Bogleheads

Lbill · Joined: 13 Mar 2008 Posts: 2078

macclary wrote:

Maestro G · Joined: 03 Aug 2007 Posts: 27 Location: San Francisco

Hi Macclary,

Thanks much for providing info on the ETF CPI. I find it very interesting that TIPS are not part of its allocation strategy at all! Curious!

On the other hand, the notion of basing an investment vehicle upon the idea of outperforming a spurious inflation number is a bit questionable at best.

Maestro G
_________________
Yesterday is history, tomorrow is a mystery, today is a gift, that's why it's called the present. Most daily market noise is "a tale told buy an idiot, full of sound and fury, signifying nothing."

Lbill · Joined: 13 Mar 2008 Posts: 2078

Maybe someone can explain to me why I would want to purchase the CPI ETF with an expense ratio of 0.75% when I can buy TIPS at auction for free and the TIPS index has done better than CPI. Caveat Emptor.

Year..1..3..5
IQ CPI Inflation Hedged Index
-- 0.77 4.04 4.91
Barclays Capital TIPS Index
-- 5.67 5.62 4.79
_________________
"Whenever you find yourself on the side of the majority, it is time to pause and reflect." ~ Mark Twain
"A foole and his money is soone parted." - J. Bridges, 1587

MediumTex · Joined: 01 Mar 2009 Posts: 447

I love viewing history without the overlaid narrative that the historians provide us with.

HB liked to do a form of this by reviewing investment newsletters and comparing their predictions with what actually happened (you can imagine how such comparisons made the fortune tellers look).

I ran across a blog that posts Wall Street Journal stories from 1929 and 1930. It's quite interesting. Here is the link.

Here are a few good ones from October 27, 1930:

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

Lbill · Joined: 13 Mar 2008 Posts: 2078

jsylvert · Joined: 28 Jun 2009 Posts: 1

I left a post (below) on Craigr blog earlier today.....any answers to these questions will be appreciated.

"I don’t know about everyone else on this blog but I’m worried about a potential dollar collapse. Does the Permanent Portfolio really protect us from such a catastrophic event when 50% of the assets are in government securities?

Also, I’m about fed up with this Federal Government (Ron Paul we NEED you) and I don’t trust them one bit. I stopped contributing to my Roth IRA and 401K since government can actually SEIZE these assets since they were granted through the tax code ala Argentina. Am I over reacting? The Permanent Portfolio is tax efficient anyway so there’s no need for retirement accounts I believe.

Lastly, as I said before I have a strong distrust for our Government. We were promised “change” but as I predicted its the same nonsense no matter who’s elected. I feel like a hypocrite having 50% of my assets (bonds & cash) in government securities……can’t I leave my cash portion in a solvent bank and my bond section in a AAA Blue Chip company like Microsoft? If so, would that dramatically alter the Portfolio in a negative way? I want to starve the beast…….but the Permanent Portfolio actually helps further their cause…….what a conundrum."

RedZombie · Joined: 29 Oct 2009 Posts: 1

I understand the permanent portfolio calls for 25% in US stocks.

I read some earlier discussion about this, but I'm still confused.

If I weren't using the PP allocation, I'd want to have a significant portion of my stock investment in foreign stocks. If I did this and rebalanced regularly to whatever my mix is, let's just say 50-50, that would seem to offer better diversification and improved performance.

Is there some reason why this would hurt the permanent portfolio's built-in safeguards? I'm thinking of taking the 25% stock component and dividing it either 12.5% - 12.5% US/foreign or 15% US, 10% foreign.

But I'm hoping those of you who have studied and analyzed this a lot more than I have can tell me if this is a good or bad idea, and why.

If there is already a post that answers my question, just a link to it would be much appreciated. Thanks!

SquawkIdent · Joined: 23 Dec 2008 Posts: 89

I'm the poster that had said I had many questions for Michael Cuggino regarding PRPFX. I sent him a letter with my questions/concerns and recently spoke with him on the phone. He asked me not to discuss what was said during that conversation (not even paraphrase) and I agreed. The only thing I will say is that I am very comfortable with my taxable investment in PRPFX and I will add to it as funds become available. In retirement I will withdraw 4-5% of the account value per year to supplement my other retirement income sources. Very Happy

craigr · Joined: 13 Mar 2007 Posts: 1973

craigr · Joined: 13 Mar 2007 Posts: 1973

Lbill · Joined: 13 Mar 2008 Posts: 2078

craigr · Joined: 13 Mar 2007 Posts: 1973

Maestro G · Joined: 03 Aug 2007 Posts: 27 Location: San Francisco

Craig,

I share LBill's argument. Furthermore, while it does seem (at least recently) that there is a strong positive correlation between European and US equities, emerging Asia (and Japan, for that matter) don't seem to follow lock,stock and barrel. In fact, often the opposite direction. It's hard for me to fathom that there won't be some continued de-coupling here going forward, unless of course we have another total global meltdown, and then all bets are off! Shocked

Maestro G
_________________
Yesterday is history, tomorrow is a mystery, today is a gift, that's why it's called the present. Most daily market noise is "a tale told buy an idiot, full of sound and fury, signifying nothing."

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

Thanks for the link about the PP in Iceland, that is fascinating.

craigr · Joined: 13 Mar 2007 Posts: 1973

double post
_________________
“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

stratton · Joined: 04 Mar 2007 Posts: 6233 Location: Puget Sound

MediumTex · Joined: 01 Mar 2009 Posts: 447

Part of the permanent portfolio concept is that it is permanent.

People who are doing a lot of hand wringing over the dollar right now should see that now may actually be a great time to buy the dollar (and dollar denominated assets). Note that this is what the rest of the world is doing as we speak.

Here are a few things to consider:

China is not about the de-link its currency from the dollar. This will form a solid floor under the dollar for a long time.

The reserve currency status of the dollar will also form a solid floor under the dollar for many years. U.S. military and diplomatic commitments will make abandoning the dollar as reserve currency much harder than the chicken littles in the media would have us believe.

As I have said many times before, if the dollar is losing what fiat currency is winning? What nation has a fiat currency that is so much better than the dollar right now? Answer: None of them. The whole world is in the midst of a simultaneous devaluation to match the devaluation in asset prices we are seeing around the world. This process will be great for gold, but over the next few years the dollar will likely hold up better than almost any other currency (especially since it is starting at a low point from here). If you want proof that currency strength and fiscal recklessness have little to do with one another in the largest economies just look at the yen.

Remember what happened last year when it looked like the world might really end: the whole world piled into the dollar because it was and is the safest fiat currency in the world. That's not my opinion, that's what happened when people got really spooked. I never would have predicted that is what would happen (I understand the theoretical weaknesses with the dollar), but it did.

The PP is built for all seasons. Right now we may be at a secular trough for the dollar or we may have farther down to go, but the PP will protect you in either case.

What the PP won't do, however, is protect you if you decide to load up on foreign equities because you are sure the dollar is dead and later discover that the dollar was actually about to rally and drive the value of all your foreign equity holdings down until you finally realize that you got out of the dollar denominated assets at the worst possible moment.

I've never seen a bottom in a market that wasn't accompanied by confident predictions that all was lost and the world was about to end. The world never seems to end, however, and such moments are normally the best times to buy rather than sell the asset in question.

There is certainly nothing wrong with deviating from the PP formula, but just be aware that the heavy foreign weighting in stocks may not turn out as planned and there may be a belated realization that HB cautioned against a heavy foreign equity weighting for this very reason.

Note that we are going through a particularly foul mood about and toward the U.S. right now, but I have found that these things are cyclical.

I was at an event tonight and spoke with a woman from Hong Kong and another woman from Kenya and they both marveled at how people in the U.S. can get so worked up about the supposed decline of the U.S. when on its worst day the U.S. economy is still light years ahead of virtually every other place in the world to do business.

Here are a few real things to pay attention to in the future that could be REAL markers of U.S. decline:

1. U.S. inflation over 15% on an annualized basis.
2. U.S. 30 year treasury rates over 15%.
3. Unemployment over 25%
4. Loss of at least 50% of currency value in 24 month period.
5. Loss of status as #1 manufacturing economy in the world.
6. Loss of status as largest economy in the world.
7. Loss of reserve currency status for the U.S. dollar.
8. Net population loss as a result of emigration to other nations.
9. When military spending is eclipsed by another nation or group of nations.
10. When the markets react to a future credit or other financial crisis by selling the dollar rather than buying the dollar.

The world is full of countries who would kill to have unemployment at ONLY 10% with a stable government, stable bond market and stable consumer prices.
_________________
"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

http://seekingalpha.com/articl....d-farmland

MediumTex · Joined: 01 Mar 2009 Posts: 447

MediumTex · Joined: 01 Mar 2009 Posts: 447

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

That is a good article, in fact Craigr linked to it further up the page. I cross pollinated it to Roger's blog, since they were talking about the PP and land. Then it came back to this thread again!

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

Medium Tex Wrote

Roy · Joined: 10 Sep 2008 Posts: 341

Lbill · Joined: 13 Mar 2008 Posts: 2078

Interesting article on gold. FWIW, I myself have been thinking it's over-cooked of late and looking for a sharp selloff that will scare out all the born-again gold bulls.
http://www.hardassetsinvestor.....arket.html

concerned752 · Joined: 10 Sep 2009 Posts: 6

MediumTex · Joined: 01 Mar 2009 Posts: 447

Harvey Manfredjinsinjen · Joined: 07 Jul 2009 Posts: 5

stratton · Joined: 04 Mar 2007 Posts: 6233 Location: Puget Sound

Roy · Joined: 10 Sep 2008 Posts: 341

Tgrds · Joined: 31 Oct 2009 Posts: 2

Roy · Joined: 10 Sep 2008 Posts: 341

Quasimodo · Joined: 03 May 2007 Posts: 613

I think it's a human tendency to resist the idea that we really don't know what's coming next, so we tend to have a strong opinion, like "gold is too expensive now. Let's wait for it to correct" or "The economy stinks. Stocks are going to tank soon. Better to buy long t bonds." For me, the hard part of this portfolio idea is to face the idea that my opinion about what's coming next is probably wrong. Lord knows I've had a lot of evidence to support that idea, but I still can't accept it.

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)

MediumTex · Joined: 01 Mar 2009 Posts: 447

Often, the asset class that you don't want to buy because it's too "expensive" is the one that actually does the best from the time you set up the PP.

Last year, it was LT treasuries. Everyone was convinced the 25 year run was over last summer. They were also convinced of the same thing THIS summer.

People have been waiting for gold to correct for almost 10 years. You can only wait so long before you realize that you are timing the markets, which is what the PP is supposed to keep you from doing.

If I had to make a recommendation to my grandmother, I would say build your PP in ten equal parts over a ten month period. This is easier on the nerves than just jumping in all at once, though jumping in all at once is VERY unlikely to lead to future regret. (In other words, I would rather see someone build a PP slowly than not build one at all.)

Trust me, though, EVERYONE has the same objection before setting up their own PP--they are convinced that one of the asset classes is a terrible place to put their money. Sometimes this is true, and sometimes it isn't--that's the point, you just don't know. With the four asset classes mated in the proper proportions, however, it doesn't matter if one of the asset classes is falling at any point time. The PACKAGE will normally be taking good care of you.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

Roy · Joined: 10 Sep 2008 Posts: 341

Tgrds · Joined: 31 Oct 2009 Posts: 2

MediumTex · Joined: 01 Mar 2009 Posts: 447

Roy · Joined: 10 Sep 2008 Posts: 341

MediumTex · Joined: 01 Mar 2009 Posts: 447

Wonk · Joined: 11 Jul 2008 Posts: 204

I'm feeling a bit lazy today so I'm not going to check back on all the pages, but I think there were a few people who were interested in strategies of rebalancing out of cash and when to do it--specifically during the accumulation and withdrawl phases of the investing lifecycle.

Here are some thoughts on rebalancing with the cash portion. Hopefully it will be useful to others and might stimulate some other points of view I've not considered.

For accumulators (my current status):

1. To limit taxable events during rebalancing, each week as I save it goes directly to the cash section and I let it accumulate.

2. Each month I'll check back on percentages. I treat 15% and 35% as my "trigger points" for rebalancing. If either of these two percentages is hit within an asset class, it will trigger an automatic portfolio rebalance.

3. For the rebalance itself, instead of selling off the winner, I'll take cash and deploy lump sum into the laggards to bring all volatile classes (gold, LTT, equities) back to 28% each--if possible. Cash would be drawn down to 16% in a perfect scenario. I would not sell any non-triggered classes to get to exactly 28%. I would leave them be.

4. While cash would be drawn down to 16%, it would soon rebuild as I deposit fresh savings on a weekly basis.

For de-accumulators (in retirement):

1. Start with the 4 x 25 and draw down the cash portion to live on until a 15/35 trigger point event is reached.

2. Rebalance at this trigger event and continue to live off the cash portion during retirement.

Some notes overall:

1. For accumulators, this will work perfectly until your portfolio reaches a large enough level where your savings aren't significant enough to offset the swings in value of the more volatile asset classes. Still, it should help.

2. For de-accumulators, I factor a 5% real return of the PP over time, so a 5% WD rate should be fine (unless the PP stops working).

3. These strategies are specifically for limiting rebalancing events that would likely trigger tax consequences--strictly unemotional and does not leave room for intra-PP speculation. I consider that to be the territory of the VP.

Roy · Joined: 10 Sep 2008 Posts: 341

Clive · Joined: 13 Jun 2009 Posts: 82

MediumTex · Joined: 01 Mar 2009 Posts: 447

Roy · Joined: 10 Sep 2008 Posts: 341

craigr · Joined: 13 Mar 2007 Posts: 1973

craigr · Joined: 13 Mar 2007 Posts: 1973

AndromedaAsc · Joined: 01 Oct 2009 Posts: 20

Ok there's one thing I don't get about PP.

Why does one need to hold cash/short-term bonds during for deflation? 25% in cash is really undesirable, and even assuming one replace cash with short-term bonds, that's 50% in bonds, which is far too conservative for a young (mid 20s investor). Can there be room for adjustment? Personally, I was thinking more of 25% Bonds, 50% Equity and 25% Gold + Commodities. Does that make sense in terms of the PP philosophy?

My designed allocation for a revised PP would be something like
25% for Inflation
12.5% Gold
12.5% Commodities (e.g. DBC)
25% for Bonds (Bear Market)
7.5% US Long-Term Bonds (20-30yrs)
7.5% US Short-Term Bonds (1-5yrs) - I suppose this can be the "cash" equivalent in my portfolio
10% Foreign Intermediate/Long-Term Bonds (5-10yrs)
50% for Equity (Bull Market)
15% US Stock
15% Europe-Pacific Stock
15% Emerging Stock
5% Global REIT (about 1:1:1 for US:EU:Asia)

Some comments:
1) I halved Gold allocation and gave it to a diversified commodities ETF. Maybe I'm being emotional but 25% in gold is a bit high... will diversifying it out to commodities serve the same overall function? As commodities are real asset won't they also help during periods of hyperinflation or periods of economic frenzy?.
2) You may have noted that US-based stock and bonds make up ~40% of my portfolio. That is intentional. For e.g. if an Iceland-scenario would to happen, only 40% of my wealth will be lost; here I'm assuming total economic collapse/bankruptcy of the nation not just a bad bear market. Of course, I'm also assuming EU and Asia will still survive in the process.
3) I don't use TIPS as I think they will not stand up well under hyperinflation or pseudo-hyperinflation conditions. I use gold and commodities for this.

Also, I'm having trouble understanding why is deflation bad for us? If during deflation my money gets more valuable, shouldn't I be happier? I mean we all have reasons to fear inflation and hyperinflation, but why should we protect ourselves from deflation?