Bogleheads

[craigr]

[stratton]

Larry Swedroe uses wider bands on more volatile assets. The idea is to not cause too many taxable events and transaction costs.

So Craigr's 20-30 band could be 15-35 for gold only.

Paul

[Wonk]

[stratton]

[Wonk]

[Roy]

[ziggy29]

[MediumTex]

[stratton]

[snowman9000]

Folks: It's been a great thread; let's not deviate too far into speculative matters that might be better off in another thread....


JMO of course.

[MediumTex]

[Lbill]

If this question has already been asked and answered I apologize. I've been playing around with Simba's backtest spreadsheet and find that I get a better 1972-2008 CAGR and SD when I diversify the 25% stock portion of PP somewhat; for example, allocating 5% or more to SCV. I get some further improvement when I allocate a small portion to Emerging Market. Is there anything inherently wrong with diversifying the stock portion as long as a total 25% allocation is maintained? I can see an argument for not including any foreign market (especially emerging market) because there tends to be a slightly higher correlation of foreign markets to gold. However, what would be wrong with allocating a portion to a US index such as SCV? I'm thinking about 20% TSM and 5% SCV.
_________________
"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

[MediumTex]

[Roy]

Lbill; Tex,

One way to view this is to "Slice" the equity however you would in a more conventional asset allocation not named the PP. But now you'll get even more tracking error (if that matters to you). I think this can "work," and should work, and it would be only my "ain't broke" approach to the PP that would prevent me from making any change (an emotional fear-factor I'd never apply to other portfolio designs!). Much of this had been discussed on Craigr's blog and probably here.

A less aggressive approach would be to add a broad TSM International fund, like VGTSX, to taste (this keeps the comparative market capitalizations similar). I think doing this helps standard deviation, improves long-term returns some, and would not make a big deal if you wanted to go 50/50 on the split. I see doing this as much less aggressive than a full Slice and Dice using domestic only, say.

I would not worry so much about currency risk in adding any foreign equity, as I would worry if using foreign fixed income as a proxy for US fixed.

Finally, think "portfolio as a whole," always. If adding the PP to your existing portfolio (vice using PP exclusively) you'd really need to see how you are already set with international in the non-PP portion. And if you have some international, I'd likely just stick to TSM for the PP.

Roy

[manuvns]

[Elmer Fudd]

Came across this but something doesn't sound right. http://republicmonetary.com/goldira.html

[MediumTex]

[Lbill]

[stratton]

[dumbmoney]

[MediumTex]

What we have learned from 2008 is that no matter how bad things seem in the U.S., the rest of the world still views it as a safe haven, including the dollar.

I completely agree that GLD and IAU are not nearly as good as holding physical gold, but they are still nice tools to use in working with the PP.

I always assume that market insiders know the real score way ahead of the rest of us. With this in mind, if either GLD or IAU were not clean games (or perhaps exactly equally dirty), they would not trade in almost perfect lockstep. One would command a higher premium than the other.

When it comes to the government intervening in the gold market if the price of gold really spiked, I think it would be done on a more "plunge protection team" basis (i.e., behind the scenes or through clowns like the U.K.'s Gordon Brown), rather than something overt like confiscation or something more draconian. Why do I believe this? No reason, other than I assume that the government will always do what's best for the government, and I don't see how it would benefit the government in a fiat currency regime to start confiscating gold. From the government's perspective, who cares how high the price of gold goes? It's not like food, where hoarding can cause people to starve. If someone hoards gold, it's not like anyone is going to starve or freeze to death. This theory was proven to have at least some basis in reality the last time gold had a strong run in the 1970s. I don't recall any talk about the government attempting to confiscate gold back then (though lots of gold dealers talked about it endlessly).

Look at it this way: What would be the best way to ASSURE a huge run in the price of gold globally? It would be the United States government talking about confiscating gold. With that in mind, why would the U.S. government do that if it was concerned that there was too much appreciation in the price of gold already?

Here is the MediumTex theory on how gold confiscation by the U.S. government might actually occur............

...............It would occur through PURCHASE.

The U.S. government would announce one day that it would be BUYING gold for the next 180 days at $4,000 an ounce (that's just an arbitrary price, but there would need to be a big premium). People would readily turn over their gold for the $4,000 per ounce price. The U.S. government wouldn't care about the price, because it's all printing press money anyway.

Once everyone had sold their gold to the government, the government would then put some sort of restrictions on trading bullion like a high excise tax (e.g., 50%) that would kill the gold market.

In this scenario, the government could poison the well of the gold market without prohibiting anyone from owning gold and without prohibiting anyone from buying and selling it either.

If it was my job to mess up private ownership of gold, that's the way I would do it. I would never try to get into confiscation, though. I don't see how that would do anything but make a bad situation worse (from the government's perspective anyway).

It's a bit like price controls. They NEVER work. All they do is guarantee shortages of the items subject to the price controls and create a black market for those who really need the items and are willing to pay the market price.

There are probably some holes in my theory, but I think that the way it would actually go down is probably impossible to predict today, which is exactly what HB would have said.

Here is one thing to keep in mind and really think about deeply (if you want to): in a globalized world economy with plenty of China-like super-cheap labor markets, how could an advanced first-world economy like the U.S. EVER have a real inflation problem? Let me explain. What does runaway inflation require? It requires rising wages, otherwise demand destruction kicks in almost instantly in the face of rising prices because people have the same amount of money that they had before prices started rising, so they can't spend more, and thus they must buy less of the now higher priced goods. We saw this last year when gasoline spiked; since wages didn't rise in response, people just cut back on driving and everything else in response to the higher gas prices.

Now, under what conditions would wages in the U.S. rise in response to rising prices? I can't think of any, because it has become clear to me that U.S. companies are thrilled to offshore any U.S. job they can if it will help their bottom line. Thus, ANY upward U.S. wage pressure is likely to cause more offshoring of U.S. jobs, rather than actual higher U.S. wages. This dynamic is new, and thus makes historical examples of inflation a little off the mark (for me, anyway).

The difference in the 1970s was that free trade hadn't caught on like a new dance move (and thus massive offshoring of jobs wasn't an option), and labor unions still had enough strength in the U.S. that they could demand higher wages and get them.

I think that this strange inflation situation is going to catch a lot of people by surprise (including both workers and companies). Companies are going to find at some point that every time they try to raise prices they immediately see decreased sales, and at some point profit margins are going to get squeezed so hard that there will just be a handful of ultra-low cost providers around.

But I may be wrong about all of that. That's why I stick with the PP.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[ziggy29]

[stratton]

[DP]

Hi,

[MediumTex]

Since the conversation seems to have hit a lull, I thought I would mention something about Harry Browne that some of you may have wondered about.

If you have visited his website, you may have seen the 20 CD audio program called "Rule Your World" that was recorded back in 1966 (I think) and wondered to yourself if it was any good. Well, I bought it about a year ago (download for $99 I think) and it is an amazing program (I thought so, anyway).

Basically, it's a 20 hour discussion of how to apply libertarian principles to everyday life (though that doesn't even begin to capture the scope of the content, which is quite provocative, and not at all like most self-help drivel).

What's especially impressive is that HB was in his early thirties when he put on this program, and even then his worldview seemed complete and mature (not to mention that he was a truly gifted public speaker).
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[Pres]

[MediumTex]

[koekebakker]

I've recently decided to gradually change my current basic boglehead 50/50 portfolio to a Eurozone-Permanent Portfolio.

Maybe other people reading this topic are interested in a euro-based approach as well, so here's what I've decided to do:

Stocks: Vanguard Global Stock Idxfund (TER 0,5%)
Bonds: iShares euro government bond 15-30 (TER 0,2%)
Cash: iShares Barclays euro treasury bond 0-1 (TER 0,2%)
Gold: mostly physical, some in ETFS Physical Gold to make rebalancing easier.

I think this is a cheap and easy to maintain portfolio. Happy to hear suggestions!

[MediumTex]

[ClubberLang]

I recently read Harry's book, Fail Safe Investing, and have been listening to the old Money Talk shows. In fact, I read the book five years ago, and didn't take action, and I can kick myself now for not doing so at the time.

Anyway, I recently invested about 60% of my retirement portfolio in a Permanent Portfolio as Harry would suggest. The other 40% is in a Money Market but I've been debating what to do with that money as the stock market seems to be picking up. The only thing keeping me from investing that money in a Permanent Portfolio is that my entire portfolio was in stocks and I lost 40% over the past year. If I place it in a Permanent Portfolio, I will only recover 25% of that if the stock market rebounds. So I guess the question is this:

Should I forever write off my losses over the past year and put it all in a Permanent Portfolio?

or

Buy all stocks with the funds in the Money Market Fund? I would still have 60% of my retirement funds in a Permanent Portfolio.

I'd hate to only recover only a fraction of what I lost over the past year if the stock market rebounds...but I don't want to lose anymore.

[DP]

Hi,

[Pres]

[zhiwiller]

Clubber, whatever happened in the past is a sunk cost. Set your adequate level of risk now and go from there. Forget what happened last year because you cannot go back and change it.

[dumbmoney]

[MediumTex]

[Lbill]

Stratton said:

[Pres]

[MediumTex]

[Lbill]

[stratton]

[MediumTex]

[DP]

Hi,

[MediumTex]

[Lbill]

[MediumTex]

Anyone remember that Barbara Mandrell song "I Was Country When Country Wasn't Cool"?

Well, Harry Browne was utilizing non-correlated risk to mitigate portfolio volatility and frequency of extinction events when utilizing non-correlated risk to mitigate portfolio volatility and frequency of extinction events wasn't cool.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[Lbill]

MedumTex - You have some provocative thoughts there for sure. The article by Ray Dalio at Bridgewater that is linked in DP's post, has similar provocative ideas. For example, it made perfect sense to me to use leverage in order to equate the betas of different low-correlated assets. If you leveraged up a bond index so that it would have the same SD as TSM, in theory this would improve risk/return by combining the two because they generally have a pretty low correlation. You would, in effect, be souping up the diversification benefit of bonds. I liked the idea so much I spent some time trying to figure out how to approximate it using some of the leveraged ETFs. However, it turns out that this mousetrap didn't work as well in practice as in theory. In 2008, Dalio's "All Weather Portfolio" using this methodology crashed and burned with everything else. The concept worked alright, but everybody apparently overlooked the fact that it would work as well to the downside as it would to the upside. So, back the drawing board...
_________________
"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,
I think it may be extreme to say that Dalio's All Weather Portfolio crashed and burned. It was intended to carry risk similar to a 60/40 portfolio, and I thought I had read that it lost on the order of 20%. This is almost exactly what a 60/40 portfolio lost last year. Diversification was of little help last year to most portfolio's, the Permanent Portfolio being a significant exception. This doesn't mean All Weather won't still outperform the 60/40 portfolio in the long run.

Re. the use of leverage. I have to think that combining leveraged assets as suggested earlier, would provide higher returns, although not higher risk adjusted returns. In addition to using VFISX and EDV, you could include small cap with perhaps some emerging market as the stock allocation in a permanent portfolio. This should raise the returns, but if you use the full allocation you have also raised the risk ... which kind of goes against the whole idea. Of course you could then allocate less to the Permanent Portfolio and use the remainder for something else and carry similar risks.

Don

[craigr]

[arjking]

The major problem with this asset allocation is the availability of long-term treasuries and gold in a 401k account. A relative of mine has 95% of her money in her company 401k. For the bond allocation she has available a TIPS fund or a total bond market fund. TIPS has the longer duration but not by much, I think its like 7 vs 3 years, nothing close to 20+ that is required. I chose the total bond market because I understand it better than TIPS. Any suggestions?

[Swivelguy]