Bogleheads

[Lbill]

I agree with you MT - the market is nuts now and has been nuts several times in the recent past. That said, I've left a lot of money on the table because I didn't want to go to the dance. But, it didn't feel so bad when the hammer of justice finally came down on the stock cult in 2000 and in 2008. Maybe there is a God.
_________________
"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]

I've still got my PP targets in place. Right now I'm sitting at about 25% all around.

I admit to rebalancing a little early sometimes. I don't mind leaving money on the table to take some gains when I get rattled.

As I have mentioned above, one of the nice things about the PP, from a human emotion perspective, is that the PP fear response is to rebalance, whereas the fear response in less disciplined allocations is to go to 100% cash (usually at the worst time).

For anyone who wants a kick, check out the Yahoo Finance message board for VWINX. You can see people throwing in the towel (even in this conservative and steady fund) at almost precisely the bottom this past spring.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[Lbill]

I've got about 60% of my target PP allocation deployed (as of last Friday). I plan to sit on the rest and await developments. I don't like stocks after the 50% runup in the major averages over the last 6 months, when all the problems that caused the crash still seem to be around - in spades. We still have all those worthless zombie investment banks (remember when we scolded the Japanese for not having the cajones to let their banks take their medicine?). We still have all the toxic debt, only now you and I own it courtesy of Uncle Slam. I see nothing but a naked --political comment deleted--
_________________
"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]

Pasted below is a comment from another forum I post in occasionally responding to one of my comments about the PP and deflation.

I thought some of you might enjoy the irony and/or the hubris of this person.

The post is from September 7, 2008.

[spam]

[Lbill]

What it comes down to is that I have a chronic sense of unease about the financial future that I didn't used to have - but I'm getting closer to Old Coot-hood too so maybe that's it. But I think about my immediate family and close friends, and their jobs and financial futures seem to be a lot shakier than I recall also, so maybe it's not entirely my Coot-hood. I don't see this malaise going away anytime soon and fear that it could get a lot worse. I wonder if others in Boglehead-land have similar feelings? Whatever the cause, I feel very defensive about my own financial future and how I invest my Egg.
_________________
"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]

[Lbill]

[MediumTex]

I am simply bewildered.

I'm sure I'm not the only one.

I'm glad the PP has kept me in stocks for this whole run, because I never would've believed it back in March.

I am struggling to believe it today.

This whole rally has a Cinderella quality to it, and at some point the clock is going to strike midnight (though I don't know when that will be).

Look at what the bond market is telling us, though--it's sort of like the wicked stepmother.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[Lbill]

[MediumTex]

[snowman9000]

You are trying too hard to understand the markets. Next you will be trying to outguess them with your PP money.

[Clive]

A 50/50 stock/bond blend is normally considered as being modest return for modest risk.

Blend that 50/50 with a PP and you have 37.5% in each of stocks and bonds, 12.5% in each of gold and cash.

Put stocks, bonds, gold and cash (ST Bonds) into the optimiser http://www.riskcog.com/portfolio.jsp#5b009ac5f82re and out pops



i.e. the optimised fell closer to a S/B + PP blend than it did a PP alone.

[Wonk]

I'd be interested in hearing if any PP devotees value tilt the stock portion of their PP. I know there was a lively discussion earlier in the thread between Trev H. and craigr, but I'm curious if anyone has changed their opinion either way as a result.

If you do tilt, are you going all SV or splitting a certain way? If you are TSM, what made you stay put?

[snowman9000]

I went with TSM & 500 type index funds for tax efficiency and to track the market. I personally would not have any problem with someone tilting within the context of the PP. You'd be tinkering around the edges, mostly. HB wanted diversified stock funds that moved with the market, and by using small value, you might not be getting that. Some years it would help you, some it would hurt. But it's your call.

My money is approximately 70% PP and 30% VP. That's a little on the high side for VP, but I don't want to sell anything right now. The VP gives me room to go for value, income, international, etc. It's not casino-type plays, it's just more traditional Boglehead type stuff with a little market timing thrown in.

[craigr]

[tc101]

What does PP stand for?
_________________
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The most important thing you should know about me is that I am not an expert.

[MediumTex]

[Clive]

Here's another 1972 to recent run, this time blending emerging markets with gold and LT bonds and with relatively low draw-downs.



Some buy-highers might rush out and buy into a EM, G and LTB blend on seeing such past performance, attracted by the historic low draw-downs and high gains.

A common feature of assets that have performed well over a period of time is the low draw-downs.

Could it be LT Bonds and Gold have performed exceptionally well and as such risk entering a period of relatively poor performance.

Gold after all was de-price-fixed in 1971 and subsequently roared ahead in price over the next decade. LT Bonds were at around exceptionally high yield (low price) levels instigated by the excessive 1970's inflation levels.

If 1970 based low prices were the principle driver, the we might expect to see the rolling ten year returns on a progressive decline, which is apparent in the previous chart I posted.

Just points to be aware of should you be considering a PP investment. Past performance should not be seen as an indicator of future growth because more often it isn't. If gold and LTB's are amongst the highest performers over the last 30 years, then expecting that relative out-performance to repeat over the next few decades is perhaps a little optimistic at best.

[Kevin K]

"Past performance should not be seen as an indicator of future growth because more often it isn't. If gold and LTB's are amongst the highest performers over the last 30 years, then expecting that relative out-performance to repeat over the next few decades is perhaps a little optimistic at best."

Maybe so, maybe not. If you don't believe wholeheartedly in basing portfolios on historical returns, why bother with all the data mining, model portfolios and charts? The whole point of the PP as I understand it is you have 4 assets that respond to particular economic conditions. If you want to go the other route you're back to slice-and-dice, MPF and so on. I don't think you can have it both ways.

[billb]

I grapple with the exact same fear. It's a result of repeated kicks to the teeth. I used to float along paycheck to paycheck because hey, a paycheck was always there if you were willing to work, and I was willing to work ... so no worries, right? Had a company that failed to make payroll. Left me in a hell of a bind, but learned a valuable lesson in the process. I would never be in that situation again. So I started saving and investing money. Put money in the Nasdaq in 1998. So easy! You put the money in, on a good year, it doubles, on a bad year, it goes up 50%. This continues forever, right?

But I'm slow, I learn the hard way. But at least I learn. So long story short, I've become more aware of risk as opposed to reward. Ever since 2006, my motivation has been to lower risk. Obviously, doing so efficiently. But this endeavor makes me step back and question sanity at times. Like right now, I'm fearful of gold. Who in the hell is fearful of gold?

[billb]

[Lbill]

For those who have been keeping their powder dry on long treasuries, it might be time to kick yourself for trying to outguess the market. Bill Gross, who runs the biggest bond funds in the universe, is buying longer dated treasuries. As he explains: “There has been significant flattening on the long end of the curve,” Gross said in an interview from Newport Beach, California, with Bloomberg Radio. “This reflects the re- emergence of deflationary fears." Consider also the negative CPI: the real yield of treasuries is now the highest in history. It's real yields that drive the treasury market, not nominal yields. All the talking heads have been hammering on the theme for months now that treasuries are overpriced, that inflation was about to take off and interest rates would spike - thereby slaughtering treasury bond holders.
_________________
"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

[Wonk]

[MediumTex]

[Wonk]

[MediumTex]

[Lbill]

Using long-dated call options to implement the PP.
I wonder if anyone has considered using call options to implement the PP instead of going long on funds/ETFs. I believe that 2-year call options are available on GLD, S&P 500, but don't know about long treasuries (TLT). Zvi Bodie recommends a strategy of using long-dated call options (LEAPS) in order to limit downside risk (you can only lose what you paid for the Calls). You invest the balance in zero coupon treasuries or TIPS that mature when the calls expire. You would then roll over the calls into new 2-year issues, etc.
_________________
"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

[billb]

[Lbill]

billb- I don't know a whole lot about trading options. In your example, 5 contracts on GLD would control 500 shares of GLD? If that is correct, I would have to invest ~ $50K to buy 500 shares. Instead, I invest $5500 in call options, and put $45K into bonds. Let's say I can make 2% on the bonds over the next year. That's $900 and I save about $200 in GLD management fees. If the options expire worthless, I've lost a net $4400. If I were long 500 shares of GLD, I would lose $4400 if GLD closed in 1/2011 about 9% lower, or at about 90. If GLD were to lose more than that next year, I would have been better off with the Call options. So, the $4400 that is at risk buying the calls is the cost of "insurance" against a greater than 9% decline in the price of GLD over the next year. Is this the correct way to look at 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

[MCSquared]

[MCSquared]

[billb]

[MediumTex]

This is sort of in VP land now, but I would think that someone thinking of playing options on GLD might do better to spend the same money on a good miners fund. If gold goes down, the miners will go WAY down, but you wouldn't lose ALL of your money.

If gold goes up more than 10%, it should be good for a 20% or more move in the miners fund.

Miners are, of course, no substitute for owning PMs, but for someone who wants to amplify moves in the price of gold, I might look to the miners before I would look to options on the PM ETFs.

For those who want some nice pin action on the LT treasuries side, EDV has been fun to watch lately.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[Wonk]

[MediumTex]

Wonk, the whole problem with a debt fueled economic expansion is that the debt remains after the economic expansion stalls.

What is really needed in such a situation is some mechanism for re-pricing part of the debt and forgiving other debt that can never be repaid.

Here are some of the poor decisions I think we have made in recent years that have made the steps above more difficult:

1. Failing to apply the same anti-trust logic to financial institutions that we applied to AT&T in the 1980s and countless other corporate behemoths that came before it. Dopey Phil Gramm of Texas (I've followed his career for many years) was one of the drivers of this dumb policy.

2. The 2005 bankruptcy "reform" package passed by Congress. What a massive screw job that was to consumers. Many people today could have benefited tremendously from the pre-2005 Bankruptcy Code provisions.

3. The inability to get out from under student loans. This is a very sad situation. A young person goes to college and then perhaps graduate school because the phony leveraged economy sent the signal that there would be a job opportunity to help pay down that $200,000 in debt he ran up getting the education (BTW, I don't recommend this approach). But when he gets out he finds no job and the interest on the student loan becomes something that haunts him for decades.

4. When you let economists run economic policy, you get thinking that is ultimately delusional--i.e., economics assumes that infinite economic growth in a finite world is possible (otherwise a debt based monetary system could not exist for more than a few generations) and there will always be infinite substitute-ability of one resource input or product for another (which works until it doesn't--e.g., "I ran out of clean air to breathe, what can I substitute to help me stay alive?").

***

RE the 1929-1933 period up until the FDR inauguration, we had a pretty good opportunity to see how non-intervention in the economy would work, and the results weren't good. I know it is fashionable to talk about how Hoover meddled in the economy, but Roosevelt's meddling was orders of magnitude greater than Hoover's. Remember, Hoover's Treasury Secretary was Andrew "The Liquidator" Mellon.

Note the unemployment level rise from 1929 to 1932 with Andrew Mellon at the helm of the Treasury (he served through January 1932):



Now note the CPI from 1929 to 1933:



Price levels fell 25% in a little over two years and then languished there until Roosevelt was inaugurated, announced the bank holiday, called in the gold, and was finally able to create some inflation and get people spending again. In other words, a true accelerating deflationary spiral had taken hold and there is no reason to believe it would have stopped absent extraordinary government intervention (as HB would say, the government is good at breaking your leg and then congratulating itself on providing you with a free crutch).

I am certainly not saying that Roosevelt's actions were wise, but he was simply doing the same sort of hospice care that Japan has been providing its economy since 1990--basically, anything that looks like it MIGHT help things out a little. The truth is, though, and this is the point I was making, when an economy has a debt bubble and then won't allow the debt to be liquidated when the bubble pops, it basically poisons the entire economy for a LONG time.

The Great Depression was the result of too much debt in the 1920s that could never possibly have been repaid (just MHO, of course). When economic growth stops but the debt payments continue, it just gradually chokes everyone to death financially.

The beauty of the PP is that 50% of its assets are in sovereign debt instruments that would not be subject to this "choking to death" debtor problem, since the government has the power to create additional money whenever it needs to.

I appreciate your comments. Love the good discussion.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[macclary]

Good discussion. I will throw out my answers to a few interesting questions I have seen.

Is gold magic risk away dust? Gold is a distinct asset class which offers diversification comparable to bonds when combined with stocks: 70/30 stocks/gold offers similar reduction in draw down to 70/30 stocks/bonds.

Gold's value in a portfolio has been known for some time. The talmud's recommendation on diversification is "Let every man divide his money into three parts, and invest a third in land, a third in business, and a third let him keep by him in reserve." The "reserved" portion of the money was of course gold and silver in the third century afaik. Land could be thought of as analogous to bonds because it throws off steady income. Business is obviously analogous to stocks. The PP adds cash (fiat currency) to the mix as a buffer, if you wanted to keep the analogy going perhaps stored food and other goods would be the equivalent to folding money in the ancient near east.

Does gold return nothing? Gold's value is set by supply and demand just like all commodities. Gold's uses include jewelry, industrial/medical applications, and 2nd most trusted reserve currency. A very small amount of gold is used up each year, but the world's store of gold increases by more than that amount each year due to mining. So supply is increasing slightly over time. On the demand side all uses see increased demand as the world population increases. World population is increasing at about 1.2% per year according to wikipedia and has grown as fast as 2.2%. Gold increases due to mining at around 1-2% per year according to Mises.

So yes gold returns approximately nothing if you buy at the "fair value". In the PP gold is bought and sold based on re-balancing which can tend to get better buy and sell prices. The primary role is diversification and insurance against inflation and economic collapse. Additionally if you buy Jim Rodgers' take on commodities/equities cycle, then commodities as a whole may turn out to be relatively cheap for about the next decade.

Are LT bonds, gold, US/EM stocks overvalued now? Buying LT bonds now is buying into an ongoing 28 year bull market in long bonds. Yields have been falling for years and could fall further in nominal and real terms ala the Japanese archetype. Gold is in an 8 year bull market and is far below its *real* all time highs. US stocks are in a 10 year bear market (look at inflation adjusted plot) and are going to be hard pressed to earn acceptable returns due to balance sheet problems. EM stocks are not cheap but are in a 7 year bull market, and would be hard pressed to not grow.

Am I insane to be scared of gold? No you're not isane. Gold is risky just like stocks, bonds and cash. Gold investors *think* that they want the price of gold to spike but really nobody wants to see that because it will be painful and dangerous times. The risk with gold isn't that it will go down - its that the price will go up uncontrollably I personally use CEF for a chunk of my "gold" allocation because it holds gold and silver in Canada.

Multiple-personality disorder: historical data versus PP? Harry Browne did use historical back-testing to verify that the PP did what he thought it should. I don't think anyone should feel bad knowing the hypothetical history of a proposed investment approach. Note though that the PP belongs to a different class of portfolio in my mind than historically optimized buy-n-hold portfolios. It is in a different class because more information was used in the construction: namely HB's economic theories and observation of recorded history of the world.

The riskcog.com optimizer is a useful example that gets a lot of value out of historical data, but it doesn't know about ancient history or economic theory. Because of this it produces portfolios that are fundamentally different - which may be better or worse at meeting your risk/return needs than the vanilla PP. I will say that RiskCog is a better approach to portfolio construction than anything based on modern portfolio theory, or anything that hasn't been backtested at all.

"The app that you're using is taking these assets and curve fitting, which is horribly dangerous... using past zig zags to predict future zig zags." The riskcog.com approach doesn't actually predict anything, it just reports historical performance numbers. Users of the tool may extrapolate from history using whatever method that they are comfortable with.

Optimizing portfolios for the highest return per risk is inherently dangerous because the optimizer will pile into the assets that are most in need of a correction!! The RiskCog approach is the opposite of that, it says "what is the safest portfolio that meets the return requirements". Instead of maximizing return/risk RiskCog just minimizes risk as much as possible. When I was working on riskcog.com I tried maximizing return/risk and the result was portfolios that would blow up during out-of-sample crises (sound familiar?). I chose to just minimize risk because the portfolios were more likely to perform as expected out-of-sample.

RiskCog is not an mean-variance type optimizer and is not based on modern portfolio theory. A RiskCog type optimizer will use less of an asset that has had a big run up in price. For example in 1999 the tool would have chosen 42% stocks and 58% bonds to hit a return goal of 11% per year. After the crash in say 2004 the tool would chosen to use 81% stocks to hit the same 11% return goal. In contrast a MVO type optimizer will use more of an asset that has just had a big run up in price.

Do you value tilt your PP? In my mind all equities bounce around together (and as we found out reits / corporate bonds / industrial metals / oil / softs can move with equities too). Because equities tend to bounce the same way, I don't mind tilting to US small value and emerging stocks because I feel they play the same basic role in the PP as the SPX would but with consistently higher medium and long term return prospects.

[billb]

[Roy]

This is a great thread.

To echo a question Tex brought up awhile back...has anyone begun the HB PP—and then stopped (why?). And, if one has read the information and tracked the action of this concept, why don't you begin a PP? Is it because it is too different, or sometimes too volatile? Or too much Gold (or won't hold physical Gold and scared of ETFs?), or too few Stocks? LT bonds frighten you? Too much cash (or ST Bonds) makes you yawn? Or do you simply prefer a more traditional approach more than this one? Interested in hearing the why nots of those who believe they understand this durable concept and do not use it as suggested by Harry Browne.

Roy

[SquawkIdent]

Your quote about gold of "Gold scares me a bit because it's more or less a single stock. It's volatile, no it won't go to 0, but it can lose for long stretches. I think allocating 25% of ones portfolio to something that volatile is risky. But you can't argue the diversification power. So I'm stuck" hits home.

One way around this is investing in PRPFX instead of the classic 4 x 25. Yes, the fund does have its downfalls... .84 expenses, manager risk, not enough long term bonds, etc. However, you get the benefit of a premanent portfolio without watching all of the moving parts. You just see the end result. I find that much easier to handle day to day, week to week and year to year.

Maybe that can be an alternative for you?

[Clive]

[Clive]

[SquawkIdent]

Clive, I like your way of thinking. Nice graph also...very enlightning.

[Tramper Al]

Really, though. It seems to me that anyone who is worried about current valuation in one of the 4 asset classes, that that person isn't fully committed to the PP concept to begin with. No? You are supposed to not know what will happen next and you are supposed to realize that you don't know. So you own the 4 corners and be done with it.

[Wonk]

@ MT, it's all good. Love the discussion too.

@ billb: when I try to get my head around something, I like when people use analogies. So here goes...

Take cocoa. If you've ever been curious and eaten a teaspoon of cocoa, you know it tastes terrible and bitter--always has in isolation.

But when you mix it with sugar, butter & flour in the right proportions you get delicious chocolate brownies. Gold is the cocoa of the permanent portfolio. In isolation, there isn't much to like as the real return is 0 and it's pretty darn volatile. However, mix some gold into a batch of permanent porfolio brownies along with the other ingredients and you'll have nothing but sweet satisfaction.

Hope that helped. I'm going to have some dessert now.

[MediumTex]

[Lbill]

Just a thought - if you're worried about long treasuries and/or gold being in bubble territory now, what are you going to think if they move higher? If big losses in one or both of these assets scares you, if you want an extra margin of safety you have to employ a left fat tail defensive strategy. Buying call options is one way to do 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

[Clive]

[Clive]

--deleted--