Permanent Portfolio in a low interest environment

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Always passive
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Permanent Portfolio in a low interest environment

Post by Always passive » Fri Jul 10, 2020 12:54 am

Harry Browne's permanent portfolio has worked well for a long time; however, is it possible that it will continue doing so in an environment of zero or near zero interest rate when 50% of it is in fixed income?
I have a very small portion of my portfolio in this strategy. BTW so far it has done absolutely great in 2020
Can someone comment on this...
PP Strategy:
25% Equities (ACWI)
25% Gold (GLD)
25% Long Term Treasuries (TLT)
25% Cash (SHY)

jimbomahoney
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Re: Permanent Portfolio in a low interest environment

Post by jimbomahoney » Fri Jul 10, 2020 4:26 am

The PP isn't popular around here.

I believe there is another forum, possibly a spin-off from this one, where the PP is the standard portfolio.

There seems to be a jovial animosity between the two forums because of the difference in philosophies.

https://www.gyroscopicinvesting.com/forum/index.php

Essentially, you will get two different answers to your question on each forum! :D

For what it's worth, I'm somewhat in the middle, but definitely towards the PP side of things.

My allocation is 55/25/17/3 (Stocks/Gold/Bonds/Cash) and my reasoning is thus (main points in bold):

1) The future is unknowable. All the backtesting in the world only tells you what has happened, not what will happen.
2) Therefore, I like the PP for its agnosticism, lack of correlation between assets and diversification.
3) I am biased towards stocks. I believe in human ingenuity.
3) I am baised against bonds. I believe in human greed and fiscal mismanagement at the government level. i.e. Governments overspend and eventually the piper must be paid. This will likely result in strange solutions such as perpetual bonds and/or 100% central bank funding of government debt.
4) The stock allocation is as diversified as possible.
5) Allocation is as unbiased as possible and I've chosen as close to GDP-weighted country allocations as I can, whilst keeping the portfolio simple and costs to a minimum.
6) The cash allocation is very low - 3% is typically 1 year's expenses. I'm in the accumulation phase and currently have very little need for cash.
7) Gold is an insurance policy for a few things - see point #3 - as well as Black Swan events such as EMP / solar flare / financial collapse / revaluation of gold to a high $ value to attempt to balance the financial system. (Don't get me wrong, I'm not a prepper and am aware that in a severe emergency scenario, gold will be less useful than food and water). See point #1. Holding gold as an ETF / fund is not the same as owning gold. It should be physically accessible at any time you wish. Without this, it loses much of its purpose.
8) I rebalance monthly. There is no optimal rebalance frequency. Less frequent rebalancing may be superior (e.g. quarterly / annually), but I enjoy tinkering. The main thing is that I maintain my chosen allocation and force myself to sell the winning assets (they're getting expensive) and buy the losing ones (they're on sale!).

I would encourage you to make your own "bias list" and determine an allocation you're happy with.

I believe Harry Browne was also an advocate of biasing the PP somewhat, but not to the "extremes" that I have taken it. I believe allocations as low as 15% and as high as 40% were "allowed".

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Re: Permanent Portfolio in a low interest environment

Post by fredflinstone » Fri Jul 10, 2020 5:11 am

Cash has never delivered high-voltage long-term returns. The purpose of cash in PP is not to provide high returns but to provide ballast.

Long-term treasury bonds have performed magnificently over the last 12 months, 3 years, 5 years, 10 years, 20 years, 30 years, and 40 years. Do you know what people were saying 12 months ago? They said, "long-term interest rates are so low, they can't go any lower." They said the same thing 3 years ago and 5 years ago. Do you know what the current long-term interest rate is in Switzerland? Look it up. Yes, interest rates here in the US can go lower. Possibly much lower. So LT treasuries may or may not continue to perform well going forward. I don't know, you don't know, and nobody else knows. The PP is agnostic on such things and eschews market timing.
Stocks 28 / Gold 23 / Long-term US treasuries 19 / Cash (mainly CDs) 22 / TIPS 8

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Re: Permanent Portfolio in a low interest environment

Post by GRP » Fri Jul 10, 2020 6:50 am

Yes, do please join us at www.gyroscopicinvesting.com!

We serve gyros in the lounge! 😊

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Re: Permanent Portfolio in a low interest environment

Post by azanon » Fri Jul 10, 2020 7:47 am

Permanent Portfolio is very similar to Risk Parity strategy on the point that it's a portfolio designed to be agnostic to whatever economic period it's being held in. So if you're trying to "time" selecting a right portfolio for a particular economic period, then I'd scratch these off your list since they should never be optimum for any particular period.

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Re: Permanent Portfolio in a low interest environment

Post by Wade Garrett » Fri Jul 10, 2020 10:12 am

jimbomahoney wrote:
Fri Jul 10, 2020 4:26 am
My allocation is 55/25/17/3 (Stocks/Gold/Bonds/Cash) and my reasoning is thus (main points in bold):
1) The future is unknowable. All the backtesting in the world only tells you what has happened, not what will happen.
2) Therefore, I like the PP for its agnosticism, lack of correlation between assets and diversification.
3) I am biased towards stocks. I believe in human ingenuity.
3) I am baised against bonds. I believe in human greed and fiscal mismanagement at the government level. i.e. Governments overspend and eventually the piper must be paid. This will likely result in strange solutions such as perpetual bonds and/or 100% central bank funding of government debt.
4) The stock allocation is as diversified as possible.
5) Allocation is as unbiased as possible and I've chosen as close to GDP-weighted country allocations as I can, whilst keeping the portfolio simple and costs to a minimum.
6) The cash allocation is very low - 3% is typically 1 year's expenses. I'm in the accumulation phase and currently have very little need for cash.
7) Gold is an insurance policy for a few things - see point #3 - as well as Black Swan events such as EMP / solar flare / financial collapse / revaluation of gold to a high $ value to attempt to balance the financial system. (Don't get me wrong, I'm not a prepper and am aware that in a severe emergency scenario, gold will be less useful than food and water). See point #1. Holding gold as an ETF / fund is not the same as owning gold. It should be physically accessible at any time you wish. Without this, it loses much of its purpose.
8) I rebalance monthly. There is no optimal rebalance frequency. Less frequent rebalancing may be superior (e.g. quarterly / annually), but I enjoy tinkering. The main thing is that I maintain my chosen allocation and force myself to sell the winning assets (they're getting expensive) and buy the losing ones (they're on sale!).
I would encourage you to make your own "bias list" and determine an allocation you're happy with.
Good stuff. We think similarly. Difference is I'm even more biased than you and hold much more in stocks and much less in gold.
"I'm not an inventor. I'm an improver. I see things that are wrong, and I improve them." - Larry David, Curb Your Enthusiasm

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Always passive
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Re: Permanent Portfolio in a low interest environment

Post by Always passive » Fri Jul 10, 2020 10:24 am

azanon wrote:
Fri Jul 10, 2020 7:47 am
Permanent Portfolio is very similar to Risk Parity strategy on the point that it's a portfolio designed to be agnostic to whatever economic period it's being held in. So if you're trying to "time" selecting a right portfolio for a particular economic period, then I'd scratch these off your list since they should never be optimum for any particular period.
Good point

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Re: Permanent Portfolio in a low interest environment

Post by Robot Monster » Fri Jul 10, 2020 10:28 am

fredflinstone wrote:
Fri Jul 10, 2020 5:11 am
Cash has never delivered high-voltage long-term returns. The purpose of cash in PP is not to provide high returns but to provide ballast.

Long-term treasury bonds have performed magnificently over the last 12 months, 3 years, 5 years, 10 years, 20 years, 30 years, and 40 years. Do you know what people were saying 12 months ago? They said, "long-term interest rates are so low, they can't go any lower." They said the same thing 3 years ago and 5 years ago. Do you know what the current long-term interest rate is in Switzerland? Look it up. Yes, interest rates here in the US can go lower. Possibly much lower. So LT treasuries may or may not continue to perform well going forward. I don't know, you don't know, and nobody else knows. The PP is agnostic on such things and eschews market timing.
Agreed.

Switzerland has -1.3% inflation. Who's to say we couldn't have that, or much worse, taking us to -10.3% which is what we had in 1932. Hugely negative interest rates might gleefully be accepted during a deflationary spiral.

Sources:
https://tradingeconomics.com/switzerland/inflation-cpi
https://www.thebalance.com/u-s-inflatio ... st-3306093
Investors often exhibit a tendency to evaluate the performance of their portfolio over very short horizons (e.g. days) even when their actual investment time horizon is quite long (e.g. decades).

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Re: Permanent Portfolio in a low interest environment

Post by nisiprius » Fri Jul 10, 2020 11:03 am

It's either "permanent" or it isn't.

The rhetoric of adherents of Harry Browne--or of Tony Robbins and Ray Dalio--is that these strategies intentionally sacrifice return in order to get steady performance in all market conditions.

Why sacrifice the return if you don't think you will get steady performance in all market conditions?

If it's just a temporary portfolio, or a fair-weather portfolio that needs to be dynamically adjusted to changing winds, then it shouldn't be called "permanent" or "all-weather."
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.

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Re: Permanent Portfolio in a low interest environment

Post by Always passive » Fri Jul 10, 2020 12:18 pm

nisiprius wrote:
Fri Jul 10, 2020 11:03 am
It's either "permanent" or it isn't.

The rhetoric of adherents of Harry Browne--or of Tony Robbins and Ray Dalio--is that these strategies intentionally sacrifice return in order to get steady performance in all market conditions.

Why sacrifice the return if you don't think you will get steady performance in all market conditions?

If it's just a temporary portfolio, or a fair-weather portfolio that needs to be dynamically adjusted to changing winds, then it shouldn't be called "permanent" or "all-weather."
Your point is excellent. Maybe I should have stated the question better.
The PP performed well in an environment of huge fixed capital gains as rates fell in the past. So my question is whether this strategy can continue doing so in the future.

rich126
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Re: Permanent Portfolio in a low interest environment

Post by rich126 » Fri Jul 10, 2020 7:32 pm

I think if you use it in retirement or as a conservative portfolio it is very good. If you got decades of accumulation before retirement you might want something more aggressive.

The way I look at it is that at a 4% swr, if I can get 4% real, then I won't run out of money. At 3% real, 25X expenses will last 43+ years and at 2% real it will likely last 35+ years unless the sequence of returns are truly horrible.

In the next few years I probably prefer the PP over other strategies since I'm not confident in the market nor do I expect rates to increase (I could see them increasing under one scenario but that is more of a political thing so I'll skip that).

Like most investing, it depends what you are looking for and if you are looking for max returns while taking no risks, let us know when you find it :)

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Re: Permanent Portfolio in a low interest environment

Post by Explorer » Fri Jul 10, 2020 10:03 pm

It is hard for me to believe in gold as an investment. I do agree that bonds have issues when Fed controls things artificially.
My choice: risk assets + cash

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Re: Permanent Portfolio in a low interest environment

Post by All Seasons » Fri Jul 10, 2020 11:36 pm

Always passive wrote:
Fri Jul 10, 2020 12:18 pm

Your point is excellent. Maybe I should have stated the question better.
The PP performed well in an environment of huge fixed capital gains as rates fell in the past. So my question is whether this strategy can continue doing so in the future.
My recommendation is that you join our forum over at www.gyroscopicinvesting.com. While I don't believe people on the Bogleheads forum are malicious, there is a serious lack of earnest discussion here regarding the PP and gold more generally. (The other assets in the PP are perfectly Boglehead-ish, so they don't receive much flak.)

The thing about investment discussions, or any discussions for that matter, is that they require all parties to debate and argue in good faith. There is no such good faith here. The arguments coming from the gold detractors are really just dismissive rather than really substantive. Most often it just boils down to "I just don't GET gold! It's just a useless yellow metal!" It really reeks of willful ignorance.

You can do anything you want in this crowd to show how, say, a 10% gold allocation can improve SWRs and risk adjusted performance. You can show papers from great investment minds like Ray Dalio that demonstrate cyclical macroeconomic rationales for owning gold. Still, nothing. There's no good faith around here.
The market portfolio is always a legitimate portfolio.

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Re: Permanent Portfolio in a low interest environment

Post by Always passive » Sat Jul 11, 2020 12:14 am

Thank you for the advice. I will

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Re: Permanent Portfolio in a low interest environment

Post by whodidntante » Sat Jul 11, 2020 2:03 am

All Seasons wrote:
Fri Jul 10, 2020 11:36 pm
Always passive wrote:
Fri Jul 10, 2020 12:18 pm

Your point is excellent. Maybe I should have stated the question better.
The PP performed well in an environment of huge fixed capital gains as rates fell in the past. So my question is whether this strategy can continue doing so in the future.
My recommendation is that you join our forum over at www.gyroscopicinvesting.com. While I don't believe people on the Bogleheads forum are malicious, there is a serious lack of earnest discussion here regarding the PP and gold more generally. (The other assets in the PP are perfectly Boglehead-ish, so they don't receive much flak.)

The thing about investment discussions, or any discussions for that matter, is that they require all parties to debate and argue in good faith. There is no such good faith here. The arguments coming from the gold detractors are really just dismissive rather than really substantive. Most often it just boils down to "I just don't GET gold! It's just a useless yellow metal!" It really reeks of willful ignorance.

You can do anything you want in this crowd to show how, say, a 10% gold allocation can improve SWRs and risk adjusted performance. You can show papers from great investment minds like Ray Dalio that demonstrate cyclical macroeconomic rationales for owning gold. Still, nothing. There's no good faith around here.
I would also like to be able to do intellectually honest and civil debates about almost anything, anywhere. But that has not been my experience.

People with similar views tend to cluster. Nothing new there. A sufficiently informed investor with critical thinking skills should be able to hang out in other clusters that challenge their world view to improve understanding. If I wanted to become fluent in French, it would make more sense to hang out in Paris than Milwaukee. Maybe I'll achieve my goal of becoming fluent in French, but decide to return home and speak English anyway. Maybe you're here to learn French?

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Re: Permanent Portfolio in a low interest environment

Post by jimbomahoney » Tue Jul 28, 2020 3:53 am

Wade Garrett wrote:
Fri Jul 10, 2020 10:12 am
Good stuff. We think similarly. Difference is I'm even more biased than you and hold much more in stocks and much less in gold.
Actually, I've decided to dump the bonds and reallocate mostly to equities.

I've never liked bonds and don't believe they will have a good future (e.g. I'm suspicious that governments will issue perpetual bonds or some sort of policy to enable them to pay off or write off their debts).

Plus there's some very interesting videos on this channel showing pure gold/stocks mixes:

https://www.youtube.com/watch?v=LA2Yr6NoZyA

I'm now going something like:

25% Gold / 67% Global Equities (inc. EM) / 5% Crypto / 3% Cash

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Re: Permanent Portfolio in a low interest environment

Post by Forester » Tue Jul 28, 2020 4:04 am

AFAIK, Harry Browne intended for cash at hand to be included in the PP, in this sense the purest form of the portfolio is 33% each stocks, long bonds, gold. It's a very formidable portfolio because every base is covered; the typical "two fund portfolio" lacks 'hard' assets, which is a place money could flee to if both stocks & bonds sell off.

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Re: Permanent Portfolio in a low interest environment

Post by fredflinstone » Wed Jul 29, 2020 4:42 am

Forester wrote:
Tue Jul 28, 2020 4:04 am
AFAIK, Harry Browne intended for cash at hand to be included in the PP, in this sense the purest form of the portfolio is 33% each stocks, long bonds, gold. It's a very formidable portfolio because every base is covered; the typical "two fund portfolio" lacks 'hard' assets, which is a place money could flee to if both stocks & bonds sell off.
The PP is 25/25/25/25 stocks/gold/LT treasuries/cash.
Stocks 28 / Gold 23 / Long-term US treasuries 19 / Cash (mainly CDs) 22 / TIPS 8

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Re: Permanent Portfolio in a low interest environment

Post by topper1296 » Wed Jul 29, 2020 7:26 am

GRP wrote:
Fri Jul 10, 2020 6:50 am
Yes, do please join us at www.gyroscopicinvesting.com!

We serve gyros in the lounge! 😊
Thanks for the link. Personally, 25% each in gold and cash is too high for me, but I will check out the site. I do have both gold and cash (outside of my emergency fund), but at a much lower allocation.

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Re: Permanent Portfolio in a low interest environment

Post by Brianmcg321 » Wed Jul 29, 2020 8:27 am

Forester wrote:
Tue Jul 28, 2020 4:04 am
AFAIK, Harry Browne intended for cash at hand to be included in the PP, in this sense the purest form of the portfolio is 33% each stocks, long bonds, gold. It's a very formidable portfolio because every base is covered; the typical "two fund portfolio" lacks 'hard' assets, which is a place money could flee to if both stocks & bonds sell off.
I don’t think so. If you have a $1MIL portfolio, are you going to keep $250k in your house?
Rules to investing: | 1. Don't lose money. | 2. Don't forget rule number 1.

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Re: Permanent Portfolio in a low interest environment

Post by goodenyou » Wed Jul 29, 2020 8:51 am

Brianmcg321 wrote:
Wed Jul 29, 2020 8:27 am
Forester wrote:
Tue Jul 28, 2020 4:04 am
AFAIK, Harry Browne intended for cash at hand to be included in the PP, in this sense the purest form of the portfolio is 33% each stocks, long bonds, gold. It's a very formidable portfolio because every base is covered; the typical "two fund portfolio" lacks 'hard' assets, which is a place money could flee to if both stocks & bonds sell off.
I don’t think so. If you have a $1MIL portfolio, are you going to keep $250k in your house?
Put the cash in your underwear drawer and the gold bullion in your sock drawer. It just requires you to separate the socks and the underwear.
"Ignorance more frequently begets confidence than does knowledge" | Do you know how to make a rain dance work? Dance until it rains.

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Re: Permanent Portfolio in a low interest environment

Post by Brianmcg321 » Wed Jul 29, 2020 9:26 am

goodenyou wrote:
Wed Jul 29, 2020 8:51 am
Brianmcg321 wrote:
Wed Jul 29, 2020 8:27 am
Forester wrote:
Tue Jul 28, 2020 4:04 am
AFAIK, Harry Browne intended for cash at hand to be included in the PP, in this sense the purest form of the portfolio is 33% each stocks, long bonds, gold. It's a very formidable portfolio because every base is covered; the typical "two fund portfolio" lacks 'hard' assets, which is a place money could flee to if both stocks & bonds sell off.
I don’t think so. If you have a $1MIL portfolio, are you going to keep $250k in your house?
Put the cash in your underwear drawer and the gold bullion in your sock drawer. It just requires you to separate the socks and the underwear.
Oh, I see. That makes more sense.
Rules to investing: | 1. Don't lose money. | 2. Don't forget rule number 1.

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Re: Permanent Portfolio in a low interest environment

Post by goodenyou » Wed Jul 29, 2020 9:49 am

Brianmcg321 wrote:
Wed Jul 29, 2020 9:26 am
goodenyou wrote:
Wed Jul 29, 2020 8:51 am
Brianmcg321 wrote:
Wed Jul 29, 2020 8:27 am
Forester wrote:
Tue Jul 28, 2020 4:04 am
AFAIK, Harry Browne intended for cash at hand to be included in the PP, in this sense the purest form of the portfolio is 33% each stocks, long bonds, gold. It's a very formidable portfolio because every base is covered; the typical "two fund portfolio" lacks 'hard' assets, which is a place money could flee to if both stocks & bonds sell off.
I don’t think so. If you have a $1MIL portfolio, are you going to keep $250k in your house?
Put the cash in your underwear drawer and the gold bullion in your sock drawer. It just requires you to separate the socks and the underwear.
Oh, I see. That makes more sense.
Here at Bogleheads we strive to make investing simple!

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Re: Permanent Portfolio in a low interest environment

Post by Ferdinand2014 » Wed Jul 29, 2020 11:10 am

Explorer wrote:
Fri Jul 10, 2020 10:03 pm
It is hard for me to believe in gold as an investment. I do agree that bonds have issues when Fed controls things artificially.
My choice: risk assets + cash
+1

I hold enough cash to sleep well and everything else in equities. Cash over long periods has shown a close match to inflation and a benefit with deflation.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

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Re: Permanent Portfolio in a low interest environment

Post by Robert T » Wed Jul 29, 2020 12:31 pm

.
Lower real interest rates should be good for commodity prices in general
https://scholar.harvard.edu/frankel/eff ... ity-prices

Lower real interest rates should also be good to gold prices (exhibit 4 in linked paper).
https://www.feim.com/sites/default/file ... GLDDEF.pdf

i.e. low interest rates not the 'season' for bonds, but perhaps the 'season' for commodities/gold. And lower discount rates also good for stocks.
.

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Re: Permanent Portfolio in a low interest environment

Post by rich126 » Wed Jul 29, 2020 12:41 pm

Although I do own gold and LT treasuries and my portfolio is fairly defensive I certainly don't maintain a PP. I have been tracking it and since the market's peak in Feb to 27 July the PP is up 8.28% compared to the SPY (-4.5%), 60/40 portfolio (-0.58). Obviously gold and LT have been doing great.

Long term I don't know. I'm not an adherent to any one portfolio style and think you have to adapt to the economic realities and maintain a somewhat diversified portfolio, not excessively, but certain never put all eggs into one basket.

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Re: Permanent Portfolio in a low interest environment

Post by TXGator » Wed Jul 29, 2020 12:55 pm

I've actually converted my EF to the PP at M1 recently!

My reasoning:

* yearly performance is better than the money market I've held it in
* draw downs are subdued
* there will always be 25% in cash (using SHY) so I can change the M1 pie if I need to access cash
* I signed up for M1 plus ($25 for first year); have access to 35% of portfolio at 2% as another source of funds

Been very pleased so far (gold shooting up doesn't hurt) - but knowing my 401k and IRAs are much more aggressive I don't get tempted to jump in more aggressively.

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Re: Permanent Portfolio in a low interest environment

Post by abuss368 » Wed Jul 29, 2020 7:34 pm

Ferdinand2014 wrote:
Wed Jul 29, 2020 11:10 am
Explorer wrote:
Fri Jul 10, 2020 10:03 pm
It is hard for me to believe in gold as an investment. I do agree that bonds have issues when Fed controls things artificially.
My choice: risk assets + cash
+1

I hold enough cash to sleep well and everything else in equities. Cash over long periods has shown a close match to inflation and a benefit with deflation.
Excellent advice and investors would be wise to follow.
John C. Bogle: Two Fund Portfolio - Total Stock & Total Bond - “Simplicity is the master key to financial success."

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Re: Permanent Portfolio in a low interest environment

Post by APX32 » Thu Jul 30, 2020 2:03 am

rich126 wrote:
Wed Jul 29, 2020 12:41 pm
Long term I don't know. I'm not an adherent to any one portfolio style and think you have to adapt to the economic realities and maintain a somewhat diversified portfolio, not excessively, but certain never put all eggs into one basket.
Solid advice right here, this is exactly what I try to do. Adapting to the economic realities of the time as you describe has to be part of any investment/portfolio decisions instead of blindly and fanatically following the same principles.
20% SPY | 12% GLD | 68% Cash

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Re: Permanent Portfolio in a low interest environment

Post by Robert T » Thu Jul 30, 2020 6:14 am

nisiprius wrote:
Fri Jul 10, 2020 11:03 am
If it's just a temporary portfolio, or a fair-weather portfolio that needs to be dynamically adjusted to changing winds, then it shouldn't be called "permanent" or "all-weather."
It is interesting.

Even the Bridgewater All Weather seems to change in the highest winds. From the link below - it transitions to a "Safe Portfolio" in a "Depressionary Environment". The components of the All Weather portfolio are reflected on pg. 9, while the "Safe Portfolio" is comprised of "a balanced mix of hedged global government nominal bonds, hedged global government inflation-indexed bonds, government bills, and gold."
http://sdcera.granicus.com/MetaViewer.p ... ta_id=9141.

Also from the link - Bridgewater All Weather Performance:
June 1996-December 2009: Annualized return (net of fees) / SD / Sharpe = 7.9% / 11.3 / 0.38

It seems to have a large slice of inflation-linked bonds (as does RPAR), but none were specifically included in Dalio's All Season portfolio in Tony Robbins' book as far as I can tell).

Robert
.

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Re: Permanent Portfolio in a low interest environment

Post by garlandwhizzer » Thu Jul 30, 2020 5:33 pm

PP Strategy:
25% Equities (ACWI)
25% Gold (GLD)
25% Long Term Treasuries (TLT)
25% Cash (SHY)
This portfolio is basically 50% extreme barbell quality fixed income, only 25% equities, and 25% gold whose price is purely sentiment driven without underlying fundamentals. It prepares for any downside contingency. World wide economic/political catastrophe: gold and LTT shine, cash holds value. Inflation: cash holds its value, and gold may or may not help but if inflation is severe enough to drive panic, gold very likely helps a lot. Equities also provide some long term inflation protection. Deflation: LTT shine like nothing else. The problem comes with standard bull markets where markets spend the great majority of their time. Only 25% of the portfolio is dedicated to equity to ride the bull.

So the PP mitigates a lot of downside risks, including severe risks, but when things are rolling well in a bull equity market you don't take full advantage of it. Protection isn't free, and 50% of PP portfolio (gold + cash) has a long term expected return of zero real. On the other hand one can simplify it a bit to just LTT (or just TBM) and equity, in which case both assets have expected significant positive long term real returns and each provides a high level of cost effective diversification to the the other.

I personally prefer a standard balanced portfolio of broadly diversified equity and quality bonds to PP. In some dire circumstances PP will likely outperform and significantly reduce risk. Choosing a portfolio is not a one size fits all situation IMO, but rather setting the long term risk/reward balance at the right level to suit our circumstances.

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Robert T
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Re: Permanent Portfolio in a low interest environment

Post by Robert T » Sat Aug 01, 2020 4:52 am

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When you pull back the curtain of the Bridgewater All Weather Strategy Fund it doesn’t look so impressive, at least so far. High minimum investments, exclusivity, and low public disclosure build a ‘mystic feeling’ that the ordinary investor is missing out on something that is better than what they currently have access to.

This linked document of the Ventura County Employees Retirement Association provides annual returns data for 22 full calendar years from 1997 to 2018. Here’s a comparison with the Vanguard Wellington and Wellesely Income fund returns.

1997-2018: Annualized Return / Standard Deviation / 2008 return
  • 8.1% / 10.4 / -22.3% = Vanguard Wellington [VWELX] – net of fees
    6.7% / 10.4 / -20.2% = Bridgewater All Weather Strategy – net of fees
    7.3% / 6.8 / -9.8% = Vanguard Wellesely [VWINX] – net of fees
The Vanguard Wellington portfolio of stocks and bonds (about 65:35 stocks:bonds) outperformed the Bridgewater All Weather Strategy by 1.4% per year for the 22-year period 1997 to 2018, with the same volatility (as measured by the standard deviation of annual returns). 2008 returns were fairly similar. It is surprising the Bridgewater Strategy was as volatile given its relatively low stock allocation – but perhaps it’s the effect of leverage used. Even the Vanguard Wellesely portfolio of stocks and bonds (about 35:65 stocks:bonds) outperformed the Bridgewater All Weather Strategy by 0.5% but with a third less volatility, and less than half the drawdown in 2008.

The All Weather/Season approach is based on diversifying across asset classes that perform well in 4 distinct ‘’seasons”, with different asset classes performing the best in different seasons.
  • Rising growth & rising inflation: Commodities
    Falling growth & rising inflation: TIPS
    Rising growth & falling inflation: Stocks
    Falling growth & falling inflation: Nominal Bonds
US inflation in 1997 = 2.3%, in 2018 = 2.4% so its not evident that this period was overly favorable to stocks and nominal bond (relative to commodities and TIPS) based on the above framework.

Some may argue (rightly) that a portfolio of only stocks and bonds would have had poor real returns in a high inflation period such as 1969-1981 where annualized inflation was 7.8%, and annualized returns from stocks and intermediate (nominal) treasuries was 5.7% and 5.9% respectively. Commodity prices (including/especially gold) increased significantly in this period and would have provided an inflation hedge. In this respect, rising inflation is a significant risk to a portfolio of stocks and nominal bonds. Over the long-term stocks should provide some inflation hedge, but the period 1969-81 was 13 years (which is long-term for some, where stocks had negative real returns). A stock portfolio with a value (and momentum) tilt may have provided more inflation protection than a market portfolio.

Current bond yields are the lowest in US history, which lowers the expected return of an ‘all weather’ type portfolio that has about 50% in (nominal and inflation protected) bonds. For low yield environments (when 10-year US treasury bonds yields less than 1%), the new ‘Risk Parity’ ETF changes its weighting methodology – it reduces its long-term (15+yr) TIPS allocation by 15% (from 35% to 20%), and increases its gold and t-bill allocation by 7.5% each – essentially reducing its bond allocation by 7.5% in favor of gold, and reducing bond duration (term risk). Not sure how this will help. Perhaps the view is low real interest rates helps commodity (gold) prices, and lowering duration reduces the risk of interest rate increases (when they are at zero they can either stay where they are–potentially good for gold prices-or increase, which would reduce the price of longer duration assets).

My preferred approach is an equity orientation (with a tilt to value [and momentum]), holding just enough bonds to help me stay the course during market declines. In any event, returns moving forward will likely be lower than in the past.

Obviously no guarantees.

Robert
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Last edited by Robert T on Sat Aug 01, 2020 10:52 am, edited 1 time in total.

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Re: Permanent Portfolio in a low interest environment

Post by Robot Monster » Sat Aug 01, 2020 9:26 am

Robert T wrote:
Sat Aug 01, 2020 4:52 am
The All Weather/Season approach is based on diversifying across asset classes that perform well in 4 distinct ‘’seasons”, with different asset classes performing the best in different seasons.
  • Rising growth & rising inflation: Commodities
    Falling growth & rising inflation: TIPS
    Rising growth & falling inflation: Stocks
    Falling growth & falling inflation: Nominal Bonds
Some may argue (rightly) that a portfolio of only stocks and bonds would have had poor real returns in a high inflation period such as 1969-1981 where annualized inflation was 8.4%, and annualized returns from stocks and intermediate (nominal) treasuries was 6.2% and 6.4% respectively. Commodity prices (including/especially gold) increased significantly in this period and would have provided an inflation hedge. In this respect, rising inflation is a significant risk to a portfolio of stocks and nominal bonds. Over the long-term stocks should provide some inflation hedge, but the period 1969-81 was 13 years (which is long-term for some, where stocks had negative real returns).
It's surprising to me how little love commodities get, even among goldbugs. Using the graph below you can see how well commodities did during this inflation melt up from '68 to '80 -- commodity prices were $97.7 in 1968 and $330 in 1980...A CPI calculator says $97.7 (1968) turns into an inflation adjusted $222.90 in 1980 dollars.

Image
Investors often exhibit a tendency to evaluate the performance of their portfolio over very short horizons (e.g. days) even when their actual investment time horizon is quite long (e.g. decades).

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