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Bogleheads
Investing Advice Inspired by Jack Bogle
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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 Posted: Mon Jun 01, 2009 7:11 am Post subject: |
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| Roy wrote: | | GA Ray wrote: | 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 |
For me, the "permanence" of the HB portfolio lies in the constancy of its asset classes in their 4x25 ratio. But that's different from how much money a "wealthy" or risk-averse investor would put into it, vice into lower risk/lower return alternatives.
As I am risk-averse, if I had her stated wealth, I'd invest primarily in the least risky instruments I could find. Not all disaster scenarios in the universe of investing options are equally likely; I would not invest significantly in yet riskier instruments just to gain diversification. The HB PP is a superior concept considering its risk/return potential. But in this situation, I would invest only a portion in it, because it is clearly riskier than alternatives that have much lower expected return.
This is a personal choice based largely on willingness and need to take risk. But I do not think all risks are equal. And it has nothing to do with Suzy Orman, per se, who should be ignored.
Roy |
One way to vastly reduce the risk of even something relatively safe and stable like the PP is to move into it slowly. Thus, if I had $50 million to invest, I might move from all cash into the PP allocation at the rate of, say, $1 million per month for 50 months.
***
To be fair to the personal finance advisor crowd, I do think that Dave Ramsey and Scott Burns have a lot of helpful things to say.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne
Last edited by MediumTex on Mon Jun 01, 2009 7:18 am; edited 1 time in total |
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eurowizard
Joined: 10 May 2008
Posts: 844
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| Posted: Mon Jun 01, 2009 7:17 am Post subject: |
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| MediumTex wrote: |
One way to vastly reduce the risk of even something relatively safe and stable like the PP is to move into it slowly. Thus, if I had $50 million to invest, I might move from all cash into the PP allocation at the rate of, say, $1 million per month for 50 months. |
This is a terrible idea because then you would have 49,250,000 in Cash, 250k in Gold, 250k in stocks and 250k in LT Bonds. Theres virtually no point in doing this. HB would say to put it all in the PP right now. |
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Mon Jun 01, 2009 10:18 am Post subject: |
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| eurowizard wrote: | | MediumTex wrote: |
One way to vastly reduce the risk of even something relatively safe and stable like the PP is to move into it slowly. Thus, if I had $50 million to invest, I might move from all cash into the PP allocation at the rate of, say, $1 million per month for 50 months. |
This is a terrible idea because then you would have 49,250,000 in Cash, 250k in Gold, 250k in stocks and 250k in LT Bonds. Theres virtually no point in doing this. HB would say to put it all in the PP right now. |
I understand that HB would say put it all in right now. However, your typical person with $50 million in cash may be unwilling to commit such a large sum to a new strategy all at once.
I'm just suggesting the following as an alternative to jumping in the pool:
If you are a little uncertain about the PP strategy to begin with, and the $50 million you have cannot be replaced, there is the outside chance that you are going to set up your PP right on the edge of one of those cliffs that have occurred in the last 30 years where the PP had a down year or sluggish period. For the ultra-cautious person, this risk could be virtually eliminated by easing into the PP a little at a time, since the PP has never had any 50 month period in which it experienced sustained losses or unusual volatility.
I'm just using 50 months as an example, but the principle is the same whether you decide to allocate once a year for 10 years, once a month for 12 months, or something in between.
It's just another way of dampening volatility for the scaredy cats.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne |
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Roy
Joined: 10 Sep 2008
Posts: 341
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| Posted: Mon Jun 01, 2009 10:48 am Post subject: |
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| MediumTex wrote: | | eurowizard wrote: | | MediumTex wrote: |
One way to vastly reduce the risk of even something relatively safe and stable like the PP is to move into it slowly. Thus, if I had $50 million to invest, I might move from all cash into the PP allocation at the rate of, say, $1 million per month for 50 months. |
This is a terrible idea because then you would have 49,250,000 in Cash, 250k in Gold, 250k in stocks and 250k in LT Bonds. Theres virtually no point in doing this. HB would say to put it all in the PP right now. |
I understand that HB would say put it all in right now. However, your typical person with $50 million in cash may be unwilling to commit such a large sum to a new strategy all at once.
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Dollar cost averaging does not alter risk per se. It is a psychological tool for those (wealthy or not) who think they need it (fearing a sudden downturn, say), and most of the time it would be inferior to lump-summing. I suppose the PP is conceptually different enough that someone may want to "live with it" for a while with a portion of their money before committing wholly to the concept.
Though, if I had 50mil in cash tomorrow, and had investing fears at all (and I do), I would not invest much if anything in the PP (or any traditional stocks/bonds method) because my need and willingness to take risk would be too low, even as my ability would be high. I would seek less risky alternatives and accept the lower expected return those would offer.
Roy |
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Mon Jun 01, 2009 11:05 am Post subject: |
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| Roy wrote: | | Dollar cost averaging does not alter risk per se. It is a psychological tool for those (wealthy or not) who think they need it (fearing a sudden downturn, say), and most of the time it would be inferior to lump-summing. I suppose the PP is conceptually different enough that someone may want to "live with it" for a while with a portion of their money before committing wholly to the concept. |
That's an interesting perspective. Tell me more about the idea of dollar cost averaging not reducing risk. It seems to me that it can't help but reduce risk. I always think about the person who bought the NASDAQ when it was at 5000. That person would have done better to dollar cost average.
| Quote: | | Though, if I had 50mil in cash tomorrow, and had investing fears at all (and I do), I would not invest much if anything in the PP (or any traditional stocks/bonds method) because my need and willingness to take risk would be too low, even as my ability would be high. I would seek less risky alternatives and accept the lower expected return those would offer. |
It's interesting to me that you are basically saying that the PP is riskier than holding cash. In my view, it may be a little riskier, but not much. When you say you would seek less risky alternatives to the PP, what would an example of a less risky alternative be?
How about this for a true "safety showcase":
You hold 50% of your portfolio in cash (t-bills) and 50% in the PP (I know the PP has t-bills too, but just treat them as different pots of money for purposes of this example). In addition to any rebalancing you may do on the PP side, once a year you rebalance the 50% cash piece and 50% PP piece to get back to the 50/50 mix.
For example:
Beginning of Year 1:
PP = $1,000,000 ($250k x 4)
Cash = $1,000,000 (t-bills)
Total = $2,000,000
End of Year 1:
PP = $1,078,000
Cash = $1,011,000
Total = $2,089,000
***
Beginning of Year 2 (After Rebalancing):
PP = $1,044,500
Cash = $1,044,500
And so on.
Now THAT'S safety (to me anyway).
I'm mainly interested, though, in what would be a less risky allocation than the PP. I suppose 10 year treasuries held to maturity would be a reasonable alternative, but you still don't get a lot of inflation protection there.
***
It's interesting to note that when HB was talking about how he came up with the PP concept, it was when he was trying to figure out how to safely invest the substantial sum he earned in the 1970s writing books, doing investment consulting and trading his own account. So in a sense, the PP was born of a situation not unlike my example of a huge one time windfall that you want to invest safely without having to worry about what the future may bring.
But as always, I understand that the PP is not for everyone (though it does look very sharp on those it fits).
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne |
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DP
Joined: 17 Apr 2008
Posts: 481
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| Posted: Mon Jun 01, 2009 11:46 am Post subject: |
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Hi,
If the goal is to reduce the risk (volatility) of the permanent portfolio, then one has to invest in less volatile assets. I think this limits the selections to Bonds. TIPS immediately comes to mind. Though there can be some short term interest rate risk, it's my understanding that these are pretty much the safest investment there is in terms of real returns if held to maturity.
An equal allocation including TIPS puts 60% of the PP in US Gov't Bonds, with another 20% in US Equities. Clearly there is significant risk if there are serious problems in the US, and no guarantee that gold would provide the expected protection, or enough of it. I think the next step would be to diversify into other currencies, invested in Government bonds (or other countries), probably best held offshore.
I think the resulting portfolio would be less volatile, and less risky in the majority of scenario's. The next level of protection would probably be on the order of a fallout type shelter stocked with several months worth of food and water. That's my 2 cents at least.
Don
Last edited by DP on Mon Jun 01, 2009 12:04 pm; edited 1 time in total |
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GA Ray
Joined: 16 May 2009
Posts: 8
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| Posted: Mon Jun 01, 2009 11:51 am Post subject: |
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Medium Tex, this is what I had in mind in my hypothetical situation: what would be less risky, but afford one the opportunity to beat inflation over time. T-Bills would be one option for pure safety, but going forward it will be very difficult for this alone to beat inflation. If you had $50MM, it likely wouldn't matter, but with a solid, though not life changing, windfall of say $2MM, T-Bills alone would be riskier than the PP IMO.
Ray |
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Mon Jun 01, 2009 12:18 pm Post subject: |
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| GA Ray wrote: | Medium Tex, this is what I had in mind in my hypothetical situation: what would be less risky, but afford one the opportunity to beat inflation over time. T-Bills would be one option for pure safety, but going forward it will be very difficult for this alone to beat inflation. If you had $50MM, it likely wouldn't matter, but with a solid, though not life changing, windfall of say $2MM, T-Bills alone would be riskier than the PP IMO.
Ray |
In a sense, though, if you had $50 million you would have more to worry about than ever, since presumably you would feel some fiduciary duty to yourself or others to take good care of such an impressive sum.
Ultimately, I think that what Yoda told Luke in "The Empire Strikes Back" is instructive (I'm paraphrasing):
Luke: [while lifting trinkets with his mind as Yoda looks on with approval notices his X-wing is sinking into the swamp] Oh man, my only way off this place just sunk into the goop.
Yoda: [looking disappointed] Will not you even try to lift your ship out of the goop with your introductory level jedi powers?
Luke: [after trying his best to use his jedi mind trick to lift the ship but failing and watching it settle back into the goop] Oh man, I can do these little trinkets, but I can't do my ship, especially when it's in the goop.
Yoda: [looking wise] It is not size that matters, it is the strength of the force within you.
Luke: Yeah, well all that jedi mumbo jumbo isn't going to get my ship out of the goop.
Yoda: [after using his superior jedi skills to skillfully lift the ship from the goop and place it on dry land as Luke looks on in astonishment] Much training we have to do still, hmm?
***
I truly believe that the PP should be equally appropriate for any size portfolio. If it were a very large portfolio, I would understand easing into the PP slowly, but I don't think that there is another allocation that is going to deliver the long term safety and stability of the PP (while keeping you out of the goop).
Just my opinion, of course.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne |
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Roy
Joined: 10 Sep 2008
Posts: 341
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| Posted: Mon Jun 01, 2009 2:30 pm Post subject: |
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| MediumTex wrote: | That's an interesting perspective. Tell me more about the idea of dollar cost averaging not reducing risk. It seems to me that it can't help but reduce risk.
| Quote: | | Though, if I had 50mil in cash tomorrow, and had investing fears at all (and I do), I would not invest much if anything in the PP (or any traditional stocks/bonds method) because my need and willingness to take risk would be too low, even as my ability would be high. I would seek less risky alternatives and accept the lower expected return those would offer. |
It's interesting to me that you are basically saying that the PP is riskier than holding cash. In my view, it may be a little riskier, but not much. When you say you would seek less risky alternatives to the PP, what would an example of a less risky alternative be? |
A number of studies (not immediately at hand) showed that lump summing outperforms DCA about 2/3 of the time. And I'm not sure if those studies even included the additional transaction fees that using DCA obviously entails. Dollar cost averaging —when one has a choice— has always been primarily a pyschological tool. Dollar cost averaging into the PP, or any other allocation that includes even only stocks, would be riskier that holding cash exclusively. That is why those portfolios would have higher expected return.
PP is certainly riskier than cash (3 of its 4 asset classes have serious volatility even as the portfolio, as a whole, performs admirably). Of course, the PP has higher expected return, and an excellent return for its risk.
But I agree that with such an unusual portfolio as the HB PP, dollar cost averaging, again for even more psychological reasons, might be a way for an investor to "try it on." No problem there.
If I did not use the PP exclusively (I am now a very rich man) I would seek vehicles that assured, as much as possible this side of a doomsday scenario, that I'd not lose my principal, that I'd gain interest, or inflation adjusted returns at maturity. I might consider CDs and other instruments where I'm not likely to break my buck and spread those around as insurance permits. Maybe individual TIPS held to maturity, and some offshore equivalent holdings. So I would probably still use the PP, just not with all my money or even most of it.
PP is an excellent alternative to practically any other concept, except possibly those that also have a similar expected return while equivalently reducing fat tail risk. I have no problems with it in general. I love Yoda and hate "goop", but I'd not use the PP for the greater part of my portfolio if I became a 50mil man tomorrow. That unlikelyhood aside, it remains a frontrunning investment vehicle, and one I recommend often.
Roy |
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MarcDeMesel
Joined: 18 Mar 2009
Posts: 40
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| Posted: Mon Jun 01, 2009 7:58 pm Post subject: |
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All depends ofcourse on how high you believe inflation really is. If you believe, as I do, that inflation has been 7,5% on average, since 1972 but equally the last ten years, then I see not many other alternatives that are able to preserve your buying power.
TIPS, T-Bills or any other intrest rate product does not and will not keep up with true inflation in my opinion. This is why I am convinced that a PP is equally wise for 50 mil as it is for 100k. And surely the quicker you are positioned the faster you are protected. An Icelander with 50 mil at the beginning of 2008 has lost in only 1 year about 70% of his buying power when invested only in local currency Cash, Tips or T-Bills. With the PP an Icelander, in this case thanks to gold, preserved his buying power much better.
_________________
My blog about the European Permanent Portfolio: http://europeanpermanentportfolio.blogspot.com/
Last edited by MarcDeMesel on Tue Jun 02, 2009 6:54 am; edited 2 times in total |
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eurowizard
Joined: 10 May 2008
Posts: 844
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| Posted: Mon Jun 01, 2009 9:09 pm Post subject: |
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Heres a question I do not believe has been covered yet in this thread.
If I wanted to contain everything except gold in the traditional HB portfolio, within VG funds, could I overweight the VG LT treasury fund and underweight the MMF?
The reason is that the VG Long Term fund is not really that long duration. Offhand I believe its 15 years as opposed to TLT etf's duration of 20 years. VUSTX, the VG fund didnt do nearly as good as TLT last year.
I wonder if one could do a 35% VG LT Bond, 15% MMF (then 25% stocks 25% gold). Since the VG LT fund is not that strong, you would need more of it to work in deflationary environments. Also since the duration is shorter, to achieve a similar duration between the bonds/cash portion, this split may work.
Any thoughts?
EDIT
Just ran some quick numbers using the 52 week spread of VG LT Treas and TLT.
VUSTX has a 26% spread between 52 week high and low
TLT has a 39% spread
In order to achieve the same June 2008 to June 2009 results of 50% TLT with 50% Cash
you would use 75% VUSTX and 25% Cash therefore my guesstimation of 35% VUSTX to 15% MMF (and 25% stocks 25% gold) would have yielded the same over the last year as a 25x4 HB portfolio using a proper LT fund such as TLT. |
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Lbill
Joined: 13 Mar 2008
Posts: 2078
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| Posted: Mon Jun 01, 2009 11:39 pm Post subject: |
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This has probably been hashed earlier in this thread but I'm too lazy to go back through all 17 pages. Why not TIPS instead of LTT? Larry Swedroe (who has to qualify IMB as one of the most knowledgeable guys around when it comes to bonds) points out that, since TIPS do carry some "inflation insurance" (imperfect as that may be for some) it allows the investor to go out further along the maturity curve. That is, a TIP with a 25-year maturity may behave more like a LTT with a 20-year maturity if inflation heats up, and it gives you more leverage )because of the longer duration) in a deflationary scenario. TIPS used be issued with 30 year maturities, but now only out to 20 years. You can still get one of the older 30-year, but it now has a maturity of about 23 years. If the 30-year TIPS ever come back they might be a viable alternative to 20-25 year LTT. I know Craigr has made some observations about using TIPS instead of LTT but don't recall his reservations. Seems to me that they could possibly do the job of LTT while providing some protection against inflation that kills LTT. I'd like to hear more discussion about this alternative because TIPS confuse the h--- out of me most of the time.
_________________
"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: Tue Jun 02, 2009 12:05 am Post subject: |
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Why not LT TIPS instead of nominal bonds? 2008.
LT bonds up something like 30-40%.
TIPS bonds down for the year.
TIPS have no leverage against threats of deflation like LT bonds. |
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stratton
Joined: 04 Mar 2007
Posts: 6233
Location: Puget Sound
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| Posted: Tue Jun 02, 2009 3:06 pm Post subject: |
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| craigr wrote: | Why not LT TIPS instead of nominal bonds? 2008.
LT bonds up something like 30-40%.
TIPS bonds down for the year.
TIPS have no leverage against threats of deflation like LT bonds. |
TIPS have a floor, but they certainly don't have the "kick" of LT bonds.
Fooling around a bit with TIPS you can get a similar long term return of a PP, but not the violent uptake you'd have with gold or LT bonds during times of financial stress. Something like:
25% stocks
5% gold
45% TIPS
25% cash or ST bonds
Personally I like this better than a PP.
The PP is simple, very well designed and does its job well, responding positively during economic stress. Just because I don't want it doesn't mean others won't.
Paul |
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GA Ray
Joined: 16 May 2009
Posts: 8
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| Posted: Tue Jun 02, 2009 3:55 pm Post subject: |
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stratton, did you run the historical returns to compare the portfolio you listed against the PP? If so, can you share them? I'd be interested in seeing this.
Thanks |
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eurowizard
Joined: 10 May 2008
Posts: 844
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| Posted: Tue Jun 02, 2009 4:01 pm Post subject: |
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| stratton wrote: |
25% stocks
5% gold
45% TIPS
25% cash or ST bonds
Personally I like this better than a PP.
The PP is simple, very well designed and does its job well, responding positively during economic stress. Just because I don't want it doesn't mean others won't.
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Harry Browne was ridiculously distrustful of the US Government and would never trust TIPS and the CPI calculated by the government. |
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Lbill
Joined: 13 Mar 2008
Posts: 2078
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| Posted: Tue Jun 02, 2009 4:28 pm Post subject: |
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| Quote: | | stratton, did you run the historical returns to compare the portfolio you listed against the PP? If so, can you share them? I'd be interested in seeing this. |
For 1985-2008:
------------------- PP -------- TIPS
Average--------- 8.36%----- 8.26%
Std. Dev.-------- 6.10%------5.86%
CAGR------------ 8.19%------8.09%
Sharpe---------- 0.61--------0.61
Very close using Simba's spreadsheet data. I used VTSMX for stocks, and VFISX for 2-year treasuries. TIPS are represented by Vanguard's VIPSX, which was initiated in 2001. TIPS data from 1985-2001 are "synthetic" and not actual.
_________________
"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: Tue Jun 02, 2009 4:38 pm Post subject: |
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| Lbill wrote: | | TIPS data from 1985-2001 are "synthetic" and not actual. |
Just wanted to quote that part again.
TIPS may work perfectly fine going forward for investors, but their history in the US is very short. I'm not willing to be the guinea pig with them if bad inflation comes.  |
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Tue Jun 02, 2009 5:38 pm Post subject: |
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| craigr wrote: | | Lbill wrote: | | TIPS data from 1985-2001 are "synthetic" and not actual. |
Just wanted to quote that part again.
TIPS may work perfectly fine going forward for investors, but their history in the US is very short. I'm not willing to be the guinea pig with them if bad inflation comes. |
Let me put in another plug for I-Bonds, which sort of have the upside of TIPS, but not the downside.
Don't buy them until after November (when I assume they will pay a higher fixed rate), but to me the combination of complete tax deferral, zero principal risk, fair inflation protection and full faith and credit make them an appealing instrument for part of the cash holdings.
TIPS scare me. Wouldn't it be nice if managing inflation was as simple as buying a certain kind of bond. The fact is, though, that inflation is usually a symptom of underlying monetary and fiscal problems, and calling a debt instrument "inflation protected" is really kind of silly to me. It's sort of like saying that a roof is "wind proof"--it all depends on how much wind you are talking about and for how long. Perhaps "wind resistant" would be a better term.
_________________
"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 Jun 02, 2009 6:45 pm Post subject: |
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Looking at the TIPS vs. classic PP since 2001 using annual returns (Simba's data - I assume this reflects the actual performance of VIPSX since it's inception):
-------------PP---------TIPS
CAGR----7.78%------4.83%
SD--------5.37%-----6.43%
Sharpe---0.53--------0.06
Over many different time periods, including this one, the risk-adjusted return of the PP is remarkably consistent. By comparison, the TIPS version of PP (25% VTSMX, 45% VIPSX, 25% VFISX, 5% GOLD) does not do as well as over the full 1985-2008 time period (which incorporated synthetic TIPS for the years 1985-2000).
_________________
"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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elmerfudd
Joined: 24 May 2009
Posts: 12
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| Posted: Wed Jun 03, 2009 10:18 am Post subject: HOW SAFE IS VANGUARD? |
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| Hello again Craig, I was just reading an article in your blog. Someone questioned having all your eggs in one basket. Well, I am going to pull the trigger on my PP and have two questions. #1 What about having all four portions of the PP at Vanguard? I now have all my IRA funds (that means all my money) in PMMF at Vanguard. I will have stocks-TSM-VTI, cash-ST treasury Bond fund and Treasury MMF, bonds- iShares LT treasury ETF TLT, gold-75% GLD and 25% Krands in hand for 25% gold portion. All this to be in Vanguard. Is this putting all my eggs in one basket? Should I open a Fidelity IRA and put half of this there? It is getting complicated. How safe is Vanguard and Fidelity? #2 How does one buy LTT at auction and get them in my IRA in Vanguard? Is it worth the effort over buying TLT? I have to keep it simple. I have been living Harry Brown for the past several weeks. Seems like I did this back in his silver, gold and SF days back in the 70's. The Krands are $220. coins from that period. Thanks for all your help and work withe PP |
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Lbill
Joined: 13 Mar 2008
Posts: 2078
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| Posted: Wed Jun 03, 2009 2:44 pm Post subject: |
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I just spent a couple of hours calculating these data showing 5-year rolling returns from 1972-2008 for the classic PP (25% TSM, 25% LTT, 25% STT, 25% Gold) using the data in Simba's spreadsheet, and thought others might be interested in it:
Begin___End___CAGR____SD___Sharpe
1972....1976....13.59%.....3.94%....1.98
1973....1977....10.92%.....4.17%....1.23
1974....1978....10.24%.....3.47%....1.28
1975....1979....15.18%....14.84%....0.68
1976....1980....16.25%....14.34%....0.77
1977....1981....12.70%....17.23%....0.46
1978....1982....16.26%....16.92%....0.67
1979....1983....14.58%....17.87%....0.55
1980....1984.....7.46%....10.52%....0.19
1981....1985.....8.83%....11.90%....0.29
1982....1986....13.57%.....9.61%....0.84
1983....1987....10.23%.....8.48%....0.55
1984....1988....10.26%.....8.45%....0.55
1985....1989....12.40%.....7.33%....0.92
1986....1990.....8.58%.....7.07%....0.41
1987....1991.....7.52%.....5.31%....0.34
1988....1992.....7.17%.....5.50%....0.26
1989....1993.....8.88%.....5.65%....0.56
1990....1994.....5.65%.....6.90%....0.00
1991....1995.....8.89%.....8.16%....0.40
1992....1996.....7.28%.....8.00%....0.21
1993....1997.....7.91%.....7.81%....0.29
1994....1998.....7.53%.....7.56%....0.25
1995....1999.....8.96%.....5.64%....0.57
1996....2000.....6.07%.....3.08%....0.09
1997....2001.....5.25%.....3.89%...-0.14
1998....2002.....5.17%.....3.84%...-0.16
1999....2003.....5.76%.....5.06%....0.00
2000....2004.....6.24%.....4.98%....0.10
2001....2005.....7.24%.....4.67%....0.32
2002....2006.....9.31%.....3.12%....1.12
2003....2007....10.48%.....3.13%....1.49
2004....2008.....7.46%.....5.25%....0.33
Averages.........9.51%.....7.69%....0.53
A few things caught my attention:
> For the most part, the 5-year rolling StdDv are pretty low, so the PP gave you a fairly smooth ride during most of the 5-year periods. However, there were some fairly volatile 5-year periods for the 5 periods beginning in 1975 through 1979. So you can get on the roller coaster even with the PP - although these were 5-year periods that were characterized by double-digit compound annual gains, so it turned out to be a good roller coaster ride in the end.
> Over the 1972-2008 period, the worst drawdown during any of the rolling 5-year periods was only 4.1%. This occurred in 1981.
> During the 1990s, most of the rolling 5-year Sharpe ratios were pretty low, showing that the risk-adjusted return for the PP was not especially good during this period (i.e., the average returns were relatively low compared to the average standard deviation of returns). This was a period in which stocks took off - leading up to the 2000 crash.
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"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: Wed Jun 03, 2009 2:58 pm Post subject: |
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Thanks Lbill. The 5 year rolling return is very helpful.
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Wed Jun 03, 2009 8:57 pm Post subject: Re: HOW SAFE IS VANGUARD? |
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| elmerfudd wrote: | | Hello again Craig, I was just reading an article in your blog. Someone questioned having all your eggs in one basket. |
There is a balance between safety, simplicity and complexity. At some point you just have to say "good enough" and not worry about it any more. Vanguard will be just as safe as any other fund company. Mutual fund companies, by law, do not control the assets in the funds. They just manage them. Even if Vanguard were to go kaput tomorrow they do not have access to the actual assets of the customers for creditor purposes. If they did steal them (and it would be stealing), they have insurance on top of that.
If fund companies go bust, they may liquidate assets and return the funds to investors. But they don't simply vanish with all the money. Now this doesn't mean there can't be some type of calamity that disrupts record keeping and creates problems, etc. This is why some diversification of providers, I feel, is prudent. Sometimes things happen (like planes going into buildings and shutting down Wall Street) so it's best to have some geographic diversification.
I prefer to own bonds directly. It's cheaper and simple to do. It's also one less layer of people I need to worry about. I don't have to worry if a manager is loaning out my bonds or doing other things to goose returns and take on more risk for instance. You may want to call the Vanguard bond desk and see what the procedure is for buying bonds to put into your IRA. If you can't do this for whatever reason, then TLT is a good second choice.
Perhaps you can have the gold investments stored at another location so you have some diversification. ETFs are OK, but it's better to have more direct physical control but again there are logistical concerns. ETFs though are better than owning no gold in the portfolio. IMO.
But overall I agree that complexity should be avoided where possible. However, I wouldn't put 100% of my money in any single company though just to be safe. Best to keep at least the gold allocation somewhere else. Just in case there were ever a problem you won't be locked out totally from your assets, or at least you are spreading around the risk.
Last edited by craigr on Wed Jun 03, 2009 9:32 pm; edited 1 time in total |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Wed Jun 03, 2009 9:06 pm Post subject: |
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| LBill. Thanks for the interesting numbers. The mid-late 90s were a bad time for the portfolio. Everyone wanted stocks. But in the long run it seems to have worked out OK. |
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Lbill
Joined: 13 Mar 2008
Posts: 2078
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| Posted: Wed Jun 03, 2009 10:16 pm Post subject: |
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I should have mentioned that the 5-year rolling returns of the PP from 1972-2008, as well as the maximum drawdown of 4.1% during this period, are based on annual rebalancing to target 25% for each of the 4 assets. I noticed that if there was no rebalancing over the 5-year periods the results were generally not as favorable. When I have time, I'll take a more detailed look at this and post the results. As for now, it looks to me as though annual rebalancing might be important to consider. I know there has been some posts about using "bands" to rebalance; e.g., allowing each asset to vary by +- 5% from target (20% - 30%). This may be OK, or maybe even better than annual rebalancing - but I haven't seen any data regarding the historical results of this strategy.
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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: Wed Jun 03, 2009 10:18 pm Post subject: |
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On the subject of which brokerage to hold your assets at, I have always felt that using a non-publicly traded company like Vanguard is preferable to using a publicly traded company, which could always find itself subject to short attacks and other Wall Street antics. It doesn't mean that your assets aren't safe at a publicly traded brokerage, it just creates a potential hazard that a company like Vanguard doesn't face.
Professionally, I am a pension attorney, and for the most part money held in trust is much safer than people realize (whether it is a pension trust or a mutual fund). The biggest risk that most investors face is getting nickel and dimed to death with fees and commissions--that's another reason to like Vanguard very much.
It's important to remember, too, that the idea behind the PP is safety and simplicity and being able to forget about your investments and enjoy your life. Nothing is perfectly and completely safe, and think what a dull world it would be if such certainty was possible. However, when you look at the last 300 years or so of civilization, you will see that a PP-type approach to both asset management and defining the individual's relationship to government has been a very sound approach.
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Wed Jun 03, 2009 11:09 pm Post subject: |
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| Lbill wrote: | | I know there has been some posts about using "bands" to rebalance; e.g., allowing each asset to vary by +- 5% from target (20% - 30%). This may be OK, or maybe even better than annual rebalancing - but I haven't seen any data regarding the historical results of this strategy. |
Someone sent me a spreadsheet modified to do the annual and 15/35 rebalancing bands. The edge of about 0.50% CAGR a year went to the rebalancing bands if I recall. This is probably because it allows a bit of momentum to work into the system vs. the annual method that harvest more often. If I get permission, I'll post the modified version here.
In the long run each method has plusses and minuses. The biggest mistake though (for any type of index fund portfolio investing) is not doing any rebalancing and falling in love with one or another particular asset. |
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GA Ray
Joined: 16 May 2009
Posts: 8
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| Posted: Thu Jun 04, 2009 9:21 am Post subject: |
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Craig,
Can you post this performance data to your blog? It would be interesting to read.
Thanks |
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Lbill
Joined: 13 Mar 2008
Posts: 2078
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| Posted: Thu Jun 04, 2009 9:26 am Post subject: |
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| Quote: | | In the long run each method has plusses and minuses. The biggest mistake though (for any type of index fund portfolio investing) is not doing any rebalancing and falling in love with one or another particular asset. |
I agree. As a crude example - even though it is unlikely anybody would do this - had you held the 4 x 25 PP from 1972-2008 and never rebalanced, your maximum drawdown would have been 22.7% (1982) compared with a maximum drawdown of only 4.1% if you had rebalanced annually. In 1981, Gold suffered a loss of nearly 33% after it had been on a tear during the late 1970s while stocks and LTT tanked, so it would have grown to a much larger percentage of an unrebalanced PP. Rebalancing is essentially a risk management tool, not a return enhancement tool. If you allow the high-momentum assets to dominate the portfolio you are assuming greater risk that "reversion to the mean" of that asset, when it inevitably occurs, will drag down the overall performance of the portfolio. Rebalancing might improve CAGR over longer periods because it helps to smooth the ride and we know that usually improves CAGR because it helps to reduce the magnitude of drawdowns.
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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: Thu Jun 04, 2009 10:20 am Post subject: |
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| Lbill wrote: | | Quote: | | In the long run each method has plusses and minuses. The biggest mistake though (for any type of index fund portfolio investing) is not doing any rebalancing and falling in love with one or another particular asset. |
I agree. As a crude example - even though it is unlikely anybody would do this - had you held the 4 x 25 PP from 1972-2008 and never rebalanced, your maximum drawdown would have been 22.7% (1982) compared with a maximum drawdown of only 4.1% if you had rebalanced annually. In 1981, Gold suffered a loss of nearly 33% after it had been on a tear during the late 1970s while stocks and LTT tanked, so it would have grown to a much larger percentage of an unrebalanced PP. Rebalancing is essentially a risk management tool, not a return enhancement tool. If you allow the high-momentum assets to dominate the portfolio you are assuming greater risk that "reversion to the mean" of that asset, when it inevitably occurs, will drag down the overall performance of the portfolio. Rebalancing might improve CAGR over longer periods because it helps to smooth the ride and we know that usually improves CAGR because it helps to reduce the magnitude of drawdowns. |
In "Why The Best Laid Investment Plans Usually Go Wrong", HB included charts of the PP with and without rebalancing. The difference is dramatic. Rebalancing is necessary for the PP to work as advertised.
To me, three of the largest challenges investors face are (i) fully appreciating the destructive effect of large loses on a portfolio, (ii) resisting the temptation to chase returns, and (iii) knowing when to buy and when to sell.
The PP handles all three challenges by design.
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makalu
Joined: 05 Feb 2008
Posts: 44
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| Posted: Fri Jun 05, 2009 4:27 am Post subject: |
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| MediumTex wrote: | | In "Why The Best Laid Investment Plans Usually Go Wrong", HB included charts of the PP with and without rebalancing. The difference is dramatic. Rebalancing is necessary for the PP to work as advertised. |
I tried to keep this in mind as I, with teary eyes, clicked the sell button on stocks and gold, and bought LT bonds the other day. |
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Wonk
Joined: 11 Jul 2008
Posts: 204
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| Posted: Fri Jun 05, 2009 7:26 am Post subject: |
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| Quote: | | I tried to keep this in mind as I, with teary eyes, clicked the sell button on stocks and gold, and bought LT bonds the other day. |
Now that's discipline.
Ok, here's an exercise for all the PP devotees out there:
Obviously HB is not with us anymore so we can't ask him questions without the aid of a seance.
Say this board didn't exist, craigr's blog didn't exist--in fact, no resources existed to help put some perspective on the "why" we set up the PP as we do. Call it 20 years into the future....
What types of scenarios can you see that the PP would be fundamentally changed and you would have to change with it?
I can think of one--say the dollar is gold-backed again? That would change the standard 4 x 25, right?
How about if the Treasury started offering 50-year bonds? Would you purchase in place of the 30 year bonds?
Change has been a part of life and I can't imagine the future will be any different. So as economic changes happen, what scenarios could pop up that would require you to think and adjust accordingly? |
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Fri Jun 05, 2009 7:43 am Post subject: |
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| makalu wrote: | | MediumTex wrote: | | In "Why The Best Laid Investment Plans Usually Go Wrong", HB included charts of the PP with and without rebalancing. The difference is dramatic. Rebalancing is necessary for the PP to work as advertised. |
I tried to keep this in mind as I, with teary eyes, clicked the sell button on stocks and gold, and bought LT bonds the other day. |
I have fallen off the wagon from time to time, but I always rebalance when I realize that I don't sleep nearly as well with anything but the PP.
Congratulations. The hard part is behind you now. Just pay attention to the bottom line (as opposed to watching each asset class too closely) and I think you will be pleased with the results.
The funny thing about the PP is that it is just the opposite of most investment plans. Usually, an investment plan feels really good, you know you're going to get rich, your mind is clear....there's just some pesky data suggesting that what you are doing might not work out at all.
OTOH, with the PP, your mind is usually your enemy because it fights against doing something so counterintuitive as buying assets that seem to be in direct conflict with one another. The PP data, however, far from being pesky, makes a case for the approach being about as safe and stable as anything in this world can be.
Good luck.
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-Harry Browne |
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makalu
Joined: 05 Feb 2008
Posts: 44
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| Posted: Fri Jun 05, 2009 7:48 am Post subject: |
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| MediumTex wrote: | | The funny thing about the PP is that it is just the opposite of most investment plans. Usually, an investment plan feels really good, you know you're going to get rich, your mind is clear....there's just some pesky data suggesting that what you are doing might not work out at all. |
Whether it's Harry Browne, William Bernstein or any of the other respected investment-related authors, their message on rebalancing is always the same:
"Don't underestimate how much easier rebalancing is in *concept* than in *practice*, because each time you rebalance, you'll be selling what's currently popular and doing well, and buying what isn't." |
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Lbill
Joined: 13 Mar 2008
Posts: 2078
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| Posted: Fri Jun 05, 2009 3:01 pm Post subject: |
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I recently ran across this comment:
| Quote: | | Hyperinflation, on the other hand, has little to do with supply-side shortages and overheated economies. It happens when a currency dies. Once the realization grips savers (not consumers) that their money is losing its purchasing power, then they exit money and look for better stores of value. |
Every time I read something like this (and it is more and more often) I worry about holding stocks, bonds, and cash all denominated in the U.S. dollar. Granted, holding the PP with 25% gold is a bigger percentage in an "anti-dollar" asset than most investors have, but is it enough? I keep thinking that I should at least diversify some of my stocks, bonds, and cash out of the dollar as well. That would mean holding foreign securities and perhaps other "real" assets besides gold, such as commodities and real estate. Jim Rogers thinks buying farmland would be a good idea. Comments?
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"A foole and his money is soone parted." - J. Bridges, 1587 |
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dumbmoney
Joined: 16 Mar 2008
Posts: 1312
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| Posted: Fri Jun 05, 2009 8:24 pm Post subject: |
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Stocks aren't currency. In a hyperinflation the nominal value of stocks would skyrocket, as would every asset except for bonds.
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neverknow
Joined: 05 Jun 2009
Posts: 719
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| Posted: Fri Jun 05, 2009 8:34 pm Post subject: |
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| Lbill wrote: | I recently ran across this comment:
| Quote: | | Hyperinflation, on the other hand, has little to do with supply-side shortages and overheated economies. It happens when a currency dies. Once the realization grips savers (not consumers) that their money is losing its purchasing power, then they exit money and look for better stores of value. |
Every time I read something like this (and it is more and more often) I worry about holding stocks, bonds, and cash all denominated in the U.S. dollar. Granted, holding the PP with 25% gold is a bigger percentage in an "anti-dollar" asset than most investors have, but is it enough? I keep thinking that I should at least diversify some of my stocks, bonds, and cash out of the dollar as well. That would mean holding foreign securities and perhaps other "real" assets besides gold, such as commodities and real estate. Jim Rogers thinks buying farmland would be a good idea. Comments? |
We must read from the same source, as I read the article you are quoting. That particular article makes darn good sense, doesn't it?
I am diversified into 4 different currencies, the portion of the Permanent Portfolio usually reserved for Treasuries, or Bonds. I use both Gold & Silver in the category for Gold. I will not be buying a farm, as I just sold mine. I have picked all the beans I ever intend to pick in this lifetime, but I do miss the freshness of my produce. I hope to get to our towns farmers market this summer. I do own my home outright, and am on a well and septic. The electric grid is handy, but I can get along without it.
No one knows the future. Everyone is guessing.
neverknow |
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matt
Joined: 04 Mar 2007
Posts: 856
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| Posted: Fri Jun 05, 2009 8:56 pm Post subject: |
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makalu wrote:
| Quote: | | I tried to keep this in mind as I, with teary eyes, clicked the sell button on stocks and gold, and bought LT bonds the other day. |
I have been moving into Zeroes in portions (fortunately, considering the first ones I bought about a month ago are already down 10%). My instinct tells me that buying these will not turn out well. But that's what I thought two years ago and I was wrong. Maybe I'll be wrong again. But if I'm right...well, the gold better go up. |
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Fri Jun 05, 2009 10:13 pm Post subject: |
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| Lbill wrote: | I recently ran across this comment:
| Quote: | | Hyperinflation, on the other hand, has little to do with supply-side shortages and overheated economies. It happens when a currency dies. Once the realization grips savers (not consumers) that their money is losing its purchasing power, then they exit money and look for better stores of value. |
Every time I read something like this (and it is more and more often) I worry about holding stocks, bonds, and cash all denominated in the U.S. dollar. Granted, holding the PP with 25% gold is a bigger percentage in an "anti-dollar" asset than most investors have, but is it enough? I keep thinking that I should at least diversify some of my stocks, bonds, and cash out of the dollar as well. That would mean holding foreign securities and perhaps other "real" assets besides gold, such as commodities and real estate. Jim Rogers thinks buying farmland would be a good idea. Comments? |
Here are a few things to think about:
Currencies trade in relation to one another. If the dollar is weakening, what is strengthening? The whole world is in trouble. There is no paper currency safe haven. Gold will probably do well, but I suspect the dollar will hold up better than people think, if only because the rest of the world's currencies have so many problems of their own.
Most people in the U.S. don't really understand HYPERinflation, as opposed to very annoying inflation. Very annoying inflation is 10%-15%, and there are many countries all over the world that routinely experience long periods of this level of inflation, including the U.S. for periods in the 1970s. Hyperinflation, on the other hand, is more along the lines of 200%+ per year, year after year after year, usually accelerating. I'm the first to note that the dollar has not held its purchasing power very well in the 20th century, but it has held its purchasing power better than virtually any other currency you might compare it to.
Globalization is both inflationary AND deflationary. Let me explain--for developing economies, globalization is like throwing gas on a fire, and the newly created wealth drives up prices in those countries and probably does drive up some local wages and prices, as well as the price of some assets traded internationally, such as oil and other commodities. OTOH, in the developed world, globalization has a deep and prolonged deflationary effect, as the temptation to offshore jobs and industries depresses wages in many industries. When you take easy credit out of the equation, you discover a U.S. consumer whose wages have been stagnant for many years. As I have noted before, with stagnant wages it is virtually impossible to have sustained inflation--demand destruction shuts the process down when people simply don't have the money to pay the higher prices.
If one listens to someone like Jim Rogers, think about this: what was the last thing he was right about? Also, if he doesn't like the dollar, why on earth does he like the yen?
Normally, when everyone is convinced it's time to jump out of an asset, that is often the time to jump in. In early 2008, everyone said the dollar was toast, but when the world started to unravel, it was the dollar that was the safe haven. Why would that be different if the world started to unravel again? Has the U.S. managed its economic problems that much more incompetently than the rest of the world? I would say everyone is doing about the same thing, basically TRYING to flood the world with money, but with the velocity of money at a standstill you can flood the world with all the money you want and you will still have deflation (see Japan).
If one thinks that the U.S. banksters are pulling the strings (and there is reason to think that when you look at institutions like Goldman Sachs and its tentacles), is it really realistic to think that the man on the street would get as good a deal as seeing his enormous debt load just evaporate through hyperinflation? That would actually be very helpful to a lot of people who are over their heads in credit cards, houses, cars and the rest of their rented lives. It might happen, but I sort of doubt it, since wages are FALLING, not RISING. No rising wages, no inflation.
25% gold would easily protect you in any hyperinflationary scenario. Cash should also do okay, since short term rates should more or less track inflation. Stocks would do fine--rising inflation means rising revenue, which means rising profits in dollar terms, which should mean rising stock prices.
The Chinese, Russians, Saudis and a lot of others have a powerful incentive not to see U.S. dollar inflation and rising long term treasury rates. As Benjamin Franklin said: "appeal to interest, not to reason." So long as a stable dollar is in the rest of the world's interest, I'll bet it stays in a trading range.
If you want the MediumTex prediction, I say the U.S. is traveling the exact path as Great Britain, with about a 100 year lag. This means that many of the predictions about the U.S. are probably correct, but they are just off by several decades.
Of course, no one knows the future, but I'll bet the PP will "minimize future regret" better than any other approach to investing in coming years.
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makalu
Joined: 05 Feb 2008
Posts: 44
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| Posted: Sat Jun 06, 2009 12:52 am Post subject: |
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| Lbill wrote: | | Every time I read something like this (and it is more and more often) I worry about holding stocks, bonds, and cash all denominated in the U.S. dollar. Granted, holding the PP with 25% gold is a bigger percentage in an "anti-dollar" asset than most investors have, but is it enough? I keep thinking that I should at least diversify some of my stocks, bonds, and cash out of the dollar as well. That would mean holding foreign securities and perhaps other "real" assets besides gold, such as commodities and real estate. Jim Rogers thinks buying farmland would be a good idea. Comments? |
As someone living in Europe, but with interests in the US, I setup my ETF-based PP attempting to diversify globally. I suppose it's not perfectly in line with all of HB's ideas, since it diversifies on currency. Here's how it looks:
- Stocks: IWV (US) + VEU (non-US) + IWRD (non-US)
- Bonds: TLT (US) + IBGL (European LT government bonds)
- Gold: GLD (US based gold ETF) + ZGLD (Swiss based gold ETF)
- Cash: SHY (US) + IBGS (European ST bonds)
IWRD, IBGL, IBGS and ZGLD trade on the swiss exchange. I think that (though not 100% sure) that E*TRADE in the US provides convenient access to the swiss exchange.
I've not calculated the returns precisely, but it seems that the overall portfolio, over the past year, as performed similarly to the US component if viewed separately.
For the "speculation" portfolio, I'm all Jim Rogers. |
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Sat Jun 06, 2009 9:32 am Post subject: |
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| makalu wrote: | | For the "speculation" portfolio, I'm all Jim Rogers. |
Is that 50% farmland, 50% yen?
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neverknow
Joined: 05 Jun 2009
Posts: 719
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| Posted: Sat Jun 06, 2009 10:16 am Post subject: |
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| MediumTex wrote: |
The Chinese, Russians, Saudis and a lot of others have a powerful incentive not to see U.S. dollar inflation and rising long term treasury rates. As Benjamin Franklin said: "appeal to interest, not to reason." So long as a stable dollar is in the rest of the world's interest, I'll bet it stays in a trading range.
If you want the MediumTex prediction, I say the U.S. is traveling the exact path as Great Britain, with about a 100 year lag. This means that many of the predictions about the U.S. are probably correct, but they are just off by several decades.
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It is nice to read someone with a similar world view. My household is half American, half Brit. The American is asking the Brit - how will this work out in the end? It does look an awful lot like America is undergoing a similar restructuring that Great Britain has been through.
A lot of talk has been in the media about the possibility of China not buying Treasuries and what that might mean. I don't know, but it seems pretty clear to me, that for the moment, resurrecting the American consumer is in China's best interest, so that they can put their factory workers back to work. This may not always be true, but for now - this seems obvious to me.
neverknow |
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Lbill
Joined: 13 Mar 2008
Posts: 2078
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| Posted: Sat Jun 06, 2009 10:39 am Post subject: |
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In his recent commentary, it sounds like Bill Gross might be thinking the same thing I am about the buck. He is also wary of long term bonds.
| Quote: | | Staying rich in this future world will require strategies that reflect this altered vision of global economic growth and delevered financial markets. Bond investors should therefore confine maturities to the front end of yield curves where continuing low yields and downside price protection is more probable. Holders of dollars should diversify their own baskets before central banks and sovereign wealth funds ultimately do the same. All investors should expect considerably lower rates of return than what they grew accustomed to only a few years ago |
I know HB didn't advocate foreign currencies, but I wonder if the world has changed. I don't believe in currency trading, but I wonder if adding some currency diversification to the cash portion of the PP wouldn't be a good idea now. We've heard reports that the Chinese and others may be slowly diversifying away from holding 100% U.S. dollar reserves. They're worried about the Zimbabwe effect. Some people say you should only hold USD because that is the currency you spend but this ignores the fact that we depend hugely on foreign imports. It might be smart to hold some of the currencies of countries who sell a lot of stuff that you and I have to buy - that would mean Asian currencies and probably Latin American currencies in particular. As for Jim Rogers, he was one of the first to holler "buy commodities" back when everyone thought he was nuts - so I don't discount his thoughts. He is now hollering "get out of the dollar and into Chinese and Asian currencies and securities." He might be calling that right too.
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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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makalu
Joined: 05 Feb 2008
Posts: 44
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| Posted: Sat Jun 06, 2009 11:00 am Post subject: |
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| MediumTex wrote: | | Is that 50% farmland, 50% yen? |
Now that I look at it again, it's not *all* Jim Rogers. It's:
- DJP (Commodities, Jim Rogers)
- USL (Oil, Jim Rogers)
- AAPL (Apple Computer, not Jim Rogers)
- JNK (High-yield bonds, seemed interesting a few months ago)
- LendingClub.com (P2P lending, not Jim Rogers) |
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Sat Jun 06, 2009 11:19 am Post subject: |
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| Lbill wrote: | In his recent commentary, it sounds like Bill Gross might be thinking the same thing I am about the buck. He is also wary of long term bonds.
| Quote: | | All investors should expect considerably lower rates of return than what they grew accustomed to only a few years ago |
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I like Bill Gross. His analysis (as well as others in the PIMCO shop) is always interesting.
Note that he is talking about "considerably lower rates of return" in the future. Following that line of thinking, what would cause lower rates of return? Wouldn't inflation mean higher rates of return, since higher rates of return on bonds are necessary just to keep up with a higher rate of inflation. If he is talking about lower inflation-adjusted returns, he is not saying that.
To me, lower rates of return mean lower interest rates--it can't mean anything other than that. If the bond market has weak equity profits to compete with, lower bond yields will be the result.
From a macro perspective, the bursting of a debt bubble is a textbook deflationary event. Deflation is not something you turn off by printing money (see Japan).
Admittedly, the current environment is bewildering, but to me a future with both inflation and lower rates of return (assuming we are not talking about inflation adjusted returns) is really not even possible.
Think about the best time in the last 30 years to buy long term treasuries--you could have picked up a 30 year treasury bond in October of 1981 with a yield over 14%, but people who were buying them were called fools, since it was so obvious that inflation would be a problem as far as the eye could see. What actually happened? Inflation was peaking at that very moment and was tame for the next 30 years.
Is anyone aware of a historical example of inflation following the popping of a debt bubble? The question I can't get away from is where will people get the money to pay the higher prices as a result of inflation?
The inflation discussion is, to me, a great example of how something that SHOULD occur has nothing to do with what will ACTUALLY occur. Think about how in the last 30 years the money supply has exploded, while the price of countless items have fallen dramatically as a result of globalization. That's not what the increase in money supply suggests SHOULD happen.
Think about it like this: when U.S. fiscal and monetary policy began to get REALLY stupid in the mid-1980s, that's when long term treasury yields began FALLING like a rock--that's not what should have happened. And when Japan decided to go SUPER-STUPID with the same fiscal and monetary policies in the last 15 years, what happened?--the yields on their long term debt dropped even faster than on treasuries. Who would have predicted that? It makes no sense, but that's what happened. Given how counterintuitive these things are, how can we have any confidence in predicting what the future might hold?
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Lbill
Joined: 13 Mar 2008
Posts: 2078
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| Posted: Sat Jun 06, 2009 11:27 am Post subject: |
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Then, on the other hand, as I just posted here , long-term bonds might continue to do well going forward. As craigr says, you just cain't foretell the future.
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"A foole and his money is soone parted." - J. Bridges, 1587 |
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Trev H
Joined: 02 Mar 2007
Posts: 1456
Location: Tennessee
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| Posted: Sun Jun 07, 2009 8:23 am Post subject: |
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Looking for GOLD !!!
Annual Returns (that is).
Found returns in Simba's rev8 sheet but he did not list a source (and I like to know that the source before using the data).
Looking for other sources online I found the site below this morning.
http://www.measuringworth.org/....result.php
Got the New York Market Price for Gold 1970-2004.
Using the GLD ETF annual returns 2005-forward.
Anyway - from the source/site above below is the NY Market Price for Gold 1970-2004.
| Code: |
1970 36.41
1971 41.25
1972 58.60
1973 97.81
1974 159.74
1975 161.49
1976 125.32
1977 148.31
1978 193.55
1979 307.50
1980 612.56
1981 459.64
1982 375.91
1983 424.00
1984 360.66
1985 317.66
1986 368.24
1987 447.95
1988 438.31
1989 382.58
1990 384.93
1991 363.29
1992 344.97
1993 360.91
1994 385.42
1995 385.50
1996 389.09
1997 332.39
1998 295.24
1999 279.91
2000 280.10
2001 272.22
2002 311.33
2003 364.80
2004 410.52
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I converted that to annual return % and get numbers that are somewhat similar to Simba's but still quite different in different areas.
Anyone know where Simba got his data, what source he used ?
Below is what I get using the source above 1970-2004 (backing out ER of .40), and the GLD ETF which has a ER of .40.
12.89 1970
41.66
66.51
62.92
0.70
-22.80
17.95
30.10
58.47
98.81
-25.36
-18.62
12.39
-15.34
-12.32
15.52
21.25
-2.55
-13.11
0.21
-6.02
-5.44
4.22
6.39
-0.38
0.53
-14.97
-11.58
-5.59
-0.33
-3.21
13.97
16.77
12.13
8.24
17.76
21.95
31.10
4.92 2008
11.19 as of 05/31/2009
====
Summary Stats
StDev
26.21
CAGR
8.14
====
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22.5% US LCB, 22.5% US SCV, 10.0% US REIT, 22.5% Intl LCV, 22.5% Intl SCB
"As you can probably tell by now, my sympathies lie with the splitters"
Trev H |
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Lbill
Joined: 13 Mar 2008
Posts: 2078
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| Posted: Sun Jun 07, 2009 2:51 pm Post subject: |
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Trev- Try this site. They state that the annual gold price close that they show from 1800-2008 comes from Global Financial Data (requires membership). I downloaded and calculated the annual percent returns from 1972-2008 and they agree with Simba's data.
http://www.finfacts.ie/Private....tprice.htm
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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: Sun Jun 07, 2009 3:28 pm Post subject: |
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| dumbmoney wrote: | | Stocks aren't currency. In a hyperinflation the nominal value of stocks would skyrocket, as would every asset except for bonds. |
A point worth remembering. Companies can survive some pretty treacherous times. Think of everything Mercedes has been through for instance and they are still around. Companies in Latin America have survived many huge currency problems as well and lived to tell the tale. The stock prices are just revalued in the new and improved currency once things settle back down.
Re: Currency diversification in the portfolio.
Gold provides currency diversification a-plenty. No need to load up on foreign currencies unless you are living in those countries. IMO. As bad as the US is handling their finances, just remember there are plenty of places that are in even worse shape. It's the proverbial frying pan into the fire in many cases. |
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