Bogleheads

[MediumTex]

I don't think that Terry Coxon ever really took the deflation scenario seriously, while HB did. That, to me, is the reason that PRPFX is less than ideal. A Japanese PRPFX would have suffered mightily in the last 25 years.

For anyone who hasn't read Mish's analysis of deflation in a fiat regime, I suggest you take a look. It's an interesting analysis. I can't post links because I just registered, but Google "Mish", "deflation" and "fiat" and you will find the post on his blog from last April.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[DP]

Hi,

[MediumTex]

One comment about PRPFX is that it is great for taxable accounts.

That's a huge plus for folks without access to tax-deferred accounts.

I think that this is often overlooked when discussing PRPFX.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[craigr]

The portfolio allocation will lag a stock heavy allocation when the stock market is firing on all cylinders. Unfortunately the market has many long stretches of time where this isn't the case. The period of the 1980s-1990s were unprecedented in stock returns in US history. These results I feel skew the expectations of what heavy stock allocation portfolios can do consistently for most people.

As it were, it is human nature to chase the latest hot investment idea. However for people who are tired of playing the game and don't like much excitement with their investments, then the permanent portfolio allocation is one way to approach the problem.
_________________
“The best-kept secret in the investment world is this: Almost nothing turns out as expected.” - Harry Browne

[snowman9000]

[koekebakker]

[Lbill]

2009 Challenge to PP: So far this year I have the following returns for PP components:

VTSMX -18%
TLT - 13%
GLD 5%
CASH 0%

Total Return -6.5%

Last year, LT Treasuries ramped at the last minute to save the day. This year, it might have to be GOLD!
_________________
"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]

I have a question about the CASH asset in PP (held in a treasury MM, as T-bills, or as a ST Treasury fund). I tried to visualize the pros and cons of cash across 5 economic scenarios: inflation, hyperinflation, dollar collapse, deflation, and prosperity.

It seems to me that Cash would be useful primarily to hedge either inflation or deflation, as it preserves your real purchasing power in dollar terms in either of these economic scenarios.

However, in either hyperinflation or dollar collapse, Cash (held in dollars) would be a dysfunctional asset. And in prosperity, Cash would be a neutral, or non-performing, asset.

TIPS seem to me to have exactly the same risk-hedging profile as Cash, but would work better. TIPS should do better in inflation than Cash, and should work as well or better in deflation (assuming you held TIPS as a bond ladder rather than a fund). TIPS would be just as lousy as Cash in hyperinflation or dollar collapse (because they are denominated in dollars), and would probably not yield much more than cash in prosperity.

If my analysis is correct, why not substitute a TIPS bond ladder for Cash in PP?
_________________
"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]

[stratton]

[Roy]

If I were using the HB portfolio, I would not tinker with its construction, with TIPS or anything else. "It ain't broke," as Craigr says, and it would take years before one could assess its fragility. Reasonable arguments could be made against it but that would be true of any allocation. The HB version is conceptually sound, proven, inexpensive to implement, and simple. As is, it is clearly an approach worth considering if protection of capital is critical. What it would be with tinkering is anyone's guess.

Regarding TIPS, I now think their optimal use is to buy them with the plan of holding til maturity, if one had the time (preferable to the fund, even as the fund is inexpensive and convenient). Perhaps some investors would then be less bothered by the swings in NAV and unpredictable correlations if they had the option of holding til maturity at worst, or selling when they could clearly take profits.

Roy

[Lbill]

Thanks for comments on swapping cash for TIPS in the PP. I tend to agree with the view that "if it ain't broke, don't fix it" as well as the observation that it is difficult to know for sure how TIPS will behave in the context of the PP. I was interested in the finding that there might have been years with bigger drawdowns with TIPS. I definitely wouldn't want to use a TIPS fund because bonds are being continually rolled over in a fund, and you don't have the limited deflation protection that you get with individual bonds that are held to maturity; specifically, the floor in the redemption value at face regardless of how much below face the adjusted principal might have fallen to. I don't know how that can be simulated at all in a backtester - but I would expect a bond ladder to behave better than a fund because of the protection from liquidating below par in a deflationary environment. Of course that is only limited protection if one were holding TIPS that had a significant positive inflation factor built in.
_________________
"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

[DP]

Hi,
Well I think the objective of the PP is simplicity and safety. A more aggressive/optimistic investor might want something different. I think it is possible to take the concepts from the PP and apply them to something else. For example, take the 6 Ways from Sunday portfolio:
Six Ways from Sunday

* 1/6 – Vanguard Inflation-Protected Securities (VIPSX)
* 1/6 – Vanguard Total Stock Mkt Idx (VTSMX)
* 1/6 – Vanguard Total Intl Stock Index (VGTSX)
* 1/6 – American Century International Bond (BEGBX) (I used VBMFX)
* 1/6 – Vanguard REIT Index (VGSIX)
* 1/6 – Vanguard Energy (VGENX) (I used PCRIX)

Now I substituted Gold for PCRIX (commodities) and LT Gov't Bonds for VIPSX (tips) to create a portfolio which contains: Total Stock, Total Int'l, REIT, Total Bond, LT Gov't Bond, Gold, referred to in the table below as Mix.

Using the backtest portfolio, I get the following results

[MediumTex]

Cash would give you something to rebalance with in the event that there was a run on all assets and gold, stocks and LT treasuries all declined at the same time (as we have seen recently).

As I noted above, I believe that splitting between I savings bonds and EE savings bonds is an acceptable portion of the cash holdings, especially if you are working with a taxable account. No principal risk and no tax until redemption.

TIPS, however, are a different animal, and it's not hard to lose 20% in TIPS if you buy them at the wrong time.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[skow]

I am totally feeling the urge to dump my current asset allocation and buy a Harry Browne style portfolio and forget about it. But that would be capitulation, right? The capitulation counters might as well mark another one down. I think I'm going to be next.

[Roy]

[Wonk]

[MediumTex]

During times like this, the premium on peace of mind goes up a lot.

I get a kick out of everyone talking about treasuries being in a bubble right now.

Maybe they are...maybe they aren't.

It was last summer that everyone was saying that shorting the long bond was the easiest money out there.

But they were wrong.

Think about how the yen behaved as Japan moved through what we are going through right now. No one would have predicted that massive increases in Japanese government debt would lead to deflation.

But that's what happened.

Harry Browne's central thesis was that the future is fundamentally un-knowable and impossible to predict reliably. It sounds so simple, and yet when you turn on CNBC all you see are people attempting to predict the future. The more refreshing perspective would be for someone to say "since we don't have any way of reliably predicting the future, what strategy might still allow us to invest prudently?" That's what Harry Browne offered.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[craigr]

[stratton]

[Roy]

[quote="craigr"]

[MediumTex]

I agree about Cuggino.

Kudlow asks him what he likes right now. What he should say is "I like the same thing every day. That's why it's called the PERMANENT portfolio."

I think, however, that at some point PRPFX will need to reassess its Swiss franc holdings. I think that the banking problems in Switzerland and the fact that the U.S. dollar has actually become the safe haven (that the franc used to be) suggests that the franc's role in the PRPFX version of the permanent portfolio ought to be revisited.

It just seems to me like the 10% that PRPFX devotes to Swiss francs doesn't really add much to the fund. I would much rather have more long dated treasuries in their place.

Dropping the expense ratio again would be helpful as well. It seems like dropping it from .95% to .80% would be a good move, and get the fund expense closer to some of the other popular balanced funds (OAKBX, for example).

OR, you could just do VTSMX, GLD, TLT and SHV and have an average expense of around .15%.

Anyone who hasn't read "Fail Safe Investing" really should take a look at it. Even if you don't choose to do the PP allocation, Harry Browne has a lot of wisdom to pass along.

For example, when he calls the PP a "permanent" portfolio, he means it. Not many people really mean permanent when they use that word.

I am confident that the PP will be a good strategy in 100 years (though the bond portion may be in a different currency).
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[Pres]

[Pres]

European Harry Browne fans who understand Dutch may be interested in this blog:
http://marcdemesel.blogspot.com/

The owner's priority is capital preservation and he has has recently decided to switch to the Permanent Portfolio.

It's not as impressive as craigr's blog and he's only starting out with the PP. But it's the only resource that I know of for people who want to implement the PP with what is available in the Eurozone.

No, this is not my blog, but I'm watching it with great interest.

[Roy]

[craigr]

[MediumTex]

As far as I know, this thread and craigr's blog contain the best discussion of the permanent portfolio concept on the whole internet.

If you are reading this and wondering if there is anything like it anywhere else, to my knowledge there is not.

It's interesting to me that Harry Browne wrote in "Why The Best Laid Investment Plans Usually Go Wrong" that the permanent portfolio had never REALLY been tested by truly extreme market conditions, but that he believed it would perform as advertised in such conditions. I think that 2008 probably meets the criteria for extreme market conditions and the PP concept really shined.

One idea that I think can't be mentioned enough is that if you are wary of the PP concept, try it with a small part of your portfolio and see how it feels. If it works on a small basis, consider devoting more of your portfolio to it. This approach worked well for me.

But as Harry Browne said, NEVER do anything with your money that you don't understand or don't feel comfortable with. I get so frustrated watching all of the money experts talking about what to do next when following their advice would have cost you 30%-60% of your portfolio since 2007.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[snowman9000]

I've actually wondered about starting a true 4x25 PP fund. Maybe buying a shell of a defunct fund or something. Considering I have zero experience in the field, it's just a pipedream. OTOH, it can be done.

[MediumTex]

[Lbill]

[DP]

Hi,

[Roy]

[MediumTex]

Cuggino is just carrying on Terry Coxon's original allocation from when the fund was set up in the early 1980s.

Harry Browne and Terry Coxon toyed around with different PP allocations over the years before Harry Browne finally settled on the 25% x 4 allocation. Terry Coxon never agreed with this as the ideal allocation, since Coxon apparently believed that inflation was more dangerous than deflation, while Harry Browne was content to say he didn't know what the future would hold.

At the end of "Why The Best Laid Investment Plans Usually Go Wrong" Harry Browne wrote that Terry Coxon basically co-wrote the book with him, but didn't want to put his name on it because the allocation was not what he (Coxon) believed was optimal.

Just some PP "Inside Baseball" stuff.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[Pres]

Has anyone got any idea what SWR retirees should use with the PP?

[Roy]

[MediumTex]

[Ziggy75]

Here would be my version of the permanent portfolio:

33.33% = Cash
33.33% = Bonds
33.33% = Stocks

I am not impressed with gold as a long term investment. I feel cash is a little bit better with flexibility (intermediate type savings/emergency fund, etc.)

[MediumTex]

[Lbill]

[newbie001]

Tex or Craigr or anyone else,

I really like the PP, and have no problem with holding gold except for one concern, which may be ludicrous. What if a synthetic version of gold were developed, i.e.g, it has the chemical properties of gold to a remarkable degree? I have heard (although I have not verified) that synthetic versions of silver are being or have been developed. Obviously, if synthetic "gold" could ever be developed, that would have implications for the value of true gold.

This may be pure alcehmist quackery for all I know, but it's something I would like to hear views on before I take the plunge into the PP.

[craigr]

[craigr]

[Gekko]

[craigr]

[Roy]

[craigr]

[Lbill]

craigr said:

[MediumTex]

RE the stock portion and international exposure, here is what I do: In Burton Makliel's "A Random Walk Down Wall Street", he shows how historically the optimal stock return has been based upon an 85% domestic, 15% international allocation. I liked his reasoning, so I do 85% VTSMX and 15% VGTSX. Of course, 100% VTSMX works fine as well. I would not be comfortable doing more than 15% in international stocks.

RE alchemy and gold, I am not overly concerned by this one. I'll bet one of the mining companies would buy up the rights to the formula and kill off the scientists who knew how to make it. I have seen that Twilight Zone episode where the guys take the gold to the future and it's worthless. Nice.

RE rebalancing and new contributions, here is what I do: I use PRPFX for a portion of my portfolio because of its simplicity (even though I'm not crazy about it). This is one easy way to allocate new contributions. When PRPFX gets to be more than 15% or so, I move it into the other individual classes. In the stock piece, there are no transaction costs. In the cash piece, I do like craig and split between MM and VFISX, so there is no cost there (I also use savings bonds, but that piece doesn't get moved around). In the LT bond piece I keep a balance in VUSTX and when it gets to a certain size I move it into TLT or EDV. I don't buy individual long bonds, but I probably should. VUSTX allows the accumulation of enough funds to purchase a block of TLT or EDV that justifies the commission. In the gold piece, I use GLD, IAU and physical. There's not a cheap way to rebalance in this part of the portfolio, but it's not really a big deal.

I do prefer 20% and 30% rebalancing bands, rather than 15% and 35%, but this is a minor point. Either way works fine.

Whatever you do, make sure it makes sense to you. You're the one who has to live with it. Read "Fail Safe Investing." It's the best $10 you can spend on an investment book, even if you decide the PP is not for you.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[koekebakker]

Craigr, Tex or anyone,

Thanks for all this great discussion.

I would be interested to hear your thoughts about a eurozone-based permanent portfolio.

For example:
Would you advice to hold just European/Eurozone stocks in the PP, or just go global?
Do you believe there is a need for exposure to other currencies besides the Euro? Maybe some bonds or cash?

Thanks!

[Roy]