Bogleheads

[allenmickers]

[MossySF]

[dumbmoney]

[docneil88]

[craigr]

[jh]

...

[dumbmoney]

[craigr]

[jh]

...

[allenmickers]

Ive listened to 4 of Browne's podcasts and read a little bit more since my initial post the other day.

This is my new proposal for a modified browne portfolio:

The actual portfolio is 25%-25%-25%-25%

I want to steal 5% from the cash, gold, and bonds section and bump equities up to 40%.

My reasoning is that I believe there will be slightly more prosperity years than bad years so I want to overweight this section. Also I think that during deflation and inflation, gold, cash, and bonds will react more positively than stocks will during prosperity. i.e. I feel that during inflation gold may go up 200% but during prosperity, stocks may only go up 50% so I need to overweight equity in order to make sure I am really am equally prepared for all economic situations.

Another reason for overweighting equity is that I dont feel safe putting 25% in a single thing. While unlikely, a new source of gold may be discovered. Or something may happen that makes gold worthless. Its not likely but 25% is too much in my mind of one thing that I cant internally diversify. Stocks at 40% can be diversified amongst REITs, US, and International stocks so while it may be 40% total, it will only be 10% in any one asset class.

Therefore I am 20% Gold, 20% Cash, 20% Bonds and 40% Equities

I dont quite like 20% to be all in gold coins, it still seems a little high for me. So I am going to take 10% into swiss francs at a swiss bank. Once I have enough to afford a swiss bank that will store physical gold for me, I will up the gold closer to 15%, but right now I only have enough money to afford a basic swiss account with swiss francs and not custodian gold.

The 20% Cash section will be 20% treasury MMF

The 20% bonds section will be long term treasury bonds. I will likely try to buy individual bonds along with the VG long term taxable bond fund for regular rebalancing until I have enough for a new T-Bond.

The 40% equities section will be broken down as follows:

5% US REITs (VGSIX/VNQ)
10% US Stocks VFINX)
10% EM (VWO)
5% Euro VG Fund
10% Asia VG Fund
(Considering adding 5% Latin America ETF, possibly taking 5% out of Asia for that)

Most international equity funds weight Euro as 55%, asia as 25% and EM as 20%. The thinking behind my weighting is that Euro is most heavily correlated to US and I want to limit overall US exposure in my overall portfolio. I also am holding 10% Swiss Francs which should have higher correlation to Euro than to EM or Asia. Asia and EM are considered more volatile and scarier than Euro or US, which is fine to overweight them here since the portfolio overall is very safe.

I might make a counterargument against myself that by overweighting EM and Asia and underweighting US and Euro, I am not going to get the proper anti-correlation with the other 3 parts to the permanent portfolio, such that I might miss the Prosperity period if EM and Asia arent correlated to US prosperity. However I am 40% equity, not 25% as the perm p does and I am still essentially 20% Euro/US. I dont feel as though I will miss the prosperity with this "Weird" equity allocation.

The reason behind going 10% swiss francs is that this money will be liquid and held in an offshore account. It will serve as a hedge against inflation/devaluation of the USD. Combined with my 10% gold allocation, I now have 20% of my portfolio entirely outside of the US Financial radar. I intend to pay taxes and declare the swiss account (and qualify for the FTC on the 35% withholding that Swiss Gov imposes on accounts held in francs), however no one in the US can reasonable sue me or steal this 20%. Also in case of widespread bank failure in the US, I still have 20% readily available.

The other major point that I purposely built into this is that my overall portfolio is only 50% exposes directly to US markets (5% REITS, 10% TSM, 15% T-Bills, 20% TBonds). The gold, Francs, and international stocks, while possessing some correlation to the US Market, are not as scrwed as badly if the US goes under. Sure the entire world is affected if the US were to collapse, but gold will still be gold, francs will still be francs but USD/Bonds/Stocks will be completely worthless.

This may seem like crazy talk but all giant civilizations eventually Fails (Rome, USSR, and dozens of others). The common thought here is that you shouldnt invest in your company stock because if your company dies, your stock is worthless and your unemployed. Well if the US collapses, and I am out of a country, it would really suck if 90% of my assets were US based and also worthless too. At least with 50% in other things, I have some chance of affording to move to a new country.

I dont feel that I am trading off too much in the way of returns for safety. I will expect to return only 1 to 3% average annualized per year less than someone with a "normal" boggleheads portfolio except with several hundred percent more safety for extremely bad economic situations. While compounded over 40 years that 1 to 3% per year is going to hurt, I know I will be able to sleep better at night and not really care about daily market fluctuation's as much as I care now with 80% stocks.

Final Draft of Perm Portfolio:

10% Gold Coins
10% swiss francs
20% Treasury MMF
20% 30 year T Bonds
5% REITs
10% US TSM/SP500
10% Emerging Market
10% Asia Market
5% Euro Market

[docneil88]

[allenmickers]

[craigr]

[dumbmoney]

[allenmickers]

[jh]

...

[docneil88]

[allenmickers]

[docneil88]

[allenmickers]

This is going to sound crazy but I am considering changing the weighted values from 25-25-25-25 down by equal amounts such that they equal 90% total and having 10% of my portfolio be a Variable Portfolio that Browne describes.

The idea is that none of the 4 investments he chooses does well in a recession. Browne claims that recessions are self-limiting so its not a problem however I have a belief that I can achieve positive returns during a recession with a variable portfolio.

I am probably crazy and just lucky but I was day trading large cap US stocks between Jan 1 and March 15 and had about 10% gains in that time period- if I kept it up, it would be 50% annual returns. I believe that I was only able to achieve such gains due to the market being in a recession and me be able to exploit cheap stock prices after a panic sale followed by a minor 3% boost a few days later. All I did was try to make 2 to 3% in a hard-hit Large Cap stock each week and wound up with some really nice gains.

I stopped a few weeks back because it was time consuming, I was admittedly lucky and wanted to stop on a streak, I am going to need to use this money in 6 months so dont want to risk it, and I believe we are coming out a recession now and this strategy wont beat an index fund during times of prosperity because the constant turnover reduces market exposure during prosperity. It works well in a recession - although admittedly, my 3 month run isnt really scientific proof by far.

However, if I wanted to run this strategy, I would likely steal 5% from equities and 5% from cash to get the 10% variable.

That would be:
25% gold
20% equity
20% cash
25% bond
10% variable

I stole from equity and cash because in using my strategy, I am in stocks half the time, and in cash half the time waiting to time the next good deal (hopefully not catching a falling knife). In times of non-recession, I would just put my portfolio fund half in a stock index fund and half in a MMF, so it would keep the overal 25-25-25-25 correct. But in recession, I take out my 10% to play with.

Of course its probably a bad idea because if I screw up and lose the 10%, then I hurt myself more during a recession than I would if I did nothing.

[craigr]

[dumbmoney]

[snowman9000]

One of his favorite sayings was "anything can happen, and nothing has to happen."

[allenmickers]

If you wanted to keep as close to the 25-25-25-25 as possible but wanted to overweight equities slightly, could you use something with overlap like TIPS?

Perhaps take away 5% gold and 5% cash and put in 5% TIPS. The idea is that Tips would be good for both inflationary and deflationary and it fees up 5% to put into equities while still giving 25% for inflation and 25% for deflation. Or even take away 10% Gold and 10% CASH, add in 10% TIPS to bump equities from 25 to 35%.

Do you think we could change the 25% gold allocation to have an ETF as portion of the mix - perhaps 15% physical gold 10% gold ETF (or general CCF), and then use the ETF/Fund for rebalancing so that you dont have to sell physical gold for privacy and tax reasons? Of course Browne wanted you to have physical possession of the gold, but 15% is still reasonable to have on hand.

[craigr]

[hurshaw1]

I enjoyed this thread alot. Overall, I do like the philosophy behind the AA you are discussing. I just wish I had come across it earlier in my investing life. I am happy to have come across it now at any rate.

I think you could add a commodities fund as a substitute for part of the gold allocation in that portion of the portfolio, a fund such as the PIMCO commodities real return strategy fund. I don't have as much gold as this portfolio suggests, but the combination of commodities and gold mining stocks did very well for me during the decline of the dollar and bear market of recent past. They seem to diversify a portfolio in the same way.

I also have a REIT that has international exposure -- TAREX. I don't know how that effects the thinking here, but I have not been sorry to own it, and plan to continue to own it going forward.

I am looking at making other adjustments to bring my overall categories more in line to the discussion here. Thanks.

[zhiwiller]

I'm seriously considering adding an inflation protection portion to my portfolio other than TIPS after reading this thread. The PIMCO fund backtests well with the rest of my portfolio for what that is worth. I plan on doing more reading about it.

[craigr]

A few notes...

I found the show where he talks about a lot of topics that have come up here:

1) Why he doesn't overweight assets.
2) Why he thinks the 25% split is the best solution.
3) Can gold ETFs be used in the portfolio?
4) How dollar doomsday scenarios have been talked about in the past and why you should ignore them.
5) Investing vs. speculation - Know the difference.
6) Why not shift assets as we age?

ftp://radio.harrybrowne.org/05-02-13.mp3

In this episode he has a guest on who is a gold dealer (so beware of the bias). Yet, Harry Browne keeps things in check and explains what this asset can and can't do:

1) Using the TLT ETF for treasury bonds if you can't buy the bonds directly.
2) Why gold is used for inflation protection in the portfolio.
3) Why the portfolio is a package and you shouldn't try to guess what the markets will do (a caller is nervous about rebalancing).
4) Ignore all the inflation vs. deflation doomsday arguments you read. Nobody knows what will happen.
5) Why you should keep a balanced portfolio.
6) Harry only advocates index funds now, he doesn't advocate other mutual funds any longer as he did many many years ago.

ftp://radio.harrybrowne.org/05-03-06.mp3

As for commodities vs. gold. If you look at the record, gold and a basket of commodities have similar properties in returns and volatility. Harry Browne discussed not using commodities though because they can have bull and bear markets independent of inflation concerns. Gold has a very distinct and violent allergic reaction to high inflation, or threats of high inflation that commodities may not. I'll have to find the show where this is discussed.

Also, gold mining stocks are different than gold and may not react the same. Gold producers may do very well when gold is doing poorly and gold itself may be doing well when gold producers are doing poorly. The reason is gold miners can sell their gold forward and not benefit from price increases. Likewise, they could be hit with the same economic problems that have made gold shoot up very high. So that could affect them. Again, this is discussed in another show, but I'll have to find it.

I'm glad everyone is so interested in this thread. I really need to catalog all of his shows and put up a web page about them.

As with all investing advice though this is just one man's opinion. Please do your own due diligence. Realize that nobody has the perfect answer for everything and asset allocations are very personal choices. The important part is to make sure you always maintain a diversified portfolio, keep costs low, keep things simple and index the parts that work best with indexing (such as stocks).

[snowman9000]

[docneil88]

[snowman9000]

Neil,

I'm pretty sure CPI is not the key. The dollar's weakness in the world currency market is driving the gold price moves. IMO. Gold and the dollar are the two reserve currencies in the vaults of central banks around the world, so they are compared against each other. The gold and forex market does not seem to be too impressed with the validity of CPI numbers.

The CPI phoniness is why I am not impressed by TIPS. Groceries are up 9%, fuel is up a bunch, everything I buy is up, but the CPI says 2 point something. So the TIPS get goosed by 2 point something. It's a racket. CPI and TIPS, ptooey.

Exchange and gold rates tell us what is really happening to the dollar.

You raise a great point about past performance. We might not have as much history to go by as we'd like. I don't see any big flaws in the logic though.

[craigr]

[snowman9000]

The Permanent Portfolio was added to the portfolio smackdown.

Check out the current standings:
http://madmoneymachine.com/portfolios/

[allenmickers]

A few more possible ideas to modify his portfolio concept:

1) Use a standard aggressive bogglehead portfolio, something like 80/20 stock/bond until you turn around 40 years old and then begin to transition to his 25-25-25-25 instead of transitioning to 40/60 stocks/bonds. The permanent portfolio is about perserving capital more than making gains, so when you are younger and are riskier, then you can do more stocks and then switch to his permanent portfolio later.

The other reasoning behind this would be that if you are young and maxing out 401k and Roth IRAs, you probably dont have much extra money to invest in taxable accounts so physical gold would be an impossibility - at least it is for me with my $40k salary after maxing out $20.5k into 401k/IRA.

2) Use a 5% aggressive modifier to the 25% split:

Example:

GOLD - 20%
CCF - 5% (energy/Ag centric)

CASH - 20%
FLOATING SHORT TERM JUNK BONDS - 5%

BONDS - 20%
LONG TERM JUNK BONDS - 5%

GLOBAL INDEX FUNDS 20%
EMERGING MARKET/FRONTIER MARKET 5%

In these examples the 5% approximates the same "realm" as what its replacing. Theres more risk involved but in the environments that their safe counterparts are supposed to excel, the aggressive 5% should do good as well.

Perhaps one idea with the 5% risk factor would be to set it and forget it. When you build the portfolio, put the 5% in initially and never rebalance back into it. Count it as part of the 25% for overall balancing, but never contribute more to it. So over time, its going to represent a smaller and smaller portion of the overall portfolio, thus decreasing risk as you get older, but having more possiblity for return when you are younger. And theres a simplicity factor of never rebalancing back into those 4 - 5% sectors.

My concern against this 5% aggressive split is that I wouldnt really otherwise consider owning junk bonds or floating rate bonds. The only reason I chose them was because the 5% aggressive modifier concept seems worthwhile and those 2 are the only aggressive things I could think of that fall under the category of cash and long term bonds respectively.

[craigr]

[allenmickers]

Ive been listening to a few more of this shows. One thing he repeats often strikes me as another possible modification of his portfolio idea to make it more suitable for me.

He always states that the money thats precious to you, that you cannot afford to lose, should be in the permanent portfolio, and anything else could be speculated with. Based on prior boglehead readings, I always thought 5 to 10% was the max speculating money percentage. However working that 5 to 10% into the permanent portfolio didnt seem enough to really get good gains.

So what if I decide that exactly half of my money is "precious" to me and cannot afford to be lost. In theory, an 80/20 stock/bonds cannot lose more than 40% overall based on the worst year of stocks - however we all know thats no indication of the future.

So lets say that half my money is precious, that half goes into the Browne Portfolio, and the other half gets "speculated". I dont necessarily mean I am going to put 50% of my portfolio into micro-cap-emerging-market-commodity ETFs, but I could "speculate" into stock index funds, with the speculation being that stocks will outperform gold,cash and bonds over the next 40 years.

That would essentially make my portfolio 12.5% Gold, 12.5% Stocks, 12.5% Cash 12.5% Bonds, and then 50% into index funds.

To make the numbers simplier, lets modify it to:

10% Gold
5% TIPS
10% Long Term bond
15% MMF Cash
60% Global Stock Indexing

Thats basically a 60-30 Stock Bond split with 10% Gold.

Theoretically the 50% thats in the browne portolio cannot lose money - and the 50% thats "speculating" on stocks could go to zero but will more than likely produce nice gains in the future.

I'll probably throw some REIT into the 50% speculating stock section.

I keep learning and reading more of browne's work, and trying to figure out how to have it make sense with other boglehead ideas and my own personal risk tolerance.

[craigr]

I think that would keep with the ideas he presents as long as you think 50% is the right number for you. Barry talked about a couple of the requirements of the Variable Portfolio in his post.

Keep in mind that one of the most important concepts is if you underperform with the Variable Portfolio you aren't allowed to take money from the Permanent Portfolio to build it back up. However if you keep with index funds and follow the prudent Diehards philosophy you'll probably do just fine.

[cdgoldin]

Although Harry Browne initially suggested the use of zero coupon bonds for [part of] the long term treasury bond allocation, he later recanted ("Why Zero Coupon Bonds Aren't What They Seem", October 29. 1992, Harry Browne's Special Reports, Issue 154 Page 15).

He points out that "zeros provide extra power during periods of falling interest rates, but they provide no extra leverage when yields are steady! At such times, a zero will increase in price at a rate roughly equivalent to the interest you would have earned on Treasury bonds. So the smaller investment in Zeros will lag behind the return you would have obtained with a full budget for conventional T-bonds."

He further states, "As we've seen, there's no way to know how much volatility zeros will add to a bond investment. When interest rates fell in 1985, the gains in zeros were roughly twice those of conventional bonds of similar maturities. But the next time interest rates drop, zeros may show more -- or less -- leverage."

Another distinct disadvantage to zeros is that the imputed coupon interest is taxable each year, even though it is not received. Thus, zeros are more appropriate as an IRA investment, where the income tax is deferred -- but then you lose the advantage of capital gains treatment of profits.

After presenting a great deal of detail in regard to the actual vs. theoretical performance of T-bonds and zeros, he concludes, "I don't think it's a good idea to use zero coupon bonds for the Permanent Portfolio -- except for a few investors in special circumstances. Zeros are attractive for someone whose wealth is so tied up in illiquid assets that only a small part is available for diversification and balance. Zeros are an imperfect substitute for Treasury bonds, but for such an investor they can help to achieve a degree of safety....The additional leverage of zeros might be useful for a Variable Portfolio speculation...Benham Target Maturity Trusts are a valid substitute for zeros...and more convenient to work with.

The concept of having a "permanent portfolio" and a "variable portfolio" was "invented" by Harry Browne AND Terry Coxon (who went on to found the Permanent Portfolio Fund, with Harry as one of the advisers). The PPF sticks closer to the original allocation formula designed by the two. However, Harry and Terry disagreed as to whether silver and Swiss Francs belonged in the portfolio. Eventually, Harry presented a simpler portfolio to his readers, which performed as well (based on studies of the past 25-year's performances) as the original formula.

Another significant difference is that the PPF adjusts the Portfolio far more frequently. I believe an adjustment is made when there is a 1% deviation from the target allocations. For an individual investor to do so would result in profits being eaten up by trading commissions, as well as the need for the investor to monitor their portfolio much more closely. Harry's computer studies of 25-years' performance led him to believe that an annual adjustment (coupled with an unscheduled adjustment any time one of the four categories doubled in value) was sufficient, and would yield virtually the same result. Thus, one could effectively ignore the portfolio, except for the annual adjustment, once it was set up.

I am amazed when I do an Internet search, and find so many people who claim to base their portfolio and/or advice on Harry's concept, without understanding the very basics of it. For example, one wag tells us that he wouldn't feel comfortable with investing in long-term bonds, because they wouldn't mature in his lifetime. So he suggested much shorter term bonds as an alternative, ignoring the very reason that Harry and Terry selected long-term bonds for the portfolio. In another example, the "adviser" suggested radically modifying the portfolio percentages based on speculations as to what the market would do in the near future -- which is precisely what the permanent portfolio was designed to alleviate.

I miss receiving Harry's newsletter (which he stop writing when he "retired" and went into politics). Harry was one of the few "investment advisers" who didn't mind admitting he was wrong, didn't mind changing his mind when new facts became available, or when old theories didn't pan out, and didn't boast about his past achievements (except in occasional jest).

I wonder what he would have advised as a substitute when the Treasury stopped issuing 30-year bonds, and I wonder why he recommended TLT (which is a 20-year bond fund) as a valid substitute for direct purchase of treasury bonds.

[cdgoldin]

[cdgoldin]

Craigr state above:

[Barry Barnitz]

In Browne's final edition (2003) of his last book Fail Safe Investing he advocates the use of a low cost S&P 500 index for the stock portion of the Permanent Portfolio:

[craigr]

[cdgoldin]

Thanks for the additional information.

It seems that I never read "Fail Safe Investing", probably because I had read all of Harry's earlier writings, and assumed there was no change in his philosophy or specific recommendations. ('') I was also unaware of his radio shows until after his demise, and therefore missed any new advice he may have offered via that media. I do recall Harry recommending against using index funds (in answer to a readers' inquiry in the early 1990's), but perhaps that was before the broader S&P 500 and TSM index funds became available

My question in regard to TLT vs. long bonds was in respect to the average maturity of the bonds (20 years), not the use of a fund vs direct purchase of bonds. In his writings before 1998, Harry expressed the opinion that a bond with a maturity less than 25 years lacked sufficient volatility to carry the portfolio during a deflation. Thus, he recommended purchasing the longest bond available (which would have been close to 30 years) for the portfolio, and "rolling over" to a longer bond when the remaining maturity approached 25 years. Because there was no bond fund at the time that held 25-30 year issues, he specifically recommended against using a fund.

Of course, when the Treasury subsequently stopped offering 30-year bonds (~2001), I presume that Harry modified his early stance, and simply recommended the longest available bond. Thus, when TLT became available, it met the criteria for a bond fund, because Harry no longer required a 25-30 year average maturity. But I would have been interested in hearing his discussion of the volatility issue in respect to this change.

Currently Fidelity Investments charges NO COMMISSION on Treasury Bond trades, whereas Zions Direct charges a flat $10.95. Treasury Direct charges nothing for purchases, but imposes a whopping $45 fee for redemptions. Regardless, there is little reason to use a fund rather than purchasing the bonds directly, except that (long) bonds can only be purchased in $1000 denominations. The bond fund allows smaller amounts to be invested, after the fund minimums are met.

Because Harry Browne and Terry Coxon did extensive computer modeling of the permanent portfolio's performance over the 25-years before they "invented" it, we actually have a track record for over 55 years, covering a variety of economic scenarios.

As far as "using short-term Treasury bonds ... in combination with a Treasury MMF (for emergency reserves) with no impact on volatility or risk, but a better annual return", this agrees with Harry's advice (as I understand it). In fact, he recommended the Permanent Portfolio Treasury Bill Fund (PRTBX, which is managed by the same folks as the Permanent Portfolio Fund) for this specific purpose. Supposedly, PRTBX would provide a slighter higher return, especially after taxes. The following is a comparison of CPFXX and PRTBX (for a 0, 15, and 25% FIT bracket) as of 6/04/2007:

YTD 1 yr 3 yr 5 yr 10 yr

CPF 1.98 4.59 2.92 2.10 3.34
CPF–15% 1.68 3.90 2.48 1.79 2.84
CPF-25% 1.49 3.44 2.19 1.58 2.51
PRTBX 1.63 4.04 2.80 1.74 2.73

Assuming a 15% tax bracket, CPF outperformed PRTBX (before and after taxes) in 2007, and (on average) over the previous five and ten year periods. PRTBX slightly outperformed CPF in 2006, and (on average) over the previous three years. Assuming a 25% (or greater) tax bracket, PRTBX outperformed CPF in all years. This is assuming that all of the PRTBX gains were tax-free (until redemption). If not, then CPF may be the better choice. However, unlike CPF, PRTBX has annual fees and redemption (check) fees, as well as a much higher expense ratio (1.45% vs. 0.45%). And each redemption is a taxable event. Thus, for me, CPF is the clear winner, even after taxes!

However, an investment of the "cash" portion of the portfolio in bonds with a maturity date much more than 90 days in the future will expose that portion of the portfolio to market fluctuations as well as interest rate fluctuations, which will distort the role of the "cash" portion of the portfolio.

[Barry Barnitz]

Here are Harry Browne's comments on the long bond slice of the Permanent Portfolio allocation (quoting from Fail Safe Investing (2003 edition);

[craigr]

[workingatit]

this has been a great thread
if nothing else, it's an alternative for discussion purposes to the more common investment approaches seen here
thanks all for the contributions
particularly craigr has been outstanding w/supplying harry browne info

some thoughts from my standpoint:

a bond fund is going to show day to day high volatility compared to individual bonds, and so is a gold etf vs bullion in hand. this may be hard to stomach. on the other hand, w/a million dollar portfolio for example, how does one physically hold 25% in bullion like he suggests?

why not vg's etf, extended duration bond, instead of tlt, if choose to go this way?

the portfolio requires a lot of tax-deferred space to be efficient. the treasury mm fund, short term treasury bonds, certainly long term treasury bonds, and possibly a gold etf, are going to lose a lot in high tax bracket accounts

i followed harry browne on the political scene and found him to be brilliant. amazing how clearly he could communicate, and how simple things became after listening to him, but didn't know about this investing side. truly one of the greatest minds and contributors of our time, imo

[allenmickers]

Instead of 25% Cash which are essentially short term bonds, and 25% long term bonds, how would 50% Intermediate term bonds do instead? Yes they arent as volatile as long term but anytime I read about bond funds they mention average maturity date, so that even though it has some short, long and intermediate, they cite the bond as being intermediate.

I know why harry browne wouldnt do it, but if anyone with spreadsheet data can run them, Id be curious to see how much of a difference it made.

[craigr]

[craigr]

[dumbmoney]