Summary: Given the back-and-forth debates that go on about the PP, I wanted to (a) provide a one-stop shop summarizing views on both sides, hopefully in a fair and balanced manner, and (b) offer the thoughts of one Boglehead who appreciates but does not personally hold the PP (disclaimer: except an experimental 'miniature' version in a 'fun money' account).
What is a Boglehead?
- From the Wiki, with my bold:
Everyone has their own idea of what it means to be a Boglehead, so I'll refer to the most generally-available, agreed-upon source I can find. Let's check out the fit to the PPThe Bogleheads approach begins with an investor deciding on percentage allocations to various asset classes, such as U.S. stocks, international stocks, U.S. bonds, etc. The desired allocations are then implemented using low-cost vehicles which are true to the targeted asset classes. Tax costs are carefully considered, influencing decisions as to what investments to place in taxable versus tax-advantaged accounts.
Bogleheads emphasize regular saving, broad diversification, and sticking to one's investment plan regardless of market conditions.
- The PP starts from an idea of asset allocation to various classes - perfect fit
The PP is ideally implemented via low-cost vehicles that target those classes - good fit
The PP can be made tax-efficient just as any portfolio - good fit
The PP works best with regular savings, of course - good fit
The PP is broadly diversified - arguably more so than stock/bond only portfolios - perfect fit
The PP is absolutely and explicitly designed around different market conditions - perfect fit
Deconsructing Components of the PP:
- 1 - Stock: I believe Bogleheads in general can largely relate to this component, so I will skip it here (though we could debate the stance on US vs. Ex-US Equities)
2 and 3 - Cash & LLTs: Cash is not very Boglehead, at least in large percentages, and Long-Term Treasuries are debatable (probably not the consensus pick for most portfolios, but agreed to be appropriate in some cases). Together, however, if you consider cash a 0 duration bond and mix that with a 20 or 30-year Treasury fund, you get a weighted duration of 10-15 years. Quite Boglehead.
4 - Gold: This is just 25% of the portfolio, and people will just have to agree to disagree. I could point out that it dense, divisible, easy to identify and has a long history as a store of value, but there are some folks who just can't get past it being a non-dividend-paying piece of shiny metal. Well, OK. However, it does have a long history of being negatively or non-correlated with the other assets in the mix, and a good Boglehead should at least concede that anything with such properties can increase diversification.
Common Criticisms of the PP:
- A) "There is too much buzz around it right now."
Response: I think this is the single best point to be leveled against discussions of the PP (note: I didn't say the PP itself). Invariably, some people piling on *right now* are not going to stick with it for the long haul. However, that criticism could be leveled at many more 'Boglehead-style' portfolios as well. It is simply something worth keeping in mind for any portfolio that has outdone other portfolios recently.
B) "Its contents are too run-up in the market (particularly gold, maybe bonds)."
Response: with the PP, at least one asset will be overvalued and/or due to drop in value at some point in the near future, just as other components are probably due to go up. We just don't know which. People keep saying gold and bonds have 'peaked' ... only to watch them soar during down days in the market. I don't know how many times the PP has to re-prove itself in various conditions.
C) "Half of its contents generate no value"
Response: this feels like an arbitrary dividing line applied to the PP's assets in a biased way. TIPS are, of course, the great counter-example - some have negative real yields, some have 0 yields, and some have barely-above-even yields, yet no one says that they are categorically a bad investment based on those facts; or, just as important: no one holding TIPS stops arbitrarily when they cross the 0 line. Likewise, some Bogleheads hold a permanent (albeit usually small) allocation of cash, or commodities, which likewise have no 'real' return.
In conclusion, I agree that the PP may be overemphasized during times of trouble when its flight-to-safety assets (gold and LLTs) are doing great, but at the same time, as Nis so wonderfully illustrated in a recent post: times of turbulence are a good time for a gut check, too, and PP holders are right to point out their portfolios are currently bouncing around a lot less than those portfolios (like mine) that are stock-and-bond dominated. Do its fans and proponents take things too far? Maybe, if they win followers who will flee at a later date, but that is a risk of any portfolio.
On a final note: for those who are satisfied with neither camp entirely, and seek some sort of middle ground, here are some diversified 'hybrid' portfolios blending aspects of more-Boglehead and more-Permanent-Portfolio approaches: http://lazytraders.com/the-bhpp-3-hybri ... ortfolios/