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General Discussion on the Permanent Portfolio Strategy

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portart
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Re: No where to hide

Post by portart » Wed May 06, 2015 4:45 pm

Looking at PP from a distance and after having owned it for a long period of time, it's coming off of (for me) over a 10% average yearly gain to now, under 7%. Does this surprise me? Consider half the portfolio is in cash paying very little, treasuries that being haunted by the bottoming of interest rates and rates no where to go but up, and gold which has had it's heyday during the crash and now is deciding if it wants to continue to hang around 1,200 or go down another couple of hundred bucks, it's insane to expect PP to hold to that rate.  Because of rebalancing, I have locked some of those gold and treasury gains. The market has also been sold to go into the other categories as of late. HB has rated the PP as a 9% long term gain over time.

However, what is the length of time needed to achieve that. Currently we are not in that event period with low rates on your cash, bonds under pressure and a market that will turn cold whenever people decide the party is over because of debt and an artificially created boom. So I look at PP to settle in right about the rate of inflation until a major event pushes gold to the forefront which moves the fastest, farthest in the shortest period of time.
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Re: No where to hide

Post by moda0306 » Wed May 06, 2015 4:55 pm

It certainly helps to have bonds yielding double digits when you start a portfolio and want it to average 9.6% rate of return.

However, when HB was designing the PP, stock market earnings yields were also far better than they are today.

So the entire market is priced differently.  Equities and fixed income.  Now that doesn't mean stocks can't ride a phenomenal wave of repricing like bonds and stocks both have for decades?  Of course it could.  But if we operate on the assumption that it is fundamentally the stock market's ability to generate earnings over time that determines its value to us, we have less indication of those rich earnings, similar tot he fact that we have less interest coming in from our long-term bonds.

The PP's days of 9% RoR might be over, but IMO, so is the equity market's (unless, of course, the market resets itself macroeconomically, which could take a lot of bond market losses and stock market price dawdling OR huge earnings growth.
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Re: No where to hide

Post by Pointedstick » Wed May 06, 2015 5:02 pm

moda0306 wrote: It's never going to be the sexiest portfolio on the block in the good times.  But wanting passive portfolios to be sexy is like wanting the roof of your house to be sexy.
I think a well-installed high-pitch dark-colored standing seam metal roof could be sexy. But I'm probably insane. :)
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Re: No where to hide

Post by Reub » Wed May 06, 2015 6:19 pm

The faith aspect is simply an ungrounded belief that gold and treasuries will continue to rise as they have mostly done for 40 years. What happens when they falter?
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Re: No where to hide

Post by dutchtraffic » Wed May 06, 2015 6:23 pm

Reub wrote: The faith aspect is simply an ungrounded belief that gold and treasuries will continue to rise as they have mostly done for 40 years.
Nobody should be that stupid to believe ANYTHING could ever rise forever.
What happens when they falter?
Then the portfolio wont do very well. Obiously..?
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Re: No where to hide

Post by Pointedstick » Wed May 06, 2015 6:47 pm

Reub wrote: The faith aspect is simply an ungrounded belief that gold and treasuries will continue to rise as they have mostly done for 40 years. What happens when they falter?
I recommend evaluating a portfolio based on its fundamentals, not approval of the hypothetical historical performance of some of its assets.
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Re: No where to hide

Post by dutchtraffic » Wed May 06, 2015 7:01 pm

It's quite funny and sad to see how everybody is scared to hold gold..

It is by F A R the safest asset if you compare it to the other 3. (obviously not in paper form)

stocks can and do go to zero
bonds can and do go to zero
cash can and always goes to zero (it has never NOT gone to zero)

Honestly not that much is needed to wipe bonds and stocks, don't think it can't happen, it's just another manmade idea, not a law of nature.
Last edited by dutchtraffic on Wed May 06, 2015 7:05 pm, edited 1 time in total.
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Re: No where to hide

Post by Tyler » Wed May 06, 2015 7:03 pm

Reub wrote: The faith aspect is simply an ungrounded belief that gold and treasuries will continue to rise as they have mostly done for 40 years. What happens when they falter?
I think you have it exactly backwards.  From my perspective, the PP does not put faith in ANY asset continuing to rise.  In fact, it's one of the rare portfolios that recognizes recent stock performance as a false idol and places firewalls in place for when stocks inevitably disappoint.  When gold and treasuries falter, the PP generates decent real returns.  When stocks falter, it does the same. 

IMHO, a lot of problems arise when people apply an inappropriate investing mindset to evaluate the PP.  It's not a value investing portfolio where you're looking for good deals in every component ("rates have nowhere to go but up", "P/E ratios are low/high". etc.).  It's also not a dividend portfolio where you look for constant income from every component ("gold is a shiny metal that provides no income").  It's a system-based portfolio based on neutral-outlook macroeconomic baskets.  It's a different type of animal that, because it requires a unique perspective, only certain people appreciate.  But as a package it is remarkably robust. 
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Re: No where to hide

Post by Reub » Thu May 07, 2015 12:20 am

But how robust will it be when the two components that have been bullish for 40 years suddenly turn bearish for 40?
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Post by dutchtraffic » Thu May 07, 2015 12:23 am

Reub wrote: But how robust will it be when the two components that have been bullish for 40 years suddenly turn bearish for 40?
You keep asking the same question, the answer is still that nobody knows, and nobody will ever know, it can be very bad, and very good.
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Re: No where to hide

Post by Austen Heller » Thu May 07, 2015 3:23 am

Desert wrote: That's pretty much what I switched into, about 26 months ago.  I still like the PP, and think it's a great portfolio.  But I prefer something closer to 30% equity, 60% 5-10YT, and 10% gold.  10% gold happens to be about the max I'm comfortable holding in physical form as well, so it's a good match for me personally.  I don't expect any long term real return from gold, so I hold it almost entirely as a sort of disaster insurance.  And it's also very shiny.
Glad that I'm not the only one who chose this deviation from the 4x25.  I still have abundant respect for those who have stayed the course with the 4x25, it's just not for me right now.
dutchtraffic wrote: It's quite funny and sad to see how everybody is scared to hold gold..
It is by F A R the safest asset if you compare it to the other 3. (obviously not in paper form)
Sometimes it is not that a person is scared to hold gold, fearful of price declines.  Rather, as Desert points out, there is the real-world problem of holding large amounts of physical gold bullion.  I have yet to hear of a reasonable solution.  Getting a bunch of safe deposit boxes at banks, getting a heavy home safe, hiding coins in your walls and inside your peanut butter jars and bags of rice, keeping it at the Perth Mint, holding paper ETFs, etc.......I have never gotten comfortable with any of these solutions, so now I just don't have much of a gold allocation, even though I think that gold is probably the most reasonably priced of the 4 PP components.
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Re: No where to hide

Post by barrett » Thu May 07, 2015 6:12 am

Austen Heller wrote: ... Rather, as Desert points out, there is the real-world problem of holding large amounts of physical gold bullion.  I have yet to hear of a reasonable solution.  Getting a bunch of safe deposit boxes at banks, getting a heavy home safe, hiding coins in your walls and inside your peanut butter jars and bags of rice, keeping it at the Perth Mint, holding paper ETFs, etc...
Point taken though I think one safe deposit box is adequate for most of us. There is a lot of value in a relatively small number of gold coins
Reub wrote: The faith aspect is simply an ungrounded belief that gold and treasuries will continue to rise as they have mostly done for 40 years.
How has gold risen for 40 years? It was up for eight, down for 20, up for 11-12 and way down since then. I am not saying that it will necessarily go up in the near future but I don't see the past 40 years as a sustained bull. Or did you mean "stocks and treasuries"?
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Re: No where to hide

Post by Ad Orientem » Thu May 07, 2015 7:48 am

Reub wrote: But how robust will it be when the two components that have been bullish for 40 years suddenly turn bearish for 40?
Which of the four economic conditions are you envisioning?
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Re: No where to hide

Post by ochotona » Thu May 07, 2015 8:35 am

Ad Orientem wrote:
Reub wrote: But how robust will it be when the two components that have been bullish for 40 years suddenly turn bearish for 40?
Which of the four economic conditions are you envisioning?
Designing a portfolio to meet the four conditions was not made up by Harry Browne, either. PP is not a cult or religion. Big commercial providers are in this space, too. Click here to see Compass diagram.
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Post by moda0306 » Thu May 07, 2015 10:35 am

I'm having trouble even finding what the definition of bull and bear markets even are.  Especially when you try to make a distinction off secular vs cyclical.  Sure, we feel like we generally understand when one is at the very least in a cyclical bull.  And if stocks are at all-time highs perhaps we feel like we can label it a secular bull.

But what is the definition?

Most asset classes are going to perform positively over 40 years... does that mean they are "in a 40-year bull market?"

How much would long-term bond rates have to fall over a 40 year period to qualify it as a "40-year bull bond market?" (especially if peak rates on bonds didn't occur until 34 years ago, not 40)  What if rates fall from 5% to 4% over 40 years?  Is that a "40-year bull bond market?"

How high in price does a commodity have to grow over 40 years to have a "40 year bull (Commodity X) market?"  If it goes up in price nominally?  If it goes up in price higher than the rate of inflation?  What if it's only .5% higher than the rate of inflation (ie, inflation is 3%, and the performance of a commodity is 3.5%)?  Could we really call that a "bull market?"

What about the stock market?  We are at all-time highs.  P/E ratios are relatively high (thought with rich earnings growth).

It would help to get some definitions to deal with here that can help us put this all in perspective.
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Re: No where to hide

Post by Cortopassi » Thu May 07, 2015 10:52 am

Look at the second chart on this site (nothing no one here doesn't already know)

http://www.advisorperspectives.com/dsho ... -Highs.php

I think virtually no one anywhere would dispute the past 6 years has been a bull market for stocks, for that time period.  But depending on the starting point, rate of inflation, reinvesting of dividends, etc. for some of us at least, not only has 2000-2015 been flat, it has been worse because we (I!) got scared and ran in 2008.

I think one of the keys over long periods is the rebalancing that will happen.  For my investing career, 1989 to now, with 35/15 bands, I would have rebalanced 7 times (quite less than I would have expected).  With a CAGR of 7.21.  Change that to no rebalancing and the CAGR drops to 5.8.  Quite a lot over 26 years!

In fact, it made me rethink my current strategy which was to rebalance quarterly.  I am changing that to 35/15.

Again, I am shocked at the simplicity and wish I heard of Harry Browne 25 years ago.
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Re: No where to hide

Post by ozzy » Thu May 07, 2015 11:55 am

Designing a portfolio to meet the four conditions was not made up by Harry Browne, either. PP is not a cult or religion. Big commercial providers are in this space, too. Click here to see Compass diagram.

Ochotona - One important difference is the PP is passive (e.g. permanent).  The Schwab Windhaven thing is actively managed.  Their website says “Windhaven dynamically moves across and within those asset classes, primarily using low-cost index exchange-traded funds (ETFs) and adjusts allocations as it sees opportunities arise or risks appear”
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Re: No where to hide

Post by ochotona » Thu May 07, 2015 12:34 pm

ozzy wrote:
Designing a portfolio to meet the four conditions was not made up by Harry Browne, either. PP is not a cult or religion. Big commercial providers are in this space, too. Click here to see Compass diagram.
Ochotona - One important difference is the PP is passive (e.g. permanent).  The Schwab Windhaven thing is actively managed.  Their website says “Windhaven dynamically moves across and within those asset classes, primarily using low-cost index exchange-traded funds (ETFs) and adjusts allocations as it sees opportunities arise or risks appear”
I am aware. I was just pointing to the four points on the compass. Some Windhaven investors are just as unhappy with Windhaven as some are unhappy with PP, for the exact same reason.... it's not the S&P500 during 2012-Present.
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Re: No where to hide

Post by buddtholomew » Thu May 07, 2015 12:47 pm

This is merely an observation and not meant to incite a negative response.

There are many staunch advocates of the PP, but how many of these individuals truly invest in the 4x25 allocation? I see posts where people have modified the portfolio to suit their individual circumstances.
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Post by Pointedstick » Thu May 07, 2015 12:57 pm

buddtholomew wrote: This is merely an observation and not meant to incite a negative response.

There are many staunch advocates of the PP, but how many of these individuals truly invest in the 4x25 allocation? I see posts where people have modified the portfolio to suit their individual circumstances.
I have a 4x25 PP as well as a 50/50 stocks/bonds VP.
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Re: No where to hide

Post by KevinW » Thu May 07, 2015 1:09 pm

My wife and I each have a 4x25 PP.
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Post by Cortopassi » Thu May 07, 2015 1:18 pm

I have a 4x25 PP, with virtually all the VP side in gold and silver (that's where I came from investing most recently)
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Post by Pointedstick » Thu May 07, 2015 1:31 pm

And here's the thing… it's an investment portfolio, not a religion. You should use it if you like it, and use something else if you like that better. The PP is clearly not for everyone, and, like all investment portfolios, its characteristics make it better-suited for some than others.
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Post by buddtholomew » Thu May 07, 2015 2:21 pm

Pointedstick wrote: And here's the thing… it's an investment portfolio, not a religion. You should use it if you like it, and use something else if you like that better. The PP is clearly not for everyone, and, like all investment portfolios, its characteristics make it better-suited for some than others.
Agreed. Let's take a closer look at your portfolio - PP and VP included.

Depending on the PP to VP ratio, equities and fixed income are > 25% and Gold is < 25%. Only you can tell us whether the deviation is material. My question is whether your entire retirement nest egg is invested in the 4x25 allocation? I want to hear from those people and their experiences over the last few years.
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Re: No where to hide

Post by Cortopassi » Thu May 07, 2015 2:29 pm

86% of my standard investable retirement is in the PP.  14% "VP" is gold/cash/silver.  So I am >25% in gold and cash overall, but I have grown very conservative after my experiences.

To my detriment, currently.  But that is not saying I am not 100% more comfortable having the shiny stuff vs. stocks or bonds.  I certainly am.
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