"Agnostic" mechanisms in the PP aren't

General Discussion on the Permanent Portfolio Strategy

Moderator: Global Moderator

Post Reply
User avatar
ochotona
Executive Member
Executive Member
Posts: 2929
Joined: Fri Jan 30, 2015 5:54 am

"Agnostic" mechanisms in the PP aren't

Post by ochotona » Wed Dec 21, 2016 8:37 am

Two prominent features of the PP - rebalancing bands and market-weighted S&P500 index funds - aren't agnostic.

Meb Faber's cool podcast reminds us that the S&P500 index, a cap-weighted index, represented a historical choice by the creator of the index. It didn't have to be market cap weighted. It could have been weighted by any other factor. Yet... voila, we have it. We assume it's a natural characteristic of the market. No, it's was a choice by people. Different choices were and are possible.

Meb also points out that rebalancing bands are a form of trend-following. Didn't have to be that way - Harry choose that particular style. Maybe if he'd woken up on the different side of the bed, it would have been different.

The proclaimed agnosticism of the PP or any portfolio is an illusion. No portfolio is agnostic.

But the classic PP is automatic... and that is the useful feature. Rules-based portfolios would eliminate all of the angst and chatter here. But people are rule-breakers, right?
User avatar
I Shrugged
Executive Member
Executive Member
Posts: 564
Joined: Tue Dec 18, 2012 6:35 pm

Re: "Agnostic" mechanisms in the PP aren't

Post by I Shrugged » Wed Dec 21, 2016 9:01 am

I disagree with your conclusion. Investing always involves angst. Well, in traditional terms, it involves greed and fear. The PP's angst comes in more on the greedy side, it seems. :)

I think the PP has pretty strict rules as investment plans go? But you're right, we don't seem to want to follow them.
Mr Vacuum
Executive Member
Executive Member
Posts: 164
Joined: Tue Jan 19, 2016 11:51 am

Re: "Agnostic" mechanisms in the PP aren't

Post by Mr Vacuum » Wed Dec 21, 2016 3:27 pm

What exactly is the agnostic claim you refer to? My understanding is that the portfolio is agnostic about what the markets will do (besides go up and down wildly all the time). The mechanisms are selected for various practical properties, which may be tangential to other observed properties. The mechanisms may have other properties besides the properties for which they were chosen.

So what if rebalancing bands are a form of trend following? Harry's stated reasoning was to protect the gains because markets go up and down in general, not because the trend says it's already on its way down.

So what if cap-weighted indexes are an historical choice? They are available and cheap to trade and own. It beats scrounging up your own stocks or picking the lesser evil actively managed fund like you had to when the original PP was designed.

Agnostic portfolio, practical mechanisms.

And yes, if we followed the rules and didn't obsess about it like Harry said, we'd be less stressed.
User avatar
dualstow
Executive Member
Executive Member
Posts: 8818
Joined: Wed Oct 27, 2010 10:18 am
Location: next to emotional support peacock
Contact:

Re: "Agnostic" mechanisms in the PP aren't

Post by dualstow » Wed Dec 21, 2016 5:04 pm

ochotona wrote:Meb also points out that rebalancing bands are a form of trend-following.
Not really.
Gold has passed 1645/oz
User avatar
sophie
Executive Member
Executive Member
Posts: 3149
Joined: Mon Apr 23, 2012 7:15 pm

Re: "Agnostic" mechanisms in the PP aren't

Post by sophie » Thu Dec 22, 2016 7:36 am

I'm not sure what the point of this thread is. Ochotona, if you're looking for rationales for your desire to market-time PP asset purchases, you don't need them. It's your money and you can do with it what you please. Please just don't call it a PP, to avoid confusing readers. Nor is it passive investing, a la the Boglehead strategy.

For everyone else: Harry Browne's stated reasons for setting rebalancing bands is to ensure that the portfolio remains safe despite inevitable drift in asset proportion. That is, there each asset should be present in enough quantity that assets that are increasing in response to a sudden price crash in one of the assets can counterbalance the losses. Look at what happened to the PP during 2008-2009, to understand how this works.
Mr Vacuum
Executive Member
Executive Member
Posts: 164
Joined: Tue Jan 19, 2016 11:51 am

Re: "Agnostic" mechanisms in the PP aren't

Post by Mr Vacuum » Fri Dec 23, 2016 10:29 am

sophie wrote:I'm not sure what the point of this thread is. Ochotona, if you're looking for rationales for your desire to market-time PP asset purchases, you don't need them. It's your money and you can do with it what you please. Please just don't call it a PP, to avoid confusing readers. Nor is it passive investing, a la the Boglehead strategy.

For everyone else: Harry Browne's stated reasons for setting rebalancing bands is to ensure that the portfolio remains safe despite inevitable drift in asset proportion. That is, there each asset should be present in enough quantity that assets that are increasing in response to a sudden price crash in one of the assets can counterbalance the losses. Look at what happened to the PP during 2008-2009, to understand how this works.
Thanks, Sophie. You said what I basically meant but much stronger.
mukramesh
Senior Member
Senior Member
Posts: 129
Joined: Fri Sep 12, 2014 3:27 pm

Re: "Agnostic" mechanisms in the PP aren't

Post by mukramesh » Fri Dec 23, 2016 2:14 pm

dualstow wrote:
ochotona wrote:Meb also points out that rebalancing bands are a form of trend-following.
Not really.
Aren't rebalancing bands technically a form of mean-reversion/volatility harvesting? That's the opposite of trend-following. ???
EdwardjK
Senior Member
Senior Member
Posts: 133
Joined: Mon Oct 11, 2010 8:16 pm

Re: "Agnostic" mechanisms in the PP aren't

Post by EdwardjK » Tue Jan 24, 2017 11:04 am

Ochotona,

I agree with you. Harry Browne could have created the PP in any number of ways, but he did what he did. In fact, Harry himself made some revisions along the way (as documented elsewhere on these boards).

The PP is not a religion, although some commentators suggest otherwise. Everyone is free to use the strategy as defined by Browne, or implement it using other mechanics. It is speculation to suggest that Browne would not have updated his PP strategy were he alive today.

I have backtested several alternative implementations of pseudo-PP strategies using the same four assets or a subset of them. Many yield results superior to the traditional PP; some with higher volatility and some lower.

We are all free to choose the investment strategies of our liking.
User avatar
dualstow
Executive Member
Executive Member
Posts: 8818
Joined: Wed Oct 27, 2010 10:18 am
Location: next to emotional support peacock
Contact:

Re: "Agnostic" mechanisms in the PP aren't

Post by dualstow » Tue Jan 24, 2017 11:39 am

EdwardjK wrote: It is speculation to suggest that Browne would not have updated his PP strategy were he alive today.
There's no way to know. Still, ocho (or meb) said,
The proclaimed agnosticism of the PP or any portfolio is an illusion. No portfolio is agnostic.
To that, I would simply say, "but it's about as agnostic as it gets." I think Harry's choice of stock funds predated the first readily available S&P index fund. When he switched to it, it was because it approximates the broad market, as you know. It seems like equities are one place where you have a bit of wiggle room to tinker (e.g. small cap value, yes; 100% Tesla, no) and you can still call it a bona fide pp. Skipping long-term treasuries, buying gold miners instead of gold, no.

I haven't read the Meb Faber article, but I don't think much can be made of Browne's suggestion to buy the S&P. It's pretty darn agnostic when combined with the other assets.

And the rebalancing band strategy- I just don't get how this could be called anything but agnostic. Browne even stated that the recipe doesn't have to be exactly 4 x 25%, which makes in unassailably agnostic. No? I mean, if he had written, buy the four assets and then never rebalance, would that somehow be closer to the mark in Faber's mind?
Gold has passed 1645/oz
Post Reply