No where to hide

[ochotona]

I am not comparing YTD. I am referring to the period 2011-current. That is the timeframe I have been invested in the PP.

FWIW, some of Budd's pain in caused by gold going into the tank since 2011, which is exactly why both I and MachineGhost, if I may drag him into this, advocate underweighting gold. I also know of another PP user in Canada who has done a risk parity study and has also independently come to 15% gold. I favor 15% gold, and MachineGhost 20%.

[moda0306]

They can decline in unison in the VERY short-term.  They're macro-economically, fundamentally different, though, and offer huge fat tail risk protections that traditional portfolios don't.  This means you might have to suffer some short-term volatility to have that shortish-to-long-term protection.  I'd much rather have something that experiences short-term noise, but offers robust protection (but with some downside yet) in multiple catastrophic risk scenarios than one that appeared diversified but went to shit when things REALLY got bad (even if that's only a severe recession).

But we've tried to point out to you on multiple occasions that the PP WILL go down, sometimes in unison (see 1981 for probably the most extreme example).  And it's bound to happen in far more potent doses than many of the ones where you are losing your calm.  There is noise to the whole plan.  If this is going to give you frustration, then the PP isn't for you.  This isn't just a risk, but more like a near-certainty!  I expect my PP to bounce around.  In fact, I kind of like when it does, because it's something I feel reasonably comfortable buying on the dips with, if I so choose.


But overall, the fundamentals of your recent consternation have gone on several times in the past.  The late 1990's would have been an extremely depressing time to be in the PP. 

You are simple expecting too much.  These assets aren't perfect non-correlators every single day, or even every year.  What you are expecting is not even close to being bared out by history.

[moda0306]

I am not comparing YTD. I am referring to the period 2011-current. That is the timeframe I have been invested in the PP.

FWIW, some of Budd's pain in caused by gold going into the tank since 2011, which is exactly why both I and MachineGhost, if I may drag him into this, advocate underweighting gold. I also know of another PP user in Canada who has done a risk parity study and has also independently come to 15% gold. I favor 15% gold, and MachineGhost 20%.

But that will only solve part of his problems.  His expectations of how this portfolio should behave are WAY off.  Gold is only part of that problem.

[Reub]

What will happen to the PP when treasuries and gold enter 40 year bear markets?  Or has this already begun?

[dutchtraffic]

What will happen to the PP when treasuries and gold enter 40 year bear markets?

How can we know? All depends what happens to equities, it's unlikely to be good obviously.

Or has this already begun?

How can we know? If i would i would be short right now with maximum leverage.

[dutchtraffic]

I think a lot of people need to get it into their head that the PP is not the holy grail, and that it can also crash drastically, you can lose 50% of your investment, it's not very likely, but it can surely happen.

It's also very likely that 90% of other types of portfolios would be crushed even harder in that scenario.

There is no such thing as a safe investment, or you would not be rewarded for your investment.

[ochotona]

What will happen to the PP when treasuries and gold enter 40 year bear markets?  Or has this already begun?

If we imagine Treasuries doing to do an about face and go back to what they were doing in 1980, then that means you anticipate lots of inflation; this would be great for gold, and probably not so good for stocks.

[Reub]

Aren't many of us interested in the PP exactly because of the 40 yr bull markets in gold and treasuries? Isn't it just recency bias? What if those bulls are over?

[Pointedstick]

Aren't many of us interested in the PP exactly because of the 40 yr bull markets in gold and treasuries? Isn't it just recency bias? What if those bulls are over?

Wouldn't any such people have been better off investing in bold and bonds instead of the PP?

[Reub]

Yes. But this doesn't change the fact that at least half of the PP religion has been based on long term bull markets that may be over.

[moda0306]

What will happen to the PP when treasuries and gold enter 40 year bear markets?  Or has this already begun?

First off, your question presupposes it as a FACT that bonds and gold will both enter bear markets for 40 years.  This is a bit presumptuous, though, of course, possible

If rates are rising, it will likely be due to some kind of combination of healthy economic growth and/or inflation.  If we have healthy economic growth and rates rise, while inflation stays tame, gold should drop, and LTT's will obviously drop.  If rates are rising to catch inflation that is NOT being driven by growth (like the 1970's... even though there was pretty healthy earnings growth then), then gold could very well do well for us, as its pricing is heavily predicated on interest rates vs inflation rates.  Either rich growth or high inflation tend to drive higher interest rates.  This bodes well for either stocks or gold.

But I find a lot of the language around long-term bull vs bear markets in reference to bonds vs stocks to be a bit flawed.

First off, the earnings yields of the stock market have come way down as compared to price compared to where they used to be when interest rates were a lot higher.  So the very tightening of yields that has boosted bond prices is actually mimicked quite well by the stock market.  So if the bond market has had a bull market, what have stocks had?  Quite the same, actually.  Further, a lot of the commentary around the "bull market" in bonds is the long-term bond market.  With-out price fluctuation, the only way you get "bull" out of a bond is via interest income.  So long-term bonds are fundamentally different in that sense than short-term bonds (yet, obviously, far more sensitive to interest rate environment in terms of their marginal return in any given year). 

And unless you're talking about actual default risk pricing, long-term bond price fluctuations are 100% an affect of the mathematical implications of the interest rate environment.  So bond pricing in the treasury arena is 100% an affect of a third party having to pay me something in the future to borrow money.  Stock pricing is quite different.  It can be similar to bonds, where people are simply re-pricing future earnings.  Or it can be as a result of poor current earnings and/or a change of future earnings expectations.

But in one sense, the markets are similar.  They both price a current investment based on what it will pay into the future, and do so based on all the other options available to do a similar thing, including each other.  A country that has higher growth, higher inflation, and higher interest rates (sustained consistently over time) is going to see better performance from BOTH assets than one with low growth, low inflation, and low interest rates.  They're priced AGAINST each other, and while they offer non-correlations quite often, there is a long-term trend to correlate in some sense (emerging economies will see high interest rates AND high growth over decades... advanced economies might start to peter out and have lower interest rates).

Perhaps, just because yields tighten and prices increase, maybe we're just looking at a market that's fairly priced, with lower growth and inflation expectations for the future, and therefore simply less yield.  Perhaps there's no price mean to revert to.  Perhaps we've just reverted to a future earnings mean of countries as they develop and become more advanced.  The PP could very well simply be poised to bounce around this new macro-economic norm... low inflation... low interest rates... modest earnings ratios (and price growth & dividend prospects) out of the stock market.

Yes. But this doesn't change the fact that at least half of the PP religion has been based on long term bull markets that may be over.

Many are interested in the PP due to the high rate of return.  For me, it's the fat tail risk protection first, then the decent RoR.  And fat tail risk protection isn't about long-term trends, but economic fundamentals in a given economic environment.  It's not just that gold has done ok... but the fact that we know with a decent amount of certainty that due to the macroeconomics surrounding its pricing, in a damaging inflationary event, it will do BETTER than ok, and help protect our wealth from catastrophic loss.

It's not just that long-term bonds have done decent, it's that we know that they are economically designed to do well in a deflationary shock type of crisis.


Oh, and the PP isn't a religion.  It's just an investment framework based first and foremost on the importance of protecting our wealth from catastrophic risks.

[LC475]

Aren't many of us interested in the PP exactly because of the 40 yr bull markets in gold and treasuries? Isn't it just recency bias? What if those bulls are over?

There has not been a 40-year bull market in gold.

There has been, you could say, a 35-year bull market in bonds, in that interest rates have generally fallen since 1980-ish.  That's glossing over a lot of fluctuation, but OK.

[LC475]

Yes. But this doesn't change the fact that at least half of the PP religion has been based on long term bull markets that may be over.

What about the 100-year bull that is the US stock market?

[LC475]

If you truly have a high tolerance for volatility and are absolutely positive that you won't need the money for 50 years, then a very stock-heavy portfolio can work very well for you.

Unless stocks go down for 50 years.

Nobody knows what's going to happen in the future.  Nothing is inevitable.  Having a permanent portfolio as designed by Harry Browne means you are prepared for whatever economic conditions may come.

[Reub]

One might argue that the PP is a faith based model which is justified by 2 long term bull markets. Without those 2 bulls none of us would even be here. The question is are they over?

[dutchtraffic]

One might argue that the PP is a faith based model which is justified by 2 long term bull markets. Without those 2 bulls none of us would even be here. The question is are they over?

Are you serious with that question..?

[Austen Heller]

Aren't many of us interested in the PP exactly because of the 40 yr bull markets in gold and treasuries? Isn't it just recency bias? What if those bulls are over?

I agree with you, Reub.  The past bull markets in gold and treasuries are what put the PP onto my radar screen in the first place, way back in 2009.  The promise of decent returns plus lower volatility, what's not to like?  However, at least in the case of long-term treasuries, the bull market cannot go on, and so the safety of the PP going forward is cast into doubt.

There's certainly nothing wrong with sticking with the 4x25 PP, especially if you've been in it for a while and are sitting on lots of past gains.  For instance, if you've been holding long-term treasuries since since yields were at >6% and you bought gold at less than $500/oz, sure you're happy to sit tight and ride out today's fluctuations.  The PP has been good to you.  But what if you're just starting out at today's prices: stocks at a P/E of 18 with earnings set to decrease going forward, LT treasuries below 3%, and gold at $1200.  I would advocate the following:

1) Stocks: stick with 25% stocks, since today's valuations are not extreme.  Add in as much international stocks as you can handle, up to 50% of your stock position, to get non-dollar denominated assets (this will be used to offset a reduced position in gold, see #3 below).
2) LT bonds: With yields below 3%, these are too risky to hold.  Instead, hold up to 75% of your portfolio in intermediate term treasuries, with a duration between 3-5 years.  Currently, this focuses your bond holdings at the steepest part of the yield curve, so you get the bond interest plus the capital gains benefits from "riding the curve".
3) Gold: Hold between 0-15% gold.  Carve this position out of your 75% intermediate treasury position.

I would consider adding a position in LT bonds only if yields rise to >4%, and I would likely increase the gold% if it went to <$1000/oz.

This modified portfolio is nothing new, combining the LT bonds and the cash into one big intermediate treasury position is something Clive used to talk about a lot back in the day.  It just might help some folks sleep better at night, since the 4x25 PP is not for everyone (I'm looking at you, budd).

[moda0306]

Yes. But this doesn't change the fact that at least half of the PP religion has been based on long term bull markets that may be over.

What about the 100-year bull that is the US stock market?

Yes.

I'd like to know what the definition of a "bull market" in bonds truly is.  If long-term treasury rates are 4% in 1915, and 3% in 2015, is that a 100 year bull market?  Why just include the price and not earnings paid out by the bond?

I'm far more concerned with a bond or stock's pricing against each other than I am with what they are in a vacuum.  I would have loved both the bond and stock market in 1981.  16% interest rates and P/E ratios of 8 with a fed that has shown once and for all that it will cause a recession to stop inflation??  That's awesome!

In a lot of ways, I think this bull/bear business is a way to give CNBC buzz words to talk about.  What a security's price is today is important, but that is more driven by what the market expects it to do (pay interest?  pay dividends?  obtain value through earnings?) into the future than what it will do today.  It's those fundamentals we should be looking at, IMO.

[moda0306]

One might argue that the PP is a faith based model which is justified by 2 long term bull markets. Without those 2 bulls none of us would even be here. The question is are they over?

One might argue that.

One very misguided individual.  That is an awful argument. IMO, of course.

The PP is the LEAST faith-based model I've seen. 

And it's not LTT's performance from 1971-2008 that brought me here... it's the fact that it went ZONKERS in 2008 when the entire financial world was falling apart.  It forced us to ask ourselves a lot of weird questions that we hadn't even thought of yet like "how the f*k does our monetary system work?"

It also happens to be on the more lucrative end of a very steep yield curve which is very weak on the left side, which helps it remain a very healthy portfolio addition in the right doses.

Gold's performance from 2000-2009 isn't what brought me here. In fact I didn't even like gold until I realized its oddly predictable relationship with inflation AND interest rates and how they juxtapose each other.

What's kept me here is the constant tire-kicking the folks here have a tendency to do.  The good faith arguments that usually result from walking through history and contingencies for certain events.

With the exception of a couple of our fine members of a slightly more religious persuasion and discussions around said religion, I find there to be little "faith" here compared to almost any other area of online discussion, including investing.

[LC475]

One might argue that the PP is a faith based model which is justified by 2 long term bull markets. Without those 2 bulls none of us would even be here. The question is are they over?

You are referring, of course, to the US dollar and the US stock market.  Correct?

Yes, they've both had a good, long run.  Maybe those good days are now behind us and we should put 100% into (foreign) bonds and gold instead.

[moda0306]

One might argue that the PP is a faith based model which is justified by 2 long term bull markets. Without those 2 bulls none of us would even be here. The question is are they over?

You are referring, of course, to the US dollar and the US stock market.  Correct?

Yes, they've both had a good, long run.  Maybe those good days are now behind us and we should put 100% into (foreign) bonds and gold instead.

Actually, I was assuming he meant the world stock market and internet porn.

Personally, I don't expect the correlations to hold up in an economic collapse.  Lotsa laid-off depressed dudes out there.

[Pointedstick]

The basic point here is that if you're in the PP, you should do it for the right reason.

The right reason isn't, "it yields nominal stock-like returns with almost no volatility." Too many people seem to be under that impression. The right reason is something more along the lines of "it offers broad diversification among diverse asset classes that makes me well-hedged against any disasters and still gives me a reasonable rate of return when things are good."

If that doesn't describe a portfolio you find attractive, you shouldn't be invested in it.

[moda0306]

The basic point here is that if you're in the PP, you should do it for the right reason.

The right reason isn't, "it yields nominal stock-like returns with almost no volatility." Too many people seem to be under that impression. The right reason is something more along the lines of "it offers broad diversification among diverse asset classes that makes me well-hedged against any disasters and still gives me a reasonable rate of return when things are good."

If that doesn't describe a portfolio you find attractive, you shouldn't be invested in it.

This.

Until you realize that your passive investments are more about protecting your wealth than growing it (due to the efficiency of the markets involved) and your wealth building should come from your career, it's probably going to be impossible for people to invest in a manner that doesn't hold a lot of cognitive dissonance and stress.  Any time you try to control the uncontrollable, and predict the unpredictable, vs controlling what you can and predicting things only within a margin of error and deciding what to do with that margin, you're going to be doing mental/emotional backflips trying to make get your square peg into a round hole.

[Professor Disorientation]

Interesting discussion. I have been investing on-and-off since 1990. I have made some big blunders. The biggest is: "The talking heads know where the market is going." I don't know, and they don't know. That's the dirty little secret. It's more important to me to approach the market in a sane manner. How do I do this? I have portfolios with different strategies that will react differently in various market conditions. The PP has not performed well YTD. Does that means the best days of the PP are over. I doubt it. My PP was down today, and it is down YTD. But my penny stock portfolio was up 2.06% today and it is up 9.77% YTD. Most of my penny-stock buying was in March and April of this year. Is that crazy? Maybe. Do I have all of my money in penny stocks? No. And I don't have all of my money in the PP either. It's day will come. My other portfolio is comprised of dividend-paying stocks-both common and preferred. The dividends are nice. The portfolio is slowly growing. The PP is one part of my investing strategy.

I can sleep at night. I have cash on the sidelines ready to be deployed. I am in control. The market is not controlling me. That is the difference between the potentially successful investor and the one who laments the market's gyrations on a daily basis.

Perfect hindsight is useless. The future is uncertain. Make your investment plan. Know why you are investing. Implement your strategy and give the market time for your investment plan to bear fruit. That is what I have learned since 1990.

[moda0306]

I actually tend to think that it is likely that "the PP's best days are over" if you're comparing the PP's ongoing performance to how it performed the last 45 years.

Barring a financial crisis or currency crisis of some sort, the PP's best days could very well be over from the standpoint of having such tight RoR numbers to a 100% stock portfolio.

However, considering the former, you have a time period where we came off the gold standard, and had historically very high bond yields and some great earnings withing the equity markets, with phenomenal earnings ratios in the early 1980's.

But from the standpoint of macro diversification against fat tail risk, the PP, IMO, still holds some hugely sound risk-management principles, and hefty parts of its structure should still be maintained.  So in that sense, and since that is the foundation of the fundamental reasoning behind owning the PP, its days are not over.  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.  It'll cost you a lot of time and energy and you'll probably at best have something that is more form than function and could very easily fail you when the tornado comes.

Make your cabinets and countertops (your career & budgeting) sexy.  Design your roof for maximimum hold-up to the elements.