Bogleheads

[simpleman]

Craigr,
I read that you have sold some LT bonds. In my PP, the LT bonds have increased but have not reached the 35% rebalancing threshold advocated by HB. Do you use the prescribed bands? Or do you rebalance at year end? Just curious...

[eurowizard]

I like the PP but I dont understand the individual bonds. I would prefer to use TLT or the VG Long term Treasury bond fund.

The problem I have with the individual bond ladder is that in order to keep it long term, I believe that I constantly have to buy and sell on the secondary market to keep my durations high.


For those of you using the PP how do you do this? Buy a 30 year bond at auction and hold it for 5 years, sell and buy a new 30 year bond? In order for the PP to work, it needs the volatility of the long duration. so holding to maturity is a no-go.

[Wonk]

[Tramper Al]

[DP]

Hi,

[Tramper Al]

[DP]

Hi,

[Wonk]

[Tramper Al]

[craigr]

[craigr]

[craigr]

[craigr]

[Getting Serious]

I have followed this post for some time. (Regretfully, I have also watched LT Bonds fly up without me owning any). Anyway, as a 29 year old investor looking to set up a Permanent Portfolio as well as a Variable Portfolio, what percentage of your total assets should be in the Permanent Portfolio? I assume this goes up as you i) get closer to retirement, and/or ii) have less need to take risk to achieve your desired retirement sum. But should it be roughly 50% or 80% or even 30% (I find it hard to believe it would be equal to 100-age bond equation).

Any thoughts would be appreciated!

[wilksdr]

Im 33 .. here's my current "permanent portfolio"


SLV 7.0% (held in bullion form)
GLD 15.0% (held in bullion form)
VEU 11.0%
VTI 19.0%
VNQ 7.0%
TLT 3.0% (held in Treasury direct at 4.5%)
G fund 24.0%
GDX 7.0%
FXI 3.0%
Cash 4.0%

[snowman9000]

[craigr]

[PedXing]

In a PP, you need enough volatility to drive the portfolio in a climate that favors the long-term bonds portion.

Percentage change in NAV or yield (as appropriate) according to calculations of google finance (Nov 13, 2008 - Dec 12, 2008):

VUSTX (Vanguard long-term treasury fund) 12.99%
TLT 16.72%
30 year treasury bond yields 29.30%
EDV (Vanguard zero-coupon ETF) 31.94%

Just an observation of the volatility of various options discussed in this thread over a very short-time frame. I'm open to a critique as to why this observation shouldn't make me think that while TLT may be an option if you have no other choices, it's really not a very good option compared to holding the 30 year bond itself if you want the bonds to carry the portfolio. Maybe the time frame is too short to draw any conclusions? I suppose the answer would be that over a time frame of years, approaching the duration of the TLT fund, that things will even out. If so, is the shorter-term volatility more useful for the portfolio (ie, rebalancing out of the bonds)? Of course, I recognize the futility of trying to identify a trend from a single data point. Just hoping someone will clarify my thinking.

[snowman9000]

Describe how you calculated the 30 year bond number. It seems too close to the zero coupon return.

[craigr]

Zero coupon bonds have problems for the Permanent Portfolio that were discussed earlier in this thread by "cdgoldin":

http://www.bogleheads.org/foru....p;start=50

TLT's duration is almost as good as owning the 30 year bonds directly (about 15-16 years). The reason to own the bonds directly are a) You aren't paying expenses on holding Treasury bonds and b) You eliminate one more layer of people between you and the asset.

If you can own the bonds directly then you should do so (this is easy to do with Treasury Direct or a brokerage account). If you can't do it for whatever reason then TLT is a good alternative. I'd stay away from zero coupon bonds for the portfolio. Regular nominal LT bonds work fine and provide enough volatility.
_________________
“The best-kept secret in the investment world is this: Almost nothing turns out as expected.” - Harry Browne

[PedXing]

Hmm. Maybe I'm just displaying my statistical ignorance to the world. I thought the calculation would simply be a percentage change:

(X-Y)/X
X = starting value
Y = ending value

For treasury yields, I used the chart on yahoo finance to pull the following numbers:
11/13/08 4.333
12/12/08 3.064

(4.333-3.064)/4.333 29.3% drop

For TLT, EDV, and VUSTX, I just used the percent change provided by google charts, but now trying to crunch the numbers according to the method above, I don't get the same percent change they do. For example:

TLT
11/13 93.32
12/12 112.37
The above numbers were taken from the graph on Google finance. Google finance tells me this is a 16.72% change, but they also state that this is a 15.99 point increase. My calculator tells me this is a 19.05 point increase which I guess I would calculate as a 20.4% change. Hmm, what am I missing? I can only assume I'm oversimplifying the calculation somehow.

Of course, as another issue, maybe trying to compare percentage increase in price to a percentage change in yield is a poor comparison.
My apologies if I'm hijacking the thread for a lesson in remedial finance...

[snowman9000]

Ok, I figured it was something like that. As you found, the interest rates are a very good proxy for the value of the zeroes.

You need to find the value of the 30 year (or slightly shorter) bonds on the two dates in order to the compute the price change. Add in any coupon payments for total return. Bonds are quoted based on a 100 par value, so you might find 104 and 115 for the two values you need (I'm making up the numbers). I'm not sure where to find them, but they are out there.

[brswif00]

It has been very interesting to see the PP perform as advertised this year. One thing I am curious about is whether HB's recommendation to avoid foreign holdings still applies if one plans to live all or part-time in Euroland?

HB was a very patriotic guy, did he assume his advice was for Americans who would always have their expenses in US dollars?

Or is the assumption that the gold allocation hedges dollar declines so well that foreign currency stock/bond holdings are not needed to protect purchasing power in foreign currencies?

Thanks!

[Wonk]

[eurowizard]

A few questions.

Suppose I wanted to run a PP as the main 80% and a variable portfolio as my other 20%. Harry Browne said its fine as long as you dont steal from the PP to fund losses in the variable.

What if I strongly believe that LT bonds will drop and in my variable portion, I decide to short them.

Would it make sense to hold LT Bonds in the 80% PP and then short them in the 20%? Or can I just remove LT Bonds from the PP holding? I doubt HB would like that very much. But I feel dumb going long $10k LT bonds and going short $10k in another portfolio. Perhaps I can sell short the LT Bonds I am holding in my PP in this way:

Sell the LT Bonds in my PP. "Buy" those LT bonds in my variable portfolio and then sell them. Sit on MMF cash with that money. Then if I am wrong and LT bonds gain, and I dont have enough cash to cover the repurchase, then I perform a margin call on myself, take the hit on my variable portfolio, and pump that money back into the PP part and rebuy the LT Bonds for more than I sold them at. I kind of like this idea.

Second question - what do you think HB would say about gold bullion selling at 15% over spot? I needed to rebalance into gold when it dropped to $700 but I didnt because I didnt want to pay $850 per ounce of gold when its at $700 spot. Now its back up to $850 and I havnt checked but that probably means the coins are selling at $1k+

Should I have bought GLD in my IRA brokerage and temporarily sat on it until coin demand dropped? Then sell the GLD on the same as I buy the coins? Or should I not have used the spot price of gold in the AA calculation and instead used the bullion coin prices, in which case what I have is worth more so I didnt really need to rebalance.

[craigr]

[craigr]

[eurowizard]

Craig,

What do you think of the following idea:

A lot of people recommend a stock-bond split of your age in bonds. So that you progressively get less aggressive as you age. The theory is that bonds are safe. My problem is that I dont think they are as safe as the PP.

So what if I set up my portfolio such that I set up my age% in the PP style and then set the rest in equities.

At 20 years old, one would be 5% gold 5% cash 5% LT bonds and 85% stocks.

At 40 years old. That would be 40% PP and 60% Equities. So I would be 70% equities 10% gold 10% LT Bonds and 10% cash. That seems reasonable for a 40 year old.

When you get to 60, it would be 15% cash 15% LT Bonds 15% Gold 55% Stocks. It seems a little equity-heavy at this point.

Perhaps another alternative might 2x your age in PP. With 2x your age you would be tilting towards equity until you were 50 years old and then be fully PP. It slowly goes away from equity, 1% per year so its not one big sudden change that might occur in a bear market.

It also provides more inflation protection than a age in bonds-equity split.

I think this coincides with HB because he says to use the PP in any money thats precious and you can have a smaller separate Variable Portfolio. In this case though, if the variable portfolio does bad, it will drag on the rest. Perhaps its OK to do this, provided that the PP and Equity tilt portions are completely isolated or set up with a one-way valve such that any gains from equity tilt get pumped back into the main PP 4 way split, but any losses can only be recouped by new money.

[dumbmoney]

euro,

I don't think there is much left of the PP concept if you do it that way.

How about this: start out 50% equity / 25% LT bond / 25% gold, and gradually shift from equity to cash.

Just a thought.

Of course the totality of your financial situation must be considered. It doesn't make sense to hold either bonds or gold if you have a mortgage, for example.

[Wonk]

@ eurowizard,

In the portfolio adjustments you've mentioned, you'd effectively be setting up the following:

@ 20 y/o: 20% PP(5-5-5-5), 80% variable, all equities

@ 40 y/o: 40% PP (10-10-10-10), 60% variable, all equities

The PP would perform as expected, but you'd have very large swings in your variable. If you know for sure that equities will outperform over the time horizon you need, have at it.

Depending on the end dates chosen, equities have CAGR on avg 10-12% long term with high volatility. The PP over nearly the last 40 years has a CAGR of 9.6-10% with low volatility. If you want to take on the added volatility for the chance of another 1-2% over the very long term, it might be reasonable.

Just remember that your PP is your nest egg. Your VP is for speculating. Treat them as two separate portfolios.

[eurowizard]

Did Harry Browne ever discuss a modification of the PP for advanced investors? I have a strong feeling he had thoughts of something a little more convoluted than 25x4 split.

1) He constantly said in his radio show that the PP was great for people who didnt want to constantly worry or look at their money. He also said you shouldnt rebalance more than once per year or when things got out of a 10% band. It seems to be designed for the casual investor.

2) He created the PP mutual fund which uses a PP similar to but not identical to the 25x4 split. The PP fund has swiss francs and silver and less cash then 25%.

There must be some way to juice returns a little bit by modifying it slightly, but then again its only down 5% YTD and is beating everything else by far.

I think one good aspect to the PP is that even if everyone sees its great results this year and decides to jump on the PP bandwagon next year, since its a 4 way split it wont cause any special bubbles. Unlike the tech bubble or oil bubble or RE bubble, even if one of these 4 bubbles and pops the others will save you.

[snowman9000]

EW,

Get his 1981 and 1987 books listed here:
http://en.wikipedia.org/wiki/Harry_Browne

They are usually cheap as used books on Amazon.com.

[brswif00]

[brswif00]

[brswif00]

I think someone earlier said it makes no sense to own gold or cash (maybe a misquote, I can't find it in the thread) if you have a mortgage. Does everyone (anyone?) agree with this?

More broadly, do you think the PP should be adjusted to take into account other obligations/holdings people may have that can't be made to fit exactly into the PP, like mortgages, employer stock, and defined benefit pensions?

Or should one ignore all that stuff and use PP on the investable portfolio?

[craigr]

[craigr]

[eurowizard]

Craig,

With the high disconnect between physical gold and COMEX price measured by GLD do you think that we should be using the bullion price or the spot price as part of the allocation calculation? With the bullion spread being 10 to 15% that might be enough to push rebalancing by selling out of it.

Has this high disconnect ever been seen in the past? I dont understand why its possible. I would think the COMEX price would equalize with the bullion price within a few percent. Maybe thats why gold went back up from 700 to 850 an ounce over a few weeks - because the real demand was there with people paying 850 per ounce even though spot was around 700?

For tax reasons, would it make the most sense to keep maybe 1/4 or 1/5 of your gold in the GLD ETF within an IRA so that you could rebalance out of it with no tax consequence and then rebalance into it by buying coins?

[grumel]

[craigr]

[Met Income]

I'm 25 with about 55% of my portfolio is stocks (through Vanguard) and 45% in cash. I think my 2009 IRA contribution should be in GLD. What's the cheapest way to buy it?

[Rose21]

MetIncome, you might take a look at the Central Fund (CEF), a closed-end fund consisting of allocated shares of gold and silver bullion (about 50/50) stored in a Canadian bank vault. It's all-gold counterpart is GTU. CEF and GTU are reputed to have much more rigorous accounting and custodial controls than GLD and SLV and, unlike the latter, do not appear to be used by the institutional shorts in their various shenanigans. The only problem with CEF and GTU is that they probably fall within the definition of a passive foreign investment company (PFIC) and therefore need to be bought within a non-taxable account unless you want the headache of dealing with the rules governing PFICs. Also, GTU is very thinly traded.

[Pres]

Linda (room42) has come up with her own Permanent Portfolio inspired asset allocation.

Food for thought!

You can read about it here

[oneleaf]

[snowman9000]

Jeez, at what price would a person be insane to buy T-Bonds? I know, we thought they were high at 5%, then at 4%, etc. I bought at 4-ish, IIRC, and have made a good chunk of paper profits on them. But I did not fill my quota. Now I just can't do it at these prices. I'm sticking with the thought that half a loaf is better than none. I just cannot do it. Maybe if I was starting from scratch with a lump sum into the 4x25. (In reality, isn't that still the case? I guess I'm kidding myself there.)

[Wonk]

[Wonk]

[eurowizard]

[Elmer Fudd]

How would I handle possession of gold coins from an IRA? I have no cash outside my IRA.

[eurowizard]