is pp for all ages and portfolio sizes?

[LC475]

I tend to agree with LC475 that the PP is great for most people. Though I do agree that the ultra-rich could probably have a sizeable variable portfolio that consists of property, businesses, etc.

That was actually my first thought, but then it didn't make it into my post by the time I was writing it.  Yes, once you have billions of dollars and want to build a dynasty that will endure forever (or whatever you're trying to do) the main thing that such people do is add things even *more* conservative and robust and diversified and resilient, namely large tracts of real estate (not REITS, real real estate) and businesses under their control, and sometimes exotic rare items such as priceless art.  And I think that makes a lot of sense.  They do not increase their stock allocation.  I don't think that would make much sense.  That is a fragile plan.  You want to plan for your wealth to endure for centuries, you have to make it anti-fragile, not more fragile.

Stocks are always bound to be the best, long term?  Really?  How would the Rothchilds have fared if they had put 100% of their money in the German stock market?  The world changes.  Our situation is liquid.  It's not inevitable that the stock market grow and grow forever.  Nothing is inevitable.

A bet against the Dark Ages is essentially a bet for the Singularity.  But actually either one could happen, and they both sound like preposterous and impossible visions to most people.  Or something could happen we aren't even conceiving.

[LC475]

...I must echo Ad Orietem's oft-repeated approval of owning a chunk of VT and never letting it go. Use the PP to protect your personal stash and use VT to bet on humanity.

Ventricular Tachycardia? Seriously, what is VT?

Vanguard Total World Stock ETF

http://finance.yahoo.com/q?s=VT

[MachineGhost]

Stocks are always bound to be the best, long term?  Really?  How would the Rothchilds have fared if they had put 100% of their money in the German stock market?  The world changes.  Our situation is liquid.  It's not inevitable that the stock market grow and grow forever.  Nothing is inevitable.

They would probably owned the world by now because Germany went on the recovery from those devestating losses.  The harder they fall, the more the upside gain.

[Pointedstick]

At its core, this question seems to concern just how much money you can afford to lose. If you cannot afford to lose any of it--no matter how much it is--it should all be in a PP. If you can afford to lose half of it, then that half should be your PP with the remainder your VP. And so on. What you do with your VP is irrelevant and personal because it's your VP; you should be psychologically prepared for it to go to zero in the worst case scenario.

[invst65]

My continued question is what to do for the very young investor such as teenager. Do they go with a permanent portfolio or the traditional more heavy in stock portfolio?

Personally, I have a hard time wrapping my head around the concept of a teenage investor. When I was a teenager I was putting all my money in the bank to pay for my college tuition. Unless we're talking about some significant assets beyond what he needs to get his career started shouldn't we be advising the young man to focus on HB's rule#1 at this point in his life and forget about investing?

[Tortoise]

Personally, I have a hard time wrapping my head around the concept of a teenage investor. When I was a teenager I was putting all my money in the bank to pay for my college tuition. Unless we're talking about some significant assets beyond what he needs to get his career started shouldn't we be advising the young man to focus on HB's rule#1 at this point in his life and forget about investing?

Rule #1 certainly doesn't say forget about investing. In Fail-Safe Investing, Rule #1 says your wealth is ultimately built from your career, but it also points out that investing is an important and necessary tool for preserving and growing that wealth you've built.

I tend to think that the most appropriate portfolio is a function not of age or of portfolio size, but of the investment time horizon for the portfolio in question. If you may need all of the money tomorrow--such as an emergency fund--you probably shouldn't invest it; instead, you'd probably be better off with cash or cash-like funds. (Even the PP has had the occasional one- or two-year loss.) But any investment horizon of, say, three years or more is suited fine for a PP, regardless of age or net worth. The reason I say that is because the PP provides medium- to long-term investors with a couple of things that virtually everyone--teenagers and multi-millionaires alike--desire for the hard-earned money they don't want to lose: safety of principal (diversification and low volatility) and a moderate amount of real growth.

With that view in mind, a teenager making his first few deposits into, say, an IRA would do well to consider a PP for that money since he won't be touching it for many years. For most other teenage savings goals, my guess is they tend to be shorter-term (a few years or less) and are therefore better suited for the liquidity of savings accounts or other cash-like funds.

Regarding all the talk about millionaires: I have a hard time believing that anyone with a $100M portfolio would be willing to earmark only 2 or 3% of his portfolio as "can't afford to lose" and the other 97-98% as funny money. It might sound perfectly logical on paper to gamble everything in excess of $2M-$3M, but I'm thinking the psychological reality is that most people who actually have a $100M portfolio remember what they had to go through to earn it and therefore wouldn't want to speculate with 98% of it. (Unless they're the type of people who get a kick out of base jumping and flying between trees at over 100 mph in a wingsuit--in which case, best of luck!)

[LC475]

Regarding all the talk about millionaires: I have a hard time believing that anyone with a $100M portfolio would be willing to earmark only 2 or 3% of his portfolio as "can't afford to lose" and the other 97-98% as funny money... I'm thinking the psychological reality is that most people who actually have a $100M portfolio remember what they had to go through to earn it and therefore wouldn't want to speculate with 98% of it.

Exactly.

[Tyler]

I personally find the Permanent Portfolio to be great advice for both young and old. Few will use the method up-front, but many will eventually wish they had. Everyone thinks they are very risk tolerant up until the moment they experience a real drop, and I find the typical advice to load up on stocks to get rich quick build wealth young and naive.

[sophie]

... I must echo Ad Orietem's oft-repeated approval of owning a chunk of VT and never letting it go. Use the PP to protect your personal stash and use VT to bet on humanity.

Another priceless gem from Pointedstick!!!!

I didn't mean to imply that a 100% stock portfolio would be appropriate for an ultra-rich investor because it's a bet on prosperity.  Indeed, for 99.99999% of people, the PP is the most sensible way to go regardless of age, because we need to protect our money more than we need that last scrap of CAGR. 

I was just pointing out that in the above extreme Warren Buffett/Bill Gates/Mitt Romney/etc scenario, protecting capital takes a back seat to minimizing taxes.  Qualified dividends from stocks owned directly are an excellent way to do this.  Because this person can live on the dividends without ever having to sell stock, stock price downswings are irrelevant as long as the dividends are maintained.  Unlike municipal bonds, this gives you long-term growth potential in addition to tax-sheltered income.

This is why both PS and I have been arguing that once your 25-30x living expenses are safely stashed in the PP, investing the rest in stocks is a good option to consider.  We would, however, consider it a VP that you should not rely on to preserve capital in the short term.

However, it's unlikely that I'll ever be that ultra-rich person, so this was just a flight of fancy for me.  Outside of my non-PP-friendly retirement accounts, I'm about 95% PP with a bit of play money on the side.  And I went the solo 401K route purely so I could use my side income to redirect retirement contributions from my employer's plan into my PP.

[Pointedstick]

Another curious thing to me is those who recommend investing the surplus in stocks. Maybe this is theoretically correct but my conservative nature would say put it in something like CDs because there is no need for risk.

I want to go back to this because I think it's the key to the offshoot discussion about huge amounts of money. To one person, having excess wealth beyond what's needed for financial independence may cause them to think that there's no longer a reason to take any risk on for additional return--and they would be right. But another person might see the same situation and conclude that there's no longer a drawback to taking on additional risk for the chance to to grow the money faster for whatever purpose--and they'd be right as well. It all depends on your personality, I think.

As for teenagers, I honestly think the PP is a fine choice, barring the difficulty in implementing it and the magnitude of possible transaction costs at extremely low portfolio sizes. If you can overcome those, perhaps by using an all commission-free ETF portfolio at Schwab, I don't see any particular drawback. Given that we're even discussing a teenager with any kind of investment portfolio, I am assuming that this hypothetical person is extremely bright, sensible, and future-oriented in the first place. Not the kind of person who's likely to cash it all out and blow the money on a humongous TV for her room or an unfortunate tattoo. So why not put their savings into a micro PP?

[sophie]

Sounds like you're advocating saving for retirement right from when you're a teenager?  My parents would have agreed with you, although teenagers need to keep their small nest eggs liquid for things like college spending money, backpacking/hosteling around the world, security deposits on an apartment, and such things.  Short term savings really are better in a bank account than in the PP...I wouldn't even do that for, say, saving for a house downpayment.

I'd say the PP is appropriate for any savings with a time horizon of ~5 years or longer.  And we of course believe it is the vehicle of choice for anyone wanting to protect their savings... see my post earlier in this thread.  A bank account does not protect your savings!!! Cash value will erode over time because short term interest is generally less than inflation.  So in fact the PP is more conservative for long time horizons than a savings account.  It's a subtle and maybe counterintuitive point, but I cannot emphasize this enough!!

[murphy_p_t]

Sophie...why 5 years? I agree w/ the general premise, but question that horizon...I would have thought 2 years as an outer, conservative horizon...maybe I should pull up some charts...

[MachineGhost]

As for teenagers, I honestly think the PP is a fine choice, barring the difficulty in implementing it and the magnitude of possible transaction costs at extremely low portfolio sizes. If you can overcome those, perhaps by using an all commission-free ETF portfolio at Schwab, I don't see any particular drawback. Given that we're even discussing a teenager with any kind of investment portfolio, I am assuming that this hypothetical person is extremely bright, sensible, and future-oriented in the first place. Not the kind of person who's likely to cash it all out and blow the money on a humongous TV for her room or an unfortunate tattoo. So why not put their savings into a micro PP?

What is the latest recommendations for implementing a commission free ETF PP?

[MachineGhost]

I'd say the PP is appropriate for any savings with a time horizon of ~5 years or longer.  And we of course believe it is the vehicle of choice for anyone wanting to protect their savings... see my post earlier in this thread.  A bank account does not protect your savings!!! Cash value will erode over time because short term interest is generally less than inflation.  So in fact the PP is more conservative for long time horizons than a savings account.  It's a subtle and maybe counterintuitive point, but I cannot emphasize this enough!!

That's not true.  T-Bills do keep up with inflation plus .6% (not sure about after tax).  It's the actual cash under the mattress that gets eaten away into moth holes.  The duration of the PP is about 7.5 years, assuming gold is same as stocks.

[Pointedstick]

What is the latest recommendations for implementing a commission free ETF PP?

All at Schwab:
Stocks: SCHB
Bonds: TLO
Cash: SCHO
Gold: SGOL

Zero transaction costs!

[dualstow]

...  A bank account does not protect your savings!!! ...

That's not true.  T-Bills do keep up with inflation plus .6% (not sure about after tax). ...

I thought inflation was currently more than the 5-year note yield, let alone that of t-bills. 

[MachineGhost]

I thought inflation was currently more than the 5-year note yield, let alone that of t-bills. 

Short term periods don't count.   Later on, investors will overreact to the inflation they previously underreacted to.  It all works out in the end.

We don't have fundamental issues like Japan or Europe do, short of subpar immigration.  So we'll probably squeak by, as usual.

[Libertarian666]

Qualified dividends from stocks owned directly are an excellent way to do this.  Because this person can live on the dividends without ever having to sell stock, stock price downswings are irrelevant as long as the dividends are maintained.  Unlike municipal bonds, this gives you long-term growth potential in addition to tax-sheltered income.

I don't think this is accurate. First of all, qualified dividends are indeed taxed, just at a lower [capital gains] rate than ordinary income. Muni bond interest is federal tax free. Granted, in theory, over time the stocks will appreciate in value with no tax until sale. But there is no guarantee of this. Likewise, muni bonds may appreciate in value [if interest rates are falling]. It really is not an apples-to-apples comparison.

Qualified dividends (and capital gains) are taxed at a 0% rate if they fall within the 10% or 15% bracket.
However, the only thing we can be sure about with respect to tax law is that we don't know what it will be in the future.

[dualstow]

I thought inflation was currently more than the 5-year note yield, let alone that of t-bills. 

Short term periods don't count.  

Ok, thanks. That was also the only explanation I could come up with, but I was holding out hope that I had the numbers wrong. 

[DragonJoey3]

Sophie...why 5 years? I agree w/ the general premise, but question that horizon...I would have thought 2 years as an outer, conservative horizon...maybe I should pull up some charts...

I didn't see Sophie answer your question, but I can tell you that based on my research the longest time you would go without at least seeing a positive return in the PP is 5 years.  There is a nice chart here that shows how the returns stabilize after about 5 years.

Of all the portfolios I've tested I find that the PP is the around the lowest in volitility, but even it can return negative returns 2 years in a row, and has.  But after 5 years the "noise" is worked out and you are left with straight return.

[sapperleader]

Fascinating discussion   My wife and I  started building a house this year.  We pushed our cash allocation to the limits of the rebalancing band the past 3 years knowing that the market could certainly have losses during that time and that we needed the money liquid.  We did i-bonds and cd's where we could for deep cash to help against inflation, but I think staying in cash for anything less than 3 -5years is a solid plan, and over 5  invest normally.

I definitively think that PP is great for all ages, though as we grow older and better off we will be shifting our percentages to a final 60% permanent portfolio, 40% variable(currently 84/16).

For those interested in studies on how the wealth do investing, I love Stanley's Millionaire next door series as it focuses on the 2-3 million crowd(, where as millionaire mind looks at deca-millionaires mindset.  Joshua Kennon's blog (joshuakennon.com) also does some great case studies on how the wealthy treat cash, and general wealth. For those that want the cliffnotes, all in stocks is not normal, its all about wealth preservation and income streams.  Our big takeaways is you can hit financial independence/safe retirement playing good defense(savings and investing) but to hit the deca-millionaire you need a successful business model.  I think the PP works for either of those scenarios, or normal retirement, its just what percentage you want to tweak for variable.

[Pointedstick]

Off topic, and I'd love to comment on another thread, but how far along are you in your house? What kind of construction are you using?

[sapperleader]

Ill start a thread for that to avoid any more off topic