Bogleheads

[billb]

UDN is short futures contracts, so you'd be subject to contango and backwardation. The best way to get a feel for lag is to compare the ETF with the index it's trying to track. Usually if the holdings are futures, the tracking error is significant. And usually if you read even closer, their goal is to replicate the "daily" move of the index. So gaps day to day would cause significant tracking error over the long term.

[MediumTex]

[billb]

Couldn't agree with you more. I hate the idea of more regulations and restrictions on trading products, but I think these inverse and leveraged ETFs are poison pills for most people because they simply don't understand how the products work. If they did, they would've never got them for a buy and hold portfolio IMO.

So now FINRA is making a fuss about the products. Again, as much as I hate regulation, it's probably for the good of most. At the very minimum, brokers should step in and make sure an account holder has a certain level of product competence for these items.

[MediumTex]

[MediumTex]

It will be interesting to see if some of the gold haters begin to revise their feelings if this gold bull market continues.

I understand those who don't want to own any gold and their normal list of objections: zero return, etc. However, at some point, a rational person has to acknowledge that an asset class has performed well. Furthermore, the rational person at some point has to stop saying "it's just a bubble." We are getting close to 10 years since this bull market for gold started, and the price has quadrupled.

I feel bad for the people who just can't grasp the concept of liquid investments that are NOT financial instruments, no matter how many losses they are asked to absorb and over what period of time. The whole idea of getting excited about Dow 10,000 is sort of like trying to get excited about Elizabeth Taylor getting married. We're in a secular bear market for stocks. These things last a long time. We aren't close to the end of this one. It will end one day, but it won't be tomorrow.

It's worth mentioning too that on an inflation-adjusted basis the Dow would need to be WAY higher than current levels to be where it was 10 years ago (never mind the dow/gold ratio which casts the whole thing in an even more negative light). Also, and this is something NO ONE is talking about, I wonder what the Dow would be at if GM was still in it. In fact, with the elimination of Citigroup and GM from the Dow in June of this year (replaced by Cisco and Kraft), getting excited about getting back to the same level of 10 years ago seems even sillier.

When the global economy gets back on a firmer footing, perhaps a portfolio of 100% financial instruments will make sense for the prudent investor, but when I look at global economic fundamentals between 2001 and today and the degree to which they have deteriorated, I would say that the bull case for gold is much stronger now than back in 2001.

***

Just a note on the "paper gold" debate: it occurred to me the other day that the people who make the most noise about "paper gold" and all of the problems with it tend to be those who are connected one way or another to the gold coin and bullion industry (either because they are a PM dealer or they rely on PM dealer advertising for revenue) and see the PM ETFs as nothing more than competition (as opposed to some sort of deeply flawed concept).

This point may be obvious to many, but it might be helpful to some.

It's sort of like how I used to wonder why the local media never did investigative pieces on car dealerships and the way they rip people off every way they possibly can (e.g., trade-ins, sales, financing, parts, service). One day I realized that the volume of print and broadcast advertising done by car dealerships in local markets virtually ensures that none of those local media outlets would ever cast them in a bad light.

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

[helmut]

[quote="MediumTex"]

[helmut]

[quote="Maestro G"]

[MediumTex]

[craigr]

[stratton]

[stratton]

If you put the 25% of PP equity in VT you have ~14% in international which will give you about 3. to 3.5% in EM large cap. Those EM companies are about the least likely to be "screwy" and there is probably 300+ of them in that fund. So the risk is about as minimal as you're going to get.

If you do CraigR's 20% TSM and 5% Total Intl there is about 1 to 1.25% in EM so the exposure isn't high at all.

I have some EM small (DGS) and frontier stock (TRAMX), but I keep a lid on them. They add up to about 1.25%. I don't want too much of them because of the risk factors.

Paul

[helmut]

Quote by Kevin

[Lbill]

I think it is important to diversify out of the US dollar. I agree with Jim Rogers that it is a flawed currency that is bound to keep sinking. The classic PP gives you a 25% slice in gold, but 75% remains in dollar-denominated assets: treasury bonds, cash, and US stocks. Too much IMO. So my choice is to hold a good chunk in international stocks in a well-diversified international index fund or funds. I just don't get the advice that you should hold your "home currency" because that's what you use to buy "stuff." If the stuff is becoming more and more expensive in your home currency - because the currency sucks - then how does that advice make sense?
_________________
"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

[Kevin K]

I'm with you Lbill but I don't think any of us are going to change each other's minds about this. Investing according to global market capitalization, to me, is simply not playing favorites in a world where as we have certainly seen in the past ~18 months all markets are interlinked.

If you're trying to construct an all-weather portfolio I see no reason to have any bias at all in the equity allocation. There's a certain amount of what sounds like jingoism and naive patriotism in some of the more recent comments here. Meanwhile growth prospects in the BRIC countries certainly look bright compared to here at home, where we don't seem to be capable of manufacturing much of anything the world wants, educating our citizens or fixing a broken health care and entitlements system.

Realizing this is probably the last thread where historical performance should be mentioned, I also can't help but point out that as the "Matrix Redux" thread makes abundantly clear this kind of broad equity allocation with small cap and value tilts has thoroughly trounced TSM. I'll go back to the latter 100% the day after medicare and SS are fully funded and we have a health care system that's in the top 10 worldwide instead of stuck at #37.

[MediumTex]

[Maestro G]

Here, here! Couldn't agree with you more Kevin on all points

Best,

Maestro G

[Maestro G]

Whoops! That should have read: Hear, hear! Perhaps a Freudian slip!

Maestro G

[MediumTex]

Bill, please consider the following (especially in light of the Mark Twain quote in your signature):

[Clive]

-- deleted --

[helmut]

[MediumTex]

[Rodc]

[helmut]

Rodc,
What you are referring to is the Consumer Price Index, which is considered the official CPI. While you are correct in the assumption that the consumer price index does include energy and food, it is not what the Federal Reserve uses to determine whether or not to change the Fed Funds rate. The Federal Reserve uses what is commonly referred to as the core CPI. Core CPI is basically the consumer price index (CPI) minus food and energy prices.

The core CPI is what most commonly reported by the financial media because the government uses the Fed funds rate to control the money supply and inflation. Using the core CPI can take as much as 18 months to determine if such things as increased gasoline or food prices will drive up the prices on other goods and services.

Even using the Consumer price index is not a full measure of inflation because there are many things that it does not include such as income tax or social security taxes. Whether income and social security taxes affects the rate of inflation could be an entire thread on its own, but I tend to think that when taxes are either directly or indirectly passed on to the consumer it will make the cost of just about everything go up.

helmut
_________________
"Back of every mistaken venture and defeat is the laughter of wisdom, if you listen." -Carl Sandburg

[MediumTex]

RE inflation and inflation expectations, I am inclined toward the more simplistic view that an extended period of rising energy prices tends to be a precursor to one of two things:

1. a period of price inflation and inflationary expectations (as in the 1970s)

or

2. demand destruction as prices outpace consumers' ability to purchase products at higher aggregate prices (as in 2008)

For reasons that are too involved to get into in this post, I believe that high energy prices are here to stay, so in my view we will be bouncing between 1. and 2. as competing secular trends for many years.

To me, the determinants of whether an economy sees 1. or 2. is aggregate debt levels going into the inflationary period, plus availability of credit, savings and discretionary income and the level of unemployment (since unemployment levels determine the degree to which rising prices can trigger rising wages).

Since the current economic situation is one in which we have high debt levels, restricted lines of credit, historically low savings, low levels of discretionary income (due to debt servicing cost from prior consumption), and high levels of both unemployment and underemployment (which will act as a damper on rising wages for quite some time), I just don't see how the economy will be able to absorb much price inflation without starting to come unraveled again (as it did in 2008 following the spike in energy prices and the beginning of what looked like a period of inflation).

The bottom line on inflation is it is simply impossible to have any meaningful level of price inflation without rising wages and/or easy lines of credit. In other words, prices can only rise to the level of the consumer's ability to pay. If the consumer only has $200 to spend on payday, he's only going to spend $200. In such an environment of rising prices and static wages, it's virtually inevitable that all you are going to see is demand destruction and its ripple effects from what Austrian economists would say was a massive level of overcapacity resulting from years of artificially low interest rates, which leads to the cycle of debt defaults and credit crisis, as we saw in 2008.

It's peculiar, but in this environment we should probably dread the day our boss tells us we are getting a raise, since in an economy this weak a raise typically means that market actors are beginning to form inflationary expectations, which is a hard cycle to break, as we saw in the 1970s.

However, with the wage pressure exerted on high wage economies as a result of globalization and the offshoring of jobs (plus the decline of unions), I'm not sure how wages in the U.S. are ever going to rise in any meaningful way on a large scale. How could they? Why wouldn't the industry subjected to the rising wages simply move operations offshore or import lower paid laborers from other countries?

When you add the near-certainty of higher future taxes to pay for unfunded entitlements, bailouts, military adventures, and public health care it's like the cherry on top of a really NASTY sundae.

It's going to be fascinating to see how all of this resolves itself.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[Maestro G]

Hi Medium Tex,

I've been meaning to ask for awhile now, I can't quite make out who your avatar is? Just curious.

Thanks,
Maestro G

[MediumTex]

[Lbill]

If you haven't already, I recommend reading Bill Bonner, especially his book "Empire of Debt." That provides a roadmap of what might be coming and why it might be a good idea to think globally and not nationalistically about the future. I'm more willing to believe that Jim Rogers will turn out to be more right than wrong - get out of dollars and learn to speak Mandarin Chinese. The era of US dominance, upon which we currently calculate our financial futures, is waning. It might be wise to consider macroeconomic trends when investing.
_________________
"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

[Lbill]

Now, if you really want to scare the crap out of yourself, have a look at Paul Farrell's piece. When you read it, you'll have the eerie feeling that most of it makes sense:

http://www.marketwatch.com/sto....genumber=2
_________________
"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]

[MediumTex]

[purduepete]

[MediumTex]

[helmut]

[Wonk]

Does anyone know of an online resource where you can plug in ticker symbols for a model portfolio (in this case VTI, GLD, SHY, TLT) and track the historical up to current performance on a chart for the collective portfolio?

Sort of like "Trev" on-demand? For one, it would be interesting to see the ebb and flow of the PP in a visual representation other than numerical. Also, I'd like to use it as a secondary visual as I'm deploying fresh capital.

The thought would be to add fresh capital when the portfolio is at or beneath the trendline (not like it would matter in the grand scheme of things, but it's all the tinkering I have).

[MediumTex]

[concerned752]

[macclary]

[Maestro G]

Medium Tex,

Thanks for the avatar explanation Although a huge fan of film, I'm not an aficionado of the Evil Dead series. Perhaps I will have to rectify that, particularly, as you suggest, starting with the sequel. The idea of Evil Dead "the musical" and more so an Ice Show is hysterical to me

Thanks again, I'm inspired to come up with my own avatar!

Maestro G

[Phalanx]

1) A few bazillion pages ago, someone had run an optimizer for the PP, cranking out 22.5 TSM, 17.5 gold, 30 LTT, 30 STT.

With SD for gold much higher than LTT, would it be more efficient to have a higher allocation for LTT? Gold's pull during inflation seems to outweigh LTT's pull during deflation; as presently constructed, the PP appears designed to handle inflation a bit better.

2) In theory, I think I understand 25 LTT/25 STT. In backtesting (for whatever that's worth), there doesn't seem to be much difference between 25 LTT/25 STT and 50 ITT.

Also, pulling out my old Ibbotson yearbook, the compound annual rate of return during the 1930's for LTT was 4.9, and for ITT 4.6.

Am I confusing results w/ strategy?

Please shed some light on this willing student, and thanks to the heavy-hitters in this thread for your contributions!

[MediumTex]

[helmut]

If I don't intend to own physical gold would it be better to hold gold in several different ETFs and CEFs such as GTU, GLD, CEF? I'm having a hard time with this because it is difficult for me to put that large a portion of my portfolio in just one investment.
It is my understanding that GLD in a IRA does not the incur the 28% collectible tax for gains at the time it is sold. Any further enlightenment on this issue would be appreciated.

helmut
_________________
"Back of every mistaken venture and defeat is the laughter of wisdom, if you listen." -Carl Sandburg

[MediumTex]

[danbek]

How has the PP done historically if you set it up and then *never* rebalance?

I know that rebalancing is a critical part of the PP, so I ask this purely out of curiosity. A non-rebalanced stock-bond portfolio will have higher expected return than the rebalanced portfolio, at the cost of higher expected risk. But with the large allocation to gold, I'm curious whether/how this changes with the PP.

[MediumTex]

For the TIPsters crowd, here are YTD, one year and three year performance figures for TIP and GOLD.

GLD:

YTD: 14.25%
One Year: 16.2%
Three Years: 18.46%

TIP:

YTD: 7.02%
One Year: 5.68%
Three Years: 5.54%

To borrow another line from T.S. Eliot:

Between the idea
And the reality
...
Falls the shadow.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne

[MediumTex]

[brick-house]

If 30 year TIPS start being issued, would anyone consider using that instead of nominal long term treasuries in the permanent portfolio?

Or is that better left for the variable portfolio?
_________________
Have you ever noticed that anybody driving slower than you is an idiot, and anyone going faster than you is a maniac? George Carlin

[Wonk]

MT, concerned, Macclary--thanks for the posts on charting help.

MT--right on with gold not being an inflation hedge. However, I think it would be quite painful for a gov't to fully back currency with gold. It's one thing to buy a few tons of gold to keep as a small reserve. It's entirely another to back every issue with gold. If it really were that easy, China would have accomplished it by now.

Brickhouse, 30 year TIPS wouldn't provide the necessary protection in a deflationary environment like nominal bonds would. That being said, if the gov't starts issuing 40 or 50 year bonds (as has been discussed), that would be an even better option than 30 year nominal.

[MediumTex]

[helmut]

When either GLD or IAU is held in an IRA is the maximum tax of 28% charged or the prevailing tax rate at the time of a distribution when withdrawn from a tax sheltered IRA?

helmut
_________________
"Back of every mistaken venture and defeat is the laughter of wisdom, if you listen." -Carl Sandburg

[MediumTex]