Moving into the PP

[ppnewbie]

It’s funny my brain keeps groping for a pattern to predict the future. Demographics, Fed balance sheets, Chinese debt levels, coming boom in new innovations...etc, etc...I’m still working on taming this beast. Funny I barely even understand half of what I’m reading!

Just saw a good video on youtube by Investopedia and Ray Dalio called “Ray Dalio’s holy grail”. It seems like he’s created a sophisticated PP. He shows briefly how multiple uncorrellated assets can reduce risk to very low levels.

Also - how do PP proponents view Real Estate. What asset class does it fall into? Or is it apart of the VP portion of the portfolio? If you had an opportunity to invest in property paying in the 10 percent return range but not liquid - would you view this is a long term bond?

[mathjak107]

Sort of reframing what jhogue said, but if you think about the PP as a single unit, you can feel more assured about owning the 4 assets. While the 3 volatile assets can be swinging around wildly, the PP 'black box' acts more like an intermediate bond. Keeping the components balanced just makes sure the black box doesn't have any holes, so it can do its thing.

I find the PP is like a junk bond with good manners. The performance is similar, but less puking.

i find my junk bond fund swings less then when all the parts of the pp don't like something ..

[pmward]

It’s funny my brain keeps groping for a pattern to predict the future. Demographics, Fed balance sheets, Chinese debt levels, coming boom in new innovations...etc, etc...I’m still working on taming this beast. Funny I barely even understand half of what I’m reading!

Just saw a good video on youtube by Investopedia and Ray Dalio called “Ray Dalio’s holy grail”. It seems like he’s created a sophisticated PP. He shows briefly how multiple uncorrellated assets can reduce risk to very low levels.

You will see that Ray Dalio basically took Harry Browne and added risk parity and leverage into the mix. He does have an "all-seasons portfolio" which is his recommendation for an unlevered all-weather variation for an average retail investor, you will see it looks eerily familiar to the PP, only with risk parity weightings: https://portfoliocharts.com/portfolio/a ... portfolio/

[ochotona]

Sort of reframing what jhogue said, but if you think about the PP as a single unit, you can feel more assured about owning the 4 assets. While the 3 volatile assets can be swinging around wildly, the PP 'black box' acts more like an intermediate bond. Keeping the components balanced just makes sure the black box doesn't have any holes, so it can do its thing.

I find the PP is like a junk bond with good manners. The performance is similar, but less puking.

i find my junk bond fund swings less then when all the parts of the pp don't like something ..

Mmmmm, not so sure about that. Blue - my current "hideout because it's all a fake market now and I don't trust the V-shaped rebound" portfolio*. Red - HBPP. Golden - high yield bond index.



* 25% equity, 12% gold, 13% cash, 50% 5-year US Treasuries

[boglerdude]

> It’s funny my brain keeps groping for a pattern to predict the future.

Thats what brains do, and investing (morlike savings allocation) is frustrating because its the one area where thinking backfires. You cant get the real insider info on what's going on inside China or inside companies.

And the market is mostly efficient, you have no advantage as someone reading mainstream news (which always has an agenda or is click bait)

In real estate, your efforts can make a difference. You can research your local market and put in sweat equity.

I got trolled into buying a rental in 05 by everyone's confidence that real estate doesnt go down. Its value is influenced by inflation and the US economy, so I hold less gold and tilt away from US stocks

[sophie]

Welcome PPnewbie!

It sounds to me like you're looking for a less volatile alternative to 100% stocks, but you're not yet sold on the PP. In which case, the best thing to do may be more research/reading before you touch anything. Try reading the epic "Permanent Portfolio" thread on Bogleheads, and also examine different options on portfoliocharts.com. Real estate is in several of them, but not the PP. The PP was simplified to 4 basic assets that are orthogonal to each other. Other assets, like corporate bonds, behave sort of like a mixture of the PP assets so there's no point to owning them. Also, the PP's cash allocation can contain your emergency fund, which I assume you have in addition to the 100% stock portfolio.

Another question: what life phase are you in, are you still accumulating, or are you in or near retirement? If you're still accumulating, the easiest way to ease into the portfolio of your choice is to devote new contributions to buying the non-stock assets (in equal measure - that's very important to keep the portfolio balanced). Also, are these stocks in tax-advantaged accounts? Selling in taxable and taking a large capital gains hit may be something to approach carefully.

[ppnewbie]

Welcome PPnewbie!

It sounds to me like you're looking for a less volatile alternative to 100% stocks, but you're not yet sold on the PP. In which case, the best thing to do may be more research/reading before you touch anything. Try reading the epic "Permanent Portfolio" thread on Bogleheads, and also examine different options on portfoliocharts.com. Real estate is in several of them, but not the PP. The PP was simplified to 4 basic assets that are orthogonal to each other. Other assets, like corporate bonds, behave sort of like a mixture of the PP assets so there's no point to owning them. Also, the PP's cash allocation can contain your emergency fund, which I assume you have in addition to the 100% stock portfolio.

Another question: what life phase are you in, are you still accumulating, or are you in or near retirement? If you're still accumulating, the easiest way to ease into the portfolio of your choice is to devote new contributions to buying the non-stock assets (in equal measure - that's very important to keep the portfolio balanced). Also, are these stocks in tax-advantaged accounts? Selling in taxable and taking a large capital gains hit may be something to approach carefully.

I am now kind of in the lowering of risk lowering / protection phase of my investment life and hopefully in the next few years gently moving into a harvesting phase. The reason I ask about real estate is that I want to ease into the PP or something close to the PP without getting killed on taxes while I make the move. It would be a bonus if I could jigger in real estate into the bond portion (because my investments basically act like bonds no debt plus a consistent cashflow) and just add long term treasuries on top to create enough liquidity to that quadrant of the portfolio for rebalancing.

Anyway thanks for the heads up on the Bogleheads PP thread. I will definitely go over it in detail. I've been all over portfolio charts lately but need to dig into the portfolio's that include real estate. And will also use the modeling tool he has created to add in real estate into the PP and see what happens.

[Xan]

Welcome PPnewbie!

It sounds to me like you're looking for a less volatile alternative to 100% stocks, but you're not yet sold on the PP. In which case, the best thing to do may be more research/reading before you touch anything. Try reading the epic "Permanent Portfolio" thread on Bogleheads, and also examine different options on portfoliocharts.com. Real estate is in several of them, but not the PP. The PP was simplified to 4 basic assets that are orthogonal to each other. Other assets, like corporate bonds, behave sort of like a mixture of the PP assets so there's no point to owning them. Also, the PP's cash allocation can contain your emergency fund, which I assume you have in addition to the 100% stock portfolio.

Another question: what life phase are you in, are you still accumulating, or are you in or near retirement? If you're still accumulating, the easiest way to ease into the portfolio of your choice is to devote new contributions to buying the non-stock assets (in equal measure - that's very important to keep the portfolio balanced). Also, are these stocks in tax-advantaged accounts? Selling in taxable and taking a large capital gains hit may be something to approach carefully.

I am now kind of in the lowering of risk lowering / protection phase of my investment life and hopefully in the next few years gently moving into a harvesting phase. The reason I ask about real estate is that I want to ease into the PP or something close to the PP without getting killed on taxes while I make the move. It would be a bonus if I could jigger in real estate into the bond portion (because my investments basically act like bonds no debt plus a consistent cashflow) and just add long term treasuries on top to create enough liquidity to that quadrant of the portfolio for rebalancing.

Anyway thanks for the heads up on the Bogleheads PP thread. I will definitely go over it in detail. I've been all over portfolio charts lately but need to dig into the portfolio's that include real estate. And will also use the modeling tool he has created to add in real estate into the PP and see what happens.

Is your real estate in several nationwide REITs, or is it in a handful of individual properties in a single market? If the latter, it's not possible to model your real estate situation. It would be like working with individual stocks. Your local market could go haywire in either direction completely independently of any overall trend.

[pmward]

Welcome PPnewbie!

It sounds to me like you're looking for a less volatile alternative to 100% stocks, but you're not yet sold on the PP. In which case, the best thing to do may be more research/reading before you touch anything. Try reading the epic "Permanent Portfolio" thread on Bogleheads, and also examine different options on portfoliocharts.com. Real estate is in several of them, but not the PP. The PP was simplified to 4 basic assets that are orthogonal to each other. Other assets, like corporate bonds, behave sort of like a mixture of the PP assets so there's no point to owning them. Also, the PP's cash allocation can contain your emergency fund, which I assume you have in addition to the 100% stock portfolio.

Another question: what life phase are you in, are you still accumulating, or are you in or near retirement? If you're still accumulating, the easiest way to ease into the portfolio of your choice is to devote new contributions to buying the non-stock assets (in equal measure - that's very important to keep the portfolio balanced). Also, are these stocks in tax-advantaged accounts? Selling in taxable and taking a large capital gains hit may be something to approach carefully.

I am now kind of in the lowering of risk lowering / protection phase of my investment life and hopefully in the next few years gently moving into a harvesting phase. The reason I ask about real estate is that I want to ease into the PP or something close to the PP without getting killed on taxes while I make the move. It would be a bonus if I could jigger in real estate into the bond portion (because my investments basically act like bonds no debt plus a consistent cashflow) and just add long term treasuries on top to create enough liquidity to that quadrant of the portfolio for rebalancing.

Anyway thanks for the heads up on the Bogleheads PP thread. I will definitely go over it in detail. I've been all over portfolio charts lately but need to dig into the portfolio's that include real estate. And will also use the modeling tool he has created to add in real estate into the PP and see what happens.

Real estate is not similar to bonds. Stocks give cash flows as well, but they are different to a bond.

What we ask in the PP is what macro environments are the fundamental strengths and weaknesses of the asset? Real estate is weak in deflation and tight money, strong in an inflation, and generally decent in prosperity. What is this similar to? Gold.

Real estate would be a very poor bond replacement, because bonds are strong where real estate is weak. If anything, having a lot of real estate assets would tempt me to want to hold more bonds and less gold to hedge the real estate. Or, you could just consider it a business, and look at the cashflow as nothing more than income that then gets funneled into your PP. It really depends on how heavy you are in real estate as a percentage of your networth, and how nervous you are about the future of the properties you own. Since you have no loan your chances of taking a loss are much lower than most real estate investors. What are the odds you could take a substantial loss in the value of the real estate? Is that chance and total money at risk high enough to warrant hedging? Or is it something that will always provide decent cash flows, hold value well enough from the purchase price, and not something you really want to spent time worrying about and complicating your portfolio over? There's definitely a lot to consider here.

One last thing I will mention is that if you are heavy enough in real estate and decide to hedge you might want to look into long treasury zero coupons (ticker EDV) as it has a lot more volatility than the standard long term treasury that pays a coupon. That extra volatility gives it a bit more oomph, so you get a greater hedging effect out of it per dollar invested. This is what Harry recommended for those that had a large chunk of their networth in physical real estate that desired a hedge. Even if you decide to count your real estate as either a VP or as a business, you could still swap LTT's out for EDV in your PP just so you know you have a bit more protection against deflation.

[mathjak107]

i agree , real estate is no sub for bonds .. real estate is wishy washy which is why harry does not include it .. when inflation rises and mortgages are high like they were in the 1980's and mortgages were 18% real estate sucked ... when we have recessions real estate sucks ... it is only after things get better that real estate responds usually. So they are no proxy for bonds or protection from a weak dollar in high inflation

[sophie]

pmward, you're right about EDV having more oomph than TLT, but...beware holding it in a taxable account. It's had some giant December payouts in the past. If you instead buy a zero coupon Treasury directly, realize that you owe taxes on the interest as it accrues, but can't access said interest until you sell.

ppnewbie, if you're nearing retirement maybe you can also consider how complex vs simple you want your portfolio to be? That's a consideration too, that may eventually be more important than optimizing CAGR. Also, all the more reason to avoid selling appreciated stock shares, if you expect your tax bracket to go down to 12%-land in the near future.

[boglerdude]

If the US issued 100 year bonds, do you still do 25% weighting? whats the math

[jhogue]

ppnewbie:

Your residential real estate is a business, not an investment. The market for your business is highly localized and relatively ill-liquid—which means your principal is not guaranteed and cannot be converted into cash overnight. Also, the income stream from your rental is not guaranteed. It carries the risks that your tenants don’t pay or the property sits vacant while you continue to pay taxes and upkeep. Those kinds of risks explain why you are presently making 10% in rent, versus about 3% for Treasury bonds.

Long term Treasury bonds (LTTs) are an investment, not a business. The market for LTT’s is global and highly liquid—you could sell any amount you hold and convert its value to cash in 24-48 hours. The principal and the income stream from interest payments is guaranteed by the full faith and credit of the U.S. Treasury—which, unlike some tenants, has never defaulted on its scheduled payments.

Converting the value of your business into an investment will probably be a complicated process. Harry Browne did not specifically recommend putting businesses in your VP, but it sounds as though your are confident about the future prospects of your cash flow. If you are concerned about the tax liability from an immediate sale, you could offer to negotiate a lease-to-own arrangement spread over several years or more. My parents sold their house in a small town that way to a trustworthy young couple who did not have enough in savings for a traditional 20% down payment and mortgage. I have wondered why such arrangements have not been more common.

[jhogue]

If the US issued 100 year bonds, do you still do 25% weighting? whats the math

If the Treasury sold 100 year bonds, I would buy them according to a 35/15 rebalance band strategy. The advantage of 100 yr. T bonds would be twofold:

1. The math is simple, since we know 100 yr. T-bonds would be more volatile than 30 yr. T-bonds: Buy low / Sell high.
2. Lower transaction costs: Sell and replace after 30 years, instead of the current 10 years.


Trump's Secretary of Treasury Mnuchin actually floated the idea of 100 yr. T-bonds to finance infrastructure. Wall Street bankers opposed the idea, perhaps out of legitimate concerns about the structure and liquidity of a new 100 year market; more likely out of self-interest (in my view).

[pmward]

If the US issued 100 year bonds, do you still do 25% weighting? whats the math

If the Treasury sold 100 year bonds, I would buy them according to a 35/15 rebalance band strategy. The advantage of 100 yr. T bonds would be twofold:

1. The math is simple, since we know 100 yr. T-bonds would be more volatile than 30 yr. T-bonds: Buy low / Sell high.
2. Lower transaction costs: Sell and replace after 30 years, instead of the current 10 years.


Trump's Secretary of Treasury Mnuchin actually floated the idea of 100 yr. T-bonds to finance infrastructure. Wall Street bankers opposed the idea, perhaps out of legitimate concerns about the structure and liquidity of a new 100 year market; more likely out of self-interest (in my view).

That would sure put them closer to risk parity with stocks and gold. Probably a bit more volatile than stocks and about even with gold, as a rough guesstimation.

[jhogue]

Longer maturity bonds should certainly have greater volatility at the far end of the yield curve, though it would hard to pinpoint just how much it would be.

Should the U.S. continue down a deflationary track, longer term bonds might some day be the only way to avoid negative interest rate bonds, like some European governments are currently experiencing.

[dualstow]

I have a decent sized investment portfolio that is pretty much all stocks. I am in the process of allocating some of the portfolio into gold with new cash.

Interesting. Usually, people seek out the PP after stocks crash, not before, which is unfortunate. We won't know until a long time from now, but this seems like a fortuitous time to have some non-stock allocation, with the pp being a good example*. I think you might be wiser than the average bear.I mean it.
Best of luck.

*Of course I've been thinking that since 2013.

[pmward]

I have a decent sized investment portfolio that is pretty much all stocks. I am in the process of allocating some of the portfolio into gold with new cash.

Interesting. Usually, people seek out the PP after stocks crash, not before, which is unfortunate. We won't know until a long time from now, but this seems like a fortuitous time to have some non-stock allocation, with the pp being a good example*. I think you might be wiser than the average bear.I mean it.
Best of luck.

*Of course I've been thinking that since 2013.

I agree. The best time to invest in a PP is during a long run of prosperity.

[ppnewbie]

ppnewbie:

Your residential real estate is a business, not an investment. The market for your business is highly localized and relatively ill-liquid—which means your principal is not guaranteed and cannot be converted into cash overnight. Also, the income stream from your rental is not guaranteed. It carries the risks that your tenants don’t pay or the property sits vacant while you continue to pay taxes and upkeep. Those kinds of risks explain why you are presently making 10% in rent, versus about 3% for Treasury bonds.

Long term Treasury bonds (LTTs) are an investment, not a business. The market for LTT’s is global and highly liquid—you could sell any amount you hold and convert its value to cash in 24-48 hours. The principal and the income stream from interest payments is guaranteed by the full faith and credit of the U.S. Treasury—which, unlike some tenants, has never defaulted on its scheduled payments.

Converting the value of your business into an investment will probably be a complicated process. Harry Browne did not specifically recommend putting businesses in your VP, but it sounds as though your are confident about the future prospects of your cash flow. If you are concerned about the tax liability from an immediate sale, you could offer to negotiate a lease-to-own arrangement spread over several years or more. My parents sold their house in a small town that way to a trustworthy young couple who did not have enough in savings for a traditional 20% down payment and mortgage. I have wondered why such arrangements have not been more common.

I am coming to the same conclusion - I need to view the cash flow real estate investments as either part of a variable portfolio or as a seperate business. Thanks!

[ochotona]

I have a decent sized investment portfolio that is pretty much all stocks. I am in the process of allocating some of the portfolio into gold with new cash.

Interesting. Usually, people seek out the PP after stocks crash, not before, which is unfortunate. We won't know until a long time from now, but this seems like a fortuitous time to have some non-stock allocation, with the pp being a good example*. I think you might be wiser than the average bear.I mean it.
Best of luck.

*Of course I've been thinking that since 2013.

I agree. The best time to invest in a PP is during a long run of prosperity.

At the very top! Maybe like right now. Good move if you're within 5 years of retirement. The 60/40 took 3.5 years to get back to even after the Tech Crash.

[ppnewbie]

pmward, you're right about EDV having more oomph than TLT, but...beware holding it in a taxable account. It's had some giant December payouts in the past. If you instead buy a zero coupon Treasury directly, realize that you owe taxes on the interest as it accrues, but can't access said interest until you sell.

ppnewbie, if you're nearing retirement maybe you can also consider how complex vs simple you want your portfolio to be? That's a consideration too, that may eventually be more important than optimizing CAGR. Also, all the more reason to avoid selling appreciated stock shares, if you expect your tax bracket to go down to 12%-land in the near future.

Quick question about TLT (of possibly EDV). Do you just buy one of those and just rebalance as the PP prescribes. How does TLT replicate my buying 30 year treasury bonds and selling after 10 years (hope I have that correct) during the periodic rebalance.

[ppnewbie]

Interesting. Usually, people seek out the PP after stocks crash, not before, which is unfortunate. We won't know until a long time from now, but this seems like a fortuitous time to have some non-stock allocation, with the pp being a good example*. I think you might be wiser than the average bear.I mean it.
Best of luck.

*Of course I've been thinking that since 2013.

I agree. The best time to invest in a PP is during a long run of prosperity.

At the very top! Maybe like right now. Good move if you're within 5 years of retirement. The 60/40 took 3.5 years to get back to even after the Tech Crash.

The Shiller CAPE is at 30. Money printing, Record debt levels, etc, etc....Definitely has me freaked out.

[ppnewbie]

I agree. The best time to invest in a PP is during a long run of prosperity.

At the very top! Maybe like right now. Good move if you're within 5 years of retirement. The 60/40 took 3.5 years to get back to even after the Tech Crash.

The Shiller CAPE is at 30. Money printing, Record debt levels, etc, etc....Definitely has me freaked out. I am also just ready to "set it and forget it" (other than rebalancing ofcourse).

[pmward]

pmward, you're right about EDV having more oomph than TLT, but...beware holding it in a taxable account. It's had some giant December payouts in the past. If you instead buy a zero coupon Treasury directly, realize that you owe taxes on the interest as it accrues, but can't access said interest until you sell.

ppnewbie, if you're nearing retirement maybe you can also consider how complex vs simple you want your portfolio to be? That's a consideration too, that may eventually be more important than optimizing CAGR. Also, all the more reason to avoid selling appreciated stock shares, if you expect your tax bracket to go down to 12%-land in the near future.

Quick question about TLT (of possibly EDV). Do you just buy one of those and just rebalance as the PP prescribes. How does TLT replicate my buying 30 year treasury bonds and selling after 10 years (hope I have that correct) during the periodic rebalance.

You could. I buy the treasuries myself to save on fees, since it's easy enough to do. If you went into the open market and split your proceeds evenly between bonds issued every year from 2009-today you would have a pretty close approximation of TLT. But that was a bit too complicated for me, so I just buy all new at auction. It really all evens out in the end, as you would pay more/less for the past bonds based upon the changes in yield from date of issue to today. But if you want to simplify and don't mind a small ER then TLT or EDV are fine instruments.

[dualstow]

I buy the treasuries myself
...
I just buy all new at auction.

Me, too.
With a few EDV shares in a Roth IRA.