Black Monday

[buddtholomew]

Yup, just as I figured. PP down on a down day and down on an up day. What a joke!

the bolded above may be the problem.. the PP was not made to be successful with a day to day investment horizon, it is only going to start looking good in the 5 year time range and only really hit its stride with a ten year horizon.. a day trader outlook and a PP portfolio are oil and water and will never mix.. 

if i hear "PP down on a down decade and down on an up decade. What a joke!" i am going to that think it and i have failed, but i don't expect that to come to pass..  (check back with me in ten years...)

I understand the premise that each asset is designed to respond in a certain economic climate.
I find it difficult when equities decline and the PP declines as well.
I have more faith in equities than I have in gold.
I like the benefits of LTT's and Cash held in a barbell.
Losing money is painful. Losing less is still painful.

[Pointedstick]

Just a realist. Tell the truth, you have a VP with higher equity allocation as well as many on this board do.

Sure I do. In no way does that mean that I think the PP--or the idea of a widely diversified portfolio consisting of varying proportions of stocks, government bonds, cash, and gold--is fundamentally broken.

[Kbg]

Some times I wonder if people really study the portfolio they invest in. Cash stayed even and bonds went up. Stocks are down and there is zero inflation in the world right now so gold has gone down/nowhere...what isn't working as advertised?

[buddtholomew]

Bought stocks into the close. I don't feel comfortable with the PP unless my equity allocation exceeds 25%. If stocks rally in the upcoming days, gold and treasuries will get massacred.

I usually get 9/10 guesses wrong, but why was this so obvious yesterday?

[iwealth]

Bought stocks into the close. I don't feel comfortable with the PP unless my equity allocation exceeds 25%. If stocks rally in the upcoming days, gold and treasuries will get massacred.

I usually get 9/10 guesses wrong, but why was this so obvious yesterday?

Better question is, will it still be so obvious tomorrow or next week? I made some buys yesterday morning and felt like the smartest man on the planet, but this volatility makes me anxious. Even if i'm right for a day or two or a few weeks, should I really be buying more stocks in the middle of the summer...at these valuations...in the midst of a potential market correction?

[l82start]

Yup, just as I figured. PP down on a down day and down on an up day. What a joke!

the bolded above may be the problem.. the PP was not made to be successful with a day to day investment horizon, it is only going to start looking good in the 5 year time range and only really hit its stride with a ten year horizon.. a day trader outlook and a PP portfolio are oil and water and will never mix.. 

if i hear "PP down on a down decade and down on an up decade. What a joke!" i am going to that think it and i have failed, but i don't expect that to come to pass..  (check back with me in ten years...)

I understand the premise that each asset is designed to respond in a certain economic climate.
I find it difficult when equities decline and the PP declines as well.
I have more faith in equities than I have in gold.
I like the benefits of LTT's and Cash held in a barbell.
Losing money is painful. Losing less is still painful.

nobody likes losing money.... that is why i try to avoid looking at returns between an arbitrarily chosen date and some other arbitrarily chosen date (IE ytd returns) i personally follow an XIRR for my portfolio that starts when i started investing and runs till today, i know how much i am up in dollars and what the % is..  this may not be the idealized maths for investing, but it may be just the ticket for psychology

[rickb]

Yup, just as I figured. PP down on a down day and down on an up day. What a joke!

the bolded above may be the problem.. the PP was not made to be successful with a day to day investment horizon, it is only going to start looking good in the 5 year time range and only really hit its stride with a ten year horizon.. a day trader outlook and a PP portfolio are oil and water and will never mix.. 

if i hear "PP down on a down decade and down on an up decade. What a joke!" i am going to that think it and i have failed, but i don't expect that to come to pass..  (check back with me in ten years...)

I understand the premise that each asset is designed to respond in a certain economic climate.
I find it difficult when equities decline and the PP declines as well.
I have more faith in equities than I have in gold.
I like the benefits of LTT's and Cash held in a barbell.
Losing money is painful. Losing less is still painful.

If what you want is a "don't lose any money no matter what" portfolio, you don't want the PP. 

Over 5-10 years the PP will reliably produce about a 4-5% real return.  The cost of this is that it can also (temporarily) decrease by relatively small amounts.  So it's a "small losses but moderate real gains" portfolio.

"No nominal losses with moderate negative real gains" is what cash in the bank gives you.

"Virtually no losses and float along at the rate of inflation" is also possible, see Bridgewater's "depression proof" portfolio described in an article I've linked several times, for example from this thread http://gyroscopicinvesting.com/forum/pe ... #msg122275

The question is what do you want from this portion of your money?  If you want any real gains, as far as I can tell you HAVE to put up with occasional losses.  You can't have your cake and eat it, too.

[Pointedstick]

I think Budd is fine with stock losses, just not PP losses, because everybody knows that the stock market gan go down a lot, but the PP is supposed to minimize losses. It's a mismatch between expectation and reality.

Given that Budd appears to be able to tolerate some stock volatility and likes big gains, I would recommend a more traditional Boglehead-style portfolio, with maybe a bit of gold thrown in for some diversification.

Given that this is basically the overall allocation that Budd already has, I have no freakin' idea what the problem is.

[iwealth]

Given that this is basically the overall allocation that Budd already has, I have no freakin' idea what the problem is.

I think Budd's investments can be broken into 4 portfolios:

1) the PP (taxable)
2) a 60/40 (retirement)
3) extra cash to reduce bond duration (I'm guessing taxable, but unsure)
4) a VP which he adds to discriminately such as buying stocks yesterday at the close (I'm guessing retirement, but unsure)

Apparently it's a tidy 50% equities/40% intermediate bond/10% gold mix, but it's probably incredibly difficult to see it that way when you look at your portfolio as a bunch of buckets meant for different timeframes.

[buddtholomew]

In-line comments in bold.

Given that this is basically the overall allocation that Budd already has, I have no freakin' idea what the problem is.

I think Budd's investments can be broken into 4 portfolios:

1) the PP (taxable) - Correct
2) a 60/40 (retirement) - 65/35/5 GOLD
3) extra cash to reduce bond duration (I'm guessing taxable, but unsure) - Correct
4) a VP which he adds to discriminately such as buying stocks yesterday at the close (I'm guessing retirement, but unsure) - Correct, retirement. I stay within my tolerance bands. I did buy SPY in taxable yesterday as well as mentioned previously.

Apparently it's a tidy 50% equities/40% intermediate bond/10% gold mix, but it's probably incredibly difficult to see it that way when you look at your portfolio as a bunch of buckets meant for different timeframes. - Correct. I do look at it as a whole, but taxable is for the money I cant afford to lose.

[Tyler]

During a period where the stock market is experiencing some of the wildest volatility in quite a while and the PP is more or less doing its normal thing and eating a bag of popcorn while watching the chaos on TV, I find the fact that some people are actually taking the time to complain about the PP to be telling.  Either the PP is the wrong portfolio for you emotionally (a perfectly fine realization if true), or perhaps the root cause of your anxiety really has nothing to do with asset allocation and no portfolio will ever make you happy. 

When the markets stress you out, ask not what portfolio changes you should make in response.  Ask what life changes you can make so markets don't stress you out. 

[Libertarian666]

During a period where the stock market is experiencing some of the wildest volatility in quite a while and the PP is more or less doing its normal thing and eating a bag of popcorn while watching the chaos on TV, I find the fact that some people are actually taking the time to complain about the PP to be telling.  Either the PP is the wrong portfolio for you emotionally (a perfectly fine realization if true), or perhaps the root cause of your anxiety really has nothing to do with asset allocation and no portfolio will ever make you happy. 

When the markets stress you out, ask not what portfolio changes you should make in response.  Ask what life changes you can make so markets don't stress you out.

Right. And I say this as someone who has a really unusual portfolio with way more volatility than the PP.

[Pointedstick]

In-line comments in bold.

Given that this is basically the overall allocation that Budd already has, I have no freakin' idea what the problem is.

I think Budd's investments can be broken into 4 portfolios:

1) the PP (taxable) - Correct
2) a 60/40 (retirement) - 65/35/5 GOLD
3) extra cash to reduce bond duration (I'm guessing taxable, but unsure) - Correct
4) a VP which he adds to discriminately such as buying stocks yesterday at the close (I'm guessing retirement, but unsure) - Correct, retirement. I stay within my tolerance bands. I did buy SPY in taxable yesterday as well as mentioned previously.

Apparently it's a tidy 50% equities/40% intermediate bond/10% gold mix, but it's probably incredibly difficult to see it that way when you look at your portfolio as a bunch of buckets meant for different timeframes. - Correct. I do look at it as a whole, but taxable is for the money I cant afford to lose.

http://www.etfreplay.com shows that the biggest total drawdown for the PP in the last 3 years has been about 7%, and the biggest one in the past 10 years was -17% (in 2008). If you're not comfortable with your "can't afford to lose" money losing this much over the span of maybe a year, then it simply should not be invested in the PP. "Can't afford to lose" in the context of Harry Browne and the PP means "won't go to zero" or "won't crash and take decades to recover", not "never experiences any principal decline ever." If that's what you're looking for, then this money should be in cash instead, case closed.

If I recall, this money is earmarked for living expenses in the event of a job loss, and every drawdown makes you nervous because it makes you feel like the time you would have before needing to find a new job is diminished. For heaven's sake, stop torturing yourself and just put it in cash!

[sophie]

I understand the premise that each asset is designed to respond in a certain economic climate.
I find it difficult when equities decline and the PP declines as well.
I have more faith in equities than I have in gold.
I like the benefits of LTT's and Cash held in a barbell.
Losing money is painful. Losing less is still painful.

Budd, sorry we are all ganging up on you.  I just think your position is a bit hard to understand, but let me take a stab at it...

From above, it sounds like a) the element you mainly dislike is gold, and b) you're not too concerned about declines in the stock allocation as long as you are holding enough cash for security's sake.  Sounds to me like what you'd really like is something like the Desert Portfolio, but maybe with the stocks (and thus risk) amped up a bit.

There's zero wrong with that of course.  As long as you are ok with 60+% of your holdings nosediving by 30% or more in a stock market crash, that is.  Are you sure that's ok with you?

I would suggest scaling back the stocks a bit and increasing gold to 10%, plus being sure to hold enough cash to see you through a big stock market decline (like the 1970s).  Otherwise I don't see the problem.  However, please note that you have something similar to, but that is clearly NOT, the PP.  So what the PP is doing currently is not really relevant to you, is it?

[Xan]

It sounds to me like he's okay with those big gyrations and (hopefully) higher returns in his longer-term stash, but he's very conservative for his in-case-of-job-loss stash.  Budd, you might just want to go to cash for the job-loss money, and stick with Boglehead for the longer-term.  Toss in some gold for diversification (which you already have a bit of in your long-term stash) and then you're approaching PP/Desert overall.

[buddtholomew]

Thank you for all your comments and I realize it is difficult to understand my personal perspective.

Perhaps I should add this to my tag line.
Retirement portfolio invested 65/35/5 and 100% taxable invested in the PP with additional cash to reduce fixed income duration.
I am comfortable re-balancing in tax-deferred accounts as I have 20+ years before retirement.
My emergency fund and PP is held in taxable for short to intermediate term needs (2-3 years expenses). I am far less comfortable re-balancing in this account.
I have problems reconciling how a conservative allocation like the permanent portfolio + cash can experience losses when the DOW declines 1500 points. Now that we have a rebound, gold and treasuries are getting slammed (as usual). Damned if you do and damned if you don't.

[dragoncar]

Yup, just as I figured. PP down on a down day and down on an up day. What a joke!

the bolded above may be the problem.. the PP was not made to be successful with a day to day investment horizon, it is only going to start looking good in the 5 year time range and only really hit its stride with a ten year horizon.. a day trader outlook and a PP portfolio are oil and water and will never mix.. 

if i hear "PP down on a down decade and down on an up decade. What a joke!" i am going to that think it and i have failed, but i don't expect that to come to pass..  (check back with me in ten years...)

This is ridiculous.  I recently tried an extended period of "looking away" and did find that my PP angst also went away (even though it's down quite a bit since I first started ignoring my investments).  But if I am going to "look away" for decades at a time, I might as well be in 100% stocks.  The reason I wanted the PP is for lower short-term volatility, not for it's lagging crappy long term returns.  Yes, it does have lower short-term volatility, but I find it's still too much to look at daily (personally).

[l82start]

its not so much that you look away for 10 years at a time (you need to look for yearly and for broken band re-balances), its more a question of having a five to ten year expectations set/horizon vs a day traders expectation to be up today and up tomorrow and to be making the big killing regardless of what the market does each day..

[Pointedstick]

But if I am going to "look away" for decades at a time, I might as well be in 100% stocks.  The reason I wanted the PP is for lower short-term volatility, not for it's lagging crappy long term returns.  Yes, it does have lower short-term volatility, but I find it's still too much to look at daily (personally).

For money you don't need for 20 years, and when you're still accumulating, I think I would agree with you that a more stock-heavy portfolio can make sense. However, for money you might need in the next, say, 3-5 years, I think the PP is ideal, and yes, it does have lower short-term volatility than stocks or a Boglehead portfolio. But "lower" is not "none."

I think a lot of people seem to have been under the impression that the PP is a way to get stock returns with cash volatility, and are disappointed because the too-good-to-be-true portfolio turned out to be just that. If you want a return, you have to take some risk, and risk means accepting the possibility of drawdowns and weird day-to-day fluctuations. How much of this you're comfortable with determines the magnitude of the gains you can make. There's no free lunch. I think the PP offers a better risk/reward ratio than many other portfolios, but it's certainly not going to beat a bull stock market or be as nominally stable as cash.

[sophie]

I think the problem is your definition of "long term" vs "short term".

For stocks, "long term" means 15 years at minimum.  If you think you want to access your money in less than 15 years, you might want to rethink a stock heavy portfolio.

If you look at Tyler's PP performance charts, you'll see that "long term" for the PP means more than 3 years.  For rolling 3 year periods, the PP has a nearly perfect score at generating a real return.  and no, I never expected it to match the return of a 100% stock portfolio.

For me, getting "long term" down from 15 years to 3 years is where the PP's magic comes in.  The Boglehead forum will tell you that to reduce volatility, you increase the percentage of short or medium term bonds.  Since those bond funds contain corporates that track the stock market, they only dampen the volatility, instead of providing true diversification.  Thus, all that strategy will do is lessen the pain of stock market dips/crashes.  The PP, on the other hand, is capable of neutralizing them - but like any man-made system, it is not perfect and will not provide 100% day to day protection.  You really do have to give it 3 years, and also consider real - not nominal - returns.

[iwealth]

I have problems reconciling how a conservative allocation like the permanent portfolio + cash can experience losses when the DOW declines 1500 points. Now that we have a rebound, gold and treasuries are getting slammed (as usual). Damned if you do and damned if you don't.

Equities aren't your issue and I can wrap my head around your hatred of gold.

But I can't understand why you care about what LTT's do considering you've already taken steps long ago to fix that problem by holding more cash. You like the barbell but you also feel tortured by one of its components. Do you really think you'd feel this way if you just held IEI or some other intermediate duration ETF? That's essentially what you've built, and on purpose, right? Why do you care at all what TLT does when you only own it as part of a synthetic IEI?

[Tyler]

You really do have to give it 3 years, and also consider real - not nominal - returns.

+1 to everything Sophie said, and I want to build on that last statement.  You need to look at real returns and not nominal returns.  You also need to look at compound returns and not average returns.  Average returns are closer to what you feel in the moment even if they are less accurate for your actual account balance. 

Depending on the numbers you look at, the return on your additional risk may not be nearly as high as you may think. Volatility is not simply an emotional drag but a financial one as well.  http://portfoliocharts.com/2015/08/24/a ... trap/ 

As an example, the average real return of the PP since 1972 is about 1% less per year than a 60-40 portfolio.  But the compound real return that you'd actually experience in real-life dollars is virtually identical (within the range of fund expense ratio differences).  The 40% less volatility in the PP makes up the difference mathematically.  People like to say "higher risk, higher reward" but that isn't always the case. 

I acknowledge keeping an eye on the big picture can be really hard at times.  Investing isn't easy or everyone would have it all figured out by now. 

[mathjak107]

if you want to know about the past you want cagr returns as they account for sequence risk .

if you are projecting forward you want  to use average returns since sequences are unknown .

vanguard gives returna as average , morningstar is cagr .

for those who want to know the difference :

if you are have 10k and are  up year 1 by  100% and down year 2  by  50% you made 0% cagr but your average return is 25% .

depending what you are projecting , forward or backward which you want to use is  determined by what you want to see .

[Jack Jones]

Depending on the numbers you look at, the return on your additional risk may not be nearly as high as you may think. Volatility is not simply an emotional drag but a financial one as well.  http://portfoliocharts.com/2015/08/24/a ... trap/ 

Hey, great article, Tyler! Thanks for writing it!

[dualstow]

From Tyler’s article:

Recently, a 100% stock market investor starting in 2000 experienced 13 years of negative real returns before finally breaking even.

I wish there were a tool out there — and maybe there is — that lets you add in ongoing cash infusions. I didn’t start really investing until 2004. However, I was able to put a significant amount into stocks on really bad days in 2009. Not the absolute bottom, but really bad days.

I have seen tools that let you input regular, automatic investments. Buys at specific prices, though- it gets complicated.