Bogleheads

[eurowizard]

For those considering using the VG long term treasury fund instead of TLT - dont do it! It was said earlier in this thread that TLT holds longer duration bonds than the VG Long Term fund - and back when I first became interested in the PP I backtested and both VUSTX (the VG fund) and TLT were considerably similar so as to avoid the commision on smaller investments, I would use VUSTX.

Over the last couple months, TLT has DOUBLED the performance over VUSTX. VUSTX is up something around 20% whereas TLT is up around 35% over that same period.

Of course it means TLT will have more to fall when it does fall, but the purpose of the PP is high volatility in this corner to have more negative correlation with the equity side.

[Wonk]

TLT has avg weighted maturity of 24 yrs. I'd be curious to know what a portfolio of 30 yr bonds (exclusively) would have returned this year.

[eurowizard]

[craigr]

I wrote up a year-end summary of the Permanent Portfolio performance for 2008. Overall it was a gain of about 1-2% depending on what small allocation variations you had.

http://crawlingroad.com/blog/2....r-averted/

I also wrote up a piece on rebalancing and why you should think about doing it if your portfolio allocation is off:

http://crawlingroad.com/blog/2....rebalance/

Happy New Year! Let's hope 2009 is better than 2008 for investors.


EDIT: Updated figures with finalized end of year total returns from Morningstar.
_________________
“The best-kept secret in the investment world is this: Almost nothing turns out as expected.” - Harry Browne

[Snoopy]

Craig:

I have really enjoyed reading your new blog regarding all things Permanent Portfolio.

I adopted a close approximation of the PP in the Spring of '08, and am certainly glad to have done so. Last week I did some necessary rebalancing from bonds to stocks.

I consider the PP as representing the Tortoise in his famous race with the Hare; slow and steady wins the race!

(See avatar)

[Tramper Al]

[craigr]

[Snoopy]

Tramper Al:

Yes, no one knows for sure what AA will "win the race." I suppose that, for me, the historically smooth ride of the PP will (potentially) allow me to maintain my AA, whereas if I had a higher allocation to stocks I might be more tempted to time the market, thereby actually diminishing my returns in the long-run. Plus, I've decided that I just don't have the need to take as much risk with my portfolio as I once did.

[Tramper Al]

[craigr]

[Tramper Al]

[DP]

Hi,

[oneleaf]

Well, thanks to this thread, and thanks to craigr's generosity in sharing his ideas, I have slowly moved towards a permanent portfolio.

I have decided to build my bullion portfolio slowly, but hope to work my way to 10% of portfolio someday.

I am also holding off on LT treasuries, until they at least yield significantly more than TIPS. TIPS offering high real yields and cannot go below par... and with LT treasuries yielding so little, I am going to let things play out for a bit before rushing to build a LT treasury portion.

Also, with bullion, I actually made my first purchase recently... however, I did not buy gold yet, and instead opted for some silver and platinum. I decided to have a more diverse precious metal bullion portfolio, as I am a bit wary holding too much of my portfolio in a single metal. I also decided to hold off on gold, as I have made it a rule not to buy a new asset class until it has done poorly for at least a year or two (after getting burned on REIT's and EM). In the meantime, silver and platinum are at historically attractive price ratios relative to gold... not sure if that means much, but both metals have certainly come down hard in the past year.

[craigr]

[oneleaf]

[oneleaf]

[Getting Serious]

[foglifter]

[craigr]

HB earlier advocated trying to pick funds that held stocks that would be more volatile/aggressive than the stock market itself. Later he just advocated using the S&P 500.

The idea of funds trying to pick "aggressive" stocks is hard to do and beat the market consistently. IMO.

My take on this is the value/growth performance is too cyclical to rely upon. So you're better off just owning the entire stock market.

Just to make my point: From 1980-1999 Small Cap Value stocks returned 15.2% CAGR but Large Cap stocks returned 17% CAGR. So for nearly 20 years the supposed higher returns of small-cap stocks over large-cap stocks didn't exist. That's always been how this works. Sometimes small cap wins, sometimes large cap wins. It is just not predictable and a few stretches of good times for small-cap stocks have really gamed the returns data to prove "conclusively" that they always win. When, in fact, they don't over some pretty long stretches of time.

And before anyone starts thinking that you'd rather have 100% stock portfolio to get those great returns all I can say is "Good Luck!" That was a wild ride and one of the greatest bull markets in stocks in US history. Not only that, but there are periods on both sides of that date range (1970's and 2000's) when stock performance was horrible!
_________________
“The best-kept secret in the investment world is this: Almost nothing turns out as expected.” - Harry Browne

[milso]

Any advice on using the TSP G Fund as the cash portion of the PP? It seems to be a rare free lunch (better returns than T-Bills with the same risk).

Also, any wild guesses on the outperformance of buying 30-yr treasuries directly vs. using the ETF TLT (excluding transaction costs)? Maybe this is impossible to know.

[craigr]

[eurowizard]

[craigr]

[eurowizard]

Does VBS automatically market price the bonds I hold so that I know how much they are worth for purposes of rebalancing?



I am in the process of opening a treasury direct account right now - waiting for my signature guarantee paperwork to get to them and approve my account, but do they let me sell the bonds on the secondary market? For the purposes of the PP, dont I absolutely need to sell the 30 year bonds after 5 or 6 years to keep the duration long? This means that every year I have sell some bond and then buy a new bond to maintain the same 25% split.

Also I dont think treasury direct offers IRAs, do they? So then the added cost would be tax efficiency.

[Tramper Al]

[Getting Serious]

In trying to determine where I should keep the "cash" portion of the PP - i)Treasury MM, ii) Prime MM, iii) SHV, or iv) SHY (from least to most aggressive), something occurred to me.

My concern has been that at some point in the near future (6 months, 12 months, I don't know...), interest rates are probably going to go up. I'm fully aware that I cannot predict when, but it's not like they are going to go down too much. If I put my cash in SHY or -- to a lesser extent -- SHV, my returns will be hurt by those increases. But otherwise, I would be getting a better yield in SHY/SHV than in the MM accounts. (Also, I will have my Emergency cash in a MM fund regardless, so that is not an issue).

As it happens, I haven't set up the LT Bond portion of my PP fund yet, and have been hesitating to do so based on valuations. Yes, I understand that TLT could go even higher, but I just can't pull the trigger. I plan on putting LT Bonds in tax-deferred, so even though I don't want to buy them yet, I need to reserve the 2008 IRA space before I lose it in April. My question is: if I do this with SPY/SHV, I can play both sides of the interest rate game, right? As long as they remain the same, keep my funds in SPY, take the higher yield. As soon as interest rates go up, long term bonds should be hurt more by this than short term by definition, so I just start trading in the short term for long term, making up the difference in cash in a MM fund. Does this make sense?

I understand that HB would advocate setting up the PP all at once without worrying about one of the 4 assets being over-valued, but I still have several holes to fill in my PP and I might as well pay attention to valuations.

I also understand that we're not talking about major differences, but every % point helps (esp. these days).

[craigr]

[brswif00]

Milso, the TSP G fund is an excellent choice for those who have access to it. I am sure it would qualify as cash by HB standards, since it is guaranteed by the Federal Gov't. The rate it pays is I believe the average of outstanding US debt from 3 mos to five years, which is pretty close to nothing right now, but usually decent 3% - 4%. I use G for my cash when I have any.

I would only say that right now you might get better rates from a bank or credit union FDIC-insured account. The Gov't guarantees those too, and banks are paying as much as 4% right now because they are desperate to raise their equity levels, according to a recent MSN Money story.

[Lbill]

Regarding the LT Treasury asset, is it best to simply purchase the entire allocation at a single maturity (e.g. 30-year at auction) or are there some reasons for holding a ladder at different maturities? If a ladder, what maturities should be held? If one maturity is purchased then this will become shorter with time. My understanding of HB's advice is that one should purchase the 30-year and then wait 10 years before it is sold and then repurchase another 30-year. So the maturity of the T-bond holding would shorten from 30 to 20 years, making it less responsive to interest rate changes with time. If one had a bond ladder instead, say in 1 or 2 year increments from 20 to 30 years, the average maturity of the ladder could be kept stable at around 25 years. However, it is more hassle and cost to manage a bond ladder. Which is best? All thanks.
_________________
"Whenever you find yourself on the side of the majority, it is time to pause and reflect." ~ Mark Twain
"A foole and his money is soone parted." - J. Bridges, 1587

[craigr]

[Lbill]

Thanks craigr - I'm assuming that you would feel that if I simply purchased my full T-bond allocation as 30-year bonds at treasury auction (through
Vanguard) that would be OK. No reason to divvy it up into a ladder of maturities?
_________________
"Whenever you find yourself on the side of the majority, it is time to pause and reflect." ~ Mark Twain
"A foole and his money is soone parted." - J. Bridges, 1587

[craigr]

[Lbill]

Craigr - Now if I can just overcome my extreme fear of investing in 30-year bonds when people like Buffett are saying treasuries are in a gigantic bubble, and that all the deficit spending by the government is going to trigger gigantic inflation and rising rates. I notice that TLT is down by 13% already this year, making stocks actually look good. I know the PP philosophy is that no-one can predict the future, but sometimes it just looks so obvious what's going to happen that it feels like stepping in front of a speeding truck. If gold doesn't shoot the moon this year, combined long bond and stock losses could be a real challenge. It's actually easier for me to take on the 25% stock allocation than the 25% long bond allocation because stocks have been beaten up so much. Thoughts?
_________________
"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

[Ariel]

[Lbill]

Ariel - Yikes! you are right. I was looking at the returns for VTI

http://moneycentral.msn.com/de....Symbol=vti

Why does it only show down about 8%?
_________________
"Whenever you find yourself on the side of the majority, it is time to pause and reflect." ~ Mark Twain
"A foole and his money is soone parted." - J. Bridges, 1587

[craigr]

[Ariel]

[Lbill]

Ariel - I couldn't get anything out of the Yahoo link. Look at mine again.

http://moneycentral.msn.com/in....Symbol=VTI

It is very clearly showing about an 8% YTD decline for VTI.

Here

http://moneycentral.msn.com/in....mbol=VTSMX

The same site shows an approx 18% decline for VTSMX.
_________________
"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

[Lbill]

Thanks Craigr - very thoughtful and balanced answer from you as usual. Wish I had that ability. I anticipated you might recommend to stay parked in cash if too nervous to pull the trigger. Since I'm in GLD and VTSMX and a Treasury MM already, I think I might add the long bond component but not go to 100% in PP. Just match what I've got in the other components which would represent only a portion of my total portfolio. It occurs to me that one can still maintain PP, but reduce exposure to it by reducing all 4 components (or in my case, not going all-in). I guess this amounts to some sort of timing or TA doesn't it?
_________________
"Whenever you find yourself on the side of the majority, it is time to pause and reflect." ~ Mark Twain
"A foole and his money is soone parted." - J. Bridges, 1587

[Lbill]

Clearly MSN Money is WRONG WRONG WRONG on VTI and they are incompetent. Vanguard website shows VTI down 17.84%. It really ticks me off that you apparently can't rely on "authoritative" sites for correct data. Lesson for me: always get a second opinion.
_________________
"Whenever you find yourself on the side of the majority, it is time to pause and reflect." ~ Mark Twain
"A foole and his money is soone parted." - J. Bridges, 1587

[craigr]

[MediumTex]

I've been reading all of craigr's great posts for some time and enjoy reading his blog as well, though this is my first post here.

While "Fail Safe Investing" lays out the basics behind the permanent portfolio strategy, someone who is really interested in how it came to be should pick up a copy of "Why The Best Laid Investment Plans Usually Go Wrong." It's out of print but you can find it used on Amazon. It was published in 1987 and I found it sort of an unabridged version of "Fail Safe Investing."

One point I would like to make is that you can't change the allocation percentages and expect to get the stability and returns that the PP advertises. This may be obvious to some, but a response I often get when discussing the PP strategy is "that's a good idea, but I would probably do it this way..." and the person goes on to describe THEIR allocation based upon what they think is likely to happen. Just do the 25% x 4, or don't bother doing it at all. There are other good allocation strategies that work pretty well, among them simply going 50% S&P 500 and 50% LT treasuries. The PP certainly isn't the only conservative approach to investing.

The PRPFX fund should be approached with caution. It doesn't have the LT bond exposure that you need in the pure PP, and its 10% Swiss franc exposure is not something I am especially comfortable with (I would prefer to have that 10% in long term treasuries). In reading Harry Browne's writings closely, you will see that he has a high regard for Terry Coxon, who started the PRPFX, but it's clear that he is not crazy about the PRPFX allocation (though PRPFX is easy one stop shopping and better than anything you will find in one package).

For those who are scared of LT treasuries right now, think about this: the bull market in treasuries that started in 1982 coincided with the beginning of reckless and stupid deficit spending that continues to this day. If exploding deficits were the criteria for LT treasury yields to RISE, the bull market in LT treasuries would have ended in the late 1980s. Also consider Japan: the more money they printed the more deflation they experienced. So weird things happen. I don't see LT treasury rates rising dramatically as many predict, simply because the U.S. is not in any better condition than a lot of other countries right now (but is in better condition than quite a few). I can just as easily see rates falling as I can see them staying where they are now or maybe rising slowly. But I don't know, which is the point of the PP.

For the long bond exposure, EDV is a good complement to TLT. It is more volatile, so you can get a little more bang for your buck in that part of the PP. Check its chart from the fall--TLT went from $95 to $122, but EDV went from $98 to $157. Just something to think about.

For the gold piece, splitting between GLD and IAU is something to think about. If you are scared of paper gold, putting a little in each ETF should give you some comfort. Try to own a little physical gold as well. Even starting with something small like a British sovereign or one of the half ounce coins is good. Once you own one coin, trust me, you will want to own more. It's usually the first one that is hard to get over buying.

For the stock portion, I like VTSMX very much, though I am a fan of the energy sector as well. I personally hold some shares of large integrated oil and oil service companies with good balance sheets and dividends. I believe these companies will perform as well or better than the VTSMX in the future, but that's my own way of cheating a little in my PP, but it's an informed decision; it helps me to sleep better. Putting a few shares of BRK-B into the stock piece wouldn't be a crazy thing to do, IMO, though I don't currently own any.

For the cash piece, for someone working with a taxable account, I think that splitting a portion of the cash piece evenly between EE and I Savings Bonds is not a bad idea. You get the opportunity for a decent return in both deflationary and inflationary scenarios without any principal at risk. The fact that they don't throw off any taxable income until redemption is a huge plus for me. You can also redeem them at almost any bank, so they are VERY liquid assets.

Right now is an interesting time for the PP. There is a lot of tension across the stock, gold and LT treasury allocations. Something's got to give. Either treasury yields are going to plummet again, gold is going to explode or we will see a nice bear market rally in the stock market. I see all three assets as being tight as a drum right now. It will be interesting to watch in the next few months for sure.

Thanks for all the great contributions craigr.

[Roy]

[MediumTex]

The PP seems to incorporate and address the "black swan" problem more elegantly than any other strategy I know of. That's one of the reasons I like it.

Gold is the best example. People scoff at it, but it's always done its job as a truly non-correlated asset in times of trouble.

Harry Browne's thinking was so subtle it is really amazing. He is one of my favorite people. His realistic views on how unpredictable the world is are refreshing.

The .95% fee for PRPFX (while lower than the 1.11% it used to be) is a real problem. Considering that you are hoping for an average return in the 9% range over time, paying .95% is a huge drag on potential performance.

2008 really highlights for me the distinction between a pure PP and PRPFX. I believe PRPFX was down about 8.5% for the year (which is still quite good), but the pure PP, as craigr has noted, was up 1% for the year.

I obviously have mixed feelings about PRPFX, and I do own a little bit of it myself. It has pros and cons.

One of the things that causes people to resist the PP is they just can't bring themselves to commit to it fully. What I would suggest to anyone in that situation would be to commit a small amount of your total holdings to the strategy, but do it exactly according to the 25% x 4 recipe.

Thus, if you have a $75,000 portfolio, maybe set aside $20,000 for the PP, and put $5,000 in each asset class and rebalance when you hit the 15% or 35% band in any asset class, and just see how it works for you over time. If you like it, add to it; if you don't like it, at least you will have had the actual "PP experience."

One inexpensive way of doing the long term treasury piece for an account that you are contributing new money to is to use VUSTX as a way of building up enough money to buy a chunk of TLT, EDV or an individual bond. As noted, VUSTX doesn't give you the volatility you want in the LT treasury piece, but it's okay for a small part of the LT treasury allocation. Thus, if you are contributing $1,000 per month to the portfolio, it wouldn't be crazy to contribute a little to the money market, a little to VTSMX, and a little to VUSTX. Once VUSTX gets to a few thousand dollars, you can buy a chunk of TLT. Just one way of using VUSTX as part of the PP. My own target is to keep the VUSTX holding to no more than 15-20% of the LT treasury piece of the portfolio before moving the funds into longer dated treasuries.

One thing I like about EDV is that by holding a little of this ETF, in the event that there is a bond spike like we saw in the fall, you can sell a little EDV and move it into TLT, which is sort of a rebalancing within the LT treasury portion. But this is just another one of my personal tweaks of the strategy and is certainly not necessary to get the expected results. For me, it is just a way to take some money off the table during an exceptional period of dropping yields.

[stratton]

The interesting question is how many folks that are newly enthused with the Harry Browne Portfolio will stick with it when its returns trail the broad markets at some point in the future. However many months/years down the line that is.

Paul

[Rose21]

I, too, have struggled with the same fear of long-term treasuries this year, and in fact have gone so far as to take a position in TBT to hedge the long-term treasury component of PRPFX--which is a core holding for me. So given my rather heretical behavior on this point--admittedly against my best judgment--I'm not one to be dispensing advice.

I will offer, however, that I'm a whole lot more comfortable with a 4x25 fund like PRPFX than I ever would be with the four individual components--for no reason other than the fact that I don't have to look at a large loss in any one sector. The combined fund smooths things out. Of course this is all "mind games," but then so much of investing is. . .

[deepdrive]

I think this portfolio is stupid. I wouldn't put a cent into gold or any other metal funds. The fact is that we don't need our portfolio to have something that always does well. What we do need is a portfolio that will do well over several years. A stock/bond portfolio will do much better than this portfolio over time. I could handle some down years for the added return.
_________________
Investment difficulty and long-term success are perfectly negatively correlated. Keep it simple.

[Rose21]

It might not look so "stupid" when you're nearing retirement and don't have 20 years to get back to where you started. The PP is looking damned good to me about now.

[MediumTex]

[Roy]