Bogleheads

[Clive]

--deleted--

[craigr]

I wouldn't use leverage of any type with the Permanent Portfolio. I predict that many of these leveraged ETFs are not going to be around in a few years. They aren't an investment product that long term investors should be using. IMO.

[Lbill]

I played around with leverage funds a while back and one thing I noticed is that they go down faster than they go up; i.e., the gain/loss profile is asymmetric. I read something somewhere that confirmed this, and I believe it has to do with the use of derivatives for leverage. Of course, this introduces another layer of counterparty risk. If you want to leverage, it is probably technically more efficient to do it by using options or margin. I have no desire to go there at all.
_________________
"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

[WileECoyote]

All I want is something for nothing, is that asking too much!?!?!

I think I like the idea but as with most things when I research them more I find out it doesn't work as well as it initially seems. Investing for me is slightly depressing in that way, 99.99% of what I look at gets binned for one reason or another. But it is also part of the fun, trying to find something that works.

I'm still amazed at the simplicity and effectiveness of the PP. I keep trying to make it more complicated to "improve" it but am not having much luck.

[Lbill]

I'm with you WileE. The thing that bothers me the most about PP is that it's just too darn simple. But not to fear - I'll figure out plenty of ways to make things more complicated (what would I do with myself otherwise?)
_________________
"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

[Kevin K]

I'm in the process of instituting the PP and the only problematic area for me is the gold. I've followed up on all the links and done a lot of poring over prospectuses (prospecti?) for GLD and IAU.

While we maintain a U.S. mailing address my wife and I live in Mexico full-time, so needless to say coins or bullion in a safe deposit box is not an option. I am tempted to go with 2/3 of our allocation in Goldmoney and1/3 in either Bullionvault or CEF (though I hate the idea of paying a 10%+ premium over NAV).

It would of course be far easier to just do the ETFs. A friend of mine points out that for the purposes of the PP allocation we don't care whether these funds have the gold to back up their shares as long as the markets THINK they do. I tend to agree but the idea of tying up a quarter of my net worth in what quite clearly are dubious funds defeats the "sleep well at night" part of the PP.

I would be curious to know what others who have actually instituted this portfolio are doing.

Kevin

[WileECoyote]

I'm in the process of doing the same thing. I hold GLD which I'm totally fine with, but I'm trying to find another source, possibly physical. I'm ok with the CEF NAV premium IF it has consistently stayed that way- then it doesn't matter to me too much. Also looking at the GoldMoney option. Funny how what should be the simplest part of the PP is giving everyone the most headaches!

[Tramper Al]

[zoot]

Any thoughts on using trailing stop loss orders with the permanent portfolio? For example, using a "loose" stop loss percentage of about 10% on the bond and stock portions and perhaps gold if held in an ETF? No need for stop loss on the cash. Just wondered if this strategy would improve performance.

[MediumTex]

One easy way of easing your mind about the gold ETFs is to watch the spread between GLD and IAU. As long as they are trading more or less in lockstep, that tells me that the market believes they are both clean.

If an unusual spread between GLD and IAU begins to develop, I think that would probably serve as a good warning sign to look a little more closely at what is happening with the ETFs in general.

I always assume that there are market players who become aware of monkey business way ahead of the rest of the investing public. So long as gold, GLD and IAU track one another in a consistent manner, I view that as a vote of confidence from the market.

Of course, GLD and IAU could both unravel at the same time, but that seems unlikely, given that each has a tremendous incentive to keep its game cleaner than the other in order to attract more investors.

Just something to think about.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[WileECoyote]

Along those lines, I've only purchased GLD so far but the next time I go to buy through an ETF I was thinking about purchasing whichever had the better discount to NAV at that time. I think the bid\ask spreads are a little wider on IAU too as it's a little more thinly traded, just something else to consider.

[Quasimodo]

Central Gold Trust (symbol GTU) holds gold bullion in a Canadian bank and trades at a substantially lower premium to NAV, currently 4.1%. (Another poster pointed this out earlier - forgive me for not being able to find the post and give credit where credit due)

This could be more palatable than CEF for those concerned about the premium to NAV issue, and possible counterparty risk with some of the ETFs.

My personal preference is for CEF because it holds both silver and gold. I'm not too worried about the premium to NAV. Rebalancing over time might make this a non-issue.

John
_________________
Don't surrender your loneliness so quickly. Let it cut more deeply. Let it ferment and season you as few human or even divine ingredients can.

Hafez, poet (1315-1390)

[WileECoyote]

I brought this up in another post but I figured I'd mention it again. I was reading an article about commidty ETFs and it had this to say:

"All three of these bullion ETFs track the price of their given commodities, minus fees of 40 basis points per year (0.40%). These expenses are paid by liquidating a portion of the fund's assets -- literally, selling 0.40 percent of the gold or silver each year. As a result, over time, each share's claim will represent a smaller and smaller amount of gold. (After 50 years, each share will represent just 0.082 ounces, compared to 0.1 ounces at launch.) "

Does that math sound right?

[Ariel]

[Kevin K]

From what I can tell this is true of GLD and IAU but not of the closed-end funds CEF and GTU. The latter clearly do own the physical metal to back up their share price but from the most important difference between them and owning metal in a safe deposit box or the equivalent via, say, Julias Bauer (Swiss) or the aforementioned Gold Money or Bullion Vault is there doesn't seem to be a provision for actually redeeming your shares for bullion if political circumstances put you in survivalist mode.

Kevin

[Clive]

-- deleted --

[zoot]

Clive, do I understand correctly that I should deploy the cash portion of the PP into TSM with a trailing 5% stop at the beginning of a year, say July if I start now, and if stopped, stay in cash until the following July?

Also, I read your link about laddering the stock, bond, and gold allocations. Here is my understanding of your ladder concept using $100,000 and VTI and TLT for TSM and LTT proxies as an example:

Ticker Yield/Price Fund Allocation - Cash Reserve = Amount Invested
VTI 2.64% 47,000 - 39,690 = 7,310
TLT 4.16% 68,000 - 47,320 = 20,680
Gold 940 56,000 - 30,305 = 25,695
Cash = 100,000 - 7,310 - 20,680 - 25,695 = 46,315

And then deploy the 46,315 Cash into VTI with the 5% stop. Is this right?

[Clive]

-- deleted --

[MediumTex]

I was looking at the new PRPFX prospectus and saw that the fund's management fee has been lowered from .95% to .84%.

I find this very impressive, especially considering that the fund's fees were reduced to .95% not that long ago, and the fact that the fund probably does have legitimate expenses that other funds don't have, considering its eclectic mix of assets.

This decision also probably took some money out of Cuggino's pocket, and I think it speaks well of his commitment to the fund and his desire to look out for its shareholders.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[SquawkIdent]

[eurowizard]

[Chas]

[juhrio]

my guess would be the only way to improve the PRPRX or the HBPP is too use a mebane faber market timing model on each asset class. maybe it would be good to sell all. maybe it would be good to underweight.

imho the only weakness to the PRPFX/HBPP is you underperform when on of the asset classes is in a bull market. look at the PRPFX vs. the sp500 during the bull market of the 90s. big underperformance. on the other hand, gold went down for 20 years and you held it for that long!

being underweight or overweight is probably more in keeping with the HBPP concept than simply selling all of one of your asset classes during a bear market.

I love the concept but I don't know that I could hold an asset class I knew was in a bear market.

[MediumTex]

[WileECoyote]

[Quasimodo]

[quote="WileECoyote]What I was referring to specifically in that post was the leveraged Treasury etf that I really like the premise of. Giving a slight amount, say 1.5x leverage to Treasuries to give it equity like returns is attractive. But when you dig into the options available through an ETF or fund format the prospects become less appealing.[/quote]

Hi WileE;

Have you looked at the American Century bond fund BTTRX? It holds Treasury zero-coupon bonds maturing in 2025 when the fund will be liquidated at an estimated NAV of around $116.00. It's below $60 currently. It has a lot more volatility than a regular long term T Bond fund, but it isn't actually "leveraged". The added volatility would seem to fit the Permanent Portfolio rebalancing system well. For me, there is the comfort that the NAV has to eventually increase because of the imputed but unpaid interest that has accumulated.

John
_________________
Don't surrender your loneliness so quickly. Let it cut more deeply. Let it ferment and season you as few human or even divine ingredients can.

Hafez, poet (1315-1390)

[Wonk]

Craigr,

The rebalancing stats you referenced in a post a few pages back--did those stats reference Tbills in the cash section or 1-3yr bonds?

Thanks.

[WileECoyote]

Hi there Quasimodo,

I just looked at BTTRX again. It looks to hold almost all strips and has a lot of Resoltuion Funding Corp debt, is that explicitly backed by the gov't?

The idea of how the fund works is pretty interesting though. Looking at the chart it seems to have basically reacted the same way as VUSTX or TLT.

Morningstar says it has about 1.5x the beta of LT Treasuries and TLT has about 1.3x.

[Quasimodo]

Hi WileE;

BTTRX appears to be about 80% treasury and up to 20% government agency bonds. From the prospectus:

Target 2010 Fund
Target 2015 Fund
Target 2020 Fund
Target 2025 Fund
What is the funds’ investment objective?
The funds seek the highest return consistent with investment in U.S. Treasury securities.
How do the funds pursue their investment objectives?
Each fund invests primarily in zero-coupon U.S. Treasury securities and their equivalents, and may invest up to 20% of its assets in AAA-rated zero-coupon U.S. government agency securities. Each fund is designed to provide an investment experience that is similar to a direct investment in a zero-coupon U.S. Treasury security.

Here's a short article on Resolution Trust, which appears to have been absorbed by the FDIC:

http://www.yourdictionary.com/....-corp-abbv

John
_________________
Don't surrender your loneliness so quickly. Let it cut more deeply. Let it ferment and season you as few human or even divine ingredients can.

Hafez, poet (1315-1390)

[WileECoyote]

Forgot about this one too for those interested is Wasatch Hoisington Treasury fund, managed by Hoisington. I believe they move the maturity around depending on their forecast. A while back they were figuring on debt deflation and went pretty long.

Here's now they stack up:

From Morningstar after expenses

[MediumTex]

EDV is really all you need if you want a little higher octane in your LT treasuries.

Just compare TLT, EDV and VUSTX over the last 12 months and the difference will be very clear.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[WileECoyote]

Thanks Tex, just looked at EDV, it really reacts violently!! Might be the way to go to get a little extra out of the Treasury portion. I saw it in earlier posts but hadn't compared them all again.

[juhrio]

one question.

why doesn't the HBPP use a bond ladder. something that will protect against inflation. something like the etf PLW. doesn't that help protect against rising rates?

Ibbotson did a study and they concluded that a bond portfolio would need about 18% of it's assets in gold to protect from inflation. the number is around 40% for a stock portfolio! that number seems like a lot.

"Wainwright Economics determined that, in the current rising inflationary environment, bond portfolios need an 18% allocation to precious metals bullion and equity portfolios need 47% just to immunize them against inflation."

http://www.goldcore.com/resear....tion_hedge

keep in mind those allocations may have changed now that we have experienced deflation!

[MediumTex]

[zoot]

[MarcDeMesel]

I do think that one has to be carefull even with the PP. In a post a few pages back I asked what happens with the PP in a hyperinflation scenario where one is rebalancing from gold/shares to cash/bonds, but the cash/bonds are destroyed years in a row.

MediumTex replied that the PP will not work in a hyperinflation scenario but only in normal stable economies. I think he is right. The problem is I want to be protected in every possible scenario, especially the worst ones like hyperinflation and government defaults where cash and bonds can lose value for a possibly long time and end up worthless. I also want to be protected against communist nationalisations of the stock market where stocks can lose value for years in a row and end up worthless.

Could the PP be improved so that it not only protects you against prosperity, recession, inflation and deflation but also against hyperinflation, government defaults and communist nationalisations?

The source of destruction is not in the asset an sich but in the yearly rebalancing that makes no sense in such scenario's. Would it be wise to simply not rebalance? I understand that if you do not rebalance some assets will skyrocket in value and others will become very small. Also volatility will likely go up. But you would avoid pouring valuable purchasing power into black holes.

Another idea I am attracted to is to skipp the cash part and go for 33% stocks, 33% gold and 33% LT Bonds. This because it feels to me I am better protected as I will only lose 33% in a government default and not 50% in case of a traditional PP. I understand that volatility goes up when leaving cash out but if I am better protected all is well for me.

I would also like to note that the 'protected against recession' feels odd to me. A recession is eather inflationary or deflationary. Sure it can take some time before the direction is certain but clear it will become. Eather intrest rates go up or intrest rates go down and thus gold will protect you against the inflation following or LT bonds will protect you against the deflation following. Gold and LT bonds are sufficient to protect you against recessionary periods.

These rationales I would use to skipp the cash part and skipp the rebalancing so that my PP can also survive hyperinflation, nationalisation and government defaults.

Is this making sense?
_________________
My blog about the European Permanent Portfolio: http://europeanpermanentportfolio.blogspot.com/

[dumbmoney]

[MarcDeMesel]

[zoot]

Holding some physical gold is a good idea. Eliminating the cash part of the PP would only work if you are absolutely certain you won't have to sell any portion of the other asset classes at a loss for emergency needed cash. I think Clive had a good suggestion earlier in this thread to invest the cash in TSM with a tight stop, say 5% that would slightly improve the overall portfolio return. Don't know what the strategy would do to portfolio volatility. Hard to say how the PP will hold up under a black swan event...but I can't think of any better strategy than the PP for extreme market uncertainty.

[MediumTex]

Part of the elegance of the PP is that it prevents you from becoming too attached to one particular future scenario.

Marc, in reading your posts I sense that you may be overly attached to the idea of hyperinflation and potential ruin of all three assets in the PP except gold. As you are thinking about this thesis, however, bear in mind that the world is not controlled only by political ideologues who want to wreck economies and confiscate property. There are also the evil robber barons, the sinister banksters, and basically all manner of capitalist greedsters who are 100% committed to making money, and who have a LOT of political power as well.

Consider that over the last 100 years, there has been just about every political and economic calamity that one could imagine, but the examples of hyperinflation in the developed world can probably be counted on one hand.

One of the things that I have learned is that things are rarely as good or as bad as people seem to think at any given point in time. Unless you see significant wage increases, I wouldn't worry about hyperinflation, and unless the ruling power is picking up members of the capitalist elite and confiscating their property and throwing them in jail, I wouldn't worry about government-sponsored wealth destruction too much either.

Using my criteria, Russia would probably not be a great place to set up a PP right now, but then we probably already knew that.

Why not just invest in an all-world stock index if you are that concerned about your home government and economy and store your gold in Switzerland as HB suggested? There seem to be some pretty strong built-in disincentives toward inflation in the structure of the euro, so that seems like a reasonably good place for cash in a Euro-PP. Buy long term German debt and you're done.

What's wrong with that approach for a nervous Belgian?
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[MarcDeMesel]

[MediumTex]

Marc, you do have the choice not to rebalance if that was your preference during times of extreme crisis where stocks, bonds and cash are all losing their value rapidly.

Although I do not personally think that such a scenario is currently possible in the U.S. and a handful of other nations, I don't see why you couldn't just hang on to your initial 25% gold allocation and let the world fall apart in whichever way it decides to. A 25% gold allocation in such a scenario would easily protect you from the sort of disaster you are envisioning (along with a good rifle, plenty of ammo, and a woman with grit who knows how to re-load 7.62mm rounds ).

Bear in mind, though, that nothing bad lasts forever, and neither do the good deals that come along during those times.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[MarcDeMesel]

I think it is a bad idea to stop rebalancing your PP whatever happens as you will most likely miss all those nice buying opportunities and will end up with a very undiversified portfolio which means you will not be protected decently any longer against prosperity, recession, inflation and deflation. Ie. stop rebalancing the PP does not make a PP any longer.

[MediumTex]

I do see that a rebalanced PP in Zimbabwe would not provide the protection that the PP advertises.

What I don't see is any country in western Europe on track for a Zimbabwe-type experience.

However, in the event that a Robert Mugabe-type character were to come to power in Belgium, for example, it seems like there would be plenty of lead time to relocate both you and your assets to a safer location. Part of what set the stage for the current Zimbabwe experience was that much of the country's capital fled to safer places long ago when it became apparent that Zimbabwe was no longer a safe place for capital.

But if your proposed approach is to basically use the variable portfolio to hold disaster insurance in the form of gold (in addition to the gold in the PP), I think that's consistent with HB's thinking.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[WileECoyote]

MediumTex,

You might want to diversify your portfolio to include 5.56, .45, or possibly 12 ga for disaster insurance.

[Wonk]

Found an interesting article that PP devotees might like:

http://theaffordablemortgagede....atrick.net

The author challenges the official CPI and the use of "owner's rental equivalent." What I find compelling is if you overlay the 4th graphic with a gold chart, you'll see the spike in gold around the same time (06-07).

Additionally, using his adjusted CPI numbers (included housing, not ORE), he notes a 6.5% price deflation in 08. If he's correct, the PP at 0% return for 08 was an impressive 6.5% real return. Not bad, Mr. Browne. Indeed for 08, not losing really was winning.

While detractors of this type portfolio don't like it's lag in nominal returns, the long-term real returns continue to be impressive on a risk-adjusted basis IMO.

[MarcMyWord]

I have enjoyed following this thread––which has now grown into one of the longest I can recall reading on this forum––although my understanding of the issues being discussed is not as technical as many of the knowledgeable posters here.

I would like to ask a question which I think has been addressed tangentially, but not "head–on" in the course of this thread. (And in asking it, I'm not just thinking of myself but also several friends who may be interested.)

For people who generally like to "keep things simple," and would rather avoid the hassle of assembling their own portfolio, or trading in ETFs, or buying physical gold, or triggering "taxable events" because of rebalancing, and so on, is there anything seriously, seriously wrong with just buying the Permanent Portfolio mutual fund (PRPFX)? I can tell from the posts in this thread that some may not consider its asset allocation the perfect way to construct a permanent portfolio, or may wish that its (recently reduced) expense ratio was still a bit lower, but for someone who is interested in the permanent portfolio concept but also seeking simplicity and who likes to put investments "on automatic pilot" as much as possible, is PRPFX––even if not perfect––"good enough"?

Thanks for comments.

Marc (not the Belgian Marc who is also posting here! )

[WileECoyote]

I transcribed the paragraph below from a "summer 2009" interview with Bob Prince Co-Chief Investment Officer of Bridgewater

"This is a great time for people to learn from their mistakes and to see the dfferences in approaches. Almost every institutional investor has an unbalanced portfolio with too much equity and credit, so they will do poorly when growth is worse than discounted. This vulnerability was revealed by the recent environment. Today's conditions in the U.S. are similar to Japan's in the early 1990s. Imagine how these portfolios will perform over the next 20 years if things play out in a similar manner. However, a Japanese portfolio that was balanced with respect to growth and inflation actually performed very well since 1990, roughly as well as a balanced U.S. portfolio, which was in a boom. You don't want an implicit bet on the environment that can hurt you for decades; you want to balance your portfolio so that you are neutralized to any particular environment and then earn the risk premiums that are priced into assets as consistently as possible."

He goes on about their 'All Weather' portfolio:
"......All Weather is simply a balanced portfolio- it does not represent a bet on a particular outcome. Instead, the risks are balanced with respect to economic growth and inflation so that we are neutralized...."

Granted they use leveraging\deleveraging to create their portfolios but their fundamental idea is the same as the PP.

[Quasimodo]

[WileECoyote]

I would agree that it is a fairly close approximate for the later Harry Browne PP. Some people on here mentioned earlier that they think the PRPFX might be a little more weighted towards inflation protection than the 4 asset HB PP, but the results are fairly similar and far easier with the mutual fund. Also it's tax efficient to boot.