Bogleheads

[Lbill]

[DP]

Hi,

[MediumTex]

One of the ideas that I think doesn't get enough attention is that some normally uncorrelated asset classes can become correlated under extreme conditions.

The best example is high quality corporate bonds, which during good times provide a nice complement to stocks and when combined with stocks can provide for some very good sleep. Wellesley is probably the best example.

However, when it looks like the sky might actually fall, everyone figures out that corporate bonds are no better than stocks if earnings are being pinched and financing for continuing operations is suddenly very hard to come by.

***

To the issue of the inability to do a PP in a 401(k) plan, this doesn't have to be a big deal. Virtually every 401(k) plan has an S&P 500 fund and a stable value fund, which can function as the cash portion of the portfolio. Thus, you only have to come up with 50% of the portfolio outside the 401(k) plan, which is within reach of many people who also have IRAs from previous employers, as well as non-taxable accounts.

Also not to be overlooked is the "brokerage window" in many 401(k) plans, which allows you to buy and sell individual stocks in your 401(k) account. Many plans don't advertise this feature heavily because they don't really want heavy utilization of it. About 20% of 401(k) plans have a brokerage window. Read your plan materials to see if your plan offers it.

***

BTW guys, I want to say again what a great discussion this is. It's a real treat to be able to discuss the PP with such a thoughtful group.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[Lbill]

DP said:

[DP]

Lbill,
The returns listed indicate that they are annualized THROUGH Dec 2008, so I assume the 2005 article was updated after the end of the year. So in this context, the 1 year annualized return is the same as the 1 year annual return. Dec 2008 was a very positive month so it should not be surprising that returns for the year were higher then they were through Dec. I'm not sure what your source was for the Nov returns. Perhaps that was at the market bottom, not month end.

In any case, I think the point you were making is that the returns broke down last year, and they did. My point was simply that for the last year, relative to other allocations, -20% wasn't so bad. For reference, in checking the recent backtest spreadsheet which lists performance for a number of lazy portfolio's, over 2008 the All Weather portfolio outperformed 21, underperformed 4, and was essentially even with the CoffeeHouse portfolio.

Last year was a perfect example of the saying, "the only thing that goes up in a bear market is correlation". Per Bridgewater the returns for 1, 3, 5 years was -20.3, -3.4, 4.3. For PRPFX the comparable returns were -8.36, 5.45, and 7.18. I expect the 4 part permanent portfolio was similar over 3 to 5 years, it was definitely better last year.

So you have to hand it to Harry Browne, to have created a portfolio that weathers the storm better then one of the leading hedge fund managers best attempts at an all-weather portfolio.

Don

[Lbill]

DP - I better put an end to this side conversation we're having. Thanks for your comments. I did find something by searching the web again, in which a website quotes Dalio as saying that the All-Weather portfolio lost about 20% last year, so you may well be correct. If so, then it probably did do about the same as the traditional 60/40 portfolio.
_________________
"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

[stratton]

Gold performance in various currencies from this article.


Paul

[MarcDeMesel]

[MediumTex]

That sounds like a pretty solid Euro permanent portfolio.

What rebalancing bands are you thinking?

I might add 15% of the stock piece in an international fund, but that's a minor point.

What type of physical gold? (it doesn't really matter, I'm just curious)

In the U.S., the Eagle, Maple Leaf, and Krug are probably the most popular.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[MarcDeMesel]

[Lbill]

[MediumTex]

You are protected from deflation with long term treasuries.

The long bond is currently at about 3.72%. It could easily hit 2% if things started to seriously fall apart. See Japan.

The question isn't whether deflation would be hard on the government's finances--there is no question it would be a disaster, but the point is that the government will do better than the private sector, since the government has the ability to loan money into existence and print it as well, while the private sector has to rely on profit and credit to honor its debt.

Here is something you can depend on (in my opinion): if the U.S. government defaulted on its treasury debt, the cash under your mattress wouldn't be worth anything. Think through the scenario from start to finish and you will see that a U.S. default on its sovereign debt would be the last domino to fall.

Heading into 2008, the whole world was talking about how the weak dollar was here to stay, the Euro was going to replace it, inflation was starting a long term upward trend, etc. However, when the wheels really started to fall off, everyone piled into the dollar. It reminded me of a pack of teenagers calling their parents from the police station after getting in trouble.

While this may not be true at some point in the future, the U.S. dollar is still the world reserve currency, as well as the beneficiary of the petrodollar regime. The reserve currency status creates an enormous incentive for the rest of the world to do whatever is necessary to prevent a default, if that were ever to look likely.

Finally, can anyone conceive of a default on sovereign debt with 30 year yields under 4%? It seems to me that if default risk were ever to become a serious possibility, it would be preceded by a spike in long term rates. I don't pretend to understand it, but over the last 27 years, the more irresponsible the U.S. fiscal and monetary policy has become, the lower long term treasury yields have gone. This trend defies logic, but the PP protects you from breakdowns in logic as well.

Of course (and as always), if cash makes you feel better than short term treasuries or savings bonds, then hold the cash.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[MarcDeMesel]

[MarcDeMesel]

[MediumTex]

[dumbmoney]

The case of Euro bonds is different from U.S. bonds because the Euro is a multinational currency. The Euro countries can't "print" Euros at will, which makes default possible without a collapse of the Euro.

If there were fears of a U.S. default, people certainly wouldn't flee to cash. They would flee the dollar entirely. The debt and the currency share the same fate.
_________________
I am pleased to report that the invisible forces of destruction have been unmasked, marking a turning point chapter when the fraudulent and speculative winds are cast into the inferno of extinction.

[MarcDeMesel]

[MediumTex]

MarcDeMesel,

Have you read "Fail Safe Investing" and/or "Why The Best Laid Investment Plans Usually Go Wrong"?

No amount of discussion about the PP can take the place of hearing the whole case for the PP as Harry Browne made it.

Best of luck with the Euro PP.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[Lbill]

Richard Russell, who is a well-known "goldbug" of sorts writes that he believes the Chinese wish to acquire large gold reserves in order to eventually put the yuan on the gold standard. Their goal is to become a dominant international power by acquiring reserve currency status. Russell notes that historically the major reserve currencies have lasted roughly 100 years during the time that the reserve currency nation was a dominant superpower of its time. The USD has had that status for about the last 89 years. This implies that the USD will lose it's reserve currency status at some point in our lifetime, perhaps even sooner than we now expect. Among other things, I believe that one's "all-weather" investing strategy, be it PP or something else, should incorporate the possibility of another currency, or basket of currencies evolving to reserve currency status. The U.S. seems to have sowed the seeds for this by acquiring enormous debt, particularly foreign debt. I suppose gold is a natural hedge for this possibility - stocks, bonds, and cash all denominated in USD do give me some concern. I don't know what to do about this except to diversify broadly into foreign equities and bonds. However this is a departure from Harry Browne's teachings. Is there any basis to argue that he never really considered the possibility of loss of reserve currency status and probably corresponding debt defaults by the U.S.? If these cataclysmic events were not even seriously considered, one might argue that we need to modify the PP model in order to take them into account.
_________________
"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

[Pres]

If only Harry Browne had lived to see these times. This crisis is making huge numbers of people see the brilliance of his permanent portfolio!

One of the finest and most popular personal finance blogs has just made a post about Harry Browne's permanent portfolio. J.D., who owns the blog was impressed by craigr's explanation at a recent Portland diehards meeting. The post is generating a lot of comments.

[MediumTex]

I think that the China reserve currency gold standard scenario is intriguing, but would be a process that would, in my opinion, unfold over a period of time.

I am not overly concerned with holding U.S. dollar denominated sovereign debt, so long as that is the same currency that the grocery store and the IRS take for payment.

I am pretty sure that HB wouldn't disapprove of 15% in international stock, which is what I do.

Apparently, the rest of the world still thinks the dollar is a safe place to be, so I'm not too worried about it in the short to intermediate term.

To me, China is just a big question mark. It's sort of like a guy who is 7 feet tall and loves basketball. That doesn't mean that he's going to be a great player, though it's certainly fun to speculate about.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[Pres]

[norak]

I think the permanent portfolio is very good. Many Bogleheads talk about the importance of diversification, yet many recommend young people put 100% in stocks, which is hardly diversification since it ignores bonds, cash, and gold.

[stratton]

[Lbill]

There's another thread on this, but I thought it was so relevant to the discussion of the PP that it was worth repeating it here. This is a quote from this interview with Peter Bernstein in 2004.

[MediumTex]

[craigr]

[MarcDeMesel]

[MarcDeMesel]

I have been pondering leaving the cash part out of the permanent portfolio and taking 33/33/33.

I understand that volatility will be higher with only 3 assets. Since 1972 the PP with only 3 assets would have given 5 years negative instead of only 2. And the worst year 1981 with -4% with 4 assets would have been -12% with 3 assets.

Nonetheless, total performance over 38 years with only 3 assets would be 10,4% with 3 assets instead of 9,7% (transaction costs included) with 4. So volatility is higher but total performance too.

An extreme example is Iceland where with 4 assets you would have had 45% in 2008, with 3 assets you would have had 155%, 10% more. (This high performance is due to the crash of the currency which gave gold a very high performance of +200%. Note that your buying power was still halved because that currency was only worth 1/3th of what it was at the start of the year. So the 100 Krona could buy 1 euro/dollar at start of the year. The 155 krona (55% 'profit') at the end of the year could only buy 0,3 Euro/dollar.

However, performance is not the most valuable argument to me for 3 assets. It's counterparty risk. With 4 assets you have 50% government/fiat currency counterparty risk. With 3 assets this risk is better divided equally 33% government, 33% companies (stocks) and 33% gold.

I don't get how cash would protect against 'recession'?
Long term bonds already protect against 'recession' because interest rates are going down during recession. And if the recession is inflationary gold will protect you.

I know Harry Browne must have had a good reason to include cash also but I cannot find his reason other than the recession argument which I don't understand.
_________________
My blog about the European Permanent Portfolio: http://europeanpermanentportfolio.blogspot.com/

[Lbill]

[MediumTex]

[craigr]

"Why the best laid investment plans..." is definitely a great book. There are parts that are dated (such as information on warrants and using non-index funds), but the general advice is spot on.

The books spends the first 1/3rd destroying many commonly used market timing and investment schemes. Then, it presents the principles behind his portfolio idea (again some outdated methods of implementing it [using non-index funds] are present so you need to remember that). It provides a very in depth explanation of the strategy and why the components were selected for the portfolio. It also discusses other components (like real estate) and why he excludes it with a thorough discussion.

It's well worth the small price to find a copy. Published in 1987, I think it is a classic with many pieces of timeless advice.

[MarcDeMesel]

Great, Why the best laid ... is ordered!

I also found some other pieces from Harry Browne:
You Can Profit from a Monetary Crisis
Complete Guide to Swiss Bank Accounts

I know it's his early work but I am curious, is it worth paying 10 dollar for per piece? (that's what it costs in Europe)

I am interested in the first book because it's how he got famous if I am correct. It's also his first and probably last pure speculative book. Dying to read it

But, maybe 'You can profit from a monetary crises' was a great disappointment for someone here, or totally outdated?

The second book about swiss banks fascinates me because I am still interested in the subject. However, I can imagine this book to be totally outdated. Maybe someone read it here already? Is it worth spending 10 dollar?
_________________
My blog about the European Permanent Portfolio: http://europeanpermanentportfolio.blogspot.com/

[MarcDeMesel]

[craigr]

[craigr]

[MarcDeMesel]

MediumTex, thanks for the great book advice "Why the best laid ..."

Craigr, thank you very much for your reply on the 3 vs 4 assets.

Harry Browne would have said the same thing. You believe that you are not protected anough against inflation with the permanent portfolio? No problem, just buy some more gold but put it in your 'variable portfolio'.

It's great advice.

It's indeed clear from past performance that there are several years where a recession happens like you describe it, where everything goes down except cash or where cash outperforms all other assets (1981, 1994, 2001).

Thanks a lot, you helped me a lot.
_________________
My blog about the European Permanent Portfolio: http://europeanpermanentportfolio.blogspot.com/

[Lbill]

What happens if there are rising interest rates, but no inflation? Martin Weiss proposes a scenario in which treasury bond rates will rise significantly because there will be decreasing demand for U.S. treasuries, particularly by foreign investors. But this will not be accompanied by a rising CPI because of economic recession, or even depression. I don't recall a period like this in history - I've always assumed that rising interest rates would be accompanied by inflation. Is there historical precedent? Even if there isn't, is this possible? I find myself wondering how the PP asset classes would perform: stocks and long bonds should go down because of rising rates, gold might not do well because there is no inflation. The only asset that would hold its own would be treasury bills, since their interest rates should track the rise in rates. Did Harry Browne ever discuss such a scenario? I'm wondering what our PP experts think about this.
_________________
"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

[MarcDeMesel]

[craigr]

[SquawkIdent]

Most of this thread has dealt with HB's 4x25 portfolio. But how many posters use PRPFX for their permanent portfolio? Lots of pluses (easy to invest in, very tax efficient, etc.) but also some minus (active manager, expenses are not cheap, etc.).

[MarcDeMesel]

Anyone would know where I could find historical returns for a European Permanent Portfolio?
_________________
My blog about the European Permanent Portfolio: http://europeanpermanentportfolio.blogspot.com/

[DP]

Hi,

[MarcDeMesel]

According to Shadow Statistics inflation since 1972 has been 7,5% on average. (You don't see the exact number but I measured 100 dollars in 1972 equals 1500 dollars today)

Equally so since 1999 inflation was still 7,5% on average. (100 dollar in 1999 equals +/-220 dollar in 2009)

This is very strange because over the last 10 years interest rates have gone down and prices have still doubled.

How could 30 year bonds be a profitable investment if I fix them on 4% while prices are going up at a rate of 7,5% on average?

I understand that interest rates can go down even more just like in Japan to 1% and that would give much needed profits in the permanent portfolio thanks to 30 year bonds.

But, I have seen interests rates going down since 1983, 25 years now, but still in that period prices have doubled every 10 year.

A confused man.
_________________
My blog about the European Permanent Portfolio: http://europeanpermanentportfolio.blogspot.com/

[stratton]

[MarcDeMesel]

[quote="stratton"]

[Roy]

[craigr]

[Lbill]

[MediumTex]

I nominate craigr for "Most Level-Headed Person I've Ever Met on the Internet".

Craigr and HB both remind me of the proverbial "greatest physician in the world" of whom no one is aware because none of his patients are ever sick.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne