 |
Bogleheads
Investing Advice Inspired by Jack Bogle
|
| View previous topic :: View next topic |
| Author |
Message |
snowman9000
Joined: 26 Feb 2008
Posts: 767
|
 Posted: Sun Sep 06, 2009 8:58 pm Post subject: |
 |
|
Regarding skepticism of the FDIC backstop, don't forget that within the last year there was serious talk of the US losing its AAA credit rating.
It might strike some as unpatriotic to say that the US government could say "sorry". It is implausible but not impossible. If there is anything an investor should realize after the past two years, it is that the implausible is not impossible.
That said, every investment or savings vehicle carries a risk of some sort. No one here is saying FDIC backed savings accounts are "risky". Just that they are not riskless. A benefit of such discussions is to make investors think about all of the risks and make informed decisions. |
|
| Back to top |
|
 |
MediumTex
Joined: 01 Mar 2009
Posts: 447
|
| Posted: Sun Sep 06, 2009 10:44 pm Post subject: |
|
|
| snowman9000 wrote: | | Regarding skepticism of the FDIC backstop, don't forget that within the last year there was serious talk of the US losing its AAA credit rating. |
Think the scenarios through under which that could occur.
I don't think it is possible.
Note, for example, the recent downgrading of a bundle of debt from AAA to barely investment grade, and back to AAA, which allowed the Fed to buy it (since the Fed can only buy AAA debt). Link
The rating agencies are NEVER going to do anything against the Fed's wishes.
In fact, I can 100% guarantee that any rating agency that downgraded U.S. treasury debt would likely be labeled a terrorist organization and would probably see its offices targeted by cruise missiles.
Don't forget who we're talking about here. People can make all the cracks they want about Zimbabwe and the U.S. dollar, but Zimbabwe doesn't have over 700 military bases in every corner of the world and more floating on the world's oceans in the form of aircraft carrier battle groups.
Once an economic threat reaches critical mass, it ALWAYS becomes a national security issue.
The rating agencies may be incompetent, but they're not stupid.
It is cynicism, not patriotism, that leads me to this conclusion.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne
Last edited by MediumTex on Sat Sep 12, 2009 10:17 am; edited 1 time in total |
|
| Back to top |
|
|
Clive
Joined: 13 Jun 2009
Posts: 82
|
| Posted: Fri Sep 11, 2009 8:26 pm Post subject: Rebalancing |
|
|
-- deleted --
Last edited by Clive on Fri Sep 25, 2009 3:41 pm; edited 1 time in total |
|
| Back to top |
|
|
neverknow
Joined: 05 Jun 2009
Posts: 719
|
| Posted: Sat Sep 12, 2009 5:32 am Post subject: Re: Global PP vs Domestic |
|
|
| Clive wrote: |
I'm in the UK, so for me its a relatively simply matter of gold in USD, bonds in Euro and stocks in UKP. |
Clive, I find this really interesting. Currencies make my head spin, but I am getting better at it. Our household income is half US Dollars, half UK Pounds (to be 1/3 - 2/3's next year) - we spend mostly in US Dollars. My husband is a UK citizen, and I assume his attitude is typical for the country; he is pretty proud the Pound Sterling did not merge out of existence into Euros. In the past week, we have become aware, that the Pound exchange to US dollars is currently running about at it's average over the past 10 years, and that the US Dollar has lost value by 1/3 since 2001. As the pound/dollar is about the same, then the pound must have lost value also? (that is a question, because I really don't know) And the only way we could even comprehend this, is if either of us had converted our home currencies to Euro's in 2000 - wala, yep, both pounds and US dollars have lost that 1/3, at least compared to the Euro. What I haven't been able to figure out (yet), is Gold priced in US Dollars to pounds or euros. 1/3 is a pretty substantial loss --- yet we don't seem to notice a 1/3 reduction in purchasing power, either here in the states or in the UK. We have traveled no where else, within this time period. Perhaps, if we had, we would have noticed? Currencies make my head spin. Best of luck to you.
neverknow |
|
| Back to top |
|
|
Clive
Joined: 13 Jun 2009
Posts: 82
|
| Posted: Sat Sep 12, 2009 11:48 am Post subject: |
|
|
-- deleted --
Last edited by Clive on Fri Sep 25, 2009 3:42 pm; edited 1 time in total |
|
| Back to top |
|
|
MediumTex
Joined: 01 Mar 2009
Posts: 447
|
| Posted: Sat Sep 12, 2009 12:17 pm Post subject: |
|
|
Are there any non-U.S. investors here who own shares of PRPFX?
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne |
|
| Back to top |
|
|
Clive
Joined: 13 Jun 2009
Posts: 82
|
| Posted: Sat Sep 12, 2009 2:40 pm Post subject: Rebalancing |
|
|
-- deleted --
Last edited by Clive on Fri Sep 25, 2009 3:42 pm; edited 1 time in total |
|
| Back to top |
|
|
Clive
Joined: 13 Jun 2009
Posts: 82
|
| Posted: Sun Sep 13, 2009 1:57 pm Post subject: |
|
|
-- deleted --
Last edited by Clive on Fri Sep 25, 2009 3:43 pm; edited 1 time in total |
|
| Back to top |
|
|
Clive
Joined: 13 Jun 2009
Posts: 82
|
| Posted: Sun Sep 13, 2009 2:38 pm Post subject: |
|
|
-- deleted --
Last edited by Clive on Fri Sep 25, 2009 3:43 pm; edited 1 time in total |
|
| Back to top |
|
|
Clive
Joined: 13 Jun 2009
Posts: 82
|
| Posted: Sun Sep 13, 2009 2:49 pm Post subject: |
|
|
-- deleted --
Last edited by Clive on Fri Sep 25, 2009 3:43 pm; edited 1 time in total |
|
| Back to top |
|
|
MediumTex
Joined: 01 Mar 2009
Posts: 447
|
| Posted: Sun Sep 13, 2009 10:29 pm Post subject: |
|
|
I don't like the stock market at these levels at all.
Can someone talk me through a quick bull case for stocks from here?
I'm just having trouble making the bull case to myself (even a momentum bull based on terrible fundamentals).
Part of the PP strategy is that any of the 4 assets COULD rise at any point in time.
Right now, I am really struggling to see what drives the stock market higher from here.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne |
|
| Back to top |
|
|
Clive
Joined: 13 Jun 2009
Posts: 82
|
| Posted: Mon Sep 14, 2009 3:14 am Post subject: |
|
|
-- deleted --
Last edited by Clive on Fri Sep 25, 2009 3:44 pm; edited 1 time in total |
|
| Back to top |
|
|
Clive
Joined: 13 Jun 2009
Posts: 82
|
| Posted: Mon Sep 14, 2009 4:18 am Post subject: |
|
|
-- deleted --
Last edited by Clive on Fri Sep 25, 2009 2:36 pm; edited 1 time in total |
|
| Back to top |
|
|
neverknow
Joined: 05 Jun 2009
Posts: 719
|
| Posted: Mon Sep 14, 2009 4:32 am Post subject: |
|
|
| Clive wrote: | Hi NeverKnow
As you say however, the USD, UKP and Euro may all rise/fall together. I suspect that perhaps I should really diversify further, like you I'm a currency novice. My main intent is not to potentially profit from currency trading, but rather to diversify against having all in the UKP only to maybe see the currency crash at some point in time. |
Thanks Clive for responding. Me too "My main intent is not to potentially profit from currency trading" --- my intent is to pay my current and future bills. Nothing more or less.
Like I said, our households income is half US Dollars, and half UK Pounds. We spend primarily in US Dollars. We do manage our household assets to our mutual benefit, but my husband and I are both fiercely proud of paying our own way in this world (and our assets are roughly equivalent). Our retirement funds are structured entirely differently, each, I think reflective of our age, and our home countries. While I have the typical American lump sum thing to manage, my English husband has monthly payouts from things he calls pensions, which sound like annuities to me (sometimes our common English language is not all that translatable --- and we have made a point of retaining some privacy regarding our individual assets). Because my English husband is in the monthly cash flow business, and UK Pounds got absolutely clobbered last winter (compared to US Dollars) ... and I have this lump sum thing, my husband is not in the position to choose when to convert currency, but I can hold his UK Pounds, and choose when (or rather at what exchange rate). (this is all an internal household, on paper thing - they are really still his pounds in his UK bank account). Because this happened to us, and I was trying to work out a plan for us to weather this current financial storm, for the first time in my life I began investigating this currency thing.
Our first premise was the currency dislocations of last winter, had to be some kind of temporary dislocation (and for the sake of discussion, we gave it a 10 year time horizon). We unwaveringly believed the vast differential that had opened up between the UK Pound and US Dollar, at minimum, would have to narrow - even if both currencies were equally unloved by the world (due to similar financial based economies). And this proved true much quicker then either of us expected. For whatever it is worth, the average value of the UK Pound to the US Dollar 1998 to present is 1.70 --- so presently, the exchange rate is running pretty close to average for the past 10 years.
The plan we came up with to stabilize our household income was I bought my husbands UK Pounds from him (wrote him a check in US Dollars) and we held them, until we came up with a better idea. I picked an arbitrary exchange rate. The pound had gotten as high as somewhere over 2.00 and at the time of my plan, was as low as 1.50 (eventually falling all the way to 1.38 ). I picked the midway point of 1.75 to buy my husbands UK Pounds from him. (I had no idea that was as close to the past 10 years average as it was).
My husband squirmed, as he didn't want to be my charity case. But he absolutely is not. Because I paid attention, I immediately noticed how strong my US Dollars were (at least temporarily) and if it was a good idea for me to buy my husbands UK Pounds, very quickly it seemed to me even a better idea to buy Aussie Dollars and Canadian Dollars (both resource economies) and I took whatever exchange I could get (on his UK Pounds) and did so. I also immediately shifted my US centric investment portfolio to an International centric portfolio (this was back last December & January). At least for that moment in time, my temporarily strong US Dollar would buy more shares of anything in a different currency. While I have supplemented my Husbands current monthly cash flow, as I assure my husband, just the fact that I looked at this issue has made me more money, then any money, I used to stabilize his cash flow.
In no way, shape or form do I understand currencies - other then they can be impacted by politics, and that goes for Gold as well. Powers far above my grade level control these things.
My lump sum I have to manage is on purpose - only 50% US Dollar based, and it's target is actually only 25%, but I'm holding an awful lot of cash at the moment, which happens to be in my home currency, the US Dollar. I use GLD & SLV, rather then IAU - but you're right, this bit is also denominated in US Dollars.
They said (the talking heads) that the US Dollar got strong because of the safety trade, but I suspect in the unwinding of massive hedge fund positions, trades had to clear in US Dollars, therefore there was an unusually strong demand for US Dollars to clear these trades. Nothing changed about the relative worth of the US Dollar, just the demand for it.
I have yet to come to any conclusion as to why the Euro has risen from 1.00 to as high as 1.60 (as of Friday 1.45) against the US Dollar since - I'm not sure, 2000 or was it 2002? But I am beginning to wonder if it has to do with the size of it''s float. If all the money that was being invested in US Dollar denominated whatever's, invested in some other currency denominated whatever's --- whether it be UK Pounds, Aussie Dollars, Canadian Dollars, Swiss Franks or whatever ... what currency has a big enough float to absorb all this investment? My guess that it is Euro's, is based on the roughly equivalent GDP size of the US versus the entire Eurozone. And for sure, much of the oil rich mid east is doing at least some business in Euros with the Eurozone.
I don't know the future. One never knows the future. But as I tell my husband, as far as the 2 or us are concerned, both are US Dollars and UK Pounds are toast. Lucky for us, what matters most is the differential between these 2 currencies. I say this with great confidence, while at the same time, if you look at history (and I've looked all the way back to 1913 - when the current US Federal Reserve was set up ... the Bank of England is much older then that, as in centuries) and you look at what price various currencies have been around the world, what stands out to me, is that WW I & WW II --- had the biggest impact on the value of currencies. I interpret this to mean that war, has the biggest impact on currencies. However this is useless trivia - because ... no one knows the future.
I love the concept of the permanent portfolio, but I have incorporated a basket of currencies into my mix. It seems only prudent to me. No currency (or coin) has remained the world reserve currency forever, and over the past 4 centuries, about 100 years is about all, any currency has held this role --- going backwards in time ... presently the US, previously the UK Pound, before that Portugal, and before that "the Dutch". There is an inherent advantage that goes to the country that holds this role, therefore, it is not surprising that politics would have various countries vying for this role. It struck me yesterday, that it was the country that dominated world trade, that has held this role (just a coincidental observation, not a known fact) and this sent my husband and me on a scramble - who is it that dominates world trade today? We didn't come up with any answer.
One never knows the future. By virtue of our household income alone, we are diversified in 2 rather weak currencies. In my investment portfolio, I took this concept a bit further, and further diversified our currency in currency etf's, in Gold & Silver, and in equities and bonds denominated in other currencies. Of my equities, only 1% is in US equities.
I don't want to be a currency trader. Currencies make my head spin. I just want to pay my present and future bills. Nothing more or less.
For whatever that is worth.
neverknow |
|
| Back to top |
|
|
MarcMyWord
Joined: 15 Jun 2007
Posts: 429
|
| Posted: Mon Sep 14, 2009 5:46 am Post subject: |
|
|
| MediumTex wrote: | I don't like the stock market at these levels at all.
Can someone talk me through a quick bull case for stocks from here?
I'm just having trouble making the bull case to myself (even a momentum bull based on terrible fundamentals).
Part of the PP strategy is that any of the 4 assets COULD rise at any point in time.
Right now, I am really struggling to see what drives the stock market higher from here. |
I don't see it either, in view of all the structural problems in the economy which are essentially unchanged from before the current crisis. I think there is a lot of unwarranted euphoria going on, and a boost to stocks because low interest rates on "safe" investments cause a lot of people to think they have to put their money "somewhere." Meanwhile, there have been a number of recent news articles reporting that among corporate CEOs, selling of shares far outweighs buying.
I like to read the Weekly Market Comment by John Hussman, who considers the avoidance of losses in his (two) funds as important as the achievement of gains, and whose mostly–bond fund typically includes a dash of precious metals stocks and foreign currencies. Last week, growing tired of all the talk about tiny "green shoots" in the real economy (as opposed to the absolute giddiness in the stock market), he said it's "Showtime for Visible Roots and Fruit"--if there are really going to be any.
http://hussman.net/wmc/wmc090908.htm
Marc |
|
| Back to top |
|
|
MediumTex
Joined: 01 Mar 2009
Posts: 447
|
| Posted: Tue Sep 15, 2009 1:45 pm Post subject: |
|
|
| MediumTex wrote: | I don't like the stock market at these levels at all.
Can someone talk me through a quick bull case for stocks from here?
I'm just having trouble making the bull case to myself (even a momentum bull based on terrible fundamentals).
Part of the PP strategy is that any of the 4 assets COULD rise at any point in time.
Right now, I am really struggling to see what drives the stock market higher from here. |
Okay, to answer my own question, I have located a case for a bull market in equities:
The market is irrational and can stay irrational for long periods of time.
That's really all I needed. Just something that is at least plausible.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne |
|
| Back to top |
|
|
craigr
Joined: 13 Mar 2007
Posts: 1973
|
| Posted: Wed Sep 16, 2009 4:33 pm Post subject: |
|
|
I just posted an update on the portfolio strategy YTD. Morningstar shows it up about 7% this year even though LT Bonds have taken a beating. It is likely higher than that if you've been rebalancing through the Winter and Spring/Summer months or making new contributions into your lagging assets.
There is a lot of buzz in the news about the stock recovery and gold prices. Just a friendly reminder that if these assets have exceeded your Permanent Portfolio rebalancing thresholds you should be looking to sell them down and buy into your losers (taking tax considerations into account if applicable). |
|
| Back to top |
|
|
Clive
Joined: 13 Jun 2009
Posts: 82
|
| Posted: Thu Sep 17, 2009 3:26 am Post subject: |
|
|
| Quote: | | up about 7% this year even though LT Bonds have taken a beating. |
LT Bonds were a bit of a saviour at the 2008 year end time point.
Looking across other periods such as the March 2009 highlighted the PP would have been down perhaps -10%.
A similar effect is evident at other times, for example a very casual approximation from the above chart is something like overall -12.5%, -5%, -10%, -7.5% at each of the Nov 08, Jan 09, Mar 09, May 09 time points
Japan also has had PP down at -12% in a couple of years historically.
To bear in mind however is that the above chart/example excludes income, so when that is also discounted generally draw downs would have remained in single digits. Just don't expect -2% or -3% maximum draw-down type levels to be reliable, accept that some years might approach -10% and if/when such an event does occur you wont be as shocked. |
|
| Back to top |
|
|
Taylor Larimore
Moderator
Joined: 27 Feb 2007
Posts: 7153
Location: Miami Florida
|
| Posted: Thu Sep 17, 2009 9:44 am Post subject: Past performance |
|
|
Hi Bogleheads:
A reminder:
"Past performance does not guarantee future performance."
_________________
Best wishes
Taylor
The Majesty of Simplicity |
|
| Back to top |
|
|
Maestro G
Joined: 03 Aug 2007
Posts: 27
Location: San Francisco
|
| Posted: Thu Sep 17, 2009 10:28 am Post subject: |
|
|
Taylor,
Thank you for the reminder. However, I'm quite certain that most following this thread are aware of this simple fact. Indeed, at the risk of writing for many, it is most assuredly one of the principal reasons that they have adopted the "Permanent Portfolio" to begin with. It is, at least, for me! 
Best,
Maestro G |
|
| Back to top |
|
|
koekebakker
Joined: 27 Nov 2008
Posts: 11
Location: EU
|
| Posted: Thu Sep 17, 2009 10:46 am Post subject: |
|
|
Hi Bogleheads:
A reminder:
"Past performance does not guarantee future performance."
- Harry Browne -
 |
|
| Back to top |
|
|
Lbill
Joined: 13 Mar 2008
Posts: 2078
|
| Posted: Thu Sep 17, 2009 10:57 am Post subject: |
|
|
What about "future performance does not guarantee past performance" instead? I got to thinking about this upside-down view. Does anybody know the answer to this question: if you could invest now and accrue the returns in reverse for the last 20 or 30 years (adjusted for inflation), would you be better off than forward investing over the last 20 or 30 years? I wouldn't be surprised if you were - which kinda throws the whole idea of economic "growth" under the train doesn't it? Maybe someone can run this "upside down" analysis and tell me if I should start working on a reverse time machine.
_________________
"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 |
|
| Back to top |
|
|
craigr
Joined: 13 Mar 2007
Posts: 1973
|
| Posted: Thu Sep 17, 2009 1:56 pm Post subject: Re: Past performance |
|
|
| Taylor Larimore wrote: | Hi Bogleheads:
A reminder:
"Past performance does not guarantee future performance." |
Here are some Harry Browne "investment gems" on the future:
“The best-kept secret in the investment world is this: Almost nothing turns out as expected.”
Why the Best Laid Investment Plans Usually Go Wrong, 1987 (First sentence in his book) pg. 15
“Forecasts rarely come true, trading systems never produce the results advertised for them, investment advisors with records of phenomenal success fail to deliver when your money is on the line, the best investment analysis in contradicted by reality.”
Why the Best Laid Investment Plans Usually Go Wrong, 1987 pg. 15
“Despite the plausible ideas, the computer-tested systems, the economic wisdom, the refined techniques, the simple truth is that practically nothing in the economic or investment world works out as we were assured it would.”
Why the Best Laid Investment Plans Usually Go Wrong, 1987 pg. 20
“The investment literature of the past tells of so many certainties – ideas that were so clear, so sensible, so obvious that they weren’t even controversial. And yet time has proven them false.”
Why the Best Laid Investment Plans Usually Go Wrong, 1987 pg. 21
“The beginning of investment wisdom is to accept that we live in an uncertain world, that we don’t fully understand what makes markets move, that we don’t know a great deal about the present – much less about the future.”
Why the Best Laid Investment Plans Usually Go Wrong, 1987 pg. 23
“No one can tell you when the stock market will peak, how far it will fall, or which market group will lead the way back up.”
Why the Best Laid Investment Plans Usually Go Wrong, 1987 pg. 23
“When you give up the hope that some advisor, some system, some source of inside tips is going to give you a shortcut to wealth, you’ll finally begin to gain control over your financial future.”
Why the Best Laid Investment Plans Usually Go Wrong, 1987 pg. 23
“…since the winners make the most noise, it’s easy to gain the impression that you should be able to find an advisor who can make large gains for you every year.”
Why the Best Laid Investment Plans Usually Go Wrong, 1987 pg. 33
“…the same principles apply to indicators or systems that are supposed to tell you whether the market is going up or down. Even if the assumptions behind all of them are foolish, there are bound to be some indicators that have amazing records.”
Why the Best Laid Investment Plans Usually Go Wrong, 1987 pg. 33
“If a computer sifts though the daily record of prices for the past 20 years, testing several hundred different moving averages, it’s bound to find a few that confirmed – quickly and accurately – each turning point in the market. But there’s no reason they have to work the next time.”
Why the Best Laid Investment Plans Usually Go Wrong, 1987 pg. 35
“The past is full of meaningless coincidences that are waiting to be discovered by investors and advisors.”
Why the Best Laid Investment Plans Usually Go Wrong, 1987 pg. 36
“Many of the best-laid plans go wrong because they assume that some past pattern will continue into the future.”
Why the Best Laid Investment Plans Usually Go Wrong, 1987 pg. 36
“The average person wouldn’t consult a fortune-teller to learn what the future holds for his career, his love life, or his health…But when he approaches the investment markets, the first thing he looks for is a fortune-teller – someone who can tell him what next year’s inflation rate or Dow Jones average will be.”
Why the Best Laid Investment Plans Usually Go Wrong, 1987 pg. 42
That's just in the first 40 pages of this book. He goes on for several hundred pages discussing the pitfalls in technical analysis, market timing, investment advisors, cycles, waves, trading systems, etc. The first third of this book is one of the best treatise on investing hokum I've seen.
An unpredictable future is the core of the Permanent Portfolio investment strategy. IMO. |
|
| Back to top |
|
|
MediumTex
Joined: 01 Mar 2009
Posts: 447
|
| Posted: Thu Sep 17, 2009 3:19 pm Post subject: |
|
|
I don't know if the poster of the "past performance..." comment was trying to be ironic, but to me it is the deep truth of this statement that makes the PP appealing in the first place.
To expand upon the comment, I would say that we know very little about the present, less about the past and absolutely nothing about the future.
Since we do know so little about the past (as a rule, successful past endeavors are disproportionately reported and we tend to interpret past events based upon what we are experiencing in the present), the idea that anything from the past would be predictive of the future is meaningless.
In other words, since we tend to manufacture an interpretation of the past that makes history seem linear (as opposed to a random collage of events), and we also tend to manufacture a narrative about the future that we can synch up with our manufactured narrative concerning the past, HB is really offering us a shorthand version of a much deeper truth when he talks about "investing in an uncertain world."
The truth is not only that the world is an uncertain place, so too is our perception of it.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne |
|
| Back to top |
|
|
Lbill
Joined: 13 Mar 2008
Posts: 2078
|
| Posted: Thu Sep 17, 2009 3:37 pm Post subject: |
|
|
Can someone tell me again what role cash has in the PP. I see both cash and gold as "currencies" that sit there with no intrinsic rate of return. Except that gold is a much better currency than paper IMO. I'm trying to imagine in ancient times when gold and silver coinage existed and were used for commerce, and the "authorities" tried to foist off paper currencies on the public, some advisor recommending that people should hold an equal proportion of their wealth in precious metals and in the local fiat currency for purposes of "diversification." I don't reckon that advisor would have kept his head for very long. So, why is a good idea now? I can make a case for "bonds" (they are essentially loans) and "stocks" (they represent ownership of business enterprise). They both pay me a return for the inconvenience of tying up my currency. But why the heck should I want cash, except for the relatively small amounts I need on hand for my daily financial transactions.
_________________
"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 |
|
| Back to top |
|
|
MediumTex
Joined: 01 Mar 2009
Posts: 447
|
| Posted: Thu Sep 17, 2009 4:05 pm Post subject: |
|
|
| Lbill wrote: | | Can someone tell me again what role cash has in the PP. I see both cash and gold as "currencies" that sit there with no intrinsic rate of return. Except that gold is a much better currency than paper IMO. I'm trying to imagine in ancient times when gold and silver coinage existed and were used for commerce, and the "authorities" tried to foist off paper currencies on the public, some advisor recommending that people should hold an equal proportion of their wealth in precious metals and in the local fiat currency for purposes of "diversification." I don't reckon that advisor would have kept his head for very long. So, why is a good idea now? I can make a case for "bonds" (they are essentially loans) and "stocks" (they represent ownership of business enterprise). They both pay me a return for the inconvenience of tying up my currency. But why the heck should I want cash, except for the relatively small amounts I need on hand for my daily financial transactions. |
Cash dampens volatility and provides you with liquidity and powder for rebalancing in the event that all three volatile assets fall apart at the same time.
Cash in the PP is not really cash, but short term treasuries, which have historically provided a rate of return farther north of zero than today.
In a prolonged deflationary environment, even cash in your mattress would provide a positive rate of return if the value of all other assets was falling.
Since we tend to experience the pain of loss more intensely than a similar gain, I think that cash in the PP is also there for moral support when things get ugly. An allocation strategy is only as good as your ability to stick with it on its WORST day (sort of like a marriage).
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne |
|
| Back to top |
|
|
Lbill
Joined: 13 Mar 2008
Posts: 2078
|
| Posted: Thu Sep 17, 2009 4:14 pm Post subject: |
|
|
Thanks for your reply MediumTex. When have gold, stocks, and bonds all tanked at the same time, or what imaginable scenario would produce this outcome? I'm thinking that the conditions that would lead to this might be ones so bad that cash wouldn't be of much use either - maybe just lead and gunpowder. If things got really terrible, wouldn't gold be the only safe harbor left?
_________________
"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 |
|
| Back to top |
|
|
concerned752
Joined: 10 Sep 2009
Posts: 6
|
| Posted: Thu Sep 17, 2009 4:25 pm Post subject: |
|
|
Hello all,
Long-time reader, first-time poster.
I've been reading up extensively on the Permanent Portfolio since first hearing about it back in April. I've read through this entire thread (craigr and MediumTex, I admire your patience in answering the same questions over and over!), craigr's blog, Harry Browne's Fail-Safe Investing, and listened to a number of HB's old radio shows. I've also implemented an ETF version of the PP in a Roth IRA to see it in action for myself.
And now, a question.
I'm looking to implement the PP in my Fidelity-administered 403(b) and face the same dilemma others have: not all the elements of the PP are available as investment choices. Specifically, I'm unable to invest in ETFs and have had a heck of a time navigating the bureaucracy to find someone who can do something about that.
Fortuitously, I happened to relisten to an old HB radio show today in which a caller posed this question, and HB suggested two actions: 1) pick the "next best" mutual fund options or, 2) open a brokerage window and invest in PRPFX. Surprisingly, Harry Browne didn't seem to advocate one option over the other.
So here are my options:
1) Open a brokerage window and invest in PRPFX
2) Invest in the following Fidelity mutual funds:
25% Stock - FSTMX
OK, as noted by craigr
25% LT Bonds - FLBIX
Invests at least 80% of assets in Long US Treasury Bonds, currently 99.96% US Treasuries with 19.5 year average maturity. 0.2% expense ratio.
25% Gold - FSAGX
I know, I know: gold stocks != gold bullion. 0.86% expense ratio.
25% Cash - FDLXX
At least 80% in US Treasury securities. 0.45% expense ratio.
Would link to the relevant quotes on Morningstar, but I'm not allowed to post links as a new member. 
I suppose I could also use the brokerage window to pick mutual funds that are a little closer to PP ideals, though I'm not aware of any for LT Bonds, Gold, or Cash.
What are your thoughts on how I should proceed, given these options? |
|
| Back to top |
|
|
craigr
Joined: 13 Mar 2007
Posts: 1973
|
| Posted: Thu Sep 17, 2009 4:25 pm Post subject: |
|
|
| Lbill wrote: | | Thanks for your reply MediumTex. When have gold, stocks, and bonds all tanked at the same time, or what imaginable scenario would produce this outcome? |
Happened in 1981 when everything was going down at once for a brief time. The markets were working out whether inflation was really going to come under control or keep on trucking. Fed Chief Volcker was deliberately raising interest rates to bring things back to "normal". This was a Fed-induced recession in which having some cash helped out.
_________________
“The best-kept secret in the investment world is this: Almost nothing turns out as expected.” - Harry Browne |
|
| Back to top |
|
|
MediumTex
Joined: 01 Mar 2009
Posts: 447
|
| Posted: Thu Sep 17, 2009 4:59 pm Post subject: |
|
|
| craigr wrote: | | Lbill wrote: | | Thanks for your reply MediumTex. When have gold, stocks, and bonds all tanked at the same time, or what imaginable scenario would produce this outcome? |
Happened in 1981 when everything was going down at once for a brief time. The markets were working out whether inflation was really going to come under control or keep on trucking. Fed Chief Volcker was deliberately raising interest rates to bring things back to "normal". This was a Fed-induced recession in which having some cash helped out. |
HB discussed "tight money" Fed-induced recessions such as 1981, which are PP krytonite, as they are to the rest of the market as well. HB notes, too, that these periods are, by definition, short term (since any government-induced recessiont that wasn't short term would likely lead to a change in government).
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne |
|
| Back to top |
|
|
MediumTex
Joined: 01 Mar 2009
Posts: 447
|
| Posted: Thu Sep 17, 2009 5:12 pm Post subject: |
|
|
| concerned752 wrote: | Hello all,
Long-time reader, first-time poster.
I've been reading up extensively on the Permanent Portfolio since first hearing about it back in April. I've read through this entire thread (craigr and MediumTex, I admire your patience in answering the same questions over and over!), craigr's blog, Harry Browne's Fail-Safe Investing, and listened to a number of HB's old radio shows. I've also implemented an ETF version of the PP in a Roth IRA to see it in action for myself.
And now, a question.... |
Do you have a brokerage window in your plan?
If you do:
VTI: 25%
GLD: 25%
TLT: 25%
SHY: 25%
and you're done.
If you don't have a brokerage window, what other accounts do you have?
Normally, it's possible to cobble together a PP with a combination of retirement plans, IRA, taxable acounts and a hole in the backyard.
Usually, in a retirement plan there will be a stock mutual fund sutiable for the stock portion of the PP and a short term bond fund that is cash-like and workable as the cash portion of the PP.
The long term treasury and gold portions of the PP (or any acceptable substitute) will not typically be found in a retirement plan fund lineup (other than through a brokerage window, of course).
I'm glad you have found this thread to be a good resource. I think that I, craig and others who have contributed do so because we believe in the strategy and think that HB's ideas don't get the attention they deserve.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne |
|
| Back to top |
|
|
Clive
Joined: 13 Jun 2009
Posts: 82
|
| Posted: Thu Sep 17, 2009 5:37 pm Post subject: |
|
|
-- deleted --
Last edited by Clive on Fri Sep 25, 2009 3:45 pm; edited 1 time in total |
|
| Back to top |
|
|
concerned752
Joined: 10 Sep 2009
Posts: 6
|
| Posted: Thu Sep 17, 2009 6:11 pm Post subject: |
|
|
| MediumTex wrote: | | concerned752 wrote: | Hello all,
Long-time reader, first-time poster.
I've been reading up extensively on the Permanent Portfolio since first hearing about it back in April. I've read through this entire thread (craigr and MediumTex, I admire your patience in answering the same questions over and over!), craigr's blog, Harry Browne's Fail-Safe Investing, and listened to a number of HB's old radio shows. I've also implemented an ETF version of the PP in a Roth IRA to see it in action for myself.
And now, a question.... |
Do you have a brokerage window in your plan?
|
Yes, but it only lets me invest in mutual funds.
I'm planning on cobbling accounts  I can hold TLT and GTU/GLD in Roth IRAs for my wife and myself, and the stock portion in FSTMX in my 403(b). I just figured that once we max out the IRAs, further contributions ought to be in the 403(b), no? At the very least, I figured I'd need the options to rebalance. Or should I hang on to VTI in one of the IRAs for rebalancing the stock allocation?
| Quote: | | I'm glad you have found this thread to be a good resource. I think that I, craig and others who have contributed do so because we believe in the strategy and think that HB's ideas don't get the attention they deserve. |
Absolutely. Thank you. |
|
| Back to top |
|
|
MediumTex
Joined: 01 Mar 2009
Posts: 447
|
| Posted: Thu Sep 17, 2009 6:34 pm Post subject: |
|
|
| concerned752 wrote: | | I'm planning on cobbling accounts I can hold TLT and GTU/GLD in Roth IRAs for my wife and myself, and the stock portion in FSTMX in my 403(b). I just figured that once we max out the IRAs, further contributions ought to be in the 403(b), no? At the very least, I figured I'd need the options to rebalance. Or should I hang on to VTI in one of the IRAs for rebalancing the stock allocation? |
I'm not exactly following the cobbling plan, but as long as it adds up to 25% in each class, you should be in good shape. Trial and error will get you to the best assembly method.
Take advantage of "stable value" funds in qualified retirement plans where you can. It's not as safe as treasuries, but a 4% return with no interest rate risk is a pretty good deal today.
Adding a little PRPFX here and there might be a good fit for part of it as well.
I use PRPFX for my kids' Coverdell accounts. It's a great option for something like that, IMO.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne |
|
| Back to top |
|
|
MediumTex
Joined: 01 Mar 2009
Posts: 447
|
| Posted: Thu Sep 17, 2009 6:41 pm Post subject: |
|
|
This is sort of a morbid topic, but it's worth mentioning as part of the PP discussion.
For those of you who use the PP approach, have you spoken to your wife, husband, girlfriend, foundation, or whoever might miss you if you died about suggested investment approaches with any assets you might leave behind (including life insurance)?
To me, this topic is where something like PRPFX can come in handy (especially its tax efficiency). Rather than trying to talk someone through all the ins and outs of how and why the PP works, if you just suggest that they do a split of assets between PRPFX and cash, it seems to me that a plan like that might be more durable than trying to get someone who isn't interested up to speed on the inner workings of the PP.
Just something to think about.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne
Last edited by MediumTex on Fri Sep 18, 2009 5:19 pm; edited 1 time in total |
|
| Back to top |
|
|
MediumTex
Joined: 01 Mar 2009
Posts: 447
|
| Posted: Fri Sep 18, 2009 12:45 pm Post subject: |
|
|
This is just another general note regarding the PP strategy, but I thought it was worth including in this discussion:
For me, although the PP strategy is essentially a passive and conservative approach to investing with static buy and sell points, I do not approach it in a passive manner. Rather, I am endlessly testing it against every investment thesis, economic analysis or other set of ideas I come across.
I have become a strong fan of the PP because my personal belief in the strategy has been hardened through countless tests against other ideas about investment allocation. Thus far, I have not found any flaws in the reasoning on which the PP is based. At some point in the future, I may change this view, but thus far I have found the strategy to meet its promise of providing a way of achieving a safe inflation-adjusted investment return.
Note that the fact that other investment allocations may provide greater returns than the PP over certain periods is irrelevant to whether the PP is a sound strategy. It's like many things in life--there is more than one way of achieving the same end.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne |
|
| Back to top |
|
|
koekebakker
Joined: 27 Nov 2008
Posts: 11
Location: EU
|
| Posted: Sat Sep 19, 2009 1:47 am Post subject: |
|
|
Same here!
Everytime, after studying some new approach, I have to convince myself again why I'm investing PP-style. So far I've always come back to the PP.
It's important to note as well that Browne's PP isn't all that different from an orthodox Boglehead-portfolio. Although all the controversy seems to suggest otherwise.
It's basically little more than a conservative one third/two third boglehead-stock/bond portfolio + gold.
For me it fixes the biggest leak in basic Bogleheads-strategy: the complete reliance on stocks and bonds. |
|
| Back to top |
|
|
Roy
Joined: 10 Sep 2008
Posts: 341
|
| Posted: Sat Sep 19, 2009 7:51 am Post subject: |
|
|
| koekebakker wrote: | | For me it fixes the biggest leak in basic Bogleheads-strategy: the complete reliance on stocks and bonds. |
I see that. I think it is the only other real alternative. Ironically, it best addresses the Markowitz concepts so embraced by those who use only stock/bond strategies: portfolio as a whole.
And I think its quartile concept really should not be tinkered with. Somehow, it always works out that its precise allocation was necessary. Sure its Gold is too much, its Stocks insufficient, its LT Treasuries too vulnerable, and its Cash, useless. Yet, together, they seem to work. PRPFX may do better in upturns but I believe it lacks the defense-ability of the HB (the "prime directive"), not to mention the difference in costs. Its advantages are that it is 1 fund, and the ebbs and flows of its component parts can not be so easily parsed and fretted over. But it is inferior, conceptually, to the HB version.
Roy |
|
| Back to top |
|
|
kpmoresco
Joined: 21 Sep 2009
Posts: 1
|
| Posted: Mon Sep 21, 2009 11:33 am Post subject: Global cash/bond diversification |
|
|
New poster to this blog.
Thoughts regarding the use of international currencies and/or global bond funds for diversification with in the cash/st bond/lt bond portions of the portfolio.
In my opinion adding this diversity would help me sleep better at night given my faith in actions and intentions of the Fed/US Tresury. |
|
| Back to top |
|
|
MediumTex
Joined: 01 Mar 2009
Posts: 447
|
| Posted: Mon Sep 21, 2009 1:09 pm Post subject: Re: Global cash/bond diversification |
|
|
| kpmoresco wrote: | New poster to this blog.
Thoughts regarding the use of international currencies and/or global bond funds for diversification with in the cash/st bond/lt bond portions of the portfolio.
In my opinion adding this diversity would help me sleep better at night given my faith in actions and intentions of the Fed/US Tresury. |
The cash portion of the PP really ought to be held in the currency accepted by the government for the payment of taxes and the grocery store in your neighborhood for the purchase of groceries.
The gold portion of the PP provides you with full protection against a currency crisis or currency collapse (to the extent such protection is possible).
Bear in mind that any dollar crisis is likely to be accompanied by other currency crises as well (after all, devaluation is hugely beneficial to a nation's exports). In other words, if the dollar is falling, what's rising? Why? Is Europe or Japan in better shape than the U.S.? Why would their currencies be safer places than the U.S. dollar?
These are hard questions, but I think most of it is built into the PP's basic premise.
If you have to have some foreign currency use your variable portfolio. OTOH, PRPFX has 10% in Swiss franc bonds, so that might be an option as well.
Just remember that in a fiat world "devaluation" is not really possible, since the currency is not pegged to anything in the first place. Any devaluation discussion must specify how the devaluation is being measured. If the answer is "we are going to devalue relative to other currencies", I would say "good luck". Other countries are not going to sit back and watch their ability to export products destroyed as their own currency soars relative to that of their trade partners.
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne
Last edited by MediumTex on Mon Sep 21, 2009 2:40 pm; edited 1 time in total |
|
| Back to top |
|
|
craigr
Joined: 13 Mar 2007
Posts: 1973
|
| Posted: Mon Sep 21, 2009 2:02 pm Post subject: Re: Global cash/bond diversification |
|
|
| kpmoresco wrote: | New poster to this blog.
Thoughts regarding the use of international currencies and/or global bond funds for diversification with in the cash/st bond/lt bond portions of the portfolio.
In my opinion adding this diversity would help me sleep better at night given my faith in actions and intentions of the Fed/US Tresury. |
I'll just echo what MediumTex said. If you think the US is bad, you should take a look at some of the other countries.
Gold is the best protection you can own against problems in your home country currency.
_________________
“The best-kept secret in the investment world is this: Almost nothing turns out as expected.” - Harry Browne |
|
| Back to top |
|
|
elmerfudd
Joined: 24 May 2009
Posts: 12
|
| Posted: Mon Sep 21, 2009 7:51 pm Post subject: Premium/Discount chart on GTU |
|
|
| Has anyone found a tracking chart for the Premium/Discount of GTU. Today it was 5.1% Premium and $37.48 NAV and appears to be in a downward trend. (I think) Any thoughts on GTU? I like it over GLD for a IRA purchase. |
|
| Back to top |
|
|
MCSquared
Joined: 02 Aug 2009
Posts: 97
|
| Posted: Tue Sep 22, 2009 7:00 am Post subject: Re: Premium/Discount chart on GTU |
|
|
| elmerfudd wrote: | | Has anyone found a tracking chart for the Premium/Discount of GTU. Today it was 5.1% Premium and $37.48 NAV and appears to be in a downward trend. (I think) Any thoughts on GTU? I like it over GLD for a IRA purchase. |
Quasimodo (John) mentioned GTU earlier in this thread and after doing the research, I too decided to use GTU for a portion of my gold allocation. The FPIC tax treatment sealed the deal for me and I believe their audit protocols etc. are superior to GLD or IAU.
ETF Connect web site had a tracker for the NAV Premium/Discount but the web site has changed in the last few days. It is now called CEF Connect and for some unknown reason GTU data is not appearing.
The premium is down from 8% or so from a few weeks ago. I have been "moving" a portion of my allocation into physical as one can still buy coins at a smaller premium (1%-4% depending upon coin). |
|
| Back to top |
|
|
snowman9000
Joined: 26 Feb 2008
Posts: 767
|
| Posted: Tue Sep 22, 2009 9:16 pm Post subject: |
|
|
It will be hard to keep the PP faith when we go through the next bull market. A lot of people showing interest now are only doing so because of recent past performance.
OTOH, recent past performance shows why it is an all-weather portfolio.
I do like the idea of having a separate variable portfolio (money you can afford to lose) for speculating on bull markets or going for income or whatever. The PP is for money you can't afford to lose. Remember that when the next bull market or fancy strategy tempts you. |
|
| Back to top |
|
|
MediumTex
Joined: 01 Mar 2009
Posts: 447
|
| Posted: Tue Sep 22, 2009 9:28 pm Post subject: |
|
|
| snowman9000 wrote: | | It will be hard to keep the PP faith when we go through the next bull market. A lot of people showing interest now are only doing so because of recent past performance. |
I assume you mean a bull market for stocks, right?
Gold and LT treasuries are still in secular bull markets. Gold started its secular bull in 2000 and LT treasuries started its secular bull in 1982.
Considering that the last secular bear market for equities lasted 16 years (1966-1982), the current secular bear that began in 2000 looks like it may have several more years to run (or longer, as in Japan).
I love this bear market rally we are seeing in stocks, but there are really zero fundamentals supporting it, so I don't expect it to last another decade (though it might run for another year or so).
If the Fed has committed itself to dollar devaluation, we are looking at another 1970s scenario with cost-push inflation and sharp bear market rallies in stocks, followed by a steady sideways drift as inflation eats away any nominal gains.
***
In many ways, it is eerie how similar current conditions are to those around 1969:
The U.S. had just elected a new President who promised to end an unpopular war (Vietnam then and Iraq now).
Protracted foreign wars with no corresponding cutbacks in domestic spending were putting extreme pressure on the government's finances.
Trading partners were getting nervous about the ability of the U.S. to honor its commitments (in 1969 it was the convertibility of the dollar to gold; in 2009 it's the potential devaluation of the vast foreign holdings of U.S. treasuries).
In each case, the new President was not able to put an end to the unpopular war, and in some ways expanded it (Nixon expanded Vietnam conflict into neighboring countries and Obama is in the process of expanding Afghanistan commitment dramatically).
In each case, the new President was forced to take dramatic actions to help stabilize the economy (1971: Nixon's elimination of gold conversion rights and imposition of price controls and trade restrictions; 2009: quantitative easing, tariffs on Chinese tires and who knows what else from here forward).
Both Presidents who were leaving office were Texans with whom the electorate had grown deeply disenchanted. Both Texans had also personalized conflicts with opposing guerrilla leaders to questionable effect (President Bush's fixation on Osama bin Laden reminds me of LBJ's preoccupation with Ho Chi Minh).
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne |
|
| Back to top |
|
|
concerned752
Joined: 10 Sep 2009
Posts: 6
|
| Posted: Wed Sep 23, 2009 6:40 pm Post subject: Re: Rebalancing |
|
|
| Clive wrote: | As we can generally assume that there is a 50/50 chance of either trend continuation or mean reversion, it makes sense to split the difference and take half of the gain off the table and leave the other half running.
When applied to Craig's US historic PP data for 1972 to 2008, such rebalancing adds around 1% more to the annualised gain compared to annual rebalancing to equal weightings. The 'selective' rebalancing as I've called it also encounters fewer rebalance trades than that of yearly rebalancing and thereby saves more on trading costs (in total there were 32 selective buy or sell trades across the 37 test years, compared to 148 trades that would have been made under yearly rebalancing).
...
The 'selective' rebalance style however did raise the drawdown. The worse year encountered a -9.1% decline. That arose out of gold being relatively overweight (36% of the whole) at a time when gold declined by a relatively large amount (yearly rebalancing's worse year was a -3.9% drawdown). (At one point gold reached nearly 40% weighting relative to the whole.)
My intent is to extend the test to include a conventional PP overlay style of limiting maximum weighting to 35% of the whole. To do this I intend to use the selective rebalance method as before, but include an additional test to scale up the rebalance amount to reduce the exposure down to midway between 25% and 35% levels (e.g. 30%) should the selective rebalance method fail to reduce by at least that amount.
...
The parameters I used for the test was to compare each components current value to that of 1.5 times the median of all four component values, and when so, reduce by half the difference, adding to the component with the current least value. What this means is that when a $10,000 investment in one component (as an example) rose to perhaps $15,000, then it would be reduced to $12,500. Another rebalance would then occur should that $12,500 odd value rise back to $15,000 again (i.e. another 20% gain). |
I'm surprised that there hasn't been more discussion of Clive's post. Of all the various proposed changes to the Permanent Portfolio in this thread, this is by far the most acceptable to me, mostly because of what it doesn't do:
1) It does not change any of the assets included in the PP
2) It does not change the weight of the assets in the PP, and
3) It does not change the upper and lower rebalancing bands.
And a bonus fourth point: it's still simple.
Besides the higher drawdown, does anyone see any disadvantages to going this route? |
|
| Back to top |
|
|
craigr
Joined: 13 Mar 2007
Posts: 1973
|
| Posted: Wed Sep 23, 2009 6:56 pm Post subject: Re: Rebalancing |
|
|
| concerned752 wrote: | | Besides the higher drawdown, does anyone see any disadvantages to going this route? |
There is no need for annual rebalancing if you use rebalancing bands. By using bands you also are reducing transactions and allowing your winners time to rise to your upper threshold.
Consider that if you use the 15% low and 35% high bands you're talking around a +-40% swing in asset class value. If you held stocks and they went up 40% in value would you think it would be a good time to take those profits and rebalance? How about if it happened to gold? Or Bonds? I'd think that a 40% gain in an asset would cause me to want to rebalance because the risk/reward question seems to me to favor more risk of losing profits with gains of those levels. On the flip side, if something dropped by 40% in value it could be a comparative bargain than it was before and the risk/reward bet would suggest buying more of that asset with profits from a recent winner would be a better move.
Ultimately, this isn't a science so there is no right formula. I use rebalancing bands because it's simple and seems to work good enough at both providing returns and reducing risk. The biggest thing, by far, is to not get so caught up in being greedy in one particular asset that you let it run up very high without rebalancing. At the same time, you can't let another asset run so low that you don't own enough of it when it is time for it to perform.
_________________
“The best-kept secret in the investment world is this: Almost nothing turns out as expected.” - Harry Browne |
|
| Back to top |
|
|
Clive
Joined: 13 Jun 2009
Posts: 82
|
| Posted: Thu Sep 24, 2009 2:16 pm Post subject: |
|
|
RE: Rebalancing
| Quote: | | Ultimately, this isn't a science so there is no right formula |
Rebalancing consensus appears to be towards 50/50 odds overall. If you reduce out of an investment that continues its upwards trend then (likely) it would have been better to not have rebalanced. If the trend reverses then rebalancing would have been the better choice.
Some even suggest rebalancing midway between no rebalance and full-rebalance. So if the full rebalancing meant selling say $3000 out of a $10,000 original investment to bring the exposure back to $10,000 (i.e. after a 30% gain) then reducing by the midway amount i.e. $1500 instead can be an alternative rebalance style.
In the case of Craig's historical returns data http://crawlingroad.com/blog/2....l-returns/ the comparison is a bit distorted in that it's comparing non-rebalanced individuals with a rebalanced (yearly) PP set. A fairer comparison might be made by comparing PP with perhaps a 50/50 stock/LT Bond blend that's also rebalanced yearly (to save the bother, a 50/50 stock and bond versus PP (both yearly rebalanced) results in both having a 9.8% annualised return in that data ).
If you compare PP without rebalancing, i.e. 25% initial allocations into each of stocks, bond, gold and cash, and let those run as-is (no rebalancing), and compare the performance from every start date between 1972 and 1995 to a 2008 end date, then the data shows individual year annualised gains of
i.e. read across to the start date of your choice and then the y-axis values at that x-axis level indicate the annualised gain that would have occurred from that start date to the 2008 end date.
Clearly the lower 1972 PP value than the 9.8% rebalanced annualised implies that in that data it was better to have yearly rebalanced than not having rebalanced. Of particular note however is how across the whole range of 1972 to 1995 start dates non-rebalanced PP in general only marginally bettered cash.
There is a risk, in concept at least, that yearly rebalancing could have swung the other way and have resulted in annualised gains that were less than the non-rebalanced case. However the particular price motion patterns/trends etc. that occurred over that sample set period were such that they installed a better reward by yearly rebalancing over not rebalancing in this particular case.
Potentially the low draw-down risk provided by PP is matched with cash like longer term average investment rewards. Personally whilst I hold a PP, I'm not doing so exclusively but instead I'm using PP as a bond like substitute in a periodically rebalanced stock/bond (i.e. stock and PP) blend. |
|
| Back to top |
|
|
MediumTex
Joined: 01 Mar 2009
Posts: 447
|
| Posted: Thu Sep 24, 2009 2:27 pm Post subject: |
|
|
What do my expert friends here think of mining stocks?
It seems to me that if the stock portion of the PP is supposed to hold "aggressive growth" stocks, in this environment I believe that mining stocks are well positioned for aggressive growth.
I'm thinking maybe 5-15% of the stock allocation in mining stocks.
Thoughts?
_________________
"A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity."
-Harry Browne |
|
| Back to top |
|
|
Lbill
Joined: 13 Mar 2008
Posts: 2078
|
| Posted: Thu Sep 24, 2009 2:33 pm Post subject: |
|
|
In another thread, there was a reference to a study by Sharpe in which he showed that rebalancing helps in time periods where markets are non-trending (where mean-reversion prevails) but it hurts during time periods in which markets are trending up or down (in which momentum prevails). In up-trending markets you are better off if you didn't rebalance and could ride the winners longer. In down-trending markets you are better off if you don't sell winners to put more money into losers that keep on losing. Now, I don't know what to make of this in practical terms unless you're able to predict trending or non-trending markets in advance (or think you can). I'm more inclined to forget about a "rebalancing premium" and just think of rebalancing as a mechanical process that is intended to keep your allocations in line with your policy targets. It is having the right policy targets that is important. For this reason, I'm also inclined not to think that having wide rebalancing bands is a particularly good idea - because it allows your allocations to wander too far from your policy targets. If you want to change your policy targets, then do it, but don't let market returns do it for you.
_________________
"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 |
|
| Back to top |
|
|
|
|
You cannot post new topics in this forum
You cannot reply to topics in this forum
You cannot edit your posts in this forum
You cannot delete your posts in this forum
You cannot vote in polls in this forum
|
Powered by phpBB © 2001, 2005 phpBB Group
|
Wiki
FAQ
Search
Memberlist
Usergroups
Register
Profile
Log in to check your private messages
Log in
