Nobody believes in the Permanent Portfolio

[mathjak107]

The best argument for the Golden Butterfly is that the four economic conditions that the PP is designed to leverage don't occur in equal measure in the 35+ year history that we are able to to use for backtesting. Prosperity clearly dominated.

The GB is a bet that Prosperity will continue to be more prevalent than inflation or deflation. That may well be true, but of course we can't know for certain. A Japanese investor, for example, would certainly disagree! If you decide to remain agnostic, stick to the PP.

Another reason to stick to the PP is if you are in my situation: a retirement account that is large compared to your PP savings, and that you can't integrate into the PP. I keep a standard 50/50 stock/bond portfolio in this account. I'm well aware of both its strengths and its weaknesses, and I need the PP to backstop the weaknesses.

same here , i hold the gb to 35% or so of all invest-able money right now but the other 65% is invested in the same models i always used and optimized for when the money is needed .

i keep about 5 years withdrawals in an income model that is about 23% equity and the rest various bond funds , years 6-10 are in a growth and income model that is 60% equity and all the rest in a growth model that is 100% equity that will feed us 11-30 years from now .

i find that method helps optimize the portfolio to the time frame .

[Cortopassi]

MJ,

You say you took some gold profits on Thursday, so is that outside your GB, or are you trading the GB vs. holding it? Or do you rebalance daily....

[mathjak107]

i rebalanced the gold in to the small and midcaps as after the run up in small caps i use an extended market fund which is not as volatile . although it can still be much more than the s&p or total market fund is . as well as cut the gb down a bit to 35% of assets from 40% .eventually i will likely hold at 30% of assets .

[Cortopassi]

The decision to do this was totally based off your current perception of the markets and that gold has moved too far, too fast, right?

So what drives your next rebalancing decision if gold doesn't do what you expect, and rises to, say, $1325? Do you say oops?

You've obviously been successful investing during your life, but these decision are what always got me screwed. Fixed bands or once a year work better for me.

In my past life I would probably do the level of tweaking you are doing on a multiple times/year rate, and I can guarantee you I'd get the direction wrong >50% of the time.

[mathjak107]

the gb is really just being used as an awe crap portfolio,. but if opportunity presents itself with what i think are gains that are just here temporary and over the top , then i will take some of the profits while they are there . think about what slipped through one's fingers after brexit if you waited until years end .

i think once the fear dies down along with the flight to safety and interest rates rising are back in the spot light the profits will diminish .

[frugal]

The best argument for the Golden Butterfly is that the four economic conditions that the PP is designed to leverage don't occur in equal measure in the 35+ year history that we are able to to use for backtesting. Prosperity clearly dominated.

The GB is a bet that Prosperity will continue to be more prevalent than inflation or deflation. That may well be true, but of course we can't know for certain. A Japanese investor, for example, would certainly disagree! If you decide to remain agnostic, stick to the PP.

Another reason to stick to the PP is if you are in my situation: a retirement account that is large compared to your PP savings, and that you can't integrate into the PP. I keep a standard 50/50 stock/bond portfolio in this account. I'm well aware of both its strengths and its weaknesses, and I need the PP to backstop the weaknesses.

TOP!

thank you Shopie.

[Smith1776]

It does not surprise me at all that people do not like the Permanent Portfolio or are at least very wary of it. All things excellent are as difficult as they are rare. In this case, difficult might mean difficulty in accepting the strategy.

Gold is probably the most contentious part of the overall portfolio. It would make sense that the financial community in general would not take too kindly to gold as an investment. I think part of it rests on the fact that the time value of money is the central concept in modern finance. Bonds are marked at the present value of future coupon payments and principal. Stocks are supposedly worth the present value of future dividends along with some growth rate.

What's gold worth? It requires a different way of looking at assets in order to appreciate it.

[Tortoise]

It does not surprise me at all that people do not like the Permanent Portfolio or are at least very wary of it. All things excellent are as difficult as they are rare. In this case, difficult might mean difficulty in accepting the strategy.

Very well put.

I think one difficulty people face when considering the PP is that it's the ultimate agnostic portfolio, and therefore requires complete financial humility.

It forces one to completely abandon the idea that one might be able to successfully tilt one's portfolio in a particularly profitable direction based on predictions about the future or analyses of past returns.

Humility is difficult.

[Cortopassi]

Financial humility, perfect!

Waiting for mathjak's 2 cents now....

[mathjak107]

nothing to really say about it . you already know my thoughts

[frugal]

Hello!

GB depending on how much savings you have done and your age.

If you just want to keep the same amount, to be above the inflation, the PP is the answer.

What do you suggest?

[mathjak107]

the gb can be very volatile on a daily basis if that matters to you. that small cap value fund can swing 2 to 3x the s&p 500 on any given day .

get a day when all 4 assets move together and it is greater than my 100% equity model

[sophie]

Smith1776, are you the same guy fighting so valiantly in that PP thread on the bogleheads forum? I tried to support you since you were beleaguered from all sides. Your posts there, as here, are great.

I'm not sure the Golden Butterfly is going to be any easier to stomach than the Permanent Portfolio in the long run, because it would only reduce the tracking error slightly. Perhaps a better model would be to use the PP as your safe, core holding, and then indulge yourself with 100% stocks when it's safe to do so. The role of bonds in a standard Boglehead portfolio is to dampen the swings of the stock market, not to counteract them, and it doesn't seem worthwhile for the added risk you take with them. Why not use the PP instead? Psychologically, it would also help you to compare its returns not to the stock market, but to a total bond fund.

If you're starting out in your 20s and ignoring 401K issues for now, you could even do something like this:

1. Save a minimal emergency fund.
2. Save everything into the PP until the cash allocation is big enough to hold a comfortable size emergency fund. Then add in the existing efund.
3. Split future savings into 100% stocks and the PP. Use whatever split you like (50/50, 75/25, etc).
4. At 25 years from planned retirement (e.g. age 40), switch to saving 100% into the PP. Leave the stock funds alone except to rebalance as needed. Alternatively, you could merge them into the PP.
5. If your savings get large enough, figure how big you need your PP to be (could be anything from "25x annual expenses" to "infinite"). Once you hit that cap, start putting all your new savings into the stock portfolio.

This is way too complicated for me, but perhaps it would be helpful for people with the portfolio optimization bug. On the other hand, you don't get to enjoy switching portfolios every few months :-)

[mathjak107]

i have devoted about 30 seconds a week to portfolio mgmt the last 30 years . it really takes no time at all for me . i run a few different models too and optimize the portfolio to the time frame .

i make a few fund swaps a year . no big deal . i think folks spend more time here telling others how they don't have to spend time on their portfolio than other folks actually spend making any changes

[Smith1776]

Smith1776, are you the same guy fighting so valiantly in that PP thread on the bogleheads forum? I tried to support you since you were beleaguered from all sides. Your posts there, as here, are great.

I'm not sure the Golden Butterfly is going to be any easier to stomach than the Permanent Portfolio in the long run, because it would only reduce the tracking error slightly. Perhaps a better model would be to use the PP as your safe, core holding, and then indulge yourself with 100% stocks when it's safe to do so. The role of bonds in a standard Boglehead portfolio is to dampen the swings of the stock market, not to counteract them, and it doesn't seem worthwhile for the added risk you take with them. Why not use the PP instead? Psychologically, it would also help you to compare its returns not to the stock market, but to a total bond fund.

If you're starting out in your 20s and ignoring 401K issues for now, you could even do something like this:

1. Save a minimal emergency fund.
2. Save everything into the PP until the cash allocation is big enough to hold a comfortable size emergency fund. Then add in the existing efund.
3. Split future savings into 100% stocks and the PP. Use whatever split you like (50/50, 75/25, etc).
4. At 25 years from planned retirement (e.g. age 40), switch to saving 100% into the PP. Leave the stock funds alone except to rebalance as needed. Alternatively, you could merge them into the PP.
5. If your savings get large enough, figure how big you need your PP to be (could be anything from "25x annual expenses" to "infinite"). Once you hit that cap, start putting all your new savings into the stock portfolio.

This is way too complicated for me, but perhaps it would be helpful for people with the portfolio optimization bug. On the other hand, you don't get to enjoy switching portfolios every few months :-)

Thank you for your kind words. Yes, it's me on both forums! I haven't logged in to the Bogleheads forums since yesterday morning, as I didn't want to intentionally continue exposing myself to toxic attitudes. I don't think it's possible for anyone to be completely unbiased and objective, but I always try to be as much as possible. It started to feel like I was having a debate with a brick wall.

In regards to the Golden Butterly portfolio, I find it very interesting and a pragmatic recognition that indeed prosperity has reigned more than the other economic states. I don't use it personally, but I don't think I could blame someone for doing it.

Mentally and intellectually, if I were to adopt the Golden Butterfly, I would actually consider the traditional 4 asset classes as a "pure" Permanent Portfolio core holding, and the allocation to small cap value as being part of my Variable Portfolio. It would literally be the same overall portfolio, but it would be framed differently mentally. Anywho, just my two cents!

[JFP_SF]

Smith1776, are you the same guy fighting so valiantly in that PP thread on the bogleheads forum? I tried to support you since you were beleaguered from all sides. Your posts there, as here, are great.

I'm not sure the Golden Butterfly is going to be any easier to stomach than the Permanent Portfolio in the long run, because it would only reduce the tracking error slightly. Perhaps a better model would be to use the PP as your safe, core holding, and then indulge yourself with 100% stocks when it's safe to do so. The role of bonds in a standard Boglehead portfolio is to dampen the swings of the stock market, not to counteract them, and it doesn't seem worthwhile for the added risk you take with them. Why not use the PP instead? Psychologically, it would also help you to compare its returns not to the stock market, but to a total bond fund.

If you're starting out in your 20s and ignoring 401K issues for now, you could even do something like this:

1. Save a minimal emergency fund.
2. Save everything into the PP until the cash allocation is big enough to hold a comfortable size emergency fund. Then add in the existing efund.
3. Split future savings into 100% stocks and the PP. Use whatever split you like (50/50, 75/25, etc).
4. At 25 years from planned retirement (e.g. age 40), switch to saving 100% into the PP. Leave the stock funds alone except to rebalance as needed. Alternatively, you could merge them into the PP.
5. If your savings get large enough, figure how big you need your PP to be (could be anything from "25x annual expenses" to "infinite"). Once you hit that cap, start putting all your new savings into the stock portfolio.

This is way too complicated for me, but perhaps it would be helpful for people with the portfolio optimization bug. On the other hand, you don't get to enjoy switching portfolios every few months :-)

Thank you for your kind words. Yes, it's me on both forums! I haven't logged in to the Bogleheads forums since yesterday morning, as I didn't want to intentionally continue exposing myself to toxic attitudes. I don't think it's possible for anyone to be completely unbiased and objective, but I always try to be as much as possible. It started to feel like I was having a debate with a brick wall.

In regards to the Golden Butterly portfolio, I find it very interesting and a pragmatic recognition that indeed prosperity has reigned more than the other economic states. I don't use it personally, but I don't think I could blame someone for doing it.

Mentally and intellectually, if I were to adopt the Golden Butterfly, I would actually consider the traditional 4 asset classes as a "pure" Permanent Portfolio core holding, and the allocation to small cap value as being part of my Variable Portfolio. It would literally be the same overall portfolio, but it would be framed differently mentally. Anywho, just my two cents!

I appreciate the work you are trying to do on the Bogleheads forum in that thread, but it's a waste of time. I've posted over there (in that thread even), and they are extremely close-minded. It's going to take a real sustained downturn before those guys get over their hubris.

[LazyInvestor]

I appreciate the work you are trying to do on the Bogleheads forum in that thread, but it's a waste of time. I've posted over there (in that thread even), and they are extremely close-minded. It's going to take a real sustained downturn before those guys get over their hubris.

I don't mind what they are doing. An important role of these forums is to support you with sticking to your portfolio. PP is quite different than many other Boglehead's portfolios because it's using assets that are often being used by market timers, and these assets are exactly what they had to shoot down in order to convince folks there just to stick to market weightings in bonds and stocks. At the same time, Boglehead portfolios are also solid portfolios, and they are tracking market better than PP, i.e., they are easier to stick to despite higher volatility. Even for us, who are hanging out at this forum and run PP for many years, it's hard to stick to PP in times of prosperity. As such, I'm happy they are close minded when it comes to PP as I know they'll do well with Bogleheads portfolios too. I even avoid reading PP threads at Bogleheads forum, but those of you who post there and argue for PP are doing them a service by strengthening their protection and belief in other Bogleheads portfolios. So all is good .

[mathjak107]

"higher volatility " is a relative term . it depends on what your own sensitivity to volatility is .

for someone who is really gun shy and hates seeing huge dollar dips on a short term basis the pp is not going to help much . it can be as volatile as any 100% equity model when all parts move together . just look at the example of someone who decided to go pp after brexit because they got scared by their conventional portfolio and suffered double digit losses by years end in the pp as bonds and gold got hammered ..

it may smooth out and become less volatile over an intermediate time frame but going out longer for a long term investor , mitigating short term dips may not be such a concern if the longer term is your view . dips so far are a short term temporary condition . so mitigating temporary short term dips by hedging and permanently reducing your long term gains to mitigate those dips has no real financial logic to it unless you have time restraints on the money .

the data shows that while we all believe that the more conservative a portfolio the more likely someone is to stick to it facts show other wise .

humans hate losing money-period . so for a gun shy investor doing something more conservative the fact is they are more gun shy and hate losing money even at these levels so they seem to exhibit the same bad investor behavior as more aggressive investors once the crap hits the fan .

the catch 22 many pp users and other very similar portfolio users face is they end up giving up a lot of money long term but in the short term do not really get a whole lot of volatility protection if we have situations like today when all assets seem to move in the same direction . so they don't get the bill of goods they thought they were buying in to . that can make sticking with it hard .

there is really no portfolio that is any easier to live with because our personal temperament make whatever we do the cusp of what we can tolerate .

a conservative investor is pretty much as likely to bail out of a balanced fund as a more aggressive investor is to bail out of an aggressive fund and in fact the more conservative investor may be more likely since they don't want to deal with losses and wide swings and that is why they are more conservative investors .

[dualstow]

I'm not saying you're wrong, but if "humans hate losing money, period" I don't see why your last paragraph would be true. Wouldn't a balanced pf be more likely to miss out on profits than to suffer severe true losses?

[mathjak107]

nope , 2008 saw balanced funds get clobbered too . i was on the 401k committee at work at the time . we saw folks bailing out of everything regardless of what they held .

one problem is volatility increased a lot since 2000 and if you even thought you were comfortable with your mix you swung a whole lot more .

but mentally losing money drives us humans nuts . our brains just hate being down . jason zweigs book your money your brain is fascinating .

when we lose money or are down , non logical portions of our brain takes control . brain imaging showed that what we intend to do in hypothetical cases goes south when the actual battle comes . our brains just say run and different parts of the brain start taking control and giving us non even handed decisions .

luckily i read his book because years ago i had to make a decision about buying in to a real estate partnership . it would cost us a huge amount and wild debt and every night my brain pounded me with why we shouldn't do it .

my brain was bad , and just pounded away , but i knew i was not being handed even handed info as only the what if it does not work out highlighted in my head .

well , i did not listen to that part of my brain and it was the greatest opportunity in our lives producing returns beyond our wildest expectations .

[dualstow]

True, no portfolio is always immune. I just think they''d get hit less often.
Then again, it only takes one hit.
So what do they bail into?

[sophie]

nope , 2008 saw balanced funds get clobbered too . i was on the 401k committee at work at the time . we saw folks bailing out of everything regardless of what they held .

That's an interesting observation. Can you be more specific about what level of losses had a significant number of people bailing?

Somebody should really do a study of population responses to different levels & durations of drawdowns, but I suspect it's not been done because no one who works in the investing arena really wants to know that information.

[mathjak107]

what was interesting in jason's book was the brain imaging showed when actual money was not on the line and the people were planning their strategy their brains offered actual well balanced rational info .

but since we are prewired to hate losing money more than making it the images showed changes in other parts of the brain associated with some very repulsive controls they used .

the scans were similar to smelling dog crap or watching people vomit in a video . some showed the same brain areas come in to play that a heroin addict gets active when he does not get his fix .

but what was interesting is once the money was lost or actually down the brain shifted back to normal again and basically looked forward to the recovery .

so it is the fear of losing money more than the actual loss that cause's bad investor behavior no matter the amount . so there is not a trip point but just the fear that money will be lost that triggers our non rational brain .

i have my play money i dabble with and i was trading in and out of a few stocks for fun . actually i would buy the 5 highest yielding dogs of the dow and trading in and out .

i sold all of them at a profit 2 or 3x this year but i still have verizon this last time because the day after i bought it they missed earning and got hammered . i have so little money in verizon ,.007% of my portfolio yet my brain is pounding me to dump it .

i am down a few hundred dollars and my brain freaks out ha ha ha . it is just silly , but this is why no matter what folks do , many seem to end up exhibiting bad behavior at some point.

there is no magical portfolio .

[JFP_SF]

I appreciate the work you are trying to do on the Bogleheads forum in that thread, but it's a waste of time. I've posted over there (in that thread even), and they are extremely close-minded. It's going to take a real sustained downturn before those guys get over their hubris.

I don't mind what they are doing. An important role of these forums is to support you with sticking to your portfolio. PP is quite different than many other Boglehead's portfolios because it's using assets that are often being used by market timers, and these assets are exactly what they had to shoot down in order to convince folks there just to stick to market weightings in bonds and stocks. At the same time, Boglehead portfolios are also solid portfolios, and they are tracking market better than PP, i.e., they are easier to stick to despite higher volatility. Even for us, who are hanging out at this forum and run PP for many years, it's hard to stick to PP in times of prosperity. As such, I'm happy they are close minded when it comes to PP as I know they'll do well with Bogleheads portfolios too. I even avoid reading PP threads at Bogleheads forum, but those of you who post there and argue for PP are doing them a service by strengthening their protection and belief in other Bogleheads portfolios. So all is good .

That's a very mature approach. I'll try and learn from it, especially since the latest thread there has become ridiculous.

[mathjak107]

True, no portfolio is always immune. I just think they''d get hit less often.
Then again, it only takes one hit.
So what do they bail into?

those who bail generally bail to cash and end up getting burned by being out when things recover . some like many of the youngin's in their 401k's never came back . in the mean time many of the funds tripled since they threw in the towel in 2008.

nothing is immune to bad investor behavior . as long as the portfolio can lose money in down years or does not gain as much in the up years there are always those that will bail and run or bail and try something else until that has a down year . .

while there are times i allocate more or less money to the portfolio's i run i may have more less in one model vs another but i have used the same models as a core for 30 years now . i may dabble with something like the gb at times (call it my variable portfolio ) but the core has always been the core ever since 1987.

i kind of used a rising glide path entering retirement , so i phased out my growth model at the start and used my income model and growth and income model but now that the election is over and i have some gains to cushion things i re-introduced the growth model back in to the mix for money i won't be using to eat with for 12 to 30 plus years out .

so the point is adjusting things along the way as a strategy is one thing but bailing out and running is quite another .