Bogleheads

[Lbill]

MT and Roy - Good points, all. Thanks for your input. I noted that Wellesley had it's worst year in 2008, when it lost 9.8%. By comparison The 40%/60% TSM/5yr Treasury breakdown (which represents the stock/bond allocation of Wellesley) lost 6.8%, so maybe Wellesley's investment style caught up with it a bit. The 25x4 PP lost about 0.7% because it was "rescued" by LTT at the 11th hour. I have always been a fan of "rolling my own" fund by allocating across various index funds. The "manager risk" is me. This way, the allocations are completely transparent - no backroom alchemy involved in the fund performance. Since the PP did about as well as Wellesley from 1972-2008 with only 25% in stocks vs. 40% I regard that as pretty good performance and think I'd be happy with it if it were a managed fund and was reading the prospectus.

One of my goals is to dial down the allocation to equities as much as possible - no more than 15%-25% for me. Actually, that would be the highest allocation I've ever had. I built my nestegg by saving as much as I could and watching the egg closely - following Buffett's two rules of investment: #1) Don't lose money, and #2) Remember Rule #1. It worked. I wound up as well off as if I'd ridden the stock elevator up and then back down.

If you'll indulge me, I was just pondering the PP philosophically while in the shower, and reaffirmed to myself that it is a "rainy day" portfolio and not a "prosperity" portfolio. It won't do particularly well during times of prosperity and excess, when the champagne corks are popping and GS is handing out $1M bonuses. That's what we had during the 1980s and 1990s. So you have to OK with that, and I am. It will keep you whole when the party is over. Since in the history of the U.S. there have been more years of prosperity than hard times, the past advises us to invest with an "equity bias." This view has particular appeal to the optimistic and hopeful among us. By comparison the PP is not an optimistic and hopeful portfolio that thrives in times of prosperity and abundance. Oh, we get a little piece of that, but we have to put up with all the loud-mouthed Jim Cramer-types around us who are making a killing. The PP is a defensive, chicken-little portfolio that appeals more to the cautious, cynical and pessimistic (at least those adjectives would describe me). That's probably why there's so much anxiety around it. Who wants to be in a club with a bunch of timid pessimists? Lots of hopeful optimists have been attracted to this club recently because they've taken one of their periodic maulings in the stock market. When things improve, they will have a short memory for their time of woe (as they always do) and jump right back in with the upbeat equity crowd. The "hard-core" PPers, who are temperamentally suited to it, will still be hanging around waiting for the partying equity crowd to take another well-deserved beating. Now that thought makes me happy.
_________________
"Whenever you find yourself on the side of the majority, it is time to pause and reflect." ~ Mark Twain
"A foole and his money is soone parted." - J. Bridges, 1587

[MediumTex]

It's ironic that someone like Nassim Taleb gets all the applause for telling us how unpredictable the world is, even as he is going out of his way to tell you how he doesn't know what you SHOULD do (i.e., no specific investment advice), just what you SHOULDN'T do (i.e., don't discount the highly improbable).

OTOH, Harry Browne's books sit on the bookshelf, mostly unread, but are packed with basically ALL of Nassim Taleb's insights, plus a complete plan of action to deal with most every type of uncertainty that might arise.

It's like Taleb is telling us that "sometimes lightning strikes", while Harry Browne is out installing high quality lightning rods at a fair price for anybody who wants one.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[craigr]

[craigr]

[brswif00]

[Roy]

[koekebakker]

There seem to be lots of people interested in the PP concept, but for many the LT and Gold parts of the PP seem to be just a little bit too extreme.

How about a PP that's a little bit more conventional, like:

1/3 stocks
1/3 ST bonds
1/6 LT bonds
1/6 gold.

This allocation might be a bit easier to implement (emotionally) because it doesn't differ that much from a conventional 50/50 portfolio.

It still offers a lot of the protection of the 4x25 PP, but it's a lot less 'weird'.

[DP]

koekebakker,
Well I agree. I suggested exactly that earlier in this thread:
http://www.bogleheads.org/foru....985#491985

The portfolio backtests very well, better then the PP, though of course that doesn't mean it will do better in the future.

Don

[Clive]

-- deleted --

[Lbill]

[ClubberLang]

Does anyone know what happened to Money Talk (the show created by Harry Browne)?

John Chandler has been hosting it but I noticed that it is no longer on the GNC schedule or archives. Was the show canceled?

[MediumTex]

One of the many facets of the PP that I like is that it allows you to include ALL of your liquid assets in your portfolio.

Let me explain: most of us have some cash holdings in the form of checking and savings account balances, emergency reserves, etc. Often, these funds are thought of as separate from investment accounts. Thus, for example, someone might have an IRA with $100,000, savings bonds worth $5,000, savings accounts with $10,000 and a checking account with an average balance of $2,500. By overlaying the PP onto this group of liquid assets, it allows the owner to include his cash and near-cash holdings in a comprehensive allocation methodology.

For people in retirement especially, the PP allows for an orderly drawdown of investments without having to make distress sales for living expenses when the market is in a sour mood.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[MediumTex]

[eurowizard]

[Kevin K]

From what I gather even those who consider themselves "PP purists" aren't above a little bit of tweaking of the portfolio (e.g. a small allocation to international equities, or substituting ST Treasury bonds for MM funds to bump the yield of the cash portion).

As someone in the process of converting to the PP my main quandary is what to do about the LT bond and cash. I do understand that timing markets and interest rates is ill-advised, but it is sure hard to put a huge chunk into TLT with rates where they are. On the MM side Treasury MM funds are closed to new investors so not an option (and pay nothing).

I currently have most of my cash and bond allocation in Vanguard Short Term Investment Grade and GNMA funds but I know these are not kosher for the PP. Do I DCA in to a ST Treasury fund (as a sub. for the MM fund) and perhaps buy a ladder of LT Treasuries, or just liquidate, invest the lump sum and let the cards fall where they will?

[glaser1873]

[Clive]

-- deleted --

[Kevin K]

Thank you glaser1873 and Clive for your thoughtful, helpful responses. Much appreciated.

Kevin

[MediumTex]

Clive, what are your rebalancing bands?
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[Clive]

-- deleted --

[craigr]

The Motley Fool UK posted an article on the PP. The author used UK gilts for US treasuries and found that it performed with largely the same low volatility and reasonable growth of a US based permanent portfolio:

http://www.fool.co.uk/news/inv....-gold.aspx

[ClubberLang]

[SquawkIdent]

How would the 4 x 25 or PRPFX effect the results seen in the Trinity table for retirement withdrawal? If you plan to withdraw 4-5% of the account balance per year I see how the withdrawals would be smoothed out year to year but with the fixed percentage (plus inflation) I'm not sure. Thanks.

[Lbill]

Tilting PP toward bonds based on age:

The standard advice given by wise people such as John Bogle is to hold "age in bonds." This fits with the idea that the proportion of the "risky" asset to the "riskless" asset in one's portfolio should reflect age - the risky asset is considered to be stocks, and the riskless asset is considered to be cash or bonds. So, if you were a 70-year old retiree following Bogle's advice you would have 70% in bonds and 30% in stocks. Should the PP be modified based on age, as Bogle suggests? If so, how should it be modified? When Bogle refers to "age in bonds" what kind of bonds? Obviously short term treasuries are more "riskless" (less volatile) than intermediate or long term treasuries, and TIPS are considered to be the most "riskless" bond because they adjust for inflation and also protect against deflation, because they can be redeemed at par at maturity. Should long term treasuries (which are quite volatile) be held at all? I've done a lot of thinking about this but haven't come to any conclusions.

One approach I've considered is to hold age in TIPS or in short-term treasuries. Then the balance could be held in the PP: for example the allocation of a 60-year old would be 60% TIPS, 10% each in Stocks, LTT, STT, and Gold. One problem with this is that 60% TIPS plus 10% STT and 10% LTT is 80%, which is too high an allocation to bonds to meet the "age in bonds" rule. To handle this, I would need to hold 60% TIPS and the rest in a 2 x 50% PP of Stocks and Gold: 60% TIPS, 20% Stocks, 20% Gold. Or I could substitute STT for TIPS and hold 60% STT, 20% Stocks, 20% Gold. Or I could substitute 50/50 STT and LTT for TIPS: 30% STT, 30% LTT, 20% Stocks, 20% Gold. You can see where this goes.

Should I "tilt" the PP toward bonds as I age, and if so how?
_________________
"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

[Pres]

[MediumTex]

I am not a fan of age-based allocation methods.

That's just me, but I have learned that I didn't like losing money when I was younger any more than I do today. Thus, the PP risk profile is a good fit for my personality, regardless of age.

I think that many investors expose themselves to high levels of risk when they are young because someone told them that's what they are supposed to do. Over time, the market inflicts losses that are greater than the investor thought was possible, and the investor gradually learns how to manage risk in his portfolio so that the risk of loss is smaller, which makes it appear as if some sort of age-based allocation model is at work, when it's really just trial and error.

That's just my sense, though.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[MarcDeMesel]

[Lbill]

Tex - I agree with what you are saying about age-based allocation. On the other hand, I'm thinking about being 80 years old, and I have difficulty imaging that I would be comfortable with 25% of my wealth in stocks, 25% in long bonds, and even 25% in gold. I know these things have a long term record of having low or negative correlations, such that the mix is safer than each one is individually; however, when I'm an old geezer I don't think I'm going to be willing to trust my welfare entirely to historical statistics. I just know I'm going to want to have most of my wealth in stuff that seems really safe, such as short-term treasuries, with a little bit (gold probably) in an "Armageddon hedge." No stocks, no long bonds. With that in view, it makes sense to me to transition toward my old-age allocation gradually rather than all at once. Thus my question about "tilting" the portfolio gradually away from less stocks, long bonds, and probably gold too. Maybe some people would feel comfortable holding everything in the 4 X 25 PP until they croak, but I don't think I'm one of them. I wonder if HB ever addressed this?
_________________
"Whenever you find yourself on the side of the majority, it is time to pause and reflect." ~ Mark Twain
"A foole and his money is soone parted." - J. Bridges, 1587

[Dick_Y]

I want to invest in a Permanent Portfolio, and I'm looking for suggestions in getting started. Going "all-in" doesn't seem prudent to me; so I would appreciate any comments from people who have implemented the idea of a Permanent Portfolio.

Thank you.

Dick Y.

[craigr]

[MediumTex]

[MediumTex]

LBill, perhaps you should do the 4x25% allocation for whatever portion of your portfolio you are comfortable with and do a VP with assets that make you sleep better.

If I were you, I might do the normal PP with half of my money and then do a VP with some type of treasury ladder with a mix of regular bonds and TIPS, and put the rest in selected corporate bonds (I might buy a little Verizon debt if I were in the market), stable dividend paying stock sectors like pipeline partnerships (I like BWP, plus there are awesome tax savings with these entities), utilities and maybe a little big cap energy like CVX.

Note, though, that the PP is about as stable as anything in this world gets. Personally, I view the PP as VASTLY safer than holding all cash. It has taken me a long time to come to this understanding, but when you open your historical aperture a bit, the riskiness of holding all of your wealth in cash becomes clearer.

Do what helps you sleep well, though.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[glaser1873]

[SquawkIdent]

Any comments from the resident experts about my post on July 25 listed above? It dealt with retirement withdrawals and the Trinity Table. Thanks.

[Clive]

-- deleted --

[craigr]

[Lbill]

I think there are two big problems with the rate of retirement withdrawals. The one we focus on, because it is so critical, is withdrawing too much and running out of money. The other should get some attention too - it is the problem of withdrawing too little and compromising your standard of living in retirement. A delicate balancing act. One thing pointed out by Kotlikoff & Burns in their book "Spend 'til the End" is that if you invest aggressively (high percentage in equities) you must spend conservatively. That's because you have to allow for the possibility of one or more large losses and the impact that can have on the sustainability of your portfolio over your retirement horizon. Yes, there is a much greater chance of experiencing significant growth in an equity-heavy portfolio; however, one result of that is that you'll end up with a large estate - not necessarily a higher standard of living. So, it's better to have a more conservative portfolio in retirement, sufficient to fund your spending needs. You can withdraw at a higher rate (probably > 4%) without the risk of a drastic drawdown, and you will end up with a smaller surplus to be inherited by your spendthrift heirs. The PP fits nicely into this strategy IMO.
_________________
"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

[Clive]

-- deleted --

[cvn74n2]

After reviewing many of the posts within this forum coupled with my general dissatisfaction with my buy-and-hold DCA strategy over the past 18 years, I have decided to re-organize my and the wife's IRAs into a permanent portfolio construct. By amalgamating what many have said here and in another Boglehead forum, I have created the following portfolio stretching across both accounts so I can sleep better (I hope):

Equity component - 25% (Relatively equal distribution between Large/Small Cap, Domestic/Foreign, Growth/Value categories)
Vanguard Large Cap Index (VLACX) 6.25%
Vanguard Small Cap Value Index (VTRIX) 6.25%
Vanguard FTSE ex US (VFWIX) 6.25%
Vanguard International Value (VTRIX) 6.25%

Bond and MMF components - 50%
Vanguard LT Treasury (VUSTX) 35%
Vanguard ST Treasury (VFISX) 15 %

Inflation Hedge component - 25%
Vanguard REIT Index (VGSIX) 15%
Gold Coins 10%

I plan on rebalancing both within the components to maintain individual target percentages (probably at the 20% gain/loss level) and when the 20/30 triggers occur between components. I will also use additional yearly IRA contributions as balancing mechanism.

I welcome your opinions and advice.

[Lbill]

One comment: I think of REIT and equity as both essentially being equity. Simba's historical data shows a correlation of .61 between TSM and REIT for 1972-2008. There is an even higher correlation with SCV: correlation of .86. That's because SCV has a large hunk of REITS - something around 12% or so I believe. Maybe REITS hedge inflation over the very long term but I don't think they do over the short term. I personally would want I bit more "meat" in the inflation hedge portion of the port.
_________________
"Whenever you find yourself on the side of the majority, it is time to pause and reflect." ~ Mark Twain
"A foole and his money is soone parted." - J. Bridges, 1587

[MediumTex]

That looks like a pretty good portfolio. Note, however, that if the stock market rolls over, REITs will roll over with it. Thus, you might find that you basically have a stock market focused portfolio with about 40% equity and no strong counterbalance like long dated treasuries or a heavy dose of gold.

VUSTX is okay, but in Three Little Pigs-speak, it's more like a straw house or twig house than the brick house of TLT or actual 25+ year dated treasuries.

You may not be thinking about it this way, but you are leaning strongly in favor of equities with your allocation. Note that the last secular bear market lasted from 1966-1982. There is every reason to think that the current secular bear market that started in 2000 could easily have several more years in it (several years may actually be a best case scenario--Japan demonstrates how these things can go on MUCH longer).

If I were you, the question I would ask myself is on what basis are you departing from the traditional PP allocation in the first place? What is it about the PP that troubles you? Why not just do it the way HB recommended and be able to REALLY sleep at night?

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

[craigr]

cvn74n2

REITs really aren't a good substitute for gold for the inflation protection part of the portfolio. IMO. I'd consider it more of a speculative investment as it behaves much more like stock than a hard asset like gold.

While I'm not a fan of splitting up the stock allocation into many small parts (I like simple broad based stock funds), if you can keep the expenses down and manage it correctly it should work fine. But also remember that with 50% in international stocks you are exposing yourself to currency risk as well as stock risk. I generally don't recommend more than about 20% in international stocks for this reason.

For the LT bonds I'd rather see you holding the bonds directly if you can. It eliminates additional yearly expenses and another layer of manager risk. Otherwise I think that TLT is a better choice than Vanguard's LT bond as far as bond funds go for this particular portfolio strategy.

I think your 20/30 rebalancing bands are fine. The biggest thing is to be aware of transaction costs involved and to never let any asset category "ride" because you think it will just keep going up and up forever. Take the profits and buy the losers.

I also agree with MediumTex about the risks of tweaking the allocations too much. I'd look at the portfolio first with a 4x25 core and then anything you want to add (like REITs) be part of the variable portfolio "play money" side of the equation.

[Maestro G]

Craig,

I have enjoyed your insightful posts and "Crawling Road" blog, and have recently decided to give serious consideration to the PP approach. The central concern I (and others as well from what I have read) have with the portfolio is the allocation to gold. My question is this: In the context of what is intended as a long term, conservative portfolio, how have you come to terms with a significant (or any, for that matter) allocation to an asset class that has no internal rate of return, and as such, is a pure speculation on it's price movement regardless of the economic environment?

I will read your response with great interest and thanks much in advance for your time!

Best,
Maestro G[/b]

[Lbill]

I looked at the annual correlations between some of the PP assets and CPI from 1972-2008 using Simba's spreadsheet data. First, I ran the correlations using the asset returns and CPI for the same years; that is, the returns from 1972 with the CPI for 1972, and so on for 1972-2008. Then I ran the leading and lagging correlations. The leading correlations reflect the asset returns paired with CPI for the following year; for example, the return for gold in 1972 was paired with the CPI for 1973 and so forth. The lagging correlations were the reverse: the asset returns were paired with CPI for the previous year; e.g., gold for 1973 paired with CPI for 1972 and so forth. The leading returns should indicate the degree to which the asset returns led CPI, and lagging returns should indicate the degree to which the asset returns reflected changes in the CPI

___Asset_____Concurrent_____Leading_____Lagging
Commodities.... 0.25........0.33..........(-0.21)....LEADS
Gold..................0.52........0.63.............0.08.....LEADS
REIT................(-0.01)......0.01.............0.14.....LAGS
TSM.................(-0.06)......(-0.07).........0.16.....LAGS
SCV.................. 0.04.........0.00...........0.33.....LAGS
STT.................. 0.28.........0.01............0.58.....LAGS
LTT..................(-0.40).....(-0.36).........0.04......LEADS

Assuming this crude analysis is correctly done, there are a few interesting points to be gleaned:

Equities: For the most part, Total Stock Market (TSM) and REITS have a negligible relationship to CPI, and a small positive lagging correlation to CPI. Small Cap Value (SCV) is an interesting case: it's concurrent and leading returns do not correlate with CPI, but it has a lagging correlation of 0.33, which is the highest correlation between equities and inflation I found. I think it has been reported in other threads that small cap value has performed OK in past inflationary periods - this might be worth looking into. REITS were kind of disappointing, because real estate is often mentioned as a good inflation hedge; for example, by David Swensen. Perhaps they hedge inflation with a long lag period, because it would take some time for protracted inflation to show up as higher costs of property, rentals, etc.

Hard Assets: Both commodities and gold correlate with CPI and the returns for both appear to lead changes in CPI. This makes sense particularly for commodities, since changes in commodity prices will show up in CPI with some lag. It is interesting that Gold has a much higher correlation with CPI than commodities. It has the highest concurrent and leading correlation with CPI of all the assets I looked at.

Treasurys: Short term treasuries (STT) have a small positive concurrent correlation to CPI, but have a much higher lagging correlation. This makes sense, since we know that the returns of short treasuries do track the inflation rate fairly closely, and there should be a lag before short rates reflect CPI changes. Long term treasuries were different. As expected, there is a negative correlation between inflation (CPI) and the returns of LTT. It's interesting that the returns of LTT seem to lead rather than lag the CPI. Intuitively, I would have expected them to lag, so I can't think of an explanation for this off the top of my head.
_________________
"Whenever you find yourself on the side of the majority, it is time to pause and reflect." ~ Mark Twain
"A foole and his money is soone parted." - J. Bridges, 1587

[craigr]

[MediumTex]

Great thoughts craig. Much appreciated, as usual.

The thing I would add about the PP is that as conservative as it is over long periods, when you actually put your own money into it, it feels like you are doing something very risky.

It can feel a bit like getting behind the wheel of a muscle car with a trunk full of nitroglycerin wearing a blindfold--a very unsettling feeling. It's a quite different state of mind than virtually all investors who deep down believe they know which way the market is going to go next.

After you have ridden around for a while blindfolded in your PP muscle car with the trunk full of nitroglycerin, however, your perception of things starts to change. You begin to understand at a much deeper level what Browne was talking about. You begin to have faith in the approach, and you begin to realize that the perception of placing yourself in a position of extreme risk was only your perception, and wasn't, in fact, based in reality at all.

I completely appreciate the reluctance to dive into the PP pool, but the water really is fine.

Try it like HB prescribed it with a little of your money, give it some time, and understand that the PP requires a bit of psychological re-alignment--i.e., most people aren't willing to fully acknowledge that they have no idea what the future holds; doing so can be an alienating experience. However, the elegance of the PP is that it actually grounds you psychologically once you completely internalize this concept that the future is utterly unpredictable. In fact, the PP wouldn't work if the future WERE predictable with any level of accuracy or reliability.

Doing the PP is harder than it looks. Once you start it, expect to backslide a bit when one asset goes up or one goes down suddenly. Over time, though, you work out these kinks and the ride becomes very smooth and quite enjoyable, as it should be.

The most important thing to remember is that the PP is a package. Don't look at any one of the assets--look at the whole.

If I might use another analogy, the PP package is a bit like a gyroscope, and no matter how turbulent the market or world gets, it keeps your assets balanced and safe.

I note, though, that these words do not really convey the depth of Harry Browne's insights into human nature. Much of his thinking was astonishingly subtle, and it takes a lot of time and reflection to fully absorb some of his ideas (it took me a while, anyway).
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[Maestro G]

[craigr]

[ikkyu]

[MarcMyWord]