Permanent Portfolio - A Sympathetic Boglehead's Perspective

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
Noobvestor
Posts: 4750
Joined: Mon Aug 23, 2010 1:09 am
Contact:

Permanent Portfolio - A Sympathetic Boglehead's Perspective

Post by Noobvestor » Sat Aug 13, 2011 3:02 pm

Note: I spend quite a bit of time writing this post, only to find that (thanks to some bickering going on within it) the thread I was writing to was locked when I went to submit it. Talk about timing! I do hope you will understand my desire to publish this separately, and would appreciate civil-only discourse in this thread

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:
    The 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.
    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 PP
  • 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/
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Post by dbr » Sat Aug 13, 2011 3:16 pm

I am certainly having a hard time understanding why the PP is "anti" or "non" Boglehead.

So far the only thing I have heard is that Mr. Bogle himself allegedly has a negative view toward investing in gold and might not advocate large allocations to cash or, indeed, to long bonds. However, I am not ready to agree that the definition of Boglehead is agreement with every sentiment and recommendation made by Mr. Bogle. Boglehead is agreement with a certain set of investing principles expressed by Mr. Bogle, among others.

The checklist in the above pose seems like a pretty objective summary of the situation.

The other possibility is that if the PP can be shown to be ineffective or otherwise silly, stupid, or whatever legitimate objection one might raise, then it does not adhere to one possible Boglehead idea, which is that one invests wisely. So far there seems to be a balance of arguments that fail to establish that the PP is blatantly unwise.

It is highly likely that the PP has gained enthusiasts due to recency in the ascent of gold and the continued return delivered by long bonds. I don't consider the possibility that enthusiasts are such for wrong reasons to make the PP un-Boglehead.

User avatar
Noobvestor
Posts: 4750
Joined: Mon Aug 23, 2010 1:09 am
Contact:

Post by Noobvestor » Sat Aug 13, 2011 3:28 pm

Well put on all fronts, dbr. People could pile onto a passive 50/50 stock/bond lazy BH portfolio and that wouldn't make it bad either :) It might be cause for *concern* about people coming in from failed active strategies who might return to those strategies after some BH underperformance, but it doesn't reflect on the portfolio itself.

Re: Bogle himself - to me there is some cognitive dissonance and appeal-to-authority that goes on regarding him and his views sometimes. Many Bogleheads, for instance (myself included), think it is wiser to diversify globally than to focus only on one's home country (US or otherwise). While I have seen arguments against this, I don't believe many people would say it is 'un-Boglehead' to hold close-to or global market weights if that is an individual Boglehead's preference.

Anyway, like the gold discussions, perhaps there is some inevitable tension based in entrenched perspectives, but I do hope the above checklist and summary arguments help make it clear that the similarities far outweigh the differences, regardless.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

User avatar
Joe S.
Posts: 479
Joined: Sat May 05, 2007 12:11 pm

Post by Joe S. » Sat Aug 13, 2011 3:59 pm

I have seen many different studies that suggest you should invest 5-25% of your portfolio in gold or gold stocks. They usually do an analysis of the last 40 years or so. The problem is that gold has done very well in the past 40 years, but only kept up with inflation for the 170 years before that. See the link below for a graph:

http://books.google.com/books?id=KCCl0T ... 22&f=false


We have accurate financial data back to at least 1926, I would like to see an analysis that includes earlier data. I worry that people are deliberately picking a period of time when gold (or gold stocks) did better than average.

User avatar
Barry Barnitz
Wiki Admin
Posts: 3012
Joined: Mon Feb 19, 2007 10:42 pm
Contact:

Post by Barry Barnitz » Sat Aug 13, 2011 4:18 pm

Joe S. wrote:I have seen many different studies that suggest you should invest 5-25% of your portfolio in gold or gold stocks. They usually do an analysis of the last 40 years or so. The problem is that gold has done very well in the past 40 years, but only kept up with inflation for the 170 years before that. See the link below for a graph:

http://books.google.com/books?id=KCCl0T ... 22&f=false


We have accurate financial data back to at least 1926, I would like to see an analysis that includes earlier data. I worry that people are deliberately picking a period of time when gold (or gold stocks) did better than average.
Prior to 1970, the gold price was fixed by government fiat (Roosevelt raised the fixed price once during the depression years. He also (shades of Napolean Bonaparte who made gold ownership a capital offense during the Empire) made it illegal for US citizens to own bullion gold.

1970 forwards provides the historical era of free market pricing for gold, and (thanks to legislator Ron Paul), American citizens have been freed to own bullion since 1971.

regards,
Image | blb | December Birthday Celebration: Ludwig van Beethoven

Userdc
Posts: 260
Joined: Tue Jun 21, 2011 9:30 am

Post by Userdc » Sat Aug 13, 2011 4:44 pm

I agree with almost all of the original post, but I think you are being overly sympathetic to the crux of the issue, which is the PP's treatment of gold as an appropriate asset for one to allocate a signifant portion of their investment capital.

Without getting into all the reasons here, I don't think gold is an appropriate cornerstone asset class for a boglehead portfolio any more than silver, bitcoins, swiss francs, canned food, or baseball cards, so i dont think the permanent portfolio is appropriate for a boglehead.

But that's just my opinion, of course.

User avatar
Noobvestor
Posts: 4750
Joined: Mon Aug 23, 2010 1:09 am
Contact:

Post by Noobvestor » Sat Aug 13, 2011 4:49 pm

Joe S. wrote:I have seen many different studies that suggest you should invest 5-25% of your portfolio in gold or gold stocks. They usually do an analysis of the last 40 years or so. The problem is that gold has done very well in the past 40 years, but only kept up with inflation for the 170 years before that. See the link below for a graph:

http://books.google.com/books?id=KCCl0T ... 22&f=false


We have accurate financial data back to at least 1926, I would like to see an analysis that includes earlier data. I worry that people are deliberately picking a period of time when gold (or gold stocks) did better than average.
I would add to Barry's point that keeping up with inflation, roughly, would not be a bad thing for a holding to do ... again the example of TIPS comes to mind: people are buying some that yield less than 1% right now (longer-term ones) and some that are yielding *negative* real-dollar returns.

I hold TIPS despite the meager 'real' returns promised - I figure if inflation fears take off (and then inflation takes off to boot), they could easily be the best performer in a year when bonds and stocks both suffer. And, in the meantime, they seem to do as well as nominals minus a bit (the market's price for insurance, I suppose).

I am certainly of the camp that thinks gold is having a 'good period' right now (though I wouldn't want to guess how, when or how far it will/could revert), but again, like a stock/bond portfolio of most Bogleheads: we don't *not* hold something just because it's on a roll - buy, hold, rebalance ;)

I am not sure what the efficient point is for different asset mixes, but my guess is that 5 to 25 percent is a reasonable/good range. That said, I also agree: some people are interested in gold (many ... maybe even most?) right now for the wrong reasons, based on recent years of good performance.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

Ed 2
Posts: 1510
Joined: Sat May 15, 2010 9:34 am

Post by Ed 2 » Sat Aug 13, 2011 4:53 pm

Userdc wrote:I agree with almost all of the original post, but I think you are being overly sympathetic to the crux of the issue, which is the PP's treatment of gold as an appropriate asset for one to allocate a signifant portion of their investment capital.

Without getting into all the reasons here, I don't think gold is an appropriate cornerstone asset class for a boglehead portfolio any more than silver, bitcoins, swiss francs, canned food, or baseball cards, so i dont think the permanent portfolio is appropriate for a boglehead.

But that's just my opinion, of course.
In 2008 one would include flipping real estate ~%25 in AA
"The fund industry doesn't have a lot of heroes, but he (Bogle) is one of them," Russ Kinnel

Call_Me_Op
Posts: 6997
Joined: Mon Sep 07, 2009 2:57 pm
Location: Milky Way

Re: Permanent Portfolio - A Sympathetic Boglehead's Perspect

Post by Call_Me_Op » Sat Aug 13, 2011 4:53 pm

Noobvestor wrote: C) "Half of its contents generate no value"
A common idea is to replace the cash portion with ST treasuries. This will change that criticism from "Half" to "Quarter" generating "no value." Also, this increases PP return significantly, based (of course) on past performance.

I'd like to see a discussion of why the PP does not invest the equity portion more broadly.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

User avatar
Noobvestor
Posts: 4750
Joined: Mon Aug 23, 2010 1:09 am
Contact:

Post by Noobvestor » Sat Aug 13, 2011 5:00 pm

Userdc wrote:I agree with almost all of the original post, but I think you are being overly sympathetic to the crux of the issue, which is the PP's treatment of gold as an appropriate asset for one to allocate a signifant portion of their investment capital.

Without getting into all the reasons here, I don't think gold is an appropriate cornerstone asset class for a boglehead portfolio any more than silver, bitcoins, swiss francs, canned food, or baseball cards, so i dont think the permanent portfolio is appropriate for a boglehead.

But that's just my opinion, of course.
And you are welcome to that opinion :)

I guess what I'm trying to get at is: I don't think Boglehead criteria (per my list at the top) says much about what specific classes should or shouldn't fit the bill, save for their risk/reward profile within a portfolio. Two questions come to mind:

A) If it is a problem of 'real returns', wouldn't negative-yielding TIPS also be a poor cornerstone for a Boglehead portfolio (note: this is a core holding in at least one Wiki-listed Lazy Portfolio)? Also, many Bogleheads hold commodities funds and/or cash. To be fair, though, it is true that these are rarely as much as 25% of a portfolio for a Boglehead.

B) If the problem is 'store of value', hasn't gold's much longer history (as well as divisibility, portability, durability, scarcity and identifiability) at least earned it a spot above bitcoins, canned food or baseball cards? The first is extremely new, niched and illiquid, the second is useful but displaces significant space, gets old and rots, while the third fit all of the first and second criteria.

Not trying to restart the whole debate, but I don't find those counter-examples compelling. The place I see gold faltering is in terms of volatility - sure, it might be a long-term store of value, but it fluctuates in terms of local/actual purchasing power significantly. And while it is not always a hedge during stock (or bond) downturns, it does, like bonds, respond to certain economic conditions and flights to safety.

But I digress - criticism well noted: the sticking point is mostly gold, which is probably the most contentious single investment discussed on these forums (so controversial that some folks don't even refer to it as an investment, but simply a speculative commodity). Still, at the end of the day, most of the Boglehead criteria (broadly) seem to be met, and 75% of the portfolio is very Boglehead-like, so I do think there isa lot more common ground than reason to argue regardless 8-)
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

User avatar
Noobvestor
Posts: 4750
Joined: Mon Aug 23, 2010 1:09 am
Contact:

Re: Permanent Portfolio - A Sympathetic Boglehead's Perspect

Post by Noobvestor » Sat Aug 13, 2011 5:02 pm

Call_Me_Op wrote:
Noobvestor wrote: C) "Half of its contents generate no value"
A common idea is to replace the cash portion with ST treasuries. This will change that criticism from "Half" to "Quarter" generating "no value." Also, this increases PP return significantly, based (of course) on past performance.

I'd like to see a discussion of why the PP does not invest the equity portion more broadly.
I'm not an expert on this, and would like to hear other responses, but I always suspected that Harry Browne had a bit of the old Jack Bogle home bias - which, to be fair, was easier to justify a few decades back (not only because of returns, but because of the relative difficulty/expense of investing - particularly indexing - abroad). I wonder what he would say today - whether he would recognize that, thanks to its ease and low cost, global investing was the way to go (or not).
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

linuxizer
Posts: 1553
Joined: Wed Jan 02, 2008 7:55 am

Post by linuxizer » Sat Aug 13, 2011 5:19 pm

Just as a side note, 30-year Treasuries at 5% interest have a duration of 15 years. So a portfolio mixed 50/50 with cash has a duration of 7-8 years.

To me, the gold and cash is the problem. The other half of the PP is just fine....

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Post by dbr » Sat Aug 13, 2011 5:33 pm

Userdc wrote:I agree with almost all of the original post, but I think you are being overly sympathetic to the crux of the issue, which is the PP's treatment of gold as an appropriate asset for one to allocate a signifant portion of their investment capital.

Without getting into all the reasons here, I don't think gold is an appropriate cornerstone asset class for a boglehead portfolio any more than silver, bitcoins, swiss francs, canned food, or baseball cards, so i dont think the permanent portfolio is appropriate for a boglehead.

But that's just my opinion, of course.
I don't necessarily disagree with you, but what specific tenent of Boglehead investing is violated here? I suppose one possibility would be that it is ineffective investing, but how is it established that the PP is ineffective because it hold 25% gold?

Disclaimer: I have no significant holdings of gold and do not intend to ever have any.

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Post by dbr » Sat Aug 13, 2011 5:36 pm

Joe S. wrote:I have seen many different studies that suggest you should invest 5-25% of your portfolio in gold or gold stocks. They usually do an analysis of the last 40 years or so. The problem is that gold has done very well in the past 40 years, but only kept up with inflation for the 170 years before that. See the link below for a graph:

http://books.google.com/books?id=KCCl0T ... 22&f=false


We have accurate financial data back to at least 1926, I would like to see an analysis that includes earlier data. I worry that people are deliberately picking a period of time when gold (or gold stocks) did better than average.
Would this mean that the PP is non-Boglehead because it relies on expecting past performance to predict future performance unjustifiably?

User avatar
Opponent Process
Posts: 5157
Joined: Tue Sep 18, 2007 9:19 pm

Post by Opponent Process » Sat Aug 13, 2011 5:47 pm

Noobvestor wrote:If the problem is 'store of value', hasn't gold's much longer history (as well as divisibility, portability, durability, scarcity and identifiability) at least earned it a spot above bitcoins, canned food or baseball cards?
the concern is that, at some point, (along with diamonds) everyone will turn rational and realize that we're talking about a shiny metal/rock here. we don't need to adorn our pharaohs (etc.) anymore. we could even probably synthesize a million things that are a million times more beautiful than gold. it's just another fiat currency. it only has power that is given to it in late-night informercials. it's like that old dude that hangs around the office that you can't fire because "he's always worked here". it's 2011, and humans haven't perfected the prefrontal cortex yet. there's hope that they will at some point, and will start to consistently value things according to their actual...value.

incidentally, a PPer could even agree that gold is essentially worthless, but still want to invest in it as long as humans remain irrational. and humans can probably remain irrational longer than you can remain solvent. it may also be rational to bet on human irrationality.
30/30/20/20 | US/International/Bonds/TIPS | Average Age=37

User avatar
Barry Barnitz
Wiki Admin
Posts: 3012
Joined: Mon Feb 19, 2007 10:42 pm
Contact:

Post by Barry Barnitz » Sat Aug 13, 2011 6:01 pm

linuxizer wrote:Just as a side note, 30-year Treasuries at 5% interest have a duration of 15 years. So a portfolio mixed 50/50 with cash has a duration of 7-8 years.

To me, the gold and cash is the problem. The other half of the PP is just fine....
Harry Browne refined the PP over time towards greater simplicity, for the same reasons that legions of boglehead posters gravitate to simple three/four fund portfolios: ease of execution and investor behavior issues.

Browne countenanced the following additions to the PP:


Prosperity Investments: Browne would countenance the addition of international stocks to the stock mix (suggesting 20% US stocks/5% international stocks) if one wished for greater diversification of stocks. However, similar to John Bogle, he did not feel this was essential.

Cash Investments: The three other PP asset classes (gold, long treasuries, stocks) are by design, volatile. Cash helps temper this volatility. Browne would countenance the addition of short term (2 year treasury notes) to the cash allocation.

Inflation/hyperinflation Investments: Originally, Browne suggested a diversification of inflation hedges that included gold, silver, swiss francs, and equity real estate. He came to restrict this pallete to gold, and possibly equity reits (20% gold/5% reits).

Thus, those who cannot stomach gold are likely to find the more complex Browne portfolios to be more congenial.

Sliced PP allocations

Code: Select all

US stocks (Total Market Index) 20%
International stocks (Total International Index) 5%
Gold (American 1 oz. Gold Eagles) 20%
REITS  (REIT Index) 5%
Long Treasury Bonds 25%
Two Year T Notes/Treasury Bills  25%
Image | blb | December Birthday Celebration: Ludwig van Beethoven

rmelv
Posts: 106
Joined: Wed Jan 26, 2011 7:35 pm

Post by rmelv » Sat Aug 13, 2011 6:05 pm

The PP does not only invest in US stocks. The PP is relative to the country you are in. There is a powerful interplay between a countries stock market and their government bond market. The PP attempts to manage risk from this relationship.

A Japanese PP would be

25% Japanese Equities
25% Japanese 30 year government bonds
25% Japanese 0-1 year government bonds
25% Gold

The PP is designed to protect the purchasing power of your capital, in the country you live. It is not a panacea.

Note, it only works in a country where the government has a sovereign currency, that is zero default risk on the bonds. If you are not in a country with a big stock market or risk free government bond market, you are kind of out of luck because to buy another countries bonds or stocks entails additional currency risk.

EDIT: I am not sure that Japan offered 30 year bonds. One may have had to have 50% 10 year bonds. You get the idea. Barbells are nice however because they allow greater flexibility in tax planning and possible rebalancing benefits from low correlation to one another.

M B
Posts: 198
Joined: Mon Jul 11, 2011 5:58 am

Post by M B » Sat Aug 13, 2011 6:41 pm

What has been the average real return of the PP historically? What stock-bond allocation would have the same return? Because obviously, the PP is not a competitor for allocations very different from this one.

How did the PP fare outside the US historically? (After all the success in the US may be a fluke.)

User avatar
Noobvestor
Posts: 4750
Joined: Mon Aug 23, 2010 1:09 am
Contact:

Post by Noobvestor » Sat Aug 13, 2011 6:43 pm

Opponent Process wrote:
Noobvestor wrote:If the problem is 'store of value', hasn't gold's much longer history (as well as divisibility, portability, durability, scarcity and identifiability) at least earned it a spot above bitcoins, canned food or baseball cards?
the concern is that, at some point, (along with diamonds) everyone will turn rational and realize that we're talking about a shiny metal/rock here. we don't need to adorn our pharaohs (etc.) anymore. we could even probably synthesize a million things that are a million times more beautiful than gold. it's just another fiat currency. it only has power that is given to it in late-night informercials. it's like that old dude that hangs around the office that you can't fire because "he's always worked here". it's 2011, and humans haven't perfected the prefrontal cortex yet. there's hope that they will at some point, and will start to consistently value things according to their actual...value.

incidentally, a PPer could even agree that gold is essentially worthless, but still want to invest in it as long as humans remain irrational. and humans can probably remain irrational longer than you can remain solvent. it may also be rational to bet on human irrationality.
I love your closing line by the way :D

I agree we could synthesize things more beautiful than gold, but that would defeat one core point about gold - the fact that we can't synthesize it.

I have always wondered (and have yet to research) the impact of artificial diamonds on that industry ... it amazes me that 'real' ones have held value, though.


Here's a thought experiment (or: train of thought, as it were) - this is my first time trying it, so expect mistakes and feel free to poke holes. Here goes: gold is actually not that attractive. There are many beautiful rocks in the world that sparkle, shine, give off gorgeous colors, etc... yet ... here we have gold, a shiny yellow metal, but certainly nothing that rivals what we can already make artificially (or get in abundance from nature). So why gold? Well, it is relatively scarce - so I can't screw up the existing value by stumbling upon a 100-ton boulder of it. It is fairly soft, and very divisible - we can make it in any kind of increments, just like dollars or cents. And then there is your point, which cuts both ways: humans irrationally have evolved to value it. Is there something intrinsically beautiful about a sunset? Nope. It's just lights, sky, etc... but I don't expect we'll stop finding them beautiful when we rationalize realize there is not 'inherent beauty value' involved. Is it the most valuable thing consistently? Not entirely, but more so than any single currency (which everything we hold in terms of cash, bonds and stocks is denominated in). And it is more durable (and portable) than other timeless goods like fruits, vegetables or livestock.

So, irrational? I suppose it is. But gold is backed by a collective global belief in its value that has more or less persisted for thousands of years ... paper currency is backed by promises, yet we accept its devaluation over time as a given. So ... I don't expect gold not to fluctuate, and dramatically - it does do that. I also don't expect it *not* to crash violently sometime in the coming years (it is going up disturbingly fast). But at the same time, I question words like 'worthless' - because I wonder in what sense that can be true. It has no direct/immediate utility like food, water or a Leatherman ... but nor does paper money. It can't be exchanged quite as readily as paper money, but is still openly traded on a liquid market. Anyway, I'm beginning to ramble, and sound like a gold bug ... I just keep thinking: how is it really so fundamentally different (or less real/true) than our digital savings accounts or paper promises?
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

M B
Posts: 198
Joined: Mon Jul 11, 2011 5:58 am

Post by M B » Sat Aug 13, 2011 6:43 pm

rmelv wrote:I am not sure that Japan offered 30 year bonds.
In a country with multi-generation mortgages, 30-year bonds are considered short-intermediate.

User avatar
Noobvestor
Posts: 4750
Joined: Mon Aug 23, 2010 1:09 am
Contact:

Post by Noobvestor » Sat Aug 13, 2011 6:45 pm

Barry Barnitz wrote:
linuxizer wrote:Just as a side note, 30-year Treasuries at 5% interest have a duration of 15 years. So a portfolio mixed 50/50 with cash has a duration of 7-8 years.

To me, the gold and cash is the problem. The other half of the PP is just fine....
Harry Browne refined the PP over time towards greater simplicity, for the same reasons that legions of boglehead posters gravitate to simple three/four fund portfolios: ease of execution and investor behavior issues.

Browne countenanced the following additions to the PP:


Prosperity Investments: Browne would countenance the addition of international stocks to the stock mix (suggesting 20% US stocks/5% international stocks) if one wished for greater diversification of stocks. However, similar to John Bogle, he did not feel this was essential.

Cash Investments: The three other PP asset classes (gold, long treasuries, stocks) are by design, volatile. Cash helps temper this volatility. Browne would countenance the addition of short term (2 year treasury notes) to the cash allocation.

Inflation/hyperinflation Investments: Originally, Browne suggested a diversification of inflation hedges that included gold, silver, swiss francs, and equity real estate. He came to restrict this pallete to gold, and possibly equity reits (20% gold/5% reits).

Thus, those who cannot stomach gold are likely to find the more complex Browne portfolios to be more congenial.

Sliced PP allocations

Code: Select all

US stocks (Total Market Index) 20%
International stocks (Total International Index) 5%
Gold (American 1 oz. Gold Eagles) 20%
REITS  (REIT Index) 5%
Long Treasury Bonds 25%
Two Year T Notes/Treasury Bills  25%
Great addition to the thread - all of the above make sense to me, and I do keep thinking that there is potential middle ground between the two extremes (albeit one that comes with behavioral risks associated with uneven amounts and additional complexity).
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

M B
Posts: 198
Joined: Mon Jul 11, 2011 5:58 am

Post by M B » Sat Aug 13, 2011 6:47 pm

Noobvestor wrote:But gold is backed by a collective global belief in its value that has more or less persisted for thousands of years
Until recently it was not belief, but fact: gold was money. The official status of gold changed deeply when the gold standard was dumped, but the way it was treated did not.

M B
Posts: 198
Joined: Mon Jul 11, 2011 5:58 am

Post by M B » Sat Aug 13, 2011 6:52 pm

Noobvestor wrote:I do keep thinking that there is potential middle ground between the two extremes
Adding 10% gold to a stock-bond portfolio seems a plausible middle ground.

One may wonder about non-financial diversification (even gold is often owned as ETFs --be they physical gold ETFs--, and real estate as REITs): how about real stuff (as inflation hedge) that is not securitized?

User avatar
JDInvestor
Posts: 159
Joined: Tue May 03, 2011 1:41 pm

Post by JDInvestor » Sat Aug 13, 2011 6:52 pm

I think even its name contributes to its notoriety. Labeling something perfect invites criticism!

I am personally not a believer in gold, though I could see adding some to my holdings if it drops significantly. If it rises exponentially into the future, I'll congratulate those who took the risk and stick to my equity / bond / cash guns :)

rmelv
Posts: 106
Joined: Wed Jan 26, 2011 7:35 pm

Post by rmelv » Sat Aug 13, 2011 6:55 pm

M B wrote:What has been the average real return of the PP historically? What stock-bond allocation would have the same return? Because obviously, the PP is not a competitor for allocations very different from this one.

How did the PP fare outside the US historically? (After all the success in the US may be a fluke.)
US returns

75/25 TBM/TSM: 3.92%
HBPP: 4.93%

The TBM/TSM blend exhibited slightly greater standard deviations.

Here is an article about a British PP.
http://www.fool.co.uk/news/investing/in ... -gold.aspx

rmelv
Posts: 106
Joined: Wed Jan 26, 2011 7:35 pm

Post by rmelv » Sat Aug 13, 2011 6:59 pm

By the way. Thank you for this thread. I think us PPers like posting on this forum because we are very similar. Jack Bogle is a hero to all small investors. I think that PP investors are simply a subset of Bogleheads, similar to people who use Larry Swedroe Fat Tails Min.

Like Protestants and Catholics are both Christians.

User avatar
nisiprius
Advisory Board
Posts: 36476
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Post by nisiprius » Sat Aug 13, 2011 7:06 pm

Well, first of all, really, it's all about the gold, isn't it?

Now, as to why gold might not be a Bogleheadish investment, I'm going to look at some of the things John C. Bogle has said. He doesn't talk about it a lot and I can't be certain I've caught his message correctly... and please don't assume I necessarily agree with everything he says.

In The Little Book of Common Sense Investing, he refers to "Then, at last, whatever returns our businesses may be generous enough to deliver in the years ahead, reflected as they will be in our stock and bond markets, you will be guaranteed to earn your fair share."

I think this is a fairly common strain in Bogle's rhetoric: to him, investing is about getting "your fair share" of the returns created by business.

Brushing the actual industry of gold mining aside, the fluctuations in gold prices do not represent the returns of "our businesses." I think he would categorize gold as 100% speculation, 0% investment because it is not a passing on of value created by businesses.

He does not talk about gold a great deal in the books of his I have at hand. But he does talk about gold in two places. One of them, conveniently, is online: Risk Control in an Era of Confidence.. Search on "gold" and you'll find this paragraph:
Did He Say "Gold"? Or "Alternative Investments"?

If the idea is truly to reduce risk (or to be clear, standard deviation) by the introduction into the portfolio of asset classes with low correlation to the U.S. market, what about gold? I may be the first serious investor in decades to bring up the subject of gold as a useful portfolio diversifier, but surely it fills the bill! (Others, such as James Grant, discuss gold as an investment opportunity, but I’m just not so sure.) Gold stocks have had a correlation of about 0.05 with the U.S. market, doubtless the smallest figure for any discrete sector of our market. A few decades ago, gold was considered the diversifier, just as foreign stocks are in this more recent era. So I emphasize that while diversifiers may serve a useful purpose, investors are unwise to diversify their equities ever more broadly merely for diversification’s sake. Rather, we must consider the tangential relationship between standard deviation and risk, the implications for long-term returns when we reduce short-term risks, and the amount of real risk we are assuming.
That's not as clear as it could be, but I think he's saying that gold is a high-risk investment with zero real return, and that diversification should take second place to the suitability of the investment in itself. He doesn't say it outright, but it doesn't sound as if he thinks much of it.

Finally, in his essay, also conveniently online, The Telltale Chart, there is a long section on "RTM and 'Slice and Dice'". Again, if you search for the world "gold," you will find an illustration of a portfolio that is 25% each S&P 500, small-cap, international, and, "because it is the single asset class that most diversifies an equity portfolio (i.e., has the lowest correlation to the stock market of any asset class), gold (it didn't look silly then!)." His conclusion is that "Yes, it wins during the first 8 years; no, it loses during the last 22." He seemed to be concluding this was an example of reversion to the mean.

He added update notes to this essay in his recent book, Don't Count On It. The results for his 25%-gold example aren't too clear; they don't fit a simple pattern of "return to the mean," but the outperformance at the time he updated the chart had still not reached the previous peak.
Last edited by nisiprius on Sat Aug 13, 2011 7:19 pm, edited 4 times in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Beagler
Posts: 3442
Joined: Sun Dec 21, 2008 7:39 pm

Post by Beagler » Sat Aug 13, 2011 7:11 pm

Please, not another Permanent Portfolio thread...

Image

Just today Taylor said that a recent thread "has exhausted the subject..." http://tinyurl.com/3bl8jrk
“The only place where success come before work is in the dictionary.” Abraham Lincoln. This post does not provide advice for specific individual situations and should not be construed as doing so.

rmelv
Posts: 106
Joined: Wed Jan 26, 2011 7:35 pm

Post by rmelv » Sat Aug 13, 2011 7:12 pm

I see gold as a form of insurance. Insurance products offer a negative return, but desirable correlations.

That is the only logical jump you have to make. Once you can see gold as a form of insurance, its ownership is not speculative.

I don't own health insurance because I am speculating about my health prospects, I do it to manage a risk that I could not manage without insurance.

TIPS and REITS do not offer a big enough coverage. They are not as volatile as gold.

M B
Posts: 198
Joined: Mon Jul 11, 2011 5:58 am

Post by M B » Sat Aug 13, 2011 7:14 pm

Over 30 years, gold returns were low and volatile:
1970-2000: doubled in real terms (USD)
1975-2005: lost 1/3
1980-2010: lost 1/3
See: http://en.wikipedia.org/wiki/File:Gold_price_in_USD.png

By contrast, the worst historical result of the S&P 500 over 30 years was a real gain of 75% (1902-1932). This is the only historical instance of a 30-year real gain below 125%.

rmelv
Posts: 106
Joined: Wed Jan 26, 2011 7:35 pm

Post by rmelv » Sat Aug 13, 2011 7:15 pm

Beagler wrote:Please, not another Permanent Portfolio thread...

Image

Just today Taylor said that a recent thread "has exhausted the subject..." http://tinyurl.com/3bl8jrk
Beagler,

That thread was clearly out of control. But thus far, this thread has been very civilized. I think talking about the PP is important. It is a low cost, diversified, tax efficient, and simple portfolio. There's nothing controversial about it inherently.

Let's just all be gentlemen. :)

rmelv
Posts: 106
Joined: Wed Jan 26, 2011 7:35 pm

Post by rmelv » Sat Aug 13, 2011 7:17 pm

M B wrote:Over 30 years, gold returns were low and volatile:
1970-2000: doubled in real terms (USD)
1975-2005: lost 1/3
1980-2010: lost 1/3
See: http://en.wikipedia.org/wiki/File:Gold_price_in_USD.png

By contrast, the worst historical result of the S&P 500 over 30 years was a real gain of 75% (1902-1932). This is the only historical instance of a 30-year real gain below 125%.
The PP holds 25% gold, not 100%.

Also, do you feel ripped off every day you don't go to the doctor and reap the benefits of health insurance?

Gold is my form of portfolio insurance. I certainly don't cheer when it is rising. Just like how I don't cheer when I go to the emergency room.

Beagler
Posts: 3442
Joined: Sun Dec 21, 2008 7:39 pm

Post by Beagler » Sat Aug 13, 2011 7:24 pm

rmelv wrote:
Beagler wrote:Please, not another Permanent Portfolio thread...

Image

Just today Taylor said that a recent thread "has exhausted the subject..." http://tinyurl.com/3bl8jrk
Beagler,

That thread was clearly out of control. But thus far, this thread has been very civilized. I think talking about the PP is important. It is a low cost, diversified, tax efficient, and simple portfolio. There's nothing controversial about it inherently.

Let's just all be gentlemen. :)
Have you reviewed the previous PP threads (and the thousands of posts)? What remains uncovered?
“The only place where success come before work is in the dictionary.” Abraham Lincoln. This post does not provide advice for specific individual situations and should not be construed as doing so.

rmelv
Posts: 106
Joined: Wed Jan 26, 2011 7:35 pm

Post by rmelv » Sat Aug 13, 2011 7:38 pm

Beagler,

When I read many of the responses on this and other threads there seems to be a large number of posters that do not know about nor understand the underlying thought behind the portfolio.

Lots of people see the 25% gold and think "Gold is in a bubble. These PP investors are market timers"

Also, this is a forum about buy and hold/rebalance investing. Every thread on this forum is a duplicate of another thread.

amh
Posts: 100
Joined: Tue Jun 22, 2010 7:52 pm

Post by amh » Sat Aug 13, 2011 7:43 pm

JDInvestor wrote:I think even its name contributes to its notoriety. Labeling something perfect invites criticism!
The word "Permanent" was used by Harry Browne to create a contrast with what he called a "Variable" portfolio, which he defined as money you could afford to lose on speculation. Permanent refers to the fixed allocation, and does not imply any kind of "perfection".

amh
Posts: 100
Joined: Tue Jun 22, 2010 7:52 pm

Post by amh » Sat Aug 13, 2011 7:52 pm

Opponent Process wrote:the concern is that, at some point, (along with diamonds) everyone will turn rational and realize that we're talking about a shiny metal/rock here. ... it's just another fiat currency.
No, not quite. One significant difference is that (barring a major technological breakthrough) it's difficult to greatly increase the supply of gold on demand. Increasing the supply of a fiat currency is trivial. Simple supply and demand.

If one is trying to hedge one's exposure to a fiat currency, there aren't a whole lot of options besides gold or other fiat currencies. Commodities have their own well-known issues.

Even if some day everyone in the world wakes up and decides gold isn't a store of value anymore, it will still have *some* value as an industrial metal and for jewelry. So the value of the PP's gold portion will never go to 0 even in the worst case.

User avatar
JDInvestor
Posts: 159
Joined: Tue May 03, 2011 1:41 pm

Post by JDInvestor » Sat Aug 13, 2011 8:01 pm

amh wrote:
JDInvestor wrote:I think even its name contributes to its notoriety. Labeling something perfect invites criticism!
The word "Permanent" was used by Harry Browne to create a contrast with what he called a "Variable" portfolio, which he defined as money you could afford to lose on speculation. Permanent refers to the fixed allocation, and does not imply any kind of "perfection".
Ah... I knew it was permanent, don't know why my brain turned off and made me think perfect. I think the point still stands somewhat, there's a definite implication of superiority.

Indices
Posts: 1031
Joined: Sun Sep 27, 2009 11:40 am
Contact:

Post by Indices » Sat Aug 13, 2011 8:13 pm

Beagler wrote:
Have you reviewed the previous PP threads (and the thousands of posts)? What remains uncovered?
What remains uncovered on any financial/economic topic on this forum?

avalpert
Posts: 6313
Joined: Sat Mar 22, 2008 4:58 pm

Post by avalpert » Sat Aug 13, 2011 8:14 pm

rmelv wrote:I see gold as a form of insurance. Insurance products offer a negative return, but desirable correlations.

That is the only logical jump you have to make. Once you can see gold as a form of insurance, its ownership is not speculative.

I don't own health insurance because I am speculating about my health prospects, I do it to manage a risk that I could not manage without insurance.

TIPS and REITS do not offer a big enough coverage. They are not as volatile as gold.
I think this is the fundamental issue - I disagree that gold is a good form of insurance. And if you were to fully specify what type of insurance you think it is and how you would expect it to act as that type of insurance I think you might find that its behavior this decade contradicts that notion (even if it was on a positive return side - we are more concerned with whether the theoretical underpinnings of the portfolio are correct than if they happened to be incorrect this time up rather than down).

Even then, I doubt I would be comfortable using 25% of my assets as insurance, seems like a high cost.

Indices
Posts: 1031
Joined: Sun Sep 27, 2009 11:40 am
Contact:

Post by Indices » Sat Aug 13, 2011 8:15 pm

JDInvestor wrote:
amh wrote:
JDInvestor wrote:I think even its name contributes to its notoriety. Labeling something perfect invites criticism!
The word "Permanent" was used by Harry Browne to create a contrast with what he called a "Variable" portfolio, which he defined as money you could afford to lose on speculation. Permanent refers to the fixed allocation, and does not imply any kind of "perfection".
Ah... I knew it was permanent, don't know why my brain turned off and made me think perfect. I think the point still stands somewhat, there's a definite implication of superiority.
Read Harry Browne's (inventor of the portfolio) books or listen to old recordings of his radio show. There was certainly no implication of superiority.

avalpert
Posts: 6313
Joined: Sat Mar 22, 2008 4:58 pm

Post by avalpert » Sat Aug 13, 2011 8:16 pm

amh wrote:Even if some day everyone in the world wakes up and decides gold isn't a store of value anymore, it will still have *some* value as an industrial metal and for jewelry. So the value of the PP's gold portion will never go to 0 even in the worst case.
Why couldn't everyone wake up and realize it is no longer a store of value and the same day all industrial uses are replaced with synthetic elements that cost near nothing to produce? I think it is very easy to come up with a worst case, even if unlikely, scenario in which the value of gold becomes its weight in rocks.

Indices
Posts: 1031
Joined: Sun Sep 27, 2009 11:40 am
Contact:

Post by Indices » Sat Aug 13, 2011 8:18 pm

avalpert wrote:
amh wrote:Even if some day everyone in the world wakes up and decides gold isn't a store of value anymore, it will still have *some* value as an industrial metal and for jewelry. So the value of the PP's gold portion will never go to 0 even in the worst case.
Why couldn't everyone wake up and realize it is no longer a store of value and the same day all industrial uses are replaced with synthetic elements that cost near nothing to produce? I think it is very easy to come up with a worst case, even if unlikely, scenario in which the value of gold becomes its weight in rocks.
Is this fantasy alchemist scenario more or less likely than the US defaulting or the permanent closure of the US stock market? Standard and Poor's disagrees with you.

rmelv
Posts: 106
Joined: Wed Jan 26, 2011 7:35 pm

Post by rmelv » Sat Aug 13, 2011 8:23 pm

I'm sure a physicist could construct a gold atom today. It would probably cost a couple million dollars an ounce to produce though...

I see gold as currency with a relative fixed debasement rate (yearly production divided by total gold in circulation). Fiat currencies can have much more variable debasement rates.

avalpert
Posts: 6313
Joined: Sat Mar 22, 2008 4:58 pm

Post by avalpert » Sat Aug 13, 2011 8:25 pm

Indices wrote:
avalpert wrote:
amh wrote:Even if some day everyone in the world wakes up and decides gold isn't a store of value anymore, it will still have *some* value as an industrial metal and for jewelry. So the value of the PP's gold portion will never go to 0 even in the worst case.
Why couldn't everyone wake up and realize it is no longer a store of value and the same day all industrial uses are replaced with synthetic elements that cost near nothing to produce? I think it is very easy to come up with a worst case, even if unlikely, scenario in which the value of gold becomes its weight in rocks.
Is this fantasy alchemist scenario more or less likely than the US defaulting or the permanent closure of the US stock market? Standard and Poor's disagrees with you.
I didn't know S&P has rated the likelihood of different industrial innovation scenarios.

How did they do in predicting the growth of ceramic dental filings?

Snowjob
Posts: 1488
Joined: Sun Jun 28, 2009 10:53 pm

Post by Snowjob » Sat Aug 13, 2011 8:28 pm

Beagler wrote:
rmelv wrote:
Beagler wrote:Please, not another Permanent Portfolio thread...

Image

Just today Taylor said that a recent thread "has exhausted the subject..." http://tinyurl.com/3bl8jrk
Beagler,

That thread was clearly out of control. But thus far, this thread has been very civilized. I think talking about the PP is important. It is a low cost, diversified, tax efficient, and simple portfolio. There's nothing controversial about it inherently.

Let's just all be gentlemen. :)
Have you reviewed the previous PP threads (and the thousands of posts)? What remains uncovered?
Almost everything discussed on this website has been discussed completely many times over. Why strike down just one particular topic?

rmelv
Posts: 106
Joined: Wed Jan 26, 2011 7:35 pm

Post by rmelv » Sat Aug 13, 2011 8:29 pm

Avalpert,

I guess the insurance analogy is imperfect, because gold is a part of the portfolio that rebalances.

Also, insurance for important protections rarely come cheap. Paying for insurance is a huge part of modern life. If everything works out with no bumps in the road, clearly I would have done better with no gold. But I like the protection and the smoothing effects it provides.

Indices
Posts: 1031
Joined: Sun Sep 27, 2009 11:40 am
Contact:

Post by Indices » Sat Aug 13, 2011 8:31 pm

GIVE ME ALL YOUR WORTHLESS SOON TO BE MASS PRODUCED USELESS GOLD. I WILL INCORPORATE IT INTO MY INSANE HARE BRAINED ARROGANT INVESTMENT PORTFOLIO.

Thank you.

Indices
Posts: 1031
Joined: Sun Sep 27, 2009 11:40 am
Contact:

Post by Indices » Sat Aug 13, 2011 8:36 pm

Image

WORTHLESS, BUY STOCKS AND BONDS INSTEAD

User avatar
SSSS
Posts: 1889
Joined: Fri Jun 18, 2010 11:50 am

Post by SSSS » Sat Aug 13, 2011 8:42 pm

Why all gold and no silver? You can get a lot more of it for the same amount of cash, and it's almost as pretty. Sometimes I want to look at gold, sometimes I want to look at silver ... variety is the spice of life.

amh
Posts: 100
Joined: Tue Jun 22, 2010 7:52 pm

Post by amh » Sat Aug 13, 2011 8:44 pm

avalpert wrote: Why couldn't everyone wake up and realize it is no longer a store of value and the same day all industrial uses are replaced with synthetic elements that cost near nothing to produce? I think it is very easy to come up with a worst case, even if unlikely, scenario in which the value of gold becomes its weight in rocks.
Yes, quite easy especially if you're a science fiction or "singularity" fan. :P Quite a lot of what we consider to be iron-clad rules of economics probably wouldn't apply in a world where anything can be cheaply synthesized.

How would a classic Boglehead portfolio cope with an environment where we have Star Trek replicator technology? How much of the S&P 500 consists of companies that profit off scarcity of natural elements in some way?

At some point you just have to make a plan based on the realistic parameters of what is likely within one's own lifetime. Anything beyond that is "undefined", for everyone involved.

Post Reply