Question for Melveyr

General Discussion on the Permanent Portfolio Strategy

Moderator: Global Moderator

User avatar
Desert
Executive Member
Executive Member
Posts: 3233
Joined: Sat Jun 26, 2010 2:39 pm

Re: Question for Melveyr

Post by Desert » Sun Feb 14, 2016 9:46 pm

ochotona wrote: I remember getting a CD for 13%
I remember buying a 1-oz eagle for $310. 

:P
Our greatest fear should not be of failure, but of succeeding at something that doesn't really matter. 
- D.L. Moody

Diversification means always having to say you're sorry.
User avatar
Dieter
Executive Member
Executive Member
Posts: 422
Joined: Sat Sep 01, 2012 10:51 am

Re: Question for Melveyr

Post by Dieter » Sun Feb 14, 2016 10:08 pm

Desert wrote: <snip quote>
Yeah, the 30/60/10 advice is general.  I'm not a big proponent of age-dependent guidelines though, because a lot of younger folks panic and sell at market bottoms even though their theoretical investing timeline is long.  But yes, I think the equity allocation could be higher than 30 percent for folks who know they can handle the risk.  I wouldn't go much over 50 percent though.  Not just because of volatility and drawdowns, but because of the possibility that equity returns will be smaller than fixed income returns over the critical timeline of that investor.  It sounds absurd, but that's what risk really is.  It isn't only draw-downs and volatility, it's watching wealth be destroyed, with no recovery (Japan-style, for example). 

But for an aggressive investor with a longer timeline, I like a 45/45/10 with some tilting to riskier equities.  I'm middle age/old, so I'll be sticking with my 30/60/10.
William Bernstein has much the same advice for younger folks. Have a fixed allocation. In his recent 16 page pamphlet / PDF, "If You Can: How Millennials Can Get Rich Slowly" (http://www.goodreads.com/book/show/21852252-if-you-can), he advocates saving 15% for 40 years, investing it in index funds: US Stocks, Intl Stocks, US Total Bond: 33/33/34.

As Desert says above, while younger investors COULD take more risk, many can't. 66% in stocks is much higher that folks around here generally advocate, but a lot less than the 90-10 in typical target date funds for this age group.
User avatar
Desert
Executive Member
Executive Member
Posts: 3233
Joined: Sat Jun 26, 2010 2:39 pm

Re: Question for Melveyr

Post by Desert » Sun Feb 14, 2016 10:22 pm

Dieter wrote: William Bernstein has much the same advice for younger folks. Have a fixed allocation. In his recent 16 page pamphlet / PDF, "If You Can: How Millennials Can Get Rich Slowly" (http://www.goodreads.com/book/show/21852252-if-you-can), he advocates saving 15% for 40 years, investing it in index funds: US Stocks, Intl Stocks, US Total Bond: 33/33/34.

As Desert says above, while younger investors COULD take more risk, many can't. 66% in stocks is much higher that folks around here generally advocate, but a lot less than the 90-10 in typical target date funds for this age group.
I actually shared that Bernstein article with a bunch of younger engineers at work.  I think that 3x33 allocation is probably better than most. 

It's interesting though, in discussing asset allocation with most young folks:  They almost always believe they have a risk tolerance above their actual tolerance.  I suppose I was the same way, way back in the covered wagon times. 
Our greatest fear should not be of failure, but of succeeding at something that doesn't really matter. 
- D.L. Moody

Diversification means always having to say you're sorry.
User avatar
craigr
Administrator
Administrator
Posts: 2544
Joined: Sun Apr 25, 2010 9:26 pm

Re: Question for Melveyr

Post by craigr » Sun Feb 14, 2016 10:24 pm

A risk with age dependent portfolios, aside from taking on too much risk as already noted, is they assume a smooth life glide path. Meaning that you start working at 22 out of school, work until retirement at age 65, and then begin your tour of Alaska on a cruise ship.

But variable allocations can cause problems if you get sick, injured, lose a job, life circumstances change, etc. Murphy's Law has a lot of these things happening during times in the market when it might not be best to sell assets to juggle things or you can't access those assets as they are locked up in high penalty retirement vehicles.

Speaking as someone who has looked at this issue forwards and backwards for my own personal reasons, I would strongly suggest:

1) People who are retired, or nearing retirement, never discount the emotional security of sitting on a pile of really safe cash that you could draw down for a year (or much more) in an emergency without panicking.
2) Don't take too much risk that can cause you sell assets at a loss, or with a capital gains bill, during market declines when you don't want to.
3) Don't eliminate gold from the portfolio. While 25% may be too much for some, I would never go lower than 10% myself as an insurance asset.
4) Tax management is important and making changes to a taxable portfolio is extremely expensive. Don't buy any asset you aren't willing to hold for many years without touching. This means keeping things very simple with broadly based index funds for stocks for instance that do not generate lots of taxable events and won't leave you with regrets in a few years.
5) Don't speculate with money you can't afford to lose. If you want to take a little more risk, then just buy some more stock index funds and don't get tricky.

Risks need to be very carefully managed for early retirement portfolios because taking a large loss is quite likely to be fatal to the nest egg during extended drawdown phases. Early retirees can live on lower risk returns with some adjustments, but taking a huge loss to a risky portfolio while having living expenses removed is really bad news.
Last edited by craigr on Sun Feb 14, 2016 11:17 pm, edited 1 time in total.
User avatar
BearBones
Executive Member
Executive Member
Posts: 689
Joined: Sat Sep 18, 2010 4:26 pm

Re: Question for Melveyr

Post by BearBones » Mon Feb 15, 2016 5:51 am

Appreciate your quick response, Melveyr. And the comments of others. As you are aware, Tyler has created PortfolioCharts and suggested the Golden Butterfly. I am thinking about the derivation below. Regardless, I assume you would replace the treasuries with intermediate and ditch the gold? And you would use TIPs instead of gold or REIT? If you do these things, there is a lot higher drawdowns and/or poorer CAGR in back testing. Just ignore b/c the past does not predict the future?

I'm also going to ask you elsewhere to explain more why you don't like gold. Nice to have your perspective. Thanks.

Image
User avatar
BearBones
Executive Member
Executive Member
Posts: 689
Joined: Sat Sep 18, 2010 4:26 pm

Re: Question for Melveyr

Post by BearBones » Mon Feb 15, 2016 6:04 am

Might as well ask here. Elsewhere you said, "I found that the main advocates for gold were using old models that have already been proven wrong." Can you elaborate a bit more?
barrett
Executive Member
Executive Member
Posts: 1535
Joined: Sat Jan 04, 2014 2:54 pm

Re: Question for Melveyr

Post by barrett » Mon Feb 15, 2016 7:01 am

Hey melveyr,

You have written so eloquently (and concisely) in support of the PP on your site and I am curious what has caused you to change your mind about Harry Browne's ideas. Has something fundamentally shifted in the world, or were those just the writings of a younger version of your current self?

I think it's important to bring into this conversation that most of us on here (everyone, please correct me if I am wrong) are interested in a portfolio that is easy to maintain over a long period of time, doesn't get clobbered at any point, and can really perform when one of the big three assets is doing great.

Also, to me at least, the notion that boom cycles in the economy are longer than bust cycles strikes me as maybe not true. Historically, of course, that has been true here in the US. But we have the advantage of being able to look at Japan as an example of what can happen to a major economy as it matures. There were a lot of factors that went into 1982-1999 being great for stocks but some of them (for example, the great leap forward that computers helped bring about) may not be repeatable.

I guess I see that an economic boom, deflation or high inflation could all happen at some point in the next few years. Maybe I am just suffering from confirmation bias.

And FWIW, I fall into moda's category #1... basically gearing up for retirement with most of my earnings potential in the past. I am paraphrasing what he wrote but I think that puts me in with many on here who are either retired or at least closer to the end of their working lives than they are to the beginning.

Lastly, it's good to have you back even if you are not planning to stick around for long. Your input is greatly appreciated!
User avatar
melveyr
Executive Member
Executive Member
Posts: 971
Joined: Mon Jun 28, 2010 3:30 pm
Location: Seattle, WA
Contact:

Re: Question for Melveyr

Post by melveyr » Mon Feb 15, 2016 9:07 am

barrett wrote: Hey melveyr,

You have written so eloquently (and concisely) in support of the PP on your site and I am curious what has caused you to change your mind about Harry Browne's ideas. Has something fundamentally shifted in the world, or were those just the writings of a younger version of your current self?

I think it's important to bring into this conversation that most of us on here (everyone, please correct me if I am wrong) are interested in a portfolio that is easy to maintain over a long period of time, doesn't get clobbered at any point, and can really perform when one of the big three assets is doing great.

Also, to me at least, the notion that boom cycles in the economy are longer than bust cycles strikes me as maybe not true. Historically, of course, that has been true here in the US. But we have the advantage of being able to look at Japan as an example of what can happen to a major economy as it matures. There were a lot of factors that went into 1982-1999 being great for stocks but some of them (for example, the great leap forward that computers helped bring about) may not be repeatable.

I guess I see that an economic boom, deflation or high inflation could all happen at some point in the next few years. Maybe I am just suffering from confirmation bias.

And FWIW, I fall into moda's category #1... basically gearing up for retirement with most of my earnings potential in the past. I am paraphrasing what he wrote but I think that puts me in with many on here who are either retired or at least closer to the end of their working lives than they are to the beginning.

Lastly, it's good to have you back even if you are not planning to stick around for long. Your input is greatly appreciated!
Nothing hugely fundamental has changed. I think that Harry Browne's framework of real growth/real contraction and inflation/deflation is still relevant. Any economic event can be plotted on these two axes and changes in expectations about these factors drive the majority of asset class returns. Harry Browne was the first writer I know of to lay this out so clearly and I will always be grateful for that way of looking at things.

My only real departures are preferring bullet over barbell bond portfolios, and de-emphasizing gold's role in portfolios. I also want to make it clear that my new portfolio is more susceptible to inflation risk. The PP will outperform my portfolio if we have a big inflation, but I am accepting that as a risk that I am willing to take. Every portfolio has a weakness and you have to align that with what risks you are willing to take. The risk of the PP is that lately it has actually gone down when things look very rosy and had it's largest spikes when things get bad. It also is more correlated with gold than the other assets (true historically as well) so the 3 way split is not exactly balanced. I think that gold has the lowest theoretical underpinnings for long term returns, so I don't like that the PP is most correlated with that asset.

Most of my learnings are related to my own psychology as an investor. I am not trying to ring alarm bells about the PP. If you have been happy with it, then by all means keep going with it. I just have different risks that I am more comfortable taking than the risks that are within the PP.
everything comes from somewhere and everything goes somewhere
User avatar
Pointedstick
Executive Member
Executive Member
Posts: 8700
Joined: Tue Apr 17, 2012 9:21 pm
Contact:

Re: Question for Melveyr

Post by Pointedstick » Mon Feb 15, 2016 9:18 am

melveyr wrote: Most of my learnings are related to my own psychology as an investor. I am not trying to ring alarm bells about the PP. If you have been happy with it, then by all means keep going with it. I just have different risks that I am more comfortable taking than the risks that are within the PP.
That's really the important part, I think. Certain assets give some people fits and starts. It makes sense to tweak the asset allocations according to whatever is most compatible with your world view and the mindset with which you approach things so you don't feel vindicated and panic-sell when your least favorite asset starts to fall.

I too have started to implement a slight prosperity till to my PP, taking advantage of the recent stock decline. I'm now for 40% stocks, 20% everything else, with. I still like having a big slug of gold and in fact feel more confident about it when I'm more stock-heavy, and I like the barbell better than the bullet because the large cash reserve likewise makes me feel comfortable.
Human behavior is economic behavior. The particulars may vary, but competition for limited resources remains a constant.
- CEO Nwabudike Morgan
User avatar
melveyr
Executive Member
Executive Member
Posts: 971
Joined: Mon Jun 28, 2010 3:30 pm
Location: Seattle, WA
Contact:

Re: Question for Melveyr

Post by melveyr » Mon Feb 15, 2016 9:20 am

BearBones wrote: Might as well ask here. Elsewhere you said, "I found that the main advocates for gold were using old models that have already been proven wrong." Can you elaborate a bit more?
Not so much here on this forum but many gold holders were betting on a big inflation coming because of charts like this:
Image

The idea was that banks lend in direct proportion to the amount of reserves that they have, and that once things returned to normal we would have an explosion of credit and spending that would push prices up. Many people equated monetary easing and QE with "money printing" which I have found to not be accurate, at least when trying to connect it with its effect on inflation. People were buying gold based on these theories, and pushing the price up. We have seen a slow bleed in gold as holders have slowly come to recognize that their understanding of the connection between Fed policy and inflation is not as direct as they thought.
Last edited by melveyr on Mon Feb 15, 2016 9:22 am, edited 1 time in total.
everything comes from somewhere and everything goes somewhere
barrett
Executive Member
Executive Member
Posts: 1535
Joined: Sat Jan 04, 2014 2:54 pm

Re: Question for Melveyr

Post by barrett » Mon Feb 15, 2016 9:26 am

Thanks for clarifying, melveyr. I am way older that you and hyper aware of that Harry Browne rule that reminds us that we can't count on generating the same wealth a 2nd or 3rd time around. So, I'll accept a lower return over time and hope that the PP can reduce sequence of returns risk. I learned a lot about how low my late-career risk tolerance is last year when the PP had a drawdown of nearly 8%.
melveyr wrote: Most of my learnings are related to my own psychology as an investor. I am not trying to ring alarm bells about the PP. If you have been happy with it, then by all means keep going with it. I just have different risks that I am more comfortable taking than the risks that are within the PP.
I'm glad you made this clear. There seems to be a significant cohort on here that is really focussed on the 2nd half of the investing curve.

It's good to have you stop by and chat. You have been missed on here.
User avatar
buddtholomew
Executive Member
Executive Member
Posts: 2118
Joined: Fri May 21, 2010 4:16 pm

Re: Question for Melveyr

Post by buddtholomew » Mon Feb 15, 2016 9:48 am

melveyr wrote:
BearBones wrote: Might as well ask here. Elsewhere you said, "I found that the main advocates for gold were using old models that have already been proven wrong." Can you elaborate a bit more?
Not so much here on this forum but many gold holders were betting on a big inflation coming because of charts like this:
Image

The idea was that banks lend in direct proportion to the amount of reserves that they have, and that once things returned to normal we would have an explosion of credit and spending that would push prices up. Many people equated monetary easing and QE with "money printing" which I have found to not be accurate, at least when trying to connect it with its effect on inflation. People were buying gold based on these theories, and pushing the price up. We have seen a slow bleed in gold as holders have slowly come to recognize that their understanding of the connection between Fed policy and inflation is not as direct as they thought.
I don't recall HB commenting on the relationship between money supply and gold.
Gold responds to unexpected inflation is the theory not excess bank reserves stored at the FED.
The $ didn't reach those who could spend it and raise inflation.
Not sure the model is broken, perhaps misused but not broken.
"The first principle is that you must not fool yourself and you are the easiest person to fool" --Feynman.
Post Reply