The Permanent Portfolio is too complicated!

[pplooker]

What, you say?

Let me back up a bit here.  I do not consider myself a very sophisticated investor from the perspective that I only want the greatest gains for the least amount of effort.  I sincerely believe I can be a wealthier person focusing on what it is that I do and have done that's made money for me, and the truth is it's not been professional investing.  I don't do my own surgeries either.

But I guess in a weird way I am sophisticated compared to many others.  I "hack" the system and buy indexes which are essentially derivative of the work of people who do try to invest professionally, and capture their average results without any real effort or meaningful expense on my part.  I'm smart enough to know what CAGR means and what a Sharpe ratio is (even wrote a paper on IPOs comparing them by this ratio once) and I can do triple integrals too, I just don't see the utility of crunching a bunch of numbers for something I don't think I can meaningfully interpret even with very sophisticated models.  I know what the EMH is and some of the arguments against it, but I don't care if it's true or not.

I feel it's important to invest and keep learning new things, like right now I'm trying to understand options better even though I don't think I'll ever buy any, if only for the reason you need to make sure you understand why you personally don't do something.  You as an individual do not owe the general public an accounting of your investing decisions nor do you owe anyone, besides yourself, an apologetic for your investment decisions.  They are a private matter.

The point being that as “dumb”? as I think I am, a great many people are well, “dumber”?.  That’s not to say they’re not very intelligent.  My sister, for instance, makes life and death decisions every day which overwhelmingly result in life, understands the complex interactions of many drugs and chemicals, and can tell you the proper name of every part of the human body among many other impressive cognitive capabilities.

But is she a “dumb”? investor?  Overwhelmingly so.  Some time ago she came to me and said I have no idea what to put in my 401k.  Actually, she said “So what is a 401k?”?

The fact is she doesn’t care to learn.  Now admittedly, this is her problem and not mine and I understand that.  But at the same time you feel like you might owe your sister your best guidance up to the point she’s willing to follow it.  What she ultimately wound up doing is probably going to horrify you all: we opened her a Roth IRA, and she uses two all in one funds in both the Roth IRA and the 401k, the combination of which gives her an asset allocation she thought she could live with.  All rebalancing and really all decisions are out of her hands, as she desired.

Why?  All she was willing to do was adjust her allocation every five years and shovel money into it every month.  This is her system: she gets paid, the 401k is already taken out, some cash goes into the Roth, some cash goes into savings, then the bills are paid, and she spends the rest.  No written planning whatsoever.  She wasn’t going to read any books, listen to me prattle on, or anything of the sort.

And yet, I sincerely believe she is better off than 85% of America.  I believe she stands a better chance than I do of being wealthy (of course I didn’t choose the right occupation either).  And I sincerely believe that for such minimal effort, what her plan will return is going to be phenomenal with a 90 something percent chance of success.  At least she is investing, she is somewhat diversified, she is controlling costs, she isn’t in any debt, etc.  Also, she chose this.  I laid out several options, including simply putting all investments in cash or treasury bills, the PP mutual fund, etc. and this was her decision after many considerations such as what was available in her 401k.  I didn’t try to make it for her and I refused to tell her what I did because I didn’t want her to just copy cat me. 

Honestly, what else are you going to do with someone like that other than lead the horse to water?  You put in the least effort, you get the least benefits.  Personally I’d rather be in her position with a less sophisticated approach than my own but with much more money behind it than in my position with a somewhat more advanced strategy but less capital.  But hey, them’s the breaks.

Browne recommends several PP alternatives: just shove it all in the bank, buy nothing but treasuries, etc., but to be honest I don’t like any of them because they all avoid doing much besides preserving principle.  I fail to see why all inclusive funds like say Vanguard’s Balanced Index or Target Retirement funds aren’t just as viable if you’re going to be unthinking and shovel money into something.  Even if it’s not the PP strategy, at least that way you’re capturing some of the asset classes and doing something.  Obviously the mutual fund is probably what comes to mind most readily, but even that’s fundamentally different in my most humble opinion as it doesn’t invoke the interactions between the four asset classes so elegantly and it may not be available in many 401ks.

I’ve also read somewhere that the Couch Potato Portfolio is a viable substitute, and so long as the Bond half is LT Treasuries, I agree that would probably suffice and should be something most people can do even with a very restrictive 401k plan.

But overall, I just wish some kind soul would make an ETF/mutual fund which was the 4 slice portfolio.  I’d be in hog heaven.  I understand why that doesn’t happen as some would argue the existing mutual fund is close enough, which I disagree most humbly with, and the most viable way to do it would be as fund of funds and that could have some nasty tax consequences for some people as opposed to the fund holding the bonds, stocks, etc. directly.  But it doesn’t exist and possibly never will.

So what do you do with people for whom the PP is too complicated, besides the Coxon fund if that’s not an option?  Even my sister is actually more sophisticated than a good many people by having more than one brokerage account with different tax treatments.  I hate to say it but I think most people wouldn’t even have investments if not for 401ks.

[craigr]

What you describe is a problem many people face. It's primarily the reason why self-directed retirement savings plans are easy pickings for Wall St. and results are lackluster. It's not just a problem for the Permanent Portfolio. The reality is that most people just do not understand these issues or succumb to marketing blitzes that convince them of some kind of investing fantasy.

Unfortunately not everyone is good at handling money. Or probably I should say the schooling they receive didn't much focus on it to see if they could be good at it. For many, the PRPFX fund is a fine choice but as you point out it is significantly different than the 4x25 split. Maybe it doesn't matter though for those that don't want to worry about this stuff?

The balanced funds are not optimal, but as you point out they are simple. I personally don't think a 4x25 allocation is too complicated because once it is setup you so rarely have to touch it. Yes, there are some peculiarities about owning bonds directly and owning gold. But really these are just features that someone who really understands investing should be looking to do for highest safety. If someone came up to me and said: "CraigR I don't want to manage this stuff and I just bought four iShares to hold my Stocks, Bonds, Cash and Gold: VTI, TLT, SHV and GLD" I'd tell them that I think they are doing a good thing because that solution offers a very high degree of diversification and opportunity for growth over many other Wall St. creations they could have done.

A portfolio that was setup like that and rebalanced maybe once a year or when rebalancing bands were out of whack would do well and require very little maintenance.

As for a 4x25 fund. I agree it would be appealing to many people and I've heard of some money management firms that do such a thing for clients. But the fees are too high to be a good option. IMO.

Another option are that some brokerages/401(k) providers are starting to offer automatic rebalancing. I don't know more than this and a quick search. I think it would be ideal to have a brokerage/mutual fund company that would allow you to setup rebalancing bands for your account and just do the buy/sells for you on a scheduled basis.

[KevinW]

I "hack" the system and buy indexes which are essentially derivative of the work of people who do try to invest professionally, and capture their average results without any real effort or meaningful expense on my part.

I have mixed feelings about this.  Buying an index fund makes you a free rider since you benefit from the pricing information that results from active trades, but don't bear any of the costs of those trades.  Then again, anyone trading actively has the option of buying an index fund, just like I do, but they decided to roll the dice and try to beat the index.  I don't shed any tears over other people's gambling losses, so I'm not sure I should feel guilty about other people's broker commissions.

[pplooker]

Yeah I don't worry about that whole argument that indexing is parasitic or would crash the whole market.  As it has already been pointed out, all investors have the ability to buy the index (theoretically, people with truly sorry 401ks might not), and if everyone indexed, well the valuation for each individual security would have to come from somewhere still yes?  And as soon as one person proposed a way to value each security, another person would disagree, and lo and behold there'd be an active market again.