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Bogleheads
Investing Advice Inspired by Jack Bogle
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billb
Joined: 12 Jun 2009
Posts: 125
Location: Kennesaw, GA
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 Posted: Sun Aug 02, 2009 6:55 am Post subject: |
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| MarcMyWord wrote: |
For the benefit of those who have not read them, could ikkyu or someone else please describe Taleb's concept of an "ideal portfolio"?
I'm not trying to hijack/divert the discussion away from the permanent portfolio concept, but since the very diversified PP has apparently been suggested as a good remedy for (among other things) a Taleb world of black swans, and there seems to be a disagreement among other posters here concerning Taleb's helpfulness on the subject of actual portfolio design, I'm just curious to know what Taleb himself says about it, and to what extent Taleb's approach would be similar to (or different from) a Harry Browne–style permanent portfolio.
Thanks.
Marc |
He recommends 90% in risk free such as T-bills from various countries and 10% in extremely high risk. I believe high risk to be buying calls on an index. |
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ClubberLang
Joined: 12 Apr 2009
Posts: 65
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| Posted: Sun Aug 02, 2009 8:50 am Post subject: |
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| craigr wrote: | For the LT bonds I'd rather see you holding the bonds directly if you can. It eliminates additional yearly expenses and another layer of manager risk. Otherwise I think that TLT is a better choice than Vanguard's LT bond as far as bond funds go for this particular portfolio strategy.
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Is there a way to purchase the bonds directly and placed them in an IRA account? Or would this have to be a taxable account? What makes TLT better than VUSTX? My apologies if this has already been covered...I haven't not read the entire thread yet. |
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meckaneck
Joined: 31 Jul 2008
Posts: 189
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| Posted: Sun Aug 02, 2009 9:17 am Post subject: |
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Craig, Tex & Others,
I received the following reply about the HB permanent portfolio from Larry Swedroe and would appreciate any insight on his remarks:
"Not a fan of Browne's portfolio for whole variety of reasons.
First it makes the major error of thinking there is a right portfolio --no such thing. Just one right for you. All of these cookie cutter solutions by definition are going to be wrong for most people.
Second, it has way too low an equity allocation for almost everyone.
Third, it has way too high a gold allocation and I don't even like gold relative to broader based commodity solution like PIMCO fund.
Fourth, the evidence shows, and my coworker and I will be publishing a paper on this in the Journal of Indexing in November issue, that the duration of a fixed income asset should be dependent on the equity allocation and Browne's portfolio gets it wrong anyway--at low equity allocations you should hold shorter term bonds.
Fifth, holding cash is really bad idea, let alone that much cash or equivalent as the highest Sharpe Ratio is at about 1 year---so simply going from cash to 1 year would help everyone.
Sixth, he totally ignores TIPS which is the asset class that the research shows should dominate fixed income portfolios and it does well in both inflation and deflation." |
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Sun Aug 02, 2009 10:11 am Post subject: |
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| ikkyu wrote: | | MediumTex wrote: | It's ironic that someone like Nassim Taleb gets all the applause for telling us how unpredictable the world is, even as he is going out of his way to tell you how he doesn't know what you SHOULD do (i.e., no specific investment advice), just what you SHOULDN'T do (i.e., don't discount the highly improbable).
OTOH, Harry Browne's books sit on the bookshelf, mostly unread, but are packed with basically ALL of Nassim Taleb's insights, plus a complete plan of action to deal with most every type of uncertainty that might arise.
It's like Taleb is telling us that "sometimes lightning strikes", while Harry Browne is out installing high quality lightning rods at a fair price for anybody who wants one. |
Greetings,
This statement about Taleb is totally incorrect! He has talked about his personal investment (trading) style in numerous places. In "The Black Swan" he describes what he believes to be an ideal portfolio for a black swan world. Have you even read his books?
Cheers from Osaka,
john |
Sorry, it IS totally correct. Taleb has a series of canned speeches he gives and every time he is asked the question about what one should do in light of his advice he says he has no affirmative recommendations, rather he can tell you what NOT to do, and you're on your own from there.
Taleb has his personal strategy which his hedge fund uses, but that's not a strategy for most retail investors, and I have never heard him recommend it in response to a question about what action someone should take in light of Taleb's views.
I have read both of his books, many of his other writings and have sought out every recorded speech he has given in the last two years or so.
I like Taleb a lot, but my statement about him was correct.
I will look for a link to one of his speeches and mark the point in the speech in which he describes his "negative advice" and its value.
The problem with Taleb's strategy is that if you don't have 10 years or more to commit to following it, you might lose money every year waiting for the BIG ONE to hit. The PP, on the other hand, works all of the time.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne |
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Sun Aug 02, 2009 10:15 am Post subject: |
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| meckaneck wrote: | Craig, Tex & Others,
I received the following reply about the HB permanent portfolio from Larry Swedroe and would appreciate any insight on his remarks:
"Not a fan of Browne's portfolio for whole variety of reasons.
First it makes the major error of thinking there is a right portfolio --no such thing. Just one right for you. All of these cookie cutter solutions by definition are going to be wrong for most people.
Second, it has way too low an equity allocation for almost everyone.
Third, it has way too high a gold allocation and I don't even like gold relative to broader based commodity solution like PIMCO fund.
Fourth, the evidence shows, and my coworker and I will be publishing a paper on this in the Journal of Indexing in November issue, that the duration of a fixed income asset should be dependent on the equity allocation and Browne's portfolio gets it wrong anyway--at low equity allocations you should hold shorter term bonds.
Fifth, holding cash is really bad idea, let alone that much cash or equivalent as the highest Sharpe Ratio is at about 1 year---so simply going from cash to 1 year would help everyone.
Sixth, he totally ignores TIPS which is the asset class that the research shows should dominate fixed income portfolios and it does well in both inflation and deflation." |
What was Swedroe's record in 2008?
I love the way some of these clowns (not necessarily Swedroe) who got it all wrong somehow expect people to believe that they are going to get it right next time.
Swedroe is claiming to know the future. No one knows the future. It's really that simple.
BTW, TIPS have never been tested in a bad period of inflation, so it's not possible to know how they will do.
_________________
"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: Sun Aug 02, 2009 10:28 am Post subject: |
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meckaneck- Thanks for posting that input from Larry. I have wondered what he would say about the PP. Most of his views are pretty well known and these are consistent with those. I always value his views.
_________________
"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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dumbmoney
Joined: 16 Mar 2008
Posts: 1312
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| Posted: Sun Aug 02, 2009 2:50 pm Post subject: |
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Taleb's general advice is to avoid medium-risk investments. Instead use only very risky and very safe. As far as I know, he's never been more specific than that.
_________________
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. |
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Sun Aug 02, 2009 2:56 pm Post subject: |
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| ikkyu wrote: | | MediumTex wrote: | It's ironic that someone like Nassim Taleb gets all the applause for telling us how unpredictable the world is, even as he is going out of his way to tell you how he doesn't know what you SHOULD do (i.e., no specific investment advice), just what you SHOULDN'T do (i.e., don't discount the highly improbable).
OTOH, Harry Browne's books sit on the bookshelf, mostly unread, but are packed with basically ALL of Nassim Taleb's insights, plus a complete plan of action to deal with most every type of uncertainty that might arise.
It's like Taleb is telling us that "sometimes lightning strikes", while Harry Browne is out installing high quality lightning rods at a fair price for anybody who wants one. |
Greetings,
This statement about Taleb is totally incorrect! He has talked about his personal investment (trading) style in numerous places. In "The Black Swan" he describes what he believes to be an ideal portfolio for a black swan world. Have you even read his books?
Cheers from Osaka,
john |
Go to this site and listen to Taleb's speech from early in 2008: Link
At 56:15 he begins talking about what people should do in light of the uncertain world he posits and his comments include the following:
| Quote: | Someone asked me "what should we do?"
I entered a state of rage.
I will tell you what NOT to do.
I have a general worldview. I cannot tell people what to do. |
BTW, I encourage anyone to listen to this entire speech. Like most of his work, it's very provocative.
The strategy that he describes in his books relies on basically making options bets on unlikely events with the idea that they will occur more often than the market thinks. However, this strategy is complex, has considerable transaction costs, may go many years and produce no gains at all, and in my view is close to worthless to a retail investor who is trying to accumulate a nest egg for retirement.
So I stand by my comment that Taleb tells us that the world is uncertain, but does not provide us with a specific plan of action to deal with this uncertainty (buying out of the money options year after year hoping for a black swan is simply not an appropriate strategy for the average investor). In Taleb's view, he has done his job by merely alerting us to the true nature of the market and its tendency to "eat like a bird and sh*t like an elephant." Harry Browne, OTOH, starts with Taleb's premise and proceeds to map a safe and simple strategy that anyone can implement.
There is another Taleb speech on the site above from January 2009 that is also outstanding. Check it out if you have time.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne |
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Sun Aug 02, 2009 4:43 pm Post subject: |
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| ClubberLang wrote: | | Is there a way to purchase the bonds directly and placed them in an IRA account? Or would this have to be a taxable account? What makes TLT better than VUSTX? My apologies if this has already been covered...I haven't not read the entire thread yet. |
You can purchase treasuries in an IRA account. I believe you have to do so on the secondary market, since there is no way to do a treasurydirect IRA that I am aware of.
TLT is better than VUSTX for purposes of the PP because of TLT's longer average duration (14 years vs. 20 years, or thereabout). Check the one year chart on both to see the difference in volatility. Check EDV while you're at it to see how zero coupons behave in relation to TLT.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne |
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stratton
Joined: 04 Mar 2007
Posts: 6233
Location: Puget Sound
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| Posted: Sun Aug 02, 2009 4:53 pm Post subject: |
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| MediumTex wrote: | | ClubberLang wrote: | | Is there a way to purchase the bonds directly and placed them in an IRA account? Or would this have to be a taxable account? What makes TLT better than VUSTX? My apologies if this has already been covered...I haven't not read the entire thread yet. |
You can purchase treasuries in an IRA account. I believe you have to do so on the secondary market, since there is no way to do a treasurydirect IRA that I am aware of. |
Both Vanguard and Fido let you purchase new issue TIPS when they come out from tge Treasury in an IRA or other account.
Paul |
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Roy
Joined: 10 Sep 2008
Posts: 341
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| Posted: Sun Aug 02, 2009 4:55 pm Post subject: |
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| MediumTex wrote: | What was Swedroe's record in 2008?
I love the way some of these clowns (not necessarily Swedroe) who got it all wrong somehow expect people to believe that they are going to get it right next time.
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I think Larry "got it right" in 2008.
Ironically, the "Swedroe portfolio" has an important similarity to the PP: both reduce Fat Tail risks; they both surrender great upside potential to minimize downside loss. Larry's portfolio also has about only 25-30% equities (including a small amount of CCFs—about 10% of equities), though his equities are tilted to SV classes and EM, unlike the HB portfolio.
Depending on precise holdings (all indexes), and using a ST Treasury* fund for his 70% fixed income (another popular Swedroe recommendation) that go back to 1972, I estimate his portfolio (and his clients who use it) lost about 6% in 2008. That was the portfolio's worst year; the second worst year—of the 3 overall down years—was about a -1% in 1994. Since 1972 it has done about as follows:
CAGR 9.86%
Standard Dev 6.57%
*Larry recommended ST Treasuries until recent years as more research was published on TIPS.
Since 1972, I would say few portfolio designs that contain at least 25% equities can match the risk/return characteristics of Larry's portfolio. Still, if you kept equities to 40% or lower and used high-quality fixed income (Treasuries) of any maturity, you did well since 1972, without a large yearly loss.
Both portfolio types worked pretty well since 1972, especially regarding their common stated objectives of minimizing loss, and low exposure to Beta is one common factor that clearly helped greatly in big downturns.
Larry has clearly said his portfolio is not for everyone, due to tracking error regret (another feature common to the PP) and individual needs. In that "universal recommendation" sense, he certainly differs from Harry Browne.
Roy |
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Sun Aug 02, 2009 7:58 pm Post subject: |
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The thing I find remarkable is how presumably sophisticated people like Swedroe place so much faith in TIPS as an effective inflation hedge.
The federal government has a very poor record of reporting inflation. I find the items that are included and excluded from the CPI to be arbitrary and notions like "owner's equivalent rent", "hedonic adjustments" and considering things like computer processor speed when determining whether the price of a computer has risen or fallen to be silly.
Trusting the federal government to keep the TIPS game clean is a bit like trusting a politician with other peoples' money.
Time will tell, of course, but personally I have seen the government do a poor job of virtually everything it has tried (there have been a few exceptions, like the Moon missions and a public school here and there), except when it comes to confiscating private property, which it is quite good at. I don't know why TIPS would break this trend.
Harry Browne had a great line about why the government is able to win wars if it is so incompetent. His answer was that if a government ever wins a war it is only because it is fighting another government and normally they can't both lose.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Sun Aug 02, 2009 8:30 pm Post subject: |
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| meckaneck wrote: | | Swedroe states: First it makes the major error of thinking there is a right portfolio --no such thing. Just one right for you. All of these cookie cutter solutions by definition are going to be wrong for most people. |
In virtually every investment book I've read they list out default portfolio recommendations almost without exception. In fact, they tend to list out a large number of portfolio recommendations which is really nice because no matter what happens they can simply point to the one that did the best and say that was their recommendation after-the-fact.
Curiously, in updated versions of many investment books the portfolio recommendations tend to drift around. I also frequently notice this behavior when interviews are given. I suspect recency bias is alive and well in many of these recommendations.
Browne instead whittled down his initial portfolio design in the late 1970's to the simpler one by 1987 and stuck with it almost without change (except he started recommending index funds vs. stock funds later). And over that time the portfolio has done pretty much what he said it would do which is provide consistent conservative growth with low volatility.
Of these two approaches I tend to regard Browne's higher simply because he hasn't changed his advice significantly over this time period. He only made it simpler and more efficient. Lastly, he also has a strategy that has 30 years of hard empirical evidence at this point that it does what he said it would do. Nothing more. Nothing less.
So why in the world would you want to go and seriously alter a strategy that has proven itself to work as designed? If you fancy yourself a more conservative investor who doesn't like a lot of excitement with their life savings then this portfolio recommendation works exactly as advocated.
| Quote: | | Second, it has way too low an equity allocation for almost everyone. |
This is debatable when you consider the portfolio design considerations and the idea that stocks may not outperform over very long stretches of time. The portfolio performance has been acceptable even against heavier stock portfolio allocations with much lower volatility. In fact, over the last 10 years it has even outperformed most stock heavy portfolios. Over the past 35 years it has managed to even keep pace with many heavy stock allocations with only a couple years with small losses (-4-6% in 1981 was the worse).
| Quote: | | Third, it has way too high a gold allocation and I don't even like gold relative to broader based commodity solution like PIMCO fund. |
The PIMCO fund is opaque and open to many risks in how the fund is run. Commodities do not have a monetary metal value that straight gold does either. In 2008 when people dumped commodities in droves they were more than happy to hold onto their gold which is because it is viewed both as a commodity but also as a form of money/wealth during certain market climes.
The Permanent Portfolio does not seek diversification for diversification's sake. It uses assets that were specifically chosen to perform best for each market condition it was expected to protect against. That means for high inflation you want to own gold and nothing else.
| Quote: | | Fourth, the evidence shows, and my coworker and I will be publishing a paper on this in the Journal of Indexing in November issue, that the duration of a fixed income asset should be dependent on the equity allocation and Browne's portfolio gets it wrong anyway--at low equity allocations you should hold shorter term bonds. |
Browne does not get it wrong. Swedroe has almost certainly fallen into the trap of considering correlations of assets in relation to each other and not considering the economic drivers that produce returns. 2008 clearly showed that Browne is correct in how his asset allocation strategy works. When deflation came on strong it was LT bonds that performed exactly as economic theory would suggest they would. ST bonds do not have the power to offset stock losses under certain economic conditions.
| Quote: | | Fifth, holding cash is really bad idea, let alone that much cash or equivalent as the highest Sharpe Ratio is at about 1 year---so simply going from cash to 1 year would help everyone. |
I generally recommend holding ST bonds instead of 100% Treasury MMF once you have built up your short-term living expenses/emergency needs. So here I don't disagree necessarily. However cash is very helpful in riding out bad markets and taking advantage of market drops to purchase stocks during rebalancing operations. It's nice to have a part of your portfolio like cash that will not fluctuate wildly in value when the markets are working out which way they want to go.
| Quote: | | Sixth, he totally ignores TIPS which is the asset class that the research shows should dominate fixed income portfolios and it does well in both inflation and deflation." |
He doesn't ignore TIPS. He flat out refuses to use them and recommends that nobody else use them either. There is absolutely no way that TIPS are going to react as strongly to bad inflation as gold will and pull up the other parts of a portfolio that are being ravaged by inflation. TIPS also will never perform as well as nominal LT Treasury bonds during deflation. So you lose there as well.
TIPS are really not the great idea people believe and since they have been completely untested in the US markets during a bad dollar crisis there is no telling how they will really perform. The US Dollar is the world reserve currency. If bad inflation comes to the US it affects holders of dollars all over the planet and there is no telling how TIPS will react. Last year 5-year TIPS had a negative yield briefly. So I think that if we get bad inflation in this country that there could be some interesting surprises in store for people relying on TIPS to save them.
But he does not ignore TIPS at all and was well aware of them. He just doesn't think they provide the high inflation protection gold does. Finally, inflation is a monetary problem. You don't want the people causing the problem (government) being the same ones deciding how much to pay you on the problem they caused (inflation). It's like buying arson insurance from arsonists.
Last edited by craigr on Mon Aug 03, 2009 1:23 am; edited 1 time in total |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Sun Aug 02, 2009 8:46 pm Post subject: |
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| Roy wrote: | | I think Larry "got it right" in 2008. |
I've read several of Larry's books and I don't recall where he was recommending his 80/20 safe/risky portfolio in any of them. I didn't read his last couple books so perhaps I missed it. But his other portfolio suggestions were nothing at all like the portfolio he talks about today after what happened in 2008. However I'm glad he is acknowledging the inherent risks in stock heavy portfolios and offering people an alternative to guard against fat-tail events. |
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ikkyu
Joined: 29 Dec 2008
Posts: 18
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| Posted: Sun Aug 02, 2009 10:54 pm Post subject: |
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| MediumTex wrote: | | ikkyu wrote: | | MediumTex wrote: | It's ironic that someone like Nassim Taleb gets all the applause for telling us how unpredictable the world is, even as he is going out of his way to tell you how he doesn't know what you SHOULD do (i.e., no specific investment advice), just what you SHOULDN'T do (i.e., don't discount the highly improbable).
OTOH, Harry Browne's books sit on the bookshelf, mostly unread, but are packed with basically ALL of Nassim Taleb's insights, plus a complete plan of action to deal with most every type of uncertainty that might arise.
It's like Taleb is telling us that "sometimes lightning strikes", while Harry Browne is out installing high quality lightning rods at a fair price for anybody who wants one. |
Greetings,
This statement about Taleb is totally incorrect! He has talked about his personal investment (trading) style in numerous places. In "The Black Swan" he describes what he believes to be an ideal portfolio for a black swan world. Have you even read his books?
Cheers from Osaka,
john |
Go to this site and listen to Taleb's speech from early in 2008:
At 56:15 he begins talking about what people should do in light of the uncertain world he posits and his comments include the following:
| Quote: | Someone asked me "what should we do?"
I entered a state of rage.
I will tell you what NOT to do.
I have a general worldview. I cannot tell people what to do. |
BTW, I encourage anyone to listen to this entire speech. Like most of his work, it's very provocative.
The strategy that he describes in his books relies on basically making options bets on unlikely events with the idea that they will occur more often than the market thinks. However, this strategy is complex, has considerable transaction costs, may go many years and produce no gains at all, and in my view is close to worthless to a retail investor who is trying to accumulate a nest egg for retirement.
So I stand by my comment that Taleb tells us that the world is uncertain, but does not provide us with a specific plan of action to deal with this uncertainty (buying out of the money options year after year hoping for a black swan is simply not an appropriate strategy for the average investor). In Taleb's view, he has done his job by merely alerting us to the true nature of the market and its tendency to "eat like a bird and sh*t like an elephant." Harry Browne, OTOH, starts with Taleb's premise and proceeds to map a safe and simple strategy that anyone can implement.
There is another Taleb speech on the site above from January 2009 that is also outstanding. Check it out if you have time. |
Whoa there buddy! Didn't mean to get you too excited 
I don't want to clutter thread with too much nonsense. You realize of course the logical inconsistency of insisting that he has no strategy and then describing it and saying why you don't like it, don't you? As mentioned by the above reader, who has clearly read the book, the strategy is references as "Barbells" where you put 90% in treasuries and 10% in speculative (likely OTM) options positions on individual stocks (not indices, as stated above). This provides exposure to "positive black swans".
That is a portfolio, whether you like it or not.
I think Taleb would be sympathetic to the Browne-style portfolio (having slight equity exposure), so it is essentially a non-issue.
Cheers,
john |
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ikkyu
Joined: 29 Dec 2008
Posts: 18
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| Posted: Sun Aug 02, 2009 10:54 pm Post subject: |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Sun Aug 02, 2009 11:27 pm Post subject: |
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One more thing about TIPS and high inflation just to highlight the political football that it will likely become if it comes back here again.
In the 1970s the inflation chicken finally came home to roost. In the early 1970's they blamed high inflation on businesses and implemented price and wage controls to try to fight it. They seemed to think it was business owners looking to gouge consumers with higher prices and workers demanding higher wages who were printing the money. Inflation was 12% by end of 1974.
In the mid-70s they blamed high inflation on the consumer. They started a "Whip Inflation Now" program encouraging consumers to stop inflation. They seemed to think it was the consumers at home printing and spending all the money. Inflation dropped, but was still a very high 6.5% by the start of 1977.
By the late 1970s they were blaming everyone for high inflation just about. Apparently it was everyone who was printing all the money and running massive deficits. Inflation was now almost 15% by 1980.
By the early 1980s they finally discovered the real problem and unplugged the printing presses for a while. Inflation collapsed to 3-4% by 1985.
So my point in all of this is if we get really bad inflation the government is going to come up with all sorts of excuses and politicize it up and down. I just have to wonder if holders of TIPS may be pulled into the fracas and perhaps deprived their fair compensation in subtle or not so subtle ways. As for me, I'd rather avoid the discussion entirely and just own gold for my inflation protection while things settle out. |
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Roy
Joined: 10 Sep 2008
Posts: 341
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| Posted: Mon Aug 03, 2009 6:17 am Post subject: |
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| craigr wrote: | | Roy wrote: | | I think Larry "got it right" in 2008. |
I've read several of Larry's books and I don't recall where he was recommending his 80/20 safe/risky portfolio in any of them. I didn't read his last couple books so perhaps I missed it. But his other portfolio suggestions were nothing at all like the portfolio he talks about today after what happened in 2008. However I'm glad he is acknowledging the inherent risks in stock heavy portfolios and offering people an alternative to guard against fat-tail events. |
Larry's portfolio samples in his books are meant as examples of how diversification works. He has stated that many times. I am not sure when Larry began discussing his particular portfolio composition (the fixed income varies in maturity and type based on yields and rates but is alwaus highest quality) or on what board, but it was well in advance of the 2008 meltdown. As you can see, I don't think the basic composition (equity to fixed) changed much, if at all, to more recent threads. One thread from June, 2007 is here:
http://www.bogleheads.org/foru....hp?p=45574
"First my portfolio is heavily fixed income--about 75%, mostly munis due to limited relative space in tax advantaged accounts.
Of the fixed income the munis are basically laddered with about average maturity in the 4-5 year range. The rest is in TIPS mostly 8-10 year now but just bought first 20 year when it went to 275.
The equities are about 50% US TM SV, 35% ISV and 15% EMV, all DFA funds.
Small amount of CCF via Pimco fund "
"Just to add, the expected return of my portfolio is similar IMO to that of one that is TSM but much higher equity allocation. The difference is that the potential dispersion of returns is much different. My left tail and right tail are much shorter. A trade that almost all investors would make if should two portfolios with different potential dispersions of returns (without knowing what is inside the two portfolios). Tracking error regret risk is the biggest risk here. And of course the value risk could easily show up--but it shows up most when beta gets hit hard--which is just when my portfolio would be the far superior one due to the far lower beta exposure."
Roy |
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Mon Aug 03, 2009 8:47 am Post subject: |
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| ikkyu wrote: | Whoa there buddy! Didn't mean to get you too excited
I don't want to clutter thread with too much nonsense. You realize of course the logical inconsistency of insisting that he has no strategy and then describing it and saying why you don't like it, don't you? |
I don't recall saying he had no strategy. What I suggested is that his personal strategy is inappropriate for virtually every retail investor.
Here is what I said in the OP:
| Quote: | | It's ironic that someone like Nassim Taleb gets all the applause for telling us how unpredictable the world is, even as he is going out of his way to tell you how he doesn't know what you SHOULD do (i.e., no specific investment advice), just what you SHOULDN'T do (i.e., don't discount the highly improbable). |
I then posted a speech in which these precise words came out of Taleb's mouth. I see no logical inconsistency there.
I then noted that the fact that Taleb has a "black box" that he uses for his hedge fund which has provided a good hedge against the rest of the market four times in the last twenty years does not strike me as something that is especially useful to the average investor.
My point was simply that Harry Browne provides useful advice about how to invest your money in light of the world's uncertainty, while Taleb, by his own admission, has insights that are more akin to what he calls "a worldview", and you must decide for yourself in what way this "negative advice" will be useful in your own situation.
That's what I meant when I wrote:
| Quote: | | It's like Taleb is telling us that "sometimes lightning strikes", while Harry Browne is out installing high quality lightning rods at a fair price for anybody who wants one. |
To sum up, here is exactly what Taleb said:
| Quote: | Someone asked me "what should we do?"
I entered a state of rage.
I will tell you what NOT to do.
I have a general worldview. I cannot tell people what to do. |
If you think that Taleb is out giving speeches in which he is incorrectly stating his own beliefs, perhaps you should contact him directly.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne |
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zhiwiller
Joined: 20 Feb 2007
Posts: 1133
Location: Orlando, FL USA
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| Posted: Mon Aug 03, 2009 10:06 am Post subject: |
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| I just read Bogle's "Enough" book and he has a section about how ridiculous the government CPI adjustments are. So this isn't just a Tinfoil Hat conspiracy crowd talking point, Bogle has his reservations about it as well. |
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larryswedroe
Joined: 22 Feb 2007
Posts: 5368
Location: St Louis MO
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| Posted: Mon Aug 03, 2009 10:18 am Post subject: |
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| Quote: | | Swedroe is claiming to know the future. |
Medium Tex
Be very interested to have you show a single statement that I have ever made that could even remotely be interpreted as my saying I know the future. In fact everything I have written is about the fact that we all have cloudy crystal balls.
Why people choose to make totally unsubstantiated statements like this is an interesting question.
As to TIPS you are certainly entitled to your opinion on the subject. However there is no academic evidence that I am aware of that shows the data is biased. In fact I have read some studies that show the reported data overstates inflation at times. And as I have said, if the government does cheat, then the market will price that (higher TIPS yields will be required) and the government will actually lose because there will be a risk premium.
As to my books and my own portfolio. There is no conflict. The books show examples and clearly discuss how these are models and there is no right portfolio--models are meant to be just starting points --good examples of well diversified portfolios that one should consider and then adapt to their own situation.
My own portfolio has been almost the same since 1998, as I have posted here and discussed many times. It is simply the right one for me, at least IMO. And as to knowing the future, if I knew I would certainly have all my assets in the asset class that would deliver the highest returns. My portfolio is highly diversified, with exposure to all the risk factors (beta, size and value) with broad international diversification. I do that because I don't know the future. |
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Lbill
Joined: 13 Mar 2008
Posts: 2078
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| Posted: Mon Aug 03, 2009 10:19 am Post subject: |
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Using Simba's historical data, from 1972-2008 the returns of a portfolio that is 75% in intermediate treasurys matches or exceed the PP when the 25% stocks is in SCV, even better when it is 20% SCV and 5% EM. Even better is replacing 10% intermediate bonds with 10% gold.
________________________________CAGR____SD___Sharpe
25%TSM/25%LTT/25%STT/25%GOLD........9.6%....8.5%......0.48
25%SCV/75%ITT........................................9.7%....7.8%......0.53
20%SCV/5%EM/75%ITT...........................10.0%....7.4%......0.60
20%SCV/5%EM/65%ITT/10%GOLD..........10.4%....6.7%.....0.71
BTW, I find that there is little difference in the historical performance of portfolios with intermediate term treasuries vs bonds split between short-term treasuries and long term treasuries.
I think bond-heavy portfolios, such as Larry's, are an interesting alternative to the PP. Since the bond-heavy portfolio excludes gold, and doesn't seem to have as much "inflation insurance," as the PP, I was interested in how it fared during the 1970s- which was a period of high inflation in the U.S. and a poor stock and bond market. The worst annual drawdowns were small (<3%). That was a period during which gold had massive returns and the PP total returns were quite good - but you would have survived with a bond-heavy portfolio. Beginning in 1981, portfolios with a high gold allocation like the PP tended to lag the bond-heavy portfolio, being beaten in 18 of the 29 years to 2008. The bond-heavy portfolio actually gained about 2% in 2008 vs. a loss of -0.8% for the PP.
Both the PP and bond-heavy portfolios like Larry's are defensive portfolios that minimize downside losses so I see them both as appropriate for retired investors who are drawing down their portfolios in particular. The PP seems to me to be the most heavily fortified against nasty downside surprises. The bond-heavy portfolio, if the stock holdings are tilted toward small and value, looks like it might have a little more upside potential over the long term than the PP with similar historical downside protection.
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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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MCSquared
Joined: 02 Aug 2009
Posts: 97
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| Posted: Mon Aug 03, 2009 10:38 am Post subject: |
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| larryswedroe wrote: | | Quote: | | Swedroe is claiming to know the future. |
Medium Tex
Be very interested to have you show a single statement that I have ever made that could even remotely be interpreted as my saying I know the future. In fact everything I have written is about the fact that we all have cloudy crystal balls.
Why people choose to make totally unsubstantiated statements like this is an interesting question.
As to TIPS you are certainly entitled to your opinion on the subject. However there is no academic evidence that I am aware of that shows the data is biased. In fact I have read some studies that show the reported data overstates inflation at times. And as I have said, if the government does cheat, then the market will price that (higher TIPS yields will be required) and the government will actually lose because there will be a risk premium.
As to my books and my own portfolio. There is no conflict. The books show examples and clearly discuss how these are models and there is no right portfolio--models are meant to be just starting points --good examples of well diversified portfolios that one should consider and then adapt to their own situation.
My own portfolio has been almost the same since 1998, as I have posted here and discussed many times. It is simply the right one for me, at least IMO. And as to knowing the future, if I knew I would certainly have all my assets in the asset class that would deliver the highest returns. My portfolio is highly diversified, with exposure to all the risk factors (beta, size and value) with broad international diversification. I do that because I don't know the future. |
Hello. New to the board but have been following the Browne PP thread with great interest. I have not done the necessary research, but I do recall Bill Gross indicating in one of his reports that US Gov CPI is significantly understated and GDP is overstated. I have a portfolio very similar to the Swedroe personal portfolio but am giving serious consideration to adding long term treasury position (via Treasury Direct) and a gold etf. I would like to know both Medium Tex and Larry's thoughts on taking physical possession of gold versus GLD.
Thanks,
Mike |
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MarcMyWord
Joined: 15 Jun 2007
Posts: 429
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Quasimodo
Joined: 03 May 2007
Posts: 613
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| Posted: Mon Aug 03, 2009 11:11 am Post subject: |
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[/quote]
Hello. New to the board but have been following the Browne PP thread with great interest. I have not done the necessary research, but I do recall Bill Gross indicating in one of his reports that US Gov CPI is significantly understated and GDP is overstated. I have a portfolio very similar to the Swedroe personal portfolio but am giving serious consideration to adding long term treasury position (via Treasury Direct) and a gold etf. I would like to know both Medium Tex and Larry's thoughts on taking physical possession of gold versus GLD.
Thanks,
Mike[/quote]
Here's a link to an article that advocates Central Fund of Canada for a bullion holding vehicle, and also contains some other links to articles discussing possible drawbacks to the ETFs GLD and SLV:
http://www.goldstockbull.com/a....-own-gold/
Good luck!
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) |
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Mon Aug 03, 2009 11:18 am Post subject: |
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| larryswedroe wrote: | | Quote: | | Swedroe is claiming to know the future. |
Medium Tex
Be very interested to have you show a single statement that I have ever made that could even remotely be interpreted as my saying I know the future. In fact everything I have written is about the fact that we all have cloudy crystal balls.
Why people choose to make totally unsubstantiated statements like this is an interesting question. |
Any asset allocation that is not neutral with respect to future outcomes contains the built-in assumption of certain future scenarios being more likely than others. That's predicting the future. The weatherman does it every night, and sometimes he is right and sometimes he is wrong.
The PP is future neutral and has historically performed well in periods of inflation, prosperity, recession and deflation (which I think was demonstrated in 2008). The PP does not have a preference for which future set of conditions will arrive, and reacts to whatever comes along with equal ease.
Unless your portfolio is designed to achieve a similar inflation-adjusted return in any of the four economic conditions above, you are predicting the future, whether you realize it or not.
| Quote: | | As to TIPS you are certainly entitled to your opinion on the subject. However there is no academic evidence that I am aware of that shows the data is biased. |
No such data could exist, since TIPS have never been tested under live-fire conditions (accelerating rates of inflation in excess of 10% per year).
| Quote: | | In fact I have read some studies that show the reported data overstates inflation at times. |
Do you have a link to those studies?
| Quote: | | And as I have said, if the government does cheat, then the market will price that (higher TIPS yields will be required) and the government will actually lose because there will be a risk premium. |
If you think that the cluster of governmental entities that prints the money, issues the bonds and sets interest rates can ever "lose" vis-a-vis the rest of the market, you are naive. The house never loses when dealing with its own chips. That's why gold bothers them--it's not house chips.
_________________
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-Harry Browne |
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larryswedroe
Joined: 22 Feb 2007
Posts: 5368
Location: St Louis MO
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| Posted: Mon Aug 03, 2009 11:58 am Post subject: |
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Medium Tex
Helps if you make factually correct statements
| Quote: | | Any asset allocation that is not neutral with respect to future outcomes contains the built-in assumption of certain future scenarios being more likely than others. |
That is not a factually correct statement. There is in fact no basis for your making it. Just because you believe something doesn't make it correct. I make no assumptions about what might happen or not. This is a question of risk management and marginal utility of wealth. In fact, if I chose an AA based on my perception of likelihood of events I would have a much higher equity allocation. But I don't confuse the likely with the certain, nor the unlikely as impossible
Also note very specifically I have discussed my view that the consequences of outcomes should dominate the probabilities in making asset allocation decisions. And in my blog even discussed Pascal's wager and how it relates to this issue.
I won't comment on the rest of your statements simply because of their tone. So if you don't get further responses you will know why
As to your other comments, |
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Mon Aug 03, 2009 12:25 pm Post subject: |
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| larryswedroe wrote: | | I make no assumptions about what might happen or not. |
If you are recommending TIPS to people for inflation protection, you are clearly making the following assumptions about what might happen. You are assuming the following:
1. Government reported inflation figures will be accurate.
2. Government will have the ability to pay inflation-adjusted interest on TIPS.
3. Government will, in fact, pay inflation-adjuted interest on TIPS.
and
4. Government tax policy will not be modified to cause much of the inflation-related "windfall profits" on TIPS to simply be returned to the government in the form of higher taxes.
I did not say you were naive to hurt your feelings; I said it to help you clear up your thinking. Take a closer look at history and you will see that faith in a government's ability to keep promises that exceed the resources under the government's control is one of the most common ways that wealth is destroyed.
What concerns me is the "allocation creep" I see where people do things like substitute TIPS for gold without realizing that, in the case of the PP, such an action potentially destroys the safety of the whole approach.
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"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne |
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Wonk
Joined: 11 Jul 2008
Posts: 204
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| Posted: Mon Aug 03, 2009 12:26 pm Post subject: |
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MedTex,
Did HB ever reference zero coupon bonds in the LTB portion? If so, what was the verdict?
Thanks. |
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Mon Aug 03, 2009 12:39 pm Post subject: |
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| Wonk wrote: | MedTex,
Did HB ever reference zero coupon bonds in the LTB portion? If so, what was the verdict?
Thanks. |
HB discussed zero coupon bonds in some detail in "Why The Best Laid Investment Plans Usually Go Wrong." In "Fail Safe Investing" he did not discuss them nor recommend them.
His earlier position was that you could get more bang for your buck with zero coupon bonds (which is true), but I think he opted for the simplicity of regular bonds later on.
The increased volatility of zero coupons cuts both ways, of course, and it seems to me that they are perhaps TOO volatile when compared to the volatility of the other PP asset classes.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne |
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MCSquared
Joined: 02 Aug 2009
Posts: 97
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| Posted: Mon Aug 03, 2009 2:15 pm Post subject: |
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For anyone familiar with PP, would Vanguard ETF symbol VT be a good international substitute for the S&P 500 index for the equity allocation of the portfolio?
Thanks in advance,
Mike |
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Quasimodo
Joined: 03 May 2007
Posts: 613
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| Posted: Mon Aug 03, 2009 2:44 pm Post subject: |
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| MCSquared wrote: | For anyone familiar with PP, would Vanguard ETF symbol VT be a good international substitute for the S&P 500 index for the equity allocation of the portfolio?
Thanks in advance,
Mike |
For what it's worth, that's what this confused older person does...
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) |
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MCSquared
Joined: 02 Aug 2009
Posts: 97
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| Posted: Mon Aug 03, 2009 2:55 pm Post subject: |
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Thanks for your replies John. Do you use TLT for your long treasury allocation? With a 30 year auction coming up, I was also weighing TLT against purchasing long bonds next week.
Regards,
Mike |
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Quasimodo
Joined: 03 May 2007
Posts: 613
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| Posted: Mon Aug 03, 2009 3:19 pm Post subject: |
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| MCSquared wrote: | Thanks for your replies John. Do you use TLT for your long treasury allocation? With a 30 year auction coming up, I was also weighing TLT against purchasing long bonds next week.
Regards,
Mike |
Hi Mike;
Yes, I do. I was using BTTRX, an American Century zero coupon bond fund, but it was awkward to add to or rebalance because of Vanguard Brokerage minimum transaction amounts using a mutual fund.
So it's CEF, TLT, VT and Vanguard Prime MMF in equal parts for my version of the PP.
Good luck!
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) |
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MCSquared
Joined: 02 Aug 2009
Posts: 97
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| Posted: Mon Aug 03, 2009 3:30 pm Post subject: |
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John:
Thanks for the feedback. I am also considering putting 50% of my gold allocation in physical bullion as my banking relationship allows me to store for no charge. My reasoning has nothing to do with a doomsday scenario (although one never knows!), but more to do with saving 50 to 75 basis points a year on expenses. The problem I am seeing is the spread over spot that most dealers are asking for in the marketplace.
I am really digging the simplicity of the Browne PP! |
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Quasimodo
Joined: 03 May 2007
Posts: 613
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| Posted: Mon Aug 03, 2009 3:56 pm Post subject: |
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| MCSquared wrote: | John:
Thanks for the feedback. I am also considering putting 50% of my gold allocation in physical bullion as my banking relationship allows me to store for no charge. My reasoning has nothing to do with a doomsday scenario (although one never knows!), but more to do with saving 50 to 75 basis points a year on expenses. The problem I am seeing is the spread over spot that most dealers are asking for in the marketplace.
I am really digging the simplicity of the Browne PP! |
Mike;
Andrew Tobias in one of his books recommended physical possession of pre 1965 US silver dimes and quarters as a personal precious metals holding. The coins are still legal tender, so government confiscation would be unlikely, if it ever comes to that sort of thing. They are recognizable to most people, unlike some exotic gold coins. The increments are small, so if you had to buy groceries or barter with them, they would be handier than gold bullion or even gold coins. Silver is going to hold its value in an inflationary scenario. I have no idea what sort of dealer spread you'd encounter with them. There's always going to be some sort of "spread", though, isn't there? If you're buying for inflation insurance or even a survivalist orientation, I just wouldn't worry about the spread, and simply figure out a safe place to keep them..
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) |
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MCSquared
Joined: 02 Aug 2009
Posts: 97
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| Posted: Mon Aug 03, 2009 4:06 pm Post subject: |
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John:
I have not looked at silver at all but have added it to my list for "further consideration." How long have you allocated via the PP and do you know if silver performance is linear with gold?
Thanks,
Mike |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Mon Aug 03, 2009 4:23 pm Post subject: |
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| Roy wrote: | | As you can see, I don't think the basic composition (equity to fixed) changed much, if at all, to more recent threads. One thread from June, 2007 is here: |
| Quote: | | "Just to add, the expected return of my portfolio is similar IMO to that of one that is TSM but much higher equity allocation. The difference is that the potential dispersion of returns is much different. My left tail and right tail are much shorter. A trade that almost all investors would make if should two portfolios with different potential dispersions of returns (without knowing what is inside the two portfolios)..." |
I've read these threads and what he's saying is that he uses a portfolio that can achieve about the same returns over the long run as a very stock heavy portfolio but do so with far less downside risk, less volatility, and only about a 25% stock allocation. That sounds awfully familiar to what the Permanent Portfolio allocation attempts to do. Yet above he states that 25% stocks in the PP are not enough for most people. |
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Mon Aug 03, 2009 4:25 pm Post subject: |
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| MCSquared wrote: | John:
I have not looked at silver at all but have added it to my list for "further consideration." How long have you allocated via the PP and do you know if silver performance is linear with gold?
Thanks,
Mike |
Expect to pay a 4-5% premium over spot for gold coins (but not more than that).
Silver is not a substitute for gold. Look at the silver chart compared to the gold chart in 2008 and you will see what I mean. When people think inflation is coming, they may buy silver, but when they are just plain scared they buy gold.
HB recommended holding a small amount of the PM portion of the PP in silver in some of his writings, but preferred gold for the reasons I cite above.
Historically, there is a pattern to the price correlation between gold and silver, and that correlation suggests that silver is currently undervalued. This correlation, however, like many correlations, can remain out of whack for VERY long periods of time, so I don't put much stock in them. A 20% gold, 5% silver allocation is not unreasonable, and that is the approach that PRPFX uses.
It is important to note, however, that silver is simply no substitute for gold. I didn't make this rule, but that's the rule.
Owning some 90% U.S. silver coins is not a bad idea. The buy/sell spread is normally higher than it is for gold, though, so that's something to consider. The spread on silver eagles is ridiculous, but it is one of the most beautiful coins you will ever see (IMHO).
If you want gold in smaller denominations than one ounce, the British sovereign is the best way to go (it's a little less than a quarter ounce). Don't mess with the .1, .25 and .5 coins. The premium is way too high.
The gold ETFs are not as good as holding physical, but probably not as bad as some people seem to believe. Do your own due diligence.
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-Harry Browne |
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craigr
Joined: 13 Mar 2007
Posts: 1973
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| Posted: Mon Aug 03, 2009 4:28 pm Post subject: |
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| MCSquared wrote: | | For anyone familiar with PP, would Vanguard ETF symbol VT be a good international substitute for the S&P 500 index for the equity allocation of the portfolio? |
Possibly it is, but it may hold too much international and not enough home country depending on where you live. Browne generally advocated concentrating on stocks in your own country so the portfolio is more in sync with what is going on in the economy that affects you most. |
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Quasimodo
Joined: 03 May 2007
Posts: 613
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| Posted: Mon Aug 03, 2009 4:29 pm Post subject: |
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Mike;
Here is a link to some historical charts for gold and silver, not that I was ever able to make sense of charts:
http://www.centralfund.com/charts.htm
I first read Harry Browne in about 1970 and followed his advice of the time by holding gold and silver coins, Swiss Francs and South African gold mining stocks. I don't think he had a "Permanent Portfolio" systematized at the time. I sold those investments in 1979, a bit too early, and lost track of Harry's writings until recently. I've only had a Permanent Portfolio allocation since earlier this year.
It seems that after the excesses of the recent past, we're either headed for a deflationary crash or some really serious inflation, or maybe both in turns, and not the mellow prosperity of the '90s, so the PP seems a reasonable way to reach a balance I can live with. Life does have a way of presenting us with the last thing we imagined possible, so if the stock market keeps taking off like a big bird, the Permanent Portfolio will go along for the ride without leaving me totally broke if things don't work out as I'm guessing they will.
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) |
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Mon Aug 03, 2009 4:39 pm Post subject: |
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| craigr wrote: | | MCSquared wrote: | | For anyone familiar with PP, would Vanguard ETF symbol VT be a good international substitute for the S&P 500 index for the equity allocation of the portfolio? |
Possibly it is, but it may hold too much international and not enough home country depending on where you live. Browne generally advocated concentrating on stocks in your own country so the portfolio is more in sync with what is going on in the economy that affects you most. |
One approach that many agree with for the stock portion of the PP (and the one I use) is 85% VTSMX and 15% VGTSX.
The research I have read shows that this ratio has historically delivered the highest risk-adjusted equity return for a U.S. investor. There was an interesting discussion of this topic in "A Random Walk Down Wall Street."
I wouldn't do more than 20% in international equities, though, since, as craig notes, you get into currency risk that shouldn't be part of the stock portion of the portfolio.
_________________
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-Harry Browne |
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MCSquared
Joined: 02 Aug 2009
Posts: 97
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| Posted: Mon Aug 03, 2009 4:44 pm Post subject: |
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MediumTex:
Thanks for your insight. I have done some diligence on the potential gold etf trade and I am not uncomfortable with them generally. The Canadian closed end funds are trading at a premium to NAV so that is a little hard to swallow. Since I am looking long term, I would like to save the 50-60 bips that everyone charges; hence, my view towards splitting my gold allocation 50% liquid etf and 50% physical "self-stored."
I had not looked at silver (other than my knowledge of PRPFX holding a small allocation) but will do so. Thanks again to you, John, and craigr for your posts on PP.
Mike |
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Roy
Joined: 10 Sep 2008
Posts: 341
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| Posted: Mon Aug 03, 2009 5:31 pm Post subject: |
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| craigr wrote: | | I've read these threads and what he's saying is that he uses a portfolio that can achieve about the same returns over the long run as a very stock heavy portfolio but do so with far less downside risk, less volatility, and only about a 25% stock allocation. That sounds awfully familiar to what the Permanent Portfolio allocation attempts to do. Yet above he states that 25% stocks in the PP are not enough for most people. |
I posted mainly to clarify that Larry was using his strategy well in advance of 2008, and now, since 1998, as per his clarification; so his portfolio clearly wasn't a response to the 2008 bear.
He clearly does not say his approach is right for everyone and that tracking error regret is a big problem that many choose to avoid. That may explain, in part, why he feels most investors would need more than 25% equities.
As stated many times by different posters, the two portfolios (his and the PP) are similar in risk/return aspects, yet wildly different in certain particulars.
And many diversified portfolios that had 40% or fewer equities, plus high-quality fixed income (of virtually any maturity), had good returns since 1972 with no large drawdown in any single year. So there were a number of profitable approaches that allowed for a good investing experience along th way.
Roy |
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Lbill
Joined: 13 Mar 2008
Posts: 2078
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| Posted: Mon Aug 03, 2009 6:50 pm Post subject: |
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| Quote: | | And many diversified portfolios that had 40% or fewer equities, plus high-quality fixed income (of virtually any maturity), had good returns since 1972 with no large drawdown in any single year. So there were a number of profitable approaches that allowed for a good investing experience along th way. |
I agree Roy. I never allocated much to equities and became interested in low-equity portfolios that could still produce decent risk-adjusted returns. I've concluded that 25% of my hard-earned money is about as much as I ever want to go for equities - actually that would be much higher than I've ever gone. But the recent carnage led me to believe that it might be OK to swim with the sharks again - as long as I don't swim naked. So, I'm trying to work my way up to 25% - have a long way to go and probably won't make it. The PP and Larry's personal portfolio have been of interest to me as a way tiptoe into the water with some protection. I've always regarded stocks as a speculation, despite all the good efforts of John Bogle and others to make buying funds (albeit index funds) sound like a real investment. I think true stock investing is what Warren Buffett does (or did before Berkshire became too big to manage adroitly). Whenever one speculates it is important to hedge, or insure, that speculation to try to avoid losing the bet. That's what PP is about and I think also a bond-heavy portfolio like Larry's.
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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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dtrainer
Joined: 16 Dec 2008
Posts: 33
Location: San Antonio
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| Posted: Mon Aug 03, 2009 9:25 pm Post subject: |
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I have managed to read this entire thread and found it quite interesting. While I am still undecided about implementing the PP I would like to pose a question under the assumption that I am in the process of creating a PP with the money I have.
Currently, I save money in many different ‘baskets’ and each has a specific allocation based on its time frame and intended purpose. For example, I have specific accounts for an emergency fund, house down payment fund and two retirement accounts (TSP and Vanguard Roth IRA). The emergency fund and down payment money are in a savings account so can be considered cash. Harry Browne stated that money that is precious to you should be kept in a permanent portfolio. Should I place these funds in the permanent portfolio allocation as well? If I had a large portfolio it would not be an important question but when dealing with a small portfolio in the accumulation phase it would actually seem to leave me short of cash for near term (within three years) use. Let me provide an example:
Current Allocation (notional)
Emergency fund -25K savings account (cash)
Down payment -25K savings account (cash)
Retirement account- 50K (stocks and bonds)
If I lumped all these funds into a PP I would only have 25K in cash and could easily find myself incurring a heavy rebalancing cost when I needed all of the cash for a down payment in a few years. This was meant as an example- I also save money for car purchases and other long-term capital expenses. Should all of these funds be kept out of the PP until my portfolio is large enough that they do not comprise the entirety or majority of my cash position?
For extra information, I am currently in medical school and active duty in the Navy. There seems to be a low probability of me needing to draw on the emergency fund (at least for job loss) within the next ten years. I don’t know if that affects the calculation at all.
Thanks for any opinions and insight.
Donald |
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MediumTex
Joined: 01 Mar 2009
Posts: 447
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| Posted: Tue Aug 04, 2009 8:45 am Post subject: |
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I would put it all in the PP. The down payment plans could change and you might have missed some nice potential PP gains in the interim.
In any case, you want your money to be safe, and the PP is about the safest game in town.
Do what is comfortable for you, though, as always.
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"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne |
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MarcMyWord
Joined: 15 Jun 2007
Posts: 429
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| Posted: Tue Aug 04, 2009 12:22 pm Post subject: |
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| dtrainer wrote: | I am still undecided about implementing the PP . . . Currently, I save money in many different ‘baskets’ and each has a specific allocation based on its time frame and intended purpose. . . . The emergency fund and [house] down payment money are in a savings account so can be considered cash. Harry Browne stated that money that is precious to you should be kept in a permanent portfolio. Should I place these funds in the permanent portfolio allocation as well? . . . Let me provide an example:
Current Allocation (notional)
Emergency fund -25K savings account (cash)
Down payment -25K savings account (cash)
Retirement account- 50K (stocks and bonds)
If I lumped all these funds into a PP, I would only have 25K in cash and could easily find myself incurring a heavy rebalancing cost when I needed all of the cash for a down payment in a few years. . . . Should all of these funds be kept out of the PP . . . ? |
| MediumTex wrote: |
I would put it all in the PP. The down payment plans could change and you might have missed some nice potential PP gains in the interim.
In any case, you want your money to be safe, and the PP is about the safest game in town. |
I would disagree with MediumTex's advice here.
Your emergency fund and your house downpayment fund should be kept exactly where they are: in a safe form of cash which will reliably be there if and when you need them for their intended purposes (in your words, "based on its time frame and intended purpose"). This is not money for speculation. Yes, it is true, as MediumTex says, that you "might have missed some nice potential PP gains in the interim," but it it also true, depending on the course of financial events, that you might end up glad that you "missed" some not–so-nice potential PP losses in the interim. It doesn't matter if your "downpayment plans could change" and you end up not needing the downpayment exactly when you originally thought you'd need it. Unless you think there's a chance you'll give up the entire idea of wanting to buy a house, the downpayment money is already set aside, right now. Why risk the peace of mind of knowing that you've already got money set aside toward a someday home? Or, conversely, supposed you do want to buy a home exactly when you expected to––but the PP is having a down year and you must postpone your home–buying plans?
IMO your "stocks and bonds" "basket" is the place to implement a PP, if you decide to do so––including any part of a PP that is allocated to cash. For purposes of your budgeting, mentally "wall off" the emergency and house down payment baskets, as if they're not even part of your portfolio. You've set them aside for the express purpose of spending them when the time comes––and that time is probably in the relatively near future––so I think it would be unwise to pull them into your retirement–related portfolio construction and rebalancing, which is an entirely different and more long–term purpose. At least that's my view. When you treated your money as "baskets" with different time frames, and chose cash formats for the "instant access" "baskets" with the shortest time frames, you already had the right idea. Stick with it. Any cash in your PP allocation is for a different purpose, and will be held longer in cash form, than the separate cash for emergencies and a home.
| MediumTex wrote: | | Do what is comfortable for you, though, as always. |
Of course.
Marc |
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dtrainer
Joined: 16 Dec 2008
Posts: 33
Location: San Antonio
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| Posted: Wed Aug 05, 2009 11:17 am Post subject: |
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MediumTex and Marc,
Thank you for your opinions. At this point I am inclined to keep those funds walled off from the personal portfolio. I think as my balance grew I would be more inclined to include everything in the PP. If I had a $2 million portfolio it wouldn't be a problem to lump everything together. A $500K cash portion would cover all individual short term savings goals. Of course at that point, I may spend all my time guarding my hoard of gold bullion like a viking protecting his spoils.
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Donald R. Trainer, MSPH
UTHSCSA SOM 2012 |
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james22
Joined: 21 Aug 2007
Posts: 526
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| Posted: Thu Aug 06, 2009 4:13 am Post subject: |
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An appropriate avatar, MediumTex.
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Please assume my post refers to my Bogle-approved 15% Tactical Asset Allocation or 5% Funny Money. |
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