Permanent Portfolio revisited

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
KyleAAA
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Post by KyleAAA » Fri Aug 12, 2011 11:45 am

Gumby wrote: Kyle, there's no need for insults. If you're such an expert, maybe you can enlighten us on what kind of economic environment would cause a negative real return in the Harry Browne Permanent Portfolio over a multi-year period?
Then you shouldn't have made any insults. Look, nobody here is saying the Permanent Portfolio isn't a legitimate option. Few are saying it can't even be a good option for many investors. What we ARE saying is that you aren't telling us anything we haven't already discussed here a hundred times. We have heard all your arguments before and know everything you know, yet you come in here acting like you are trying to educate us or something. That's what annoys people. There are PP thread dozens of pages long where ever tiny point of the strategy has been analyzed ad infinitum. The PP isn't a magic bullet. There is nothing that makes it automatically better than a 60/40 or any other portfolio, which is the impression you seem to be giving.
Gumby wrote: Maybe it's better if we ask someone who knows a lot more about the Permanent Portfolio than either of us. Harry Browne and John Chandler worked together in creating the Permanent Portfolio.
Why would that be better? Would you as a life insurance salesman if you needed more life insurance?

Gumby
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Post by Gumby » Fri Aug 12, 2011 11:55 am

hsv_climber wrote:
Gumby wrote: There was never a 24 month period of negative real returns. Do your research and you will see.

:lol:

All 2-year returns that I've posted had negative real returns. Please feel free to disprove any of them.

SHOW ME THE NUMBERS to disprove any of my 2 - year periods.
If we look at the monthly data from Harry Browne (same data he used in his chart) and adjust it for inflation, we get the following:

Total Real Return PP vs S & P 500.csv

The longest drawdown I'm seeing (peak to trough) is Nov 1980 to Jun 1982 (19 months).

Gumby
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Post by Gumby » Fri Aug 12, 2011 12:00 pm

KyleAAA wrote:
Gumby wrote: Kyle, there's no need for insults. If you're such an expert, maybe you can enlighten us on what kind of economic environment would cause a negative real return in the Harry Browne Permanent Portfolio over a multi-year period?
Then you shouldn't have made any insults.
I never insulted you, or anyone, directly or personally. Though, you seem to think that insults are acceptable and justified for some reason. I thought Bogleheads were supposed to be open minded and welcoming?

Instead of having a friendly debate, you insist on jumping down my throat for no other reason than you disagree with me.

hsv_climber
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Post by hsv_climber » Fri Aug 12, 2011 12:03 pm

Gumby wrote:
hsv_climber wrote:
Gumby wrote: There was never a 24 month period of negative real returns. Do your research and you will see.
:lol:

All 2-year returns that I've posted had negative real returns. Please feel free to disprove any of them.

SHOW ME THE NUMBERS to disprove any of my 2 - year periods.
If we look at the monthly data from Harry Browne (same data he used in his chart) and adjust it for inflation, we get the following:

Total Real Return PP vs S & P 500.csv

The longest drawdown I'm seeing (peak to trough) is Nov 1980 to Jun 1982 (19 months).
Huh?

Do you know what the definition of the term "real return" mean?
Why do you compare PP with S&P 500?

Please google the term "real return"....

PP had negative real return over 3 years in a row once and 5 times it had a negative real return over 2 year period. .
See my posts above for the exact years.

avalpert
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Post by avalpert » Fri Aug 12, 2011 12:07 pm

Gumby wrote:
hsv_climber wrote:
Gumby wrote: There was never a 24 month period of negative real returns. Do your research and you will see.

:lol:

All 2-year returns that I've posted had negative real returns. Please feel free to disprove any of them.

SHOW ME THE NUMBERS to disprove any of my 2 - year periods.
If we look at the monthly data from Harry Browne (same data he used in his chart) and adjust it for inflation, we get the following:

Total Real Return PP vs S & P 500.csv

The longest drawdown I'm seeing (peak to trough) is Nov 1980 to Jun 1982 (19 months).
Why would you look peak to trough? It had negative real returns from November 1980 all the way to May 1985 according to your data.

Heck, if you just wanted to limit how long you can say it has consecutive periods of real losses use days, or better yet hours - it will seem great.

Gumby
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Post by Gumby » Fri Aug 12, 2011 12:08 pm

hsv_climber wrote:
Gumby wrote:
hsv_climber wrote:
Gumby wrote: There was never a 24 month period of negative real returns. Do your research and you will see.
:lol:

All 2-year returns that I've posted had negative real returns. Please feel free to disprove any of them.

SHOW ME THE NUMBERS to disprove any of my 2 - year periods.
If we look at the monthly data from Harry Browne (same data he used in his chart) and adjust it for inflation, we get the following:

Total Real Return PP vs S & P 500.csv

The longest drawdown I'm seeing (peak to trough) is Nov 1980 to Jun 1982 (19 months).
Huh?

Do you know what the definition of the term "real return" mean?
Why do you compare PP with S&P 500?

Please google the term "real return"....

PP had negative real return over 3 years in a row once and 5 times it had a negative real return over 2 year period. .
See my posts above for the exact years.
You are talking about annual real rate of return. I'm talking about monthly real rate of return. The S&P data just happened to be in that data set. Sorry for not being more clear about that.

Gumby
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Post by Gumby » Fri Aug 12, 2011 12:12 pm

avalpert wrote:Why would you look peak to trough?
It's called Max Drawdown. It's an important aspect to consider about any investment portfolio.

I give up. If you guys feel like waiting around for the next bull market to begin, be my guest.

hsv_climber
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Post by hsv_climber » Fri Aug 12, 2011 12:29 pm

Gumby wrote:
avalpert wrote:Why would you look peak to trough?
It's called Max Drawdown
It is not.
Max Drawdown is based on a predefined time period. Long term investors use at least annual or longer. You came up with some arbitrary time (i.e. month), which is not part of Max Drawdown def.
As avalpert has pointed out, you are using an arbitrary time for incorrect data mining.

avalpert
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Post by avalpert » Fri Aug 12, 2011 12:38 pm

Gumby wrote:
avalpert wrote:Why would you look peak to trough?
It's called Max Drawdown. It's an important aspect to consider about any investment portfolio.

I give up. If you guys feel like waiting around for the next bull market to begin, be my guest.
Fine, but that wasn't what was being discussed. You started it with a chart and saying
Stocks have clearly offered negative real total returns for more than a decade now
Was that consecutive? Did you look at max drawdown in terms of time when making that statement?

You followed that up by saying
If you spent more than 30 minutes looking at the Permanent Portfolio, you'd see why it's highly unlikely (though, not impossible) that it would ever have a period of more than 18 months with negative real returns
No mention of max drawdown or consecutive negative months there. Nope, sure seems like you were talking about negative returns in an absolute sense.

You follow that by saying in even more definitive terms
There was never a 24 month period of negative real returns. Do your research and you will see.
Than you go on to provide data which shows at least one 55 month such period. So you change the conversation...

Your style of argumentation is quite poor and frankly does a disservice to your cause. It is hard to take you seriously (not that that is a reflection on the merits of the PP just you).

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rmelv
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Post by rmelv » Fri Aug 12, 2011 12:43 pm

hsv_climber,

I have never understood drawdown to be put into nice and neat calendar chunks.

I think investopedia http://www.investopedia.com/terms/d/dra ... z1UhjAXLKb

uses the peak to trough definition as well. Besides, isn't it more reasonable? Who cares about arbitrary sections of a calendar? I just want to know what the worst case scenario is. Using peak to trough does that.

Gumby
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Post by Gumby » Fri Aug 12, 2011 12:44 pm

hsv_climber wrote:
Gumby wrote:
avalpert wrote:Why would you look peak to trough?
It's called Max Drawdown
It is not.
Max Drawdown is based on a predefined time period. Long term investors use at least annual or longer. You came up with some arbitrary time (i.e. month), which is not part of Max Drawdown def.
As avalpert has pointed out, you are using an arbitrary time for incorrect data mining.
See: http://madmoneymachine.com/2010/10/22/m ... 2001-2009/
Paul Boyer wrote:Recently, I have been computing the Max Drawdown of the many Lazy Portfolios. I modified Simba’s spreadsheet to include monthly returns data instead of just yearly data because a portfolio could suffer drawdown within the year and recover before the end of the year, thus masking the fact that a larger drawdown occurred
Clearly I'm not the only one who thinks higher-resolution data is more accurate in describing Max Drawdown.
Last edited by Gumby on Fri Aug 12, 2011 12:47 pm, edited 2 times in total.

Gumby
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Post by Gumby » Fri Aug 12, 2011 12:45 pm

avalpert wrote:Your style of argumentation is quite poor and frankly does a disservice to your cause. It is hard to take you seriously
More direct insults. I guess this is typical behavior from Bogleheads after all.

avalpert
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Post by avalpert » Fri Aug 12, 2011 12:51 pm

Gumby wrote:
avalpert wrote:Your style of argumentation is quite poor and frankly does a disservice to your cause. It is hard to take you seriously
More direct insults. I guess this is typical behavior from Bogleheads after all.
Well, it did follow from detailed explanation as to why your style was poor which you choose not to repsond to - you know that whole ignoring what you said previously being shown wrong, changing the terms of debate and then misusing a concept that is meant to estimate max risk in terms of loss as some measure of consecutive period losses.

Do you think your lack of response is at all a reflection of your, well, lack of a response? Once you are wrong and can't quickly think of what to, once again, change the conversation with do you just give up altogether, resort to ad hominem argument to avoid the meat of the topic?

I suppose this is typical behavior from Browneheads after all. Okay, I'm kidding, as I said before it only reflects poorly on you not the PP itself.

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rmelv
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Post by rmelv » Fri Aug 12, 2011 12:51 pm

Also, I think all of you guys arguing about the backtesting are splitting hairs. This chart tells it all. I used simba's spreadsheet, then adjusted for inflation using yearly inflation data (I even did the correct adjustment, not just subtracting inflation rate from nominal rate, go me!).

Image

I am totally comfortable with this chart. I am pretty confident I could have easily ridden this ride. Please, try to find something wrong with this chart. Whatever gripes you may have, I would have been totally okay with this performance!

Now that backtesting is settled (atleast for me) all we can do is speculate about the future of the portfolio. Because we are all (hopefully) disciplined investors, we know that speculating about the future of asset classes is hopeless.

The PP is a hypothesis that has yet to be proven false and we have no idea when/if it will be, but I really think its past performance is not up for debate. Thus far, it has fulfilled its promise.

avalpert
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Post by avalpert » Fri Aug 12, 2011 12:53 pm

Gumby wrote:
hsv_climber wrote:
Gumby wrote:
avalpert wrote:Why would you look peak to trough?
It's called Max Drawdown
It is not.
Max Drawdown is based on a predefined time period. Long term investors use at least annual or longer. You came up with some arbitrary time (i.e. month), which is not part of Max Drawdown def.
As avalpert has pointed out, you are using an arbitrary time for incorrect data mining.
See: http://madmoneymachine.com/2010/10/22/m ... 2001-2009/
Paul Boyer wrote:Recently, I have been computing the Max Drawdown of the many Lazy Portfolios. I modified Simba’s spreadsheet to include monthly returns data instead of just yearly data because a portfolio could suffer drawdown within the year and recover before the end of the year, thus masking the fact that a larger drawdown occurred
Clearly I'm not the only one who thinks higher-resolution data is more accurate in describing Max Drawdown.
You do know they don't care about time frame with those measures, only magnitude, right? You do know that your use of max drawdown here bears no relation to how it is used by everyone else? You do know that you still haven't acknowledged that you were wrong about no 24 month period of negative returns, right?

avalpert
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Post by avalpert » Fri Aug 12, 2011 12:57 pm

rmelv wrote:The PP is a hypothesis that has yet to be proven false and we have no idea when/if it will be, but I really think its past performance is not up for debate. Thus far, it has fulfilled its promise.
What is the hypothesis? Can you state it as one so that we can actually test it - because I don't know that I have seen that and without that you cannot say whether it has yet been falsified or not.

rotorhead
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Post by rotorhead » Fri Aug 12, 2011 12:57 pm

Very good thread.

I think Gumby stated the salient facts as well as anyone has in an earlier post.

“Now, to my knowledge there is no other portfolio out there that minimizes volatility in every economic condition — while still providing a moderate return — as much as the Permanent Portfolio does.”

I think that’s a very accurate assessment. A moderate return, with minimum volatility, in every economic condition; without constantly worrying about what’s up / what’s down would satisfy many of us.

I think the big problem for most people with the PP is the gold component. In our modern societies of paper money and electronic transactions, most people just cannot fathom the notion of actually owning the metal itself. Owning the metal itself, in whatever form, might not be practicable for most people; and many might not feel comfortable buying "paper gold” via an ETF.

I spent a lot of my working life in Asia and the Middle East; and have absorbed some of the notions of those folks about gold as a real asset in troubled times. I like gold, perhaps not as well as Scrooge McDuck; but I do like it. When I discovered the Boglehead forum a couple of years ago, and the PP thread, I went through it completely. Some excellent points made there; and I have read Harry Browne’s books. The case he makes for the PP is quite compelling.

Having said all that, as much as I like gold, I still have trepidations about putting 25% of my total portfolio into gold at today’s prices.

So I have been doing a little experiment. At the end of May 2010, using the portfolio tool at SmartMoney.com, I created a “shadow portfolio” of 25% each VTI, GLD, TLT & SHY, using the total value of my portfolio at the time for starters. At yesterday’s close my "shadow PP" was up +16.5%. Not too bad! Most of that is gold to be sure; but that's the whole point. One of the components will always be making the largest impact. My real personal portfolio (60/40) is up +9.7% during the same period – was up nearly 20% until two weeks ago.

What conclusions have I drawn from this? I’m not sure yet. I’m still nervous that the gold price doesn’t reflect reality; and that the big speculators are beating it up. But on the other hand perhaps the TSM is similarly undervalued. Corporate earnings are quite strong; and they have lots of cash. So, what to do?

I think I will continue my “shadow PP” exercise for a few more months; perhaps to the end of the year, and then make a decision. Using the logic of the PP, it really doesn’t seem to matter when one gets in; because of the interaction of the different components. It's the sum of the parts that counts.

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rmelv
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Post by rmelv » Fri Aug 12, 2011 1:12 pm

avalpert wrote:
rmelv wrote:The PP is a hypothesis that has yet to be proven false and we have no idea when/if it will be, but I really think its past performance is not up for debate. Thus far, it has fulfilled its promise.
What is the hypothesis? Can you state it as one so that we can actually test it - because I don't know that I have seen that and without that you cannot say whether it has yet been falsified or not.
Here is my approach.

The Permanent Portfolio provides a consistent inflation adjusted return, combined with moderate capital appreciation.

Now, there are two subjective terms there, "consistent" and "moderate". They are going to be different for every investor.

I see the PP as consistent, as evidenced by the chart. However, you could look at that chart and be made uncomfortable by the fluctuations. Every investor is different. Note, I don't like using standard deviations, I think looking at a chart (logarithmically scaled and inflation adjusted of course) is a perfectly acceptable way of gauging risk.

And the word "moderate" is also subjective. The PP has provided real returns, slightly in excess of 4.5%. I find this more than moderate. I would be comfortable with anything in excess of 4%, but every investor is different. The PP hypothesis could already be proven false, if you are an investor that seeks 5-6% real returns.

It really depends on the investor. But for my criteria, it has not been proven false.

Note, comparisons to other portfolios have nothing to do with my criteria! I invest because I want my purchasing power to consistently grow. Therefore, my measure of success is simply real returns that satisfy my required growth of those savings. I don't care if the PP underperforms other strategies at some point. I do care if it underperforms that straight, logarithmically scaled, straight line.

avalpert
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Post by avalpert » Fri Aug 12, 2011 1:17 pm

rmelv wrote:
avalpert wrote:
rmelv wrote:The PP is a hypothesis that has yet to be proven false and we have no idea when/if it will be, but I really think its past performance is not up for debate. Thus far, it has fulfilled its promise.
What is the hypothesis? Can you state it as one so that we can actually test it - because I don't know that I have seen that and without that you cannot say whether it has yet been falsified or not.
Here is my approach.

The Permanent Portfolio provides a consistent inflation adjusted return, combined with moderate capital appreciation.

Now, there are two subjective terms there, "consistent" and "moderate". They are going to be different for every investor.

I see the PP as consistent, as evidenced by the chart. However, you could look at that chart and be made uncomfortable by the fluctuations. Every investor is different. Note, I don't like using standard deviations, I think looking at a chart (logarithmically scaled and inflation adjusted of course) is a perfectly acceptable way of gauging risk.

And the word "moderate" is also subjective. The PP has provided real returns, slightly in excess of 4.5%. I find this more than moderate. I would be comfortable with anything in excess of 4%, but every investor is different. The PP hypothesis could already be proven false, if you are an investor that seeks 5-6% real returns.

It really depends on the investor. But for my criteria, it has not been proven false.

Note, comparisons to other portfolios have nothing to do with my criteria! I invest because I want my purchasing power to consistently grow. Therefore, my measure of success is simply real returns that satisfy my required growth of those savings. I don't care if the PP underperforms other strategies at some point. I do care if it underperforms that straight, logarithmically scaled, straight line.
Okay, so what you need to do is define 'consistent' and 'moderate' in objective terms (even if only for you) and we can test it. For example if you needed to maintain a 4.5 real return over any 5 year period than (using the data gumby provided since that is what I have in front me) it clearly is falsified. If you want to maintain a 4.5 real return over any 20 year period, well that probably hasn't been falsified but we may not have enough independent periods to have much confidence in the conclusion.

KyleAAA
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Post by KyleAAA » Fri Aug 12, 2011 1:29 pm

Gumby wrote:
I never insulted you, or anyone, directly or personally. Though, you seem to think that insults are acceptable and justified for some reason. I thought Bogleheads were supposed to be open minded and welcoming?
Yes you have. Repeatedly.
Gumby wrote: Instead of having a friendly debate, you insist on jumping down my throat for no other reason than you disagree with me.
We've already had this debate a hundred times. For the record, I DON'T disagree with you. I just take issue with your condescending tone.

Gumby
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Post by Gumby » Fri Aug 12, 2011 1:35 pm

avalpert wrote:Do you think your lack of response is at all a reflection of your, well, lack of a response?
I think it is a reflection of the animosity you and others have expressed here. Perhaps I misspoke or wasn't clear, and I apologize for that. It still doesn't justify your direct insults. Perhaps the volatility of a typical Boglehead portfolio is making everyone a bit grouchy. I don't know. Either way. I'm heading out for the weekend and don't plan to be responding to this kind of rhetoric anymore.

Good day.

Reubin
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Post by Reubin » Fri Aug 12, 2011 2:07 pm

I thank my lucky stars for finding the Permanent Portfolio and for the likes of Gumby and MT.

And I have noticed a lot of BH belligerence on this site. I posted a thread a while back about how a certain coop board was summarily rejecting numerous qualified buyers regarding the sale of my deceased sister's apartment and I couldn't believe how nasty some were on here. Where does this come from?

hsv_climber
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Post by hsv_climber » Fri Aug 12, 2011 2:47 pm

To all happy PP holders - nobody has any issues with your portfolios. But if you are so happy about them then why do you (and others like you) have a constant need to start a "PP is the best thing since slide bread" thread on bogleheads forum?
When did terms "google challenged" and "PP holder" have become synonyms?

BTW, why are you surprised that PP is not popular on bogleheads forum? Do you guys know what the word "bogleheads" stands for? Do you think it might have something to do with J. Bogle? Have you read Bogle's books? What does he think about holding cash and gold in huge (i.e. 25%) quantities?
Do you know what the term "bogleheads author" mean? Do you know the names of the most popular Bogleheads authors (you can cheat and look up on Wiki). Have you read books by Rick Ferri, Larry Swedroe, or Mel & Taylor? What do they think about AA and holding cash / gold / LT bonds?
What does the author of the most popular investment book of the last 30 years ("Random Walk...") writes about AA and gold?

In other words, dear PP holders, it is great that your portfolios are doing well and you have found your investment niche that can make you sleep well at night. But it would be so much better if you'd move your PP boasting to the forum, which is specifically designed for that purpose:
http://www.gyroscopicinvesting.com/forum/

IMHO, other than picking up the fights (and it is easy to see that almost every PP is turning into that) there is absolutely nothing for you to gain or contribute here.

avalpert
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Post by avalpert » Fri Aug 12, 2011 2:54 pm

Gumby wrote:
avalpert wrote:Do you think your lack of response is at all a reflection of your, well, lack of a response?
I think it is a reflection of the animosity you and others have expressed here. Perhaps I misspoke or wasn't clear, and I apologize for that. It still doesn't justify your direct insults. Perhaps the volatility of a typical Boglehead portfolio is making everyone a bit grouchy. I don't know. Either way. I'm heading out for the weekend and don't plan to be responding to this kind of rhetoric anymore.

Good day.
And have a nice weekend. When you get back, maybe you will respond to the substance (you know, the obvious record of period greater than 2 years of negative real returns which directly contradicts your early assertion).

Either way, I have no animosity towards you, I just wish you were able to have a logical argument on this topic.

Topic Author
rmelv
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Post by rmelv » Fri Aug 12, 2011 4:56 pm

avalpert,

Hopefully can restore some civility :)

I made some charts of rolling returns.

The data is taken from Simba’s spreadsheet and adjusted for inflation. Note: it is hard to perfectly replicate a PP in his spreadsheet because the long bonds are not volatile enough. So, for cash I used a 2 year Treasury fund to help compensate for the lack of duration in the long bond fund. Also, the PP calls for 35%/15% rebalancing bands, but Simba’s spreadsheet assumes annual rebalancing. All of these little details are unlikely to make a material difference, but I am a big fan of full disclosure.

The 60/40 achieved a 4.74% annualized real rate of return from 1972-2010 and the PP returned 4.93%. So, the overall CAGR is a basically a tie, this battle will have to be settled in how the portfolios manage risk.

Image

60/40 Highest 5 Year Real Rate of Return: 16.4%
60/40 Lowest 5 Year Real Rate of Return: -4.4%

PP Highest 5 Year Real rate of Return: 9.8%
PP Lowest 5 Year Real Rate of Return: 1%

Image

60/40 Highest 10 Year Real Rate of Return: 11%
60/40 Lowest 10 Year Real Rate of Return: -1.4%

PP Highest 10 Year Real rate of Return: 6.3%
PP Lowest 10 Year Real Rate of Return: 3.4%

I think these charts tell a truly honest story for what it is like to be an investor in either portfolio. We can clearly see that the PP is not perfect, but it has significantly less variability in real returns.

MCSquared
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Post by MCSquared » Fri Aug 12, 2011 6:08 pm

hsv_climber wrote:To all happy PP holders - nobody has any issues with your portfolios. But if you are so happy about them then why do you (and others like you) have a constant need to start a "PP is the best thing since slide bread" thread on bogleheads forum?
When did terms "google challenged" and "PP holder" have become synonyms?

BTW, why are you surprised that PP is not popular on bogleheads forum? Do you guys know what the word "bogleheads" stands for? Do you think it might have something to do with J. Bogle? Have you read Bogle's books? What does he think about holding cash and gold in huge (i.e. 25%) quantities?
Do you know what the term "bogleheads author" mean? Do you know the names of the most popular Bogleheads authors (you can cheat and look up on Wiki). Have you read books by Rick Ferri, Larry Swedroe, or Mel & Taylor? What do they think about AA and holding cash / gold / LT bonds?
What does the author of the most popular investment book of the last 30 years ("Random Walk...") writes about AA and gold?

In other words, dear PP holders, it is great that your portfolios are doing well and you have found your investment niche that can make you sleep well at night. But it would be so much better if you'd move your PP boasting to the forum, which is specifically designed for that purpose:
http://www.gyroscopicinvesting.com/forum/

IMHO, other than picking up the fights (and it is easy to see that almost every PP is turning into that) there is absolutely nothing for you to gain or contribute here.
Since you addressed this to "all happy PP holders," I will respond as I am one of "them." My first question would be why do you have a "constant need" to respond to these threads that you obviously are not interested in? Why not ignore them?

My second question is do you understand that the PP is very Boglehead like in many respects? 50% in UST (barbell fashion) and 25% in a total stock market index fund. That would imply at least 75% of the PP would be considered Boglehead like, yes? The hangup seems to be the 25% gold allocation. Would it be fair to say that if the PP contained 25% TIPS for inflationary environment(s) (versus the gold the PP holds) you would agree that the entire portfolio is very Boglehead-like?

I am glad that most posters here are a little more open-minded so I disagree with your assessment that there is nothing for PP investors to gain or contribute here.

MCSquared
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Post by MCSquared » Fri Aug 12, 2011 6:15 pm

rmelv wrote:avalpert,

Hopefully can restore some civility :)

I made some charts of rolling returns.

The data is taken from Simba’s spreadsheet and adjusted for inflation. Note: it is hard to perfectly replicate a PP in his spreadsheet because the long bonds are not volatile enough. So, for cash I used a 2 year Treasury fund to help compensate for the lack of duration in the long bond fund. Also, the PP calls for 35%/15% rebalancing bands, but Simba’s spreadsheet assumes annual rebalancing. All of these little details are unlikely to make a material difference, but I am a big fan of full disclosure.

The 60/40 achieved a 4.74% annualized real rate of return from 1972-2010 and the PP returned 4.93%. So, the overall CAGR is a basically a tie, this battle will have to be settled in how the portfolios manage risk.

Image

60/40 Highest 5 Year Real Rate of Return: 16.4%
60/40 Lowest 5 Year Real Rate of Return: -4.4%

PP Highest 5 Year Real rate of Return: 9.8%
PP Lowest 5 Year Real Rate of Return: 1%

Image

60/40 Highest 10 Year Real Rate of Return: 11%
60/40 Lowest 10 Year Real Rate of Return: -1.4%

PP Highest 10 Year Real rate of Return: 6.3%
PP Lowest 10 Year Real Rate of Return: 3.4%

I think these charts tell a truly honest story for what it is like to be an investor in either portfolio. We can clearly see that the PP is not perfect, but it has significantly less variability in real returns.
rmelv, thanks for the data plotting. This can't be true. I thought I just read a post that indicated that the PP return has been akin to a money market? :D

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Post by Bongleur » Fri Aug 12, 2011 6:56 pm

I will be much more tempted by the PP at a time when all 4 asset classes are close together. Wonder how often that has occured?

What is the theoretical performance of the PP in a secular bear environment? Vs a canonical Boglish AA with the same sort of B/H/Rebalance rules?

And for an investor who is not in accumulation anymore -- so capital preservation is much more important than growth beyond yearly draw ?
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Post by Indices » Fri Aug 12, 2011 7:04 pm

Bongleur wrote:I will be much more tempted by the PP at a time when all 4 asset classes are close together. Wonder how often that has occured?

What is the theoretical performance of the PP in a secular bear environment? Vs a canonical Boglish AA with the same sort of B/H/Rebalance rules?

And for an investor who is not in accumulation anymore -- so capital preservation is much more important than growth beyond yearly draw ?
You are holding the PP to a higher standard than your own stock heavy portfolio. Replace the term PP with the term "my portfolio" and you will see whether your portfolio will do as well in the environments you are using to test it.

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Post by Bongleur » Fri Aug 12, 2011 8:01 pm

My portfolio is pretty much CASH...
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Post by Wonk » Fri Aug 12, 2011 8:32 pm

MCSquared wrote:The hangup seems to be the 25% gold allocation. Would it be fair to say that if the PP contained 25% TIPS for inflationary environment(s) (versus the gold the PP holds) you would agree that the entire portfolio is very Boglehead-like?
I was thinking the same thing. The permanent portfolio seems to be very much a Boglehead-compliant portfolio with the exception of gold. Low cost, stay the course, rebalance, don't time the market, etc.

It seems there's a subset of investors that just don't like the idea of gold in a portfolio. The fact that the gold market hasn't dropped substantially in over a decade has them flustered and agitated--classic case of shiny rock syndrome.

I particularly like the thread about the ponzi scheme.

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Post by hazlitt777 » Fri Aug 12, 2011 10:49 pm

Wonk wrote:
MCSquared wrote:The hangup seems to be the 25% gold allocation. Would it be fair to say that if the PP contained 25% TIPS for inflationary environment(s) (versus the gold the PP holds) you would agree that the entire portfolio is very Boglehead-like?
I was thinking the same thing. The permanent portfolio seems to be very much a Boglehead-compliant portfolio with the exception of gold. Low cost, stay the course, rebalance, don't time the market, etc.

It seems there's a subset of investors that just don't like the idea of gold in a portfolio. The fact that the gold market hasn't dropped substantially in over a decade has them flustered and agitated--classic case of shiny rock syndrome.

I particularly like the thread about the ponzi scheme.
I agree. I see gold as completing the bogle philosophy, through the ultimate currency diversification. It is the completion of the bogle philosophy.

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Post by steve roy » Fri Aug 12, 2011 11:31 pm

I don't know what all the cantankerous back and forth is about. Bill Bernstein, cited here, put up an essay on the Permanent Portfolio ("Wild About Harry"), and he said it worked as prescribed.

But he also said that the investors now piling into it due to its recent high performance would (one day) pile out again, especially when the PP lagged other asset allocations.

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Post by Noobvestor » Sat Aug 13, 2011 2:09 am

hsv_climber wrote:
Gumby wrote: That's right, Kyle. If you spent more than 30 minutes looking at the Permanent Portfolio, you'd see why it's highly unlikely (though, not impossible) that it would ever have a period of more than 18 months with negative real returns. That's why we hold it.
Are we calling 1980-1981 (24 months) as "highly unlikely"?

Are we calling 2000-2001 (24 months) as "highly unlikely"?

Are we calling 1975-1976 (24 months) as "highly unlikely"?

Are we calling 1983-1984 (24 months) as "highly unlikely"?

I am using returns from Harry Browne's page:
http://harrybrowne.org/PermanentPortfolioResults.htm

In my terminology 4 2-year periods (out of 40 years of data), I would not call "highly unlikely".
I must be half asleep ... I'm looking at the numbers, and I don't see two negative years in a row. What am I missing?

1970 + 4.1%

1980 + 22.1%

1990 – 0 .7%

2000 + 2.7%

1971 + 13.4%

1981 – 6.2%

1991 + 11.5%

2001 – 1.0%

1972 + 18.7%

1982 + 23.3%

1992 + 4.0%

2002 + 7.2%

1973 + 10.6%

1983 + 4.3%

1993 + 12.6%

2003 + 11.8%

1974 + 12.3%

1984 + 1.1%

1994 – 2 .4%

2004

1975 + 3.7%

1985 + 20.1%

1995 + 16.6%

2005

1976 + 10.1%

1986 + 21.7%

1996 + 5.2%

2006

1977 + 5.2%

1987 + 5.3%

1997 + 6.7%



1978 + 15.0%

1988 + 3.6%

1998 + 7.4%



1979 + 36.7%

1989 + 14.8%

1999 + 4.7%
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Post by Barry Barnitz » Sat Aug 13, 2011 3:42 am

Hi:

Better formatting

PP Returns 1970-2003

1970 + 4.1%
1971 + 13.4%
1972 + 18.7%
1973 + 10.6%
1974 + 12.3%
1975 + 3.7%
1976 + 10.1%
1977 + 5.2%
1978 + 15.0%
1979 + 36.7%
1980 + 22.1%
1981 – 6.2%
1982 + 23.3%
1983 + 4.3%
1984 + 1.1%
1985 + 20.1%
1986 + 21.7%
1987 + 5.3%
1988 + 3.6%
1989 + 14.8%
1990 – 0 .7%
1991 + 11.5%
1992 + 4.0%
1993 + 12.6%
1994 – 2 .4%
1995 + 16.6%
1996 + 5.2%
1997 + 6.7%
1998 + 7.4%
1999 + 4.7%
2000 + 2.7%
2001 – 1.0%
2002 + 7.2%
2003 + 11.8%
  • Stock results are for an S&P 500 Index mutual fund, and include reinvestment of dividends.
    Bond results are for a 30-year T-bond, and include interest received.
    Gold results are for American Eagle 1-ounce coins.
    Cash results are for Treasury bills, assuming that a 1-year bill was bought at the start of each year.
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Post by snodog » Sat Aug 13, 2011 7:38 am

steve roy wrote:I don't know what all the cantankerous back and forth is about. Bill Bernstein, cited here, put up an essay on the Permanent Portfolio ("Wild About Harry"), and he said it worked as prescribed.

But he also said that the investors now piling into it due to its recent high performance would (one day) pile out again, especially when the PP lagged other asset allocations.
Pretty much sums up my thoughts as well.

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Post by avalpert » Sat Aug 13, 2011 10:56 am

rmelv wrote:avalpert,

Hopefully can restore some civility :)

I made some charts of rolling returns.

The data is taken from Simba’s spreadsheet and adjusted for inflation. Note: it is hard to perfectly replicate a PP in his spreadsheet because the long bonds are not volatile enough. So, for cash I used a 2 year Treasury fund to help compensate for the lack of duration in the long bond fund. Also, the PP calls for 35%/15% rebalancing bands, but Simba’s spreadsheet assumes annual rebalancing. All of these little details are unlikely to make a material difference, but I am a big fan of full disclosure.

The 60/40 achieved a 4.74% annualized real rate of return from 1972-2010 and the PP returned 4.93%. So, the overall CAGR is a basically a tie, this battle will have to be settled in how the portfolios manage risk.

Image

60/40 Highest 5 Year Real Rate of Return: 16.4%
60/40 Lowest 5 Year Real Rate of Return: -4.4%

PP Highest 5 Year Real rate of Return: 9.8%
PP Lowest 5 Year Real Rate of Return: 1%

Image

60/40 Highest 10 Year Real Rate of Return: 11%
60/40 Lowest 10 Year Real Rate of Return: -1.4%

PP Highest 10 Year Real rate of Return: 6.3%
PP Lowest 10 Year Real Rate of Return: 3.4%

I think these charts tell a truly honest story for what it is like to be an investor in either portfolio. We can clearly see that the PP is not perfect, but it has significantly less variability in real returns.
This is helpful data. A couple of questions: What are the average returns if you cut the data off at 2000? I ask because I would be curious how much of the current view of the portfolio is driven by the recent run of gold, whether the role gold has played aligns with the role Browne imagined it would and whether you think that performance is what you would expect in the future.



I also would be curious in comparing it to more conservative stock/bond mixes. 60/40 doesn't seem right for comparison to a portfolio that holds 25% equities, 50% cash/bonds and 25% gold, does it?

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Post by Indices » Sat Aug 13, 2011 12:49 pm

Harry Browne thought that gold would go down in value in deflation. He was wrong, but it wasn't his fault. Gold wasn't traded during the Depression, so no one was able to see the effect deflation has on its price. We now know that people buy gold during deflation because they are afraid of government instability.

So in essence the Permanent Portfolio works even better than Harry Browne thought it would.

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Post by hsv_climber » Sat Aug 13, 2011 1:25 pm

Noobvestor wrote: I must be half asleep ... I'm looking at the numbers, and I don't see two negative years in a row. What am I missing?
One word: REAL

Discussion was about REAL return.
There were 5 negative 2-year real returns, 1 3-year and 1 5-year negative.

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Post by hsv_climber » Sat Aug 13, 2011 1:45 pm

MCSquared wrote: Since you addressed this to "all happy PP holders," I will respond as I am one of "them." My first question would be why do you have a "constant need" to respond to these threads that you obviously are not interested in? Why not ignore them?
And my first question is why do you have a constant need to start these threads in order to convince everyone of your superior allocation?
And my second question is why do you (as PP holders, since you want to represent all of them) need to go into "insult" mode (see
Reubin's & Gumby's posts) when others disagree with your approach. After all there is a dedicated forum for PP and I've posted a link to it.
MCSquared wrote: My second question is do you understand that the PP is very Boglehead like in many respects? 50% in UST (barbell fashion) and 25% in a total stock market index fund. That would imply at least 75% of the PP would be considered Boglehead like, yes? The hangup seems to be the 25% gold allocation. Would it be fair to say that if the PP contained 25% TIPS for inflationary environment(s) (versus the gold the PP holds) you would agree that the entire portfolio is very Boglehead-like?

It is not just gold. LT bonds are also not recommended. But that is not the point. I am Ok with discussing different AA, since there is no perfect portfolio. But we need to discuss it using numbers and civility rather than going into insulting game like the 2 posters that I've already mentioned started going into.

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Post by rmelv » Sat Aug 13, 2011 2:26 pm

hsv_climber wrote:
Noobvestor wrote: I must be half asleep ... I'm looking at the numbers, and I don't see two negative years in a row. What am I missing?
One word: REAL

Discussion was about REAL return.
There were 5 negative 2-year real returns, 1 3-year and 1 5-year negative.
My analysis did not find a 5 year period of negative returns. How did you get this? Which time period?

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Post by MCSquared » Sat Aug 13, 2011 2:31 pm

hsv_climber wrote:
MCSquared wrote: Since you addressed this to "all happy PP holders," I will respond as I am one of "them." My first question would be why do you have a "constant need" to respond to these threads that you obviously are not interested in? Why not ignore them?
And my first question is why do you have a constant need to start these threads in order to convince everyone of your superior allocation?
And my second question is why do you (as PP holders, since you want to represent all of them) need to go into "insult" mode (see
Reubin's & Gumby's posts) when others disagree with your approach. After all there is a dedicated forum for PP and I've posted a link to it.


MCSquared wrote: My second question is do you understand that the PP is very Boglehead like in many respects? 50% in UST (barbell fashion) and 25% in a total stock market index fund. That would imply at least 75% of the PP would be considered Boglehead like, yes? The hangup seems to be the 25% gold allocation. Would it be fair to say that if the PP contained 25% TIPS for inflationary environment(s) (versus the gold the PP holds) you would agree that the entire portfolio is very Boglehead-like?

It is not just gold. LT bonds are also not recommended. But that is not the point. I am Ok with discussing different AA, since there is no perfect portfolio. But we need to discuss it using numbers and civility rather than going into insulting game like the 2 posters that I've already mentioned started going into.
Not sure why there seems to be confusion. I have not started a thread. I am merely responding to your post. By your post, it appeared that these PP threads are bothersome to you so I suggested just ignoring them. Further, I have not insulted anyone to the best of my knowledge nor have I suggested that I "want" to represent anyone other than myself. I certainly did not post that despite your allegation otherwise.

I tend to think a short term/long term bond barbell approach is an acceptable boglehead type allocation. Maybe we will just agree to disagree on that point. I agree that civility is necessary to discuss differing viewpoints. I just did not think it was very civil to declare that there is nothing that a PP advocate could add or gain by participating in this forum.

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Post by hsv_climber » Sat Aug 13, 2011 2:32 pm

rmelv wrote: My analysis did not find a 5 year period of negative returns. How did you get this? Which time period?

Take a look at avalpert's post N4 or 5 on the 4th page about dates.
I have not checked his claim, but nobody has disproved it either so far.
Personally, I've checked 5 2-year and 1 3-year returns. I've posted years above.

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Post by Taylor Larimore » Sat Aug 13, 2011 2:46 pm

This thread has exhausted the subject and is becoming rude and argumentative. Locked.
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