I've read Rowland and Lawson, browsed this excellent forum, am convinced by the principle, and want to get started. But it seems to me that PP theory is incoherent on the subject of entry timing. As I understand it, the PP's essence is to own a selection of assets whose performance is largely uncorrelated (or negatively correlated) in all market conditions, and to capture growth by rebalancing, using cash as a buffer. This means selling the asset/s that have outperformed, and increasing exposure to those that have under-performed. At the moment this means selling stocks and buying gold. Why then does it make sense to tell someone who is constructing a new PP to BUY stocks? Would it not be a better application of PP theory to feed cash at the end of the year into whichever asset had been the dog that year, until you were fully invested, and then start applying 35/15 rebalancing?
The same logic should presumably also be applied to bonds. I'm dying to buy them, as I'm overexposed to stocks, but a 300 year low in interest rates must be significant. I know the market can remain irrational longer than the individual investor can remain solvent, and don't deny rates could go lower for a year or two, but everything reverts to the mean. Isn't that another tenet of PP thinking? A PP has got to be for the long term, so what is the point of baking in a guaranteed long term loss?
The only advantage to averaging in over time is psychological. Since the PP averages 8-9% annually and is positive about 9/10 years at least historically, averaging in will probably just cost you money.
That being said, if you're convinced bonds are a guaranteed long term loss (at least in real terms), then don't buy them.
I'm convinced they are a guaranteed long term loss (at least in real terms) and therefore I haven't and won't buy them until rates are much higher and everyone is certain the US is going to default.
No one is forcing you to buy into the Permanent Portfolio theory. If you want to market time and you think that you can predict the future then go right ahead. There are other types of portfolios that don't require 25% in the four assets and if you like them better then use them. Or just wing it. Just keep in mind that, as Harry Browne said, the future is unknowable. The thing to remember about the PP is that it is one entity consisting of 4 separate, moving parts. You shouldn't cut off one of those parts as it could hurt!
Great question Gnome! I am a newbie here too on the precipice of instituting my own PP.
It is hard to predict the future....inflation, deflation, stagflation, currency devaluation or some combination? Who knows? When I try to make a list of what I think is fairly certain it is a simple one item list: the USA will make the political calculus to devalue its currency.
Therefore: Gold seems like a pretty good medium term bet.(though I would have lost alot more money this year had I jumped)
But what about the other asset classes?
Stocks: All time highs(not inflation adjusted of course) with the taint of a Bernackie pump. (I would argue they will go lower)
Bonds: as you pointed out, record low interest rates seem to imply somethimg of their medium term prospects (I would argue they will go lower)
Cash/Currency: likely to be devalued.
To hedge this bad US fed and spending policy I am considering forming 5 to 6 separate PP's based on Heritage's annual ranking of freest national economies(namely Australia, Canada, Singapore, Switzerland) So sad that the US does not even crack the top 10 most free at present, though US consituents will be one part of my portfolio.
The other commentators here raise a very powerful point on the unpredictability of the future market conditions. They are right of course. It is just so hard to surrender to that and forego using our judgement to favor those assets likely to do less poorly in the current environment of so much bad economic and social policy which will PREDICTABLY end poorly, and in tears.
I believe HB advised that it's best to jump in all at once but then there is this sentence from the article that might indicate in some cases at least, maybe not.....
"However, you do have expectations you believe that some things are more likely to happen than others. It would be foolish to treat those expectations as certainties, but it would be equally foolish to ignore them — since disregarding them would leave you exposed to the dangers you see and unable to profit from what you believe will happen."
Interesting that permanentpessimist is thinking of diversifying currencies. It does seem to be the weak spot of the PP. Fine if one lives and invests in a huge economy like the US, and markets are functioning as a price discovery mechanism, so that you get normal economic cycles. It does appear, however, as if QE has suspended that. And there remain only 3 remedies for over-indebtedness - growth, default and devaluation. Growth on the requisite scale is unlikely, and default (of the US) is unthinkable. The same is true for the UK, where I'm based. Savers are being slaughtered in order to bail out the banking system. Why not choose to invest instead where there are governments running balanced budgets, with sound money? I agree that Singapore looks good, and one could use 30 yr Singapore government bonds and a pan-Asian index. 5 or 6 regional portfolios seems like unnecessary complication and hard work, though. Does anyone have any suggestions about how to implement currency diversification in a PP?
I'm glad to see that kshartle agrees with me about bonds. As ns3 points out, a dogmatic interpretation of PP theory can have limitations. The essence of it is 'gyroscopic', and it would seem sensible to make use of those gyrations when constructing a portfolio as well as when running it.
Split your money 3-way.....stocks, gold, cash (I've dropped this but I don't care what my investments do even on an annual basis). Any new money just add to bonds until you're at a 4-way split. It might take years. By then who knows....maybe long-term yields will be double digits and the crisis you envision will have passed leaving you less certain
I love the question that gnome has posed here and it seems that it hasn't really been answered properly (at least not in this thread). Seems like some backtesting scenario could be devised, no? Or is the real problem that by following a strategy of buying up the worst performing asset while much of your money sits on the sidelines, you are potentially missing out on a lot of gains? And what if the best performing asset is cash? Hmm. It is certainly easier to just go all in with equal purchases of the four assets, but is it really the most effective way to implement the PP?
Predicting the future tends not to work out so well. Try digging up predictions from, say, 3 years ago and see how well they panned out. It'll give you some perspective. I highly recommend Harry Browne's book "Why the Best Laid Plans Usually Go Wrong".
The portfolio that works for you is the one that you'll stick with. We on this forum favor the PP, but it's not the only "right" answer. The key, though, is to pick one portfolio, set it up, and then DON'T MESS WITH IT except to rebalance as necessary. If you are constantly buying and selling in order to follow the latest trends then you'll inevitably sell low (i.e. investments that are doing badly) and buy high (i.e. the latest and greatest).
Regarding bonds: to quote HB, there's nothing that's so low it can't go lower. Take a look at recent Japanese and German long term bond rates and then see what you think of US long term bonds.
"Democracy is two wolves and a lamb voting on what to have for lunch." -- Benjamin Franklin
Regarding bonds: to quote HB, there's nothing that's so low it can't go lower. Take a look at recent Japanese and German long term bond rates and then see what you think of US long term bonds.
I would agree up to a point, Sophie, but I am wondering how many others feel as I do... that there is a yield on the LTTs below which they would not be comfortable holding onto them any longer. I get that the PP embraces volatility in the different assets, but if rates on the long bond get down to, say, 2%, won't a lot of folks be headed for the door? It would just seem that there is not a lot of potential upside and a LOT of potential downside at that point. Could be a painful ride. Or would the chocolate coating make that easier to swallow as well, Butterkwup?
Yes there was a thread about that, and a poll. I think the point at which most people would pull the trigger was somewhere around 1.5%, not far off from your guess. That's still a good ways from where we are though.
"Democracy is two wolves and a lamb voting on what to have for lunch." -- Benjamin Franklin
The current LTT rate is about 3.7%, so we are a long way from 1.5%. Another point that came out in earlier threads was that, due to some technical details on bonds that I don't remember, the price would rise sharply as rates get lower and lower (i.e., it's not a linear relationship, but more like exponential). Therefore, we would likely be rebalancing out of bonds at that time. My own strategy at such low rates would probably be to rebalance out of bonds and keep only say about 10 to 15% bonds rather than 25%. However, as mentioned earlier, we are a long way from 1.5% rates.
Thank you Sophie and stuper1 for those answers. I am such a turkey for not seeing the obvious... that a rebalancing out of bonds would be very likely if yields got very low. I would have made money at that point and sold some bonds at a nice profit. OK, I will try to come up with something else to worry about and post it as soon as I can generate the necessary amount of angst. Seriously, getting these answers to basic questions is a huge help to someone who is new to the PP. Much appreciated!
No problem, Barrett. Believe me I have asked much stupider questions on this forum. I've always gotten great answers, and I've learned a ton. I figure it's better to ask stupid questions and learn something, rather than not ask and stay stupid. There are some great thinkers on this forum and a lot of wisdom from investors who have been around a long time (not me).
Regarding bonds: to quote HB, there's nothing that's so low it can't go lower. Take a look at recent Japanese and German long term bond rates and then see what you think of US long term bonds.
I would agree up to a point, Sophie, but I am wondering how many others feel as I do... that there is a yield on the LTTs below which they would not be comfortable holding onto them any longer. I get that the PP embraces volatility in the different assets, but if rates on the long bond get down to, say, 2%, won't a lot of folks be headed for the door? It would just seem that there is not a lot of potential upside and a LOT of potential downside at that point. Could be a painful ride. Or would the chocolate coating make that easier to swallow as well, Butterkwup?
Here's a quote from another thread from years ago about the bond market.
Gumby posted it during a similar discussion.
My favorite quote about the bond market:
"I like the bond market because it’s smarter, bigger, and faster than the stock market. It’s like the older brother who graduated top of his class at Yale and was captain of the crew team and now leads the M&A department at a major bank. He’s little unapproachable to the average investor. He’s austere, academic, and aloof. But he knows his stuff and is usually the first one to do anything about anything. The investor at home prefers to watch the stock market. That’s the colorful younger brother who dropped out of school to join the Poker tour and sells car insurance at the local strip mall. He’s charismatic — if a little manic depressive — and easier for the average investor to share a beer with. He’s what people talk about on TV." — Jeffrey Dow Jones
The bond market isn't easily distracted by political games or wild speculation. It just seems to follow the money.
"All men's miseries derive from not being able to sit in a quiet room alone."
Well, I just finished re-balancing into gold and bonds so maybe I actually timed something right for a change.
It wasn't hard to buy the bonds at 3.75. No harder than jumping in and buying gold at 1600 when I first started out about 3 years ago.
I wonder if that is about the average time it takes for someone to get truly comfortable with the PP.
The bottom line is that it's a long term strategy with a proven track record and those numbers above are truly meaningless - just a snapshot in time. Full of sound and fury at times, but mostly signifying nothing.
I think the biggest mistake is looking at the portfolio and measuring it by what you could liquidate it into cash for today, which is what all the charts show you, when what you are really concerned about is how it's going to play out in the long run. You might get the impression that all the smart people here ran all the numbers with spreadsheets for themselves and determined that yes, it does work out in the long run, but the truth is none of us knows that for sure. It's just our best educated (or un-educated in my case) guess.
Last edited by ns3 on Thu Feb 13, 2014 10:06 pm, edited 1 time in total.
Kshartle wrote:
I'm convinced they are a guaranteed long term loss (at least in real terms) and therefore I haven't and won't buy them until rates are much higher and everyone is certain the US is going to default.
This quote really grabbed me. Why would you buy US Treasury bonds if you knew the US was going to default. Wouldn't defaulting mean that the bonds would then be worthless???
Kshartle wrote:
I'm convinced they are a guaranteed long term loss (at least in real terms) and therefore I haven't and won't buy them until rates are much higher and everyone is certain the US is going to default.
This quote really grabbed me. Why would you buy US Treasury bonds if you knew the US was going to default. Wouldn't defaulting mean that the bonds would then be worthless???
Kshartle wrote:
I'm convinced they are a guaranteed long term loss (at least in real terms) and therefore I haven't and won't buy them until rates are much higher and everyone is certain the US is going to default.
This quote really grabbed me. Why would you buy US Treasury bonds if you knew the US was going to default. Wouldn't defaulting mean that the bonds would then be worthless???
I think he means that he will buy them when "the crowd" is certain that the US will default.
"All men's miseries derive from not being able to sit in a quiet room alone."
Kshartle wrote:
I'm convinced they are a guaranteed long term loss (at least in real terms) and therefore I haven't and won't buy them until rates are much higher and everyone is certain the US is going to default.
This quote really grabbed me. Why would you buy US Treasury bonds if you knew the US was going to default. Wouldn't defaulting mean that the bonds would then be worthless???
I think he means that he will buy them when "the crowd" is certain that the US will default.
Preceisly.
Once everyone "knows" default is inevitable the prices will be extremely low (rates high). That would be the most sensible time to buy...when the risk is more limited.
I think the Greek equivilant T-bills were going for 30-40% interest rates a couple years....maybe it was longer maturity. Of course everyone was certain that default was right around the corner.
The guys who had the balls to buy then made a killing.
