PP returns USA 2013?

[Marc De Mesel]

Is someone publishing the returns of the PP for 2013 up to as recent as possible?

[buddtholomew]

Marc, there is a site www.peaktotrough.com created by a  member of this board (I believe) which displays the YTD return for the PP.

[Marc De Mesel]

Marc, there is a site www.peaktotrough.com created by a  member of this board (I believe) which displays the YTD return for the PP.

Exactly what I was looking for! Thanks so much buddtholomew

[hedgehog]

Marc, there is a site www.peaktotrough.com created by a  member of this board (I believe) which displays the YTD return for the PP.

I would like to know the forum nick of the author. Thanks.

[dragoncar]

Marc, there is a site www.peaktotrough.com created by a  member of this board (I believe) which displays the YTD return for the PP.

I would like to know the forum nick of the author. Thanks.

That would be "peak2trough"

It's confusing because I always forget the website and try peak2trough.com then peak2trough.net, then google peak2trough which gives a bunch of statistical analysis packages

[whatchamacallit]

pretty amazing

gold is down -27.01% year to date and the pp is only down -3.35%

even the negative returns of the pp are encouraging

edit:

and 30 year bonds are down -13.96%

wow

[craigr]

pretty amazing

gold is down -27.01% year to date and the pp is only down -3.35%

even the negative returns of the pp are encouraging

edit:

and 30 year bonds are down -13.96%

wow

One of the attributes of the Permanent Portfolio is it has really good protection against big declines in a single asset because it does not concentrate its bets. Investors often focus too much on chasing upside returns but do not pay enough attention to preventing big losses. But the Permanent Portfolio has a lot of design in it to prevent big losses as well as capture gains when it can.

All investments will eventually have a losing year. The question then is how much that loss is going to be when it comes? Also there is another factor to consider. What I call Portfolio Capital Flows. I talk about it here:

https://web.archive.org/web/20160324133 ... ital-flow/

Basically, when money is going out of one asset you want to own another asset that is likely going to receive it to have good diversification. In this year, gold (and bonds) have been the punching bags, but luckily stocks have been able to take up a large amount of the loss as money in the market is moving around.

But you know at the end of the year everyone will look at the returns and see a negative number and be in total despair. But if you've invested for any length of time then you know negative returns happen. What really matters is the magnitude of the loss. In this year for the Permanent Portfolio there is a loss, but it's peanuts next to what I've seen (and experienced) through the years in terms of investing strategies.

[flyingpylon]

Yeah but the PP doesn't keep up with a 100% stock portfolio in an up year for stocks.

[craigr]

Yeah but the PP doesn't keep up with a 100% stock portfolio in an up year for stocks.

Go figure! And it doesn't keep up with a 100% stock portfolio during a down year either! 

[Peak2Trough]

Thanks guys, and yes, I guess I didn't think the whole "Peak2" and "Peakto" thing through very well

I like to set the detail level to 'daily' and run the YTD results. 



What I find most concerning about the 2013 results isn't the 3%-ish loss, but rather that the correlation of the 3 risk assets in the portfolio goes nearly to 1 during the "taper" drawdown in June.  This leads me to the (admittedly unscientific) conclusion that the 3 risk assets are at the upper end of their ranges largely due to quantitative easing and that they will not provide the uncorrelated protection we've witnessed in the past in the portfolio.

If I'm being honest, that period is giving me significant pause as to whether this is the right portfolio for me going forward.  I truly believe profoundly in Harry Browne's reasoning behind the portfolio - that's what made it so attractive to me in the first place.  I'm just not so sure Harry could ever have anticipated this level of meddling by the Federal Reserve, and that may well have affected his investment recommendations.

Ironic as it may be, I have to quote Keynes here… "When the facts change, I change my mind. What do you do, sir?"

[craigr]

What I find most concerning about the 2013 results isn't the 3%-ish loss, but rather that the correlation of the 3 risk assets in the portfolio goes nearly to 1 during the "taper" drawdown in June.  This leads me to the (admittedly unscientific) conclusion that the 3 risk assets are at the upper end of their ranges largely due to quantitative easing and that they will not provide the uncorrelated protection we've witnessed in the past in the portfolio.

There have been other short periods where the assets have moved together (up or down). Usually I find there is a break where one or two split off then start to go opposite and the third continues the previous course.

Overall, I don't think the markets move fast enough to make a judgment call over a period of a month. If I were to see a couple years of assets all moving together I'd be more concerned. But a month, quarter or even a year I don't worry about.

If I'm being honest, that period is giving me significant pause as to whether this is the right portfolio for me going forward.  I truly believe profoundly in Harry Browne's reasoning behind the portfolio - that's what made it so attractive to me in the first place.  I'm just not so sure Harry could ever have anticipated this level of meddling by the Federal Reserve, and that may well have affected his investment recommendations.

Ultimately I use Harry Browne's advice to steer me toward the portfolio idea, and then after that I constantly evaluate if the data still fits the model. What I find is it still does primarily because:

1) It assumes the future is not predictable.
2) It still holds assets that have fundamental economic reasons why people buy/sell them and those reasons do not strongly overlap.
3) It doesn't hold enough of any particular asset to wreck the entire allocation catastrophically if it blows up (comparatively speaking).

Specifically, if people are dumping bonds or gold or stocks or cash, where is the money going? If the money isn't going to any of those assets then I'd argue I should probably include it in the portfolio. But fundamentally those four assets are real cornerstones to any investor and chances are one of them is going to be on the positive end of the transaction. And as much as the Fed can influence the markets, in the end the markets are bigger than even the Fed. When it all breaks the money is going to flow somewhere. So where exactly is that somewhere going to be and can I make sure I own some of it if it's not stocks, bonds, cash, or gold? What is that missing asset?

[Alanw]

One of my current concerns is the cash portion of the PP paying nearly 0%.  Reviewing the historical returns, the past down or minimal positive years were supported by a much higher percentage return on cash.  Now with the Fed holding short term rates near 0%, we don't have a return on cash to buoy the PP.  It looks like this situation will continue for the next couple of years.  This also leads me to believe the LTT's will not go much higher or the short term rates will be pulled up with them.  Not sure how wide the yield spread can become with out something breaking. What to do? Not sure.  Just go along for the ride I guess.

[dragoncar]

If I'm being honest, that period is giving me significant pause as to whether this is the right portfolio for me going forward.  I truly believe profoundly in Harry Browne's reasoning behind the portfolio - that's what made it so attractive to me in the first place.  I'm just not so sure Harry could ever have anticipated this level of meddling by the Federal Reserve, and that may well have affected his investment recommendations.

Ironic as it may be, I have to quote Keynes here… "When the facts change, I change my mind. What do you do, sir?"

So what's the alternative?  Cash?  Serious question.

[frugal]

Thanks guys, and yes, I guess I didn't think the whole "Peak2" and "Peakto" thing through very well

I like to set the detail level to 'daily' and run the YTD results. 



What I find most concerning about the 2013 results isn't the 3%-ish loss, but rather that the correlation of the 3 risk assets in the portfolio goes nearly to 1 during the "taper" drawdown in June.  This leads me to the (admittedly unscientific) conclusion that the 3 risk assets are at the upper end of their ranges largely due to quantitative easing and that they will not provide the uncorrelated protection we've witnessed in the past in the portfolio.

If I'm being honest, that period is giving me significant pause as to whether this is the right portfolio for me going forward.  I truly believe profoundly in Harry Browne's reasoning behind the portfolio - that's what made it so attractive to me in the first place.  I'm just not so sure Harry could ever have anticipated this level of meddling by the Federal Reserve, and that may well have affected his investment recommendations.

Ironic as it may be, I have to quote Keynes here… "When the facts change, I change my mind. What do you do, sir?"

Hi,

depending on the quantity of money you can invest in some other physical things, like land, house, apartment, ...

No?

[hedgehog]

I like to set the detail level to 'daily' and run the YTD results.

Who played with this a lot: how often is best to rebalance?

[Peak2Trough]

There have been other short periods where the assets have moved together (up or down). Usually I find there is a break where one or two split off then start to go opposite and the third continues the previous course.

Thanks Craig… and yes, the above is true.  The difference in my mind is the vast amount of easing that has taken place in the last 5 years.  I think the assets can't help but move together.  Let's consider how QE has affected the pricing of the 3 risk assets in the PP:

- Equities - UP because easier access to capital for business, low rates, "don't fight the fed", etc. 
- Bonds - UP because of the inverse relationship of bond price vs interest rate.
- Gold - UP because the investing public views QE (rightly or wrongly) as inflationary

Admittedly gold is more of a wild card than the other two, but I suspect you'll see absolutely no protection from long bonds, and very little from gold, if the equity markets take a breather.  Just my opinion, but that June period seems to lend evidence.

So if the above cause and effect is true, why would not the opposite also be when QE slows down or stops?

What I find is it still does primarily because:

1) It assumes the future is not predictable.
2) It still holds assets that have fundamental economic reasons why people buy/sell them and those reasons do not strongly overlap.
3) It doesn't hold enough of any particular asset to wreck the entire allocation catastrophically if it blows up (comparatively speaking).

Specifically, if people are dumping bonds or gold or stocks or cash, where is the money going?

All good points, and reasons I originally considered for the investment.  Taking them one at a time, my answers would be:

1.  True, the future is not predictable.  What is preditable, to some degree, is reversion to the mean.  All 3 risk assets in the PP are currently well above their respective means.

2.  True, but economic reasons aren't the only ones to buy (or sell) an asset.  A Federal Reserve and congress that is ready, willing, and able to pump 3T+ into the economy and markets in various forms clearly has a distorting effect.

3.  True, and no argument here.  I also like the cash allocation for the reason of muting the volatility in case one or more does blow up.  It is for these reasons that I feel like when the foot finally comes off the QE pedal, we're unlikely to see a sharp upside down V in the PP return graph, but rather a slow drift down like what was encountered over 2013.

All that said, I am still evaluating my position on this, so I certainly welcome any cogent reasoning why something I wrote is unrealistic

[Peak2Trough]

So what's the alternative?  Cash?  Serious question.

It's a good, and fair, question.

One of the points on which I have always disagreed with Harry Browne is that he believes real estate is not an investment.  Despite the downturn, I have made more money in physical real estate investments than I have in the equity markets over the last 20 years.

My thinking is that real estate is one of a few asset classes which has not yet reached levels above its long-term mean, since the 2008-2009 downturn.  Moreover, there are a variety of ways to make money in real estate… stable monthly income through rentals, stable market value growth, income through deeds of trust or tax deeds, built-in inflation protection, etc.  In my experience it provides rewards in the range of 9-10% with a standard deviation of 6% - very similar numbers to that of the HBPP, and well within my comfort zone.

There are also other places to put money that make sense outside the US.  I think there exist opportunities in both equity and credit markets outside the US, the likes of which we won't see again here as long as the markets are propped up by low rates and QE.  Mebane Faber has written extensively on this topic if you're interested.

Finally, I believe the emergence of p2p lending as an investment class has just begun.  We are in the golden era of p2p lending right now and anyone who misses it will miss it forever.  Already institutional investors are crowding the space, and once the securitization of the asset class begins in earnest, the returns will necessarily drop to match borrower and investor demand.

[Pointedstick]

Let me second the concern that if the PP is going to do poorly when QE ends, that all other portfolios are going to get clobbered worse. Where is the money going to go? It can't all go into real estate or foreign investments. Probably most of it will go into cash for a period of time, that's my guess. It'll be another mini market crash and we'll start all over again.

peak2trough, I agree with you about real estate to a degree, but to my eyes, the real estate market has been propped up by QE just as much as the other assets we're discussing. All over the country properties are getting snatched up by investors eager for a better yield than they could make with other assets. I have a hard time believing that Joe Average is getting back into the housing market right now, after prices and interest rates have been rising for months.

As for p2p lending, that's just a big speculation IMHO. It was a great opportunity for a while, but even Mr. Money Mustache who has the time, skill, and energy to do it semi-professionally has seen his returns fall as the market has matured. The moment iShares offers a p2p index fund is about the time I would expect the returns to drop to about the level of any other asset.

Maybe the thing that's really broken is passive investing. The idea of the small-net-worth retail investor is an extremely new concept, and index funds are even newer. For most of the history of our country, people saved their money in cash and liquid checking and savings accounts, with the occasional CD or U.S. savings bond thrown in. Perhaps we are reverting to the mean of investment being a rich man's game and a sucker bet for the small investor who can't tolerate a lot of volatility. A perpetual low interest rate environment is extremely unfortunate for people who wish to return to this model because the financial markets give them the willies.

Additionally, now that we have a generational cycle of earners and retirees, that compounds the problem of people saving using investment products because retirees selling off their investments represent a net outflow of capital that the younger generation just starting to accumulate assets needs to at least match for the market for the assets they're all buying and selling not to tread water for years. I don't have high hopes for the up-and-coming millennials as a generation as long as large numbers of them are burdened with tens of thousand of dollars in student loans and face uncertain job prospects. Perhaps the retiring boomers are part of the reason for the Fed's QE infinity: without it, there wouldn't be enough buyers for all the sellers and the markets would crash, leaving the boomers with nothing.

[buddtholomew]

Specifically, if people are dumping bonds or gold or stocks or cash, where is the money going? If the money isn't going to any of those assets then I'd argue I should probably include it in the portfolio. But fundamentally those four assets are real cornerstones to any investor and chances are one of them is going to be on the positive end of the transaction. And as much as the Fed can influence the markets, in the end the markets are bigger than even the Fed. When it all breaks the money is going to flow somewhere. So where exactly is that somewhere going to be and can I make sure I own some of it if it's not stocks, bonds, cash, or gold? What is that missing asset?

Bitcoins (not joking)?

I am often reminded of a quote from Adolph Galland when analyzing the PP - "He who wants to protect everything, protects nothing."

With this in-mind, I have personally decided to overweight global equities and increase my allocation to fixed income investments. When assessing my portfolio as a whole, 50% is in equities (TSM, SCV, REIT, INT, INT SC, EM), 40% in FI (SV, IT-Bonds, Cash) with an AVG duration of 5.5 years and 10% allocated to precious metals and mining (GLD and GDX). Seems a lot closer to a BH portfolio than a PP, but I do maintain a tax-deferred and taxable account. Taxable is entirely PP with some bonds and gold in a non-deductible IRA (contributions accessible at any time).

Deleted a comment about my emotions at this time as I do not want to derail the topic of this thread.

[AdamA]

The difference in my mind is the vast amount of easing that has taken place in the last 5 years.  I think the assets can't help but move together.  Let's consider how QE has affected the pricing of the 3 risk assets in the PP:

- Equities - UP because easier access to capital for business, low rates, "don't fight the fed", etc. 
- Bonds - UP because of the inverse relationship of bond price vs interest rate.
- Gold - UP because the investing public views QE (rightly or wrongly) as inflationary

But this really hasn't been happening.



I think in the end all of the QE concerns when it comes to the PP will turn out to be nothing more than noise.

Just my opinion, of course. 

[Peak2Trough]

But this really hasn't been happening.

Sure it is.  Expand your graph back to early 2009 when QE began. 

Or for the more statistically minded, someone work us up a correlation matrix between the 3 assets for the following time periods:

- 1972 to Jan 2009
- 2009 to current

That should show pretty quickly whether it's noise.  Without having worked the numbers yet myself, my gut says we'll see a statistically significant difference in the correlations for the two periods.

[AdamA]

Sure it is.  Expand your graph back to early 2009 when QE began. 

Or for the more statistically minded, someone work us up a correlation matrix between the 3 assets for the following time periods:

- 1972 to Jan 2009
- 2009 to current

That should show pretty quickly whether it's noise.  Without having worked the numbers yet myself, my gut says we'll see a statistically significant difference in the correlations for the two periods.

I'm not really sure what to make of this.



Definitely looks like it's lifted the stock market out of the dumps, but I'm not sure what to make of gold and bonds. 

It seems to me if/when QE ends, it will probably cause money to move from the stock market into Treasuries, but I don't think it will change the mechanics of the portfolio. 

Again...just my opinion. 

[craigr]

There have been other short periods where the assets have moved together (up or down). Usually I find there is a break where one or two split off then start to go opposite and the third continues the previous course.

Thanks Craig… and yes, the above is true.  The difference in my mind is the vast amount of easing that has taken place in the last 5 years.  I think the assets can't help but move together.  Let's consider how QE has affected the pricing of the 3 risk assets in the PP:

- Equities - UP because easier access to capital for business, low rates, "don't fight the fed", etc. 
- Bonds - UP because of the inverse relationship of bond price vs interest rate.
- Gold - UP because the investing public views QE (rightly or wrongly) as inflationary

Admittedly gold is more of a wild card than the other two, but I suspect you'll see absolutely no protection from long bonds, and very little from gold, if the equity markets take a breather.  Just my opinion, but that June period seems to lend evidence.

But where is the money going to move if there is a sell-off in stocks? Cash? Emerging Markets? Housing?

I just don't think it's going to move to P2P and bitcoins.

In terms of real estate I have considered putting more REIT exposure in a variable portfolio in the past. But the stocks of companies I hold have tremendous exposure to real estate just as a matter of business. So I never really felt that I wanted to overweight it. But if someone was going to own real estate I don't have a particularly strong argument against it if they are aware of the risk/liquidity issues.

I can also see an argument for adding more global exposure to the portfolio. But again, U.S. companies have a ton of overseas exposure already. So that leaves the cash/bond assets. And why would I want to own Euros when they are in the same predicament as the U.S.? Or even the Chinese Yuan (if not controlled) has some bubbly aspects to it internally. Even international real estate in markets like Australia/New Zealand/etc. has inflated looks to it.

Basically it just comes back to spreading the risk against the unknown. There are too many ways for this all to go. Which is of course the status quo!

[moda0306]

There have been other short periods where the assets have moved together (up or down). Usually I find there is a break where one or two split off then start to go opposite and the third continues the previous course.

Thanks Craig… and yes, the above is true.  The difference in my mind is the vast amount of easing that has taken place in the last 5 years.  I think the assets can't help but move together.  Let's consider how QE has affected the pricing of the 3 risk assets in the PP:

- Equities - UP because easier access to capital for business, low rates, "don't fight the fed", etc. 
- Bonds - UP because of the inverse relationship of bond price vs interest rate.
- Gold - UP because the investing public views QE (rightly or wrongly) as inflationary

Admittedly gold is more of a wild card than the other two, but I suspect you'll see absolutely no protection from long bonds, and very little from gold, if the equity markets take a breather.  Just my opinion, but that June period seems to lend evidence.

But where is the money going to move if there is a sell-off in stocks? Cash? Emerging Markets? Housing?

I just don't think it's going to move to P2P and bitcoins.

In terms of real estate I have considered putting more REIT exposure in a variable portfolio in the past. But the stocks of companies I hold have tremendous exposure to real estate just as a matter of business. So I never really felt that I wanted to overweight it. But if someone was going to own real estate I don't have a particularly strong argument against it if they are aware of the risk/liquidity issues.

I can also see an argument for adding more global exposure to the portfolio. But again, U.S. companies have a ton of overseas exposure already. So that leaves the cash/bond assets. And why would I want to own Euros when they are in the same predicament as the U.S.? Or even the Chinese Yuan (if not controlled) has some bubbly aspects to it internally. Even international real estate in markets like Australia/New Zealand/etc. has inflated looks to it.

Basically it just comes back to spreading the risk against the unknown. There are too many ways for this all to go. Which is of course the status quo!

Craig,

When you say that there's a lot of real estate exposure in the US stock market, what do you mean by that?  I'd love to get my head around what this looks like... I can't really visualize for myself what kind of real estate holding there is in the S&P (or TSM).

[Xan]

McDonald's is a real estate company:
http://money.howstuffworks.com/mcdonalds2.htm