Bogleheads

[noah09]

hello all,

i want to start building a permanent portfolio, but am 16 and cant buy stocks & bonds until age 18. what i'm wondering is: should i go ahead and put half (or a portion) of my money (about two thousand dollars) in gold, or just keep it all in bank accounts until i'm 18 and can go all the way into the portfolio?

thanks! this is a great thread.

noah

[craigr]

[HBfan]

[noah09]

[craigr]

[MediumTex]

I would set my sights on PRPFX at this point, since the case for this fund is much easier to make to someone who is not familiar with the PP concept (simply based on track record). The amount of money you have to invest also makes PRPFX more suitable.

If you settle on PRPFX for the time being, I would approach your dad and explain how PRPFX is much safer than the stock market (on a historic return basis). To further enhance the safety of putting your money here, I would propose to your dad that you open an account with the minimum of $1,000 and then make a $100 contribution monthly for the next 10 months to ease you into the fund a little at a time.

Read the fund prospectus and then go over it with him.

The fund would need to be set up as a gift to minors account, which isn't a problem (in my opinion).

The key to overcoming parental objections is often a matter of making a complete case for what you want to do in a persuasive manner, anticipating and addressing objections as they arise.

Your dad is just trying to protect you and keep you from losing your money. Assume he has good motives and make your case based upon that assumption.

I've been the son and the dad and I'm just telling you what worked for me (and what works on me).

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

[SanityWins]

Hi, Thanks for all the great information and perspectives in this thread.

I am looking into setting up PP in my retirement account, and one of the available options is VBISX (Vanguard Short Term Bond Index Fund) with an ER of 0.19%. I would like to get your expert opinion on whether this is well suited for the cash portion of the PP.

From the MorningStar link below the fund currently hold 54% of its assets in US Government treasuries and bonds. But, it also has about 18% in international short term bonds.

http://quicktake.morningstar.c....mbol=VBISX

I also have the option of going with FSBIX (which is all short term US treasuries), with expense ratio of 0.20%.

Also, any recommendations on a Fidelity MM fund suitable for retirement accounts, which I could mix in with the above funds to complete the PP cash allocation.

Thanks!

[MediumTex]

[SanityWins]

Unfortunately no stable-value option in my 401k (maintained at Fidelity).

Available fixed income options are... Plus any ETFs or Fidelity funds through a brokeragelink account.

Fidelity Institutional Money Market – Institutional Class 0.18%
PIMCO Total Return Account 0.29%
Vanguard Short-Term Bond Index Fund – Signal Class 0.10%

Thanks.

[MediumTex]

[Chewie]

Finally got through all 16 pages of this thread. Great discussion everyone. Just wanted to say thanks!

[bitterroot]

This portfolio is very interesting.


I have two questions:

(1) I see all the positive comments about this portfolio but my question is"What are the potential problems" What scenario does it not protect?


(2) Why do you think GOLD is considered such a safe investment in inflation and when the world is scared to death of war and uncertainty. Gold is just metal. I know it has always been a haven for tough times---but why?

[noah09]

[MediumTex]

[MediumTex]

[craigr]

[IceFusion]

I've finally worked my way through this thread over the course of a few weeks... I came across the PP a couple months ago in the blogosphere, and have since discovered the HB books and radio show, plus craigr's blog and this thread. long story short, I've begun to build a PP on the taxable side.

the gold allocation, due the the logistical challenges, was the component that I was initially unsure how to address. I then discovered the Metals Select Account from EverBank (you'll have to google it, apparently new users can't post links) . I've since opened an (unallocated) account (I would prefer the allocated account, but I'm starting below the minimum for allocated. Accounts can be converted once the position reaches the $7.5k minimum).

I'd like to see what the PP crowd thinks of the EverBank offering. it's not the optimal solution of coins in my pocket (or in an overseas safe deposit box), but I feel it's a good, cost effective (no mgmt fee, 0.75% commissions, 1.5% annual storage for allocated accts) solution to gold ownership.

or am I missing something?

[matt]

MediumTex wrote:

[MediumTex]

[Lbill]

Using the annual returns from Simba's spreadsheet I calculated the correlations of gold and T-bills to the CPI-U. Here's what I found:

1972-2008
Gold with CPI-U = .51
T-bills with CPI-U = .63

1985-2008
Gold with CPI-U = .08
T-bills with CPI-U = .56

As you can see, T-bills (which we know does track interest rate changes related to CPI-U) has a higher correlation with CPI-U than gold. Over these two periods of time, using annual return data, T-bills were either better or just as good an "inflation hedge" than gold.

Gold had a higher correlation with CPI-U when the 1970's and early 80's are included in the data. We know this was a period when there was very high inflation followed by a significant decline in inflation and interest rates. Over this period the CPI-U was over 12% in 1974, 1979, and 1980 but had dropped to 3.8% by 1985. Over the 1972-2008 period, average CPI was 4.6% with StDev of 3.2%.

By comparison, during the period of 1985-2008 the average CPI-U was 2.9% with StDev of 1.3%. The higher variability of CPI-U when the period 1972-84 is included is associated with a higher correlation to the price of gold.

The lower correlation between gold and CPI-U during the period of 1985-2008 vs. 1972-2008 is partially due to a statistical artifact known as "restriction of range" in the value of the CPI-U during the 1985-2008 period, which lowers the size of the correlation coefficient. This probably means that the low correlation of gold price to CPI-U during 1985-2008 (.08 ) is probably an underestimate of the true correlation because CPI-U was relatively stable during that period. In fact, there was only one year (1990) in which the CPI-U was over 4% during that 23-year period. The correlation of .56 between gold and CPI during the 1972-2008 period is probably a better estimate of the "true" correlation of gold to CPI (inflation).

So you can see that gold is likely to be at least partially effective as an inflation hedge, but it is no better than T-bills. It is a much more effective hedge against "bad stuff" happening to stocks and bonds, whether that stuff is due to increasing inflation or to other factors.
_________________
"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

[brswif00]

Sorry if this is already covered in this massive thread, but I searched all sixteen pages and didn't get any hits.

Does anybody know if BullionVault. com is for real? It seems like an extremely appealing service, but almost too good to be true.

After Madoff and the rest I am paranoid about investment services that seem too good to be true.

Thanks!

[Quasimodo]

I don't know about EverBank and BullionVault, but here's an article advocating Central Fund of Canada for gold investments. The fund trades at a premium to net asset value, but there probably isn't anything you can do in this area that won't have some sort of drawback.

http://www.goldstockbull.com/a....-own-gold/

John
_________________
Don't surrender your loneliness so quickly. Let it cut more deeply. Let it ferment and season you as few human or even divine ingredients can.

Hafez, poet (1315-1390)

[Lbill]

FWIW, I think there is considerable counterparty risk investing in the gold ETFs, GLD and IAU. IMO, this is contrary to the basis for holding gold in the first place - it is supposed to be the Armageddon asset that will hold up when everything else goes to heck. If everything does go to heck, GLD and IAU will probably blow up along with every other paper security. From what I've read, CEF (gold and silver) and it's sister GTU (gold only) are probably a little safer in terms of auditing oversight and being located in Canada outside the reach of the U.S. government. But they're still paper securities and are subject to counterparty risk, the fact they are closed-end funds that do not trade at NAV, and the spreads are quite wide compared to GLD.
_________________
"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

[makalu]

[MarcDeMesel]

I am shocked to discover on Bloomberg that the Fed pumped the last 18 months a staggering 9 trillion dollars into the economy with fresh printed money. Not one recepient of this money has been disclosed.

"The promises are composed of about $1 trillion in stimulus packages, around $3 trillion in lending and spending and $5.7 trillion in agreements to provide aid. This amount is almost enough to pay off every home mortgage loan in the U.S., calculated at $10.5 trillion by the Federal Reserve."

Would Harry Browne still be convinced the PP is the best solution to protect your buying power if the government starts to print in such an excessive manner?
_________________
My blog about the European Permanent Portfolio: http://europeanpermanentportfolio.blogspot.com/

[joseph]

***REPOSTED AS A SEPARATE THREAD - please ignore this post!***

Hi all - I wasn't sure whether or not to create a new thread for this, but thought I would post here to keep the permanent portfolio stuff going. This is an amazing thread, and very useful. I've got Fail-safe Investing now, from craigr's link.

I'm not sure if anyone posting or reading is based in New Zealand (or even Australia, I suppose), but I want to get started with a permanent portfolio, I'm fine with the 25% x 4, and I'm just trying to get my head around how to do it from a non-US location...

A little more specifically - I'm not sure whether I should put my stock allocation mostly into the US market, and not sure what to do about the long-term bonds (we don't really have the same setup as the US, or at least not to my limited knowledge - I can only find, and have only heard about, 1 and 2 year terms for New Zealand government bonds).

Any pointers gratefully received! Also happy to delete this and start a new thread if that's what I should have done in the first place - this is my first post.

Thanks!
Joseph

[krumw]

Joseph

Welcome to the forum! While I cannot answer your questions, the New Zealand version of the Harry Brown Portfolio is something that I would also be interested in learning about. Over the years, several generations of my family have immigrated there. I plan to be spending a significant amount of my retirement years in your fair country.

Bill

(My avatar is actually a NASA picture taken over the Cook Strait. You can just make out the North and South Islands in the background.)

[Lbill]

PP-II? Here's an interesting take from Steve Saville:

[MediumTex]

FWIW, I was reading the annual report for PRPFX and noticed that its gold holdings were 23-24%. That's interesting, because I always thought that the fund would not allow its holdings to drift that far outside its target percentages (20% for gold). I think that silver was also in excess of 5%, bringing the total PM holdings to near 30%.

I also wish that PRPFX would disclose the average duration of its treasury holdings. I have gone through and calculated it based upon its specific holdings occasionally, but that's pretty cumbersome.

One thing about PRPFX that makes me think it might outperform the straight PP in the near future is that it doesn't have a full commitment to treasuries (35% vs. 50% for the PP) and certainly doesn't have anything like 25% on the long end of the yield curve. If it is true that long term treasuries will not perform well and the dollar will weaken in coming years, the lack of long term treasury exposure, combined with the Swiss franc holdings, could allow PRPFX to substantially outperform the straight PP.

But this view also presupposes a knowledge of what will happen in the future, which HB would say is what gets us in trouble.

For those who like PRPFX, though, now might not be a bad time to get in.

I have PRPFX for my kids' Covderdell education accounts, and I think that for an account of this type PRPFX is an outstanding choice if you like the PP concept.

***

For those who have recently joined this discussion, here is a suggestion that might make for a nice PP reference volume:

If you have downloaded "Fail Safe Investing", print out a copy and put it in a binder and print out this thread and put it in the binder as well. I think this thread probably prints out to 50 pages or so. The two documents together can provide a pretty stout PP reference volume.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[Wonk]

[MediumTex]

[Roy]

[craigr]

A friend of mine was researching the Permanent Portfolio and wanted to compile his own performance data independently of what is already available. So he went and crawled through Ibbotson and other sources and made his research available to everyone who is interested. I posted the spreadsheet here:

http://crawlingroad.com/blog/2....heet-data/

[MediumTex]

What does anyone think about using VBMFX for the cash portion of the PP?

I might be comfortable with a bit more risk in this area in exchange for basically double the return that VFISX currently offers.

Looking at VBMFX's chart, it's steady like other cash-like funds, but it's yield is more appealing right now.

***

How about this for a post-treasury bubble PP:

GLD: 20%
VTSMX: 20%
VGTSX: 5%
VUSTX: 20%
VBMFX: 30%
MM: 5%

That allocation would throw off a nice income stream for someone who needed it, and would probably be pretty stable, considering where the respective markets are right now. It's not completely true to the PP concept, but I kind of like it.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[dumbmoney]

Although the danger has passed, as far as I can tell, this crisis has made me really dislike Total Bond. If Fannie/Freddie hadn't been bailed out, it would have been a Total Disaster because of the concentration in those issuers. Plus all the exposure to banks.
_________________
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.

[MediumTex]

[matt]

MediumTex wrote:

[Roy]

[MediumTex]

[matt]

MediumTex wrote:

[GA Ray]

I posted this in Craig's blog, but thought it would be worth getting feedback here. I currently own 3/4's of the PP with 50% in SHY. With Craig's help, and my own research, I do now agree that owning Treasuries are better long term even if an investor is in the top tax bracket. This being said, would it make sense in this environment to own 10 year Treasuries instead of 30 year Treasuries because of the massive amount of dollars being created (thus new Treasury issues being sold)?

I know what happened in Japan, but that is a country of savers, and I really believe we will see much higher Treasury yields in the not too distant future. Maybe I'm over thinking this because if yields to rise, gold will probably rise much faster.

Thanks for reading and I look forward to the responses.

Ray

[Quasimodo]

While I agree that higher long term rates are a reasonable expectation, I think the Permanent Portfolio idea is to periodically rebalance uncorrelated and highly volatile assets, so intermediate term T bonds would not fit that idea as well as long term bonds.

I use American Century's Target Maturity 2025 (BTTRX) for the long bond portion. This fund will be dissolved in late 2025, at which time all the accrued interest will be paid to the then current owners of the fund. The estimated per share value of the fund at that time is about $116. Currently the net asset value is under $57.00 per share. The fund is more volatile than regular long term treasury bond funds, which never mature and pay periodic interest. But the net asset value of BTTRX tends to increase because of the accumulated interest that is earned but unpaid. The spikes up in the value of the shares get higher over time. That probably makes the fund easier to live with for me than watching the share price decline even after getting more shares from reinvested dividends.

That's my amateurish viewpoint, anyway. I'm looking forward to hearing what Craig R and Medium Tex have to say about it.

John
_________________
Don't surrender your loneliness so quickly. Let it cut more deeply. Let it ferment and season you as few human or even divine ingredients can.

Hafez, poet (1315-1390)

[MediumTex]

I don't have much to add, except that any treasuries with maturities beyond two years or so are subject to interest rate risk, which defeats the purpose of the cash holding of the PP. In my view, the 10 year treasury bond is unsuitable for the cash holding.

What you want to look for in the cash portion of the PP are the following:

1. no interest rate risk (or very little, as with two year treasuries)
2. no principal risk
3. full faith and credit backing by the U.S. government
4. high liquidity

Treasury bills meet this requirement, as do U.S. savings bonds (series EE and I).

FDIC insured deposits do not meet this requirement because when a bank closes there may be virtually no liquidity for depositors in the short term (and the purpose of the cash holding is, in part, to always have access to your money, especially in the event of an unforeseen adverse event).

I'm not saying that you can't deviate from this strict prescription, but for someone who it putting together a PP, it is useful to know the extent to which you are deviating from the guidelines, which helps to better measure the additional risk you may be assuming.

Examples of common deviations from the recipe that are not necessarily "wrong" or unreasonable, but which do involve additional risk include the following:

1. Gold ETFs
2. FDIC insured deposits
3. U.S. government agency debt
4. Longer dated treasuries for the cash holdings
5. Shorter dated treasuries for the LT bond holdings
6. Managed stock funds for the stock holding
7. Long dated treasury ETF such as TLT for the LT bond holdings

To me, the "pure" PP would consist of the following:

25% Cash: 12 month treasury bills purchased from the Treasury, rolled into new bill once a year.

25% Long Term Bonds: 30 year treasury bonds purchased from the Treasury, rolled into new bond when maturity reaches 25 years.

25% Gold: Coins or bullion, a portion of which is stored offshore.

25% Stock: S&P index fund or broader index like VTSMX.

If this allocation is the baseline, you can look at your own allocation and assets and determine what additional risk that your own approach involves.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[craigr]

[HBfan]

Are there any free services to keep track of re-balancing? I think it would be helpful to be able enter in your portfolio holding, then specify re-balancing bands. It would email you alerts if anything needed re-balancing. Is there such a thing?

[MediumTex]

[GA Ray]

Reading "Fail-Safe Investing," Browne wrote one should maintain the 4x25 ratio regardless of age. I agree with this, but reading the Suze Orman thread and how she invests her money primarily in AAA bonds because of her significant wealth made me wonder what Browne would have recommended for an investor like Suze. I imagine he would have advocated the 4x25 ratio regardless of wealth.

Ray

[MediumTex]

[craigr]

[Roy]