Bogleheads

[snowman9000]

[MediumTex]

A European PP is an interesting question.

Gold is gold, so that's easy.

As far as cash, I would do whatever you buy groceries with. I assume it's the euro.

As far as long bonds, I don't have a good understanding of how EU long term debt works, but I would buy the longest dated non-callable bonds available.

As for stocks, it seems like a world index or maybe 50% Europe, 25% emerging markets and 25% U.S. would make sense to me.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[stratton]

[MediumTex]

[Lbill]

[Quasimodo]

Wouldn't long term sovereign bonds do better than cash in a deflation? Maybe Prechter was only thinking of corporate bonds.

Cash in the form of treasury bills would do well in deflation and hold it's value in inflation as short term rates rose, so it isn't just a one-scenario holding.

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)

[craigr]

[Roy]

[quote="craigr"]

[krumw]

Craigr

I apologize in advance if this question has already been answered somewhere in the voluminous Harry Brown threads, but here goes. Since inflation seems to be on every one’s minds, has the PP ever been back tested specifically for how it would have performed during the Volker years? Back then I had a money market fund that was paying 10% interest, and I was dumb enough to think that that was pretty cool.


Bill

[Quasimodo]

[krumw]

"Here's a link that shows results back to 1972, courtesy of Craig R:"

http://crawlingroad.com/blog/2....l-returns/\

Thanks Quasimodo
The backtesting is a gold mine of information. After only a quick look the P.P. looks very solid.

Bill

[craigr]

[craigr]

[Lbill]

Now we have all the heavy hitters, including Bill Gross, Buffett, and Marc Faber, all saying that inflation is coming, and conventional bonds are going to get killed. It takes a bit of nerve to stay 25% with LT bonds in this environment where the "handwriting is on the wall". If I had to bet, I'd be maybe 80%-90% in this camp. I guess we'll see, won't we?
_________________
"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]

Remember, too, that the U.S. long bond has been in a bull market since 1982, which was about the time we started running up huge deficits and debt.

At many points in the last 25 years, people have said it was simply impossible for the 30 year rate to drop any lower, and yet it kept dropping.

On one of HB's radio shows a listener called in and said he was scared to put any money in LT treasuries because it was so obvious that yields were bottoming. As I recall, yields were in the 6% range during that discussion.

If I learned anything from reading Harry Browne, it is that just because something OUGHT to happen, it doesn't mean it WILL happen.

30 year treasury rates OUGHT to have started heading higher a LONG time ago, but they didn't.

I can easily see a scenario where the 30 year rate goes to 1.5%. If you think that sounds crazy, how crazy would the current rates have sounded a few years ago?

I love buying 30 year treasuries right here. It's the one piece of debt I am sure will be repaid.

The question isn't whether the U.S. is in bad shape or not. We know it is. The question is whether the U.S. is in BETTER shape than some of the other parts of the world, and I think the U.S. is in considerably better condition than Japan, most of the EU and much of the rest of the world, really.

Look at the U.S. national debt to GDP ratio and compare it to some of our trading partners, and the U.S. picture all of the sudden doesn't look so dire.

The case for rising 30 years rates is certainly strong, but the case for falling rates if the whole world gets stuck in a deflationary spiral also makes sense.

Think about the way Jim Rogers talks. He says how weak the dollar is, how this dollar rally is not real, etc....and then he talks about buying yen. Why on earth would you buy yen if you don't like the dollar? If you don't like the dollar, what currency would you like?

Euro?
Swiss franc?
Canadian dollar?
Australian dollar?
British pound?

Some of you probably saw the line in the news the other day about the U.S. being the best looking horse at the glue factory.

I have no idea what the future holds, but here is something to think about when people talk about inflation: there can be no inflation without rising wages and/or availability of credit. Demand destruction simply stops price increases in their tracks once people run out of money to spend.

Globalization and the weakening of U.S. labor unions all but guarantees that there will be strong downward pressure on U.S. wages in many fields for the foreseeable future and the current credit crisis is obviously going to make future credit harder to come by. How does inflation come out of that? It doesn't. It can't. Higher prices will simply lead to prompt demand destruction, as we saw with the spike in gas and food prices in 2008.

How can inflation occur when no one has any money?

Japan has been doing everything in its power to CREATE inflation for many years and has only succeeded in creating DEFLATION. Strange but true.

The case for inflation is easy to make and respect. In my opinion, too few people have the same respect for the deflation case, which can actually be much harder to control, since deflationary expectations can slow the velocity of money to a crawl.

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

[craigr]

[MediumTex]

Great comments craig.

Much appreciated.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[saurabhec]

[craigr]

[Roy]

[Roy]

[MediumTex]

Remember too that gold, unlike TIPS, has no counterparty risk.

Taking a longer view of history, gold is the only asset class that has real durability of value.

Everything is sort of ashes to ashes, dust to dust (or whatever the political and economic equivalent is of that process).

I was in a coin shop the other day and the owner had a big treasure chest out front full of coins from around the world and any coin in the chest cost a quarter. I could tell that basically all of the coins were worthless and he was just selling them for a quarter as novelty items.

It occurred to me that this is what happens to most money once its underlying political and economic system deteriorates (as eventually happens 100% of the time). The question to ask about any money is what is left when the government that issued it loses its hold on power.

In the case of gold and silver, you still have value regardless of the condition of the issuing government. In the case of most other coins, what you ultimately have are Chuck E. Cheese tokens with no Chuck E. Cheese.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[Wonk]

[Swivelguy]

I want to ask a slightly different question. The PP seems geared towards preservation of wealth, rather than growth, as gold has a 0% expected real return and cash has a fluctuating but also near-0 real return. For this reason, I think it's a great portfolio for a retiree or near-retiree, but it's better to be more aggressive as an accumulator.

So, does it make sense to begin saving with a more "normal" portfolio, say 30% US stock, 20% int'l stock, 25% intermediate treasuries, 25% TIPS, and gradually shift from that AA to the PP?

ie, 20 years before retirement, begin reducing total equity allocation by 1% per year (this gives approximately age+5 in bonds during the transition). At the same time, reduce intermediate treasury by 1% a year and increase long-term treasury and short-term treasury (or cash) both by 1% per year. You could do the same thing, trading TIPS for gold, over a similar time period.

I made a pretty picture to help explain what I mean:



What do you think?

[Tramper Al]

I resist the contention that a portfolio must be constructed exactly as the guru has specified it, or else it "won't work". I believe the idea is to gain knowledge from the gurus and past performance, rather than follow blindly.

Monsieur Bogle has not to my knowledge specifically recommended yogurt, but I eat it anyway.

A chest of dimes and nickels in a storefront, selling for $0.25 per coin would be hugely profitable, without being worthless items. If my ultimate purchasing power comes in the form of a fiat currency, so be it.

I too see an equities-dominated AA as appropriate for my (middle-) age, and a PP-like shift over time as appropriate for wealth preservation in later (retirement) years.

It's funny, I have performance-chasing tendencies just like everyone else, but it's more like wishing about what I had done yesterday, rather than wanting to switch to yesterday's winners for tomorrow. The rough short-term outcomes don't leave me any better equipped to see the future. So it's pretty easy to stay the course.

From a behavioral standpoint, what would be most challenging about shifting overnight from conventional to PP would not be the idea that I was buying a PP asset at a relatively high price (e.g. LT Treasurys), but rather that I was selling stocks at the wrong time for the wrong reasons.

[Lbill]

[Roy]

[stratton]

[MediumTex]

[Lbill]

Another question. More appropriately, this is a question regarding investing in gold. But since gold is such a big piece of PP it concerns PP holders particularly. Since the evolution of ETFs and ETNs that make it easy for Ma and Pa to buy and hold gold, I wonder if this asset will behave the same going forward as in the past. Before these were around, investing in gold was a somewhat esoteric endeavor, limited to a relatively small number of investors who had the wherewithal and the determination to hold the asset. Nowadays everybody is within a mouse click of investing in the stuff. I can't help but believe that this new market for gold will have dramatic effects on the behavior of the asset going forward. Commodity futures are a similar example. Before the advent of ETFs, ETNs, and funds that invest in commodity futures the only people who invested were those with enough know-how and the means to invest in this asset. After these new market vehicles came along, the commodity futures markets have been dramatically affected. The backwardation that allowed long futures holders to reliably profit has been replaced by contango in most of these markets. As we saw, the commodity futures market blew a giant bubble in 2007 and crashed subsequently. I'm concerned that the "edge" that was once enjoyed by commodities investors in the past (including gold) has been eliminated now that the proletariat can play around in these markets. Of course, there's no way to really tell - but it points out that no matter how much backtesting you do on any portfolio, PP included - the future is not the past. You pay your money and watch the horses run.
_________________
"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

[Roy]

[Roy]

[craigr]

[Lbill]

[Swivelguy]

Craigr, thanks for the response and your very insightful writings here and elsewhere.

I have another general question: what do permanent portfolio investors hold in their 401(k)s? It doesn't seem very likely that a typical 401(k) would have access to a long-term treasury index, gold is impossible, and stocks are already the best of the 4 asset classes to hold in taxable. So it seems like to properly implement a PP yourself, you'd need to ideally have 50% of your portfolio (TLT, GLD) in IRAs, with 75% being even better (for cash too). This would be really tough for someone who doesn't change jobs and therefore can't do a rollover IRA from 401(k).

[newbie001]

[MediumTex]

[Roy]

[Lbill]

From Forbes yesterday (3/12/09)

[MediumTex]

[daniel]

First of all -- thanks or all the interesting discussion on the permanent portfolio; now that things are not going well in the stock market we suddenly get renewed interest in the PP

Anyway, I have been considering the PP but always felt that it was a bit too radical to put 25% in gold or long term bonds -- even though it makes logical sense of course. Secondly, it is hard to consistently maintain both a variable and permanent portfolio in one account. So, to mitigate some of these issues I have been thinking about a mixture of the variable and permanent portfolio into one portfolio: the "Semi permanent portfolio"

First, we put 2/3's of our money into the PP, and 1/3 is "variable". The PP components therefore each take 1/6:

1/6 long term bonds
1/6 cash (or short term bonds)
1/6 gold
1/6 total stock market

and the other 1/3 is put into bogle head approved stock: international and value:

1/6 small value
1/6 total international

Rebalancing happens whenever a part goes up to 21% or under 14% but not more than once a month.

The nice thing about this is that it is still 50% stock portfolio this way (which is good if you believe that the stock market is where most return is) , while one still has a solid "permanent" part. If you want to tinker, it is also clear that that happens in the variable part: i.e. replace part of small value or international with CCF's, REIT's, or Africa small value stock

Refinements:
- Perhaps for the total stock market component I would choose russel midcap to avoid the largest 200 stocks as I think they correlate too closely with the 1/6 total international
- Perhaps put some of the cash/short term bonds into TIPS (or perhaps part of small value/international depending on your need to take risk)

[MediumTex]

[Swivelguy]

I made a spreadsheet that can keep track of a separate PP and VP, even if they're invested in the same funds and commingled. It's currently in only-I-can-understand-it format, but if anyone's interested, I could clean it up and post it.

The spreadsheet assumes yearly rebalancing, and does the following:
1. If the VP has outperformed the PP in the last year, some of the VP is sold off to bring the VP/PP ratio back to what's desired (and you can change this desired allocation with age)
2. New contributions are allocated according to the desired ratio of VP/PP
3. If the VP is less than its desired fraction of the total portfolio, it remains isolated from the PP, but still gets a contribution in its desired fraction

So, in short, extra juice generated by the VP flows into the PP, but money never flows in the other direction.

[snowman9000]

You can do the PP & VP with the 1/6 allocations. Just do the math at rebalancing time and only rebalance among the four PP components, and among the other two. It really isn't that hard to do the math that way.

I have a similar setup.

I do strongly recommend that anyone who is interested, spend the ten bucks or so and buy the Failsafe Investing book. And for sure spend some time listening to the radio archives. I read the book a few times, but it wasn't until listening to the radio shows that my "objections" were answered. I listened to one recently that Craig mentioned, and had a smile when Harry read a question that was from me "in cyberspace".

[daniel]

[stratton]

Gold is considered a risk free investment in Pakistan.

One thing to do in addition to the Harry Browne Portfolio is lower your risk by owning a payed off residence. This will protect a person against inflation and lower adverse effects of landlords.

Do Asset Returns Hedge Against Inflation in Pakistan

Abstract:

[Swivelguy]

How does owning a house translate into a safer portfolio? You can't liquidate your living room to rebalance when stocks take a dip.

[daniel]

[MediumTex]

Gold is not an inflation hedge.

Gold is a political and economic uncertainty hedge.

The reason for the confusion is that inflation most always goes along with political and economic uncertainty, but it doesn't have to.

Very few people seem to truly understand this point, but it's a key idea to internalize in order to fully appreciate gold's role in the PP.

Governments are transitory.

Economic strength is transitory.

Military power is transitory.

Fiat currencies are transitory.

Gold is not transitory. I can't speak for the future, but so far through human civilization, gold has outlasted each iteration of the political and economic units listed above, despite the most sincere efforts of the adherents to each system.

The point is that there is always a generation on the cusp of any or all of the changes listed above (many of them in the 20th century), and for members of those generations only gold has historically provided a shelter for their wealth.

Note that accepting this argument does not make you a gold bug. It just makes you someone who is serious about not fully trusting the fate of your wealth to the quality of decisions being made on Wall Street and in Washington.

Think of gold as political and economic system life insurance.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne