HBPP compared to other strategies on The Retire Early Homepage

[MediumTex]

Clive is one of those people who contributes much more than he probably takes away.

I really appreciate everything he does here.  Aways informative and provocative.

[Gumby]

Clive is one of those people who contributes much more than he probably takes away.

I really appreciate everything he does here.  Aways informative and provocative.

Hear, hear!

[moda0306]

I have to agree with Clive in the sense that it's difficult for me to separate the PP from my VP.  For the while I was toying with weighted PP's (towards stocks, away from cash), or RSPP's.

I don't do either now, but it's hard for me to keep them cognitively separate.

[Gumby]

Thank you so much, Clive. Always informative.

I see the attraction to a single-portfolio approach — and your portfolios always look very tempting — but I think it would concern me if a Japan situation happened where stocks drop for two straight decades, or more.

I guess I wanted to both have my cake and eat it, and originally saw the PP as such an option. 4% real reward with low risk (year down's of less than 10% and relatively quick recoveries when down's are encountered). Due diligence however has led me away from believing that the PP fulfils that role.

Clive, when you saw that the Permanent Portfolio doesn't achieve a 4% real return, is it at all possible that your calculations weren't complete? What about total real return (i.e. with dividends reinvested)? What about rebalancing at 35/15 rebalancing bands instead of rebalancing annually on Dec 1st? I'm sure you've thought about these sorts of things, but I don't see how Simba's spreadsheets (or other tools) can easily accommodate those specific factors.

When I take Harry Browne's PP Chart from here, which includes all dividends reinvested, and I extract the monthly data points using DigitizeIt v1.5, I'm able to extrapolate Harry Browne's published "Total Return" data for the Permanent Portfolio.

Here is that raw data:

 Harry Browne's Permanent Portfolio Total Nominal Return 1970-2003 (CSV)

How does that compare with your own PP calculations for that time period?

[BRESLOW]

Clive, too much information for the average investor. Can not understand all those numbers.

[Gumby]

Ok. Let me see if I get this straight.

Harry Browne has a chart on his website that looks like this:



Under his chart, he wrote:

"Stock results are for an S&P 500 Index mutual fund, and include reinvestment of dividends. Bond results are for a 30-year T-bond, and include interest received. Gold results are for American Eagle 1-ounce coins. Cash results are for Treasury bills, assuming that a 1-year bill was bought at the start of each year."

The chart clearly shows us that a hypothetical PP started with $100 invested on January 1, 1970 had a value of $2,026 on December 31, 2003.

Harry Browne's published hypothetical gain over 34 years equals a Total Nominal Return of 9.25% CAGR.

According to the BLS.gov CPI Inflation Calculator, $2,026 in 2004 would have the same purchasing power as $416.14 in 1970, and a value of $427.22 in 2003. Since the BLS.gov calculator uses average CPI for the current year, we can split the difference of those two values and assume $421.68 as the Total Real Return for Harry Browne's Permanent Portfolio on December 31st, 2003.

Therefore...

Harry Browne's published results, when adjusted for CPI, show a Total Real Return of 4.32% CAGR (less taxes and fees).

Clive, I don't understand how your calculations are more accurate than what actually happened.

[t-bear52]

As a newbie, I'm having some difficulty following Clive's posts this thread. But I get that you are now no longer believing PP provides twice the inflation rate returns like when you wrote the following:

"The PP has historically provided stock like rewards that generally have been around twice the rate of inflation (fell a bit short in the UK since 1972 with a 6.5% inflation rate and 11.1% PP reward).  As such the PP might be allocated 50% and considered as the 2x inflation investment vehicle such that the total fund value is uplifted with inflation over time.  For the other half if you can lock in a safe 8% for the long term then such a combination might serve equally as well or perhaps better than many of the alternatives."

[Storm]

I think you are both right.  Clive is taking out the bond interest payments from his calculations, because he rightly believes that if the past 30 years have been a bond bull market, it is unlikely that the next 30 years will continue the trend.

We could theoretically have a 30 year bond bear market where interest rates slowly grind higher, which would cause the PP to lag behind that magical 4.36% inflation adjusted return.

It is a bit disingenuous to completely remove the bond interest payments, because even if, for example, the 4.625% coupon 30 year bond I bought last week is not very valuable in a future 7% interest rate world, I'm still collecting the payments, however small they may be.

[Gumby]

2.32% real gain + 2% interest rate decline capital gain benefit.

In the other direction, buying a bond for $2 when cash rates were 5% and selling for $1 when cash rates were 10% results in a 50% loss for the investor which assuming a similar 30 year period = -2.3% annualised capital loss bias effect.

What I am suggesting is that over the full interest rate cycle, the average annualised rewards for the PP appear to come out at around 1.6% type amounts ABAICT.

If only it were that simple. The entire 1970s was a bear market for Long Term Treasuries and the Permanent Portfolio still managed to maintain its Total Real 4.32% CAGR the entire time. Harry Browne firmly believed that Gold was powerful enough to offset a very significant loss from Long Term Treasuries. In other words, if Long Term Treasuries drop by 50%, Gold would rise by 200% or 300% or more. I don't see how you could test that theory using your averaging calculations.

Clive, it seems to me that you are simply saying is that you don't like Long Term Treasuries.

[MediumTex]

From a longer term perspective (100+ years), the 1970s bear market in bonds was an anomaly.

Typically, long term interest rates through history have oscillated around a mean of about 4%.

What this means is that interest rates right now are not really low, they're about average.

[clacy]

As long as the US continues to send dollars overseas to purchase goods, those dollars will continue to come back to the US in for form of treasuries and/or US stock market purchases, IMO.  That is from Harry Browne's radio show and it makes sense to me.  That would more or less give us some sort of combination of low Treasury rates and/or high stock prices. 

[Gumby]

Gumby

I don't see how you could test that theory using your averaging calculations.

since then I've gone back a lot further by using silver as a poor man's gold proxy and discovered the 1.65% real average figure.

You can't use Silver in place of Gold. It doesn't work. Harry Browne discussed this on his radio show. He said that Gold reacts much more powerfully than Silver does when interest rates rise, in an inflationary environment. That's why he chose Gold and not Silver. Perhaps that's why you're not seeing what Harry Browne saw in the Permanent Portfolio.

[clacy]

The fact is we none of us will ever really know how the PP will perform in the future.  40 years is not really long enough to draw concrete conclusions.  The HBPP seems to be as solid as it comes in terms of protection, but that protection likely comes at a price in terms of growth.  Which is exactly why I have a significant portion of my investable assets in the PP.  With that said, I have 2/3's in what most here would call my variable portfolio, because I'm hoping to beat 9% pa.

Should I have 100% in my VP or move it all to my PP???? That question won't be answered until after the fact.  Time will tell I guess.

[Gumby]

On April 17th, 2005, Harry Browne answered a listener's question on how the Permanent Portfolio would perform during a period of rising interest rates. I've taken the liberty of transcribing the first 10 minutes of that episode for everyone to read. If you'd rather listen to the episode yourself, you can download that episode from Craig's archive here:

Harry Browne Investment Radio Show: April 17th, 2005

Here is Harry Browne's response:

[01:37]

HARRY BROWNE: A question from "Jim" out in cyberspace...he says, "Your [Permanent] Portfolio seems to have a proven track record over a long period of time and through many different increasing investing environments. But, has the environment really been all that different over this period of time? Haven't we been enjoying a 20+ year period with down-trending interest rates? Fluctuating of course, but trending down. As you point out, a falling interest rate environment is good for both the stock and bond portions of the portfolio. Also, through most of this period, we've had a much lower rate of inflation than we experienced in the '70s. Would this have had the effect of keeping the cash portion from hurting the portfolio over most of this period?"

So, Jim goes on to say... I'll paraphrase the rest of it. He's worried that an inflation scenario gives you only gold as the one asset performing well. And he says, "Not to predict, but if this does happen, do you think the Portfolio could maintain the purchasing power of the invested funds?"

Well, Jim, the fact of the matter is that the Portfolio did very well during the 1970s. And I don't know if you're old enough to remember the '70s first hand, but inflation was really out of hand in the '70s. And it seemed as though we just kept bouncing back and forth between inflation and recession. And the inflation rate hit something like about 8% in the early '70s, backed off a bit. Then it went up to 12% later in the decade, backed off a little bit. And then went up to 14% in 1981. And stocks were not doing well. Bonds of course were doing terribly, because interest rates kept rising and rising. We finally hit a prime rate of 20% and a T-Bill rate of 15%. And I believe the rate on Treasury Bonds finally hit about 12% or 13%. And so, bonds were really in the tank, as they say. And of course, cash was not any help at all during such an inflation. But the fact of the matter is that the Portfolio kept growing during that period. Because gold went up 20-times over.

Now, I don't think we could count on gold going up 20-times over in the next run-up in inflation and gold. And the reason we can't count on the same result is because that result of the '70s was partly from the great inflation of the '70s and also partly from the fact that gold had been price controlled at $35 an ounce for a period of 35 years, that finally ended in 1968. And after a period of market time, gold really took off in the early '70s. And it was making up for lost time for those 35 years that it had been held down in price. That always happens when you lift price controls. Whatever was price controlled goes up much faster than the rate of inflation.

But, gold goes up much faster than the rate of inflation anyway, simply because its a powerful, leveraged investment — leveraged in itself, not leveraged by borrowing money. And I would think that in the next inflation — if we had something similar to the '70s — you could count on gold going up at least five or ten times over. In other words, gold would wind up at somewhere around $2,000 and possibly as high as $4,000. Right now that seems...that's in the stratosphere, that just seems impossible. But, I have to tell you that when I wrote my first book, How You Can Profit From the Coming Devaluation, published in the 1970s, I made the asounding forecast in that book...it wasn't really a forecast, but I talked about the idea of gold going to $70 or even $100 an ounce — when it was at $35. And that seemed astounding.

But, the truth is, that gold actually went to $800 before the period of inflation was over. Now $800 was way over the mark. And so it came back down again, and it finally bounced off at about $300, and came back up a little bit. But, there was quite a period there where gold was in the $300 to $400 range, and we have to think that that's probably the equilibrium where it belonged. And that was 10-times over the point where it had started in the early '70s.

So, yes, I do believe that gold is very, very powerful. Powerful enough to pull the entire portfolio upward during a period of turmoil caused by inflation.

And that's the point of the Portfolio. We have to remember that investments that are rising have a bigger impact than investments that are falling. In investment that is falling goes down 15, 20, 25, 30, 40 percent during a bad, bad bear market. But, investments that are rising, in a bull market, go up 100%, 200%, 300%, or in the case of gold, 1,000%. So, that investment that is rising, a single investment, can be strong enough to carry the whole portfolio upwards. Gold during inflation. Bonds during a deflation, ought to be able to carry the whole portfolio upward, while stocks and gold are falling. And, during the prosperity we have the benefit of two investments that pull the portfolio upward — stocks and bonds — why gold may be falling. And cash is relatively neutral. So, the whole concept of the Portfolio is built around the idea that the winning investment will have a bigger impact on the outcome than the losing investments.

Now, if you don't think that's true, what are you going to do?

The only alternative to the Permanent Portfolio concept is to speculate. To say, 'I think this is what's about to happen and I'm going to put all, or most, of my money in that.' In other words, during a period you think inflation is here to stay for awhile, you put 70% of your assets in gold. Well, if you're wrong, if the gold price goes up a little, inflation goes up a little, and then comes falling back down, you might take an enormous loss, because you won't have a strong other investment in there to carry the portfolio upward and offset the losses in gold — which is maybe three times the impact on the portfolio as the winning investments because there's three times as much gold as the winning investment.

So, I hope that clears this up. If not, give me a call and let's talk about what's on your mind, about your money...