strategy that can be used to ignore a lot of the market noise if you desire.
| Quote: | | I'm sure most of you know who Peter Schiff is and that the dollar is under immense pressure as everyone also knows. I'm curious to know what the potential implications of Harry's PP if Schiff turns out to be correct. |
I read that book. A lot of doom and gloom. Here's the deal, a lot of people have been predicting dire things for a long time. Eventually they may be right. However, you need to protect yourself in case they are wrong.
My feelings on these various predictions are that they never turn out as expected. Usually it's one of the following (I'm sure I missed a few):
A) Never happen.
B) Never happen as bad as thought.
C) Something else happens that's maybe worse and it still surprises you.
D) Something else happens that's a benefit.
E) May happen, but the markets just shrug it off.
F) May happen, but the markets view it as a positive.
| Quote: | | Schiff predicts a dollar crash is imminent and hyper-inflation as a result. His track record thus far has been excellent. |
I don't know his track record that well to say anything. Just remember that you never hear about investment advisors when they are making a string of bad predictions. You only hear about them when they have a string of successes. The law of averages says that once you hear about them their luck is about to end.
I have books going back to the 1970's that predict a dollar crash and hyper-inflation. If you followed their strategies exclusively to protect yourself you'd have found that your investments would have not grown much at all over that time. Many of these authors are still around today saying the exact same things they said decades ago. It just happens that today they are getting the press, but nobody was listening to them in the 80's and 90's when stocks were doing well and the dollar was stronger (with good reason).
| Quote: | | That being said, if the dollar does crash, as a reserve currency it would wreak massive havoc on ALL markets-regardless of what currency you are currently in. Am I right? It's not like we're talking Argentinian Pesos or German Marks here. Just about everything worldwide is priced in dollars. |
Nobody knows. However there have been other currencies in the past that have been #1 (British Sterling, Dutch Guilders) and when they unwound the world didn't end.
| Quote: | | So even if the dollar does crash and Schiff is right, where would that leave other currencies? And the US economy? And with it, Harry's PP? |
Well what if he's wrong and the dollar stays as it is? Or what if the dollar dramatically regains strength if the US gets their spending under control? Or what if the dollar ends as a reserve currency but it still isn't catastrophic? Or what if the dollar simply becomes part of a basket of currencies countries hold so it isn't the exclusive reserve currency, but is one of several that people just keep around? Or suppose we end being a reserve currency, but it forces our leaders to drastically reduce our deficit spending and makes the country's balance sheet dramatically stronger and improves our economy markedly? There are an infinite number of ways this can all play out.
Everyone at this point knows the dollar is hurting, so you don't know anything the markets don't already know. If you place too strong of a bet in any direction and you are wrong then you could suffer severe losses that may never be recoverable.
Specifically though, if the currency has a serious problem the gold portion in the PP will shoot through the roof. If the bottom falls out and we hit a Great Depression II with collapsing interest rates and deflation the long term bonds will do very well. If things just kind of calm down then the stocks and bonds will both do OK. If there is a recession for a couple years the cash will provide a buffer.
I'll just be blunt about this: The future is unpredictable. I like reading a good economic horror novel as much as the next guy, but I would never bet my life savings on one person's predictions about the future. I don't go to a psychic for advice on how to live my life so why should we believe someone can be a financial psychic good enough to wager my valuable money?
Last edited by craigr on Fri Jul 11, 2008 7:13 pm; edited 3 times in total |
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