So today I was discussing the PP with a friend. He said that he just cannot buy something that he knows will decline. His argument was that at the beginning of 2018, the chances were almost 100% that the FED was going to do 3-4 rate increases over the year. So by buying long term bonds (or TLT) this year you KNEW up front you were going to lose money on them. Even at this moment it appears we are looking at another 3 rate increases over the next 12 months. So buying long terms bonds now means you are guaranteeing that 25% of your portfolio is going to lose money.
My argument was that we do not know the future and a recession or a 2008 type Black Swan event could see rate cuts that would increase the value of my bonds. But he countered that even if that happens, the rate cuts do not happen overnight. If the economy suddenly did a 180 turn you would still have time to buy into LTTs. But the remote possibility of that happening is not worth keeping 25% of your portfolio in an almost sure money-loser over the next 1-2 years.
Opinions?
Discussion with a friend re:PP
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Re: Discussion with a friend re:PP
I always recommend Harry Browne's book Fail Safe Investing...the philosophy and rationale is all in there. Craig's book was awesome and my intro, but I found Fail Safe better for the why.
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Re: Discussion with a friend re:PP
The PP and its variants are designed to succeed even when you are not paying attention. In order for that to work you have to be in all of the assets all of the time.
If you have a crystal ball or think you are capable of market timing, enjoy watching the markets, and can tolerate the associated risk and stress, the PP is probably not for you.
The PP and similar portfolios are not about maximizing returns. That point seems to be lost on many people, or forgotten once they get started.
If you have a crystal ball or think you are capable of market timing, enjoy watching the markets, and can tolerate the associated risk and stress, the PP is probably not for you.
The PP and similar portfolios are not about maximizing returns. That point seems to be lost on many people, or forgotten once they get started.
- Cortopassi
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Re: Discussion with a friend re:PP
So that 25% instead of in bonds, say is half of a 50% stock allocation. True, rates don't change quickly, but how quickly can that 50% stock allocation get cut 20% to 40%? A few days or weeks is quite possible.
All else equal, he just lost 10% of his portfolio. If that were 25% stocks, 25% bonds, he only lost 5% and likely the bonds would have buffered that to a lower loss as well. Could he turn around and buy if the economy did a 180? Would that mean he would be selling stocks after a fall, to put into bonds? I think it is tough for anyone to non-emotionally realize a loss like that and pull the trigger.
Same thing going up of course. Gains won't be as high, but smoothed.
Here's a picture of my portfolio YTD vs. S&P. Yes lower. But smoothed, which helps emotionally, mostly...!
And I still think we are in some weird twilight zone with stocks being way overvalued, but that won't keep me from rebalancing into them if that's what the allocations say.
All else equal, he just lost 10% of his portfolio. If that were 25% stocks, 25% bonds, he only lost 5% and likely the bonds would have buffered that to a lower loss as well. Could he turn around and buy if the economy did a 180? Would that mean he would be selling stocks after a fall, to put into bonds? I think it is tough for anyone to non-emotionally realize a loss like that and pull the trigger.
Same thing going up of course. Gains won't be as high, but smoothed.
Here's a picture of my portfolio YTD vs. S&P. Yes lower. But smoothed, which helps emotionally, mostly...!
And I still think we are in some weird twilight zone with stocks being way overvalued, but that won't keep me from rebalancing into them if that's what the allocations say.
- blue_ruin17
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Re: Discussion with a friend re:PP
With the PP, an important intuitive leap which must be made to really 'get it' is that you must judge the portfolio performance as an integrated whole rather than the arbitrary price action of individual components.
If your friend didn't know what the PP was composed of, but showed him the historical data associated with the performance, he would likely be impressed by its consistent real returns, minimal volatility, and exceptional fat-tail risk protection. But as soon as you pop the hood and reveal the actual engine that delivered that performance, that's when you encounter resistance: "Too much cash"; "I hate gold"; "Rate have no where to go but up;" "Stocks are in a bubble".
But if you exclude any one of those asset classes based on your own personal bias or opinion against them (and that's all it is, none of us know what tomorrow will bring), then you break the PP, it will no longer work as advertised. And that's fine, the PP isn't suitable for everyone's objectives, but the PP has a funny way of breaking as soon as you start tinkering with it and making major "adjustments" based on your "knowledge" about future trends.
If your friend didn't know what the PP was composed of, but showed him the historical data associated with the performance, he would likely be impressed by its consistent real returns, minimal volatility, and exceptional fat-tail risk protection. But as soon as you pop the hood and reveal the actual engine that delivered that performance, that's when you encounter resistance: "Too much cash"; "I hate gold"; "Rate have no where to go but up;" "Stocks are in a bubble".
But if you exclude any one of those asset classes based on your own personal bias or opinion against them (and that's all it is, none of us know what tomorrow will bring), then you break the PP, it will no longer work as advertised. And that's fine, the PP isn't suitable for everyone's objectives, but the PP has a funny way of breaking as soon as you start tinkering with it and making major "adjustments" based on your "knowledge" about future trends.
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