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Bogleheads
Investing Advice Inspired by Jack Bogle
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Rose21
Joined: 27 Jul 2007
Posts: 469
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 Posted: Fri Jul 11, 2008 6:34 pm Post subject: |
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| I'd be very interested in hearing any views on how the Permanent Portfolio might fare in the event of a simultaneous collapse of both the stock and bond markets. Today's bond market action really got my attention, and if the Fed proceeds to backstop FNM and FRE, I shudder to think where yields will go. . . I'm not sure whether the Permanent Portfolio has been time tested in a situation where stocks and bonds plummet simultaneously. Anyone care to hazard a guess? |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Fri Jul 11, 2008 6:53 pm Post subject: |
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| Rose21 wrote: | | I'd be very interested in hearing any views on how the Permanent Portfolio might fare in the event of a simultaneous collapse of both the stock and bond markets. |
That would probably be a bad inflation situation. Gold prices would likely spike.
| Quote: | | Today's bond market action really got my attention, and if the Fed proceeds to backstop FNM and FRE, I shudder to think where yields will go. . . I'm not sure whether the Permanent Portfolio has been time tested in a situation where stocks and bonds plummet simultaneously. Anyone care to hazard a guess? |
During the 1970's, stocks and bonds were both bad places to be. The prime rate hit 20% or so by 1981. However the gold portion of the portfolio grew so fast due to the inflation pressures that the portfolio had a real after-inflation return during the decade in the 4-5% range. A typical stock/bond portfolio probably was in the 0% to slightly negative after-inflation returns range for the entire decade.
In 1981 stocks, bonds and gold all had losses and the portfolio sustained a loss of about 4-6%. That is the worse loss it's ever had. In 1982 it recovered fully and had gains in the 20% range (which is atypical).
As of today, the portfolio with the four-way split of stocks, LT bonds, gold and cash is at +%0.23 YTD. Not bad considering most portfolios are probably well into negative territory by now. Stocks are down about 15% right now, LT bonds down about 1%, ST bonds/cash is slightly positive. But gold has shot up %15 washing out the losses in the other parts of the portfolio. |
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Wonk
Joined: 11 Jul 2008
Posts: 204
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| Posted: Sat Jul 12, 2008 9:15 am Post subject: Harry Browne's PP |
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I have books going back to the 1970's that predict a dollar crash and hyper-inflation. If you followed their strategies exclusively to protect yourself you'd have found that your investments would have not grown much at all over that time. Many of these authors are still around today saying the exact same things they said decades ago. It just happens that today they are getting the press, but nobody was listening to them in the 80's and 90's when stocks were doing well and the dollar was stronger (with good reason).
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Very good point. I could be way off here, but if deflation is the destruction of the money supply and inflation is creation of the money supply, it seems as though Bernanke is running the printing presses (inflationary) to thwart a deflationary crash in housing similar to 1929 in stocks. As housing deflates, the Fed is inflating new money to create a new floor where housing stabilises and banks stop losing money.
In essence, he is trying to the pay for destruction in housing deflation with inflation on all holders of the US dollar (throughout the world). However, if there's a run on the dollar and it collapses, where does that leave everything else? ie-housing prices?
Hyperinflationary at that point for sure, but I would imagine if the dollar collapses, all dollar denominated assets lose an equivalent level of value (stocks, bonds and cash). So really, gold would have to pick up a lot of slack in a portfolio in order to carry a crash in the other 3.
| Quote: | Specifically though, if the currency has a serious problem the gold portion in the PP will shoot through the roof. If the bottom falls out and we hit a Great Depression II with collapsing interest rates and deflation the long term bonds will do very well. If things just kind of calm down then the stocks and bonds will both do OK. If there is a recession for a couple years the cash will provide a buffer.
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So really then, either housing forces a market collapse (ie-helicopter Ben fails) and the dollar strengthens -or- housing stabilises through inflation (ie-Ben is successful, so to speak) and the dollar continues to weaken, correct?
In which case, if you had a hunch one way or the other, you'd have the PP for any scenario, and you could use a variable if you believed that one scenario had a higher likelihood of playing out.
Interestingly, I read that the difference between a deflation and recession is in the magnitude of comparison. In the 30's GDP declined 33% in the first 4 years--hence a crash down.
Compared to today, if people like John Williams and Peter Schiff are correct and the government's GDP #s and inflation #s are a joke, we could experience a violent inflationary contraction that would be somewhat similar. For instance, if GDP growth is really 1% and inflation is 10%, real contraction of 9% would be a massive recession. If it happens for several years, one could make the point that the US is undergoing a hyperinflationary depression.
Am I way off here? |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Sat Jul 12, 2008 1:21 pm Post subject: Re: Harry Browne's PP |
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| Wonk wrote: | | Very good point. I could be way off here, but if deflation is the destruction of the money supply and inflation is creation of the money supply, it seems as though Bernanke is running the printing presses (inflationary) to thwart a deflationary crash in housing similar to 1929 in stocks. As housing deflates, the Fed is inflating new money to create a new floor where housing stabilises and banks stop losing money. |
The housing prices going down is deflationary, but that doesn't mean that we need to watch out for wide-scale deflation. Bernanke's career involves studying a lot about the Great Depression. IMO, everything in his mind is trying to fight the last war. He's doing things that he thinks are helpful, but he really doesn't know what will happen. This is the problem with giving such a small group of people so much control over our economy.
| Quote: | | Hyperinflationary at that point for sure, but I would imagine if the dollar collapses, all dollar denominated assets lose an equivalent level of value (stocks, bonds and cash). So really, gold would have to pick up a lot of slack in a portfolio in order to carry a crash in the other 3. |
I'm not really worried about hyperinflation. The US is a tremendously large player in the world economy. It's more likely that political and financial forces would step in to get the situation under control. However this doesn't mean that significant damage wouldn't have occurred in the interim to the dollar. The PP has protection in place against this scenario, but it probably isn't worth worrying too much about it.
| Quote: | | So really then, either housing forces a market collapse (ie-helicopter Ben fails) and the dollar strengthens -or- housing stabilises through inflation (ie-Ben is successful, so to speak) and the dollar continues to weaken, correct? |
There's more going on than housing prices. We're spending a tremendous amount of money domestically and internationally. Then we have gargantuan obligations in other social programs coming down the road. If we get our spending under control I think the dollar could strengthen significantly.
| Quote: | | Compared to today, if people like John Williams and Peter Schiff are correct and the government's GDP #s and inflation #s are a joke |
I don't really track what those fellows have to say. Although I do agree that the CPI numbers are unreliable. But this is to be expected because it's a govt. agency putting out the numbers and they aren't going to make the chief executive look bad if they don't have to. Harry Browne talked about why govt. statistics are suspicious in his radio episode below:
04-10-31
The first 8-9 minutes of this show are where he goes into the problems with govt. statistics and the reasons to not speculate.
One last things on market prognosticators. Harry Browne made a fortune in the 1970's by correctly predicting the devaluation of the dollar and the associated problems it would have. He had people in silver when it was $1.29 and gold when it was $35 an ounce. He had people bail out of them in 1981 when silver hit $50 and gold hit nearly $800 an ounce. Yet, despite this remarkable feat, he was always very upfront with the secret to his success. Are you ready to hear what it is?
He was lucky.
He mentioned this in multiple interviews, books and articles. He never hid the fact. He knew he was lucky and that's why he came up with the PP idea with Terry Coxon. Browne and Coxon wanted a way to have a portfolio that could grow and protect money without luck.
So, when you are listening to these market predictors you need to remind yourself that nobody can predict the future. It isn't that they may not have some intelligent things to say about money and finance, just that anything that sounds like a market prediction really should be ignored among the advice they are giving.
One more thing. A couple years ago I took the time to occasionally listen to old investment radio podcasts from a popular show. The podcasts were a year or two old when I listened to them in general. I made mental notes of their predictions and what really happened. The result? No better than sheer chance. Sometimes much worse. Predicting the future just doesn't work. |
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Wonk
Joined: 11 Jul 2008
Posts: 204
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| Posted: Mon Jul 14, 2008 8:02 am Post subject: Permanent Portfolio |
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So to recap, if one would want to set up a Permanent Portfolio without tax considerations or inclusion of retirement accounts, would it look something like this?
25% US Stocks: 3 different index funds or mutual funds accounting for no more than 8-9% each of this category.
Q: Any recommendations here besides the S&P Index? Other index funds?
25% 30-year US Gov't Bonds.
Q: Is there a fund for this or would I need to buy direct from the Treasury?
25% Precious metals: Gold & silver bullion
Q: I have about 10% in a Perth Mint Certificate. Does this qualify (since it's out of the US and a bullion "claim") as safe as per Harry's recommendations or would he insist on physical segregation? I have about another 5% in gold index funds and 5% in a silver trust. After listening to one of the shows, it seems as though Harry advocated physical bullion to thwart confiscation. Perhaps its best to liquidate these positions and hold the physical metal. Any thoughts on this?
25% Cash: Direct ownership of T-Bills from the Treasury
Q: I know it was mentioned by craigr that the cash portion can be held in Short Term Bonds to increase CAGR with a moderate increase in volatility. Is there a fund for this or should one purchase the bonds directly? And what would happen to those bonds in a major deflationary scenario?
One last question came to mind. The main theme in the PP is diversification for safety. That's why its curious to me that Harry doesn't recommend an international basket of the same type of portfolio through the same asset classes.
I know it would make it harder to balance and would require a larger asset base. But supposing you had the resources, wouldn't it make sense to diversify globally to maximize bull markets elsewhere and minimize risk locally? After all, Harry didn't like all assets in one class. But why would he like all assets in one geographic market only? |
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Quasimodo
Joined: 03 May 2007
Posts: 613
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| Posted: Mon Jul 14, 2008 12:31 pm Post subject: Re: Permanent Portfolio |
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| Wonk wrote: | So to recap, if one would want to set up a Permanent Portfolio without tax considerations or inclusion of retirement accounts, would it look something like this?
25% US Stocks: 3 different index funds or mutual funds accounting for no more than 8-9% each of this category.
Q: Any recommendations here besides the S&P Index? Other index funds?
25% 30-year US Gov't Bonds.
Q: Is there a fund for this or would I need to buy direct from the Treasury?
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A stock fund in the spirit of the Permanent Portfolio could be TRowe Price's New Era fund, PRNEX
American Century has several zero coupon treasury bond funds - BTTRX is the longest term one with a 2025 maturity.
Good luck!
John
_________________
Don't surrender your loneliness so quickly. Let it cut more deeply. Let it ferment and season you as few human or even divine ingredients can.
Hafez, poet (1315-1390) |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Mon Jul 14, 2008 12:36 pm Post subject: Re: Permanent Portfolio |
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Harry Browne's "Money Talk" has started again apparently. His former publisher, John Chandler, is now hosting it and worked with Harry Browne for a couple decades. It may be worth calling in with your questions to get a better answer. The show last week was new, but this week may be a re-run:
feed://www.gcnlive.com/pubpod/mon_talk/pcast.php |
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arjking
Joined: 03 Sep 2007
Posts: 56
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| Posted: Fri Jul 18, 2008 7:26 am Post subject: |
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| Would HB consider a large emergency cash reserve part of the cash portion of the portfolio? What if this reserve accounted for a large proportion of your net worth? What if you were saving up for down payment on a home? |
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makalu
Joined: 05 Feb 2008
Posts: 44
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| Posted: Fri Jul 18, 2008 7:53 am Post subject: |
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I'm wondering about the mapping of the Permanent Portfolio onto the traditional portfolio design theory and process.
As I understand things, the traditional approach to portfolio design involves (1) the identification of a broad set of asset classes (diversification) that are as uncorrelated as possible, and then (2) identification of the allocation among those assets that exists on the optimum point on the curve of expected return vs risk (maximizing return for a set of assets, time frame and risk tolerance).
It would therefore seem to me that the selection of four asset classes by Harry Browne, to address each of four economic conditions is conceptually equivalent to the identification of four asset classes that have historically been uncorrelated (i.e. if historical correlation of any asset classes boils down to how they have comparatively behaved in all of the same economic periods that Harry Browne identifies.)
The Permanent Portfolio, however, excludes asset classes like REITS that have for sound reason (i.e. their correlations with respect to all other common asset classes) been included in the traditional portfolio design process.
In terms of allocation, I can't imagine that the PP (with its 25% equal weightings) could exist anywhere near the efficient frontier, for the given assets that have been chosen.
So it would seem that for whatever risk/return point you're aiming for as an investor in the PP, you could likely find both an improved set of assets, as well as an improved allocation, through the traditional portfolio design theory/process.
I'm more thinking out loud here than trying to argue that point. Opinions?
Last edited by makalu on Fri Jul 18, 2008 8:49 am; edited 1 time in total |
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stratton
Joined: 04 Mar 2007
Posts: 6233
Location: Puget Sound
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| Posted: Fri Jul 18, 2008 8:43 am Post subject: |
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| makalu wrote: | I'm wondering about the mapping of the Permanent Portfolio onto the traditional portfolio design theory and process.
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The Permanent Portfolio, however, excludes asset classes like REITS that have for sound reason (i.e. their correlations with respect to all other common asset classes) been included in the traditional portfolio design process.
In terms of allocation, I can't imagine that the PP (with its 25% equal weightings) could exist anywhere near the efficient frontier, for the given assets that have been chosen.
...
I'm more thinking out loud here than trying to argue that point. Opinions? |
There's at least one interpretation that's been made into a mutual fund Permanent Portfolio (PRPFX). Q2 2008 PRPFX Fact Sheet
ER 0.95%
20% gold bullion
5% silver bullion
10% Swiss francs
15% US real estate and energy stocks split evenly
15% aggresive growth stocks
35% treasury bills and bonds
Paul |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Fri Jul 18, 2008 10:37 am Post subject: |
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| arjking wrote: | | Would HB consider a large emergency cash reserve part of the cash portion of the portfolio? What if this reserve accounted for a large proportion of your net worth? What if you were saving up for down payment on a home? |
I have no idea how to answer your question. In his show he made references to the idea of keeping all money that is precious to you in the permanent portfolio though. House down payments, tuition money, retirement money, etc. It's a tough call really and there is a strong argument for being very conservative with money for a down payment. However even very conservative investments could be risky under the right conditions (such as high inflation). |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Fri Jul 18, 2008 1:06 pm Post subject: |
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| makalu wrote: | | The Permanent Portfolio, however, excludes asset classes like REITS that have for sound reason (i.e. their correlations with respect to all other common asset classes) been included in the traditional portfolio design process. |
He didn't consider real estate itself a good investment. It doesn't have a consistent tie to any particular economic condition in his opinion. Home ownership in particular is not an investment, it's a consumption item. In one of his shows in 2004 he talked about his reasonings and the myth that "real estate never goes down in value".
Twenty years ago, REITs would have been really expensive or complicated/illiquid to purchase and sell. They were risky and lots of people lost money doing direct REIT partnership deals. They weren't something that could be traded in and out of easily if I recall. For history's sake, consider that the Vanguard REIT index appeared first in 1996 and DFA's in 1993. That's 15 years old which isn't that long ago. Other than that, I'm not sure many REIT funds were widely available and they certainly wouldn't be cheap.
Ten years ago, not many investment advisors were recommending REITs. It really hasn't been more than the past 5-7 years or so that REITs started getting a lot of attention. This is not surprising as it was during this time that REITs were turning in double digit rates of growth. So I'd argue that they aren't part of the traditional portfolio design process. They are really a very recent addition for many advisors.
I think a good case can be made that you get plenty of real estate ownership benefit by owning a broad based index fund. The companies in the that index are all exposed to real estate impacts and that comes through in the stock prices. IMO.
| Quote: | | In terms of allocation, I can't imagine that the PP (with its 25% equal weightings) could exist anywhere near the efficient frontier, for the given assets that have been chosen. |
The efficient frontier is an academic construct that only tells you what would have worked best, not what will work best going forward.
In 1999, the efficient frontier would likely have had you in large cap stocks which were approaching their 20th year of bull market returns (and were about to fall 40+%). The past few years the efficient frontier portfolio probably included healthy doses of REITs, Emerging Markets and Value stocks. Someone building a portfolio with those weightings last year thinking they had achieved the optimized efficient frontier would find their portfolio today down at least 20%.
The future is unpredictable and using methods that take past data to extrapolate out to future optimized returns is never going to work. I think the idea of an efficient frontier is highly misleading and dangerous.
| Quote: | So it would seem that for whatever risk/return point you're aiming for as an investor in the PP, you could likely find both an improved set of assets, as well as an improved allocation, through the traditional portfolio design theory/process.
I'm more thinking out loud here than trying to argue that point. Opinions? |
For me there is a point in investing where you just have to say something is good enough. There is not an optimal portfolio because the future is unpredictable. When I look at a portfolio I want a some basic things:
1) A reasonable rate of growth to support my current and future goals.
2) Protection against the uncertainty that is always present in the market.
3) Strong diversification so I will not sustain a major loss if the economy is behaving very poorly but enough exposure to assets that do well when the economy is doing well.
4) A long and proven track record outside of theoretical backtesting.
5) Simple and low cost to implement with no complicated investments to monitor.
6) Logical and verifiable explanations why the strategy works.
For me, the PP concept fits these basic criteria. The 25% split may or may not be optimal. But it works well enough and has been tested by real people with real money for going on a couple decades now in its current form. |
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G12
Joined: 16 Apr 2007
Posts: 985
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| Posted: Fri Jul 18, 2008 2:33 pm Post subject: |
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| Quote: | | Twenty years ago, REITs would have been really expensive or complicated/illiquid to purchase and sell. They were risky and lots of people lost money doing direct REIT partnership deals. They weren't something that could be traded in and out of easily if I recall. For history's sake, consider that the Vanguard REIT index appeared first in 1996 and DFA's in 1993. That's 15 years old which isn't that long ago. Other than that, I'm not sure many REIT funds were widely available and they certainly wouldn't be cheap. |
As a cautionary tale, there was a good article in the WSJ about commercial property in AZ held as Tenants-in-Common (TIC) by investors who were rolling funds from sales of other RE and new investors. TIC is obviously not a REIT, but the underlying story was excellent in detailing potential flaws in TIC ownership. 31 investors, new property, lessee defaulted within 4-months (it was Le Nature, a water bottler that scammed many commercial banks by cooking the books), the owners could not find a suitable replacement tenant and had to foot the mortgage every month for well over a year, then went through various scenarios with even the sponsor offering to buy back the property at a steep discount. All 31 investors had to agree to a sell decision, which was near impossible. In the end they took about a 40% haircut on their original investment. Don't mean to go off track, just bringing forth info on another challenge to RE investing. |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Fri Jul 18, 2008 4:35 pm Post subject: |
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| G12 wrote: | | As a cautionary tale, there was a good article in the WSJ about commercial property in AZ held as Tenants-in-Common (TIC) by investors who were rolling funds from sales of other RE and new investors. TIC is obviously not a REIT, but the underlying story was excellent in detailing potential flaws in TIC ownership. |
My accountant has horror stories of private REIT deals where the investors really lost their shirts and the tax consequences were horrendous. Several years ago he saw I held a REIT index and he turned pale (disclosure: I no longer own REITs). His experience dealing with REITs was bad and didn't like seeing his clients in them. When I explained it was a REIT index and not an individual REIT he was a lot more relaxed, but still skeptical. Kind of makes it nice to have a company like Vanguard deal with all the problems in a big REIT index fund and avoid these pitfalls.
One other thing about real estate that Harry Browne would point out is that most people have huge exposures with their own home to real estate. Going out and seeking more exposure in rental properties, etc. is more of a speculation than an investment. Owning too much real estate also leaves you open to problems during a deflationary episode. On the flip side, there is no guarantee that real estate will boom during an inflation either. |
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brswif00
Joined: 17 May 2008
Posts: 175
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| Posted: Fri Jul 18, 2008 5:42 pm Post subject: Some questions |
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Thank you to all the participants in this incredible conversation. I spend way too much time reading about finance on the web, and there is nothing that compares to the intelligent, polite discussion of real usable strategies on this board.
This has raised a bunch of questions in my mind, in no particular order.
The PP throws off massive income from dividends and 50% bond/cash weightings, does it assume reinvestment, or are you supposed to rebalance with the income, assuming you are in accumulation phase and not just blowing it all?
If you live part-time overseas or are flexible about where you spend your time, wouldn't that argue for a US/Int'l split that reflects your spending locale, instead of your citizenship? Or does PP only work with the non-gold investments in USD?
I love the suit and shoes example, but wonder has gold maintained level purchasing power in many/all currencies, or does gold being priced in dollars have some effect on that?
For fans of commodities funds replacing part or all of the gold allocation, what if oil prices are backward for a long-time and you are buying high and selling low, would you switch back to gold?
I'm curious if the start date in the 70s biases the long-term returns even if you ignore the first few years off $35 gold.
| Quote: | | Because Harry Browne and Terry Coxon did extensive computer modeling of the permanent portfolio's performance over the 25-years before they "invented" it, we actually have a track record for over 55 years, covering a variety of economic scenarios. |
Are those year-by-year returns published on the website or in one of the books? I saw the returns to 1970 on the web, but I would love to see further back. What would have taken gold's place when individuals were barred from directly owning gold and the price was fixed. That has happened in the past so it could happen again.
Would everyone agree that this might be very appropriate for relatively rich people who are more concerned with protecting current purchasing power than getting the highest long-term returns? It sounds like HB adopted it in those circumstances, after his lucky strike on metals in the 70s.
Sorry for so many questions but this is really fascinating stuff. I have ordered Fail-safe investing (used from Amazon after checking that neither of my two local library systems have a copy), and that doesn't happen often as I am a big-time cheapskate. Before this thread started it was probably available for 50 cents, but then I never would have known about it. |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Fri Jul 18, 2008 6:54 pm Post subject: Re: Some questions |
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| brswif00 wrote: | | The PP throws off massive income from dividends and 50% bond/cash weightings, does it assume reinvestment, or are you supposed to rebalance with the income, assuming you are in accumulation phase and not just blowing it all? |
This is unclear. My preferred strategy personally is to have all income/dividends deposited into my MMF and I will rebalance on occasion into the lowest performing asset. This makes bookkeeping a lot easier.
| Quote: | | If you live part-time overseas or are flexible about where you spend your time, wouldn't that argue for a US/Int'l split that reflects your spending locale, instead of your citizenship? |
It probably would. The idea is to have exposure to the currencies and economy in the country where you live. So if you lived in another country you'd want to own primarily their stock market, their bonds and of course gold which is independent of any currency.
| Quote: | | I love the suit and shoes example, but wonder has gold maintained level purchasing power in many/all currencies, or does gold being priced in dollars have some effect on that? |
There is historic precedent that it maintains value in any currency. There may be cultures or times where gold was not understood to be wealth, but they are the exception and not the rule. Certainly they wouldn't understand paper bills of credit either though.
| Quote: | | I'm curious if the start date in the 70s biases the long-term returns even if you ignore the first few years off $35 gold. |
Every asset is going to have a good and bad period. The 1970's were great for gold. The 1980's were great for stocks and bonds. The 1990's were great for stocks. The 2000's were great for gold. Etc.
There may be some bias for gold in the 1970's, but you have to start somewhere! What's important for me is understanding how the different assets will perform as the markets change around. I could make a strong case that value stock investing was heavily biased by a few certain periods of time. Technically, I'd be correct in saying this. But that doesn't mean that value stock investing has no merits.
I need to look at the performance of an asset class over a long period of time to form a conclusion. It's not fair to ignore periods where an asset class does well just as it isn't fair to ignore when it does poorly. I need to look at how the asset performs in the entire portfolio and not in isolation.
| Quote: | | Would everyone agree that this might be very appropriate for relatively rich people who are more concerned with protecting current purchasing power than getting the highest long-term returns? It sounds like HB adopted it in those circumstances, after his lucky strike on metals in the 70s. |
I think the portfolio is a workable option for anyone looking to grow their money safely with low volatility and protections from economic uncertainties. It is not going to get you 15% CAGR in growth. But, it's also unlikely to blow up and see you lose a large part of your life savings. Sustained mid-teens growth in a portfolio is difficult without taking lots of risk.
| Quote: | | Sorry for so many questions but this is really fascinating stuff. I have ordered Fail-safe investing (used from Amazon after checking that neither of my two local library systems have a copy), and that doesn't happen often as I am a big-time cheapskate. Before this thread started it was probably available for 50 cents, but then I never would have known about it. |
That book is the culmination of 40 years of Harry Browne's knowledge. It doesn't have the intricate details on why he did the things he did. Those details are buried in his other books (especially Why The Best Laid Investment Plans Usually Go Wrong). But Fail Safe is the simplified version of his ideas that can be read in an evening. It's a solid investment plan even if some of the ideas he presents run counter to conventional wisdom.
Also, if you are a cheapskate, then buy his book and then listen to his free radio shows where he goes into many of the questions you have. Load them up on an MP3 player and listen to them at your leisure. They are a tremendous source of information and you can decide for yourself whether what he talks about is legit or not. |
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Rose21
Joined: 27 Jul 2007
Posts: 469
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| Posted: Thu Jul 24, 2008 10:28 pm Post subject: |
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| Craig: PRPFX has taken some hits this week despite the overall rally in the stock market, which led me to review its holdings. In doing so, I noticed that a very large proportion of its stock holdings (more than I remembered) are concentrated in the natural resource and real estate sectors. Notably, those sectors have been severely bled down this week right along with metals. Assuming that the severe takedown that we have seen in commodities may represent, at least in part, a deleveraging just beginning to take hold, does it concern you that such a large proportion of the fund's stock assets are concentrated in those areas? To the best of my recollection, and consistent with your prior posts in this thread, Harry Browne's concept was a diversified array of growth stocks. I'd appreciate any thoughts you (or others) have on this. ~Rose |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Fri Jul 25, 2008 12:08 am Post subject: |
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| Rose21 wrote: | | Craig: PRPFX has taken some hits this week despite the overall rally in the stock market, which led me to review its holdings. In doing so, |
I don't follow that fund personally. The holdings they have are heavily weighted towards hard assets and things like Swiss bonds/currency which can be a drag in certain climes. They also actively pick stocks which I simply think doesn't work as well as indexing. That fund allocation was the earliest evolution of the portfolio. The 25% split Browne later advocated seems more balanced to me.
However, PRPFX could be a good choice for people who don't feel comfortable running their own portfolio.
But again the permanent portfolio idea is not going to be a big winner all the time, nor is it going to be a big loser. It's going to have middle of the road performance and shouldn't be tracked every day just as you shouldn't track any diversified portfolio every day.
The markets are volatile right now. Most portfolios are having a wild ride. I can't guarantee the PP idea is going to be the best way to invest, it's just one way to invest that has some plusses and minuses.
I expect fully that the hard asset bull market is going to end some day. When it does, the permanent portfolio will be hurt. Hopefully the other assets will be able to pull up the slack as they did in the past though to keep it moving forward.
Last edited by craigr on Sun Aug 03, 2008 5:11 pm; edited 2 times in total |
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Wonk
Joined: 11 Jul 2008
Posts: 204
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| Posted: Fri Jul 25, 2008 1:22 pm Post subject: Harry Browne's PP |
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This has been a great thread to follow. I think it would be helpful to recap how an individual can put a PP together on their own. Special thanks to craigr for providing some suggestions earlier in the thread.
Here are some ideas, feel free to add your own:
25% Stocks:
Broad-based index funds with low expense ratios that will track the market as a whole:
VTI
IWV
Perhaps an international fund that might provide a way to profit if the "decoupling" of the U.S. from the world economy becomes more of a reality:
EFA
Questions--Does anyone like any other funds for this section? Any suggestions as to your favorite aggessive growth index fund?
25% Long-term Bonds:
TLT for those looking for a long term bond fund for an IRA. Otherwise, perhaps it's best to buy directly from the treasury and save the 0.20 expense ratio of the fund.
25% Precious Metals--Gold:
Physical gold, not gold funds. I personally like gold coins and it looks like S.A. Kruggerands are the best value. It would also make a lot of sense to keep some gold in a safe deposit box in a foreign bank such as Switzerland or Austria or purchase and store gold directly through a certificate program such as Perth Mint.
25% Cash:
Harry really liked MM funds as opposed to savings accounts. Not only for the higher return, but also the safety factor. Craigr mentioned a short term bond fund would bump the CAGR up with a nominal increase in volitility.
So the options might be a blend of both.
Short term bond fund: SHY
Money Market Fund: VMPXX
You might also want to hold a small portion of your cash in phyiscal cash tucked away somewhere accessible in case there's an immediate emergency where you may not be able to access any cash.
Again, feel free to add any information. |
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Tramper Al
Joined: 18 Oct 2007
Posts: 2374
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| Posted: Fri Jul 25, 2008 5:20 pm Post subject: |
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I become more interested in a PP approach as I get older. For some reason I find the broad diversification into such whacky assets as cash and physical gold to seem a better approach to wealth preservation vs. say 70% TIPS or something.
I don't think I would ever take the strict 25% X 4 approach, but probably more like a compromise between Browne and Swensen, for example. It would be sincere enough, though, that I'd learn about crazy things like the Perth Mint.
I would NOT expect such an approach to outperfrom a conventional retirement portfolio of stocks and bonds, but rather be a very defensive posture against a variety of market conditions, many of which I will never see. |
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stratton
Joined: 04 Mar 2007
Posts: 6233
Location: Puget Sound
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| Posted: Fri Jul 25, 2008 5:31 pm Post subject: |
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| Tramper Al wrote: | I become more interested in a PP approach as I get older. For some reason I find the broad diversification into such whacky assets as cash and physical gold to seem a better approach to wealth preservation vs. say 70% TIPS or something.
I don't think I would ever take the strict 25% X 4 approach, but probably more like a compromise between Browne and Swensen, for example. It would be sincere enough, though, that I'd learn about crazy things like the Perth Mint.
I would NOT expect such an approach to outperfrom a conventional retirement portfolio of stocks and bonds, but rather be a very defensive posture against a variety of market conditions, many of which I will never see. |
A lot of the same principals are embodied in Craig Israelsen's The Benefits of Low Correlation seven-asset portfolio:
US Large cap
US Small cap
Intl stock
REITs
Commodities
Total bond market
Cash
Essentially 4/7 of the portfolio is a close cousin to the Harry Browne portfolio.
Paul |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Fri Jul 25, 2008 10:29 pm Post subject: Re: Harry Browne's PP |
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| Wonk wrote: | 25% Stocks:
Broad-based index funds with low expense ratios that will track the market as a whole:
VTI
IWV
Perhaps an international fund that might provide a way to profit if the "decoupling" of the U.S. from the world economy becomes more of a reality:
EFA |
I think that fund or Vanguard FTSE all-world ex-US would be a good one as well for intl. exposure if you decide to buck Browne's advice and have some intl. stock. Ticker: VEU
Vanguard's new Total World Stock Index (VTWSX) is a very interesting option in the area of stock ownership. We'll have to let this index get some time under its belt to see how it does in the real world. It is appealing to just purchase one fund and get your entire stock exposure with no fuss and likely lower tax exposure.
| Quote: | | Questions--Does anyone like any other funds for this section? Any suggestions as to your favorite aggessive growth index fund? |
The problem with aggressive growth funds (aggressive is a slippery word in the investment world) is they usually are actively managed. So while they try to outperform the market, they can also dramatically underperform. By owning the market you are ensured you get market returns.
| Quote: | 25% Cash:
Harry really liked MM funds as opposed to savings accounts. Not only for the higher return, but also the safety factor. Craigr mentioned a short term bond fund would bump the CAGR up with a nominal increase in volitility.
So the options might be a blend of both.
Short term bond fund: SHY
Money Market Fund: VMPXX |
There is also the relatively new iShares Short Treasury Bond Fund (Ticker: SHV):
http://www.ishares.com/product....ew/SHV.htm
It holds 100% Treasury Bills with an average maturity of 0.3 years. Expense ratio is a low 0.15%. This would qualify for the "cash" portion of the portfolio in the more strict sense if you didn't want to use Treasury Short Term Bonds with a longer average maturity 1-3 years or so. The iShares fund is much cheaper than other 100% T-Bill funds I've seen around.
I'm less impressed with the Vanguard Treasury funds. As another poster mentioned, they aren't 100% Treasuries. They can have up to 20% in other govt. agency assets such as mortgage agencies (not backed by Full Faith and credit of the US Govt. despite the implicit backing people think they have). They can also engage in repurchase agreements (counterparty risk involved).
iShares has a better product in their bond funds if you only want to hold Treasury bonds in your portfolio. Vanguard's offerings really are not Treasury bond funds despite the name, IMO. They hold up to 20% in non-Treasury assets at the manager's discretion.
A 100% iShares Permanent Portfolio then could be built as follows:
25% Stocks
IWV
25% Cash/MMF
SHV
25% LT Bonds
TLT
25% Gold
IAU
Of course, gold should be held directly if possible and the ETF should be used only if you have no other options. LT bonds can be purchased direct from the Treasury or through a broker and you can skip the paying the annual expense ratio if you are able. Intl. is optional and not part of the PP allocation strategy but there are several good choices to use. ST Treasury bonds combined with cash allocation is an option I favor, but that's not part of the PP strategy either.
Check the totals once per year or so. If your LT bonds are 20 years or less, sell them and buy the longest ones available at the time. If anything is below 15% you purchase more of it until it is 25%. If anything is above 35% then you sell it down to 25% and use the proceeds to buy the lagging assets. Come back a year later and repeat if your rebalancing bands require it. Otherwise, let it ride. |
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Wonk
Joined: 11 Jul 2008
Posts: 204
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| Posted: Sat Jul 26, 2008 12:13 pm Post subject: HB's PP |
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| Quote: | I become more interested in a PP approach as I get older. For some reason I find the broad diversification into such whacky assets as cash and physical gold to seem a better approach to wealth preservation vs. say 70% TIPS or something.
I don't think I would ever take the strict 25% X 4 approach, but probably more like a compromise between Browne and Swensen, for example. It would be sincere enough, though, that I'd learn about crazy things like the Perth Mint.
I would NOT expect such an approach to outperfrom a conventional retirement portfolio of stocks and bonds, but rather be a very defensive posture against a variety of market conditions, many of which I will never see. |
It's ironic, because I get more interested in the PP approach the more I learn about investing in general. I'm in my early 30's, so most advisors would not recommend a portfolio like this because the projected return of about 9.5-10% would underperform a more traditional asset allocation mix that is weighted more heavily to the US stock market (perhaps 12% using historical averages).
That being said, there's a very real chance the US could experience a Japan-style deflationary event over the next 10 years--in which case traditional asset allocations would drastically underperform. Or the US could experience a 70s style hyper inflationary event, in which case the same problems would apply(underperform).
Additionally, I own my own company, and there is never security in the marketplace. If my investments are down 30-40% in a bear market and business dries up at the same time, I may need to tap those investments to go in a different direction in business or life in general. But now I'm tapping investments while they are at their trough. That's not smart.
So what I like about the PP is the relative security that I'll be receiving average returns with minimal risk in any market environment. It gives me total flexibility to move quickly when necessary. I'll give up another 2% returns for the peace of mind. Call it an expense of the fund... |
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Wonk
Joined: 11 Jul 2008
Posts: 204
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| Posted: Sat Jul 26, 2008 12:46 pm Post subject: HB's PP |
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| Quote: | I think that fund or Vanguard FTSE all-world ex-US would be a good one as well for intl. exposure if you decide to buck Browne's advice and have some intl. stock. Ticker: VEU
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I might not have gotten to one of the radio shows if he discusses staying away from int'l stocks. Craigr, if he specifically mentions that, do you have an idea of which show it was?
Although I'm not as weathered as he was in investments, it seems to me there's a lot of upside to diversifying into Int'l markets. I would think in a broad-based index fund covering many int'l economies, you would have a sufficient buffer to downside risk with signifcant exposure to upside potential. Still, I'm curious if he addressed this topic head-on.
| Quote: | The problem with aggressive growth funds (aggressive is a slippery word in the investment world) is they usually are actively managed. So while they try to outperform the market, they can also dramatically underperform. By owning the market you are ensured you get market returns.
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I just mentioned aggressive growth funds as that was what Browne recommended in Fail Safe. Is there any evidence of a particular sector performing best in times of prosperity vs. the overall market? For instance, if S&P returns 10% avg and perhaps 15% in times of prosperity, would there be any advantage in placing a majority of the stock exposure in a small-cap index fund to capture a premium gain?
Without figures, it's hard to say, but I would imagine in times of prosperity, small cap indexes will out-perform overall market indexes. However, in times of recession, the inverse would be true. If that is the case, it would make more sense to go with the volatile small caps for that section of the portfolio, no? I know part of the PP is simplicity such as the S&P index, however if you could find a small cap index you like, it might be worth the added returns.
| Quote: | It holds 100% Treasury Bills with an average maturity of 0.3 years. Expense ratio is a low 0.15%. This would qualify for the "cash" portion of the portfolio in the more strict sense if you didn't want to use Treasury Short Term Bonds with a longer average maturity 1-3 years or so. The iShares fund is much cheaper than other 100% T-Bill funds I've seen around.
I'm less impressed with the Vanguard Treasury funds. As another poster mentioned, they aren't 100% Treasuries. They can have up to 20% in other govt. agency assets such as mortgage agencies (not backed by Full Faith and credit of the US Govt. despite the implicit backing people think they have). They can also engage in repurchase agreements (counterparty risk involved).
iShares has a better product in their bond funds if you only want to hold Treasury bonds in your portfolio. Vanguard's offerings really are not Treasury bond funds despite the name, IMO. They hold up to 20% in non-Treasury assets at the manager's discretion.
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Thanks, these are very important points to make--especially given the circumstances under which a PP would hold cash. I think it's important to expunge as much risk from the cash portion as possible.
Additionally, I did some quick figuring on [SHY] and there's been some extra volatility recently. There's been a move up of 5% within 7 months in the last year and a move down of 3% in 3 months within the last year. That's quite a variance given the 3.54% yield and 0.2% expense ratio.
Over time, I'm sure it all evens out, but [SHV] is looking like a more suitable alternative for a strict cash portion of the portfolio. |
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Wonk
Joined: 11 Jul 2008
Posts: 204
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| Posted: Sat Jul 26, 2008 2:08 pm Post subject: HB's PP |
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I'd like to add a few more notes to the last few posts:
I've been reading everything possible about historic returns of every major, non-correlated asset class and as I do, I become more and more convinced of the value of the PP.
For those on the fence, I asked myself this question (and perhaps you should too): In order to receive a 12% return on my money, am I willing to experience a great depression-type event with my life savings fully invested and wait for the recovery?
The answer for me was no. Chances are I'd need that money in a time of crisis anyway. I'd much rather receive a steady 10% no matter what happens. In fact, much of the charts and information out there reflect a certain time period in the US economy: 1933-1999, the most impressive end dates in US equity history.
If you look further beyond--say, 100, 200+ years earlier, you'll see numerous world events that dictated the price of everything from stocks to gold and their massive fluctuations.
Just because the U.S.--in our lifetime--has performed quite well doesn't mean it will continue that way. That being said, I took a look at many of the other funds IShares offers and I'm curious if anyone else likes the int'l growth index (EFG) for foreign exposure. It's broad-based so you're truly global and well diversified. In addition, int'l growth stocks have vastly outperformed US growth stocks in the most recent mini-prosperous time period.
Speaking of equities, it looks like in a PP, growth is preferable to value indexing. It's interesting that over the long term, value indexing produces a higher yield with lower volatility than does growth indexing. However, it looks as though growth will outperform value during periods of prosperity, which is where we'll see the big returns in the stock portion of the PP.
Anyone care to discuss? |
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TimDex
Joined: 19 Feb 2007
Posts: 757
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| Posted: Sat Jul 26, 2008 3:22 pm Post subject: x |
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Wonk: I just stepped into this conversation, but could not help but notice you you would be very satisfied with a safe 10% return.
So would we all.
There is no such animal.
Tim
_________________
"All man's miseries derive from not being able to sit quietly in a room alone. " -- Pascal |
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makalu
Joined: 05 Feb 2008
Posts: 44
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| Posted: Sat Jul 26, 2008 4:12 pm Post subject: Re: HB's PP |
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| Wonk wrote: | | For those on the fence, I asked myself this question (and perhaps you should too): In order to receive a 12% return on my money, am I willing to experience a great depression-type event with my life savings fully invested and wait for the recovery? |
After having followed this thread for a while, and having observed the results of my own "tinkering" (and counting the time robbed from my business to tinker!) I'm pretty much decided to switch into the PP at 90% of my portfolio, with 10% dedicated to the variable portfolio, and then get back to work.
Here's what my allocation is going to look like:
STOCKS (23%)
- 18% VT (Vanguard's new global ETF)
- 5% FCHI (I'm a believer in the future of China)
BONDS (22%)
- 10% TLT (US LT treasuries)
- 12% BWX (Intl. LT treasuries)
GOLD (23%)
- 23% GLD (A gold ETF)
CASH (22%)
- 8% SHV (iShares ST)
- 14% CYB (Chinese Yuan)
VARIABLE (10%)
- 5% AAPL (Apple)
- 5% RJI (Rogers Commodities Index)
NOTES
- I'm from the US, but live in Europe, and want to hedge the USD
- Based on books from Jim Rogers and talks from Burton Malkiel, I'm sold on the long-term future of China (hence my equities & currency weighting there)
- I believe in the future of Apple Computer (though I will be selling down from my current 14% position)
- Based on books from Jim Rogers, I believe in the long term bull market for commodities
As I'm going to be selling quite a bit of my love, Apple Computer, I would recommend that you all invest heavily, as, due to my selling, it is bound to now shoot through the roof.  |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Sat Jul 26, 2008 7:27 pm Post subject: Re: HB's PP |
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| Wonk wrote: | | I might not have gotten to one of the radio shows if he discusses staying away from int'l stocks. Craigr, if he specifically mentions that, do you have an idea of which show it was? |
He never mentioned it directly in his shows if I recall. He mentioned it in some of his earlier books published in the late 80's. It's probably the only point with him I disagree on. I'd hate to have 100% of my stock in one country only to find out that country is Japan in 1990 and still hasn't recovered almost 20 years later.
The additional risk you take with intl. investing is currency exposure which could clash with other parts of the portfolio. However I personally feel not having any intl. developed market exposure is a mistake as the US becomes a smaller share of the world economy. Then again, Domestic US and Intl. developed markets largely have the same returns over the past several decades so it may not matter as much as we may think.
| Quote: | | I just mentioned aggressive growth funds as that was what Browne recommended in Fail Safe. Is there any evidence of a particular sector performing best in times of prosperity vs. the overall market? |
His recommendation changed to finally just use the S&P 500 index. I feel that the idea of using an actively managed fund is inconsistent with the principle idea of the Permanent Portfolio which is that the world is uncertain and anytime you are trying to beat the markets you are speculating and not investing.
In the end, I was happy to see he was advocating indexing. But keep in mind that when this idea was first flushed out (about 30 years ago) index funds were not commonly available. Even Vanguard's S&P 500 Index was not as well known and not easily purchased by many people with retirement plans, etc. So they had to work with funds that were available and that largely was actively managed funds.
Back to your question though, even small caps can lag the general markets for long stretches of time. From 1980-1999 the TSM fund had a CAGR of 17.1% vs. small cap value which was CAGR of 15.20%. That's almost 20 years of significant underperformance for a fund sector that is supposed to historically beat the Total Stock Market.
I'm not looking to get into the small cap vs. TSM debate. I am just pointing out that aggressive funds may not show outperformance for very long periods of time. The diversification benefits of the PP is not in holding a bunch of different stock asset classes. The diversification comes from holding core asset classes that fundamentally move much different under varying economic conditions.
| Quote: | | Additionally, I did some quick figuring on [SHY] and there's been some extra volatility recently. There's been a move up of 5% within 7 months in the last year and a move down of 3% in 3 months within the last year. That's quite a variance given the 3.54% yield and 0.2% expense ratio. |
My situation is such that I have split between MMF and ST bonds for "cash" (weighted towards ST bonds). I have enough of a buffer that, for me, the additional duration of the ST bond fund is not really a big concern as far as a little extra volatility. Each person will have to weigh their own decisions on this.
| Quote: | | Over time, I'm sure it all evens out, but [SHV] is looking like a more suitable alternative for a strict cash portion of the portfolio. |
I think this new offering from iShares is a good alternative for those wishing to strictly follow the Permanent Portfolio plan by having cash in very short term treasury notes for a low cost. My only concern with the iShares are the lack of a long track record for some of them, but I think their performance and costs so far are showing that they are a formidable competitor to other indexing products out there. |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Sat Jul 26, 2008 7:40 pm Post subject: Re: HB's PP |
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| makalu wrote: | Here's what my allocation is going to look like:
STOCKS (23%)
- 18% VT (Vanguard's new global ETF)
- 5% FCHI (I'm a believer in the future of China) |
Comments on China below. You may want China as part of the Variable Portfolio.
| Quote: | BONDS (22%)
- 10% TLT (US LT treasuries)
- 12% BWX (Intl. LT treasuries) |
If you live in Europe primarily you may want to consider holding bonds from the EU only if that is the main economy you are exposed to.
| Quote: | GOLD (23%)
- 23% GLD (A gold ETF) |
Physical is better, but if you have no other choice then the ETF is OK.
| Quote: | CASH (22%)
- 8% SHV (iShares ST)
- 14% CYB (Chinese Yuan) |
You're opening yourself up to currency risk of a country where you don't live. Same, perhaps, with your US treasuries exposure.
| Quote: | | - Based on books from Jim Rogers and talks from Burton Malkiel, I'm sold on the long-term future of China (hence my equities & currency weighting there) |
China appears to be flourishing for sure. But keep in mind that they have a lot of growing pains and they are still a very controlled government and economy. It is possible, therefore, that many of the great numbers you are hearing about their economy are, well, not entirely accurate. Then there is always the chance that they may just decide to re-nationalize all the industries one day.
Since you like Harry Browne's advice, here's something he said about the Soviet Union back in the 1970's:
http://www.marketwatch.com/New....eid=google
| Quote: | I was naturally drawn to his economic analysis. But I felt obliged to ask him my standard question for free-market types: if markets were so necessary, why was the Soviet Union showing such extraordinary growth rates?
I knew about these growth rates so because my college economics text book had reported them. The author, MIT's Paul Samuelson denounced as a "vulgar error" the idea that command economies could not be successful. (Samuelson was later awarded the economics Nobel Prize, presumably not for this).
Browne's response was unhesitating. "I don't believe it," he said.
I was taken aback by this apparent dogmatism. But years later, when the Soviet Union, collapsed, it turned out that its economic output had indeed been systematically over-estimated by Western "experts" - that it was really, as someone said, "Upper Volta with nuclear weapons." |
I'm not knocking China's apparent growth because it's obvious that it's happening. I'd just be inclined to keep my bets on China in the variable portfolio allocation. |
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james22
Joined: 21 Aug 2007
Posts: 526
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| Posted: Sun Jul 27, 2008 1:27 am Post subject: |
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My signature backtests pretty well...
_________________
Please assume my post refers to my Bogle-approved 15% Tactical Asset Allocation or 5% Funny Money. |
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brswif00
Joined: 17 May 2008
Posts: 175
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| Posted: Sun Jul 27, 2008 1:28 pm Post subject: backtesting is great |
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| how does it do going forward? |
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arjking
Joined: 03 Sep 2007
Posts: 56
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| Posted: Sun Jul 27, 2008 10:03 pm Post subject: EDV ETF for Bond Portion of Permanent Portfolio |
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| This thread has caught my interest and I've been doing some homework. The only distasteful part of implementing the Permanent Portfolio concept is the expense of trading Treasuries on the secondary bond market. That is, if I want to keep the bonds in my IRA, and I do. craigr recommended TLT as an ETF alternative to 30-year Treasuries but the duration (13.68 years) was not high enough to provide the volatility necessary for the Permanent Portfolio. I estimate the duration on a current 30-year Treasury at about 17. Then I stumbled upon EDV, a zero-coupon treasury ETF by Vanguard. With an expense ratio of only 0.14 and and an average duration of 24.4 years. I figure that with the right weighting TLT and EDV you could replicate the volatility of a 30-year treasury bond without the expense and confusion of trading bonds on the secondary market. I'm interested to know what HB fans think of this approach. |
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stratton
Joined: 04 Mar 2007
Posts: 6233
Location: Puget Sound
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james22
Joined: 21 Aug 2007
Posts: 526
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| Posted: Mon Jul 28, 2008 12:40 am Post subject: Re: backtesting is great |
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| brswif00 wrote: | | how does it do going forward? |
I expect it to do pretty well.
_________________
Please assume my post refers to my Bogle-approved 15% Tactical Asset Allocation or 5% Funny Money. |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Mon Jul 28, 2008 12:45 am Post subject: Re: EDV ETF for Bond Portion of Permanent Portfolio |
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| arjking wrote: | | I figure that with the right weighting TLT and EDV you could replicate the volatility of a 30-year treasury bond without the expense and confusion of trading bonds on the secondary market. I'm interested to know what HB fans think of this approach. |
I don't have a good answer for you. Most brokerages can handle bond purchases on the secondary market for reasonable costs. They only need to be traded every 10 years or so if you buy 30 year bonds so the expenses are negligible.
Zero coupon bonds were discussed by Browne in some of his other writings mentioned by cdgoldin on page two of this thread:
| Quote: | He points out that "zeros provide extra power during periods of falling interest rates, but they provide no extra leverage when yields are steady! At such times, a zero will increase in price at a rate roughly equivalent to the interest you would have earned on Treasury bonds. So the smaller investment in Zeros will lag behind the return you would have obtained with a full budget for conventional T-bonds."
He further states, "As we've seen, there's no way to know how much volatility zeros will add to a bond investment. When interest rates fell in 1985, the gains in zeros were roughly twice those of conventional bonds of similar maturities. But the next time interest rates drop, zeros may show more -- or less -- leverage."
Another distinct disadvantage to zeros is that the imputed coupon interest is taxable each year, even though it is not received. Thus, zeros are more appropriate as an IRA investment, where the income tax is deferred -- but then you lose the advantage of capital gains treatment of profits. |
cdgoldin's answer was the clearest explanation I have seen yet why zeroes were not used in the portfolio. |
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arjking
Joined: 03 Sep 2007
Posts: 56
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| Posted: Mon Jul 28, 2008 6:59 am Post subject: |
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| I'm very much in the accumulation phase of investing. Using bonds would involve me adding to my position annually, in very small lots. Eventually I would be selling bonds every year. Perhaps I could buy the 30-year bond for my initial purchase and then use the ETFs for rebalancing? Sounds like I would still need an account at Zions Direct, and I'm not sure its worth the $35 annual IRA fee just to buy a few thousand dollars worth of bonds. Then there is the question of what to do with the coupons. I called Scottrade and they estimate I would pay 50-75 basis points in markup for Treasuries. Even Zion has a subnote on their site that says they have the right to markup. Does anybody have any idea what the true cost of selling bonds in small lots is? |
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Tramper Al
Joined: 18 Oct 2007
Posts: 2374
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| Posted: Mon Jul 28, 2008 8:48 am Post subject: |
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| arjking wrote: | | I'm very much in the accumulation phase of investing. Using bonds would involve me adding to my position annually, in very small lots. Eventually I would be selling bonds every year. Perhaps I could buy the 30-year bond for my initial purchase and then use the ETFs for rebalancing? Sounds like I would still need an account at Zions Direct, and I'm not sure its worth the $35 annual IRA fee just to buy a few thousand dollars worth of bonds. Then there is the question of what to do with the coupons. I called Scottrade and they estimate I would pay 50-75 basis points in markup for Treasuries. Even Zion has a subnote on their site that says they have the right to markup. Does anybody have any idea what the true cost of selling bonds in small lots is? |
Maybe I am missing something, but why can't you just keep buying Treasurys (however long you wish) at auction? If the auctions are not often enough for you, you could use a Vanguard or Spartan Treasury Fund in the interim. You may be setting aside money in very small lots, but that hardly means you have to make a bond purchase each time. You can buy at auction with as little as $1K, yes? You could hold on to some position in one of these funds to facilitate rebalance out of bonds if you wish, but I have found it pretty easy to sell Treasurys at Fidelity, for example. You can see the spread and place a limit order an all that. |
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makalu
Joined: 05 Feb 2008
Posts: 44
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| Posted: Mon Jul 28, 2008 8:53 am Post subject: |
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| arjking wrote: | | I'm very much in the accumulation phase of investing. Using bonds would involve me adding to my position annually, in very small lots. Eventually I would be selling bonds every year. Perhaps I could buy the 30-year bond for my initial purchase and then use the ETFs for rebalancing? Sounds like I would still need an account at Zions Direct, and I'm not sure its worth the $35 annual IRA fee just to buy a few thousand dollars worth of bonds. Then there is the question of what to do with the coupons. I called Scottrade and they estimate I would pay 50-75 basis points in markup for Treasuries. Even Zion has a subnote on their site that says they have the right to markup. Does anybody have any idea what the true cost of selling bonds in small lots is? |
Is it possible to buy what you want at https://www.treasurydirect.gov/ ? |
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Tramper Al
Joined: 18 Oct 2007
Posts: 2374
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| Posted: Mon Jul 28, 2008 9:00 am Post subject: |
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The poster is talking about hold Treasurys within an IRA, I believe. |
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makalu
Joined: 05 Feb 2008
Posts: 44
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| Posted: Mon Jul 28, 2008 9:29 am Post subject: Re: HB's PP |
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Thanks, Craig. Very interesting article. The more I read, the more I'm impressed with Harry Browne.
I'm just now starting, "Why the best laid investment plans fail..." I'm enjoying the additional depth he goes into regarding the PP, and a variety of other issues. (He even has some specific suggestions for people like me: US citizens living abroad and unsure what their future holds.) It's great that he seems to anticipate just the questions that people first coming across his ideas will have. |
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arjking
Joined: 03 Sep 2007
Posts: 56
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| Posted: Mon Jul 28, 2008 8:04 pm Post subject: Buying individual bonds vs ETF |
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| Tramper Al wrote: |
Maybe I am missing something, but why can't you just keep buying Treasurys (however long you wish) at auction? If the auctions are not often enough for you, you could use a Vanguard or Spartan Treasury Fund in the interim. You may be setting aside money in very small lots, but that hardly means you have to make a bond purchase each time. You can buy at auction with as little as $1K, yes? You could hold on to some position in one of these funds to facilitate rebalance out of bonds if you wish, but I have found it pretty easy to sell Treasurys at Fidelity, for example. You can see the spread and place a limit order an all that. |
I suppose I could buy bonds and auction at low expense but I would still have to sell them. However, Vanguard, Fidelity, and Zions Direct all state on their site that they can act as principal on any transaction and a markup may be included in the price. The ETF just seem simpler and cheaper. Not to mention, they're automatically laddered so the duration changes very little over time. I trade an ETF on Scottrade for $7 a trade, no annual fee for IRAs, instead of paying the $35 annual fee at Zions or $30 annual at Vanguard for a brokerage IRA account.
I've Googled bond trading incessantly for the past few days. What I found was this:
1. The markup is essentially invisible to the individual. While you know what you payed for your bond, you don't know what price you could have sold the same bond for. Therefore you don't know the true expense.
2. Buyers of small lots make out well at the expense of the sellers of small lots. In other words, the spread is large for small lots.
I just don't like the idea that the true expense is unknowable. |
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JTW
Joined: 06 Aug 2008
Posts: 1
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| Posted: Wed Aug 06, 2008 9:33 am Post subject: |
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With the fed funds rate at 2%, is there much upside potential versus downside risk with the addition of 30 year treasury bonds to the portfolio?
In "Fail-Safe..." he describes the price of 30 year treasury bonds doubling when the fed funds rate decreased from 6% to 2%, but now we're starting at 2% so the lending rate can only go so much lower.
He states that macroeconomic or other specific economic indicators should not alter the asset allocation of the portfolio, nor should one hesitate to immediately reallocate one's portfolio to the permanent portfolio, but I wonder if I would be foolish to buy long term T-bonds at this time. Do they have the potential to drive the portfolio in deflation worthy of the risk of price decline under the other, probably more likely scenarios?
Excuse any mistakes, just learning about bonds. |
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arjking
Joined: 03 Sep 2007
Posts: 56
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| Posted: Wed Aug 06, 2008 11:49 am Post subject: |
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| JTW wrote: | Do they have the potential to drive the portfolio in deflation worthy of the risk of price decline under the other, probably more likely scenarios?
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I had the same thoughts and this is why I would feel a little better buying the ETF TLT, which has slightly less duration (interest rate sensitivity) than a single 30-year treasury bond. I guess the idea is, no matter how low an investment goes it can always go lower, and no matter how high it goes it can always go higher. The philosophy is you'd want something in the portfolio incase of the small chance of deflation. Besides, 30-year tresuries are yielding about 4.7% according to the WSJ. They can definitely go lower. Also, don't put too much faith in the idea that the Fed can really control interest rates, although they try. |
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DP
Joined: 17 Apr 2008
Posts: 481
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| Posted: Wed Aug 06, 2008 12:39 pm Post subject: |
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Hi,
The discussion re. Long Term bonds is interesting and I considered this myself. I lean more towards the Six Ways from Sunday allocation, that I think I mentioned earlier in this thread but originally included an allocation to Long Term bonds due to Harry Browne's arguments. After consideration of the arguments that I have seen that long term bonds don't adequately compensate for the risk as much as medium term bonds vs the risks of deflation, vs the risk of a bond bear market, vs. the idea that bonds are generally used to reduce the risk of a portfolio, I turned to another argument to make the decision.
As long as the Fed has a bias towards inflation vs. deflation, and has the ability to cause inflation, then I consider the risk of inflation to be much more significant than deflation, so I switched my LT Treasury allocation to a Total Bond market fund. Still some protection against deflation but I think this may provide better risk adjusted returns.
From Wikipedia, some discussion of comments made by Helicopter Ben before he became Chairman of the Fed:
| Quote: | | In 2002, when the word "deflation" began appearing in the business news, Bernanke gave a speech about deflation.[13] In that speech, he mentioned that the government in a fiat money system owns the physical means of creating money. Control of the means of production for money implies that the government can always avoid deflation by simply issuing more money. (He referred to a statement made by Milton Friedman about using a "helicopter drop" of money into the economy to fight deflation.) Bernanke's critics have since referred to him as "Helicopter Ben" or to his "helicopter printing press". In a footnote to his speech, Bernanke noted that "people know that inflation erodes the real value of the government's debt and, therefore, that it is in the interest of the government to create some inflation."[13] |
Don |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Wed Aug 06, 2008 12:58 pm Post subject: |
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| JTW wrote: | | He states that macroeconomic or other specific economic indicators should not alter the asset allocation of the portfolio, nor should one hesitate to immediately reallocate one's portfolio to the permanent portfolio, but I wonder if I would be foolish to buy long term T-bonds at this time. Do they have the potential to drive the portfolio in deflation worthy of the risk of price decline under the other, probably more likely scenarios |
The answer is: Nobody knows.
Seriously. No matter how smart, articulate, educated, or reasoned a person is they simply cannot predict the markets.
The counter-argument right now is that the housing bubble is highly deflationary and we could end up in a deflation situation like Japan with LT bonds yielding about 1.5% for the next 10-20 years. I'm not saying that will happen, just that it could happen and nobody knows. The Japanese Central Bank is just as knowledgeable as us but they couldn't do anything about it. It's a psychological problem in the markets just as much as a monetary problem. It's not easily cured by printing money or twiddling interest rates.
At the same time, many have been predicting rising interest rates for at least the past five years if I think back on it. Yet, the rates keep going down or staying relatively flat. They may go up, but the markets are going to decide that issue ultimately. So far, people seem to think that LT bonds yielding about 4-5% are perfectly fine for them and they keep getting bought. I don't have a good explanation why, I just sit back and collect the interest in the interim.
So my feeling is that if one wanted to use the PP strategy (or any investment strategy) that you should just go ahead and do it and not worry about it.
Fundamentally, a well diversified portfolio is always going to have at least one asset class lagging behind the others at any time. That's how diversification works. If all your assets are doing great all the time then they can do really badly all at once as well.  |
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purduepete
Joined: 18 Mar 2008
Posts: 82
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| Posted: Sat Aug 16, 2008 3:35 pm Post subject: |
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I have been listening to Harry Browne's MP3 with interest. It is a little frustrating that the web site that has the archives is mostly inaccesible. Is there another mirrored site?
On the 4 distinct environments,
1. Prosperity
2. Recession
3. Inflation
4. Deflation
How likely has it been historically that you can be in 2 or more states at the same time? What does that mean to the PP and its investments? |
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Wonk
Joined: 11 Jul 2008
Posts: 204
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| Posted: Wed Sep 03, 2008 9:20 am Post subject: HB PP |
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| Quote: | On the 4 distinct environments,
1. Prosperity
2. Recession
3. Inflation
4. Deflation
How likely has it been historically that you can be in 2 or more states at the same time? What does that mean to the PP and its investments? |
I think there's always a period of flux and transition from one environment to another. The problem is, there's no way to know which ones you're in until you see them in the rear view mirror.
My personal belief is that with the Fed's recent policies, mid-term outlook is inflationary (which I think is actually the Fed's goal). However, short term credit markets have been contracting (deflationary) in response to all of the garbage outstanding credit.
I think inflation #'s are drastically understated and GDP #s are on point or perhaps overstated to cover the fact that we're in the midst of a violent contraction. Where we're at I have no idea, but if the above is correct--that would be recessionary.
So to recap, I think short term markets are under a correction & contraction (deflation), in the midst of recession (recession) and when credit markets get through the storm we'll be on our way to inflation. The response to inflation, of course, is tight money--but I think we're still maybe 5 years off from that.
So markets are always shifting but you have no way of knowing what's going on until after it's in hindsight. Hunches perhaps, but that's it. That's why I like the PP so much--takes the guesswork out. |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Thu Sep 18, 2008 5:50 pm Post subject: |
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Hello All,
I've made a mirror for the Harry Browne Investment Radio Show Archives:
http://www.crawlingroad.com/finance/harrybrowne/
I'll post an index to the shows as I have time and let everyone know when it is available. |
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Rose21
Joined: 27 Jul 2007
Posts: 469
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| Posted: Thu Sep 18, 2008 8:12 pm Post subject: |
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| Very cool, Craig. THANK YOU, and nicely done! |
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ljblgb
Joined: 09 Oct 2007
Posts: 13
Location: California
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| Posted: Fri Sep 19, 2008 5:56 pm Post subject: Gold ETF vs. bullion gold coins prices |
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Today spot gold price decreased but my ETF SPDR (GLD) share price increased, whereas yesterday spot gold price increased but GLD share price decreased.
I was surprised because I had expected both asset classes to increase or decrease together, which I imagine happens with gold bullion coins. Perhaps this is one of the reasons Harry Browne recommends only gold bullion coins for the gold portion of his Permanent Portfolio.
I invite your comments.
Lawrence |
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