is pp for all ages and portfolio sizes?

[chesser]

is the pp appropriate for everyone including adults and kids who have a portfolio, say including teens, working ages, and retirees?

and is there a point where it's not recommended, say if the portfolio gets to a certain size then excesses beyond expected needs are put in a different category? i could see for example holding physical gold might have a limit practically.  and conversely, if just starting out do you build across the four assets evenly from the get-go?

did h.b. address these items that anyone knows? i think he said it was for $ that you can't afford to lose, but are there any details?

[KevinW]

I think the vanilla 4x25 works fine for accounts between about $10k and $2 million.

Under $10k, commissions are costly as a percentage of funds, so transactions are expensive. It is also awkward to maintain the 15-35% bands since a single ETF share or gold coin might be a large percentage of the portfolio. But, you can hold PRPFX for accounts between $100 and $10k. Alternatively, IMO it's fine to just hold 100% T-bills until you reach the $10k mark.

I don't think I'd want to personally manage more than $500k or so of gold bullion which puts an upper limit of about $2 million on a DIY portfolio. But, if you have $500k+ gold in one place, offshore gold storage services become viable. Stocks, bonds, and cash scale up without any practical limit. So if you're OK with using storage services or gold ETFs, I don't think there's any practical upper limit on a 4x25.

[barrett]

KevinW,

I wish you would post more on here. I realize that after a while it probably seems like there is not a lot to talk about with the PP. But you always have good insights and seem really comfortable with the portfolio. Just putting that out there.

[Pointedstick]

I agree with Kevin, and will add an additional personal reason: once you have a truly huge amount of money relative to your expenses, I think you don't actually have to be so conservative anymore. For example, let's say your stash is 60x your yearly living expenses and you happen to be foolishly 100% invested in stock index funds. Then there's a stock market crash and your net worth plunges 50%! Yowza! But wait, you still have 30x your living expenses... you still have enough for financial freedom forever. You can afford to wait for the market to go back up. Not obviously this is a terrible portfolio and is exposed to all kinds of risks, but it illustrates how having more money buffers many of those risks.

In the event that I ever accumulate this kind of truly ridiculous sum of money, I plan on keeping about 30x yearly living expenses in a PP and the rest in a VP. That way the PP will always be there for me, and I never have to get emotional about the performance of the VP.

[MachineGhost]

In the event that I ever accumulate this kind of truly ridiculous sum of money, I plan on keeping about 30x yearly living expenses in a PP and the rest in a VP. That way the PP will always be there for me, and I never have to get emotional about the performance of the VP.

I play the lottery when the expectation is positive. 

[KevinW]

@barrett
Thanks. I got burned out on the political threads and arguing over bike shed issues like efficient markets and the rebalancing bonus for the umpteenth time. But I still follow the non-political forums and post when I feel I have something to add. Honestly, the bread-and-butter stuff has already been discussed thoroughly, and when something new comes up, other people tend to cover it well before I get a chance to weigh in. Anyway, thanks for the feedback.

@Pointestick
Yeah, I'll admit that I've fantasized about what I'd do if I won the lottery or something and had something like $100 million or more to invest. After the first few million, everything is "money I can afford to lose." My plan, in both real life and that hypothetical scenario, is that the first $2 million or so goes in a 4x25 PP, and any overflow goes into a VP of global equity income stocks. Even if the the VP becomes worthless, I still have a bulletproof portfolio that can support my family in comfort. It's kind of amazing to envision being about 98% in stocks yet carefree about the markets.

[sophie]

A very nice problem that most of use will never have 

I think the upper limit of the PP has to do with your comfort level surrounding the gold allocation.  At some point it gets difficult to store the stuff.  I think I'd do something like what KevinW and PointedStick suggest:  put a fixed amount in the PP to guarantee a comfortable level of living expenses (I should think 8-10x would be enough though), put the rest into stock index funds, and enjoy doing extra stuff like philanthropy or exotic travel with the dividends.

[rickb]

I don't think I'd want to personally manage more than $500k or so of gold bullion which puts an upper limit of about $2 million on a DIY portfolio. But, if you have $500k+ gold in one place, offshore gold storage services become viable. Stocks, bonds, and cash scale up without any practical limit. So if you're OK with using storage services or gold ETFs, I don't think there's any practical upper limit on a 4x25.

From a thread a while ago:

http://gyroscopicinvesting.com/forum/go ... /#msg17474

a single monster box of 500 gold US Eagles (now worth about $600K) comfortably fits in a large (5x10) safe deposit box.  With 4 of those, at 4 different banks, you have enough gold for about a $10M PP.  With 10 at 10 different banks, you have enough for a $25M PP.  With that much money you might want to think about gold bars rather than gold coins - but I think the upper limit on a DIY PP (with physical gold you manage yourself, even in the form of coins) is in the 10s of millions rather than $2M. 

[MachineGhost]

I gotta say no one that can afford 500 gold eagles is going to be stoopid and store it a bank's safety deposit box that offers no  insurance and no liability for increasing amounts of safety deposit box content theft, whether done by employees internally or external.  Most suburban banks don't even offer safety deposit boxes anymore, anyway.  Bank's increasingly don't care anymore.

[KevinW]

Yeah rickb is absolutely correct about the value density of gold bullion. But along the lines of what MachineGhost is saying, I just can't abide the idea of storing more than about $500k in a portable physical object stored in one location near my home.  Even if remote, the risks of it being burgled, or destroyed in a natural disaster, or me being extorted to give it up, start to bother me too much around that figure. I'm not sure where the $500k figure comes from; it's probably "anchoring" since I'm comfortable with owning a home outright worth about that much.

[sophie]

I gotta say no one that can afford 500 gold eagles is going to be stoopid and store it a bank's safety deposit box that offers no  insurance and no liability for increasing amounts of safety deposit box content theft, whether done by employees internally or external.  Most suburban banks don't even offer safety deposit boxes anymore, anyway.  Bank's increasingly don't care anymore.

How would you suggest storing gold?  That logic applies equally well to 50 gold eagles, or 5.

I also would be very hesitant about having such a huge amount of money in one place with potentially multiple failure points.  There are still options for stashing gold internationally for US citizens, and you can also get allocated gold storage at US banks & brokers.

[stpeter]

Few folks here or anywhere else will need to worry about having that much money to invest, but it seems that the long-term ultra-rich (at least those who care about what we might call dynastic wealth) often invest in tangible assets like land and art (and gold, but we've got that covered via PP).

[rickb]

Few folks here or anywhere else will need to worry about having that much money to invest, but it seems that the long-term ultra-rich (at least those who care about what we might call dynastic wealth) often invest in tangible assets like land and art (and gold, but we've got that covered via PP).

Dynastic wealth is WAY more than $10M.  Maybe we should have a separate thread about this, but I think there are distinctly different levels of "rich".  One level is rich enough to be able to scrape by without working.  I think for most folks this is in the $2M-$3M range.  This is "lead your current life, funded only from your investments without any income from a job".  You're not drinking $100/bottle wine every night and flying first class to ski in the Swiss Alps and staying at 5-star resorts.  You're living your current life - but without a paycheck from a job. 

There's definitely a continuum but the next discrete level up is you live in a nice house (but not a mansion with a live-in staff), occasionally drink $100/bottle wine (but certainly not every night), drive whatever kind of car you want (but not a Ferrari), travel first class (but have to think about whether 5-star hotels are worth the money), and generally don't have to think about how much money you spend.  I think this is in the range $10M. 

Beyond that there are clearly degrees of rich involving more and more abnormal lifestyles (fly in your own private jet, maintain multiple houses on multiple continents each with a staff including your own private chef, drive a Ferrari, drink $1000/bottle wine).  I think this is likely a $100M (and above) sort of lifestyle.

Dynastic wealth (enough wealth to enable your descendants to live a $100M lifestyle) takes closer to $1B. 

I don't know the exact numbers but my guess is $2M-$3M puts you in the top 1%, $10M puts you in the top 0.1%, and $100M puts you in the top 0.01%. 

Assuming this forum is skewed high by an order of magnitude, perhaps 10% are in the $2M-$3M range, 1% in the $10M range, and 0.1% in the $100M and above.  There are currently about 1000 members.  That would mean there are about 100 in the $2M-$3M range, 10 in the $10M range, and 1 in the $100M and above range.

So, "dynastic wealth" is likely a consideration for very, very few folks here (perhaps 1).  On the other hand, what to do with a PP of $1M-$10M might be of interest to 100 or so members.

[chesser]

The net worth discussion is getting very interesting
different opinions as to what the cut off might be for the permanent portfolio, based upon gold physical, which seems to be a continual challenge.
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 guess however it is money you can afford to lose.
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?

[sophie]

Excellent question chesser!  It helps to understand the purpose of the permanent portfolio: it's to provide maximum protection for the assets you consider crucial.  However, over long time ranges (20-30 years), the stock market offers the most growth.  The problem for a young person figuring to start with 100% stocks and then switch to the PP is knowing WHEN to make the switch...if you happen to be in the wrong 20 year time period you could get burned pretty badly. 

Cash savings may appear to be safe, but in fact the value of cash erodes if the real return is less than zero - which is often the case.  This is one of the problems that the PP is designed to protect against.  A stock fund will not lose value over the long term, but that's only the case if you can hold onto it essentially forever, regardless of the economic climate.  The PP is designed to even out the bumps (at the cost of a small CAGR penalty) which is worth a lot in the real world.  That is, in the real world investors have a hard time watching stocks fall without selling at the bottom, and also occasionally need to dip into their savings which tends to happen more frequently in bad economic times.

I figured that if you have a PP large enough to cover your standard of living with a very comfortable margin (think of it as a DIY annuity), then you can reasonably hold a stock portfolio outside the PP and never sell it.  If you're sufficiently wealthy it makes a lot of sense to buy and hold individual stocks in order to get qualified dividends and thus pay very little in taxes. 

If you have far more money than you know what to do with (eg 100x living expenses), you could dispense with the PP altogether and go with 100% stocks (living off the dividends) and a generous cash buffer.  That probably describes very few people on this forum though.

[stpeter]

Few folks here or anywhere else will need to worry about having that much money to invest, but it seems that the long-term ultra-rich (at least those who care about what we might call dynastic wealth) often invest in tangible assets like land and art (and gold, but we've got that covered via PP).

Dynastic wealth is WAY more than $10M. 

I don't know quite what dynastic wealth is and I can guarantee you I'll never get there. I think you could fund a financially savvy, relatively frugal family forever with $50M (millionaire next door type of people who don't go in for a lavish lifestyle).

In any case, if I had more than the $2M-$3M you cite, I'd buy art and land because they're tangible assets that can be enjoyed for generations to come, not financial claims.

[KevinW]

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?

This has been discussed before. IMO, the PP is indeed a better financial plan for someone starting from scratch, like a teenager, than is more conventional advice. The PP plan is to be in the 4x25 at all times, starting from day 1. Conventional advice is something like: first save up 12 months' expenses in cash in an emergency fund, and then switch to a retirement portfolio allocated to "age in bonds" and the rest in stocks.

The problem with the conventional advice is that it puts someone 100% in cash for a long time. Let's say an independent 18 year old starts out with a 20% savings rate. It takes about 5 years for them to finish their emergency fund. In year 6 at age 24 they start their 76/24 portfolio. But that is only 1/6 of all their assets, so their household allocation is approximately 83% cash, 13% stock, 4% bond. It will be many years before the household has a majority of assets in growth assets.

By contrast the PP is approximately 50% growth assets at all times. Due to its low volatility, in the event of a financial crisis the portfolio could be liquidated, so a separate emergency fund is unnecessary. The PP plan actually has a higher expected return during the early accumulation years, which are critical due to how compound interest works.

[mukramesh]

I don't understand the responses saying that a 'stock heavy' portfolio is appropriate for anyone in the accumulation phase (young investors). Hasn't the PP historically done about as well as a 100% stock portfolio with significantly lower volatility and much smaller drawdowns? In what way would a stock heavy portfolio offer more opportunity for growth than a Permanent Portfolio?

Based on historical numbers alone, it seems that a PP is appropriate 99.9% of people (not including the ultra rich here).

[Pointedstick]

No, the PP has historically lagged the stock market by a bit, and this is especially noticeable during a stock boom when the pressure to jump in will be intense (like right now).

The arguments for being super stock-heavy only make sense to me if you are planning to and can reasonably expect that your emotions will allow you to hold onto your stocks for a minimum of 20 years, probably 30. That precludes using them for early retirement purposes, in which you will likely have a maximum of 15 years in your accumulatory working career, and will have to start selling investments for income. If you have the misfortune to start at a bad time, your entire accumulation phase CAGR may be very, very low. For example, during the 15-year period from 1997 - 2012, a 100% stock portfolio yielded a nominal CAGR of about 4.1%. Account for inflation and it's almost zero. Even worse, what if that time period is your first 15 years of retirement? Ouch.

On the other hand, if you expect to work for 30 years and then retire, a stock-heavy portfolio isn't the worst choice. Lengthen that time period by just 5 years and go from 1994 - 2014 and the same portfolio instead gives you a nominal 19% CAGR!

Basically, it works as long as you have the time and emotional stability to ride out multi-decade market busts without having to sell. That doesn't describe anyone who wants to retire before 50.

[LC475]

If you have far more money than you know what to do with (eg 100x living expenses), you could dispense with the PP altogether and go with 100% stocks (living off the dividends) and a generous cash buffer.  That probably describes very few people on this forum though.

Why would one do that?  What advantage would it offer?  Why would the advantages of the Permanent Portfolio exist for lower amounts, but not higher amounts, of wealth?

I cannot think of any good answers to these questions.

A permanent portfolio should provide roughly the same kind of benefits to a one billion dollar portfolio as to a one million dollar one.  If you want a stable, safe, growing investment portfolio, there is none better, in my opinion.

What you do with your money depends on what you want to achieve with your money.  A more interesting question, I think, for higher and higher net worths would be how much of the money would you want to invest at all?  PointedStick floats the idea of a 2 million PP and 98 million dollars in the stock market.  Why put 98 million dollars in the stock market?  Can't you think of at least a dozen more interesting, fulfilling, thrilling, or potentially profitable things to spend $98 million dollars on?

So I would say that the PP always makes sense to me, no matter how high my net worth goes.  And so I plan to continue holding all of my "investment" savings in it.  But how much I choose to set aside for such investing in the first place will vary.  There's a lot of other ways to use your money.

On the other end, for the young and impoverished, it will depend on what financial products are available.  If one could get a checking account backed by a PP, with no or virtually no buy/sell penalty costs, then it would make sense to use it for all your savings, period, from $10 on up.  With the currently available products on the market, it makes sense for $1,000 and up with PRPFX and $5,000 and up for a do-it-yourself version.

[Pointedstick]

PointedStick floats the idea of a 2 million PP and 98 million dollars in the stock market.  Why put 98 million dollars in the stock market?  Can't you think of at least a dozen more interesting, fulfilling, thrilling, or potentially profitable things to spend $98 million dollars on?

Sure, of course. The point is, I think, that once you're easily, comfortably financially independent, the benefits of lower volatility start to fade. You can tolerate higher volatility with higher expected long-term rewards because it literally doesn't matter to your ability to maintain your lifestyle. It's not that there's anything wrong with a $100 million PP, but a $2 million PP + a $98 million 100% stock portfolio should be expected to work together to both preserve your current income and also grow your assets faster than the $100 million PP would.

[mukramesh]

PointedStick, I get what you're saying that the PP will lag the Stock Market during times of prosperity. But to say that over a long time horizon, one would be better off putting more money in stocks is the equivalent of saying that one should expect prosperity in the long term. If that is the case, and one can guarantee that they won't need the money for a very long time, then sure they should put the money in 100% stocks.

However I don't think anyone can guarantee either of those conditions; the comment about having a 'higher expected long-term rewards' is not guaranteed at all, it's just an assumption based on recent history of the US stock market.

Outside times of raging bull markets, the PP has done reasonably well at generating real returns. 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.

As for the comment about a hypothetical PP with check-writing privileges, that's essentially what I already have since I consider my checking account part of the Cash portion of my PP.

[Pointedstick]

It's true that a stock tilt is a bet on prosperity. But over the long term, I think that's an easy bet, especially if you use a global stock index. If periods of high inflation, deflation, tight money recessions, financial repression, central bank shenanigans, etc. are more common than prosperity on a global level, that implies that humanity in the aggregate is becoming impoverished, and while anything is possible (the Dark Ages come to mind),  it seems unlikely to me. In that respect, 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.

[mukramesh]

Okay, that sounds reasonable to me since we agree that a stock tilt is a bet on prosperity
If someone doesn't mind making that bet and also can guarantee that they won't have to touch the money for a sufficiently long time (this is a loaded statement since there could be a multi-decade stock market slump; who's to say how long we'll have to wait for this 'prosperity' to show up and result in higher stock prices for global indexes?), then they could put their money in a stock-heavy portfolio.

I think most people would be better off not making either of those bets and just sticking their money in a PP.

[barrett]

...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?