Boglehead PP Debate

[hrux]

For those interested, a new ongoing debate...

http://www.bogleheads.org/forum/viewtop ... sc&start=0

[MediumTex]

Can you summarize what the debate is about?

The BH objections to the PP get tiring after a while. 

It's like a bunch of flat earthers talking about how pictures of the earth from space are faked.

[AdamA]

Can you summarize what the debate is about?

The BH objections to the PP get tiring after a while. 

It's like a bunch of flat earthers talking about how pictures of the earth from space are faked.

I read through it...it's about most of the same stuff as usual.  Mostly, they all hate gold because it generates no dividends or interest payments.

[doodle]

I think that no dividends or interest is golds greatest asset. It means that it cannot be accurately valued and therefore can do ridiculous things like appreciate by 1000% in a short time span. Stocks and bonds generally don't have this ability because of the fact that their valuations are constrained by things like yield or earnings.

[Indices]

They are terrified and angry that their stock heavy portfolios might not work after all. And even if they do work going forward they will be volatile and nerve wracking to watch. Someone comes along and says you've been doing it wrong all along and you get very angry and defensive. It's a natural reaction.

[MediumTex]

I just spent a little time over at BH looking over the PP posts.

I'm really surprised that some of the PP exchanges are so testy.

FWIW, it was never my impression that any PP enthusiasts were trying to say that the PP was superior to anything or the ultimate approach to investing.  In fact, I always thought that a PP user would do well just to convince others that he wasn't crazy.  The idea that we would go from convincing others that we are not crazy to desiring to be recognized as holders of the Holy Grail of investing is sort of amusing.

To a PP rookie I would say the following:

1. The PP provides a simple approach to investing that has over the last 40 years provided a stable inflation-adjusted return of around 4.5% (about 9% nominal).

2. The PP is deeply counterintuitive, and thus most people simply cannot accept that it could (or does) work as advertised.  It looks weird.  If it didn't look so weird, it probably wouldn't work so well.

3. I sincerely believe that the PP can provide excellent service to people whose temperament aligns well with it.  I also recognize that the PP is not for everyone, and there are MANY investors who probably should seek more risk in order to get the larger returns they are seeking.  FWIW, though, Harry Browne provided a framework for taking on more risk while using the PP by describing the "variable portfolio" concept which can be used to take whatever level of risk the investor wishes, so long as it is with money that the investor can afford to lose.

The one thing that I consistently notice across the investment world is that people are surprised at losses even when their prior gains strongly suggested that sooner or later such losses would show up; most stock-heavy allocations illustrate this concept on a regular basis.  

The realization I have come to based upon the observation above is that many investors actually have a lower risk tolerance than they realize, and thus many investors' portfolios are more akin to emotional time bombs than rational approaches to investing.  If it weren't true that many retail investors fit this description, we would see far fewer of them consistently selling out of their investments at the worst possible time.  

For investors who wish to get off the roller coaster that investing often becomes when following the conventional wisdom (e.g., following green ribbons down the street that supposedly lead to retirement), the PP can be, IMHO, a welcome respite from seemingly never being able to leave the investment casino a winner.

I think it's helpful to consider that the green ribbons leading to retirement may be about as realistic as the commercials showing alcohol consumption leading to nothing but a good time.  The truth is that alcohol consumption has probably led to more self-inflicted harm in peoples' lives than any other legal activity in our society.  Is it possible that the messages Wall Street sends to the individual investor are similarly inaccurate, self-serving and ultimately destructive?

Lots of investors (and lots of people for that matter) imagine that they are free agents on a free range when they are actually just wandering around a roomy feedlot.  For a person who desires to avoid this type of fate, the PP can be a very useful tool.

[Lonestar]

Well said MT!

I have spent several years over at the Boglehead Forum.  There are a lot of financially savvy folks over there, but I've seen many ugly discussions over slice and dice vs. TSM/TBM.  Once you get out of the comfort zone of these concepts, you are labeled a heretic.  In viewing other types of asset allocation, one must be very careful not to become too legalistic ( and this becomes difficult for some).

I guess my problem is that I don't expect everyone to jump into the PP head first, but after understanding it may not compete with other strategies as far as maximum returns, at least come to grips with it being a safe, low volatility, alternative passive investment strategy.

I still find it amazing how "Bogle-ish" the PP is, meeting all the qualifications except for the gold component.  I bet if the gold were replaced with REIT's, Tips, munis or any other asset class it would quickly become a hit with the crowd.

The 40 years of data won me over!

[craigr]

I bet if the gold were replaced with REIT's, Tips, munis or any other asset class it would quickly become a hit with the crowd.

Yep. Gold is the sticking point. LT Treasuries to a lesser degree. They also love to be stock heavy. Other than that, the portfolio is very much Diehard like. Harry Browne was a Diehard before the Diehards even existed. His writings over 30 years could have been written by any of the Boglehead book authors.

The 40 years of data won me over!

Even more than that, Browne's economic model on structuring the portfolio is unique and a very powerful way of building diversification. He runs circles around any investment author I've read in the area of portfolio construction. He was way ahead of his time.

[clacy]

It's sort of funny that gold is the sticking point considering what it has done in the last 10 years.  Look at a gold/S&P ratio chart.  It's easy to see where the money has flowed into. 

I could sort of understand if the sticking point was BUYING INTO GOLD AT THESE PRICE LEVELS.  That would be understandable. But that isn't the anti-gold argument.  It's simply gold that is the sticking point, not the high price.

[MediumTex]

It's sort of funny that gold is the sticking point considering what it has done in the last 10 years.  Look at a gold/S&P ratio chart.  It's easy to see where the money has flowed into. 

I could sort of understand if the sticking point was BUYING INTO GOLD AT THESE PRICE LEVELS.  That would be understandable. But that isn't the anti-gold argument.  It's simply gold that is the sticking point, not the high price.

It is ironic that they want to pick right now to hate gold.

It seems to me that ten years of performance and a move from $250 and ounce to $1,800 speaks for itself. 

I thought you were supposed to wait until gold STOPPED performing to hate it.

The thrust of the anti-gold argument seems to be "This is stupid!", to which I would reply "Maybe it is stupid, but so are a lot of things that human beings do."  To paraphrase Keynes, the market can stay stupid longer than you can stay solvent.

The really humorous thing about the current gold bashers is that many of them will be buying gold before this bull market is over.  It always goes that way.

[brick-house]

Haters gonna hate.... Bogleheads keep playing the role of Frank Grimes to the Permanent Portfolio's Homer Simpson...

[Gumby]

I can relate to having a fear against gold before being exposed to the PP. For me, it helped to think of gold as a foreign currency with no government. Would Bogleheads be against investing in a foreign currency?

[moda0306]

I had the same attitude towards gold.  A "useless" metal...

Now I basically see it as Gumby mentions it... a currency that doesn't need government, and basically the only reasonable option for that (silver being a distant second).  But, oddly, despite gold being a currency without a government, government's hold it... lots of it.

I still have a nagging question in the back of my mind as to why we place sucha high value on gold.  I also have doubts as to why a yellow metal should have the same CAGR as investing in active businesses.  Lastly, I wonder if a 25% allocation is necessary to act as the inflation hedge... I think 10-20% may be more appropriate.

[MediumTex]

Another thing to keep in mind about gold is that world gold production has not spiked up the way one would expect in response to a quintupling in price.

I think we are probably seeing a similar phenomenon with gold as we are seeing with oil.  There may be a bit of "peak gold" unfolding, which would be very bullish for gold, as it would suggest that Mother Nature is not willing to adopt any kind of Helicopter Ben policies no matter how screwed up existing human economic institutions become.

[dragoncar]

Gold is "useless", but so are many things people pay premiums for (anything fashion related -- most clothes, handbags, Apple products).  Some day people might realize that gold is useless and sell it all.  Likewise, people might realize that they don't need an iPhone when they can have a cheap Nokia, they only really need to wear a burlap sack, etc.  If people became completely utilitarian, the stock market would collapse.

Ongoing production does worry me -- estimates are that there is upwards of 158,000 tonnes ever mined, and annual production has recently been around 2,500 tonnes per year.  So that's a built-in annual devaluation of around 1.5%.

[AdamA]

Yep. Gold is the sticking point.

It is, and that's really strange to me.  

If you took the bare bones Bogglehead portfolio of 50% Broad Stock Market Fund and 50% Broad Bond Market Fund and
made it 45%/45%/10% (10% Gold), these portfolios would probably function much better (slightly higher returns with less volatility).

The central idea behind these Bogglehead portfolios is noncorrelation.  I don't know why they wouldn't want some gold exposure. 

I'll bet if it was phrased the right way you'd get some of them to agree to gold ownership.  "50% stocks, 50% bonds, and then buy some gold coins equivalent to about 10% of your stock/bond mix, just in case..."

[stone]

I guess people who find the gold part of the PP impossible to stomach probably see gold as a commodity rather than as a type of money. To me the PP is 25% stocks, 75% money (with money being split equally between its three most divergent forms). Bogglehead people probably could understand that the volatility of stocks means that it is worth buffering them with a large reserve of money. If gold is simply thought of as a currency that can not expand at more than 1.5% per year (if that is the mining rate), then I think it is comprehensible. I guess the commodity part of gold's value (for decoration and electronics) might be $50 per ounce or something so it might as well be zero.

[dualstow]

I was a boglehead who came over to the dark side* in 2010. I can breathe easier now.

(*Was going to say Browne side, but that doesn't sound so good either.  ;) )

Just spent some time in the Canadian Rockies. It was interesting to watch the market crashes when I rose each morning (Strange switch to Mountain Standard Time) along with violent flash mobs in my town and riots in London and Birmingham. It kind of seemed like the world was falling apart with the burning apartment building in the UK above a red Dow scroll at the bottom of the screen.

If I knew how to whistle well I would have as I was walking through the fir trees and looking over the emerald lakes. Thank you Gold, SHY and long-term treasuries.

[smurff]

Some investors might argue that rebalancing is unnecessary. For those in accumulation that might be valid, for those in retirement however its important IMO to rebalance.

I'm still in the accumulation phase, so I have not had to sell anything to rebalance.  I add new infusions of capital to the cash component and use the cash component to adjust all four of the  allocations.  It has not been easy matching the speed of the precious metals appreciation, but I haven't let its value get outside the 15/35 bands.

Sometimes I wonder to myself whether by not selling anything yet during this early accumulation phase--I've only been doing the PP since 2009--will this mean that I have trouble (psychologically?) later on with selling strong items in the portfolio to buy more of its laggards.  But when I find myself  thinking about it, I chill out.  By putting the majority of my funds in the PP I've eliminated a major source of worry; no need replacing serious worry with the trivial kind.

[Storm]

Some investors might argue that rebalancing is unnecessary. For those in accumulation that might be valid, for those in retirement however its important IMO to rebalance.

I'm still in the accumulation phase, so I have not had to sell anything to rebalance.  I add new infusions of capital to the cash component and use the cash component to adjust all four of the  allocations.  It has not been easy matching the speed of the precious metals appreciation, but I haven't let its value get outside the 15/35 bands.

I think this is a great point - in the accumulation phase the PP allows you to rarely ever rebalance, yet we are always buying low.  For example, I bought $2200 worth of LT bonds the last week of July and they have appreciated handsomely since then.  I also bought $18,000 worth of TSM last week at what is hopefully a low.

So, if everything works out ok, we could theoretically never rebalance, and save ourselves the tax burden of doing so.  It's been a struggle to keep all of the bonds in non-taxable accounts, but so far I have been able to do this.

[Odysseusa]

Gold is an important part of the Permanent Portfolio. If we do not invest in gold, how can we take advantage of the fluctuations and re-balance them among the four types of assets?