The Reason to Quit PP

[Libertarian666]

There is no way Mr. Browne would recommend a reduction in the gold allocation.  I believe that to a large extent the Permanent Portfolio is a way of getting people to hold gold and be able to keep holding it during a potentially long period of low returns or losses, when otherwise they'd bail.

Harry Browne thought there was and is a very real risk of high inflation coming to the dollar.  Eventually.  He just didn't think it would happen immediately.

25% is a good amount.

I agree that HB would not lower the gold allocation.

[mathjak107]

so the hypothetical question becomes ,  does that mean you shouldn't  if it seems the thing to do and he may have been wrong about allocating so much ?  remember he was inherently a gold bug and loved his gold . after all he was to gold what peter schiff was to the 2008 crash . but that does not mean they got it right forever .

as i said ,  i don't think harry visioned gold to perform so poorly over such long periods of time without the economy fairly cycling around to give it far more days in the sun where it was the only aseet to shine . .
so far  the last 40 years have been  just like john templeton said " the  four most expensive words in  the english language are  " this time is different ."

[barrett]

Harry Browne designed and refined his 4X25 PP during a time when gold was stinking up the place for 20 years and stocks were on a long bull run. Bonds and cash were also doing well during that period. It seems if there were ever a time for him to NOT include gold in a portfolio, that would have been it. Yes, he was a gold bug early on but I think he morphed into something quite different. He also lived until 2006 so he was able to see a lot of what we would consider "modern financial history."

Gold may continue to be a downer... as may stocks. We are not really trying to get the timing exactly right with gold (or any other asset for that matter). I think your real issue is with a truly passive approach to investing. I for one don't want to think about this stuff all the time and I'll take an approach that is just good enough to beat inflation over the long haul. There are those who want to get rich quickly and others who just want to put their money to work in a way that it crawls slowly upward.

[mathjak107]

why do we think tht something as complex as investing can stay passive forever in a static mix ?  why do people think they can devote zero time and input to anything in life and get good results forever ?

the answer is that they were able to do so because the long term trend for almost 40 years has been interest rates falling . yeah , there were some relatively short bumps in the road but basically any strategy that included stocks and bonds did very well over long investing time frames .  so doing nothing worked quite well .

but when that trend reverses  that format may not work well at all and so going forward may require a whole lot more nudging an steering then the past did .

you can see on this chart it has been one continuous downward slope for 40 years  and except for some short term dips most of us have  never been in  a bond bear market


rising rates hurt gold and bonds and things may need adjusting along the way . but that is up to the individual investor to decide what is right for them .

[Pointedstick]

why do we think tht something as complex as investing can stay passive forever in a static mix ?  why do people think they can devote zero time and input to anything in life and get good results forever ?

the answer is that they were able to do so because the long term trend for almost 40 years has been interest rates falling . yeah , there were some relatively short bumps in the road but basically any strategy that included stocks and bonds did very well over long investing time frames .  so doing nothing worked quite well .

but when that trend reverses  that format may not work well at all and so going forward may require a whole lot more nudging an steering then the past did .

you can see on this chart it has been one continious downward slope for 40 years .

This argument comes up constantly, but the late 70s experienced dramatic hikes in interest rates and the PP did fine, largely due to gold and cash. And you can't say that gold's performance during this time was just a blip from coming off the gold standard since that was several years earlier.

Finally, interest rates are largely driven by inflation and inflation expectations. If you are expecting the interest rate trend to reverse, what you are really saying is that you expect a period of rising inflation, which is exactly when we should expect gold to do best.

[mathjak107]

they were only short term bursts  in the 1970's .  not decades long like an up or down cycle in rates can take . by the 1980's it was one big slope down and that is when the pp came to be , not in the 1970's .

who knows had harry introduced the pp in the 1970's before monday morning quarterbacking  perhaps he would have weighted bonds differently or in fact never introduced the pp.

[mathjak107]

why do we think tht something as complex as investing can stay passive forever in a static mix ?  why do people think they can devote zero time and input to anything in life and get good results forever ?

the answer is that they were able to do so because the long term trend for almost 40 years has been interest rates falling . yeah , there were some relatively short bumps in the road but basically any strategy that included stocks and bonds did very well over long investing time frames .  so doing nothing worked quite well .

but when that trend reverses  that format may not work well at all and so going forward may require a whole lot more nudging an steering then the past did .

you can see on this chart it has been one continious downward slope for 40 years .

Finally, interest rates are largely driven by inflation and inflation expectations. If you are expecting the interest rate trend to reverse, what you are really saying is that you expect a period of rising inflation, which is exactly when we should expect gold to do best.

which it hasn't done and other assets ended up beating it long term  because that high inflation never  materialized .  which is my whole point here .

sitting in gold day in and day out  waiting for that inflation to happen  when the fed mandated inflation level has not even  been reached  and the world is slowing down may be way to much weight in that asset .

personally i can't see betting my money on a plan that never changes with the times and the bigger picture and has demonstrated that long term there is no value in holding the remote flier longer then you have to .


if anything the allocations should be dynamic , at least weighting by what has real possibility and what does not .  fighting the fed with gold never ends well  when inflation pressures are just not in the world ..


but it is your money , your choices  to do as you see fit .

[Pointedstick]

Finally, interest rates are largely driven by inflation and inflation expectations. If you are expecting the interest rate trend to reverse, what you are really saying is that you expect a period of rising inflation, which is exactly when we should expect gold to do best.

which it hasn't done and other assets ended up beating it long term  because that high inflation never  materialized .  which is my whole point here .

…Because there was no inflation. IMHO gold's run-up in the 2000s was driven by inflation expectations that proved false. If real inflation hits, gold will respond. Do you dispute this?

sitting in gold day in and day out  waiting for that inflation to happen  when the fed mandated inflation level has not even  been reached  and the world is slowing down may be way to much weight in that asset .

I only brought it up because you predicted rough waters when interest rates rise. You can't simultaneously say that the interest rate trend is about to reverse and also say that we'll be waiting around for long time for some inflation. The interest rate trend will reverse because there is rising inflation! If interest rates rise without any meaningful inflation, that would be a terribly irrational thing for the Fed to do. Anything's possible, of course, but that would be really, really stupid.

personally i can't see betting my money on a plan that never changes with the times and the bigger picture and has demonstrated that long term there is no value in holding the remote flier longer then you have to .

That's not a ding against the PP, that's a ding against most retail investors who use passive portfolios.

[Tom]

personally i can't see betting my money on a plan that never changes with the times and the bigger picture and has demonstrated that long term there is no value in holding the remote flier longer then you have to .


but it is your money , your choices  to do as you see fit .

That's because you clearly think you are smart enough to digest all of the economic information out there and act upon it prior to a long term trend setting into effect and that you can get it right most of the time.  You clearly don't put much stock in the advice that there are so many unpredictable economic, political and global events that will effect the eventual trend that you couldn't possibly be privvy to.

You're right it is our money and it is our choices, as is yours.  Good luck to you.

[mathjak107]

in the short term golds reaction to our moderate inflation is anyone guess , could be up could be down . but the long term numbers over 40 years say that trying to protect against 40 years of inflation could have been better in any other asset .

so as john templeton stated so well , the most expensive words in our language are " this time is different ".

betting as much at this point in time on the most unlikely outcome , being nothing is in place  is just  not logical at all as betting on the most likely outcomes .

yeah , i know if you are doing it you will try to justify it with no one knows what is next , but a reasonable person who is not entrenched in gold would  at least wait until some signs are in place when the trend is your friend to make a big commitment . they would likely committ no more than 10% at this point  .

[goodasgold]

Hi Mathjak:

I am curious as to how many investing philosophies you have adopted over your investing lifetime, and why you decided to dump each one for another.

And why did you adopt the PP, however brief this period may have been?

Thank you.

[Cortopassi]

Following up to the 30 year bond yield downtrend...

30 year US bond are about 2.9% right now.

Taiwan, Switzerland, Sweden, UK, Italy (?!), Netherlands, Japan, Germany, France and Denmark all are LOWER (!?) than the US bonds, most in the 1.xx% range.

Extrapolating out to even just above 2% shows that this bond bull could continue for 15 more years, easy, using the graph you provided.

Why can't falling yields be the status quo for the next 15 years?  Not saying they will be, but just like I am not predicting gold, I am not predicting bonds or stocks to continue their trends.

[barrett]

30-year bonds in traditional safe haven Spain (sarcasm alert!) are at 3.05%.

Where would you rather have your bond money with the USD gaining strength?

Even at a 2.9% yield it's easy for me to imagine there could be a stampede into US debt.

Not making predictions either but US Treasuries would seem to be a steal at these levels.

Can't believe I'm getting excited about 2.9% bond yields.

[Cortopassi]

Spain, Italy and other 30 year bonds of countries that are precarious having yields so close to the US is very curious.

I'd love for someone to explain how that is possible, unless there are severe manipulations and distortions in markets across the world.

Another reason I like the no counter party risk of gold in the PP.

[barrett]

I guess if you are in the Euro Zone and stretching for yield, you might go for those Spanish or Italian bonds inasmuch as they are priced in Euros.

If the topic were "The Reason to Quit the European PP", for me it would be the crappy bond options.

[iwealth]

yeah , i know if you are doing it you will try to justify it with no one knows what is next , but a reasonable person who is not entrenched in gold would  at least wait until some signs are in place when the trend is your friend to make a big commitment . they would likely committ no more than 10% at this point  .

So you can't understand 2 things:
1) why anybody holds gold to begin with
2) if you insist on holding gold, why don't you wait for the "trend" to reverse before committing more than 10%

I think the you still fail at times to recognize your audience. Obviously you know why people hold gold around here, so that's not worth more discussion. But to point 2), what are these signs to look for to indicate lasting trend reversals? Do you have extremely specific exit/entry criteria? If not, your advice is completely unactionable. I'd take it farther and ask why not take it a step farther and do it for individual stocks? Surely there's a LOT of money to be made out there if you can accurately predict when prices will reverse and maintain that course.

For the rest of us, it's a safer bet to follow strict guidelines such as rebalance yearly or rebalance at 35/15 bands.

[Tom]

in the short term golds reaction to our moderate inflation is anyone guess , could be up could be down . but the long term numbers over 40 years say that trying to protect against 40 years of inflation could have been better in any other asset .

so as john templeton stated so well , the most expensive words in our language are " this time is different ".

betting as much at this point in time on the most unlikely outcome , being nothing is in place  is just  not logical at all as betting on the most likely outcomes .

yeah , i know if you are doing it you will try to justify it with no one knows what is next , but a reasonable person who is not entrenched in gold would  at least wait until some signs are in place when the trend is your friend to make a big commitment . they would likely committ no more than 10% at this point  .

You are not getting the validity of the "you don't know whats coming" argument it in theoretical terms. Understanding a general trend is one thing - knowing the right times to act are another. I will make it real on another thread.

[mathjak107]

yeah , i know if you are doing it you will try to justify it with no one knows what is next , but a reasonable person who is not entrenched in gold would  at least wait until some signs are in place when the trend is your friend to make a big commitment . they would likely committ no more than 10% at this point  .

So you can't understand 2 things:
1) why anybody holds gold to begin with
2) if you insist on holding gold, why don't you wait for the "trend" to reverse before committing more than 10%

I think the you still fail at times to recognize your audience. Obviously you know why people hold gold around here, so that's not worth more discussion. But to point 2), what are these signs to look for to indicate lasting trend reversals? Do you have extremely specific exit/entry criteria? If not, your advice is completely unactionable. I'd take it farther and ask why not take it a step farther and do it for individual stocks? Surely there's a LOT of money to be made out there if you can accurately predict when prices will reverse and maintain that course.

For the rest of us, it's a safer bet to follow strict guidelines such as rebalance yearly or rebalance at 35/15 bands.

trends last years if they are really trends  and are supported by basis so there is no need to be the first one at the gate .

what i would watch for before committing more than 10% ?  signs of inflation picking up around the world , not falling in to a recession like now . i wouldn't even think about increasing while the fed is below their mandated goals .  i would watch the dollar and perhaps if it fell 10-15% .  i would watch wage increases and oil/ energy prices especially . . .

remember you are not looking to make a killing with the gold , as you tell me , you want it for protection . so as the need for protection shows itself you increase the level of protection .  you will still be way a head of the curve .

it isn't like you wake up one morning and everything is likely to be in the crapper as far as the dollar and inflation . there are always growing signs and time to act ., especially with gold .

hoping it rises out of sheer speculation  with little basis in this country  by betting so much money on it so early  , like it or not , that is a speculation .

but not only is it a speculation but so far 40 years of history  says a poor one at that .  so that is my gripe with so much gold  , thinking this time is different can be very costly and i like others believe that is a flaw in the pp design .    harry is human  as well as a gold bug and that does not mean his thinking that this model was forever was even correct logic .


if you caught a shorter term run up in gold then yes you are happy but after  30-40 years  those run ups  typically level out to just the rate of inflation  so down the road you  may not view so much  gold as such a smart use of the money  unless we have some remote flyers happen but then you would be speculating on the long shot . .

rebalancing  gold is not the answer as rebalancing may be taking money out of assets that typically have always produced better returns  over the long  haul  and sinking it in  to something that may track inflation at best  once it levels out over the years from run ups  . just way to heavy in gold  all the time instead of some of the time is where i see the flaw as well as no provisions at all for  dealing with long term treasury's getting crushed if rates should shoot up by shortening up maturity's .  in a nut shell just to inflexible  and inefficient i think for what may lie ahead with zero provisions for adjusting .

long term even a conservative fund like wellesley income surpassed the pp  and it may very well keep doing it because it stays flexible .

perhaps wellesley and a 5-10% stake in gold may make more sense  and perform better .

i thought it was interesting that in an interview yesterday  on bloomberg radio  michael cuggino  when asked how the  permanent portfolio was being positioned for the times ahead he said they were shortening up bond maturity's  .

i know the fund broke ranks on the 4x4 concept  since the beginning but they keep moving farther and farther away .  not saying they did the right thing  either the way they positioned the fund as really geared for more  inflationary times , especially so early in the game . .

[barrett]

rebalancing  gold is not the answer as rebalancing may be taking money out of assets that typically have always produced better returns  over the long  haul  and sinking it in  to something that may track inflation at best  once it levels out over the years from run ups.

Well, this was certainly true from 1982 until 1999. Then the opposite was true for a decade.
And not in any small way. Gold really performed and yet there weren't many people who saw
that coming. You would have been able to buy a bunch of shares of stock and long bonds when
they were at lower levels than they are now. Would you have been able to see that move coming?
If so, when? When it was already up to $500 or $600? My guess is that if you really think it was the
bigger fools driving the run up in gold, you would have never bought any. The asset that saved this
particular portfolio for a decade (OK, long bonds were pretty damn good as well) wouldn't have been
part of your mix.

Again, anyone committed to/accepting of an all-weather approach to investing knows that they are giving
up gains. They are just not sure which gains. And if you are OK with accepting lower returns than what the
hottest asset is delivering, then a balanced approach works well over time. Can you accept that most of us
don't want to have to get the timing right?

[dualstow]

mathjak, you remind me of a friend who divorced his wife after six months of marriage and then devoted the rest of his life to her. 
I mean, you spent so little time in the pp and how much time rationalizing your exit so far?

[ochotona]

I do like the idea of gold as insurance against (***insert your scenario here***) but why buy it now when you can buy it later? There is no "pre-existing conditions coverage exclusion" like there used to be on health insurance. And why not buy it at prices closer to the low prices it has been at in my lifetime?

So there's a risk it might be already at the lowest prices it will be at before whatever kerfuffle hits the fan happens? Well... maybe. Maybe not! Who the hell knows? But why lock money away from growth assets before you need to?

I really don't think we're going to have a "wake up and the world is set afire" scenario. Currency collapse will be seen from afar, for those who watch attentively. You'll see it in the gold price itself. The time to react will be at least weeks or months. Buy a gold ETF in a few seconds, then swap it out for physical as you can get the physical (supply chain will be stressed at that point).

Martial arts analogy - if you try to evade a knife blade too soon, the attacker will just track you and stick you anyway.

Why bother donning a winter coat in summer, just because we know winter is coming? Enjoy the summer, but know where the coat is.

I wonder if we shouldn't be talking more about gold options, in addition to gold.

[barrett]

So there's a risk it might be already at the lowest prices it will be at before whatever kerfuffle hits the fan happens?
Well... maybe. Maybe not! Who the hell knows? But why lock money away from growth assets before you need to?

Why bother donning a winter coat in summer, just because we know winter is coming? Enjoy the summer, but know
where the coat is.

The answer for me is that I wouldn't know where to get in. I know this about myself from past investing behavior.
So, yeah, gold might not be the best place to park 25% of my assets, but from where I stand I can't see that bonds
and stocks are clearly better options right now. Yes, they are growth assets but they don't always grow. Both could
head down X% from here.

I do like the winter coat analogy.

Ocho, how were you able to just go all short term instruments (50% cash & 50% short-term bonds)? No taxes to
worry about?

And I know you've posted roughly 1,700 and $900 as buy back in points for the S&P and gold. Do you have your
eye on a number for LTT yields as well?

[mathjak107]

so the question remains  why not wellsley and 10% gold  ?

why bet the same amount of money equally on outcomes that are anything but equal as to odds of playing out

[iwealth]

Why bother donning a winter coat in summer, just because we know winter is coming? Enjoy the summer, but know where the coat is.

Interesting analogy, but let's take it a step farther. In the big scheme of things, our collective financial analysis knowledge is like that of a child compared to all of the math quants and PhD's and all of those super brilliant economists. And we all have these other things going on in our lives because we aren't investing professionals, and we're super distracted with those things.

My child is outside and the temperature drops, but he's playing with his friends and having a ton of fun. He knows where his coat is, but do I really trust him to put that coat on when the temperature deems it to be appropriate?

[koekebakker]

so the question remains  why not wellsley and 10% gold  ?

why bet the same amount of money equally on outcomes that are anything but equal as to odds of playing out

It's really simple. To be protected at all times, regardless of the odds. And by investing that way you might give up some expected return.