Bogleheads

billb · Joined: 12 Jun 2009 Posts: 125 Location: Kennesaw, GA

Clive, that's very insensitive. How could you risk your dog?

MediumTex · Joined: 01 Mar 2009 Posts: 447

MediumTex · Joined: 01 Mar 2009 Posts: 447

Okay, this one is for Clive (and pardon the Rube Goldberg thinking I am using):

Imagine that one has 50% of his assets in a conventional PP (25% x 4) and 50% of his assets in PRPFX.

It seems to me that a clever person could come up with a scaling methodology where one rebalanced between the PP and PRPFX based upon certain rebalancing bands or some other signal, considering that over some periods PRPFX performs better and over some periods the PP performs better.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

MediumTex · Joined: 01 Mar 2009 Posts: 447

Here is some interesting information about PRPFX:

1. Expense ratio is now down to .82% (per the annual report), which I think is quite reasonable for everything the fund does.

2. Total assets in the fund for year ended 1-31-2008: $1.75 billion
year ended 1-31-2009: $3.22 billion
as of 10-2-2009: $4 billion

3. Thus, even though Cuggino has thrown shareholders a nice bone with two consecutive expense ratio reductions, investors have thrown him a much larger bone in the form of a HUGE increase in fund assets.

4. If PRPFX has 20% in gold, that's $800,000,000 in gold sitting in vaults around the country. That's a lot of gold (though GLD and IAU are much larger). PRPFX does, however, use GLD for part of its gold holdings (check the annual report). Not a lot, but some (I don't want to get any conspiracies started).

5. Based upon $4 billion in assets and a .82% expense ratio, Cuggino and his minions are receiving $32,800,000 annually to do whatever it is that they do (I know Cuggino gets on CNBC as much as he can).

6. Bottom line, though, is that Cuggino has done a good job for PRPFX shareholders and deserves credit for being a good fund manager. I hope he stays at the helm for a long time (he's a pretty young guy). I'm not sure how much of HB's thinking he has fully internalized, but he seems to understand enough to stick with a static allocation at all times.

7. I believe PRPFX's rebalancing bands are +/- 10% of the target allocation for each asset in the fund. Thus, stocks get rebalanced at 27% and 33%, gold at 18% and 22%, etc.

8. I still think that a person who did 90% PRPFX and 10% EDV and rebalanced to 90%/10% annually would have a pretty good thing going.

***

PP purists will note that PRPFX breaks several of HB's rules, and they would be right, but it's still a pretty good fund.
_________________
"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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SquawkIdent · Joined: 23 Dec 2008 Posts: 89

Nice post MT.

I thought long and hard when I was setting up my taxable portfolio and had a desire to go with the PP, whether to go with PRPFX or the 4 x 25. Read a ton of stuff here, on crawlingroad.com and most of HB's writings. Also, listened to a lot of his radio shows (thanks craigr!!). I decided on PRPFX.

Yes, PRPFX does have its downfalls as listed by you. However, the fund allows me to have a permanent portfolio (old school HB) and not see all the moving parts zigging and zagging. This allows me to stick with the fund even when parts are very volatile. Because I only use the fund, no rebalancing is neccessary. I contribute to the fund bi-weekly. In retirement this will be the first monies I withdraw. I plan on taking between 4-5% of the account balance per year and call it a day. I understand my withdrawal amount will vary year to year but have lived with that sort of situation all my working life. Not a big deal.

brick-house · Joined: 07 May 2009 Posts: 49 Location: Philadelphia, PA

PRPFX provides some serious tax efficiency for the after tax investor.

Per Morningstar:

Tax Analysis 09-30-09

3-Yr Avg % 5-Yr Avg 10-Yr Avg %
Pretax Return 7.54 8.82 9.51
Tax-adjusted Return 7.29 8.52 8.90
% Rank in Category 1 1 1
Tax Cost Ratio 0.23 0.28 0.56

Potential Cap Gains Exposure % 6.8
_________________
Have you ever noticed that anybody driving slower than you is an idiot, and anyone going faster than you is a maniac? George Carlin

Clive · Joined: 13 Jun 2009 Posts: 82

--deleted--

Roy · Joined: 10 Sep 2008 Posts: 341

SquawkIdent · Joined: 23 Dec 2008 Posts: 89

brick house - great point. One of the reasons I decided to go with PRPFX in my taxable account.

snowman9000 · Joined: 26 Feb 2008 Posts: 767

Heck, none of the four components look like bargains.
Stocks at high P/Es.
Bonds at P/Es, and inflation worries.
Gold at highs.
Cash yielding diddly.

Yet, some are going to do well.

I suspect it always is thus.

MediumTex · Joined: 01 Mar 2009 Posts: 447

MarcMyWord · Joined: 15 Jun 2007 Posts: 429

Is anyone here--particularly those who have holdings in PRPFX, as opposed to creating a "do it yourself" permanent portfolio--seriously bothered that Michael Cuggino, the manager of PRPFX and controlling owner of its investment advisor, seems to have so little of his own money invested in PRPFX?

I would be the first to admit that I'm no expert at reading a mutual fund Statement of Additional Information (SAI), but the one I'm looking at (06-01-09) says that he owns PRPFX shares worth only "over $100,000." Now, of course, "over $100,000" could mean anything from $100,001 to $100 million. But when I see that the SAI also says that Mr. Cuggino's "over $100,000" includes the shares that he owns indirectly through his ownership of the investment advisor, and the language that "As of April 30, 2009, the directors and officers of the Fund as a group [i.e., a group which would include Michael Cuggino] owned less than 1% of the outstanding common stock of the Fund as a whole and of the Fund’s Permanent Portfolio and Treasury Bill Portfolio," and the language that the members of Mr. Cuggino's family also "beneficially owned no shares of the fund," it seems clear to me that his ownership of PRPFX shares must be quite minimal. It seems much closer to the "for the sake of appearances" level than the "I really believe in my fund and have a major stake in it myself" level.

On the one hand, the fine performance record of PRPFX speaks for itself. On the other hand, when I see other mutual funds that we've owned, or have considered––funds where the portfolio management's own fund shares are valued in the millions rather than the thousands––I'm a bit disturbed by a PRPFX manager who doesn't seem to "eat his own cooking." Of course, if the fund does poorly, his income from investment management fees would presumably fall––but, compared to actual ownership of fund shares, that's (at best) a very, very indirect way of aligning his interests with those of the fund's retail investors.

Has anyone ever heard him offer an explanation of why he owns so little of his own PRPFX fund?

Comments appreciated. Thanks.

Marc

SquawkIdent · Joined: 23 Dec 2008 Posts: 89

MMW,

You raise a very valid point. It all comes back to manager risk. I like managers who eat their own cooking and show the shareholders that they have a large amount of wealth invested along side of me. We, the investors, should feel that the managers are partners in the fund. Have you ever read a financial report by the Oakmark firm? Everyone of their managers has over $1 million invested in every fund they manage (even if it's multiple funds).

I am also concerned that the PRPFX web site has been down for at least a month. I called CSR about 2 weeks ago and they stated the site would be back up by the end of September. Well, guess what...it isn't. If the site isn't up within the next couple of days I planned on calling Michael in his San Francisco offices and find out what's going on. If I do, I'll also voice your concern (and mine) about his amount invested in the fund and ask him to explain his reasoning.

I'll keep you updated.

MarcMyWord · Joined: 15 Jun 2007 Posts: 429

MCSquared · Joined: 02 Aug 2009 Posts: 97

SquawkIdent · Joined: 23 Dec 2008 Posts: 89

I just wrote Mr. Cuggino a snail mail letter (I figured it would be better than putting him on the spot with a phone call) about my concerns of the fund (previously noted). I asked 7 questions. I also asked Mr. Cuggino's permission to paraphrase his answers for this thread. As soon as I hear back from him (and he grants permission) I'll post my findings.

HBfan · Joined: 22 Mar 2009 Posts: 6

MediumTex, do you know what the asset mix would be with 90% PRPFX and 10% EDV? Would it be close to 4x25?

MediumTex · Joined: 01 Mar 2009 Posts: 447

MediumTex · Joined: 01 Mar 2009 Posts: 447

RE Cuggino's holdings, as I recall he does own quite a bit of PAGRX, which is basically the 15% "aggressive" growth piece of PRPFX.

If anyone has the PRPFX materials handy, what does it say about Cuggino's holdings in PAGRX?
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

MarcMyWord · Joined: 15 Jun 2007 Posts: 429

MediumTex · Joined: 01 Mar 2009 Posts: 447

The post below was from June 7, 2009:

makalu · Joined: 05 Feb 2008 Posts: 44

My (US-based) PP is held in a fully taxable account -- distributed among IWV, VEU, GLD, TLT and CSJ (for the cash) -- and so I'd be interested in better understanding the taxation comparison of this structure vs PRPFX.

Would anyone be able to clarify that? Thanks so much in advance.

lodrigj · Joined: 28 Mar 2007 Posts: 24

If you didn't want to hold a lot of physical gold, are there any things to consider for the gold portion of the Permanent Portfolio if picking between SGOL, GTU, CEF, GLD and IAU?

Thanks

TJAJ9 · Joined: 12 Sep 2009 Posts: 374 Location: Philadelphia, PA

MediumTex · Joined: 01 Mar 2009 Posts: 447

helmut · Joined: 20 Feb 2007 Posts: 29 Location: Houston, TX

As a new investigator to HB's PP I have a question concerning the equity portion of the PP.
I’ve been considering NYC, which is an index of the New York Stock Exchange Composite. This includes everything traded on that exchange, ranging from Mega-caps to Micro-caps to ADRs. While this index includes most of the S&P 500 stocks, it does not hold anything thing traded on the NASDAQ. Quite often companies usually list themselves on the NASDAQ because they don't have the wherewithall to list themselves on the NYSE. Troubled companies that have had to reorganize like Sears Holdings and United Airlines that are delisted from the NYSE relisted themselves on the NASDAQ, where they are often in a survival mode. While the NASDAQ does offer access to a lot of tech companies, which might be a better fit into the prosperity/growth part of a PP, I'm not convinced I really need them.

With about 35% ADRs you get a lot of international exposure as well.
Any thoughts?

helmut

macclary · Joined: 23 Jul 2009 Posts: 72 Location: Oregon

craigr · Joined: 13 Mar 2007 Posts: 1973

craigr · Joined: 13 Mar 2007 Posts: 1973

craigr · Joined: 13 Mar 2007 Posts: 1973

craigr · Joined: 13 Mar 2007 Posts: 1973

helmut · Joined: 20 Feb 2007 Posts: 29 Location: Houston, TX

"Don't make things complicated with new or untested investment products."

Craigr,

Thanks for your input. By the way I'm really enjoying your web site.

helmut
_________________
"Back of every mistaken venture and defeat is the laughter of wisdom, if you listen." -Carl Sandburg

craigr · Joined: 13 Mar 2007 Posts: 1973

I'm going to post a summary here again just because I think it may help some people:

1) Stocks - Buy a broad based index fund. S&P 500 is fine. Total Stock Market is fine. Just make sure it is an index fund and has low expenses. If you want international exposure, then use a fund like Vanguard's FTSE All World Ex-US or iShares EAFE fund. Don't go crazy with international exposure if you are a US investor.

2) Bonds - Only buy US Treasury bonds with maturities greater than 20+ years. When they get to less than 20 years you sell and replace with longer bonds. Do not take credit risk with your bonds and do not chase yield with your bonds. (please see 2008 for more information on this important topic). Only own Treasuries. If you live in foreign country, try to buy bonds from your own government denominated in your own currency. Buy the bonds directly if you can either through your broker or Treasury Direct. If you can't do this, then use a fund like iShares Treasury Long Term (NYSE: TLT) as a proxy. Do not buy bond funds that are actively managed. Only buy bond index funds if you have no other choice and make sure they predominately hold Treasuries.

3) Cash - Hold your cash in a Treasury Money Market fund. If you have enough cash for emergency needs (a year or so in expenses saved) then you may consider buying a Short Term Treasury fund for the excess 'cash' allocation to take on a slightly more risk but better returns than a Treasury Money Market fund. This is optional though and keeping it all in a Treasury Money Market Fund is fine for your cash. Again for foreign holders, try to use a fund in your own currency.

4) Gold - If you can hold physical bullion that's great. If you can hold it outside of the country where you live that's even better. If you have to use an ETF that's OK, but not as good as more direct control. If you buy bullion don't buy numismatic stuff. Only buy bullion gold (such as bullion coins for the gold content). Gold mining stocks and the like are not substitutes for gold bullion.

5) You must rebalance. The standard rebalancing bands are to buy an asset when it is 15% or less and sell it when it is 35% or more. Don't go outside these limits. You can set a limit of 20% on the low side and 30% on the high side if it makes you feel better and can control trading costs. Be unemotional about this and ignore what you see in the news and from pundits.

6) Don't try to guess the future of the markets.

7) Review the 16 Golden Rules of Financial Safety (backup link)and make sure you are following them.
_________________
“The best-kept secret in the investment world is this: Almost nothing turns out as expected.” - Harry Browne

craigr · Joined: 13 Mar 2007 Posts: 1973

macclary · Joined: 23 Jul 2009 Posts: 72 Location: Oregon

Here are some thoughts on the different ways to hold the gold portion of the PP.

GLD and IAU: easy to buy, tracks gold price well, low expense ratio, good for trading BUT there is some very concerning language in the fund documentation about who is finally responsible to make sure the gold is really there, there is an expense ratio, also the government knows right where to go to get the gold when it needs to support its currency.

CEF (perhaps others): easy to buy, holds gold and silver, held in Canada to diversify government seizure risk, unlike GLD the assets are inspected and insured BUT there is substantial tracking error due to the closed-end fund structure, you have to pay an expense ratio.

ETFs in a retirement plan: easy to setup and easy to re-balance BUT there is a conceivable risk of retirement plan rule changes that could adversely affect how much and when you will see your savings.

Physical gold at home: lower risk of government confiscation, lower risk of institutional fraud, low/no marginal ongoing expense BUT there is risk of theft in your home or when transporting it to/from, rebalancing can be harder/expensive (spread), and you need access to your home which may not be available in certain war or disaster scenarios.

Physical gold in a safe deposit box: good security with less risk for your your family BUT there is a going cost, risk of theft from bank personnel, natural disaster risk, and the government could require you to open your box with an IRS agent present if ownership of gold is restricted again.

Physical gold in allocated overseas accounts: diversified government risk BUT there is more hassle and expense than an ETF yet you are still at risk for fraud.

No gold: low hassle and expenses BUT if your country's currency has trouble your entire life savings could halve or completely disappear, and your portfolio won't benefit from the smoothing diversification gold provides.

Gold futures: fairly efficient from trading perspective BUT more of a hassle, default risk, legislation risk.

Broad based commodities: diversification away from just precious metals BUT commodities don't diversify as well as gold and could end up much worse if the economy is doing poorly when you need to rely on your gold holding.

I think it is a good idea to hold gold in more than one fashion to diversify risks. For example physical gold plus some CEF or GLD in a retirement account for easy rebalancing. Or maybe a foreign allocated account plus a safe-deposit box plus futures for trading. HTH

macclary · Joined: 23 Jul 2009 Posts: 72 Location: Oregon

MediumTex · Joined: 01 Mar 2009 Posts: 447

For those who are just joining the conversation, please note that the greatest challenge to using the PP allocation is just getting started.

Once you are underway you will be amazed at how smooth the ride is.

Most never do it because they can't get over how strange it sounds. However, I am not aware of anyone who has ever done it and then abandoned it because they were unhappy with the results.

Due your own due diligence, of course. You may find that training your mind not to worry about your investments is harder than it sounds (I'm still working on it myself, but the PP helps a lot).
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

lodrigj · Joined: 28 Mar 2007 Posts: 24

Craigr, thanks for the great summary

Macclary, thank you for the detailed info on gold.

I have now read this entire thread, phew, it took 3 days!

As far as putting the least tax efficient assets into IRAs, does it make any difference what you would put into what in terms of a Roth, SEP, or rollover IRA, as I have one of each at Vanguard...

And as far as cash, Vanguard's Treasury Money Market is closed, as is Fidelities, and I've seen SHY short term bonds suggested as an alternative, but what about Gabelli or Wells Fargo's Money Market Funds (Can you even hold them at Vanguard, say in a brokerage account?

Is it even worth worrying about putting your cash into a treasury money market right now with interest rates what they are as opposed to, say, keeping it under your bed or in an FDIC insured account at a bank?

Thanks a million guys for a great thread! I'm almost ready to begin a Permanent Portfolio.

Tramper Al · Joined: 18 Oct 2007 Posts: 2374

craigr · Joined: 13 Mar 2007 Posts: 1973

MediumTex · Joined: 01 Mar 2009 Posts: 447

For the cash piece, also place on your short list Series EE and Series I savings bonds.

- Full faith and credit

- Complete tax deferral until redemption

- No interest rate risk to principal.

***

Don't buy I-bonds right now at 0% fixed rate, but if the fixed rate ticks above 0% (it's set twice a year), I think they make a great part of the cash piece of the PP.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

helmut · Joined: 20 Feb 2007 Posts: 29 Location: Houston, TX

OK...Now I am really intrigued (almost hooked) in HB's Permanent Portfolio. I've ordered the book, if I like it I will order the T-shirt too.
I'm still having trouble getting my arms around an allocation of 25% gold. I understand the strategy, but I still have to overcome the paradigm of the financial hysteria of the 1970's. Gary North and Howard Ruff are just two names that come to mind.
Another concern I have is that I do not want the management and rebalancing of holding physical gold, or a laddering LT Treasuries. I guess the easy answer would be ETF's, but it seems to me that ETF's are considered second class citizens to physical gold or actual Treasuries.

helmut
_________________
"Back of every mistaken venture and defeat is the laughter of wisdom, if you listen." -Carl Sandburg

macclary · Joined: 23 Jul 2009 Posts: 72 Location: Oregon

I use CEF for a chunk of my "gold" holding. This closed-end fund holds 50 ounces of silver for every ounce of gold which represents a historical price parity point. I think that holding silver and gold diversifies legislation risk if gold ownership were banned or something. Maybe this approach would be more appealing to you?

I personally hardly thought twice about 25% gold allocation - the 25% cash and long bonds took more study for me. For those who have studiously been ignoring the gold story for the last decade, take a look at how far it has outperformed Warren Buffet's Berkshire Hathaway: http://blog.goldassets.co.uk/2....n-buffett/

If you are worried about buying gold today because it is knocking on all time high nominal prices, you need to take a look at the price of gold in inflation adjusted dollars: http://www.zealllc.com/2007/cpigold2.htm The price would have to get up to $1700-2200 range to challenge the old peaks priced in real dollars. The price of gold could of course go down from here, my point is that there is room for it to go up and not be in un-charted territory.

If you decide on holding gold through a fund, that is definitely better than not owning any! I would still encourage you to consider getting at least some physical gold and silver. It is pretty easy to get it shipped insured from here for example http://store.nwtmint.com/Bullion/. You can also just take a wad of folding money to your local coin and bullion dealer and walk away with what you need.

For long bonds, I hold TLT (the ETF) and I don't feel bad about it at all. Harry Browne mentioned this exact fund on one of his shows as an option for the bond allocation.

helmut · Joined: 20 Feb 2007 Posts: 29 Location: Houston, TX

"I use CEF for a chunk of my "gold" holding. This closed-end fund holds 50 ounces of silver for every ounce of gold which represents a historical price parity point."

I like CEF too. At a 11% premium it seems a little expensive right now. I think maybe holding gold in GLD until gold is out of favor and CEF starts selling at a discount may be a safe way of hedging gold.
helmut
_________________
"Back of every mistaken venture and defeat is the laughter of wisdom, if you listen." -Carl Sandburg

Tramper Al · Joined: 18 Oct 2007 Posts: 2374

MediumTex · Joined: 01 Mar 2009 Posts: 447

Anyone who is kicking the tires on the PP and doesn't think at least one of the asets is a ridiculous place to put their money probably isn't a rational person.

It's supposed to be this way.

The ironic thing is it is often the ridiculous sounding asset that performs the best.

Bear in mind that we are all watching the same markets. The PP forces us to be a bit contrarian, whether we want to or not.

***

To the issue of laddering LT treasuries, it's not really a big deal to buy and sell a 30 year bond every five years or so (sell when you get to 25 years to maturity and buy a new 30 year bond at that time).

There is also nothing wrong with buying a 30 year treasury bond and then using TLT to accumulate additional amounts until you are ready to buy another bond (based upon which transaction fee scenario works out best).

PRPRFX is also a great way of accumulating contributions to allocate among a traditional PP. For example, let's say you have $100,000 and are going to be contributing an additional $1,000 a month. You might set up an HB PP with the $100,000 and put the $1,000 a month into PRPRFX until you get to $10,000 or $20,000 in PRPFX holdings and then move the PRPFX holdings into the HB PP. The tax efficiency of PRPFX shouldn't be taken lightly (especially with gold performing so well).

There are many ways of assembling a PP (including using PRPFX as a piece) to minimize transaction costs, taxable events and other potential hassles.

The main thing, though, is to get started.

One thing that I like very much about the PP is that it doesn't use the word "permanent" lightly. It really is a permanent asset allocation. In that way it is (to me) a unique allocation method. It will outlast currencies; it will outlast governments; it will outlast you. It's truly a permanent portfolio.
_________________
"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

helmut · Joined: 20 Feb 2007 Posts: 29 Location: Houston, TX

My questions may have already been answered, but hopefully I can get some suggestions without having to read 30 pages of this thread.
Much of my investment money is tied up in my 401k at TRP and my wife's 403b at Vanguard. The treasuries, cash & equities I can figure out, but for the gold I suppose I would have to use PRNEX & VGPMX. Is there any other way to get a closer approximation to gold using TRP & Vanguard?

I do have a IRA that I could buy gold in, but it makes rebalancing rather difficult. I already have my taxable accounts in PRPFX.

helmut
_________________
"Back of every mistaken venture and defeat is the laughter of wisdom, if you listen." -Carl Sandburg