Bogleheads

Lbill · Joined: 13 Mar 2008 Posts: 2078

ditto with craigr on mining stocks. Too high a correlation with gold so overweighting just increases the correlation of your stock segment to gold which is counterproductive to the underpinnings of the PP, IMO. If anything, it would make more sense to squeeze the mining and natural resources out of the stock portion to decrease the correlation. Or, if you want to overweight mining, then gold should be underweighted in the PP.
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"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 · Joined: 01 Mar 2009 Posts: 447

Lbill · Joined: 13 Mar 2008 Posts: 2078

There are a lot of stories about why it's good to invest in this or that sector. Not saying the stories aren't good ones, just that if you go that route it makes sense to me to reduce exposure to gold because of the relatively higher correlation to mining, natural resources, energy, emerging markets, and the like.
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"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 · Joined: 13 Jun 2009 Posts: 82

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Lbill · Joined: 13 Mar 2008 Posts: 2078

Clive · Joined: 13 Jun 2009 Posts: 82

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MediumTex · Joined: 01 Mar 2009 Posts: 447

Lbill · Joined: 13 Mar 2008 Posts: 2078

Two sources regarding investing as a lump sum vs. gradually scaling in (e.g. using dollar cost averaging strategy). It seems to be a well-accepted finding that if you have a lump sum to invest, you're better off plunking it all into your asset allocation at one point in time rather than trying to scale in over time.

Nobody gains from dollar cost averaging analytical, numerical and empirical results
John R. Knight & Lewis Mandell
Department of Finance, University of Connecticut, CT 06268-2041, USA

Lbill · Joined: 13 Mar 2008 Posts: 2078

One further comment I left out. Gradually scaling in, as MediumTex discusses, has a clear psychological advantage over going "all-in". You are less likely to suffer a large loss in one or more of your assets right after you go all-in, which could be so discouraging you might decide to give up on your plan and pull out your investments. The step-wise approach gives you a much better chance of maintaining the courage of your convictions and sticking with your planned allocation - not a small benefit.
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"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 · Joined: 01 Mar 2009 Posts: 447

Clive, I know you have gone over it in previous posts, but could you provide an illustration of the rebalancing method you are describing?

I have used the method you describe playing roulette, and it works reasonably well so long as you don't run out of the ability to increase your bets after a string of losses (either through hitting a table limit or running out of money).

Roulette is also a great example of how even a seemingly random game can generate remarkable strings of the same outcome (it's amazing how when you look at the log of a roulette table you will see LONG strings of black or red).
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"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

Clive · Joined: 13 Jun 2009 Posts: 82

Lbill · Joined: 13 Mar 2008 Posts: 2078

Clive - your crystal ball is working better than mine. Wanna trade? Very 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 · Joined: 01 Mar 2009 Posts: 447

Sorry to toggle between topics here, but Lbill it looks like the assumption on which the DCA critique is based is that over time there is always an upward bias in the moves of an asset (presumably the stock market). I wonder if someone in Japan would agree with this assumption?

I didn't look at the study, but what time period does it cover? If it's after WWII, I wonder if it isn't biased by the lack of a prolonged deflationary period?

OTOH, there are those who would say that a truly deflationary spiral (i.e., uncontrollable drops in price levels) is not possible in a fiat currency regime. It may be that Japan is the closest you will see to a modern period of sustained deflation (though it wasn't an uncontrollable downward spiral as witnessed in the 1929-1933 period).

Even in the relatively tame deflationary funk Japan has faced, it seems that DCA would have potentially provided a VASTLY greater return than investing a lump sum 20 years ago when the Nikkei was at 40,000.
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"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

Clive · Joined: 13 Jun 2009 Posts: 82

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Lbill · Joined: 13 Mar 2008 Posts: 2078

MT - the study used "bootstrapping" as well, in which Monte Carlo was used to sample the returns distribution - so not completely reliant on analysis of historical returns. It just makes sense to me that, unless you are able to predict the future, you are better off mathematically to commit to your allocation in one step when you have the money to invest (but not psychologically). All of the assets in the PP are "growth" assets that generate interest or dividends, except for gold. You expect your original investment in stocks, bonds, and money market to grow by some amount over time - or else you don't believe that capital markets work. If capital markets don't work then you should be burying your cash in the back yard. Stocks and long term bonds are expected to grow more than cash, so you should theoretically be better off with a full allocation to these instead of holding out some in low-yielding money market. Gold is another thing. It really isn't a growth asset because it doesn't generate any earnings, interest, or dividends. It is a "mean-reverting" asset with a very high variability around the approximate real mean of zero (that is, it tends to increase in currency value at about the rate of inflation of that currency but with a high variability around that value). Since there is more benefit from rebalancing assets that are mean-reverting, there should be a particular benefit from rebalancing the gold component of the PP. Also, since interest rates tend to be mean-reverting (they don't go to zero or grow to the sky) there should be a benefit from rebalancing the treasury bond component of the PP. There is some evidence that stocks are mean-reverting over very long time periods but not over shorter time periods. Therefore, there might be less benefit to rebalancing the stock component of the PP as frequently as the gold and bond components. Considering the case of Japan, that would have reduced the percentage of a Japanese PP in stocks well below 25% and kept it there up to the present time - which would have been better than periodically rebalancing stocks back to 25% only to see more losses piled on previous losses. Speaking of Japan, it's hard to see how a Japanese investor would have made a dime with the PP over the last 20 years or so. Japanese stock market never recovered, Japanese bonds have yielded nothing, and gold did little in Yen terms. Just goes to show the potential benefits of international investing. Maybe the US PP shouldn't be so US-centric either (oh wait, I forgot that it can't happen here).
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"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 · Joined: 13 Jun 2009 Posts: 82

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Lbill · Joined: 13 Mar 2008 Posts: 2078

It's interesting that a paper on Mebane Faber's method of trying to time a portfolio made up of stocks, bonds, and commodities finds that the superior results of this approach over the historical period studied actually fall within the bounds of outcomes that are expected when a Monte Carlo bootstrapping method is used.

http://papers.ssrn.com/sol3/pa....id=1476225

Faber's method involves being in cash instead of each of the component assets (stocks, bonds, commodities) whenever the price of that asset crosses below it's 10-month moving average and going back in when the price crosses above the 10-month MA. This would be similar to the idea that it makes mathematical sense to hold the value of a given component in cash if it appears (according to some indicator or your beliefs) that being invested in that asset is less desirable from the standpoint of anticipated future performance and shifting cash to that asset when things appear more favorable. Yes, this might work - and in fact has worked for the Faber method over the historical period he studied and in the recent past. However, the fact that this finding is NOT a significant statistical outlier using Monte Carlo method indicates that it is very unlikely to work consistently gong forward, unless you get lucky. Better to go "all-in" to the complete portfolio at one point and then use regular rebalancing if you have the stomach for it. If not, then better to gradually phase in so you can stay the course - but this will cost you because you will not have a 25 x 4 allocation during the phase-in period. You will instead be way overallocated to low-yielding cash during that period which will cause you not to benefit from the diversification effect of the 25 x 4 allocation during the phase-in, as well as setting for some very low returns by being heavily in cash.
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"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 · Joined: 13 Jun 2009 Posts: 82

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MediumTex · Joined: 01 Mar 2009 Posts: 447

Clive,

I have re-read some of your posts and I commend you for sharing some interesting and subtle ideas.

It seems to me that while we can (I think) all accept that the PP is a sound strategy, the matter of the optimal rebalancing points is not easy to determine (though HB's recommendations are certainly okay for a passive investor).

As for setting up the PP at a point in time when one or more asset classes look expensive, consider the flip side of that--at those points in time when the PP is down overall, that is normally a great time to set up a PP, so anyone who is thinking of doing it would do well to do it when the whole thing is having a down quarter or year. That's just something to keep in mind for any PP tire kickers.

Clive, how does your investment scaling methodology work if your high and low projections prove to be far off of the actual range. For example, let's say that you decided to trade gold in 1972 and set up a range of $35 to $140. What would keep you from being in 100% cash when gold hit $140, only to watch it move up to over $800 in coming years? I understand that you said you could modify the range, but what is your criteria for how to modify the range in a wild market? In other words, in 1980, there were probably people with a gold range from $500 per ounce to $4,000, but in retrospect that range was way off the mark as well, and it seems like it would have left a person with too much gold and not enough cash when gold began its dramatic fall.

The problem with setting the range seems to come back to HB's admonition about the unpredictable nature of the future. When working with investments denominated in a fiat currency, this factor too seems to make it difficult to envision future scenarios in dollar terms when the value of the dollar may itself prove to be an unreliable measure of value.
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"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

Clive · Joined: 13 Jun 2009 Posts: 82

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Lbill · Joined: 13 Mar 2008 Posts: 2078

I don't want to step on anybody's toes but just wanted to state the way I see getting into the PP. The PP is not a trading strategy or a timing strategy. In fact, the PP is the anti-trading strategy. It is the ultimate "set-it-and-forget it" approach to investment allocation. This said, the philosophically-consistent way to get into the PP (for newbies) is to (1) decide how much you are willing to commit to the PP and (2) invest 1/4 of that amount in each of the 4 asset classes in the PP (cash, long bonds, stocks, and gold) all at once, and (3) if you later are willing to up the percentage of your porfolio in the PP, then invest that amount all at once in a manner that will bring your PP allocation back to 25 x 4 if it has drifted. Think about it for a second. If you intend to put $40K into the PP but don't fully invest the $40K at once ($10K in each of the 4 assets), then you are really running a smaller PP - so just decide to run a smaller PP and be done with it. For example, if you decide to invest nothing in one or more of the assets (waiting for a more opportune time), then you don't have a PP at all. If you decide to invest just half the full allocation to one of the assets ($5K) and $10K in the remaining three, then you are really running a $20K PP ($5K x 4), with the other $20K sitting around in "something else." Don't make your investment life complicated - the PP is intended to put an end to all that. Idea

_________________
"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

MCSquared · Joined: 02 Aug 2009 Posts: 97

MediumTex · Joined: 01 Mar 2009 Posts: 447

I am in complete agreement regarding HB's PP prescription.

I think this side discussion of using PP principles as part of a trading strategy is just an interesting topic.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

Lbill · Joined: 13 Mar 2008 Posts: 2078

I liked the suggestion by MT that you might want to scale into the PP over a period of time, such as 12 months, if you're not comfortable plunking down 100% of your PP allocation at one point in time. This is like the process of dollar cost averaging.

The research on DCA seems to indicate that it doesn't result in higher gains than simply putting all your money to work at once and then using rebalancing to "correct" whatever imbalances develop due to some assets doing worse than you would have liked or (more happily) better than you expected. So, for example, if you go "all in" and long term treasuries do tank, as everyone is expecting, and stocks continue to do well then you would rebalance back to 25 x 4 by moving money from stocks into long treasuries.

However, DCA does have the advantage that you don't end up with "buyer's regret" because you went whole hog and something unpleasant happens to one or more of the 4 assets right away. And it appears that you end up in about the same place at the end of your DCA-ing as you would have been if you'd gone "all in" and rebalanced.

So, for most of us, it probably makes sense to DCA into the PP over a period of time. However, don't kid yourself that you are going to somehow sidestep, or moderate, the downdrafts in some of the PP asset classes that way. But sometimes it helps to humor ourselves a little bit. Laughing

_________________
"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 · Joined: 13 Mar 2007 Posts: 1973

snowman9000 · Joined: 26 Feb 2008 Posts: 767

Taylor Larimore

Hi Bogleheads:

"There is more than one road to Dublin" is one of my favorite sayings and was inspired largely by Harry Browne.
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Best wishes
Taylor

The Majesty of Simplicity

MediumTex · Joined: 01 Mar 2009 Posts: 447

This is a bit off topic, but goes to the theme of the uncertain nature of the world HB talked about.

Does it seem like there is an especially foul undercurrent in human affairs generally right now?

I don't mean just in the markets. I mean the economy, the political world, international affairs, the environment, everything. Basically, there seems to be a gray film covering most of the world right now if you look closely.

I understand that there is a "green shoots" crowd that sees things differently. My opinion regarding this group, however, is that they are seeing green shoots because they are wearing green tinted versions of the proverbial rose-colored glasses.

My skepticism sometimes spills over into a gratuitously dark view of things, so perhaps I have allowed my perspective to become too focused on the negative.

There is a "nervous cat" quality to things right now that I don't remember feeling before. When I was a kid in the 1970s I recall sensing something like this in the general social mood, though it's a little different when you're a kid and your biggest concern is what flavor of cereal you're going to eat for breakfast. It's easier to shake off bad vibrations from the adults around you in that situation.

Are there any pollyannas out there who can spin it for me where it all has a happy ending?

I'm sort of leaning toward "this too shall pass", but I thought someone might have something a little more substantive. Maybe some kind of technology that's about the break out and change our lives.

A spaceship full of aliens that looked like Santa Claus with presents for everyone would be sort of cool.

Any other ideas?
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

Harvey Manfredjinsinjen · Joined: 07 Jul 2009 Posts: 5

Here in the Pacific Northwest we have green shoots everywhere, in the form of blackberry vines. They spread rapidly, choking off everything in their path and resisting every attempt to eliminate them. They are extremely thorny.

And that's what I always think of when politicians and pundits talk about green shoots.

But possibly that's not the uplifting view you were looking for.
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Any good investment, sufficiently leveraged, can lead to ruin.

Lbill · Joined: 13 Mar 2008 Posts: 2078

Don't know if anyone has noticed, but TLT has moved up about 10% since hitting it's low back in June amidst the consensus view that long term bonds are toxic waste waiting to implode. I picked off about 100 shares back then because I figured with everyone on one side of the trade it might be smart to take the other side. Go figure.
_________________
"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

MCSquared · Joined: 02 Aug 2009 Posts: 97

MCSquared · Joined: 02 Aug 2009 Posts: 97

MediumTex · Joined: 01 Mar 2009 Posts: 447

MediumTex · Joined: 01 Mar 2009 Posts: 447

MediumTex · Joined: 01 Mar 2009 Posts: 447

Has it ever occurred to anyone that investing is a bit like fishing (putting aside the different effects of drinking beer while doing it)?

You hope that you pick good spots at good times, but ultimately it is necessary to have patience and humility because outcomes cannot be forced.

The PP helps standardize the process a bit by allowing you to place four hooks in four different fishing spots in which the fish tend to bite at different times of day.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

MCSquared · Joined: 02 Aug 2009 Posts: 97

MCSquared · Joined: 02 Aug 2009 Posts: 97

MediumTex · Joined: 01 Mar 2009 Posts: 447

MCSquared · Joined: 02 Aug 2009 Posts: 97

Lbill · Joined: 13 Mar 2008 Posts: 2078

Oh you guys just can't stand the boring simplicity of the 4 x 25% PP can you? Just wanna keep tweaking the thing: EDV, Mining Stocks, Zeros, etc. etc. I guess we're all trader-tinkerers at heart, including me. I just have the suspicion that when all the dust has settled, the guys who just went with the Fifth-Grader's 4 x 25 allocation will be smiling at all of us wondering what all the fuss was about. Razz

_________________
"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 · Joined: 01 Mar 2009 Posts: 447

MediumTex · Joined: 01 Mar 2009 Posts: 447

The 1970s have an almost mythical quality to them when it comes to inflation, but when you look more closely the picture is less clear.

I was looking at a chart of the CPI changes from year to year in the 1972-1984 period and here is what I saw:

1972 - 3.2%
1973 - 6.2%
1974 - 11%
1975 - 9.1%
1976 - 5.8%
1977 - 6.5%
1978 - 7.6%
1979 - 11.3%
1980 - 13.5%
1981 - 10.3%
1982 - 6.2%
1983 - 3.2%
1984 - 4.3%

Of the years listed above, only 1974, 1975, 1979, 1980 and 1981 had levels of inflation that I would consider crisis or near-crisis levels. In other words, the great age of inflation was really more like five years of spikes in inflation, followed by a quick return to more historic inflation levels.

Contrast the 1970s U.S. inflation levels to many other countries and the levels look almost modest. Many countries seem to have 8%-12% inflation levels as the norm.

In other words, the U.S. in the 20th century was never anywhere near "hyper" inflation. The level of inflation was certainly corrosive to certain forms of wealth, but it was far from what one might call a real currency crisis (e.g., 20% inflation per month is where I would draw the line).

It reminds me of that dog that terrorized you when you were a kid. When you grow up you see a photo of the dog and you think to yourself "THAT'S what I was so scared of?"

To a great degree, I think that the U.S. and its media has a way of making a crisis out of almost anything (cable news has elevated this to an art form). I think that the Japanese are similar in that way. Does anyone remember the kidnapping in Japan a few years ago that led to the creation of a whole line of childrens' clothing with built in electronic tracking devices in each article?

This line of thinking is part of what makes me think that all of this talk about an imminent spike in treasury yields (despite zero evidence to this effect) and a dollar collapse (which would be unprecedented for a reserve currency) is highly suspect.

The hypnotic effects of selective media coverage and framing of issues is part of what contributes to Harry Browne's "uncertain world" thesis. Future world events are definitely uncertain to start with, but the ways in which they are filtered and molded for entertainment and political purposes means that even if I had a crystal ball, I wouldn't have any way of knowing WHICH information would actually be what moved markets (other than obvious things like a 9/11-type event).

For example, if I knew in advance that the world would be in the midst of a worldwide swine flu epidemic right now, I would NEVER have predicted that since the WHO declaration of a global pandemic the U.S. stock market would have continued one of the strongest upward moves in history (50%+) and gold would have only had a modest move to the upside (10%+). But that's what happened.
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"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

Roy · Joined: 10 Sep 2008 Posts: 341

spam · Joined: 10 Jun 2008 Posts: 643

Lbill · Joined: 13 Mar 2008 Posts: 2078

Lbill · Joined: 13 Mar 2008 Posts: 2078

Oh, by the way - the chart showing that money market funds have increased as a percentage of all fund assets shows nothing more than the fact that the value of non-MM assets, such as stocks, as declined by a whole bunch while MM assets didn't. Get it?
_________________
"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

spam · Joined: 10 Jun 2008 Posts: 643

Lbill wrote:

MediumTex · Joined: 01 Mar 2009 Posts: 447

The problem I have with stocks right now is the VERY high P/E ratios and poor earnings growth prospects.

I'm not sure we've even reached the capitulation phase of this secular bear market for stocks. Historically, stocks bottom with much lower P/Es than we have seen this time around.

It seems to me that stocks weren't especially cheap even back in March, given the stiff headwind that deleveraging is going to represent for corporations, consumers and governments for many years.

Sooner or later, fundamentals have to drive the stock market higher. I understand this sugar-high bear market rally we have been enjoying, but the question is what drives it from here? Sooner or later rational people will decide to take some profits (especially the financial institutions that have been trading with government money like a gaggle of penny stock brokers on a Red Bull binge).

Remember that the ONLY thing that kept the financials from going straight to zero earlier this year was BOTH extraordinary government intervention AND suspension of mark to market accounting. The suspension of mark to market accounting alone strikes me as an amazing exercise in self-delusion.

Looking at the market from a purely psychological perspective, I think that we have negativity stacked up like rows of teeth in a shark's mouth.

--political comment deleted-- What I am seeing, though, is sort of like a "Weekend at Bernie's" economy which is dead, but for whatever reason no one wants to acknowledge that, and instead of a mourning period and perhaps a phoenix-style rising from the ashes, we are carrying around this corpse with an IV-drip of adrenalin in the form of 0% government money and it's starting to stink.

The irony of a "Weekend at Bernie's" economy engineered by a person named Bernanke is almost as good as the irony of a person named Madoff making off with everyone's money. (The fact that Madoff's first name was Bernie probably represents some sort of metaphorical harmonic convergence that is above my pay grade to decipher.)

IF there is to be a "V-shaped recovery" in a consumer-based economy, HOW could such a thing occur with 10% unemployment, record levels of bad debt, $70 oil and no obvious new area of innovation to create explosive levels of economic growth (which is what secular bulls are made of)?

The REALLY toxic aspect of this whole mess is that the ONE thing that could create a little thrust in the right direction would be some inflation. The rest of the world is not about to give us that, though (notwithstanding the pundits' insistence that inflation is right around the corner, even in the face of near-zero percent treasury bills).

[/rant off]
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne