Recent article on PP

General Discussion on the Permanent Portfolio Strategy

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thisisallen
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Recent article on PP

Post by thisisallen » Fri Dec 02, 2016 9:48 pm

http://theirrelevantinvestor.com/2016/1 ... portfolio/

Seems overall positive but with caveats. Do you think it is a fair assessment of the PP? And are there any more advantages of the PP that he missed?
I am newly committed to the PP style of investing and interested in gaiming a clearer understanding of it.
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buddtholomew
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Re: Recent article on PP

Post by buddtholomew » Fri Dec 02, 2016 10:41 pm

It's a good article in that it highlights significant points one should consider before investing in the PP.

Tracking error and discipline in sticking to the plan when equities are outperforming. It takes fortitude to only have 25% of your portfolio in stocks during a decade long bull run. You look and feel like a failure as others are ringing the register day after day. Then one morning, you wake up and check that your PP is down 4.5% and stocks are down 20%. Having that protection and still keeping pace with inflation is priceless. It's the downside protection that matters to me most.
thisisallen
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Re: Recent article on PP

Post by thisisallen » Sat Dec 03, 2016 5:23 am

The "permanency" of the PP is very valuable. It is more preferable to deal with smaller changes (adjust savings or spending) vs dramatic/surprise moves.

There was a post in this forum (sorry, can't remember exactly who wrote it, maybe Sophie?) that explained that other portfolios do not consider the cash portion or emergency fund of their setup. In other words, if another portfolio is invested $100,000 in 60/40 and cash in reserve of $15,000 then they should consider the full $115,000 when figuring ROI. This may skew their results into seeming higher than they really are. Yes?
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sophie
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Re: Recent article on PP

Post by sophie » Sat Dec 03, 2016 8:30 am

thisisallen wrote:There was a post in this forum (sorry, can't remember exactly who wrote it, maybe Sophie?) that explained that other portfolios do not consider the cash portion or emergency fund of their setup. In other words, if another portfolio is invested $100,000 in 60/40 and cash in reserve of $15,000 then they should consider the full $115,000 when figuring ROI. This may skew their results into seeming higher than they really are. Yes?
Yup, that was me. You've summed this up nicely. I think it's important, when calculating portfolio performance, to include everything except maybe for "play" money used for speculation on the side. That means cash in emergency funds at the bank, savings bonds, HSA cash funds etc. The beauty of the PP is that it's a one-stop solution that automatically has you keeping about the right proportion of cash.

In your example, the person with $100K in stocks probably has too little cash ($15K), and will run into trouble if stocks tank and he/she loses their job. Being forced to sell stocks when they're down, locking in losses, is a big risk with most portfolios. If that person has a more reasonable cash backstop, say $30K, then the denominator for performance becomes $130K - big difference from the denominator of $100K that the person probably considers when calculating investment returns. And for a 100% stock portfolio, probably more cash than that is called for.
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Re: Recent article on PP

Post by stuper1 » Sat Dec 03, 2016 11:02 am

thisisallen wrote:And are there any more advantages of the PP that he missed?
Yes, he missed a potentially big advantage of the PP, which is physical gold. Like most of these people, he assumes that the party will go on forever, whereas looking historically that has never happened before. At some point the party will end, maybe in 100 years, or maybe in 10, whether due to conventional war, cyber war, financial collapse, huge solar flare, etc. At that point, people with physical gold will probably be much better off than those without.
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Re: Recent article on PP

Post by Kbg » Sun Dec 04, 2016 3:53 pm

Honestly I would not advise a PP for a young person. It is too conservative to build wealth over a long period of time as compared to other alternatives. I also do not think it is good advice by us a little further along in years to say it is a good portfolio for them. For a full 50% of the portfolio you are going to lose money in real terms (cash) and break even (LTTs) +/- a percent. Gold who knows what is going to happen. Stocks will provide inflation hedging and the opportunity to get some equity risk premium which as a general rule is GDP growth plus a bit give or take. Usually 2-4%. Basic economics suggests the above really isn't going to change the above all that much save a shrinking population which plays out primarily in GDP growth (or not).

If one is going to be investing periodically over a long period of time they should take the stock risk in exchange for higher growth. Obviously there is a point in age when the approach needs to be adjusted but a standard PP in one's 20's-30s is not a good idea in my view.
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Re: Recent article on PP

Post by Kbg » Sun Dec 04, 2016 4:17 pm

Honestly I would not advise a PP for a young person. It is too conservative to build wealth over a long period of time as compared to other alternatives. I also do not think it is good advice by us a little further along in years to say it is a good portfolio for them. For a full 50% of the portfolio you are going to lose money in real terms (cash) and break even (LTTs) +/- a percent. Gold who knows what is going to happen. Stocks will provide inflation hedging and the opportunity to get some equity risk premium which as a general rule is GDP growth plus a bit give or take. Usually 2-4%. Basic economics suggests the above really isn't going to change the above all that much save a shrinking population which plays out primarily in GDP growth (or not).

If one is going to be investing periodically over a long period of time they should take the stock risk in exchange for higher growth. Obviously there is a point in age when the approach needs to be adjusted but a standard PP in one's 20's-30s is not a good idea in my view.
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Re: Recent article on PP

Post by stuper1 » Sun Dec 04, 2016 4:29 pm

Kbg,

In theory, I agree with you. In practice, all I can say is that I would be light-years ahead if I had discovered the PP in my 20s. I'm now in my 50s. My problem, and that of most other people, was that I would buy when things were up and sell when things were down, instead of vice versa. The PP basically makes you do it the right way.

If I were advising a young person today, I would highly recommend the GB with annual or bi-annual rebalancing.
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Re: Recent article on PP

Post by Kbg » Sun Dec 04, 2016 4:34 pm

stuper,

My guess is that you would have had that problem anyway and it was more a discipline vs. portfolio issue. (Not that I can cast stones at anyone...I think many people have or had that challenge including me.)
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Re: Recent article on PP

Post by rickb » Sun Dec 04, 2016 5:52 pm

Kbg wrote:stuper,

My guess is that you would have had that problem anyway and it was more a discipline vs. portfolio issue. (Not that I can cast stones at anyone...I think many people have or had that challenge including me.)
...which IMO is one thing that makes the PP a good portfolio for someone in their 20s-30s. Most people do not understand their own risk tolerance until they actually experience a significant decline. You might say that a novice investor should experience this as soon as possible (so, perhaps, 100% stock). I think it's actually more reasonable to start with a conservative portfolio like the PP and then see how you feel about its volatility. If its (minimal) declines cause you distress (which seems to be true for at least some folks here), then a more volatile portfolio is probably not your cup of tea. If you can calmly ride out the PP's fluctuations, then perhaps you might consider something more volatile. I suspect for many people the PP is plenty volatile enough.
thisisallen
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Re: Recent article on PP

Post by thisisallen » Sun Dec 04, 2016 9:52 pm

Perhaps if you just compare different portfolios (allocations) it may not be appropriate for the younger investor. However if you view the PP as a package (for example, conceptually how the parts fit together, the idea that investments can be simple and not complicated, predicting, etc) then it is very valuable investing and learning tool.
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Re: Recent article on PP

Post by Mr Vacuum » Sun Dec 04, 2016 10:59 pm

Then there is the question of when and how the young person should transition from young growth mode to PP protection mode.
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Re: Recent article on PP

Post by Kbg » Mon Dec 05, 2016 8:41 am

Transition probably during someone's 50s. Gradually or all at once.
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Re: Recent article on PP

Post by Cortopassi » Mon Dec 05, 2016 9:29 am

stuper1 wrote:all I can say is that I would be light-years ahead if I had discovered the PP in my 20s.
My exact situation.

Looks like there is going to be quite a rebalancing opportunity in early January at this rate.
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