The PP, marginal utility, and investment "faith"

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The PP, marginal utility, and investment "faith"

Post by Smith1776 » Tue Jan 04, 2022 6:59 pm

I noted in the other thread that I've recently received a windfall after my father's death.

Something I must admit: I'm having a hard time committing 6 and 7 figure sums to the PP.

It was one thing when all I was managing was 5 figures. In that case I'd be putting modest amounts of money in precarious looking assets like LTTs.

With these amounts of money though?? I have to admit that my "faith" is not as strong as it was.

Maybe it's just nerves that will settle. I'll give it some time and see how I feel. Has anyone else had a similar experience where the amount of money being managed changed your proclivity towards a particular strategy?
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Re: The PP, marginal utility, and investment "faith"

Post by snedgar » Tue Jan 04, 2022 11:06 pm

I'm mostly a lurker here; don't post much but have been following this forum for some time. Your question hit a nerve.

I think you really have to be bought into whatever you're going to do. If you're not then you will end up subject to many forces to change your mind, bring you continual anxiety, and ultimately cause you to panic at exactly the wrong time. Two thoughts for you to consider:

1. There's nothing wrong with parking it in a money market-type fund for an extended amount of time (years?!) while you sort out what to do.

2. Mathjack gave some very good advice a while back that if one doesn't have the time/attention/interest/conviction/stomach to invest themselves then it's a good plan to hire someone to take care of that aspect of your life.

Hope this helps.
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Re: The PP, marginal utility, and investment "faith"

Post by Vil » Wed Jan 05, 2022 3:57 am

I have high 6 digit sum in US PP and feel just fine. Though have other assets (land inclusive) too. Actually, the more I have the more risk averse I get. It's definitely one thing to lose 30% on 5000 USD, and just another on a million for example.. But that's just me.
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Re: The PP, marginal utility, and investment "faith"

Post by mathjak107 » Wed Jan 05, 2022 4:23 am

Vil wrote:
Wed Jan 05, 2022 3:57 am
I have high 6 digit sum in US PP and feel just fine. Though have other assets (land inclusive) too. Actually, the more I have the more risk averse I get. It's definitely one thing to lose 30% on 5000 USD, and just another on a million for example.. But that's just me.
Actually it isn’t just you .

The size of the portfolio is a huge factor .

At one time a 7% drop in markets represented a month of 401k contributions..today it represents a decade of contributions at catch up .

This is why kitces did his article on the red zone .

That is when you are pre retirement through the early years of retirement and dollars are at their peak ….a hit can be years of money .

So yep , portfolio size is a big factor
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Re: The PP, marginal utility, and investment "faith"

Post by drumminj » Wed Jan 05, 2022 8:07 am

When I started with the PP I struggled with this for any asset allocation. This was for a high six-digit sum.

My approach was to slowly buy into the position over the course of about 6 months. That let me test out my comfort level, get used to the increasing investment, and smooth out any risk of buying in at a "bad" time.

I believe this has been discussed many times here, but I recall the data shows that going all-in at once leads to the better outcome. Emotionally/pyschologically it was good for me to ease into it.

At this point, I'm happy/comfortable with an even larger sum in the PP. Any large portfolio has volatility/swings, and you have to get used to/immune to being up or down 10s of thousands of dollars in a day. The PP's reduced overall volatility helps with that.
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Re: The PP, marginal utility, and investment "faith"

Post by barrett » Wed Jan 05, 2022 8:31 am

Just wanted to add that when your portfolio is larger, even if you strive for balance in your asset allocation, there will be plenty of days that you are down (or up) $10,000 or more. So, even with a PP allocation, it's best to zoom out and only reasses periodically.

mathjak has frequently posted about short-term gains and losses in dollar terms (as opposed to percentage of assets) being huge later in one's investment timeframe. So it's common to see, say, a $2,000,000 portfolio gain $150,000 in a year in which it had many down days with $10,000 or more in losses.

Kind of a "rich people prob" but something that definitely takes some getting used to.
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Re: The PP, marginal utility, and investment "faith"

Post by Vil » Wed Jan 05, 2022 9:25 am

mathjak107 wrote:
Wed Jan 05, 2022 4:23 am
...
This is why kitces did his article on the red zone .

That is when you are pre retirement through the early years of retirement and dollars are at their peak ….a hit can be years of money .
Indeed, Kitces article is a good one. For any forum newcomers it would sound like - if you are young and have modest possessions then go to Bogglers, allocate +50% to stocks (2-fund or the way they call it) and keep trying get rich. Only once you have enough, you can return back to the rich daddies gyroscopic club ;D
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Re: The PP, marginal utility, and investment "faith"

Post by Kevin K. » Wed Jan 05, 2022 9:44 am

This seems like a perfect opportunity to share Tyler's superb recent post, which surprisingly hasn't received any discussion to date on these forums:

https://portfoliocharts.com/2021/12/16/ ... ortfolios/

It's a complex and nuanced article but among the key points are that truly robust "all-weather" portfolios are often counter-intuitive in terms of what kinds of assets the include (and in what proportions), and that there are numerous portfolios (not all of which contain gold or LTT's, though most do) that have historically made "staying the course" while earning good real returns far easier than plain vanilla Boglehead's style all-stock-and-bonds "set it and forget it" approaches.

The article also makes it clear that one need not go all-in on the PP in order to have good results. The GB is certainly one of the best tweaks of the PP, as Tyler's data shows, but it's amazing how much even a 10% allocation to SCV and/or gold in an otherwise conventional 50:50 or 60:40 can help in increasing safe withdrawal rates and making drawdowns shorter-lived and shallower.

Of course the future isn't the past but surely there's much to learn from looking at the last 50 years the way that Tyler does in this piece.
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Re: The PP, marginal utility, and investment "faith"

Post by flyingpylon » Wed Jan 05, 2022 10:28 am

Kevin K. wrote:
Wed Jan 05, 2022 9:44 am
This seems like a perfect opportunity to share Tyler's superb recent post, which surprisingly hasn't received any discussion to date on these forums:

https://portfoliocharts.com/2021/12/16/ ... ortfolios/

It's a complex and nuanced article but among the key points are that truly robust "all-weather" portfolios are often counter-intuitive in terms of what kinds of assets the include (and in what proportions), and that there are numerous portfolios (not all of which contain gold or LTT's, though most do) that have historically made "staying the course" while earning good real returns far easier than plain vanilla Boglehead's style all-stock-and-bonds "set it and forget it" approaches.

The article also makes it clear that one need not go all-in on the PP in order to have good results. The GB is certainly one of the best tweaks of the PP, as Tyler's data shows, but it's amazing how much even a 10% allocation to SCV and/or gold in an otherwise conventional 50:50 or 60:40 can help in increasing safe withdrawal rates and making drawdowns shorter-lived and shallower.

Of course the future isn't the past but surely there's much to learn from looking at the last 50 years the way that Tyler does in this piece.
I mentioned it in the Gold Scream Room because of the gold-related discussions that were going on at the time.

viewtopic.php?f=5&t=4654&p=236465#p236465

But I agree that it's a fantastic article that is relevant to many of the discussions we have here.
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Re: The PP, marginal utility, and investment "faith"

Post by dualstow » Wed Jan 05, 2022 10:32 am

snedgar wrote:
Tue Jan 04, 2022 11:06 pm

1. There's nothing wrong with parking it in a money market-type fund for an extended amount of time (years?!) while you sort out what to do.
+1 to the line above and to Tyler-via-Kevin above that.

Smithers, *every* portfolio looks scary when you suddenly have a windfall. Heck, it all looks scary to me and I’ve been sitting on this amount for a while now. Nothing sudden about it.

Gold - what has gone done for us lately?
Stocks - always at the top, always bound to crash as soon as we put money in.
Cash - inflation
Bonds - often the most hated asset

And, ignoring short-term fluctuations is easy in theory when you’re playing with Portfolio Visualizer. it’s quite another thing when you watch your money swing back and forth in an amount equivalent to a year’s salary.

Take a deep breath, take your time. You might even want to get a one-time advisor like Kevin did.

Also, take heart in the fact that you’re already well above your peers because you’re not going to make concentrated bets based on the reddit pick of the week. You’re going to do great in the long run. The future looks bright!
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Re: The PP, marginal utility, and investment "faith"

Post by seajay » Wed Jan 05, 2022 11:05 am

Smith1776 wrote:
Tue Jan 04, 2022 6:59 pm
I noted in the other thread that I've recently received a windfall after my father's death.

Something I must admit: I'm having a hard time committing 6 and 7 figure sums to the PP.

It was one thing when all I was managing was 5 figures. In that case I'd be putting modest amounts of money in precarious looking assets like LTTs.

With these amounts of money though?? I have to admit that my "faith" is not as strong as it was.

Maybe it's just nerves that will settle. I'll give it some time and see how I feel. Has anyone else had a similar experience where the amount of money being managed changed your proclivity towards a particular strategy?
Where else?

All-stock is potentially fine if you're young enough to have many years of accumulation still ahead of you. But might bear the discomfort of perhaps half the value being 'lost' (on paper) relatively soon after having lumped into that. Likely, provided you don't capitulate, that has the greatest growth potential.

Adding some stock and some commodity currency (gold or silver) to a otherwise all fiat currency bond tends to be better than just all-bonds alone.

Image

BB (TB) = barbell of T-Bills and LTT
BB (STT) = barbell of STT and LTT
10yrL = 10 year treasury ladder
ITT = Intermediate treasuries (10 year treasury fund)
PP with silver and 10yrL = 25/25/50 stock/silver/10yrL

PP being somewhat like a moderately volatile 4% real inflation bond across a period of both rising and declining interest rates is as good a parking place whilst you consolidate your final asset allocation choice.
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Re: The PP, marginal utility, and investment "faith"

Post by Kevin K. » Wed Jan 05, 2022 11:10 am

First off, thanks flyingpylon for letting me know that you'd already posted a link to Tyler's article in the gold discussion forums. I apologize for missing that.

And as always dualstow, I appreciate your wise perspective! As you and others here have pointed out, portfolio size is always a huge factor. At one extreme of course what seems like the typical active poster on the Bogleheads forums - an older guy with $3 million+, a pension and a paid-off $500K+ home - can naturally afford to be sanguine about the stock market cratering for a few years. And at the other extreme - which frankly is closer to my own situation - you have folks with very modest nest eggs in or near retirement that are just trying to figure out how to come close to a 3-5% real return on their investments without experiencing devastating drawdowns that would have them eating cat food or having to move to Thailand in their golden years. At a certain age (I just turned 65) the old Will Rogers quip ("I'm much more concerned with the return OF my principal than the return ON it") starts to make sense.

The other thing I wanted to say was about the investment "faith" part of the OP's post. Despite having tried mightily to muster such faith in any number of portfolios over the years (from Merriman-style slice-and-dice to the PP, GB, "Larry" and others) I can't come up with any asset allocation that I wouldn't monkey with at least a bit in light of major changes to the macroeconomic situation. The GB itself is an excellent example of informed tinkering, but so (for example) are Tyler's suggested 80% Wellesley/20% gold, Desert's PP-informed Larry Swedroe portfolio (10% TSM 10% SCV 10% EM 60% Int Tr 10% Gold) and so on.

Would Harry Browne have invested in LTT's at all at today's rates (let alone betting 25% of the portfolio on them)? Would he have stuck to the S&P500 and avoided SCV and international in a world where ~5 tech stocks provide all of the return of that index and valuations are sky-high? Is gold (let alone 25% gold) still the only game in town for SHTF insurance in a paper gold-replaces-real and Bitcoin replaces both universe? And 25% in cash when every form of cash other than iBonds really is trash? All questions worth pondering IMHO - with the proviso that there will always be a vast number of portfolios that look better than the PP - until the next market crisis.
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Re: The PP, marginal utility, and investment "faith"

Post by mathjak107 » Wed Jan 05, 2022 11:23 am

seajay wrote:
Wed Jan 05, 2022 11:05 am
Smith1776 wrote:
Tue Jan 04, 2022 6:59 pm
I noted in the other thread that I've recently received a windfall after my father's death.

Something I must admit: I'm having a hard time committing 6 and 7 figure sums to the PP.

It was one thing when all I was managing was 5 figures. In that case I'd be putting modest amounts of money in precarious looking assets like LTTs.

With these amounts of money though?? I have to admit that my "faith" is not as strong as it was.

Maybe it's just nerves that will settle. I'll give it some time and see how I feel. Has anyone else had a similar experience where the amount of money being managed changed your proclivity towards a particular strategy?
Where else?

All-stock is potentially fine if you're young enough to have many years of accumulation still ahead of you. But might bear the discomfort of perhaps half the value being 'lost' (on paper) relatively soon after having lumped into that. Likely, provided you don't capitulate, that has the greatest growth potential.

Adding some stock and some commodity currency (gold or silver) to a otherwise all fiat currency bond tends to be better than just all-bonds alone.

Image

BB (TB) = barbell of T-Bills and LTT
BB (STT) = barbell of STT and LTT
10yrL = 10 year treasury ladder
ITT = Intermediate treasuries (10 year treasury fund)
PP with silver and 10yrL = 25/25/50 stock/silver/10yrL

PP being somewhat like a moderately volatile 4% real inflation bond across a period of both rising and declining interest rates is as good a parking place whilst you consolidate your final asset allocation choice.
Stocks and gold have beaten stocks and bonds over almost all time frames the last 20 years

A 60/40 of vti and gld have beaten vti and a total bond fund …i went back as far as gold etfs were around since that is when it was easy for all to buy gold and it was more main stream
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Re: The PP, marginal utility, and investment "faith"

Post by seajay » Wed Jan 05, 2022 11:26 am

Kevin K. wrote:
Wed Jan 05, 2022 11:10 am
Would Harry Browne have invested in LTT's at all at today's rates (let alone betting 25% of the portfolio on them)?
Of significant bearing is having one asset in 10 or 15 years time that has performed relatively well, maybe having provided a 200% type gain. Predicting which that might be, stocks, gold, LTT (unlikely to be cash) is futile, as sequence of returns has a considerable influence. The sequence of returns could have LTT's being that 'winner'. Maybe a big drop in LTT prices, perhaps with gold up and being rebalanced into buying more LTT's, that then subsequently do very well.

A reasonable alternative if you totally dislike LTT's might be to combine the STT/LTT barbell into a ITT bullet or even a 10 year ladder.

If you totally drop LTT you're timing the market and will have to also time when perhaps to re-enter, you have to be right twice. Gold 1980 to 1999 was a lousy asset alone, blended with stocks however and over those years 50/50 rebalancing accumulated something like 11% annualized more ounces of gold, that subsequently rewarded well in the 2000's. 2000 to 2009 and gold more than trebled whilst stocks were flat (nominal. In real terms gold rose near three-fold whilst stocks lost 25%)
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Re: The PP, marginal utility, and investment "faith"

Post by Smith1776 » Wed Jan 05, 2022 11:41 am

I want to emphasize again to my fellow PPers on the forum that it's probably just nerves. Because of the windfall coming from my dad's estate, I made a sudden jump from 5 figure net worth to 7 figure net worth.

Nonetheless, this is an allocation I was playing with in excel this morning. The duration risk and precious metals allocation have been attenuated.

allocation.jpg
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Last edited by Smith1776 on Wed Jan 05, 2022 11:42 am, edited 1 time in total.
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Re: The PP, marginal utility, and investment "faith"

Post by seajay » Wed Jan 05, 2022 11:42 am

mathjak107 wrote:
Wed Jan 05, 2022 11:23 am
seajay wrote:
Wed Jan 05, 2022 11:05 am
Smith1776 wrote:
Tue Jan 04, 2022 6:59 pm
I noted in the other thread that I've recently received a windfall after my father's death.

Something I must admit: I'm having a hard time committing 6 and 7 figure sums to the PP.

It was one thing when all I was managing was 5 figures. In that case I'd be putting modest amounts of money in precarious looking assets like LTTs.

With these amounts of money though?? I have to admit that my "faith" is not as strong as it was.

Maybe it's just nerves that will settle. I'll give it some time and see how I feel. Has anyone else had a similar experience where the amount of money being managed changed your proclivity towards a particular strategy?
Where else?

All-stock is potentially fine if you're young enough to have many years of accumulation still ahead of you. But might bear the discomfort of perhaps half the value being 'lost' (on paper) relatively soon after having lumped into that. Likely, provided you don't capitulate, that has the greatest growth potential.

Adding some stock and some commodity currency (gold or silver) to a otherwise all fiat currency bond tends to be better than just all-bonds alone.

Image

BB (TB) = barbell of T-Bills and LTT
BB (STT) = barbell of STT and LTT
10yrL = 10 year treasury ladder
ITT = Intermediate treasuries (10 year treasury fund)
PP with silver and 10yrL = 25/25/50 stock/silver/10yrL

PP being somewhat like a moderately volatile 4% real inflation bond across a period of both rising and declining interest rates is as good a parking place whilst you consolidate your final asset allocation choice.
Stocks and gold have beaten stocks and bonds over almost all time frames the last 20 years

A 60/40 of vti and gld have beaten vti and a total bond fund …i went back as far as gold etfs were around since that is when it was easy for all to buy gold and it was more main stream
A 2x leveraged PP, 'borrow' the bonds and investing that into stocks and gold, 50/50 stock/gold ... and scan back over time to since 1933 when convertibility ended, and the averages worked well. Yearly average of the years best, and average of years worst, for each decade, had the average of the best considerably more than offset the average of the yearly worst. In some decades that was more driven by stocks, in others by gold, in a largely unpredictable manner. Fundamentally when one had a bad decade so the other tended to have a good decade.

A barbell of two polar opposites. One fiat currency based the other commodity currency based. That combine to a central bullet that has done and likely will continue to serve reasonably well. Could be tax efficient also, such as BRK paying no dividends (not suggesting anyone does however over-concentrate into such single stock risk factor) PV

Bitcoin replacing gold, I can't see that occurring. More a case of the distributed ledger system being adopted, perhaps to include a broad range of assets such as physical gold. Yes digital art/assets are in vogue, but ultimately push come to shove and real world physical assets will continue to be more favored over virtual vaporware assets.
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Re: The PP, marginal utility, and investment "faith"

Post by seajay » Wed Jan 05, 2022 11:47 am

Smith1776 wrote:
Wed Jan 05, 2022 11:41 am
I want to emphasize again to my fellow PPers on the forum that it's probably just nerves. Because of the windfall coming from my dad's estate, I made a sudden jump from 5 figure net worth to 7 figure net worth.

Nonetheless, this is an allocation I was playing with in excel this morning. The duration risk and precious metals allocation have been attenuated.


allocation.jpg
In effect 40% PP, 60% VP. Relative to a 7 figure sum and why not. Comfort with asset allocation is more inclined to not having changes made that in itself is a good thing.
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Re: The PP, marginal utility, and investment "faith"

Post by ppnewbie » Wed Jan 05, 2022 12:26 pm

I have never purchased Mutual funds so I cannot comment on the tax implications (which could be significant). But Wellesley plus gold could be a solid solution. Moving larger sums into a GB is a little easier mentally vs the PP. Also, LTT's still have a lot of room to spike during a crash.
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Re: The PP, marginal utility, and investment "faith"

Post by Xan » Wed Jan 05, 2022 2:21 pm

Smith1776 wrote:
Wed Jan 05, 2022 11:41 am
I want to emphasize again to my fellow PPers on the forum that it's probably just nerves. Because of the windfall coming from my dad's estate, I made a sudden jump from 5 figure net worth to 7 figure net worth.
Please feel free to ignore my impertinent question, but did your dad leave you everything and his wife nothing?
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Re: The PP, marginal utility, and investment "faith"

Post by Smith1776 » Wed Jan 05, 2022 5:40 pm

Xan wrote:
Wed Jan 05, 2022 2:21 pm
Smith1776 wrote:
Wed Jan 05, 2022 11:41 am
I want to emphasize again to my fellow PPers on the forum that it's probably just nerves. Because of the windfall coming from my dad's estate, I made a sudden jump from 5 figure net worth to 7 figure net worth.
Please feel free to ignore my impertinent question, but did your dad leave you everything and his wife nothing?
Yeah. They, unfortunately, hated each other. 😓😓😓
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Re: The PP, marginal utility, and investment "faith"

Post by Smith1776 » Wed Jan 05, 2022 5:41 pm

My mom is entitled to my dad’s pension, because that’s outside the purview of the estate and will. But yeah, anything inside the estate proper? She’s not included. 🤷‍♂️
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Re: The PP, marginal utility, and investment "faith"

Post by Hal » Wed Jan 05, 2022 10:31 pm

Smith1776 wrote:
Tue Jan 04, 2022 6:59 pm
Maybe it's just nerves that will settle. I'll give it some time and see how I feel. Has anyone else had a similar experience where the amount of money being managed changed your proclivity towards a particular strategy?
Well, Smithy. For my brother (about to retire) and myself (retired), we both questioned the strategies available.
The key point being, if we screw up, we will not be able to "re-earn" the funds lost.

Personally I think it is a good thing you are re-evaluating the PP, or any other strategy for that matter.
1. Try listening to the HB archives again -> https://www.youtube.com/channel/UCzu55W ... QIQ/videos
2. Don't rush. Feel free to put everything into 1 year CAD T-Bills and revisit in a year or so

and finally, try to get back to a core understanding. Our joint retirement fund reasoning....
1. Consists of Investments and savings (capital)
2. Ben Graham minimum volatility suggestion. 50% Shares / 50% Cash (ie. 50% investment, 50% Capital)
3. HB suggestion also 50% investment, 50% Capital (ie 25/25 Shares&Bonds and 25/25Cash&Gold)

Edit: If I was young ::) I might consider something like this. 30% Capital, 70% Investment. If it all went to hell, I would still have decades of earning capacity ahead of me (assuming I wasn't run over by a truck....)
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Re: The PP, marginal utility, and investment "faith"

Post by Pet Hog » Thu Jan 06, 2022 2:55 pm

Smith, sorry for your loss. I've never been in your situation, but I did receive a windfall once that doubled my PP and I recall the nervousness of placing what, at the time, seemed like huge trades. I have a few thoughts.

One, think of your portfolio in terms of percentages, not dollars. The PP (for example) should return about 5% (real) over the long terms. Think to yourself, how will I make my portfolio grow 5% real this year, with inflation at 7%? Are the four components out of whack from their 25% allotments? What percentage bands am I comfortable with? 30/20? 35/15? If stocks on a particular day are down 1% and my portfolio is down only 0.5%, I've had a small win -- I now have slightly more purchasing power than most other investors. With this way of thinking I suspect you could manage a portfolio of any size.

Second, as Hal's chart shows, the PP has the number-one ulcer index according to Tyler. Think to yourself, if not the PP, then what else? (Agreeing with seajay above.)

Third, hedonic adaptation. You'll probably smile wryly to yourself a year from now when thinking about how small your portfolio used to be, and how much you fretted over it then.
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Re: The PP, marginal utility, and investment "faith"

Post by Kevin K. » Thu Jan 06, 2022 5:50 pm

Pet Hog wrote:
Thu Jan 06, 2022 2:55 pm
Smith, sorry for your loss. I've never been in your situation, but I did receive a windfall once that doubled my PP and I recall the nervousness of placing what, at the time, seemed like huge trades. I have a few thoughts.

One, think of your portfolio in terms of percentages, not dollars. The PP (for example) should return about 5% (real) over the long terms. Think to yourself, how will I make my portfolio grow 5% real this year, with inflation at 7%? Are the four components out of whack from their 25% allotments? What percentage bands am I comfortable with? 30/20? 35/15? If stocks on a particular day are down 1% and my portfolio is down only 0.5%, I've had a small win -- I now have slightly more purchasing power than most other investors. With this way of thinking I suspect you could manage a portfolio of any size.

Second, as Hal's chart shows, the PP has the number-one ulcer index according to Tyler. Think to yourself, if not the PP, then what else? (Agreeing with seajay above.)

Third, hedonic adaptation. You'll probably smile wryly to yourself a year from now when thinking about how small your portfolio used to be, and how much you fretted over it then.
While I think this is sage advice overall, the suggestion to ask "how will I make my portfolio grow 5% real this year" is not one I could possibly imagine answering by saying "by putting 25% of my money in cash earning ~negative 6 real, 25% in bonds with -4.8% return and huge interest rate risk exposure, 25% in a volatile metal with no inherent rate of return and dim prospects in a highly-inflationary rising interest rate environment and the rest in a U.S.-only stock index fund whose results are entirely dependent on a handful of tech stocks.

Tyler's article is great but all of that data is looking in the rear-view mirror. Cash and bonds with sharply negative real returns, U.S. stocks at sky-high valuations and gold being largely displaced by crypto aren't part of the data set.
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Re: The PP, marginal utility, and investment "faith"

Post by mathjak107 » Thu Jan 06, 2022 6:10 pm

For the most part I don’t go by portfolio performance looking at charts and pictures of the past .

You know the saying what have you done for me lately ? It’s all that counts ….things have changed in the investment world and the old guard may be a thing of the past
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