Things about the PP that do not make sense to me

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MachineGhost
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Re: Things about the PP that do not make sense to me

Post by MachineGhost » Tue Jul 19, 2016 11:18 pm

ochotona wrote:Or try 25% stocks, 25% gold, and 50% 10 year Treasury bonds. It's actually better performing than the PP... but you can never buy anything. Waffle House doesn't take 10-Ts
Depends on your definition of "better performing". It makes slightly less CAGR but also slightly less MaxDD.
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Re: Things about the PP that do not make sense to me

Post by KevinW » Wed Jul 20, 2016 1:44 pm

The cash component:
- Retains value during tight-money recessions, so that you can "buy low" on stocks, or even consumer purchases such as real estate and cars.
- Prevents you from "selling low" on other assets when you withdraw from the portfolio (as Sophie has analyzed).
- Performs well when interest rates rise quickly (as Xan pointed out). Cash drove a lot of PP returns during the inflationary 1980s.
- Makes moving money in or out of the portfolio tax-free and convenient.
- Reduces the volatility of the overall portfolio.

Yes, it can also function in place of an emergency fund, which is a happy side effect. But PP cash wasn't designed to be an emergency fund. It was designed to do the items listed above, as part of a cohesive whole.
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Re: Things about the PP that do not make sense to me

Post by mukramesh » Wed Jul 20, 2016 3:52 pm

Answers to many of these questions used to be listed in the full Cash FAQ on crawlingroad.com, but it seems like all of that material has been removed. The best way to get get the details on the Permanent Portfolio is probably by reading Craig and MediumTex's book.
https://www.amazon.com/Permanent-Portfo ... 1118288254

Additionally you should play with the backtester and calculators on Tyler's. Provides lots of good information.
http://www.portfoliocharts.com
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Re: Things about the PP that do not make sense to me

Post by Xan » Wed Jul 20, 2016 4:10 pm

I didn't find a Cash FAQ, but did find pages tagged "cash". It wasn't much. But maybe somebody else can find more.

https://web.archive.org/web/20140425133 ... /tag/cash/
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KevinW
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Re: Things about the PP that do not make sense to me

Post by KevinW » Fri Jul 22, 2016 12:12 am

I believe the Cash FAQ sticky thread on this forum has essentially the same contents as the Crawling Road blog post:
http://www.gyroscopicinvesting.com/foru ... p?f=4&t=17
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Re: Things about the PP that do not make sense to me

Post by sophie » Fri Jul 22, 2016 8:56 am

There was a great discussion in another thread about the impact of the emergency fund on different portfolios.

Basically, a portfolio that excludes cash requires the investor to hold cash as an emergency fund. If you consider the e-fund to be part of the portfolio, then the portfolio does in fact include a large slice of cash. It's great that the PP incorporates the e-fund right into the asset allocation - a brilliant move on Harry Browne's part. It's also important to note that cash has not always been the lowest yielding asset. In years past, cash has sometimes been the biggest gainer, and as Harry Browne once noted, a portfolio of 100% T bills over the past 30 years would actually have produced a better CAGR than what most investors playing randomly with stocks manage to achieve. For that reason, he recommended that for people who can't cope with managing a PP.

If you have a retirement account with access to gold that you truly don't intend to touch for a long time, and you don't want to make it part of a spread-out PP that includes your taxable accounts, you could make a case for putting a 33x3 PP (excluding cash) in that account. Personally, I would simply include it as part of my PP, and use taxable accounts and US savings bonds to hold most of the cash.
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Re: Things about the PP that do not make sense to me

Post by koekebakker » Fri Jul 22, 2016 11:25 am

The problem of using the cash part of the PP as an emergency fund is that it's too small when you start out and it can easily feel too big when you have a sizeable portfolio.
It's important to remember that when your portfolio starts to get bigger that you're holding three pretty volatile assets at all times. The cash part is needed to reduce the overall risk of the portfolio to acceptable levels.
Just because stocks, bonds and gold haven't crashed at the same time doesn't mean that won't happen in the future. Backtesting might make the PP seem more safe, more stable than it really is.
I consider the PP as a medium risk portfolio, and I'm comfortable with that, and I do feel the need to hold an emergency fund besides my PP.
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Re: Things about the PP that do not make sense to me

Post by dualstow » Fri Jul 22, 2016 11:48 am

koekebakker wrote:The problem of using the cash part of the PP as an emergency fund is that it's too small when you start out and it can easily feel too big when you have a sizeable portfolio.
Well, you don't have to consider the entire cash portion to be an emergency fund, even if the entire emergency fund is part of the cash share.
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Re: Things about the PP that do not make sense to me

Post by buddtholomew » Fri Jul 22, 2016 2:20 pm

koekebakker wrote:The problem of using the cash part of the PP as an emergency fund is that it's too small when you start out and it can easily feel too big when you have a sizeable portfolio.
It's important to remember that when your portfolio starts to get bigger that you're holding three pretty volatile assets at all times. The cash part is needed to reduce the overall risk of the portfolio to acceptable levels.
Just because stocks, bonds and gold haven't crashed at the same time doesn't mean that won't happen in the future. Backtesting might make the PP seem more safe, more stable than it really is.
I consider the PP as a medium risk portfolio, and I'm comfortable with that, and I do feel the need to hold an emergency fund besides my PP.
I am in the same category 4x25 + EF
What is your allocation after accounting for the EF?

I try to make sure that the EF total stays stable so I am forced into allocating new capital to the PP. So easy for me to place new investable money in cash and end up too cash heavy.
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Re: Things about the PP that do not make sense to me

Post by koekebakker » Sat Jul 23, 2016 4:46 am

buddtholomew wrote:
I am in the same category 4x25 + EF
What is your allocation after accounting for the EF?

I try to make sure that the EF total stays stable so I am forced into allocating new capital to the PP. So easy for me to place new investable money in cash and end up too cash heavy.
I sort of do the same. I keep 3 months of living expenses outside my PP, that should cover the majority of emergencies. Anything above that goes into my PP.
My PP is 30-20-20-30 (S/G/B/C) so I'm already a bit cash heavy. I consider the cash and bond part of the PP as one asset class. I like this barbell approach as it gives me the opportunity to get a higher combined yield than if I'd put everything in intermediate bonds.
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Re: Things about the PP that do not make sense to me

Post by Kbg » Sat Jul 23, 2016 11:35 am

What is C?
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Re: Things about the PP that do not make sense to me

Post by dualstow » Sat Jul 23, 2016 12:54 pm

Kbg wrote:What is C?
Probably cash.
Unlike its synonyms, rarely used of a combination for evil
- etymology of “alliance”
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