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Bogleheads
Investing Advice Inspired by Jack Bogle
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Lbill
Joined: 13 Mar 2008
Posts: 2078
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 Posted: Mon May 04, 2009 3:55 pm Post subject: |
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Tex - now we need the nominee(s) for "most pinheaded." 
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"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 |
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Mon May 04, 2009 4:08 pm Post subject: |
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| Lbill wrote: | | Tex - now we need the nominee(s) for "most pinheaded." |
Interest in the PP is usually a built-in pinhead filter.
The average pinhead craves something more complicated and exciting than steady returns in all economic environments.
***
One thing I have been thinking about lately is that people who haven't done the PP for themselves may visualize the allocation as being 4 x 25% all of the time. In reality, the 4 x 25% is typically only going to be present following a rebalancing. The volatility of the non-cash pieces will usually mean that the asset classes will almost immediately begin to go in different directions.
If one wanted to visualize the PP on a typical day, it might look something like this:
Stock - 29.4%
LT Bonds - 21.8%
Gold - 27.1%
Cash - 24.3%
It's like a horse race. They're all lined up to start, but they finish in a different order, and you don't know the order in advance.
Maybe it's just me, but the steady overall returns can create a misleading mental image that you are just sitting on 25% in each class all of the time.
I believe that PRPFX uses a +/- 10% rebalancing band for each asset class (e.g., for its 20% gold piece, it would rebalance at 18% or 22%), so one difference between the PRPFX and the PP is that the asset class allocation percentages are much tighter.
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"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
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dumbmoney
Joined: 16 Mar 2008
Posts: 1312
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| Posted: Mon May 04, 2009 4:22 pm Post subject: |
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I never thought of price controls before. If government creates a black market, the official CPI would certainly not reflect the black market price.
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Lbill
Joined: 13 Mar 2008
Posts: 2078
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| Posted: Mon May 04, 2009 4:38 pm Post subject: |
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dumbmoney - just remember that the people from the government are here, and they are here to help us. That is why we invest in the PP. 
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"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 |
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Lbill
Joined: 13 Mar 2008
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| Posted: Mon May 04, 2009 4:48 pm Post subject: |
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There have been lots of articles published on the diversification benefits of commodities. I'm only aware of one similar study on gold:
Portfolio Diversification with Gold, Silver, and Planinum prepared by Ibbotson Associates for the Bullion Marketing Services.
Apparently, a full copy of the report can be obtained at Bullion Marketing Services. Is anybody aware of a copy of the report, or others that look at gold and precious metals bullion (not futures) for portfolio diversification? I'm thinking that whatever benefits commodity ETFs are supposed to have (low correlation with stocks and bonds, high inflation protection) gold has got to have even a better record and I'd like to be able to back that up.
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"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 |
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stratton
Joined: 04 Mar 2007
Posts: 6233
Location: Puget Sound
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| Posted: Mon May 04, 2009 4:51 pm Post subject: |
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| Lbill wrote: | There have been lots of articles published on the diversification benefits of commodities. I'm only aware of one similar study on gold:
Portfolio Diversification with Gold, Silver, and Planinum prepared by Ibbotson Associates for the Bullion Marketing Services.
Apparently, a full copy of the report can be obtained at Bullion Marketing Services. Is anybody aware of a copy of the report, or others that look at gold and precious metals bullion (not futures) for portfolio diversification? I'm thinking that whatever benefits commodity ETFs are supposed to have (low correlation with stocks and bonds, high inflation protection) gold has got to have even a better record and I'd like to be able to back that up. |
I haven't found a copy of the report. However, there are several snippets or summaries put out as articles. There is one on the Bullion Marketing Services web site. If you look through multiple article you can pull out most of the information the study provides.
Paul |
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Lbill
Joined: 13 Mar 2008
Posts: 2078
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| Posted: Mon May 04, 2009 5:48 pm Post subject: |
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stratton - I've read those. The 33-year correlations between bullion (gold, silver, and platinum) and long treasuries, 90-day bills, and stocks were very low or negative as you would expect. However, the risk and return of portfolios with approximately 7% to 16% bullion were barely different from portfolios with no bullion. I don't understand how adding such a low-correlating asset could make such a small difference in risk-adjusted portfolio performance.
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"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 |
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DP
Joined: 17 Apr 2008
Posts: 481
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| Posted: Mon May 04, 2009 7:56 pm Post subject: |
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Hi,
Re. using gold to diversify a portfolio. FWIW, In my tests with the backtest spreadsheet I have found gold to be a more effective a diversifier then commodities.
http://www.bogleheads.org/foru....highlight=
Don |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Mon May 04, 2009 8:48 pm Post subject: |
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| MediumTex wrote: | | I nominate craigr for "Most Level-Headed Person I've Ever Met on the Internet". |
You are too kind and also obviously unaware of the other posts I've made on this forum. 
Re: Gold for diversification.
I think when a portfolio needs hard assets for protection from certain events that gold outperforms them all. You get the benefit of gold being a commodity and also being considered money by most of humanity. You therefore get protection when inflation is high or when there is a real or imagined financial crisis. |
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Lbill
Joined: 13 Mar 2008
Posts: 2078
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| Posted: Mon May 04, 2009 10:08 pm Post subject: |
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craigr - As you know there are a lot of threads on the forum regarding commodity ETFs and the conclusion is in dispute: those who argue in favor are mostly citing the low correlations of commodity ETFs to bonds and stocks, along with the positive correlation to inflation and the fact that commodity prices have spiked during "event shocks" that have hurt stock and bond prices. Those who argue against cite the fact that commodity futures have not even managed to track inflation over longer periods of time, and commodity ETFs are really not an "asset class" at all. Gold has the same problem as commodities - it has no intrinsic rate of return and just manages to track the inflation rate over long periods of time (so do T-bills). Maybe one of the best endorsements for investing in gold is that you should "hold 10% of your portfolio in gold for insurance purposes and hope you never collect". From what I do know, it seems to me that gold and commodity ETFs would be held for the same reason, and that gold is probably functionally superior to commodity ETFs for protecting against unexpected inflation and event shocks, and is probably really a true "zero-beta" asset; that is, it carries no stock market risk whatsover and has a long-term stable non-correlation to stocks (and bonds for that matter). Commodity ETFs are NOT a zero-beta asset, as shown by the fact their correlation in 2008 went nearly to 1. Therefore, if I were to choose one, it would be (is) gold. However, I do worry about the fact that it does not have an intrinsic rate of return, and that over longer periods of time it pretty much returns the same as T-bills. And it is one of the most volatile assets you can dream of holding. Maybe 10%, but isn't 25% stretching it?
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"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 |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Mon May 04, 2009 10:38 pm Post subject: |
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| Lbill wrote: | | However, I do worry about the fact that it does not have an intrinsic rate of return, and that over longer periods of time it pretty much returns the same as T-bills. And it is one of the most volatile assets you can dream of holding. Maybe 10%, but isn't 25% stretching it? |
Oh yes I'm well aware of the pros and cons of gold ownership. There is a tremendous amount of hyperbole out in the investing world about gold and hard assets on both sides of the issue. Hard assets like gold aren't worthless, yet they aren't the end-all either. They are a tool that works at certain times.
I was talking with an Ex-Marine recently and he was discussing what it was like to be in a shooting War as infantry. He told me about what a pain it was to carry a rifle. They're heavy. They're cumbersome. They require constant maintenance. They don't feed you. They don't give you water. They don't supply shelter. They in fact are just about useless 99% of the time.
But that 1% of the time they are more valuable than anything else you have.
That's my position on gold right now except it tends to be useful far more than 1% of the time (more like 50% of the time in a balanced portfolio with re-balancing going by the last 40 years). I understand the drawbacks. I understand the costs. I understand the criticisms and also the over-the-top claims from gold bugs. Yet I also feel, based on financial history, that there are certain times when having a hard asset like gold can be a real lifesaver.
Now is the right percentage 10%? 15% 25%? Hard to say. I don't think 0% is correct and neither is 100%. 50% seems awfully high unless you were running a very unusual strategy with a need for much currency protection.
But what I do know is I want to own enough of each asset to matter when I need it to. I see people debating owning 5% of this or 7.5% of that and I guess my response is "Why bother?" Even if that asset does very well it won't really impact the entire portfolio enough to matter. So I'd rather own enough such that I get the most benefit when I need it from the asset class.
But I understand your concern and if someone didn't run the permanent portfolio they may want to own much less in gold. But I wouldn't sleep well at night knowing I held none at all. I'm simply not that trusting of a person to believe the people running the show have my best interests at heart. I'd like to have some wealth outside of their ability to debauch it.
Now for me I came to the realization that I'm OK with having 25% of my money in gold and "off the table" of the investment gambling world. That's 25% of my wealth in a form that, while volatile over the short term, is amazingly stable over the long run (going on thousands of years). This is a unique attribute of this asset that stocks, bonds and cash doesn't have.
I use gold as part of a diversification strategy. While it doesn't pay interest or dividends, it does have capital appreciation at times when nothing else does. It's a useful tool to deal with the uncertainty in the markets.
Last edited by craigr on Mon May 04, 2009 10:47 pm; edited 1 time in total |
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Lbill
Joined: 13 Mar 2008
Posts: 2078
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| Posted: Mon May 04, 2009 10:47 pm Post subject: |
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craigr - Thanks for the thoughtful reply. I guess what it comes down to is the fear that having 25% in a (sometimes regarded as) "weird" asset like gold is taking a huge risk of getting killed if this volatile thing decides to turn on you (or, more likely, decides to go to sleep for a couple of decades). I think that's behind the concern about dedicating a full 1/4 of your wealth to it. I'm like a lot of people who believe in gold, but don't believe in gold either. Maybe commitment isn't really my thing, but I have to admit your points are compelling to me. Particularly the point of holding one asset that the "establishment" can't (at least so far) get it's conniving hands on.
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"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 |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Mon May 04, 2009 11:19 pm Post subject: |
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| Lbill wrote: | | craigr - Thanks for the thoughtful reply. I guess what it comes down to is the fear that having 25% in a (sometimes regarded as) "weird" asset like gold is taking a huge risk of getting killed if this volatile thing decides to turn on you (or, more likely, decides to go to sleep for a couple of decades). |
I've already resigned myself to the inevitability that gold will likely to go sleep again in the future and perhaps fall dramatically in price. In that case my plan is simply to keep rebalancing as normal.
Heck, I would have loved to have been buying gold at $250-300 an ounce as it was in the late 1990s-early 2000 when everyone was convinced stocks were all you needed to own. I would have really loved to have been doing this with my stock profits as the PP strategy would have had me selling out of stocks the entire time to maintain my 25% allocation and buying gold when it was cheap and nobody wanted it.
Alas I wasn't doing this at all. Instead what I was doing was watching my portfolio dive after 2000 and not begin to recover until 2002 while gold took off in price the entire decade so far. This was an expensive lesson in the importance of diversification and rebalancing.
Yet I had the same concerns as you did at one time, too. But I looked at the data and financial history and, frankly, didn't see this compelling case people have against holding gold. The empirical data doesn't support the hypothesis.
I understand the arguments people commonly put forth, but they are frequently looking at the asset in isolation or cherry picking dates to make their point. When you look at gold in a diversified portfolio (like being discussed here) then the criticisms don't hold up.
It would be one thing if the gold allocation had a clear and decisive negative impact on the strategy. But the past performance doesn't support this conclusion. I'll be the first to admit that gold will do very poorly when the markets recover. But I also acknowledge that there have been significant stretches of time where the gold allocation has carried the other 75% of the portfolio. And by "significant stretch" I mean a decade or more. In fact the past 40 years has already seen two of those decades (1970s and 2000s) where the winning asset was not stocks, not bonds, not cash, not TIPS, not real estate, but gold. Of course you only saw this benefit if you used it in a balanced and diversified portfolio, not in isolation.
Now this could be coming to an end at any time as gold has had a fabulous run and I have no complaints as it has done the job it was supposed to do for me in the portfolio.
So for me I'll follow the strategy as it is. I've looked at it over and over again and while it may not be the best over any period of time, it does seem to be consistent with returns, have low volatility, and works well enough for my needs. In the end, I simply haven't come up with a compelling reason based on my research to toss aside the 25% gold allocation recommended by Browne in this particular approach to investing. |
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freeman
Joined: 20 Feb 2007
Posts: 56
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| Posted: Tue May 05, 2009 12:19 am Post subject: |
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Hi all,
Great conversation here, and very, very enlightening. Thank you for widening my perspective!
Haven't had a chance to read Mr Browne's related books yet but will. (Can't wait actually )
Lbill wrote:
| Quote: | | Does anybody think some are all of these things won't happen if there is runaway inflation in the U.S.? That's why I can't bring myself to believe in Zvi Bodie's approach of investing 90% or 95% in TIPS only. No investment is the perfect investment - never, ever. |
What about 100% TIPS?! See: http://www.prospercuity.com/swr.htm!
Another point I've seen raised in this looong thread is w.r.t. using I-Bonds for the cash portion of the PP. Could they be considered inappropriate, and if so why? I happen to own I-Bonds purchased in 2001/2/3 and issued with either of the 1.10%, 1.60%, 2% or 3% fixed rates offered back then: the Savings Bond wizard shows them with a current Rate of 6.05%-7.99% and Yield of 4.12%-5.86%. Compared to currently offered terms, those are a lot more interesting. But following a pure PP approach might call for using an MMF or ST Treasuries. Wouldn't it be nonsensical though to redeem them and use the proceeds to purchase say Gold or TSM in the taxable account, while replacing them with ST Treasuries in a tax-deferred account? It looks to me that while looking good right now, they might not provide the boost ST Treasuries can provide, and have historically provided with returns in excess of 10% at times when such returns may have been needed to keep the PP in good standing.
Finally, why is TLT recommended at the expense of EDV when the latter offers much longer average duration than TLT? Is it due to its use of zero coupon bonds? I'll admit I don't understand why, and while I am not asking for a tutorial on such bonds, any pointer as to why they are not as good as those in TLT in the context of the PP would be really appreciated. When purchasing LT bonds directly, should zero coupon ones be avoided?
Thank you,
Freeman |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Tue May 05, 2009 1:04 am Post subject: |
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| freeman wrote: | | Another point I've seen raised in this looong thread is w.r.t. using I-Bonds for the cash portion of the PP. Could they be considered inappropriate, and if so why? |
The cash portion is a lot less critical because it mainly is a buffer for recessions and is not designed nor expected to provide big returns under any particular economic situation (except maybe deflation where the raw purchasing power increases). I'm not sure what HB would say, however my personal position has softened a bit with this part of the allocation.
I think the critical thing is the cash allocation should be stable and not subject to volatile price swings due to market conditions. It also should be in very safe treasury securities so you have minimal credit risk. In this case, iBonds with a shorter maturity are probably OK especially at the rates you bought them for the cash allocation if you are comfortable with them. They are not a substitute for the gold or LT bond allocations though.
I should disclose that I know very little about I-Bonds. Once I saw they weren't suitable for my situation and strategy decision I never looked too deeply into all the risks. So take my advice with caution.
| Quote: | | Finally, why is TLT recommended at the expense of EDV when the latter offers much longer average duration than TLT? Is it due to its use of zero coupon bonds? |
The member "cdgoldin" discussed the difference between zeroes and regular bonds earlier in the thread. The issues revolve around taxation and performance differences in the way they both behave. Browne decided later that zeroes would not work as well as standard LT bonds in the portfolio. Just purchase LT bonds directly and not the zero coupon variety. |
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eyedoc
Joined: 06 Jan 2008
Posts: 9
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| Posted: Tue May 05, 2009 7:50 am Post subject: |
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| I want to second medium tex nomination for craigr. Maybe craigr should have a radio talk show to continue Harry Browne' s ideas. |
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Tue May 05, 2009 8:12 am Post subject: |
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RE I-bonds for the cash portion, I think that splitting a portion of the cash holding between I-bonds and series EE savings bonds is an outstanding option. You have complete tax deferral until redemption, plus absolute principal protection.
Compare I-bonds and series EE bonds to a treasury money market, or even to VFISX and you will see the benefits.
With that said, I might wait until after November to buy I-bonds, since the May-November 2009 window only pays a fixed rate of .1%, plus inflation adjustment. I bought a bunch earlier this year when the fixed rate was .7%, and I am very happy with that, all things considered.
For those who are talking about gold "going to sleep", think about what conditions are necessary for gold to "go to sleep"--typically, it is a prosperous economy and stable monetary policy. In other words, if gold is asleep, that means that some other part(s) of the PP are doing well.
For yet another analogy regarding the PP (I love analogies), imagine that there is a 24 hour shift of economic environments and the four pieces of the PP each work 6 hours in every 24 hour period. The shifts may not be of consecutive hours, but some member of the PP is always on duty. Thus, while gold is home sleeping, the stock piece may be hard at work.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne |
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Tue May 05, 2009 8:15 am Post subject: |
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| craigr wrote: | | Quote: | | Finally, why is TLT recommended at the expense of EDV when the latter offers much longer average duration than TLT? Is it due to its use of zero coupon bonds? |
The member "cdgoldin" discussed the difference between zeroes and regular bonds earlier in the thread. The issues revolve around taxation and performance differences in the way they both behave. Browne decided later that zeroes would not work as well as standard LT bonds in the portfolio. Just purchase LT bonds directly and not the zero coupon variety. |
For a simple rule of thumb, I would limit EDV to no more than 15% of the LT bond portion, and limit international stocks to no more than 15% of the stock portion of the PP.
That's just my opinion. The PP is fine, of course, with no EDV and no international stocks.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne |
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freeman
Joined: 20 Feb 2007
Posts: 56
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| Posted: Tue May 05, 2009 12:43 pm Post subject: |
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Thank you craigr and MediumTex for your replies.
I will check cdgoldin's input, craigr. I don't think we can talk of "iBonds with a shorter maturity" as they all expire after 30 years; however I agree they cannot be considered for the LT Bond portion of the PP.
MediumTex: if I understand I-Bonds correctly, regardless of their fixed rate, their variable inflation rate can take their composite rate (fixed + variable rate) down to a nominal rate of 0% but that composite rate can't go lower than that, thus protecting the investment in case of deflation. This is what is currently happening.
From treasurydirect.gov:
| Quote: | Here's how the composite rate for I bonds issued May 2009 - Oct. 2009 was set:
Fixed rate = 0.10%
Semiannual inflation rate = -2.78%
Composite rate = [Fixed rate + (2 x Semiannual inflation rate) + (Fixed rate x Semiannual inflation rate)]
Composite rate = [0.0010 + (2 x -0.0278) + (0.0010 x -0.0278)]
Composite rate = [0.0010 + -0.0556 + -0.0000278]
Composite rate = [-0.0546278]
Composite rate = -0.0546
Composite rate = -5.46%
Composite rate = 0.00% (Composite rates are never less than zero) |
That current nominal rate of 0% appears to compare unfavorably to what Vanguard Short-Term Treasury Fund Investor Shares (VFISX) currently returns. I would need to ask the expert, Mel Lindauer, if that is the case because if it is, VFISX in a non-taxable account might be a better option.
Thank you,
Freeman |
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Tramper Al
Joined: 18 Oct 2007
Posts: 2374
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| Posted: Tue May 05, 2009 12:54 pm Post subject: |
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| freeman wrote: |
From treasurydirect.gov:
| Quote: | Here's how the composite rate for I bonds issued May 2009 - Oct. 2009 was set:
Fixed rate = 0.10%
Semiannual inflation rate = -2.78%
Composite rate = [Fixed rate + (2 x Semiannual inflation rate) + (Fixed rate x Semiannual inflation rate)]
Composite rate = [0.0010 + (2 x -0.0278) + (0.0010 x -0.0278)]
Composite rate = [0.0010 + -0.0556 + -0.0000278]
Composite rate = [-0.0546278]
Composite rate = -0.0546
Composite rate = -5.46%
Composite rate = 0.00% (Composite rates are never less than zero) |
That current nominal rate of 0% appears to compare unfavorably to what Vanguard Short-Term Treasury Fund Investor Shares (VFISX) currently returns. I would need to ask the expert, Mel Lindauer, if that is the case because if it is, VFISX in a non-taxable account might be a better option.
Thank you,
Freeman |
Huge thread, obviously, so forgive me if I may be misreading exactly your discussion of I-Bonds.
In general, I think we must be careful of an overly dogmatic adherence to PP components, proportions, etc. Any good idea is robust.
I-Bonds are obviously an entirely appropriate substitute for cash (in currency, CD, MMF, or T-Bill forms). You have the par floor, liquidity, and US Treasury behind them.
If you are asking whether a cash contribution to a PP position today should avoid a new I-Bond purchase? Yeah, probably so. There is essentially no risk in waiting until November, and you can earn something in a MMF until then. I-Bonds CPI adjustments are stale, and the current one happens to bring the composite rate to its floor.
If you are asking should you redeem your old I-Bonds with fixed rates of 1.10% to 3% (!) today, to make a short term bond fund your one and only PP cash vehicle? My God, man, no. Keep those higher fixed rate I-Bonds, of course.
Last edited by Tramper Al on Tue May 05, 2009 1:09 pm; edited 1 time in total |
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Lbill
Joined: 13 Mar 2008
Posts: 2078
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| Posted: Tue May 05, 2009 1:01 pm Post subject: |
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If we open the door to using I-bonds instead of cash (t-bills, SHY) then what about using TIPS for that component? They have a par floor (assuming you buy individual TIPS), which provides some protection from deflation (more protection if you use TIPS with a low inflation factor built into the principal). In order to replicate t-bills you should probably buy short term TIPS and roll them into new issues as they mature.
_________________
"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 |
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Tramper Al
Joined: 18 Oct 2007
Posts: 2374
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| Posted: Tue May 05, 2009 1:07 pm Post subject: |
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| Lbill wrote: | | If we open the door to using I-bonds instead of cash (t-bills, SHY) then what about using TIPS for that component? They have a par floor (assuming you buy individual TIPS), which provides some protection from deflation (more protection if you use TIPS with a low inflation factor built into the principal). In order to replicate t-bills you should probably buy short term TIPS and roll them into new issues as they mature. |
Well, just my opinion. I think for TIPS to be a cash equivalent, they really have to be extremely short, like <90 days. The par floor has no meaning in the middle of a long duration, and you can't have bond-like volatility from the cash component of the the PP, can you? You need to have your cash sitting at or very near $1 par at all times, I would think. For rebalancing, mark to market portfolio smoothing, withdrawals, etc. |
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Tue May 05, 2009 1:21 pm Post subject: |
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Big difference between TIPS and I-Bonds.
There is no tax deferral with TIPS in a taxable account.
There is principal protection if held to maturity, but this is rarely the case today (use of ETFs, mutual funds, etc. seems far more common).
***
RE VFISX vs. savings bonds in general, you could see loss of principal in VFISX, but not in savings bonds.
I-bonds should not be purchased until after November, though.
For my I-bonds that I purchased earlier this year, the first year I hold them will earn about 2.7% (6 months of 5.4%, plus 6 months of 0%). Not too bad. Going forward, I have good inflation protection as well (good, not great).
I-bonds are not for everyone (and are clearly not a good deal at all times, including the May-November 2009 window), but they deserve serious consideration for part of the cash portion of the PP.
IMO, TIPS do not have a place in the PP.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne |
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Lbill
Joined: 13 Mar 2008
Posts: 2078
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| Posted: Tue May 05, 2009 1:28 pm Post subject: |
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I dunno Tex. The effective duration of SHY (1-3 yr treasury ETF) is almost 2 years. I've heard that mentioned as an OK substitute for T-Bills in the PP. Not sure I can see the difference between holding SHY and buying 2-3 year TIPS and rolling them at maturity.
_________________
"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 |
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Ariel
Joined: 10 Mar 2007
Posts: 1290
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| Posted: Tue May 05, 2009 1:31 pm Post subject: |
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Do you PPers use GLD? Or real gold? If real, what form - old coins, bullion coins, bars or what? Seems like this would be the trickiest asset to manage.
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Lbill
Joined: 13 Mar 2008
Posts: 2078
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| Posted: Tue May 05, 2009 1:35 pm Post subject: |
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I use GLD - but I really worry about stuff like this:
| Quote: | | The problem with gold is that 95% of the market is in derivatives. Other hard assets have been turned into derivatives as well through ETFs, leverage and structured instruments. After Wall Street gets everyone into the hard asset pool, the result won’t be any different than the meltdown of financial markets through financial engineering in 2008-2009 |
I've read plenty of commentary questioning the value of "paper gold"; i.e., gold ETFs when you really need the safety of gold. Wish I knew what to do about it - since all my investments are tied up in IRAs.
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Tramper Al
Joined: 18 Oct 2007
Posts: 2374
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| Posted: Tue May 05, 2009 1:41 pm Post subject: |
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| Ariel wrote: | | Do you PPers use GLD? Or real gold? If real, what form - old coins, bullion coins, bars or what? Seems like this would be the trickiest asset to manage. |
I am interested in the PP as a returns smoothing, wealth-preserving, diversified portfolio perspective. GLD give all of that, and simple and efficient rebalancing too.
My impression is that there is within the PP culture a component of counterparty-mistrust and desired protection from financial doomsday scenarios. I believe at some point, there was a strong recommendation to have assets in other countries, namely Switzerland. This seems lesss featured now, though, in the 4x25 scheme, so perhaps I am mistaken. |
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Tue May 05, 2009 3:52 pm Post subject: |
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| Lbill wrote: | | I dunno Tex. The effective duration of SHY (1-3 yr treasury ETF) is almost 2 years. I've heard that mentioned as an OK substitute for T-Bills in the PP. Not sure I can see the difference between holding SHY and buying 2-3 year TIPS and rolling them at maturity. |
I think that SHY and VFISX are both fine for the cash holdings. If you are just doing 2-3 year TIPS and rolling at maturity, that's fine.
The thing I like about I-bonds is that if you are able to buy them at a time when the fixed rate is attractive, you can just put them in a drawer and forget about them for 20 years if you want to. No taxes, no transaction costs--truly fire and forget.
The tax deferral and protection against loss of principal are the most attractive things to me.
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Tue May 05, 2009 3:55 pm Post subject: |
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| Tramper Al wrote: | | My impression is that there is within the PP culture a component of counterparty-mistrust and desired protection from financial doomsday scenarios. I believe at some point, there was a strong recommendation to have assets in other countries, namely Switzerland. This seems lesss featured now, though, in the 4x25 scheme, so perhaps I am mistaken. |
I think that is sort of true. The problem is that draconian steps often seem unthinkable right up until the moment they occur. Considering the spotty record of the U.S. government and gold, it's not unreasonable to be concerned about potential future scenarios. Personally, I think that as long as the U.S. government is issuing gold coins it is unlikely that the same government would attempt to confiscate them. That would be bizarre, even for the government.
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Tue May 05, 2009 3:59 pm Post subject: |
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| Lbill wrote: | I use GLD - but I really worry about stuff like this:
| Quote: | | The problem with gold is that 95% of the market is in derivatives. Other hard assets have been turned into derivatives as well through ETFs, leverage and structured instruments. After Wall Street gets everyone into the hard asset pool, the result won’t be any different than the meltdown of financial markets through financial engineering in 2008-2009 |
I've read plenty of commentary questioning the value of "paper gold"; i.e., gold ETFs when you really need the safety of gold. Wish I knew what to do about it - since all my investments are tied up in IRAs. |
You could always set up a gold coin IRA. It's expensive, but not prohibitively so. Google gold, eagle, and IRA and you ought to get plenty of information. There are several custodians around the country that provide this service. It's completely legitimate.
There is always good old PRPFX--20% of the fund in gold coins and bullion, sitting in vaults around the country. If the fund folds up, they will mail you your pro rata share of the gold (check the prospectus).
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Tue May 05, 2009 4:05 pm Post subject: |
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| Ariel wrote: | | Do you PPers use GLD? Or real gold? If real, what form - old coins, bullion coins, bars or what? Seems like this would be the trickiest asset to manage. |
Not really.
Use GLD and IAU for the top 10%-25% of the gold holdings. Use this "paper gold" for rebalancing purposes. Hold the rest in real gold.
Best bets IMO for real gold are South African, Canadian and U.S. one ounce coins. There is plenty out there on this topic. If a rookie had to pick one, I would say just buy one ounce U.S. eagles. I'm not a fan of bullion bars, since you don't have to pay much more for the more liquid (and attractive) coins.
Don't buy numismatic coins. Lots of reasons, but the bottom line is that they do not fulfill the goals of the PP.
For someone who wanted to do just paper gold, splitting between GLD and IAU is one way of reducing any perceived counterparty risk.
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Tue May 05, 2009 4:21 pm Post subject: |
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For those who are troubled by the 0% return of gold, let me share my view on the PP and income.
I have a spreadsheet that I use to track my PP holdings. I does a lot of interesting things, but one of them is it calculates the expected total income of the entire portfolio, along with an estimated yield percentage.
Currently, I am managing my PP and a separate one for my mother. The holdings are similar, but not identical (her PP has more tax exposure than mine).
Overall, my PP is yielding overall about 4%, while the other one is yielding about 2.56%. Considering how low rates are right now, I think that's pretty good, especially considering that the gold piece is throwing off zero income.
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Tramper Al
Joined: 18 Oct 2007
Posts: 2374
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| Posted: Tue May 05, 2009 5:42 pm Post subject: |
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| MediumTex wrote: | | For those who are troubled by the 0% return of gold . . . |
I've not been troubled by this since I began looking at gold as money, as store of value. Other cash money equivalents like T-Bills, MMF, 6 mos CDs, etc. also generally have a real return of about zero. |
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Lbill
Joined: 13 Mar 2008
Posts: 2078
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| Posted: Tue May 05, 2009 6:22 pm Post subject: |
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I have a mixture of TIAA guaranteed return @3% yield, SHY, Treasury MM, and short-term (<5 yr) TIPS. Seems to me these all serve the purpose of "Cash" loosely speaking, since they are all highly liquid cash-equivalent holdings that should hold their "par" value in deflation and should increase in value to track short-term interest rates should they go up. Everything is U.S. treasuries except the TIAA portion, but it is throwing off 3% interest when the rest of the stuff is yielding goose-egg right now. Is there any reason I shouldn't just lump them together in the "cash" portion of my PP? This would sure be easier than converting everything to T-bills or ST Treasuries (which I can't even do in TIAA).
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Tramper Al
Joined: 18 Oct 2007
Posts: 2374
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| Posted: Tue May 05, 2009 6:58 pm Post subject: |
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| Lbill wrote: | | I have a mixture of TIAA guaranteed return @3% yield, SHY, Treasury MM, and short-term (<5 yr) TIPS. Seems to me these all serve the purpose of "Cash" loosely speaking, since they are all highly liquid cash-equivalent holdings that should hold their "par" value in deflation and should increase in value to track short-term interest rates should they go up. Everything is U.S. treasuries except the TIAA portion, but it is throwing off 3% interest when the rest of the stuff is yielding goose-egg right now. Is there any reason I shouldn't just lump them together in the "cash" portion of my PP? This would sure be easier than converting everything to T-bills or ST Treasuries (which I can't even do in TIAA). |
If you want my opinion, yes, I think it would be fair to call all of these cash for now. I certainly wouldn't incur the cost associated with selling <5 yr TIPS just for this purpose. As they matured, I'd stick with more usual cash vehicles if I my intent was to follow a PP formula. |
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MarcDeMesel
Joined: 18 Mar 2009
Posts: 40
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| Posted: Tue May 05, 2009 8:20 pm Post subject: |
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In the historical returns of the PP you have LT Bonds yielding since 1972 on average 9%. I can imagine interest rates on LT bonds at the start of the seventies were not especially high, I estimate around 3 to 5%. Today they are also around 4%. How is it possible that this asset class still yields 9% on average?
When interest rates shot up in the seventies you should have lost the same as you have won when interest rates went down again starting in the 80's. Where is this extra yield of 5% per year on average coming from?
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Tue May 05, 2009 9:35 pm Post subject: |
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| MarcDeMesel wrote: | In the historical returns of the PP you have LT Bonds yielding since 1972 on average 9%. I can imagine interest rates on LT bonds at the start of the seventies were not especially high, I estimate around 3 to 5%. Today they are also around 4%. How is it possible that this asset class still yields 9% on average?
When interest rates shot up in the seventies you should have lost the same as you have won when interest rates went down again starting in the 80's. Where is this extra yield of 5% per year on average coming from? |
When your yield spikes to 15% or so and then drifts down to 2.5% over a 25 year period, it's not hard to get to an average of 9% or so, even if the period prior to the spike had basically been flat for the preceding 10 years (1972-1982). Look at 2008--yields went from 4.5% to 2.5% and LT treasuries gained 25%.
Also, when you say "lost" from the 1970s, remember that you're collecting the dividend all along, so even if you go from 5% yield to 15% yield, and have large losses in value, you are still collecting those dividends in the 5%-15% range, which softens the blow of rising yields.
If you look at a graph of LT treasuries in the 1970s, they were flat or down a little when the dividend is included--the dividends kept one from losing a huge amount. Adjusted for inflation, the losses were worse, of course.
Check out the performance of LT treasuries on craig's blog here
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stratton
Joined: 04 Mar 2007
Posts: 6233
Location: Puget Sound
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| Posted: Tue May 05, 2009 11:04 pm Post subject: |
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| MediumTex wrote: | | When your yield spikes to 15% or so and then drifts down to 2.5% over a 25 year period, it's not hard to get to an average of 9% or so, even if the period prior to the spike had basically been flat for the preceding 10 years (1972-1982). Look at 2008--yields went from 4.5% to 2.5% and LT treasuries gained 25%. |
Those treasurey yields probably are what put gold "asleep."
Paul |
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Wonk
Joined: 11 Jul 2008
Posts: 204
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| Posted: Wed May 06, 2009 10:34 am Post subject: |
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Speaking of LT bonds, did anyone else see that the Treasury is considering auctions of 50 yr bonds? It's not official yet, but the frequency of discussion is growing.
If they give them the green light, this may provide an exceptional opportunity to PP adherents to add volatility in this segment. After all, we're looking for volatile assets that react in different market environments, right?
Perhaps all new contributions to this category would go exclusively to 50 yr bonds for as long as they offer them.
Also, totally off topic, but Harry Browne's sales book was recommended to me and I just finished it. Outstanding. We're always selling, whether we're in sales or not. As always, he puts a great perspective on the sales process and how it relates to human nature. Highly recommended at his site: www.harrybrowne.org |
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MarcDeMesel
Joined: 18 Mar 2009
Posts: 40
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| Posted: Wed May 06, 2009 10:58 am Post subject: |
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| MediumTex wrote: |
When your yield spikes to 15% or so and then drifts down to 2.5% over a 25 year period, it's not hard to get to an average of 9% or so, even if the period prior to the spike had basically been flat for the preceding 10 years (1972-1982). Look at 2008--yields went from 4.5% to 2.5% and LT treasuries gained 25%.
Also, when you say "lost" from the 1970s, remember that you're collecting the dividend all along, so even if you go from 5% yield to 15% yield, and have large losses in value, you are still collecting those dividends in the 5%-15% range, which softens the blow of rising yields.
If you look at a graph of LT treasuries in the 1970s, they were flat or down a little when the dividend is included--the dividends kept one from losing a huge amount. Adjusted for inflation, the losses were worse, of course. |
MediumTex, thanks a lot for your answer. However, I still don't understand.
Scenario 1: if you buy a 30 year LT bond with 4% interest. At the end of every year you sell your bond and buy a new 30 year LT bond. In that period interest rates on LT bonds stay flat at 4%. What is your average yield after 30 years? Answer: 4%
Scenario 2: if you buy a 30 year LT bond with 4% interest. At the end of every year you sell your bond and buy a new 30 year LT bond. In that period interest rates on LT bonds go up to 15%, then they go down again to 4%. What is your average yield after 30 years? Logical answer to me: 4%
Answer, according to historical performance of LT bonds: 9%
What am I missing? The difference is no less then 5% yield extra per year for 36 years in a row between the logical answer and the real answer.
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Tramper Al
Joined: 18 Oct 2007
Posts: 2374
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| Posted: Wed May 06, 2009 11:07 am Post subject: |
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| MarcDeMesel wrote: |
Answer, according to historical performance of LT bonds: 9%
What am I missing? The difference is no less then 5% yield extra per year for 36 years in a row between the logical answer and the real answer. |
You are right, of course. A bond's total return may only exceed its yield in the case of capital appreciation as a result of a fall in interest rates after purchase. |
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MarcDeMesel
Joined: 18 Mar 2009
Posts: 40
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| Posted: Wed May 06, 2009 11:10 am Post subject: |
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| Wonk wrote: | | totally off topic, but Harry Browne's sales book was recommended to me and I just finished it. Outstanding. We're always selling, whether we're in sales or not. As always, he puts a great perspective on the sales process and how it relates to human nature. Highly recommended at his site: www.harrybrowne.org |
You are right Wonk. If the PP is the essence of investing, his sales book is the essence of sales. We are indeed all selling constantly, whether we are conscious of it or not. He learns you how to be successfull in everything you sell. As always he keeps it very simple and to the point.
Successfull selling:
1. Ask questions and listen, listen, listen to what the person finds important. Take notes.
2. Recapitulate together what is important for that person so that you are 100% sure you understand the person his values.
3. Show how your product/service/idea satisfies the values of THAT person.
I have many times made the mistake of telling all the advantages of a product/service. A sure way of living a poor man's life.
Outstanding indeed.
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Wed May 06, 2009 3:14 pm Post subject: |
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| Tramper Al wrote: | | MarcDeMesel wrote: |
Answer, according to historical performance of LT bonds: 9%
What am I missing? The difference is no less then 5% yield extra per year for 36 years in a row between the logical answer and the real answer. |
You are right, of course. A bond's total return may only exceed its yield in the case of capital appreciation as a result of a fall in interest rates after purchase. |
I think that Marc is failing to distinguish between yield and capital appreciation. The difference between the bond yield and the overall performance during the periods we are discussing is the capital appreciation in the value of the bonds as a result of a fall in interest rates.
I wonder what the difference is in capital appreciation/depreciation in a 2% drop in yields vs. a 2% rise in yields? If you get more capital appreciation for a 2% drop in yield than you do depreciation for a 2% rise in yield, then perhaps this explains the seeming incongruity in the LT treasury returns.
I'm sure someone will know the answer to this question off the top of their heads; I just don't have it on the top of my head.
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Tramper Al
Joined: 18 Oct 2007
Posts: 2374
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| Posted: Wed May 06, 2009 4:32 pm Post subject: |
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| MediumTex wrote: | | I think that Marc is failing to distinguish between yield and capital appreciation. The difference between the bond yield and the overall performance during the periods we are discussing is the capital appreciation in the value of the bonds as a result of a fall in interest rates. |
Actually, I think maybe he is looking at the yield on the 30-year Treasury today, which is about 4%, and asking how likely is it that LT Treasurys will return 9% per year over the next 30 years. I am going to agree with his impression that it is very unlikely. It may even be mathematically impossible, without a negative interest rate at the end. |
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MarcDeMesel
Joined: 18 Mar 2009
Posts: 40
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| Posted: Wed May 06, 2009 5:38 pm Post subject: |
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| Tramper Al wrote: | | MediumTex wrote: | | I think that Marc is failing to distinguish between yield and capital appreciation. The difference between the bond yield and the overall performance during the periods we are discussing is the capital appreciation in the value of the bonds as a result of a fall in interest rates. |
Actually, I think maybe he is looking at the yield on the 30-year Treasury today, which is about 4%, and asking how likely is it that LT Treasurys will return 9% per year over the next 30 years. I am going to agree with his impression that it is very unlikely. It may even be mathematically impossible, without a negative interest rate at the end. |
Tramper, I am not asking that, I know it is very likely that interest rates will go much higher the coming years, but still I am convinced that LT bonds are very important thanks to Craigr and MediumTex so that you are protected against a Japanese delfation scenario.
I really don't understand how LT bonds could give 9% on average since 1972 while interest rates are the same today as they were in 1972 being 4%.
I am not 100% sure interest rates on LT bonds in 1972 were 4% but I think it was, anyone knows where I could find this data?
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Wed May 06, 2009 5:43 pm Post subject: |
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| Tramper Al wrote: | | MediumTex wrote: | | I think that Marc is failing to distinguish between yield and capital appreciation. The difference between the bond yield and the overall performance during the periods we are discussing is the capital appreciation in the value of the bonds as a result of a fall in interest rates. |
Actually, I think maybe he is looking at the yield on the 30-year Treasury today, which is about 4%, and asking how likely is it that LT Treasurys will return 9% per year over the next 30 years. I am going to agree with his impression that it is very unlikely. It may even be mathematically impossible, without a negative interest rate at the end. |
I think it depends on the volatility and when you rebalance.
Let's say, for example, that in year one LT treasury yields were 4% and proceeded to drop 2% during the year and then went back up to 4% during the following year, only to drop again and repeat the process in future two year periods. Over time, it would look like you were just getting a 4% return (because average yields would be around 4%), when in reality you could be seeing years like 2008 with 30% plus returns, followed by years with losses, but losses which might be smaller than the up years because of the gains captured when you rebalanced.
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MarcDeMesel
Joined: 18 Mar 2009
Posts: 40
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| Posted: Wed May 06, 2009 5:53 pm Post subject: |
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| MediumTex wrote: |
I think that Marc is failing to distinguish between yield and capital appreciation. The difference between the bond yield and the overall performance during the periods we are discussing is the capital appreciation in the value of the bonds as a result of a fall in interest rates. |
I do understand the difference. Since interest was +/-4% in 1972 and +/-4% in 2008 the only thing you should have is the interest over this period because there could not be capital appreciation because the interest did not change over that time. So average yield of LT bonds should be 4%, not 9% per year.
| Quote: |
I wonder what the difference is in capital appreciation/depreciation in a 2% drop in yields vs. a 2% rise in yields? If you get more capital appreciation for a 2% drop in yield than you do depreciation for a 2% rise in yield, then perhaps this explains the seeming incongruity in the LT treasury returns. |
Now I am sure you understand what I mean. Very good point you make here. I would think the logic is simple. If interest goes up 2%, you have 2% interest less than market, for 30 years, a loss of 60% yield. If interest goes down 2%, you have 2% interest more than market for 30 years, a profit of 60%.
So capital appreciation should be the same as depreciation when interest rates move equally. But ofcourse mister market has his own rules to value. I noticed in 2008 that a 2% drop gave only +30% appreciation, not +60%. So the market is not valuing like a mathematician. So maybe that is the explanation. That the market has always valued capital appreciations due to interest going lower, proportianaly better as capital depreciations due to interest rates rising.
But would this be the case, in such an extreme form, 5% on average more per year due to misprising of the market?
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Wed May 06, 2009 9:19 pm Post subject: |
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| MarcDeMesel wrote: | | MediumTex wrote: |
I think that Marc is failing to distinguish between yield and capital appreciation. The difference between the bond yield and the overall performance during the periods we are discussing is the capital appreciation in the value of the bonds as a result of a fall in interest rates. |
I do understand the difference. Since interest was +/-4% in 1972 and +/-4% in 2008 the only thing you should have is the interest over this period because there could not be capital appreciation because the interest did not change over that time. So average yield of LT bonds should be 4%, not 9% per year.
| Quote: |
I wonder what the difference is in capital appreciation/depreciation in a 2% drop in yields vs. a 2% rise in yields? If you get more capital appreciation for a 2% drop in yield than you do depreciation for a 2% rise in yield, then perhaps this explains the seeming incongruity in the LT treasury returns. |
Now I am sure you understand what I mean. Very good point you make here. I would think the logic is simple. If interest goes up 2%, you have 2% interest less than market, for 30 years, a loss of 60% yield. If interest goes down 2%, you have 2% interest more than market for 30 years, a profit of 60%.
So capital appreciation should be the same as depreciation when interest rates move equally. But ofcourse mister market has his own rules to value. I noticed in 2008 that a 2% drop gave only +30% appreciation, not +60%. So the market is not valuing like a mathematician. So maybe that is the explanation. That the market has always valued capital appreciations due to interest going lower, proportianaly better as capital depreciations due to interest rates rising.
But would this be the case, in such an extreme form, 5% on average more per year due to misprising of the market? |
For the purposes of the PP, though, we are concerned about capturing the gains and buying when the asset is cheap. Thus, in 2008, we banked a lot of the spike in LT treasuries, so the fact that they have since fallen from their highs is not of great concern.
One of the things I like about the PP is that it has built in buy and sell signals in the form of the rebalancing bands. One of the most vexing problems for a lot of investors is simply knowing when to buy and when to sell. With the PP, it's no problem. You just take what the market gives you, whether it makes sense or not.
Right now, I don't pretend to understand why the stock market is acting the way it is, but with the PP you're guaranteed to participate fully in any bull market from its very beginning, whereas a lot of other investors went to 100% cash at or near the bottom and are now slowly jumping back in, having missed a lot of this nice 35% upward move.
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rockchalk
Joined: 18 Oct 2007
Posts: 6
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| Posted: Wed May 06, 2009 9:38 pm Post subject: VG for PP |
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| If I were to begin a PP with just VG funds what would you recommend for the bond fund? Would gold through the Perth Mint Certificate program be as good as physical gold? |
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Wed May 06, 2009 10:28 pm Post subject: Re: VG for PP |
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| rockchalk wrote: | | If I were to begin a PP with just VG funds what would you recommend for the bond fund? Would gold through the Perth Mint Certificate program be as good as physical gold? |
I would do TLT for the LT treasuries and just do GLD to start with for the gold.
[edit--sorry, I didn't see that you wanted to do Vanguard funds for the bond piece. There really isn't a VG option for the bond piece. EDV is too volatile for the LT treasuries and VUSTX isn't volatile enough. Just go with TLT.]
If you get it going and like it, but are uncomfortable with "paper gold" in the GLD, then look into something like the Perth Mint or other alternatives to the gold ETFs.
The main thing, in my view, is to just get going with the PP. I promise you that after you have held the PP for three months, you will be sleeping better and won't look back (just my opinion, of course). In the event that you do jump in and three months later decide it's not for you, you won't be any worse for the experience (you are very unlikely to have lost much money, and you might have made some).
The hard part is getting past how crazy it sounds. Once you do that, the rest is easy.
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