Blog: Harry Browne's Permanent Portfolio

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Blog: Harry Browne's Permanent Portfolio

Post by LadyGeek » Tue Apr 29, 2014 1:52 pm

Continuing with our series on Lazy portfolios, the latest blog post is out. Please take a look at Harry Browne’s Permanent Portfolio | Bogleheads® Blog
“For the money you need to take care of you for the rest of your life, set up a simple, balanced, diversified portfolio. I call this a “Permanent Portfolio” because once you set it up, you never need to rearrange the investment mix— even if your outlook for the future changes. The portfolio should assure that your wealth will survive any event — including an event that would be devastating to any individual element within the portfolio… It isn’t difficult or complicated to have such a portfolio this safe. You can achieve a great deal of diversification with a surprisingly simple portfolio.”
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Re: Blog: Harry Browne's Permanent Portfolio

Post by Buddtholomew » Tue Apr 29, 2014 4:22 pm

Thank you for the well constructed blog on Harry Browne and the Permanent Portfolio. You may consider adding a section that outlines the role each asset class (equities - prosperity, gold - inflation, LTT's - deflation and Cash - recession) is expected to perform under various economic conditions.
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.

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Re: Blog: Harry Browne's Permanent Portfolio

Post by LadyGeek » Tue Apr 29, 2014 7:15 pm

You got it, I updated the blog post. How's this look? Harry Browne’s Permanent Portfolio | Bogleheads® Blog

(Barry Barnitz is providing behind-the-scenes assistance to help me with the details.)
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Re: Blog: Harry Browne's Permanent Portfolio

Post by craigr » Tue Apr 29, 2014 9:10 pm

Thanks for the article. It may be worth putting in a link to our book that updated the portfolio idea with modern funds, etc. without turning it into a commercial. The book answers almost every possible question there is about the Permanent Portfolio.
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Re: Blog: Harry Browne's Permanent Portfolio

Post by TO39 » Tue Apr 29, 2014 9:24 pm

Thanks for this post. I hope it generates a lot of discussion on the permanent portfolio.

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Re: Blog: Harry Browne's Permanent Portfolio

Post by LadyGeek » Tue Apr 29, 2014 9:52 pm

craigr wrote:Thanks for the article. It may be worth putting in a link to our book that updated the portfolio idea with modern funds, etc. without turning it into a commercial. The book answers almost every possible question there is about the Permanent Portfolio.
I'm certainly not an expert on this portfolio and I want to be sure that everything is covered with an accurate and fair perspective. To this end, I have updated the article as you've suggested (look near the bottom).

Your book has been discussed in this forum before. Here's a summary: The Permanent Portfolio -- A Gem
TO39 wrote:Thanks for this post. I hope it generates a lot of discussion on the permanent portfolio.
You're welcome. The forum threads referenced in the blog post are still open for comments (except for the first 72 page thread). Or, discuss it here.
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Re: Blog: Harry Browne's Permanent Portfolio

Post by grog » Tue Apr 29, 2014 10:17 pm

The Bernstein quote about the huge tracking error really hits the nail on the head. In 2013, as shown in the table, the market went up 33%, and the PP went down 2%. That truly is huge, and I imagine most of people that started a PP in 2009 have already bailed. At the same time, though, the 2% loss is pretty good considering gold AND long bonds both did poorly. It really is a very nicely hedged portfolio. If I were looking for something with minimal chance of annual losses, I might consider it, but that is overly conservative. For retirement savings, I think it is well worth it to tolerate larger losses.

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Re: Blog: Harry Browne's Permanent Portfolio

Post by dl7848 » Tue Apr 29, 2014 10:41 pm

I'd like to ask anyone who cares to answer about the topic of "manipulation" of the gold market. I know, I was on the fence for awhile, listening to the gold bugs on the one side and the more "rational" gold investors on the other. In the past few years, it seems the latter have joined the former. Now, virtually everyone seems to believe there is some degree of manipulation in the price of gold, though opinions differ on the nature of the manipulation. Where there is common agreement is: that (1) gold is a small market; (2) it doesn't take much to move it; and (3) too many of the extreme take-downs have seemed orchestrated.

Whatever the case might be, I find it hard getting sold on gold when it trades on the futures market. Gold is a safe haven asset, yet it is subject to margin calls...that is just too weird. The margin calls are a part of what happened to gold in 2008. There is a physical gold market as well but it doesn't diverge enough from the futures market for my liking. Anyway, my feelings on the possible lack of integrity in the gold market are a big stumbling block. If I ever wanted a more conservative portfolio than I have currently, the issues related to gold would be a show-stopper.

Any comments on the "manipulation" issue would be welcome.

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Re: Blog: Harry Browne's Permanent Portfolio

Post by craigr » Tue Apr 29, 2014 11:04 pm

dl7848 wrote:Whatever the case might be, I find it hard getting sold on gold when it trades on the futures market. Gold is a safe haven asset, yet it is subject to margin calls...that is just too weird. The margin calls are a part of what happened to gold in 2008. There is a physical gold market as well but it doesn't diverge enough from the futures market for my liking. Anyway, my feelings on the possible lack of integrity in the gold market are a big stumbling block. If I ever wanted a more conservative portfolio than I have currently, the issues related to gold would be a show-stopper.
Gold is an insurance asset. It's best to hold it in a tradable way that is as close to physical as possible. So I would not own any futures for gold. I would own it directly in some small amount for emergencies where you can access it quickly (like in a safe deposit box), or in a form where you can have geographic diversification outside the country where you live that is also in physical form (like Perth Mint). That way you have some protection against emergencies in your country (political risk, natural disasters, etc.) that is safer than what futures markets can provide you.

As for manipulation, honestly I don't read or pay attention to the stories. If the markets think gold prices need to go up, they will go up. The bigger the problem, the more the price will go up. There are no manipulators in the world that will be able to control it.
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Re: Blog: Harry Browne's Permanent Portfolio

Post by Browser » Wed Apr 30, 2014 10:46 am

I have the feeling that if you ever needed to collect on "gold held in foreign vaults or buried under the oak tree" insurance that things would be so bad that maybe you should consider an "underground shelter stocked with non-perishable food and guns" insurance policy instead. If we return to the Wild West, even if you were able to get to your gold then you'd have the problem of just how it could be used as a stable medium of exchange, as well as avoiding getting robbed and killed for it.
We don't know where we are, or where we're going -- but we're making good time.

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Re: Blog: Harry Browne's Permanent Portfolio

Post by craigr » Wed Apr 30, 2014 4:17 pm

Browser wrote:I have the feeling that if you ever needed to collect on "gold held in foreign vaults or buried under the oak tree" insurance that things would be so bad that maybe you should consider an "underground shelter stocked with non-perishable food and guns" insurance policy instead. If we return to the Wild West, even if you were able to get to your gold then you'd have the problem of just how it could be used as a stable medium of exchange, as well as avoiding getting robbed and killed for it.
Iceland in 2008 when the banking crisis happened it was not anarchy. All you needed was to not have all your money in an Icelandic bank and you had some protection.

Argentina in 2001 (and even today), you just needed to not have all your money in Argentinian banks and you had some protection. Ditto for other countries like Brazil, etc.

2013 in Cyprus when the banks had problems you had protection by not having all your money in Cyprus banks.

2014 in Ukraine is looking like you'd probably feel better if all your money wasn't in a Ukrainian bank.

What about 1929 in the U.S.? I'd have felt better knowing I didn't have all my money in a U.S. bank. Again, no anarchy. Same for 2008 in the U.S. Big banks were bailed out, but what if they weren't? Or what if they made investors do a "bail-in" for the failures? Then of course you had money market funds break the buck and lock up assets for years from investors. Then you get outright plundering like happened at MFGlobal in 2011 (http://en.wikipedia.org/wiki/MF_Global# ... wn_account).

Having assets overseas gives an investor more options to deal with an emergency at home if it happens. It doesn't need to be Mad Max.

I would never keep 100% of my money in any institution or banking system. History is replete with examples where that has been a bad idea.
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Re: Blog: Harry Browne's Permanent Portfolio

Post by dl7848 » Wed Apr 30, 2014 5:48 pm

craigr wrote:
dl7848 wrote:Whatever the case might be, I find it hard getting sold on gold when it trades on the futures market. Gold is a safe haven asset, yet it is subject to margin calls...that is just too weird. The margin calls are a part of what happened to gold in 2008. There is a physical gold market as well but it doesn't diverge enough from the futures market for my liking. Anyway, my feelings on the possible lack of integrity in the gold market are a big stumbling block. If I ever wanted a more conservative portfolio than I have currently, the issues related to gold would be a show-stopper.
Gold is an insurance asset. It's best to hold it in a tradable way that is as close to physical as possible. So I would not own any futures for gold. I would own it directly in some small amount for emergencies where you can access it quickly (like in a safe deposit box), or in a form where you can have geographic diversification outside the country where you live that is also in physical form (like Perth Mint). That way you have some protection against emergencies in your country (political risk, natural disasters, etc.) that is safer than what futures markets can provide you.
I didn't mean to imply that an investor should hold a gold futures contract. Only that it appears that the price of gold in the physical market is influenced by the price of gold in the futures market. Since the futures market is subject to huge distortions like those caused by margin calls, that doesn't make me feel good about holding gold in any form.
As for manipulation, honestly I don't read or pay attention to the stories.
One doesn't need to pay attention to the stories -- only the price action. I don't want to get into details since that would inevitably lead to political discussions. But when well-respected gold-market watchers that have dismissed the idea of gold manipulation for decades suddently have a change of heart, I realize I'm not the only "rational" (i.e., non-gold bug) that has questions. Additionally, regulators have been looking at other corners of the commodities futures market and finding "irregularities" and if there is one cockroach, there are likely more.
If the markets think gold prices need to go up, they will go up. The bigger the problem, the more the price will go up. There are no manipulators in the world that will be able to control it.
See, that is an unsatisfactory response, IMO, which is why I will continue to have such a difficult time envisioning gold in my portfolio. I think the Permanent Portfoliio is an interesting concept, but there are just too many quesitons about the gold market for my liking. I do commend you though for presenting another option to a pure stocks and bonds portfolio. Maybe someday there will be a clearer picture of what's going on in the gold market and I'll take a re-look.

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Re: Blog: Harry Browne's Permanent Portfolio

Post by craigr » Wed Apr 30, 2014 6:00 pm

dl7848 wrote:See, that is an unsatisfactory response, IMO, which is why I will continue to have such a difficult time envisioning gold in my portfolio. I think the Permanent Portfoliio is an interesting concept, but there are just too many quesitons about the gold market for my liking. I do commend you though for presenting another option to a pure stocks and bonds portfolio. Maybe someday there will be a clearer picture of what's going on in the gold market and I'll take a re-look.
The thing is this, if I were to believe that manipulators can control the gold markets at will, then the same thing goes for stocks, bonds, pork bellies, etc. So I shouldn't buy those either. Could manipulation happen? Sure. Will it happen indefinitely? No. Would it be sustainable if the markets all decide to go in a particular direction up or down? No way. The markets are just bigger than anyone, and that even includes people like the Fed and others that think gold markets can be controlled. If the markets could be so easily controlled then Fed policy could be tuned that we'd never have recessions, depressions, etc. But who would believe that based on the evidence?

So that's why I don't follow the gold manipulation arguments. Sure it may happen and if you are short-term trading you can get caught up in that kind of activity. But for a long-term buyer of gold, stocks, bonds, etc. market manipulation is of no concern because you aren't out there trying to trade against these guys. In the situation of gold, if there were a major global currency crisis, or even a currency crisis in the U.S. dollar, there is nobody on this planet that is going to be able to keep the price under control. It just isn't possible. There will be too many people running for the exits.

In terms of gold prices today, I am faced with two choices when I see gold prices decline:

1) It was market reaction responding to better opportunities and perceived risk outside of owning gold.
2) There are guys manipulating things.

For me I'm going to pick #1 because it just makes more sense. The Dow is going up and people don't want to miss the party. So yes, gold will fall in price. I don't think this is that preposterous of an idea when considering the alternative explanations.
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Re: Blog: Harry Browne's Permanent Portfolio

Post by wesmouch » Wed Apr 30, 2014 6:11 pm

Bernstein's quote about huge tracking error in the HBPP (Harry Browne Permanent Portfolio) cuts both ways. Sometimes you get big losses in classic investments:
VBIAX (Vanguard Balanced)
2008 -22.12%
2013 18.10

HBPP
2008 -0.7%
2013 -2.4

Then there is the diddy about inferior returns. The HBPP is said to not deliver performance for the long term.

Classic 60/40 split (S&P/5 yr Treasuries) performance 1971 to 2014 (01-01-1971 to 01-01-2014)
CAGR 8.90%
SD 8.68
Sharpe ratio 0.39

HBPP
CAGR 9.02%
SD 6.72
Sharpe ratio 0.53

(both from http://www.peaktotrough.com/hbpp.cgi)

Howard Marks is right. Gold is like God. They are only separated by one letter and people tend to believe in it or don't.

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Re: Blog: Harry Browne's Permanent Portfolio

Post by Buddtholomew » Wed Apr 30, 2014 7:07 pm

I dont like it nor do I believe in it...yet I own it as part of a diversified portfolio of stocks, bonds and cash. Look at all assets collectively and avoid dissecting the individual components to fully appreciate the genius behind the permanent portfolio.
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.

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Re: Blog: Harry Browne's Permanent Portfolio

Post by fourwedge » Wed Apr 30, 2014 7:25 pm

Thanks for the article!
Max out your tax sheltered retirement accounts with inexpensive, well diversified, index funds and you will beat 90% of all investors.

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Re: Blog: Harry Browne's Permanent Portfolio

Post by dl7848 » Wed Apr 30, 2014 7:31 pm

craigr wrote:
dl7848 wrote:See, that is an unsatisfactory response, IMO, which is why I will continue to have such a difficult time envisioning gold in my portfolio. I think the Permanent Portfoliio is an interesting concept, but there are just too many quesitons about the gold market for my liking. I do commend you though for presenting another option to a pure stocks and bonds portfolio. Maybe someday there will be a clearer picture of what's going on in the gold market and I'll take a re-look.
The thing is this, if I were to believe that manipulators can control the gold markets at will, then the same thing goes for stocks, bonds, pork bellies, etc. So I shouldn't buy those either.
The bond and equities markets are much bigger than the gold market and correspondingly harder to manipulate.
Could manipulation happen? Sure. Will it happen indefinitely? No. Would it be sustainable if the markets all decide to go in a particular direction up or down? No way. The markets are just bigger than anyone, and that even includes people like the Fed and others that think gold markets can be controlled.
What you are saying applies to the bond and equity market, but again, the commondities markets are much smaller. All it takes is the manipulation of price at key support/resistance points in the overnight markets when liquidity is poor. In fact, that is exactly what appears to happen in the gold and silver markets. Once technical damange is done, it is hard to overcome in the daytime markets.
But for a long-term buyer of gold, stocks, bonds, etc. market manipulation is of no concern because you aren't out there trying to trade against these guys.
Again, I'd agree with you with respect to stocks and bonds. But when a smaller and less liquid market is manipulated short-term, that can have longer term consequences.
In terms of gold prices today, I am faced with two choices when I see gold prices decline:

1) It was market reaction responding to better opportunities and perceived risk outside of owning gold.
2) There are guys manipulating things.

For me I'm going to pick #1 because it just makes more sense.
I would pick both #1 and #2. They both make sense. Manipulation is undoubtedly going to be present in all markets at all times, but its effects are going to be hidden in the large and liquid markets like stocks and bonds. I don't maintain the gold market is highly manipulated at all times, but in the past few years, it's hard to overlook some of the bizarre overnight shenannigans in the gold market that carry over into the daytime and affect the longer term trends. At least one CFTC commisioner has said he believes there is evidence of manipulation in the silver market. There are investigations going on in some of the other futures markets (agricultural IIRC).

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Re: Blog: Harry Browne's Permanent Portfolio

Post by Reubin » Wed Apr 30, 2014 7:53 pm

Have bonds ever been manipulated before? Yes.

Have stocks? Yes.

Regardless of whether or not you think it might be harder to accomplish this manipulation, it has been done. So then why own any of these assets? Have a good mattress?

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Re: Blog: Harry Browne's Permanent Portfolio

Post by craigr » Wed Apr 30, 2014 7:55 pm

dl7848 wrote:Manipulation is undoubtedly going to be present in all markets at all times, but its effects are going to be hidden in the large and liquid markets like stocks and bonds. I don't maintain the gold market is highly manipulated at all times, but in the past few years, it's hard to overlook some of the bizarre overnight shenannigans in the gold market that carry over into the daytime and affect the longer term trends. At least one CFTC commisioner has said he believes there is evidence of manipulation in the silver market. There are investigations going on in some of the other futures markets (agricultural IIRC).
And for all this manipulation to keep the prices down the past 10 years you had what happen? Gold prices went up through the roof from record lows. This coincided directly with the rocky stock market performance and unprecedented Fed maneuvers with interest rates so this is not a surprise and is not very good manipulation if it is going on. Now that the Dow is rocking, investors think the coast is clear and dump gold and buy stocks when they are far less of a good value than they were several years back.

In other words, it's the same old stuff and human investing psychology is as bad as ever! Sell low and buy high.

I say again, that if these guys are manipulating the gold markets to keep down prices they did a bad job the past decade. If it worked last year to cause gold prices to fall, then they probably got the guys manipulating the stock market upset because the gold capital flowed right into the stock market and helped run those prices up to record levels. So what exactly is the end-game and what exactly are all these manipulators trying to do? Stock manipulators want stocks to go up so gold markets lose money. Then the gold markets want the prices to go up, or is it down, or is it nowhere? I lose track. Then when prices of gold goes up then the stock markets decline so the stock market manipulators have to go out again to work their magic. Etc.

So even if these manipulators think they have things under control, they are only altering their variable in the market equation. And that equation is so chaotic that even if a manipulator thinks they have control, they really don't. It's just that they are assuming market direction was their fault when really it could have just been happenstance with everything else going on in the world. Kind of like how a psychic makes a bunch of predictions and only notices the ones that came true.

This is why market manipulation stories are just not worth following. You get one group saying that X is manipulating Y, but they completely ignore Z...n other infinite variables because it's way too complicated for anyone to comprehend and predict. The accusers and manipulators are both just fooling themselves if they think they really have control of the situation.

Manipulation is not a concern to a long-term investor that is widely diversifies and rebalances. Money goes left. Money goes right. But if you own all these assets you are going to take profits no matter what is going on. So I say manipulate away, it affects the Permanent Portfolio not one iota and probably provides much better rebalancing opportunities with increased volatility.

Portfolios should be constructed so that these kinds of externalities are not a concern. I don't care if someone tries to manipulate the gold markets, because I know eventually it will get away from them. Same for stocks, bonds, etc. I just own all of these assets and mechanically rebalance. That's the best way to deal with manipulation claims, don't go out trading against the pros by staying a long-term passive investor.
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Re: Blog: Harry Browne's Permanent Portfolio

Post by dl7848 » Wed Apr 30, 2014 9:31 pm

craigr wrote:I say again, that if these guys are manipulating the gold markets to keep down prices they did a bad job the past decade.
Craig, I haven't specified the time period I was talking about other than "the past few years", but I didn't say "the past decade". If I got more specific, I'd be getting into both politics and speculation, both of which are forbidden on this board.
Manipulation is not a concern to a long-term investor that is widely diversifies and rebalances.
It is a concern of those who like to understand the pieces of a portfolio before they are put together into one package. Especially for an investment approach that allocates fully one quarter of its assets to gold. But that's just me. I know many people are happy with the Permanent Portfolio and don't have the same concerns.

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Re: Blog: Harry Browne's Permanent Portfolio

Post by steve roy » Wed Apr 30, 2014 10:29 pm

craigr wrote:
dl7848 wrote: ... As for manipulation, honestly I don't read or pay attention to the stories. If the markets think gold prices need to go up, they will go up. The bigger the problem, the more the price will go up. There are no manipulators in the world that will be able to control it.
I've got two names for you, Craig.

Bunky.

Hunt.

I got whipsawed by his silver manipulations. Not pretty. And I had a BIG paper loss, a small real loss.

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Re: Blog: Harry Browne's Permanent Portfolio

Post by heyyou » Wed Apr 30, 2014 11:36 pm

I've got two names for you, Craig.

Bunky.

Hunt.

I got whipsawed by his silver manipulations. Not pretty. And I had a BIG paper loss, a small real loss.
You are showing your age if you remember the Hunt brothers. When was that, late 1970s, early 1980s? Consider that the second part of the whipsawing was when the silver market corrected from the manipulation. For some it was just boom and bust, regardless of the artificial source of the boom. Diversified, long term investors who rebalanced, were burned less than the speculators, and learning about market crashes early gave you plenty of time to recover from your youthful follies.

I don't wish for market losses for anyone, but you sure learn more in a decline than during the boom that precedes it.

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Re: Blog: Harry Browne's Permanent Portfolio

Post by dl7848 » Thu May 01, 2014 12:29 am

Former White House Official Discusses Gold Manipulation (admittedly a somewhat sensationalized title)

Link to audio (mp3)

I suppose there's no harm in linking to this partial transcript of an interview about gold manipulation. Although the site itself is considered a "gold bug" site, it does occasionally have some decent guests who have creds and insider resumes. This particular interview references a day where there was a huge drop in the price of gold. I remember it well, but don't remember the exact date. It was clear that a flurry of "uneconomical" transactions went through causing the deep plunge. By uneconomical, I mean, it was sold at a "bad" price, not designed to make a profit.

In this interview, we have somebody who has been around the block, and even served on the President's Working Group on the Financial Markets (astute readers will know what this means). Dr. Philippa Malmgren doesn't come out and say the gold plunge was the result of governmental or central bank actions but she does say that central banks are quite good at this sort of thing and have an incentive to do it. Basically, when a central bank, or central banks around the world, are engaging in monetary policies that have the side effect of devaluating a currency and/or casuing inflation, when the price of gold soars, that can show a lack of confidence in central bank policy...something central banks very much dislike. Additionally, and in my own opinion, a flood of buyers into the gold market can divert money from going into the stock and bond markets, where money is needed to support a recovery.

While I can "sort of" overlook price manipulation and collusion from commercial entities like banks (I tend to believe there is a lot of criminal activity in the financial markets almost as a matter of course), if it's the government/central banks doing the manipulation, however well-intended, that tends to negate the use of gold as an insurance policy.

BTW, various authorities are deciding whether to launch an investigation into the London Gold Fix, which would be the equivalent of the LIBOR scandal in the bond market. Here are a couple of articles that talk about that:

Gold Fix Study Shows Signs of Decade of Bank Manipulation

U.S. CFTC looking at London gold, silver fix - WSJ, Reuters

I have less concern with that since it may have been going on for decades.

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Re: Blog: Harry Browne's Permanent Portfolio

Post by Browser » Thu May 01, 2014 9:57 am

Just to reiterate what I've posted before, holding a mix of 25% stocks, 50% treasury securities, and 25% gold has historically been a low-volatility allocation. It is one of several allocations that cuts "left tail risk"; i.e, the magnitude of portfolio drawdowns. The price of doing that is that you also cut "right tail gains"; i.e., the potential for large portfolio gains. Over the long run, this results in significantly lower compound returns. Over the short run, it smooths out portfolio returns.

Another example of a left tail portfolio is 25% stocks plus 75% intermediate term treasurys. This allocation has about the same compound return and volatility as the PP from 1975-2013. If you used SCV instead of LC stocks (the Swedroe portfolio) the returns were much higher. It wasn't legal for U.S. citizens to own gold until 1975. Very few people did, and it was difficult and costly to invest significant amounts in gold bullion until the advent of gold bullion funds such as CEF, and gold ETFs.

There's no convincing statistical argument for owning gold, per se, as I've discussed above -- you get the same or better returns and volatility from other "left tail" portfolio allocations. That leaves the philosophical arguments: gold is disaster insurance, etc. You may or may not agree with these arguments. Just be clear in your head that this is the major basis for owning gold -- not any provable data that this portfolio has superior statistical benefits that are not achievable otherwise. I frankly own a little gold to calm my nerves, but nowhere near 25%.
We don't know where we are, or where we're going -- but we're making good time.

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Re: Blog: Harry Browne's Permanent Portfolio

Post by wesmouch » Thu May 01, 2014 11:21 am

Of course the problem with 25% stocks, 75% treasuries is if the dollar undergoes significant loss of value. Granted the stocks will hold up somewhat but 75% of your money is swirling the porcelain drain. Also with really high inflation (10% or so) both stocks and treasuries take a hit. Again the stocks will recover but it may take a while.

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Re: Blog: Harry Browne's Permanent Portfolio

Post by wesmouch » Thu May 01, 2014 11:29 am

Browser wrote:Just to reiterate what I've posted before, holding a mix of 25% stocks, 50% treasury securities, and 25% gold has historically been a low-volatility allocation. It is one of several allocations that cuts "left tail risk"; i.e, the magnitude of portfolio drawdowns. The price of doing that is that you also cut "right tail gains"; i.e., the potential for large portfolio gains. Over the long run, this results in significantly lower compound returns. Over the short run, it smooths out portfolio returns.

Another example of a left tail portfolio is 25% stocks plus 75% intermediate term treasurys. This allocation has about the same compound return and volatility as the PP from 1975-2013. If you used SCV instead of LC stocks (the Swedroe portfolio) the returns were much higher. It wasn't legal for U.S. citizens to own gold until 1975. Very few people did, and it was difficult and costly to invest significant amounts in gold bullion until the advent of gold bullion funds such as CEF, and gold ETFs.

There's no convincing statistical argument for owning gold, per se, as I've discussed above -- you get the same or better returns and volatility from other "left tail" portfolio allocations. That leaves the philosophical arguments: gold is disaster insurance, etc. You may or may not agree with these arguments. Just be clear in your head that this is the major basis for owning gold -- not any provable data that this portfolio has superior statistical benefits that are not achievable otherwise. I frankly own a little gold to calm my nerves, but nowhere near 25%.
Think it through a little bit more.
You retire in 1972 with 25% stock/75% intermediate bonds
Per portfolio visualizer for the next ten years you suffer negative inflation adjusted returns for 7 of the next 10 years. Your retirement will be in the doodoo. The HBPP suffered negative inflation adjusted returns only 3/10 years and kept up with inflation. It seems when you are retired, a safe, reliable return is more valuable than the best return assuming you have sufficient assets.

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Re: Blog: Harry Browne's Permanent Portfolio

Post by Desert » Thu May 01, 2014 11:36 am

Browser wrote:Just to reiterate what I've posted before, holding a mix of 25% stocks, 50% treasury securities, and 25% gold has historically been a low-volatility allocation. It is one of several allocations that cuts "left tail risk"; i.e, the magnitude of portfolio drawdowns. The price of doing that is that you also cut "right tail gains"; i.e., the potential for large portfolio gains. Over the long run, this results in significantly lower compound returns. Over the short run, it smooths out portfolio returns.

Another example of a left tail portfolio is 25% stocks plus 75% intermediate term treasurys. This allocation has about the same compound return and volatility as the PP from 1975-2013. If you used SCV instead of LC stocks (the Swedroe portfolio) the returns were much higher. It wasn't legal for U.S. citizens to own gold until 1975. Very few people did, and it was difficult and costly to invest significant amounts in gold bullion until the advent of gold bullion funds such as CEF, and gold ETFs.

There's no convincing statistical argument for owning gold, per se, as I've discussed above -- you get the same or better returns and volatility from other "left tail" portfolio allocations. That leaves the philosophical arguments: gold is disaster insurance, etc. You may or may not agree with these arguments. Just be clear in your head that this is the major basis for owning gold -- not any provable data that this portfolio has superior statistical benefits that are not achievable otherwise. I frankly own a little gold to calm my nerves, but nowhere near 25%.
Yes, the 25/75 portfolio looks excellent for the risk averse investor. The treasuries do a better job than corporates during really steep equity declines, presumably because of the "flight to safety" behavior. A similar portfolio that might appeal to both PP shoppers as well as 25/75 investors is the following mix: Bump up the equity percentage to 30% in an effort to capture a bit more ERP. To counter the increased equity volatility, lengthen the maturity of the treasuries from 5 years to 10 years. And finally throw in 10% gold. This 30/60/10 portfolio did even better than the 25/75% mix (and better than the PP), and it also allows the investor to hold enough gold to provide a significant insurance benefit in the event of serious left tail events.

And yes, the 30/60/10 outperformed (higher return, lower volatility) than a 30/70 mix. The uncorrelated gold does a good job of smoothing out the ride, even with a mere 10% allocation. It's an extremely low-cost portfolio as well. The treasuries can be purchased through vanguard, so there is no expense ratio for the 60% allocation. VTI (or VT, if international allocation is desired) can provide the equity allocation at low cost. And gold can be held via GLD or in physical form.

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Re: Blog: Harry Browne's Permanent Portfolio

Post by Browser » Thu May 01, 2014 11:54 am

Think it through a little bit more.
You retire in 1972 with 25% stock/75% intermediate bonds
Per portfolio visualizer for the next ten years you suffer negative inflation adjusted returns for 7 of the next 10 years. Your retirement will be in the doodoo. The HBPP suffered negative inflation adjusted returns only 3/10 years and kept up with inflation. It seems when you are retired, a safe, reliable return is more valuable than the best return assuming you have sufficient assets.
Yes. If you expect a return of the high inflation of the 1970s, it's likely that both stocks and nominal bonds will have poor real returns. You have to assume that a large allocation to gold will offset that. Gold returns were much higher than the inflation rate in the 1970s. Of course, the dollar had just been unpegged from gold and the ownership of gold had been made legal in the U.S. -- both one-off events. You also have to assume that the retiree in 1972 would have been able to load up on gold, which he wouldn't have been able to do legally until 1975. Even then, it was difficult to acquire and store gold so gold ownership was not convenient or common. And by the way, visualizer and Simba don't factor in the very large spreads and cost of storage for gold bullion, which would have been involved until the advent of bullion funds and ETFs in the late 1990s and afterwards. But, I agree, it's important for retirees to protect themselves from large real-value portfolio losses. For them, a defensive portfolio is best. Is owning 25% gold the best defensive portfolio? I don't think you can prove that by looking in the rearview mirror at hypothetical, never-realized returns during the 1970s. If you want to protect from the ravages of inflation there are other ways to do that -- much better inflation hedges than gold are out there. But each to his own...
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Re: Blog: Harry Browne's Permanent Portfolio

Post by Buddtholomew » Thu May 01, 2014 12:34 pm

It does not matter how gold is performing during a non-inflationary economic cycle, as the other assets were selected to outperform during periods of prosperity or deflation. I have a horse in every race and realize that each of them has the opportunity to win, place or show in their event. I allocate my funds accordingly and expect to reap the rewards when one of them wins. I also plan to take these winnings (after paying the IRS) and re-distribute them to losing horses so they are prepared to perform in their next race. I do keep some additional reserves to speculate on my favorites, but not enough to disrupt the overall plan.
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Re: Blog: Harry Browne's Permanent Portfolio

Post by 3CT_Paddler » Thu May 01, 2014 1:30 pm

craigr wrote:
dl7848 wrote:Whatever the case might be, I find it hard getting sold on gold when it trades on the futures market. Gold is a safe haven asset, yet it is subject to margin calls...that is just too weird. The margin calls are a part of what happened to gold in 2008. There is a physical gold market as well but it doesn't diverge enough from the futures market for my liking. Anyway, my feelings on the possible lack of integrity in the gold market are a big stumbling block. If I ever wanted a more conservative portfolio than I have currently, the issues related to gold would be a show-stopper.
Gold is an insurance asset.
I don't disagree, but why make an insurance asset 25% of your portfolio? I can see the argument for 5-10% in precious metals as an insurance against extreme events.

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Re: Blog: Harry Browne's Permanent Portfolio

Post by telemark » Thu May 01, 2014 1:58 pm

3CT_Paddler wrote: I don't disagree, but why make an insurance asset 25% of your portfolio? I can see the argument for 5-10% in precious metals as an insurance against extreme events.
The stated goal of the Permanent Portfolio is to preserve wealth, not to grow it.

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Re: Blog: Harry Browne's Permanent Portfolio

Post by Browser » Thu May 01, 2014 4:24 pm

telemark wrote:
3CT_Paddler wrote: I don't disagree, but why make an insurance asset 25% of your portfolio? I can see the argument for 5-10% in precious metals as an insurance against extreme events.
The stated goal of the Permanent Portfolio is to preserve wealth, not to grow it.
That's unfortunate, since it means you have to already have accumulated your wealth before the PP makes sense. Portfolio for the rich?
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Re: Blog: Harry Browne's Permanent Portfolio

Post by telemark » Thu May 01, 2014 5:05 pm

That depends on what you mean by rich. The presumption is that you will earn enough, over the course of your career, to retire on. See Rule #1: Your career provides your wealth.

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Re: Blog: Harry Browne's Permanent Portfolio

Post by Buddtholomew » Thu May 01, 2014 6:45 pm

Browser wrote: That's unfortunate, since it means you have to already have accumulated your wealth before the PP makes sense. Portfolio for the rich?
wesmouch wrote: Classic 60/40 split (S&P/5 yr Treasuries) performance 1971 to 2014 (01-01-1971 to 01-01-2014)
CAGR 8.90%
SD 8.68
Sharpe ratio 0.39

HBPP
CAGR 9.02%
SD 6.72
Sharpe ratio 0.53
The PP will make you as poor or rich as a well diversified BH portfolio.
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Re: Blog: Harry Browne's Permanent Portfolio

Post by Reubin » Thu May 01, 2014 7:13 pm

Desert wrote:
Browser wrote:Just to reiterate what I've posted before, holding a mix of 25% stocks, 50% treasury securities, and 25% gold has historically been a low-volatility allocation. It is one of several allocations that cuts "left tail risk"; i.e, the magnitude of portfolio drawdowns. The price of doing that is that you also cut "right tail gains"; i.e., the potential for large portfolio gains. Over the long run, this results in significantly lower compound returns. Over the short run, it smooths out portfolio returns.

Another example of a left tail portfolio is 25% stocks plus 75% intermediate term treasurys. This allocation has about the same compound return and volatility as the PP from 1975-2013. If you used SCV instead of LC stocks (the Swedroe portfolio) the returns were much higher. It wasn't legal for U.S. citizens to own gold until 1975. Very few people did, and it was difficult and costly to invest significant amounts in gold bullion until the advent of gold bullion funds such as CEF, and gold ETFs.

There's no convincing statistical argument for owning gold, per se, as I've discussed above -- you get the same or better returns and volatility from other "left tail" portfolio allocations. That leaves the philosophical arguments: gold is disaster insurance, etc. You may or may not agree with these arguments. Just be clear in your head that this is the major basis for owning gold -- not any provable data that this portfolio has superior statistical benefits that are not achievable otherwise. I frankly own a little gold to calm my nerves, but nowhere near 25%.
Yes, the 25/75 portfolio looks excellent for the risk averse investor. The treasuries do a better job than corporates during really steep equity declines, presumably because of the "flight to safety" behavior. A similar portfolio that might appeal to both PP shoppers as well as 25/75 investors is the following mix: Bump up the equity percentage to 30% in an effort to capture a bit more ERP. To counter the increased equity volatility, lengthen the maturity of the treasuries from 5 years to 10 years. And finally throw in 10% gold. This 30/60/10 portfolio did even better than the 25/75% mix (and better than the PP), and it also allows the investor to hold enough gold to provide a significant insurance benefit in the event of serious left tail events.

And yes, the 30/60/10 outperformed (higher return, lower volatility) than a 30/70 mix. The uncorrelated gold does a good job of smoothing out the ride, even with a mere 10% allocation. It's an extremely low-cost portfolio as well. The treasuries can be purchased through vanguard, so there is no expense ratio for the 60% allocation. VTI (or VT, if international allocation is desired) can provide the equity allocation at low cost. And gold can be held via GLD or in physical form.
I like the traditional HBPP better. Gold protects against dollar devaluation and money printing. It defends against runaway inflation and a whimsical government. Additionally I can purchase the gold ETFs and place them in taxable accounts with no taxable distributions...unlike treasuries.

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Re: Blog: Harry Browne's Permanent Portfolio

Post by Browser » Fri May 02, 2014 9:02 am

Followup to the PP as a retirement withdrawal portfolio. Using Visualizer I compared the 4X25 PP to a portfolio of 50% Total Stock Market plus 50% 5Yr Treasurys for all 30-year rolling return periods during the 1972-2013 period. There were 13 30-year periods. A 4% inflation-adjusted annual withdrawal was taken from each portfolio and the portfolios were annually rebalanced. Both portfolios survived all the 30-year periods without becoming "busted". For 11 of the 13 periods the 50/50 portfolio had an ending balance higher than the PP; on average about twice as high. The only two periods for which the PP had a higher ending balance were the periods beginning in 1972 and 1973. These data do not include the high costs of trading and storing gold bullion until the late 1990s. Even though the PP typically had lower maximum drawdowns than the 50/50, it also had lower maximum gains. Over time, the gains more than made up for the short term losses.

I also compared a portfolio of 25% TSM + 5Yr Treasurys to the PP. The 25/75 portfolio was never "busted" either. It had a higher ending balance than the PP for 9 of the 13 30-year periods. The periods for which the PP had a higher ending balance were the ones beginning in 1972,1973,1974, and 1977.
Last edited by Browser on Fri May 02, 2014 9:36 am, edited 1 time in total.
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Re: Blog: Harry Browne's Permanent Portfolio

Post by Buddtholomew » Fri May 02, 2014 9:27 am

Browser wrote:Followup to the PP as a retirement withdrawal portfolio. Using Visualizer I compared the 4X25 PP to a portfolio of 50% Total Stock Market plus 25% 5Yr Treasurys for all 30-year rolling return periods during the 1972-2013 period. There were 13 30-year periods. A 4% inflation-adjusted annual withdrawal was taken from each portfolio and the portfolios were annually rebalanced. Both portfolios survived all the 30-year periods without becoming "busted". For 11 of the 13 periods the 50/50 portfolio had an ending balance higher than the PP; on average about twice as high. The only two periods for which the PP had a higher ending balance were the periods beginning in 1972 and 1973. These data do not include the high costs of trading and storing gold bullion until the late 1990s. Even though the PP typically had lower maximum drawdowns than the 50/50, it also had lower maximum gains. Over time, the gains more than made up for the short term losses.

I also compared a portfolio of 25% TSM + 5Yr Treasurys to the PP. The 25/75 portfolio was never "busted" either. It had a higher ending balance than the PP for 9 of the 13 30-year periods. The periods for which the PP had a higher ending balance were the ones beginning in 1972,1973,1974, and 1977.
PP SWRs vary based on withdrawal strategies. The composition of your first portfolio only totals 75%
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Re: Blog: Harry Browne's Permanent Portfolio

Post by Browser » Fri May 02, 2014 9:37 am

Buddtholomew wrote:
Browser wrote:Followup to the PP as a retirement withdrawal portfolio. Using Visualizer I compared the 4X25 PP to a portfolio of 50% Total Stock Market plus 25% 5Yr Treasurys for all 30-year rolling return periods during the 1972-2013 period. There were 13 30-year periods. A 4% inflation-adjusted annual withdrawal was taken from each portfolio and the portfolios were annually rebalanced. Both portfolios survived all the 30-year periods without becoming "busted". For 11 of the 13 periods the 50/50 portfolio had an ending balance higher than the PP; on average about twice as high. The only two periods for which the PP had a higher ending balance were the periods beginning in 1972 and 1973. These data do not include the high costs of trading and storing gold bullion until the late 1990s. Even though the PP typically had lower maximum drawdowns than the 50/50, it also had lower maximum gains. Over time, the gains more than made up for the short term losses.

I also compared a portfolio of 25% TSM + 5Yr Treasurys to the PP. The 25/75 portfolio was never "busted" either. It had a higher ending balance than the PP for 9 of the 13 30-year periods. The periods for which the PP had a higher ending balance were the ones beginning in 1972,1973,1974, and 1977.
PP SWRs vary based on withdrawal strategies. The composition of your first portfolio only totals 75%
Thanks. I corrected that. :happy
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Re: Blog: Harry Browne's Permanent Portfolio

Post by arcticpineapplecorp. » Fri May 02, 2014 7:47 pm

I just saw this blog the other day and I listened to Harry Browne's radio show (thanks to craig rowland's link of downloaded archives). But I thought I remembered hearing Harry talk about how the four assets he recommends works during the 4 conditions of the economic cycle in the following way:

Stocks are good during prosperity, bad during recessions
Bonds are good during recessions, not helpful during prosperity (because they're not growing like stocks)
Cash is good during times of deflation, bad during times of inflation (because you're losing purchasing power)
Gold is good during times of inflation, bad during times of deflation

In this way, I remembered hearing him talk about the duality of the asset classes (prosperity vs recession and inflation vs deflation), but reading the blog post on bogleheads (http://www.bogleheads.org/blog/harry-br ... portfolio/) [link fixed by admin LadyGeek] it gives the following write up:

"Stocks – for profit during periods of general prosperity and/or declining inflation.
Gold – for profit during periods of bad inflation; during inflationary episodes gold bullion provides protection against a falling currency and other potential problems.
Long Term Bonds – for profit during periods of declining interest rates; and especially during a deflation. Bonds also do reasonably well during prosperity.
Cash – During a recession, no particular asset class is going to do well. The cash in a Treasury Money Market Fund offers stability when portfolio asset classes fall in price. It also protects purchasing power during a deflation."


This seems a little different than what I remember Harry stating and while I can't argue with the explanation above (in the bogleheads blog), it is different than what I wrote above. Did I mishear what Harry said on his show?
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Re: Blog: Harry Browne's Permanent Portfolio

Post by Kevin K » Thu Oct 30, 2014 10:39 am

This comment by Desert didn't receive much in the way of follow-up, but when I ran the numbers on his suggested portfolio I was most impressed. 8.80% CAGR (1972 to the present), 6.44% SD AND better performance than the PP during market crises (e.g. positive return in 2008, worst-ever loss 4.45% in 1994:

"Yes, the 25/75 portfolio looks excellent for the risk averse investor. The treasuries do a better job than corporates during really steep equity declines, presumably because of the "flight to safety" behavior. A similar portfolio that might appeal to both PP shoppers as well as 25/75 investors is the following mix: Bump up the equity percentage to 30% in an effort to capture a bit more ERP. To counter the increased equity volatility, lengthen the maturity of the treasuries from 5 years to 10 years. And finally throw in 10% gold. This 30/60/10 portfolio did even better than the 25/75% mix (and better than the PP), and it also allows the investor to hold enough gold to provide a significant insurance benefit in the event of serious left tail events.

And yes, the 30/60/10 outperformed (higher return, lower volatility) than a 30/70 mix. The uncorrelated gold does a good job of smoothing out the ride, even with a mere 10% allocation. It's an extremely low-cost portfolio as well. The treasuries can be purchased through vanguard, so there is no expense ratio for the 60% allocation. VTI (or VT, if international allocation is desired) can provide the equity allocation at low cost. And gold can be held via GLD or in physical form."

As it happens, right after reading this I was finishing up William Bernstein's excellent recent booklet "Skating Where the Puck Was: The Correlation Game in a Flat World," which pretty much concludes with this discussion of the PP:

"Still, the Harry Browne portfolio looks too good to be true. What’s wrong with this picture? Several things. For starters, gold was not easily investible during the first decade of this period; in fact, it was downright illegal to sown the stuff from 1933 to 1974. Start the analysis in 1980, for example, and you were a full percent better off leaving it out of the portfolio entirely (i.e. owning one third stocks, bonds and bills). Put another way, you can go off the gold standard and open up its ownership only once. It seem highly unlikely that gold will return several percent more than inflation in the coming decades; almost by definition, zero percent above inflation seems more like it.

Next, compare the difficulty of purchasing and storing gold in, say, 1975 with the ease of buying a gold ETF today. (You’re aware, of course, that GLD is, as of this writing, one of the world’s largest ETFs.). If you’ve read this far, you realize that ease of purchase is a warning signal that the asset class in question’s correlations with other risky assets has risen.

Likewise, the less than 2% gap that separated stock, bonds, and gold for 1964-2011 does not manke any sense, and for much the same reason: The period, particularly its last half, saw a historic bull market in both bonds and gold, a pairing of events not likely to recur any time soon. Assume the same 4% inflation rate for the next several decades, and the returns of stocks look like thy will fall slightly from 9.58% to around 7% (4% inflation plus 2% dividends plus 1% dividend growth), the returns of gold from 8.15% to 4%, the returns of long bonds from 7.77% to the current yield of 2.8%, and bills from 5.33% to God only knows what, but likely close to the assumed inflation rate of 4%. Average together all 4 of these numbers and you get an expected return of...4.5%/0.5% nominal/real. You’ll gain some return from rebalancing, but lose most of that to investment expenses. There will be tears.

So why I’ll admit that the Harry Browne portfolio still has a lot to recommend it, I’m not sanguine about its current popularity, which rests on the salutary recent performance of its two most unorthodox risky components, gold and long bonds. Both investment history and human psychology suggest that when these two asset classes turn sour, as they will one day, Harry Browne adherents will abandon the approach in droves, as suggested by fund flows in and out of the Harry Browne-inspired Permanent Portfolio (PRPFX) over the past few decades."

This is certainly a departure from Mr. Bernstein's previous praise of the PP, yet I can't find much to argue with in his perceptions and predictions. I along with many others got into the PP allocation as a reaction to the simultaneous tanking of supposedly uncorrelated asset classes during the '08 crisis, but am increasingly taking to heart Bill's message about there really being no save havens, correlation-wise, in our thoroughly interlinked financial world.

The PP is designed to be a bunker in times of "black swan" type crises, and that has remained the main argument for holding such substantial quantities of only 4 assets. 10% gold, or 10% long treasuries, is supposedly not going to be enough to save one's bacon in the event of a crisis. I can see the logic to these claims, but I find Bernstein's argument that what has happened with gold and long treasuries in recent times is most likely a one-time event quite compelling - and I also believe that most of what happened with gold prices last year was the result of market manipulaton.

Anyway, I find Desert's 60:30:10 idea quite compelling, and I suppose the only question would be whether it would be worth the added complexity to tilt the stock component towards small value.

Would welcome any thoughts.

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Re: Blog: Harry Browne's Permanent Portfolio

Post by Call_Me_Op » Thu Oct 30, 2014 11:00 am

Kevin K wrote:This comment by Desert didn't receive much in the way of follow-up, but when I ran the numbers on his suggested portfolio I was most impressed.
Indeed, studying past performance can lead to some great portfolios, especially if they hold 75% of assets in bonds during the greatest bond run-up in history.
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Re: Blog: Harry Browne's Permanent Portfolio

Post by Clive » Thu Oct 30, 2014 11:48 am

Kevin K wrote:...
Likewise, the less than 2% gap that separated stock, bonds, and gold for 1964-2011 does not manke any sense, and for much the same reason: The period, particularly its last half, saw a historic bull market in both bonds and gold, a pairing of events not likely to recur any time soon. Assume the same 4% inflation rate for the next several decades, and the returns of stocks look like thy will fall slightly from 9.58% to around 7% (4% inflation plus 2% dividends plus 1% dividend growth), the returns of gold from 8.15% to 4%, the returns of long bonds from 7.77% to the current yield of 2.8%, and bills from 5.33% to God only knows what, but likely close to the assumed inflation rate of 4%. Average together all 4 of these numbers and you get an expected return of...4.5%/0.5% nominal/real. You’ll gain some return from rebalancing, but lose most of that to investment expenses. There will be tears.
...
I'd put it more like rear view :

1972 - 2012 inclusive real gains
Total Stock Market 5.3%
Long term treasury 4%
Short term treasury 2.6%
Gold 4.4%
25% each weighted averaged 4.1% real.

and forward view :

2012 - 2052
TSM 4.5%
Long term treasury 1%
Short term treasury 0.5%
Gold -4.4%
25% each weighted averaged 0.4% real.

i.e. gold being a heavy weight to carry. The PP is a form of wide barbell, gold at the most extreme left, short term treasury, long term treasury, stocks at the extreme right. Overall comparable to somewhere around a 10 year bullet.

There is the chance that gold could swing low (popularity fade), some central banks would sell their gold if they could do so at market rates or be prevented from doing so. If gold mean reverts to inflation pacing and falls further then -4.4% might be a under-estimate (could be -6% or more).

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Re: Blog: Harry Browne's Permanent Portfolio

Post by Clearly_Irrational » Thu Oct 30, 2014 1:28 pm

Browser wrote:Just to reiterate what I've posted before, holding a mix of 25% stocks, 50% treasury securities, and 25% gold has historically been a low-volatility allocation. It is one of several allocations that cuts "left tail risk"; i.e, the magnitude of portfolio drawdowns.
Yep, that's the good part.
grog wrote:The Bernstein quote about the huge tracking error really hits the nail on the head. In 2013, as shown in the table, the market went up 33%, and the PP went down 2%.
Yep, that's the bad part.

I don't hold the PP but my portfolio is PP influenced.

30% Small Cap Value
20% Emerging Market
30% Long US Treasuries
20% Gold (rotated with cash based on real interest rates)

2013 was painful from a tracking error perspective:

My portfolio: -0.22%
My benchmark (50/50 of vwelx/vwinx): +8.14%

However, inception to date looks much different:

My portfolio: +26.14%
My benchmark (50/50 of vwelx/vwinx): +24.98%

The times when I'm least likely to panic it underperforms, the times I'm most likely to panic it outperforms, overall peformance is roughly comparable. For me, that's a good setup.

My IPS directs me to re-evaluate the gold weighting in my portfolio then next time we move into positive real rates since I'll then have two full cycles of data to work with instead of just the one and a half I had when setting this up.

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Re: Blog: Harry Browne's Permanent Portfolio

Post by market timer » Thu Oct 30, 2014 1:37 pm

Clearly_Irrational wrote:My IPS directs me to re-evaluate the gold weighting in my portfolio then next time we move into positive real rates since I'll then have two full cycles of data to work with instead of just the one and a half I had when setting this up.
Are you assuming gold's expected return is not a function of real interest rates? I could see shifting from gold to cash when real interest rates are positive if the underlying assumption is that gold always has an expected return of zero real. However, I believe gold's price should take into account real rates (higher real rates -> lower gold price), which likely defeats the purpose of changing an allocation in response to interest rate movements.

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Re: Blog: Harry Browne's Permanent Portfolio

Post by 209south » Thu Oct 30, 2014 1:43 pm

Wow that is a bold portfolio, Clearly_Irrational...I love it! I think the ultra-long-term charts of gold prices are interesting but meaningless...frankly one of golds big selling points for me is that you can track its value back over centuries...try doing that for the Dow, or any Vanguard or DFA fund. Projecting -4% returns on gold for future decades based on prices vs the GBP in the 1200s is beyond silly.

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Re: Blog: Harry Browne's Permanent Portfolio

Post by indexresult » Thu Oct 30, 2014 1:49 pm

I just wanted to leave this thought here. I have been reading this forum since 2006/2007 (since morningstar days). My observation is that the discussions on Permanent Portfolio peaked around 2011, right around the time when gold peaked. A lot of posters were changing their asset allocation at that time to mimic the Permanent Portfolio.

Guess what happened. The PRPFX also peaked in 2011. It has been sideways to down ever since.

Browser
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Re: Blog: Harry Browne's Permanent Portfolio

Post by Browser » Thu Oct 30, 2014 1:58 pm

indexresult wrote:I just wanted to leave this thought here. I have been reading this forum since 2006/2007 (since morningstar days). My observation is that the discussions on Permanent Portfolio peaked around 2011, right around the time when gold peaked. A lot of posters were changing their asset allocation at that time to mimic the Permanent Portfolio.

Guess what happened. The PRPFX also peaked in 2011. It has been sideways to down ever since.
I guess that's what separates the faux PPers from the believers.
We don't know where we are, or where we're going -- but we're making good time.

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Clearly_Irrational
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Re: Blog: Harry Browne's Permanent Portfolio

Post by Clearly_Irrational » Thu Oct 30, 2014 3:13 pm

market timer wrote:Are you assuming gold's expected return is not a function of real interest rates? I could see shifting from gold to cash when real interest rates are positive if the underlying assumption is that gold always has an expected return of zero real. However, I believe gold's price should take into account real rates (higher real rates -> lower gold price), which likely defeats the purpose of changing an allocation in response to interest rate movements.
My analysis suggest that:

1) Gold tends be an insurance/hedging asset and therefore expensive to hold
2) Gold has the strongest diversification effect during periods of negative real rates

Therefore, to minimize the expense of the insurance/hedge I only hold it when it's most likely to pay off. During other periods cash does a better job of reducing volatility. Basically I'm letting the Fed tell me what they're going to try and do with the economy and then reacting appropriately. I'm not attempting to pick the tops and bottoms of the gold market. This strategy has a secondary effect of automatically lowering my bond duration as rates rise, which is the result I would want.

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Clearly_Irrational
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Re: Blog: Harry Browne's Permanent Portfolio

Post by Clearly_Irrational » Thu Oct 30, 2014 3:19 pm

209south wrote:Wow that is a bold portfolio, Clearly_Irrational...I love it!
It's actually not as crazy as it looks. It's basically Markotwitz flavored with Fama/French and some fundamental diversification Harry Browne style. In most scenarios even if I'm wrong about some of those things it should perform adequately.

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Re: Blog: Harry Browne's Permanent Portfolio

Post by longstreet » Fri Oct 31, 2014 10:26 pm

Clearly_Irrational wrote:
20% Gold (rotated with cash based on real interest rates)
I need a lesson in real interest rates 101. Can you calculate the real interest rate for each day, week, month, or just when? How do you calculate the rate? Is it the 10 year treasury less the inflation rate? Do you increase your gold holdings when the rate is positive, or when the rate is negative?, and by how much? How did you set the initial allocation between gold and cash? How did you get to the position where you are now - why 20%?

Sorry for the basic questions, but I need a refresher in basic finance. I think I agree what you are saying, but I need to be sure I understand it completely.

I've revamped my investments to the PP format over the last 30 days, but currently own no gold. Heavy stocks and cash at the moment.

Thanks

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