Bogleheads

[helmut]

MCSquared Wrote

[MCSquared]

[MCSquared]

[MediumTex]

[MediumTex]

[Lbill]

From Medium Tex:

[MediumTex]

[Wonk]

[helmut]

[MediumTex]

[stratton]

Has anyone looked at how the easy access to gold through etfs such as GLD has influenced gold bullion price volatility in any way?

Paul

[MediumTex]

[brick-house]

The respected Boglehead expert, Rick Ferri, ventured an opinion on gold ETFs in this 8/18/2009 rant against the Permanent Portfolio. It does not sound like he did much research, but he certainly has a strong take.

Rick Ferri wrote on 8/18/2009:

[concerned752]

[MediumTex]

I have only light exposure to Rick Ferri's work, but I would be inclined to put him in Group #2 in my gold person-type categories.

As for gold being in a bubble, maybe it is. Who knows? Who cares? Just rebalance when you hit a rebalancing band.

If I had to pick a bubble right now, though, I would be more inclined to say that stocks are the asset class in a bubble.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[Lbill]

Here's Richard Russell's recent commentary about gold. Russell is not a goldbug and he's been around the block a few times:

[MediumTex]

[Harvey Manfredjinsinjen]

Here's a recent video of Michael Cuggino in which he almost sorta talks about the Permanent Portfolio concept (starting at the 3:12 mark).

The forum won't let me post links yet, but if you go to the marketwatch site and search for "Cuggino" it's the video called "Investors Brace for Earnings Season."

"We do believe there's significant questions out there that don't have answers and so you want to put your money in a variety of baskets."

I think it's the first time I've heard him mention something other than where the stock market might go next quarter.
_________________
Any good investment, sufficiently leveraged, can lead to ruin.

[Wonk]

Brickhouse,

Thanks for posting. I find Harry Browne's Permanent Portfolio a fascinating topic for a variety of reasons.

One of the observations I've made is that it causes an incredibly visceral response from the "investmtent guru" crowd. It strikes me the simplicity of it all shakes the foundation of the ivory towers. A very real threat to the credibility of guys who make their money dishing out financial advice and writing books.

After all, how could something so simple provide such outstanding returns with such low volatility for nearly 40 years while leavng more sophisticated asset allocations created by financial wizards in the dust? It's beautiful.

I don't know Rick Ferri and I've never read his books. I'm sure he's a nice guy, a model citizen, and much smarter than I am. But I'll still take Harry Browne's asset allocation over his any day of the week and twice on Sunday. The arrogance and hubris is dripping off that post.

And just for kicks, I'll take the other side of that gold trade. Let's revisit this in 2010 and 2011.

[sommerfeld]

[Lbill]

Everyone (including me) is thinking about the role of gold in the PP. The stockbugs bash the goldbugs because they say gold has no intrinsic return, such as earnings on stocks or interest on bonds. Others warn that it is a very volatile asset that can plunge in price. The trouble with this view, is that it assumes that paper currency is the appropriate reference point for measuring "true value." If something increases in dollar price, it is said to have "gained value," as in the dollar price of a stock going up. Of course, we all know that the dollar, and other paper currencies, are really rubber yardsticks - they do not have any stable value at all. One way to view gold is that it is actually the stable value asset. When the currency cost of "stuff" that we need to buy goes up, the currency value of gold increases to keep pace (as in the 1972-1982 period). When the currency cost of "stuff" goes down, the currency price of gold decreases concomitantly. Other assets, such as dollars, stocks, and bonds fluctuate around the value of gold, not the other way around. I think it makes a lot more sense to adopt a "gold-centric" viewpoint of true value, rather than the "currency-centric" viewpoint that we commonly use.
_________________
"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

[craigr]

[MediumTex]

The thing that may be missing from the analysis you hear from the Rick Ferris of the world is that investments are not always about financial and economic factors. Sometimes the determinants of investment performance are political, demographic, sociological or even ecological.

A conventional financial analyst simply has no way of accounting for what happens when a bond market suddenly collapses (see Long Term Capital Management for an example), a currency suddenly collapses (see Argentina) or an economy suddenly collapses (see Iceland).

In a stable economy with a stable currency and a pro-market fiscally responsible political leadership, it is probably good to follow a Rick Ferri-type analysis where you buy 60% stocks and 40% corporate bonds (70%/30% if you're feeling saucy) and congratulate yourself for being such a skilled investor.

But the analysis above presupposes underlying economic and political conditions which have been relatively rare from a historical perspective.

The question, to me, isn't the optimal investment allocation given the perfect underying conditions (because I know that perfect underlying conditions are rare). The question is what investment allocation will allow your assets to outpace inflation over time without significant risk of being wiped out by a rogue wave.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[maloflora]

Hi all,

Firstly, thanks to all who have contributed to this mammoth thread and added to its huge store of analysis and insight!

I'm a UK investor (and first-time poster) who's been reading lots of Bernstein, Graham, Malkiel and Browne and I'm very interested in starting a Permanent Portfolio. I would greatly appreciate advice from anyone who might have some ideas about how to get started using the rather more restricted kinds of investment tools available over here. Here are my starting points.


Stock
I'm proposing to use the HSBC FTSE All Share Index Fund. It's an OEIC which covers all shares in the FTSE index with a TER of 0.27%.


Gold
This year, I'm inclining towards the PHGP ETF (PHGP.L on London Stock Exchange). I know it's paper gold, but it's physically backed and easy to invest in! Later on, I might consider Bullionvault etc.

Cash
Best short-term UK Treasury fund I can find is the iShares Uk Gilts 0-5 (IGLS.L). Not ideal, but looks to return more than a money market fund or National Savings bonds.

Bonds
This seems to be trickiest, given the injunctions to aim for long-term Treasuries. Virtually all the LT funds have a minimum investment of at least £100k, and the ones that don't have a front load of 3-4%. [Edit: I believe I might be able to get the Axa Sterling Long Gilt (15+) without the load, with a TER of 0.8%ish]. Otherwise, best I can manage at the moment is Legal and General Gilt Index fund with a TER of 0.22%. It's got a real mix of redemption dates, ranging from 2012 to 2038.

The only other option I can see is the iShares Euro 15-30 Government Bond (IBGL). My problem with this is it relies on other Governments - not a problem with France and Germany, but the biggest holdings are Italy!


As you can see, I'm also trying to diversify between fund types (ETFs and index funds) and providers. If possible, I'd like to stick to that, though I'm more worried about sticking to the core of the PP concept.

Thanks in advance for any help you can give me!

Malo (apologies for not being able to post proper links just yet)

[MediumTex]

maloflora, weclome to the discussion.

Perhaps Clive will chime in on how specifically he does his PP in the UK. I believe there have been a couple of other UK posters as well.

The setup you describe sounds pretty good to me.

The instruments for each asset class don't have to be perfect. The PP works based upon the general non-correlated nature of the asset classes, not the precise relationships between specific investments.

For example, let's say we have a non-conformist PP investor who likes the concept but can't bring himself to follow the crowd when it comes to anything. Therefore, he sets up his PP as follows:

Stock allocation: 25% small cap stocks

Precious Metals allocation: 12.5% platinum and 12.5% silver

Cash: 25% in FDIC insured certificates of deposit

LT Treasuries: long duration federal government agency debt

Now, there are many reasons to say that this is far from an ideal PP. BUT, if an investor were to put together a PP such as this, I suspect that they wouldn't see dramatically different results than the pure HB PP (though of course under some conditions they might).

In other words, I would say put together the best PP you can based upon the available investments (and your own temperament). You are likely to see PP-like returns if you follow the formula as much as you can.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[Clive]

--

[helmut]

[MediumTex]

[SquawkIdent]

Just a quick update and question.

I'm the poster who snail mailed a serious of questions to Mr. Cuggino dealing with questions/concerns I had about PRPFX. I have not gotten any response yet.

Now my question...I'd like to get the posters feelings/comments about the 4 x 25 and/or PRPFX when used in retirement and you are taking money from the portfolio year to year. How has it gone so far?

My taxable monies are now in PRPFX and I plan on taking 4-5% of the account value per year during retirement (HB talked about this in one of his books). I realize the withdrawal rate will vary but am very comfortable with that.

[helmut]

[

[MediumTex]

[Clive]

--

[helmut]

[Clive]

--

[Roy]

[elmerfudd]

Using Vanguard to buy GTU, Barclays 1-3 year treasuries and Barclays 20+ year treasury bond fund I paid commissions of $36.16 on a $72000. buy, $23.80 on a $100000. buy, and $20.18 on a $100000. buy. How does this compare with what you pay not using Vanguard? I am looking forward to when rebalance come up. On Vanguard total stock market buy I can not find if I paid any commission. Who do you use? I like having everything showing up on Vanguard and trying to make it as simple as possible. Thanks

[MediumTex]

[craigr]

I finally posted a first cut of my Gold FAQ that people have been asking about. It's here:

http://crawlingroad.com/blog/2....ation-faq/

Last up is the Cash FAQ, but it can be summarized like this:

Only buy US Treasury Money Market Funds or maybe a US Treasury Short Term Bond fund if you are OK with the slight additional interest rate risk. Don't take risks with your cash.
_________________
“The best-kept secret in the investment world is this: Almost nothing turns out as expected.” - Harry Browne

[Kevin K]

The gold piece on your blog is fantastic Craig! I hereby nominate you and Medium Tex for some sort of sainthood for the fantastic job you do in taking Harry Browne's work into the 21st century. I really appreciate it.

Kevin

[snowman9000]

What's up with all the mysterious deleted Clive posts? Makes me feel like I'm missing something.

[MediumTex]

[MediumTex]

I was thinking today about how normally the PP is criticized for holding too much gold and PPers are often mistakenly referred to as gold bugs.

Now, however, with gold back in vogue it occurred to me that the PP is one of the few really SAFE ways of owning gold.

In other words, if I WERE a gold bug and I was looking for a safe way to own gold without having to deal with the volatility and the periods of poor performance, the PP is really the only way I know of to do that.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[craigr]

[helmut]

Any thoughts about using VT for the equity allocation?
helmut
_________________
"Back of every mistaken venture and defeat is the laughter of wisdom, if you listen." -Carl Sandburg

[MediumTex]

[Maestro G]

Hi Helmut,

This is exactly what I do for the majority (IRA) of my PP equity allocation.

I also have a similar annuity in my 403B TIAA-CREF plan ("Equity" fund) which includes a smaller percentage of foreign (both developed and emerging), and my wife's AT&T 401K ("Global Equity fund") which also has a smaller % of Developed and, unfortunately, no emerging. There is also the 401K company match in AT&T stock which we are diversifying out of as much as allowed.

I am also considering hedging a bit in a taxable account with Hussman Strategic Growth as the sole part of a variable portfolio.

I realize that the international exposure goes against the "pure" allocation as originally developed by HB. However, IMHO, VT is a simple, inexpensive, elegant and compelling choice for our times going forward, that represents global equity indexing at almost its most pure cap-weighted form save the exclusion of small caps. I wish I had the choice of VT in our company retirement accounts, but at least the options I sighted above are close and inexpensive.

Full disclosure: I have adopted a slightly modified PP with the following allocation FWIW:

Equity - VT 25%
Bonds - TLT 25%
Gold - GLD 12.5%
Tips - TIP 12.5%
Cash - TUZ 25% (new 1-3 yr Treasury PIMCO etf)

The Hussman Long/Short fund would be about 10% of my portfolio. I considered PRPFX for the variable, but I'm impressed with Hussman, and thought I had already committed enough to the PP philosophy.

I know this is more then you asked for! Please excuse my indulgence, best of luck and have a great weekend!

Regards,
Maestro G

[Kevin K]

I seriously considered VT for the equity allocation and may kick myself one day for not embracing its elegant simplicity. In the end, since I am mostly investing in a taxable account and can choose anything, I decided on a more complex 5 fund approach very much along the lines of what Trev H recommends in this companion Bogleheads thread on stock allocations for the PP:

Matrix Redux: The Larry-Browne Permanent Portfolio (I don't know how to link to this but search and you'll find it - mercifully only 2 pages long).

This approach captures the small cap and value premiums that VT does not.

So, my equity allocation is:

20% Large Blend (LB) in the form of Vanguard Index 500 (ticker VFINX)

20% Small Value U.S. Stocks (SV), Vgd. Small Value Index (VISVX)

20% International Value (Vanguard VTRIX; included 19.1% emerging markets large value stocks)

20% FTSE Index X-US Small Cap (Vanguard VSS ETF; includes 19.9% Emerging Markets Small Stocks)

10% Vanguard REIT Index

I understand and to some agree with Browne's recommendations about investing only in one's own country's stock market, but at the end of the day I have a lot more respect for a changed world in which more than half the market capitalization is outside the U.S. and there are no indications of our influence globally doing anything but waning.

I came to the PP from a much more complex portfolio of mostly DFA funds and find the research behind their approach compelling. On the other hand, I may very well eventually find rebalancing within this slice and dice too much hassle, and if so VT looks like a winning replacement.

[MediumTex]

For the equity globetrotters, just make sure you fully think through the currency risk you are signing up for as well.

The near unanimous market sense that the dollar is in trouble would be strange to someone who knew nothing about our world (especially considering that in 2009 the dollar hasn't even broken below its 2008 pre-crisis level).

Consider:

1. The U.S. has the largest economy in the world and the U.S. dollar is the world reserve currency.

2. The U.S. has the largest manufacturing sector in the world.

3. The U.S. has the most powerful military in the world, both on an absolute basis from a historical perspective AND a relative basis compared to other nations today (I don't think this is the best allocation of national resources, but that's what we've got).

4. The U.S. is an absolute treasure trove of natural resources. Coal, oil, natural gas, timber, agriculture, etc. No other industrialized nation has anything like the mix of industrial infastructure and an educated workforce mated to such enormous natural resource deposits (perhaps principal among them being topsoil). These are the ingredients for wealth formation. (Brazil may occupy a similar space some day, but that day is not close.)

5. The U.S. has as good or better protection of property and contract rights than any other industrialized nation.

6. The U.S. has a better demographic picture than most industrialized nations today.

7. The U.S. national debt figures are not good, but as a % of GDP they are not nearly as bad as many other industrialized nations.

8. U.S. multinational corporations provide an investor with a lot of exposure to foreign markets.

9. Historically, Americans have made an art form out of lamenting the demise of the U.S., the dollar, our freedoms, our way of life, etc. Whether these predictions come true eventually, I don't see them coming true any time soon (which is sort of a contrarian view of the current situation, which is a complete mess). Don't believe the media hype--things are never as bad or as good as they say. If things ever really get that bad, the TV won't work.

10. If you had the CIA World Fact Book in front of you with the names of the countries blacked out and all you had to go on was the economic figures and anything else you wanted to consider, which country would you select to invest in?

***

I would just hate to see people surprised to discover that they had purchased a short U.S. dollar fund when they thought they had purchased an international equity fund.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[Lbill]

FWIW, I once held the inverse-dollar ETF (UDN, I believe). I found there was a substantial correlation to GLD so figured that the two were kinda redundant. Would rather "bet against the dollar" by holding GLD.
_________________
"Whenever you find yourself on the side of the majority, it is time to pause and reflect." ~ Mark Twain
"A foole and his money is soone parted." - J. Bridges, 1587

[MediumTex]