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Rebalancing advice needed

Posted: Thu May 12, 2022 11:45 am
by jason
So I am semi-retired and mostly living off of my PP which is in a taxable account because I sold my business a few years ago. I started another business but the income is small so I mainly live off of my PP. I rebalanced it at one point back to 25/25/25/25 years ago, but having been draining the cash. Because it's in a taxable account I wanted to avoid rebalancing simply because of low cash, especially since, historically, the "juiced" PP without cash performs better anyway. I am obviously regretting this now as I am down around 15% overall since the beginning of 2022. My cash is down to only 3% of my portfolio so I am going to need to start selling stocks, LTTs, and/or gold to raise more cash soon. My original plan was to just sell a bit maybe once a year, to cover my living expenses for the year when I ran out of cash. But now I'm thinking I need to rebalance to 25/25/25/25, but I will have a big tax bill if I do that, and now that I've already lost 15% in less than 5 months, I'll be making it even harder to rebound. I guess I should have just rebalanced when my cash hit 15%. I was just being too cheap because the long term capital gains taxes would have given me a big hit. But I'm unsure what to do now and I am pretty stressed out about making a decision, in addition to being stressed about losing 15% of my savings in less than 5 months. Any advice would be appreciated.

Re: Rebalancing advice needed

Posted: Thu May 12, 2022 2:58 pm
by GREEN V
Look to see if you can harvest any tax losses. If yes, keep the results in cash and sell something else for cash equal to your losses [no capital gain tax].
I can't see your portfolio so this may or may not be helpful. Good Luck.

Re: Rebalancing advice needed

Posted: Thu May 12, 2022 3:14 pm
by Desert
Jason, there's no perfect answer since the future is unknowable, but I'd be tempted to do the following in your shoes:

1. Don't do a full rebalance at this moment. You weren't holding a true 4x25 HBPP at the beginning of the decline, so I wouldn't force yourself to take on the mental pain of a big capital gains tax bill on top of the declines we've experienced.

2. Rather, withdraw funds as needed for living expenses, drawing from the highest of the 3 assets (Gold, Stock, LTT). Aim to trim those three back to roughly equal with your withdrawals.

3. Each time you make a sale for living expenses, perhaps double the magnitude of that sale and leave half of it in cash. In so doing, you'd be gradually rebuilding your cash position.

The above is essentially just "averaging" back into a 4x25 HBPP portfolio. I think the above would lead to less stress and potential regret than a one-time sale and rebalance.

Note: I'd only do the above if Green V's suggestion does not apply. If you can sell one or more assets for a loss to offset other sales as a gain, that would be great. I'm guessing all three assets are still above the entry price though. If not, please reply and we can offer more specific suggestions.

Re: Rebalancing advice needed

Posted: Thu May 12, 2022 3:16 pm
by Hal
Don't live in the US, so not familiar with your tax laws.
This may be useful though -> https://www.youtube.com/watch?v=mmuh1fvHIYg

https://www.youtube.com/watch?v=MhszdAX9Leg

Re: Rebalancing advice needed

Posted: Thu May 12, 2022 4:43 pm
by jason
GREEN V wrote:
Thu May 12, 2022 2:58 pm
Look to see if you can harvest any tax losses. If yes, keep the results in cash and sell something else for cash equal to your losses [no capital gain tax].
I can't see your portfolio so this may or may not be helpful. Good Luck.
I have no losses to harvest. I have to sell gold and stocks, both of which are up since I bought them.

Re: Rebalancing advice needed

Posted: Thu May 12, 2022 9:16 pm
by whatchamacallit
Historically, equal parts stock, long treasury and gold has outperformed the permanent portfolio but with deeper drawdowns.

Since we have already had quite the drawdown, it sure seems like the correct answer would be to stay where you are at.


https://www.portfoliovisualizer.com/bac ... tion4_2=33

Re: Rebalancing advice needed

Posted: Thu May 12, 2022 10:51 pm
by Dieter
Are you reinvesting dividends / distributions?

If so, as already paying taxes in those, maybe don’t reinvest and put the stock and LTT distributions into cash?

While what I have in taxable is small, what I do to simplify the number of lots to track (I might reinvest once a year if needed to rebalance)

Re: Rebalancing advice needed

Posted: Fri May 13, 2022 4:35 pm
by ahhrunforthehills
Dump the PP allocation.

DISCLAIMER: I already know this is going to be heresy and I am not really looking to get into the weeds again. This has been discussed previously ad nauseam. IMHO, the risk-reward profile of the PP is much more complicated then people here want to believe. I also believe this forum has a lot of echo-chamber bias (this became painfully clear a couple years ago when there was little logical reason to hold any LTT... let alone 25% of it).

Rebalancing is a taxable event. You are in taxable accounts. The PP is a rebalancing methodology. The PP is crap for you.

You have a lump sum from your business exit a couple years ago. You probably only need enough cash to cover drawdowns periods (and statistically, you probably don't even need that much).

#1: The PP is first-and-foremost a "philosophy" of putting your investments on auto-pilot so you can be STRESS FREE and enjoy life.

#2: The PP is an investment methodology that takes a substantial hit on performance and, for simplicity purposes, completely ignores major changes in both taxation and macro-economic changes to make #1 possible.

If you are "stressed" about your finances, then the Permanent Portfolio philosophy HAS LITERALLY FAILED to achieve its PRIMARY OBJECTIVE. You are literally getting the worst of both worlds (giving up performance while still stressing about investments).

The HB PP is simple enough for grandma to understand. The cost for that simplicity is obviously significant. I suspect the buyer's remorse you are currently feeling will continue throughout your retirement until you either accept it (taking the tax and performance hits) or move on to something else.

If I were you, I would reconstruct an allocation that is based on your taxable accounts, your age, your net worth, your estate plan, etc.

Sorry for the tough love... but the world of finance takes no prisoners :)

Re: Rebalancing advice needed

Posted: Sat May 14, 2022 11:53 am
by jason
I don't know of another asset allocation that would be less stressful. I still think the PP is the sweet spot for risk/reward for an investment account where you really can't afford to lose money, which is my situation. Did Harry Browne say that for people in retirement taking cash out of the PP each year, you should rebalance whenever cash drops below 15%? Because I didn't want to pay taxes, I let it go all the way down to 5% and that was an expensive choice YTD in 2022.

Re: Rebalancing advice needed

Posted: Sat May 14, 2022 12:09 pm
by whatchamacallit
I think taxes are one of those things that are guaranteed.

I am not in the withdrawal phase but in my head, I expected to just sell from the asset that is up at the moment.

That may then prevent a need to rebalance and also forces you to sell high.


It would also spread out your taxes to each year instead of coming up on a big rebalance every few years.

Re: Rebalancing advice needed

Posted: Sat May 14, 2022 3:03 pm
by Xan
jason wrote:
Sat May 14, 2022 11:53 am
I don't know of another asset allocation that would be less stressful. I still think the PP is the sweet spot for risk/reward for an investment account where you really can't afford to lose money, which is my situation. Did Harry Browne say that for people in retirement taking cash out of the PP each year, you should rebalance whenever cash drops below 15%? Because I didn't want to pay taxes, I let it go all the way down to 5% and that was an expensive choice YTD in 2022.
The official HB prescription was to spend out of cash and rebalance when it hit 15% (or any other asset got out of bounds).

Re: Rebalancing advice needed

Posted: Sat May 14, 2022 3:13 pm
by jason
Xan wrote:
Sat May 14, 2022 3:03 pm
jason wrote:
Sat May 14, 2022 11:53 am
I don't know of another asset allocation that would be less stressful. I still think the PP is the sweet spot for risk/reward for an investment account where you really can't afford to lose money, which is my situation. Did Harry Browne say that for people in retirement taking cash out of the PP each year, you should rebalance whenever cash drops below 15%? Because I didn't want to pay taxes, I let it go all the way down to 5% and that was an expensive choice YTD in 2022.
The official HB prescription was to spend out of cash and rebalance when it hit 15% (or any other asset got out of bounds).
In practice, do most people do a full rebalance when cash gets down to 15%, or do most people wait until they are almost out of cash and just sell a little of whatever asset is at the highest percentage of the portfolio?

Re: Rebalancing advice needed

Posted: Sat May 14, 2022 3:21 pm
by Kevin K.
I'm with ahhrunforthehills on this.

Despite the "permanent" part, the PP (brilliant as Browne was) both reflected the times it was created in and continued to evolve and change even during his lifetime. I'm among those who think it's highly likely he'd have had little if any interest in LTT's offering negative real returns, or that he'd have been happy with only owning a total U.S. stock market fund whose performance was entirely driven by a few high-flying tech firms.

I like the Golden Butterfly because while it's grounded in the PP, it tilts a bit towards the most likely of the four economic circumstances the PP was designed to address (prosperity) by upping and intelligently diversifying the equities, while still holding plenty of gold and Treasuries. Replace its Treasury barbell with iBonds, TBills and perhaps a slug of VTIP and you've got something PP-inspired that reflects where we are economically and politically - which is to say knee-deep in the unwinding of a massive asset bubble and unprecedented currency debasement caused by the Fed's reckless money printing and kick-the-can-down-the-road political "leaders."

Cash in the form of 3-6 month TBills may very well be the best (which is to say, "least worst") performing asset for some time to come (other than iBonds, of course) - still losing to inflation but not subject to double-digit plus losses for years to come as could well be the case with both equities (especially large-cap-growth) and longer-duration bonds (the LTT rout may still be in its early stages).

Perhaps also worth taking a look at some of the other portfolios on the Portfolio Charts site. If one doesn't conflate volatility with risk something like Tyler's brilliant Pinwheel Portfolio, which unlike the PP/GB doesn't place outsized bets on any one asset class, could be worth a close look.

Re: Rebalancing advice needed

Posted: Sat May 14, 2022 4:00 pm
by jason
The scenario playing out now is one that I envisioned and was one of the reasons why I chose the PP in the first place. What is playing out now is high inflation, rising interest rates, with a potentially weakening economy. This was the exact scenario that I thought gold was supposed to bail us out in. Rising interest rates are bad for bonds. Weakening economy is bad for stocks. Gold was supposed to be the winner. Gold is what is letting everyone invested in the PP down right now. I know the dollar has gained strength so that is part of it. But why else is gold not the white knight it's supposed to be right now?

Re: Rebalancing advice needed

Posted: Sat May 14, 2022 4:27 pm
by ahhrunforthehills
jason wrote:
Sat May 14, 2022 4:00 pm
The scenario playing out now is one that I envisioned and was one of the reasons why I chose the PP in the first place. What is playing out now is high inflation, rising interest rates, with a potentially weakening economy. This was the exact scenario that I thought gold was supposed to bail us out in. Rising interest rates are bad for bonds. Weakening economy is bad for stocks. Gold was supposed to be the winner. Gold is what is letting everyone invested in the PP down right now. I know the dollar has gained strength so that is part of it. But why else is gold not the white knight it's supposed to be right now?
Pump the breaks on that. If you transitioned out of bonds a couple years ago (when it was a major discussion here) and only held Stock and Gold at a 2:1 ratio (plus enough cash for a few years living expenses), you would be around +10% instead of -1%. You would also have less of a tax burden. You would have also had a better risk/return profile.

I am not pulling this out of thin air. This is literally the discussion we were having years ago.

Harry Browne said a lot of things. His views changed as interest rates changed. Ironically, keeping a 25/25/25/25 allocation is probably the LEAST Harry Browne thing you could do when interest rates bottomed out. Based on his track record, he would have changed the allocation and called it something more ignorant like the Super-Duper Permanent Portfolio. He was literally just some guy.
jason wrote:
Sat May 14, 2022 11:53 am
I don't know of another asset allocation that would be less stressful. I still think the PP is the sweet spot for risk/reward for an investment account where you really can't afford to lose money, which is my situation. Did Harry Browne say that for people in retirement taking cash out of the PP each year, you should rebalance whenever cash drops below 15%? Because I didn't want to pay taxes, I let it go all the way down to 5% and that was an expensive choice YTD in 2022.
Nobody wants to lose money. In fact, I would be willing to bet I am even more conservative than you. It isn’t “performance chasing” when you are obtaining higher returns with less risk.

No disrespect intended, but are you an emotionally stable investor? Do you NEED to BELIEVE in some type of FIXED SYSTEM that will allegedly work in all environments?

Some people need religion. Some people can eat hamburgers but can’t meet the cow. Some people need a “timeless” investment philosophy. My father is an extremely emotional investor. Something like a PP would be great for him and keep him from being a danger to himself.

To be even more blunt… the PP “Philosophy” is for gambling addicts. That is why it has a VP. It allows you to scratch your itch without destroying yourself. You are relenting to a higher philosophy to keep you on the path. Just like how AA and religion go hand-in-hand.

If you need the “philosophy” due to your personality, then perfect. Stay where you are.

Keep in mind that here are 2 different kinds of people that have invested in a 25/25/25/25 allocation. One kind found out about the PHILOSOPHY of the PP. The other kind naturally gravitated towards the asset allocation on their own due to market conditions, risk/reward profile, and personal financial status (and many of them ended up on this forum as it provided additional information that could validate/invalidate their assumptions). Obviously, most of that second group left years ago after the fundamentals that brought them here had changed. What is left is for the most part is the “just trust the [philosophical] system” crowd.

If you are someone who needs the philosphy, you just need to accept the warts of it.

Re: Rebalancing advice needed

Posted: Sat May 14, 2022 5:48 pm
by Kevin K.
jason wrote:
Sat May 14, 2022 4:00 pm
The scenario playing out now is one that I envisioned and was one of the reasons why I chose the PP in the first place. What is playing out now is high inflation, rising interest rates, with a potentially weakening economy. This was the exact scenario that I thought gold was supposed to bail us out in. Rising interest rates are bad for bonds. Weakening economy is bad for stocks. Gold was supposed to be the winner. Gold is what is letting everyone invested in the PP down right now. I know the dollar has gained strength so that is part of it. But why else is gold not the white knight it's supposed to be right now?
Because gold has never been a good inflation hedge. William Bernstein's book "Deep Risk" ought to be required reading for anyone invested in, or thinking about investing in, the PP. It's essentially a thoughtful summary of and response to conversations he had with Craig Rowland about Browne and the PP. Here's a quick summary of the most relevant points here from an old review of that book in Forbes:

"First in terms of the probabilities that each threat will manifest, inflation is high, confiscation is medium, and deflation and devastation are low. Inflation, though high in probability, has a lower cost for protection. It is the most relevant for retirees to worry about, but it is also the least catastrophic for a globally diversified investor. It is the easiest to protect against with international diversification, TIPS held to maturity to match spending needs, delaying Social Security, and an inflation-adjusted annuity. A globally diversified stock portfolio is most effectively protected from the deep risk of inflation, though stocks do exacerbate shallow risk. Meanwhile, unexpected inflation devastates traditional bonds.

Deflation, on the other hand, is the least likely to happen. It is good for bonds and bad for stocks. Solutions include cash, bonds, and international diversification, as well as gold. But using bonds and bills carries a high cost if we experience inflation rather than deflation.

As for confiscation and devastation, the best defenses are holding foreign assets and having a means for escape. He argues that confiscation is a likely deep risk as taxes will likely increase in the future.

Bernstein’s conclusion is that the best long-term defense against deep risk is a globally diversified equity portfolio with tilting toward value and precious metals and natural resource companies, TIPS, and potentially some gold and foreign real estate. Because of inflation, bonds become riskier than stocks over long horizons, while shallow risk makes investors with shorter time horizons more vulnerable with stocks. For lifetime financial planning, determining how to transition between deep risk and shallow risk at different points in the lifecycle is one of the greatest challenges facing wealth managers."

For more on gold specifically the best thing I've ever read is Tyler's article on Portfolio Charts:

https://portfoliocharts.com/2020/08/21/ ... e-of-gold/

So getting back to your comments Jason, IMHO it's the entire PP that is letting investors down right now. Long-term treasuries are toxic, while having all of your equity position in a U.S. total stock market fund that relies on tech stocks that are getting killed for all of its returns is moronic. At least with cash in TBills you're sure to only lose ~8% to inflation, while gold has actually done quite well and - it seems to me - is likely to do even better given the level of currency debasement the Fed has engaged in.

Re: Rebalancing advice needed

Posted: Sat May 14, 2022 6:14 pm
by Kevin K.
ahhrunforthehills wrote:
Sat May 14, 2022 4:27 pm

Keep in mind that here are 2 different kinds of people that have invested in a 25/25/25/25 allocation. One kind found out about the PHILOSOPHY of the PP. The other kind naturally gravitated towards the asset allocation on their own due to market conditions, risk/reward profile, and personal financial status (and many of them ended up on this forum as it provided additional information that could validate/invalidate their assumptions). Obviously, most of that second group left years ago after the fundamentals that brought them here had changed. What is left is for the most part is the “just trust the [philosophical] system” crowd.

If you are someone who needs the philosphy, you just need to accept the warts of it.
These are good points. I know I'm not alone in having discovered the PP midway through the 2008 market crisis, I think through the epic Bogleheads thread started and largely moderated by Craig Rowland and J.K. Larson. At the time I saw my complex, slice-and-dice, global, small-cap and value tilted DFA portfolio with only 40% in equities lose 23% despite backtesting that showed it could *only* lost 8-9%. And of course the PP did great - thanks mostly to LTT's and secondarily to gold. After that it was read everything I could by and about Harry Browne, and then of course Rowland & Lawson's excellent book on the PP. I stayed with the "pure" PP for 5 years and have no regrets about doing so - even though in retrospect I'd have been much better off sticking with the DFA portfolio and developing a better ability to distinguish between volatility and risk.

The PP is, by design, a bunker (maybe that explains why it appeals so much to folks with large stashes of MRE's and ammo stored in culverts ;) ). But it should've been as obvious to everyone here as it was to Bill Bernstein that the 4 x 25 is an exercise in symmetry and simplicity at the expense of both returns and protection from market vagaries - and his book on this was published in 2013. Since then massive money printing by the Fed and irresponsible spending in Washington have debased the dollar to an unprecedented degree while suppressing interest rates and all but forcing money into risk assets - all of which are far into bubble territory.

Here's a quote from an interview with Eugene Fama, one of the founders of Modern Portfolio Theory and a principal at DFA (I'll provide the link below) about the current inflation situation:

"What can the Fed do? Can they do anything?

Well, the question is if they raise the Federal funds rate, how far do they have to raise it to have any effect on inflation? That's a wide open question. We don't have any data at all on that because this QE business is a new regime. The Fed was always operated in an environment where there were no free reserves basically. And now you get, I think about $9 trillion worth of pre reserves out there. So we've never had this regime, so we don't know what it will take to make it work, what it will take in terms of raising this short term rate. The big discussion is, is that an eighth a quarter? Well, I don't think that's anyway near, would it have to push it up to have any effect. It might be 10%. That's extreme, but wouldn't surprise me that they had to bring it up so that the real rate was positive. It wouldn't surprise me at all because historically the real rate's been fluctuating within plus or minus 1%, zero."

Meanwhile TLT is down 21.28% YTD, cash is losing ~8% to inflation, VTI is down 16.53% and GLD with its negative 1.27% return isn't exactly looking like it's gonna come to the rescue. Can you imagine what'll happen with the PP if Fama's suggestion that 10% short-term Treasury rates might be needed to have any real effect on inflation (which is currently running at 8.5%)? Not really thinking that a bunker sitting on quicksand deserves to be thought of as "permanent."

Link to interview with Eugene Fama (there's a transcript too):

https://rationalreminder.ca/podcast/200

Re: Rebalancing advice needed

Posted: Sat May 14, 2022 6:51 pm
by dualstow
Craig Rowland and J.K. Larson
Just a tiny correction: I think it’s J.M. Lawson

Re: Rebalancing advice needed

Posted: Sat May 14, 2022 10:16 pm
by Kevin K.
dualstow wrote:
Sat May 14, 2022 6:51 pm
Craig Rowland and J.K. Larson
Just a tiny correction: I think it’s J.M. Lawson
Thanks very much dualstow!

I owe he and Craig a lot and ought to at least be able to spell their names correctly.

Re: Rebalancing advice needed

Posted: Sun May 15, 2022 5:42 am
by dockinGA

These are good points. I know I'm not alone in having discovered the PP midway through the 2008 market crisis, I think through the epic Bogleheads thread started and largely moderated by Craig Rowland and J.K. Larson. At the time I saw my complex, slice-and-dice, global, small-cap and value tilted DFA portfolio with only 40% in equities lose 23% despite backtesting that showed it could *only* lost 8-9%. And of course the PP did great - thanks mostly to LTT's and secondarily to gold. After that it was read everything I could by and about Harry Browne, and then of course Rowland & Lawson's excellent book on the PP. I stayed with the "pure" PP for 5 years and have no regrets about doing so - even though in retrospect I'd have been much better off sticking with the DFA portfolio and developing a better ability to distinguish between volatility and risk.
So you 'performance-chased' in 2008 and gave up on a portfolio you'd been using? And the portfolio you jumped from then went on to out-perform the portfolio you jumped into?

There are at least some of us on the board who don't consider the PP a 'religion'. We consider it a decent investment philosophy/allocation that will never be the best performing, or the worst performing, and that once we've made the decision to invest in the PP (no matter the reason), making changes is only performance chasing and is likely to end up worse than just riding it out with the PP.

Re: Rebalancing advice needed

Posted: Sun May 15, 2022 6:46 am
by barrett
Kevin K. wrote:
Sat May 14, 2022 6:14 pm
Meanwhile TLT is down 21.28% YTD, cash is losing ~8% to inflation, VTI is down 16.53% and GLD with its negative 1.27% return isn't exactly looking like it's gonna come to the rescue. Can you imagine what'll happen with the PP if Fama's suggestion that 10% short-term Treasury rates might be needed to have any real effect on inflation (which is currently running at 8.5%)? Not really thinking that a bunker sitting on quicksand deserves to be thought of as "permanent."
I'm curious if you think there's a better asset mix to handle rising rates. And apologies if you already mentioned that up thread. Many Bogleheads seem surprised that both their bonds and stocks are getting hit at the same time with a lot saying, "At least my I-Bonds are doing OK."

On a personal note, I really need to understand TIPS better. After reading a piece on them in the NYT, I bought a bunch in the early aughts and held them to maturity. Those did great but I believe the starting point was a no brainer.

Anyway, I am curious about what folks think would be a better asset mix than the PP to handle the high probability that rates will keep rising. That last part about high probability is important, obviously. If it was an absolute forgone conclusion that rates would continue to rise dramatically, no one would be holding long bonds in the first place.

ETA. I see that you have more or less answered this above, Kevin, with your Bernstein reference. But I am curious to hear what others think.

Re: Rebalancing advice needed

Posted: Sun May 15, 2022 7:14 am
by barrett
Dieter wrote:
Thu May 12, 2022 10:51 pm
Are you reinvesting dividends / distributions?

If so, as already paying taxes in those, maybe don’t reinvest and put the stock and LTT distributions into cash?
I don't see that you have answered Dieter's question, Jason. With everything in a taxable account, "turning off" reinvestment of dividends and interest would at least help with your cash issue.

In addition to Desert's excellent suggestions above, I would add that I think a major psychological issue for us small investors (who are depending on our life savings to support ourselves) is that we get "anchored" on our all-time high account balances. Because we know in advance that investing in pretty much anything guarantees that we'll repeatedly suffer significant draw downs, what I try to do is never get too tied to our all-time high number. So maybe a helpful mental trick is to never see yourself as having $1,000,000 unless your actual balance is, say, $1,200,000. Or something along those lines.

Lastly, if you are living off assets using a "traditional" 4% annual withdrawal, you are pulling money out so slowly that shorter term draw downs shouldn't affect your lifestyle too much. 4% a year is only .33% per month. That leaves 99.67% untouched each month.

Re: Rebalancing advice needed

Posted: Sun May 15, 2022 9:40 am
by Kevin K.
barrett wrote:
Sun May 15, 2022 6:46 am
Kevin K. wrote:
Sat May 14, 2022 6:14 pm
Meanwhile TLT is down 21.28% YTD, cash is losing ~8% to inflation, VTI is down 16.53% and GLD with its negative 1.27% return isn't exactly looking like it's gonna come to the rescue. Can you imagine what'll happen with the PP if Fama's suggestion that 10% short-term Treasury rates might be needed to have any real effect on inflation (which is currently running at 8.5%)? Not really thinking that a bunker sitting on quicksand deserves to be thought of as "permanent."
I'm curious if you think there's a better asset mix to handle rising rates. And apologies if you already mentioned that up thread. Many Bogleheads seem surprised that both their bonds and stocks are getting hit at the same time with a lot saying, "At least my I-Bonds are doing OK."

On a personal note, I really need to understand TIPS better. After reading a piece on them in the NYT, I bought a bunch in the early aughts and held them to maturity. Those did great but I believe the starting point was a no brainer.

Anyway, I am curious about what folks think would be a better asset mix than the PP to handle the high probability that rates will keep rising. That last part about high probability is important, obviously. If it was an absolute forgone conclusion that rates would continue to rise dramatically, no one would be holding long bonds in the first place.

ETA. I see that you have more or less answered this above, Kevin, with your Bernstein reference. But I am curious to hear what others think.
HI barrett -

I certainly don't have a crystal ball about any of this stuff. The best article I've seen in answer to your question is this post by Larry Swedroe summarizing the take-aways from two in-depth studies:

https://www.advisorperspectives.com/art ... -inflation

He goes into a lot of interesting details but here's the quick summary (from the article):

"The best hedge against inflation – admittedly imperfect – has been a diversified portfolio of real assets including TIPS, real estate, commodities used sparingly, and certain equities selected for their ability to pass through cost increases to consumers. International equities and debt may also be a hedge against domestic inflation due to the currency effect."

The problem is of course one has to have the insurance in place BEFORE the shit hits the fan - e.g. TIPS bought back when they offered a real yield, some rental real estate bought before rather than during the COVID/work-from-home/digital nomad RE bubble, etc.

But to me the main point is that, as Bernstein says, inflation is the most likely of the four economic scenarios to occur and the PP is poorly positioned to do well when it happens. The PP is sold (as we heard again upthread) on Browne's incorrect assertion that gold provides inflation protection. Swedroe convincingly refutes the popular Boglehead claim that stocks will do the job, because they only do so over time frames that exceed the average investor's time in the market. Long-term Treasuries are of course the absolute worst asset to own in times of high inflation, and while cash may well end up being the "least worst" thing to have it's not like it's going to help all that much - unless you hold most or all of it in iBonds. And PP'ers tend to rule out TIPS either on the grounds of their anomalous bad performance during the 2008 market crash or due to embedded distrust of the government ("why should I buy fire insurance from the arsonist/"). Meanwhile those who bought TIPs when rates were high (not to mention all of the old timers at Bogleheads who bought what was then a 30K annual purchase limit on iBonds - charging them to their Visa cards to get mileage points too because the Treasury actually allowed it - are probably the only folks riding things out now without a care in the world.

The well-known personal finance writer Jonathan Clements, who is right at retirement age but has a cast-iron stomach when it comes to volatility, has about 75% of his portfolio in globally-diversified, small cap and value tilted equities and the rest equally divided between TBills and Vanguard's VTIP short-term TIPS ETF. I couldn't ride out a long-lasting, 50%+ equity downturn and sleep well at night but I certainly think it's a good approach for someone who has either a large enough portfolio that a downturn like that won't really effect their lifestyle or guaranteed sources of income (pension, SS, annuities). On the other hand, I spoke to an elite financial advisor the other day who has been managing money for high net-worth investors and foundations for over 30 years using mostly DFA funds and he said, almost as an aside, that he has all of HIS family's money in half short-term TBills, half gold. I almost asked him, "so do you call that "The Permanent Portfolio?"

Re: Rebalancing advice needed

Posted: Sun May 15, 2022 10:08 am
by Kevin K.
dockinGA wrote:
Sun May 15, 2022 5:42 am

These are good points. I know I'm not alone in having discovered the PP midway through the 2008 market crisis, I think through the epic Bogleheads thread started and largely moderated by Craig Rowland and J.K. Larson. At the time I saw my complex, slice-and-dice, global, small-cap and value tilted DFA portfolio with only 40% in equities lose 23% despite backtesting that showed it could *only* lost 8-9%. And of course the PP did great - thanks mostly to LTT's and secondarily to gold. After that it was read everything I could by and about Harry Browne, and then of course Rowland & Lawson's excellent book on the PP. I stayed with the "pure" PP for 5 years and have no regrets about doing so - even though in retrospect I'd have been much better off sticking with the DFA portfolio and developing a better ability to distinguish between volatility and risk.
So you 'performance-chased' in 2008 and gave up on a portfolio you'd been using? And the portfolio you jumped from then went on to out-perform the portfolio you jumped into?

There are at least some of us on the board who don't consider the PP a 'religion'. We consider it a decent investment philosophy/allocation that will never be the best performing, or the worst performing, and that once we've made the decision to invest in the PP (no matter the reason), making changes is only performance chasing and is likely to end up worse than just riding it out with the PP.
Hi dockin GA -

Just to be clear, I wasn't "performance chasing" pre-2008. I've always been more of a saver than an investor by nature and was simply looking for a portfolio with modest but fairly consistent real returns that was highly unlikely to suffer from deep or protracted draw-downs. And what I was trying to say - and I obviously did a poor job - was that the well-diversified 40% equity/60% bond portfolio I was already in when the crash occurred would've done just fine if I hadn't freaked out at the ~25% paper losses it experienced.

With respect to the idea that making changes in the PP is performance-chasing: Browne regularly changed what went into the PP during his lifetime (just look at the components of the original PP in today's PRPFX fund), and even dyed-in-the-wool PP'ers continue to monkey with it. Using STT's instead of a Treasury MM fund, "paper" gold instead of bullion, subbing out ITT's for the LTT's, etc. And no one buys the PP for its performance anyway: they buy it for its purported ability to be the place to keep, as Browne said, "money you can't afford to lose." And in the context of a 40 year bull run in bonds it could do just that. Going forward though? I agree it's never going to be the worst option but I think it's wise to look at how to build a better bunker.

Re: Rebalancing advice needed

Posted: Sun May 15, 2022 10:41 am
by ahhrunforthehills
Kevin K. wrote:
Sun May 15, 2022 10:08 am
I agree it's never going to be the worst option but I think it's wise to look at how to build a better bunker.
Lots of great input Kevin. I appreciate seeing your well thought-out posts.
dockinGA wrote:
Sun May 15, 2022 5:42 am

We consider it a decent investment philosophy/allocation that will never be the best performing, or the worst performing, and that once we've made the decision to invest in the PP (no matter the reason)

As you mention above, it is a philosophy. Enjoy life. Don't stress about investments and don't waste time in your life thinking about it. It is a passive lazy portfolio.

When looked at through that lens, it is a pretty good methodology.

dockinGA wrote:
Sun May 15, 2022 5:42 am

making changes is only performance chasing and is likely to end up worse than just riding it out with the PP.

100% Disagree. This idea that if you are NOT in a PP that you are “performance chasing” is nonsense. There is no way that factors like taxation, macro-economic, estate size, etc. can possibly allow a general cookie-cutter approach that is supposedly applicable to everybody would be the most effective from a risk/reward approach.

Here is a really bad example. Let's say your kids in NY sometime stay home because of snow days. Let's say you need to call off work because of that. It is stressful for you. You need to hedge your loss of income so you pay to have a babysitter on standby. Don't stress, The old lady down the street agrees to be on standby for $5/day. Done. You now have stability. You now won't have the stress... unless you start overthinking it.

This is the problem with the PP. Overthinking it.

The PP is designed for you to stop thinking about it. Looking at it too closely makes you realize the protection it offers is subpar.

The reality is that the probabilities of a snow day occurring in specific months is different. Frankly, someone in a PP is much more likely to do more worse than me. But again, I am incorporating investing into my life (where a PP follower is supposed to forget about their investments). I am taking into consideration my own personal needs of tax, estate, interest rates, geopolitics, etc. which the PP completely ignores.

None of this is meant to bash the PP. However, the OP seems to have his butt on 2 different chairs. IMHO, he first needs to pick which one he wants since his problems would not be sufficiently addressed by a simple VP addon.