Question for Melveyr

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melveyr
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Re: Question for Melveyr

Post by melveyr » Mon Feb 15, 2016 4:37 pm

I am 24 with no retirement date in mind. But I still save pretty aggressively (max out 401k, Roth, HSA, just starting to do taxable). If my health permitted and I could see myself working late into my life but using the portfolio's supplemental income to "go baller".

I am literally just doing a vanilla three fund portfolio with age in bonds/CDs. It's not very exciting or exotic, but it works for me. Ironically the more I studied CFA the more evidence I found pointing me back to Taylor Larimore's simple portfolio.
Last edited by melveyr on Mon Feb 15, 2016 4:49 pm, edited 1 time in total.
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Re: Question for Melveyr

Post by ochotona » Mon Feb 15, 2016 6:03 pm

Oh well, the PP is way too tame for you at 24, you're doing the right thing. I am 55, I have about 10 more years to accumulate data on the SWR of the PP before I have to commit to some kind of allocation for my distribution phase. I would like to find a high SWR portfolio that is lazy. It is very interesting to me that SWR and CAGR don't always coincide.
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Re: Question for Melveyr

Post by stuper1 » Thu Feb 18, 2016 12:27 pm

Melveyr,

Good to hear from you again.  The way I look at the gold allocation in the PP is that about half of the allocation makes sense in terms of providing a nice, non-correlated asset that can help to counterbalance the portfolio, and provide some rebalancing opportunities, when both stocks/bonds are going down.  The other half of the gold allocation I see as providing financial insurance against major catastrophes (black swan events) that are pretty unlikely, but not impossible.  Things like major solar flares that could knock out the electrical grid for months and stuff like that, along with currency collapse or really bad inflation.  Of course, for this insurance to be reliable, I need to hold the gold as physical gold and not as shares of an ETF.  To have this insurance, I have to be ready to give up some CAGR on my investments, but to me it's worth it.  I don't want all of my assets to just be a bunch of binary data on a computer server located thousands of miles away from me.
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Re: Question for Melveyr

Post by Matthew19 » Thu Feb 18, 2016 5:53 pm

melveyr wrote: Oh and regarding tax efficiency because you mentioned split between taxable/tax advantaged... Try to view your entire pool of assets as one portfolio but understand that some accounts are more suited to specific assets.

Roth: Stocks
401k: Bond funds
Traditional IRA: CDs (because 401ks don't offer them)
Taxable: Stocks / Gold

Don't let these tax strategies dictate the overall asset allocation, but once you have your allocation try to follow this as best as you can. Make withdrawals from your taxable account and adjust the others as you do it to keep your total AA in check because tax advantaged space is precious.
I'm just now starting to fund my IRA's after neglecting them for years. I have a solo 401k set up for my business (roth option through vanguard, expenses are high though) and some personal Roth IRAs. how big of a difference is it to just do a 4x25 portfolio for each account? It would be much more simple for me, and it seems like I've read that on the boards before.
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Re: Question for Melveyr

Post by sophie » Fri Feb 19, 2016 7:26 am

melveyr wrote: 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.
Whew, so we're not missing anything fundamental then.  I thought there was something more to it when you were talking about "old models".  These are concerns that many have voiced.  If I may restate them:

1. The PP's tracking error with respect to the stock market or a conventional portfolio (especially in the past few years)
2. Having 25% of your capital in gold is distinctly uncomfortable, and it probably is the case that it is overweighted in the PP.

Regarding the tracking error:  reactions to this are personal.  I decided that the tracking error is a small price to pay for more even returns, and indeed those two features are flip sides of the same coin.  Since I want the even returns, I have to be OK with tracking error.

I also suspect that part of the gold bubble in the years after 2008 had nothing to do with the PP's fundamentals - it was large-scale gold purchases in China and India fueled by their economic expansion.  That led to temporarily outsized gains in the PP, and it was inevitable that those gains would reverse.  It's unfortunate that many here bought into the PP at the height of that gold bubble.

I do agree that the PP is slightly overweighted in gold.  One day I may decide to limit the PP to 15% or 20% gold, but I wouldn't go lower than that, and I also wouldn't do this until retirement.  If you check out Tyler's charts, you'll see that 10% gold isn't enough to carry you through a 1970's stagflation era.  I suspect that Harry Browne knew this, but kept gold at 25% for several reasons.  First, simplicity, in an era where most financial work was done with pencil and paper.  Second, physical gold is an awesome bit of asset insurance, simply because it's held outside the financial system.  This is perhaps more attractive to me than it might be to many of you, because as a physician I am way more exposed to personal financial risk.  Finally, gold's volatility makes for some great opportunities to capture benefits from rebalancing.

I hope the above is a helpful summary.  Ryan, if there's anything I missed please comment!
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Re: Question for Melveyr

Post by technovelist » Fri Feb 19, 2016 8:19 am

sophie wrote:
melveyr wrote: 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.
Whew, so we're not missing anything fundamental then.  I thought there was something more to it when you were talking about "old models".  These are concerns that many have voiced.  If I may restate them:

1. The PP's tracking error with respect to the stock market or a conventional portfolio (especially in the past few years)
2. Having 25% of your capital in gold is distinctly uncomfortable, and it probably is the case that it is overweighted in the PP.

Regarding the tracking error:  reactions to this are personal.  I decided that the tracking error is a small price to pay for more even returns, and indeed those two features are flip sides of the same coin.  Since I want the even returns, I have to be OK with tracking error.

I also suspect that part of the gold bubble in the years after 2008 had nothing to do with the PP's fundamentals - it was large-scale gold purchases in China and India fueled by their economic expansion.  That led to temporarily outsized gains in the PP, and it was inevitable that those gains would reverse.  It's unfortunate that many here bought into the PP at the height of that gold bubble.

I do agree that the PP is slightly overweighted in gold.  One day I may decide to limit the PP to 15% or 20% gold, but I wouldn't go lower than that, and I also wouldn't do this until retirement.  If you check out Tyler's charts, you'll see that 10% gold isn't enough to carry you through a 1970's stagflation era.  I suspect that Harry Browne knew this, but kept gold at 25% for several reasons.  First, simplicity, in an era where most financial work was done with pencil and paper.  Second, physical gold is an awesome bit of asset insurance, simply because it's held outside the financial system.  This is perhaps more attractive to me than it might be to many of you, because as a physician I am way more exposed to personal financial risk.  Finally, gold's volatility makes for some great opportunities to capture benefits from rebalancing.

I hope the above is a helpful summary.  Ryan, if there's anything I missed please comment!
I thought you were an academic, not a physician who treats patients, which should reduce your personal financial risk to relatively normal levels. Did I get that wrong?

But if I were in an occupation that exposed me to such risks as practicing physicians do face, I would make sure that all my significant assets were in something that creditors couldn't attach, like an LLC. Have you considered that?

Note: not a lawyer or financial professional, do your own diligence, etc.
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Re: Question for Melveyr

Post by BearBones » Fri Feb 19, 2016 8:26 am

sophie wrote: I hope the above is a helpful summary.  Ryan, if there's anything I missed please comment!
Very nice summary, Sophie. Thanks!

Yes, I think that many of us bought into the PP when gold was hot. Many are disillusioned by "tracking error" (i.e., doubt, jealousy) and have turned toward equities again. Perhaps at the wrong time? I'm even more bullish on bonds. Probably means that I should be in cash...

If I were in Ryan's shoes I'd not be 25% gold. I might have a PP bucket, but I'd have a more conventional VP. The goal of the PP is primarily wealth protection, IMO. And if one is tin he wealth accumulation phase, one might want to be more aggressive. Less likely to get burned if one is dollar cost averaging over decades. Different issue if one is trying to protect a life's savings.
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Re: Question for Melveyr

Post by BearBones » Fri Feb 19, 2016 9:09 am

Matthew19 wrote: I'm just now starting to fund my IRA's after neglecting them for years. I have a solo 401k set up for my business (roth option through vanguard, expenses are high though) and some personal Roth IRAs. how big of a difference is it to just do a 4x25 portfolio for each account? It would be much more simple for me, and it seems like I've read that on the boards before.
I went through this a few years ago and did something like that. Too much of a hassle otherwise. Problem is that, although nice in theory to put all the LTTs in tax deferred and all of gold in taxable, you are eventually going to have one account needing to be bought or sold to rebalance, and you can't. So I like having a PP somewhat evenly divided.

Here is what I did:
Taxable: 20/20/20/40 with 40% cash
Tax deferred 30/30/30/10 with 10% cash

I like having cash easily accessible for emergency. I wont be as happy about this distribution when/if cash is ever earning high %, since I will then wish more was in tax deferred.

I keep a taxable PP about equal to my tax deferred savings. Any excess I call my VP, and I do stupid things with it like invest in energy ETFs when oil >$100/barrel  :o
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Re: Question for Melveyr

Post by barrett » Fri Feb 19, 2016 10:29 am

melveyr wrote: Please keep in mind that I am personally more comfortable having a portfolio that consists of traditional asset classes, so that makes my portfolio more susceptible to the extreme inflation tail risks. A gold heavy portfolio is likely to be the best portfolio in an extreme inflation. I just don't like having a large amount of capital tied up in something that is such a small part of the global portfolio. The gold market is around $6 trillion in size whereas the size of the global equity and bond markets is closer to $300 trillion.

I am really not trying to give advice. Please just interpret this as what I am doing, not what you should. Every portfolio that generates decent returns takes risks and you have to make sure that it is aligned with your psychology. The PP is not aligned with mine so I stopped using it.
Hey Ryan,

OK, so the gold market is relatively small compared to bond and equity markets. Why does that matter? Couldn't an argument be made that if investors really started to move into gold, there is potential for a big upside move based on the respective sizes of these markets?
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Re: Question for Melveyr

Post by technovelist » Fri Feb 19, 2016 11:41 am

barrett wrote:
melveyr wrote: Please keep in mind that I am personally more comfortable having a portfolio that consists of traditional asset classes, so that makes my portfolio more susceptible to the extreme inflation tail risks. A gold heavy portfolio is likely to be the best portfolio in an extreme inflation. I just don't like having a large amount of capital tied up in something that is such a small part of the global portfolio. The gold market is around $6 trillion in size whereas the size of the global equity and bond markets is closer to $300 trillion.

I am really not trying to give advice. Please just interpret this as what I am doing, not what you should. Every portfolio that generates decent returns takes risks and you have to make sure that it is aligned with your psychology. The PP is not aligned with mine so I stopped using it.
Hey Ryan,

OK, so the gold market is relatively small compared to bond and equity markets. Why does that matter? Couldn't an argument be made that if investors really started to move into gold, there is potential for a big upside move based on the respective sizes of these markets?
Yes, that is a consideration. There's also the fact that, as HB pointed out, unlike other markets, most holders of gold generally have similar reasons for holding it, namely as insurance against investment chaos, which becomes more valuable as a crisis erupts. Thus, to get an existing holder to let go of some of his gold in a crisis may require a much higher price than before the crisis.
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Re: Question for Melveyr

Post by sophie » Sat Feb 20, 2016 7:47 am

Thanks for the LLC suggestion tech!  Yes I'm academic but have a (limited) practice, plus there are risks associated with engaging in clinical research.

I don't think the size of the gold market matters either.  If it were large relative to the stock market, gold wouldn't be nearly as valuable.  It has to remain in limited supply for the PP to work.
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Re: Question for Melveyr

Post by cnh » Sat Feb 20, 2016 9:17 am

The discussion of gold as an inflation hedge in this thread--and more generally in this forum and the crawlingroad blog--is interesting in light of some research published in recent years. For example, citing analysis by research firm Ibbotson Associates, the Wall Street Journal published an article (http://www.wsj.com/articles/SB100014240 ... #printMode) questioning the effectiveness of gold as an inflation hedge. And I suspect at least some here must be familiar with the 2013 NBER Working Paper (http://www.nber.org/papers/w18706) in which Erb and Harvey find that "gold may be an effective hedge if the investment horizon is measured in centuries. Over practical investment horizons, gold is an unreliable inflation hedge." There's more research on the topic.

Do many here dispute such findings?

My confidence in gold as an inflation hedge has diminished. Along with treasuries, it seems to have more significance when the "flight to safety" phenomenon dominates the markets.
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