A change of heart about the PP after reading another Harry book

[miyazaki]

I have recently had somewhat of a change of mind regarding the permanent portfolio after reading Harry Browne's "How I found freedom in an unfree world". When I first started reading about the portfolio in 2011, I thought it was a fantastic idea, but there were a couple of things that I didn't like about it. Firstly, I really like real estate or reits as an investment class. It's probably my favorite investment class, and the one that I understand the most because of previous jobs I have had. Secondly, I really don't like bonds in the current environment, because in order for the value of bonds to go up, the yield would be extremely low, and for the yield to go up, the price would go down significantly, a lose-lose situation in my mind. Thirdly, I am interested in silver as well as gold. Interestingly, I would be much more inclined to stick with the regular permanent portfolio if I had significantly more money, or if I were in retirement. However, I'm in the accumulation phase, so I've always felt uncomfortable holding so much in bonds and cash with current interest rates. Previously, I felt this was just my own bias, and that I should stick with the plan anyway. However, after reading Harry's own writings, I've changed my mind somewhat.

The below is an excerpt from "How I found freedom in an unfree world":

"You are responsible for what happens to you (even if someone else offers to accept that responsibility), because you're the one who'll experience the consequences of your acts.
You are the one who decides what is right and what is wrong - no matter what meaning others may attach to those words. You don't have to obey blindly the dictates that you grew up with or that you hear around you now. Everything can be challenged, should be challenged, examined to determine its relevance to you and what you want.

As you examine the teachings of others, you may find that some of it is very appropriate to you, but much of it may be meaningless or even harmful.

...

When you decide to take matters into your own hands, someone may ask you, "Who do you think you are? Who are you to decide for yourself...

The answer is simple: You are you, the person who will live with the consequences of what you do. No one else can be responsible, because no one else will experience the consequences of your actions as you will.

If you're wrong, you will suffer for it. If you're right, you will find happiness. You have to be the one to decide."



He wrote this talking about morality, but I felt it could apply to investing as well. He also wrote: "All the answers must come from you - not from a book or a lecture or a sermon. To assume that someone once wrote down the final answers for your morality is to assume that the writer stopped growing the day he wrote the code. Don't treat him unfairly by thinking that he couldn't have discovered more and increased his own understanding after he'd written the code. And don't forget that what he wrote was based upon what he saw and what he wanted from life."

Again, this is talking about morality, but could easily be adapted to talk about any subject.

I also remember listening to Harry's radio broadcasts. In the end, he often recommended listeners his own permanent portfolio, but I seem to remember one episode where he talked about "A permanent portfolio" (emphasis on "a" not "the"), whereby he talked about owning generally appreciating assets with an asset allocation that you were comfortable with keeping. Let's not forget that Harry's own permanent portfolio was also not "permanent", but changed at least twice, from heavy in precious metals, to including natural resources, silver and Swiss francs, to the final version. Therefore, I believe it's reasonable to change one's asset allocation, assuming you have a very good reason for doing so, and you can be confident enough with your decision to stick with it for a number of years. It's perfectly reasonable to look at your holdings every 5 to 10 years, to check that your allocation matches your personal needs and broad economic conditions. I believe one of the main points of having a permanent portfolio was to force yourself to buy low and sell high, and not to incur transaction costs and taxes by buying and selling frequently.

Personally, I bought into the permanent portfolio, but had strong feelings to change in early 2012, buying back in in mid 2012, and felt uncomfortable again in April 2013. I personally feel that keeping the 25x4 allocation will make me more likely to jump in and out of the portfolio, incurring a lot of fees, and not make me confident enough to stick it out through tough times. I have decided for myself a portfolio of stocks, reits, gold, silver and cash at 35/35/20/5/5. I understand that most people here would be uncomfortable with such a portfolio, but it works for me, and is something that I can understand. Most importantly, it's something that I want to stick with, because I decided about it by myself. By the way, according to my calculations, it has had around an 11% CAGR since 1972, a few down years worse than the 25x4, the worst being around -25% in 2008. However, I'm comfortable with that.

If interest rates got up to 8%, I would strongly consider going back to the 25x4 allocation, and when I reach retirement age, I will definitely choose an asset allocation geared towards capital preservation, probably overweighted in cash. Perhaps stocks/bonds/gold/cash 20/20/20/40. Anyway, I will have to decide at that time.

For anyone on these boards, I really recommend Harry's other books for a more in depth insight into what he was thinking. I believe Harry would approve of my decision, based on my reasoning of choosing it for my own personal peace of mind, my personal freedom of choice, doing something which will incur much fewer transaction costs. He would probably not approve of the allocation, but I don't think he could argue with the reasoning.

Finally, I just want to say that I'm really happy I found this forum. I don't think there's another place which discusses such a wide range of points regarding economic conditions, and it has really made me think more broadly about the economy.

I often see people on this board complaining about not being happy with one asset class or another. I'm not saying that everyone should abandon the PP, and it's especially not because of the PP's latest performance, but rather because of economic conditions. I just want to say that there is at least one person (myself), who really likes the ideas and writings of Harry Browne, and who has chosen a unique and personalized asset allocation. Not in defiance of Harry's portfolio, but as a result of Harry's broader philosophy.

What do you think?

[Kriegsspiel]

You may also like Epictetus.

[MediumTex]

Harry Browne's philosophical writings and ideas are stimulating and challenging.  I would say that if his writings were a catalyst for that much self-reflection on your part, then whatever conclusions you came to after the process were probably sounder than what you were doing before.

I like the PP based upon my own worldview, but I would say to you (or anyone else) to do what makes sense to you, not what makes sense to me.

[Libertarian666]

Harry has been a major influence in my life, and I agree with the idea that we need to do what we personally decide is best. My portfolio allocation is extremely different from the 4x25, even more than yours is, and is subject to major downdrafts (like the first half of this year). But I have chosen it based on my best analysis of what I think is coming, and it is the one that makes it easiest for me to sleep at night, all things considered.

[Pointedstick]

Harry has been a major influence in my life, and I agree with the idea that we need to do what we personally decide is best. My portfolio allocation is extremely different from the 4x25, even more than yours is, and is subject to major downdrafts (like the first half of this year). But I have chosen it based on my best analysis of what I think is coming, and it is the one that makes it easiest for me to sleep at night, all things considered.

Perhaps there's something to the idea of a permanent portfolio and not the permanent portfolio. 4x25 works for me, but would never work for many of the people close to me who ask me for investment advice. Above all else, you need to be honest with yourself. Do that, and even an allocation in 100% Ecuadorean junk bonds might make sense... well okay maybe there some limits.

[koekebakker]

The most important thing about your asset allocation is that you pick one that feels right for you. If you don't you will go from one reasonable allocation to another reasonable allocation, probably with some recency bias.

As much as I would like to invest in the 4x25 (makes so much sense, simplicity etc) I know I won't hold on to it in the long run. I know I will be always doubting myself, sitting on this huge pile of cash, gold and long-term bonds. I would always be worried about the low expected returns, about gold reacting to rising interest rates (the evidence of gold reacting to anything is meager), etc etc. So although the classic PP makes so much sense, it never feels right for me.

But I think it's perfectly possible to create your own PP based on Browne's guidelines: Pick some conservative stock/bond mix and add some gold, or even another low-correlated asset. That's about it.

[miyazaki]

I have heard about Stoic philosophy before, but never checked it out in detail, so perhaps now is a good time to read up on it. Thanks for the advice, Kriegsspiel.

I think it's great to see that there are other people who have been so influenced by Harry. MediumTex and Pointedstick to the point where you can follow the advice exactly and it works perfectly for your goals and personal outlooks on the world. Libertarian666 and koekebakker, creating your original asset allocation, but still active members on this forum and it seems like you're fans of the philosophy behind it.

After researching as many different asset allocations and conventional advice columns as I could, I've noticed that they all have pretty similar returns, so it matters less what you invest in, but more that you invest at all, and stay the course. Only panic selling, jumping in and out, or being 100% in one asset class with no exit strategy causes any problems. Therefore, choosing something you know you can stick with, and understanding why it's good for you, these are the most important points.

[happyspec]

At the moment I'm reading Harry's book "Why government doesn't work". And as much as I like the intellectual clarity of Murray Rothbard, I'm always hooked by the practical approach that Harry had to things. This goes as well for his book "how to find freedom" which boils down to "You are always responsible - and therefore it's up to you to decide". If you want to have a deeper impression of his insights think about getting his audio titled "Rule your world!" I highly recommed them.

Concerning the Permanent Portfolio I have some problems following the thoughts that have been laid out in this discussion. Let's be clear about terminology: The PP that Harry invented aimed to be a portfolio that could weather all economic conditions. And while everyone can and should have the portfolio that suits his aims and personality a stock- or gold- or bond heavy portfolio certainly isn't one in the sense of the PP.

I for my part invest the bulk of my assets into the PP while with one fourth of my assets I have a Variable Portfolio which is a market timing Portfolio for the broad stock market. I'm fully aware that both are totally different approaches that contradit each other but they work well for me. With 80 % of my mind/assets I'm agnostic and tell myself that I have no clue what the future brings, with 20% I play the markets when I get my technical signals. I do this because I had some good experiences with technical analysis but I know as well that I wouldn' t lay my complete financial wellbeing in this instrument. So I'm very happy that I have found the PP and this fantastic forum...

But for the sake of clarity: Don't let us talk about all kinds of PP. If we talk about PP it should be clear that we mean 4x25%. Any other portfolio is a VP

[sophie]

But for the sake of clarity: Don't let us talk about all kinds of PP. If we talk about PP it should be clear that we mean 4x25%. Any other portfolio is a VP

This is a theme that keeps cropping up.  Can I offer a different perspective here?

Harry Browne defined the Variable Portfolio very elegantly, by talking about investing vs. speculating.  When you invest, you accept the return that the market gives you.  When you speculate, you are trying to beat the market.  He then talked about the Variable Portfolio as the money you set aside for speculating, because you've decided you can afford to lose it.

The money that you can't afford to lose is what you invest.  By Harry Browne's definition, investing includes any plan that is based on getting market returns, and not trying to beat them by engaging in market timing.  He then went on to recommend his Permanent Portfolio concept as the ideal way to invest, but he was very clear that it isn't the only way.  Portfolios of 100% T bills or CDs, 100% stock market index funds, 50% stock funds/50% total bond, etc all qualify as investing.

So, a person who has half their savings in a PP and the other half in a 50/50 mix of stock and bond index funds, is investing.  Whereas, the person who starts out with a PP but "tinkers" with it here and there by changing the allocation #s in response to interest rates or shifts in the gold price, is actually speculating if what they're doing amounts to market timing.  If the person implements a different version of the PP and plans to stick with it for the long haul, that could be perfectly consistent with investing.

I completely agree with the OP that the right allocation is the one that allows him to sleep at night, as long as it's fixed for the long term.  Although one cautionary note:  if your business is real estate, that might make you like REITs but you would then have a very large stake in that particular market - i.e. if your business/job goes down, your investments will do the same.  Sort of like buying your own company's stock in your 401K.  You might want to consider diversifying, in that case.

[koekebakker]

I think it is pretty clear that when we talk about the PP, we mean the 4x25. But that doesn't mean there can't be adjusted versions of the PP. Not everyone likes the idea of a VP for example. I think a VP is potentially dangerous and unnecessary. So if I want to change my allocation a bit I do that within the PP.

Take a boglehead investor for example. Most Bogleheads don't invest exactly the way that Bogle himself advises, yet they are still called Bogleheads. In the same way you could call many investors Browneheads. They don't follow the PP exactly but they still invest in a way similar to Browne.

You don't have to agree with Browne 100% to invest in a Browne style PP. I mostly agree with Browne but for example I don't believe the 4x25 PP is anywhere near 'neutral'.

Maybe we need a Brownehead forum 

[dualstow]

I think it is pretty clear that when we talk about the PP, we mean the 4x25. But that doesn't mean there can't be adjusted versions of the PP. Not everyone likes the idea of a VP for example. I think a VP is potentially dangerous and unnecessary. So if I want to change my allocation a bit I do that within the PP.

I think that is potentially more dangerous than having a Vp (EDITED from "pp"), but of course the devil is in the details. If once changes the rebalancing bands to 20/30, that's still a pp. If one refuses to buy treasuries and substitutes very high quality (long-term) corporate bonds, that's still a pp. If one replaces gold with silver altogether...that modified pp is actually a vp.

Take a boglehead investor for example. Most Bogleheads don't invest exactly the way that Bogle himself advises, yet they are still called Bogleheads. In the same way you could call many investors Browneheads.
...

Once upon a time, I suggested that we be called "Brownies". ;-)

Again, though, it really depends on the details. I think there is a degree from which you can stray from the epicenter of either philosophy, Bogle's or Browne's, and still employ the strategy. There is wiggle room in both strategies, but there's probably more in Bogle's.

[Kriegsspiel]

Take a boglehead investor for example. Most Bogleheads don't invest exactly the way that Bogle himself advises, yet they are still called Bogleheads. In the same way you could call many investors Browneheads. They don't follow the PP exactly but they still invest in a way similar to Browne.

They call themselves that. In my <1 year of reading the Bogleheads Forum, I've found that a large number of the posters there are market timers and tilters, neither of which is what I think the Boglehead philosophy is about.

[Pointedstick]

They call themselves that. In my <1 year of reading the Bogleheads Forum, I've found that a large number of the posters there are market timers and tilters, neither of which is what I think the Boglehead philosophy is about.

Similarly, when performance is especially good or bad, some here will admit, "oh, I got rid of cash because I'm young and can afford the additional volatility," or "I'm sitting out the bond market because these ultra-low rates scare the hell out of me."

As long as your plan is deliberate, I think really any portfolio allocation can be appropriate. But the worst thing is to blow in the wind, constantly questioning yourself, jumping from allocation to allocation and trying to capture the performance of the hot asset du jour. I did this for several years before winding up here, and looking back, I just shake my head. My CAGR was about 3.5% nominal if I recall. Unless you are an extremely skilled and experienced speculator, the performance of the various markets is always going to surprise you.

[koekebakker]

I mostly agree with you guys. 4x25 is good allocation but at the same it seems a bit random to me. It's not automatically neutral or balanced because the 4 parts have equal weight. I believe it's fine to adjust the 4 asset classes a  to your own situation/preferences and still invest the Browne-way. As long as you keep the adjustments within reasonable limits you'll be fine. Of course when you decide to adjust you will expose yourself to different risks.

Some examples:

A young investor who doesn't want to stick 80% (or , like the latest fashion:100%!) in equities but at the same time feels the 4x25 is probably a bit too conservative.
I don't see any reason why he wouldn't increase his stock% to 35 or 40% and maybe reduce the cash/gold% a bit. 15-20% gold will still give you a lot of protection given gold's volatility. He will still be protected in almost all circumstances, just like the 4x25, he only takes some more stock risk. But that's the risk he wants without blindly going allin bogleheadstyle.

Or take a very conservative investor. This forum has seen quite a few 'scared of everything' investors who can't stand the volatility  of the 4x25. As it's hard to change people's mindsets, those investors would be much better served if they increased the cash/short-term bond part of their PP to 50% or maybe even more. That's a lot better than abandoning the permanent portfolio and going 100% cash.

Offcourse you could argue that those investors should put half of their money in the PP and the other half in a passive VP, but I don't see any big difference between having a passive VP and tilting within the PP. I like the simplicity of having only 1 portfolio so I tilt within the PP.

[miyazaki]

I agree it would be confusing if we all started talking about "My PP", and I'm not planning to do so. I think everyone on this forum will understand "PP" as 25x4.

Sophie, good point. Harry was very clear that "investing" means accepting market returns, whereas a VP was more for money you could lose, for example, going to Vegas, starting your own company, distributing your money on LendingClub or something like that. Or, a VP was for a major asset class that you wanted to engage in market timing with (defined as buying and selling more quickly than 1 year). With that definition, I don't believe any major asset class should automatically be considered a VP, if your allocation is permanent. Too many people on here get confused that "lose money" means it going down a few percentage points. The way I understand it, Harry meant your money going to zero. Also, don't worry, my current profession is not related to real estate, so there's no overlap between my work and my portfolio.

Kriegsspiel, I agree that the worst possible thing you could do is anything that would make you question yourself. Any excess buying and selling will kill return faster than any hot strategy. "Tinkering" almost guarantees poor performance. Being honest with yourself and choosing an asset allocation deliberately will always be best. I'm actually happy to find after posting that there are some other people who are openly doing things differently.

[Libertarian666]

I suspect I have the most unusual portfolio here. My allocation is roughly as follows:

gold: 70%
silver: 10%
Swiss francs: 20%
dollars: -10%
real estate: 10%

The real estate is my primary residence.
The negative dollars are due to a non-recourse mortgage on my primary residence.

I did have a significant stock allocation (Fidelity International) while I was working at a place that didn't have very many options for their 401K, but moved that into gold and Swiss francs as soon as I left there and could get it into another retirement plan with better options.
I have been very gold-heavy for much longer than that.
I don't rebalance periodically, but when I have new money to add, I do it pretty much according to these proportions.

[murphy_p_t]

I suspect I have the most unusual portfolio here. My allocation is roughly as follows:

gold: 70%
silver: 10%
Swiss francs: 20%
dollars: -10%
real estate: 10%

cool. another way to describe this might be: double-short the Bernank/Obama regime. 

more seriously though, how long have you had this (or similar) outlook and how/why did u arrive there? I ask because my outlook says your allocation is sound based on fundamentals, but what happens until we arrive there? ....................Enter HBPP

[magneto]

I find this thread refreshing.  While a great admirer of the HBPP and MT and Craig, I find myself unable to totally commit.  My problem is that the HBPP requires me to stop thinking and just follow a system.  It is as worrying as the constant refrain from Bogleheds to just 'stay the course'.

When making investment decisions I find I must take account of valuations and perceived market cycles and weigh up the advantages of the asset classes at that point in time.  Can't stop thinking carefully about the options.  This had me totally out of gold and long bonds in time to avoid the recent setback (which may or may not be temporary), and low in stocks at the 1999 peak, buying on the dips since.

This thread is refreshing in that others are also thinking independently while giving due reverence to the philosophy of HB.  Will continue to follow the debate, listen to the sound opinions, and see how the HBPP prospers.

Good luck to us all.

[Libertarian666]

I suspect I have the most unusual portfolio here. My allocation is roughly as follows:

gold: 70%
silver: 10%
Swiss francs: 20%
dollars: -10%
real estate: 10%

cool. another way to describe this might be: double-short the Bernank/Obama regime. 

more seriously though, how long have you had this (or similar) outlook and how/why did u arrive there? I ask because my outlook says your allocation is sound based on fundamentals, but what happens until we arrive there? ....................Enter HBPP

I have had this view for about the past 10 years, once I saw that the US government/Fed was continue to blow bubble after bubble to postpone the depression that would be needed to clear out the malinvestments that have been accumulating for decades.

And although the past 6 months have been pretty painful, my overall performance has been pretty good, and it lets me sleep a lot better than having to worry about the US financial markets.

[cnh]

I suspect I have the most unusual portfolio here. My allocation is roughly as follows:

gold: 70%
silver: 10%
Swiss francs: 20%
dollars: -10%
real estate: 10%

May I ask what instrument(s) you use to access the Swiss francs?

[Libertarian666]

I suspect I have the most unusual portfolio here. My allocation is roughly as follows:

gold: 70%
silver: 10%
Swiss francs: 20%
dollars: -10%
real estate: 10%

May I ask what instrument(s) you use to access the Swiss francs?

A Swiss fixed annuity, which unfortunately is no longer sold to US persons, as far as I know.

[MediumTex]

I suspect I have the most unusual portfolio here. My allocation is roughly as follows:

gold: 70%
silver: 10%
Swiss francs: 20%
dollars: -10%
real estate: 10%

May I ask what instrument(s) you use to access the Swiss francs?

A Swiss fixed annuity, which unfortunately is no longer sold to US persons, as far as I know.

What about FXF?

[Libertarian666]

May I ask what instrument(s) you use to access the Swiss francs?

A Swiss fixed annuity, which unfortunately is no longer sold to US persons, as far as I know.

What about FXF?

Yes, that's pretty good, but the annuity has a lot of advantages, e.g., protection from creditors, a big, BIG, BIG guaranteed interest rate of... wait for it... 2%!

And of course its main advantage, which is lifetime income in a currency that is probably the least likely to be inflated out of existence.

They did resume issuing them to US persons for awhile around 2005 after stopping, so maybe they will open that up again sometime.

[Pointedstick]

I always thought it was clever that the Swiss pegged their currency to the Euro rather than adopting it officially. It leaves them the option of one day saying, "well, we've had enough of that, time to have a free-floating exchange rate!" This seems very Swiss to me.

[Libertarian666]

I always thought it was clever that the Swiss pegged their currency to the Euro rather than adopting it officially. It leaves them the option of one day saying, "well, we've had enough of that, time to have a free-floating exchange rate!" This seems very Swiss to me.

I feel fairly certain that they are not going to follow the Euro down the toilet into oblivion. The Swiss may be polite, but they are not going to put up with having their life's savings destroyed in that manner.