Synthesis of the PP and GB portfolios

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Synthesis of the PP and GB portfolios

Post by TomWexler » Fri Aug 12, 2022 10:49 pm

Hi,

I'm sure this has been mentioned before, but I've found an interesting synthesis of the Permanent Portfolio and the Golden Butterfly. I love the simplicity of the PP, but I'm not a fan of LTTs even though I know the arguments in their favor (liability matching, especially as TIPS, and bond convexity), and I needed more stock exposure anyway, so I came up with the following:

1/4 TSM/S&P 500
1/4 US SCV
1/4 ITT(/Intermediate TIPS)
1/4 Gold

It tests remarkably well, even during periods where the US TSM isn't doing so hot (2001-2008, 1965-1982, 1929-1945) when you substitute Gold for Tbills as a proxy (however accurate that is), and has held its own against the 60/40 and the GB along the way.

The only real downside to it is single-country risk, so two variants would be either (a) the 50% in stocks held at market weights between US and International, with or without SCV tilts, or, (b) go 1/3 S&P 500, 1/3 US SCV, and 1/3 Ex-Us. I don't favor these myself as I'm not keen on investing ex-US, and they add complexity and the more options and moving parts I see, the more I'm tempted to tinker.

I was just wondering what this board's thoughts were on this variation of the PP? It is a bet on interest rates/bond yields going forwards and there not being another 40 year bond bull market, but it has some currency protection in terms of the gold, the offsetting performance of TSM and SCV, and the historical sweet-spot for bonds (5 years). Any suggestions on how to improve it? Does adding international make it better, or is it not needed?
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Re: Synthesis of the PP and GB portfolios

Post by Smith1776 » Sat Aug 13, 2022 5:45 am

It seems like quite an efficient portfolio, though 50% stocks is not for everyone. I get the sense that people on this board are generally more risk averse than the typical Boglehead with a concentrated 60/40 portfolio. This gets somewhat close.

If I were American I would embrace TIPS. As a Canadian we're SOL on that front. We do have inflation-linked bonds in our country, but they're a thin market at best.
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Re: Synthesis of the PP and GB portfolios

Post by vnatale » Sat Aug 13, 2022 9:39 am

Smith1776 wrote:
Sat Aug 13, 2022 5:45 am

It seems like quite an efficient portfolio, though 50% stocks is not for everyone. I get the sense that people on this board are generally more risk averse than the typical Boglehead with a concentrated 60/40 portfolio. This gets somewhat close.

If I were American I would embrace TIPS. As a Canadian we're SOL on that front. We do have inflation-linked bonds in our country, but they're a thin market at best.


TIPS are preached as going against Permanent Portfolio heterodoxy.

I have always thought that they'd be ideal for me but I've been somewhat brainwashed regarding all I've read of them concerning being part of a Permanent Portfolio. It's almost like they should go into the Variable Portfolio?
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Re: Synthesis of the PP and GB portfolios

Post by Smith1776 » Sat Aug 13, 2022 9:42 am

vnatale wrote:
Sat Aug 13, 2022 9:39 am
Smith1776 wrote:
Sat Aug 13, 2022 5:45 am
It seems like quite an efficient portfolio, though 50% stocks is not for everyone. I get the sense that people on this board are generally more risk averse than the typical Boglehead with a concentrated 60/40 portfolio. This gets somewhat close.

If I were American I would embrace TIPS. As a Canadian we're SOL on that front. We do have inflation-linked bonds in our country, but they're a thin market at best.
TIPS are preached as going against Permanent Portfolio heterodoxy.

I have always thought that they'd be ideal for me but I've been somewhat brainwashed regarding all I've read of them concerning being part of a Permanent Portfolio. It's almost like they should go into the Variable Portfolio?
I personally think that TIPS are at least worthy of consideration for almost any investor. As a Canadian it's bit moot for me, though.

Our Canadian equivalent is called a Real Return Bond. They only come in super long maturities and they don't have a deflation floor the way TIPS do. No bueno in my book.
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Re: Synthesis of the PP and GB portfolios

Post by Dieter » Sat Aug 13, 2022 12:33 pm

FWIW, my retirement allocation is also about 50% stocks, GB inspired

So, I think overall looks fine

I'd probably avoid international (Gold kinda provides some of that diversification)

And, I'm Meh on TIPS.

No cash, high on stocks, low on duration -- I'd keep bonds focused on the bond role in the portfolio (no TIPS). Possibly a little higher duration or a little more bonds

How does allocation look if include cash reserves? (using iBonds there?)
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Re: Synthesis of the PP and GB portfolios

Post by TomWexler » Sat Aug 13, 2022 1:05 pm

Dieter wrote:
Sat Aug 13, 2022 12:33 pm
FWIW, my retirement allocation is also about 50% stocks, GB inspired

So, I think overall looks fine

I'd probably avoid international (Gold kinda provides some of that diversification)

And, I'm Meh on TIPS.

No cash, high on stocks, low on duration -- I'd keep bonds focused on the bond role in the portfolio (no TIPS). Possibly a little higher duration or a little more bonds

How does allocation look if include cash reserves? (using iBonds there?)
The bond component would be made up of T-bills (7.5%), short TIPS (7.5%) and 10 year treasuries (10%) to get to an average duration near 5 years. If needed, I can drop the gold down to 20% and put some of that towards cash as well, though I don't think I should go below 20% gold otherwise some of the balancing gets thrown off.

I'm not keen on international due to what I think are long-term structural and policy problems with the EU and China, but I am a bit scared of putting my retirement all in one country. What are your feelings on international and its place in a PP/GB portfolio?
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Re: Synthesis of the PP and GB portfolios

Post by Dieter » Sat Aug 13, 2022 4:15 pm

Oh, I am FAR from any expert on this.

My stock allocations in retirement accounts have tending to be anywhere from 50% US Large / 25% US Small/Mid ; 25% INTL to around 50/35/15 or some such

I'm pretty sure 100% US Large (TSM / SP500) did better this century vs such a split, but, if I ever went 100% TSM, then Small/Mid would outperform :)

I do like a bit of diversification, but not TOO much regret when US Large keeps winning

[Edit: PS does seem like a reasonable "cash"/Bond split]
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Re: Synthesis of the PP and GB portfolios

Post by joypog » Sat Aug 13, 2022 4:45 pm

For what its worth, my PP/GB inspired portfolio is split 6 ways in order to include international stocks as one of the equal parts to go with the GB

I think some home country bias is justified, especially since the US is currently 60% of the equities market, but I'd like some direct exposure to the world beyond just in case we end up in the 2000-2010 scenario.

After thinking about it a bit, I ultimately went with Intl SCV for my allocation, because it is notably less correlated to the SP500 than the Intl TSM.
https://www.portfoliovisualizer.com/ass ... &months=60
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Re: Synthesis of the PP and GB portfolios

Post by Smith1776 » Sat Aug 13, 2022 5:00 pm

joypog wrote:
Sat Aug 13, 2022 4:45 pm
For what its worth, my PP/GB inspired portfolio is split 6 ways in order to include international stocks as one of the equal parts to go with the GB

I think some home country bias is justified, especially since the US is currently 60% of the equities market, but I'd like some direct exposure to the world beyond just in case we end up in the 2000-2010 scenario.

After thinking about it a bit, I ultimately went with Intl SCV for my allocation, because it is notably less correlated to the SP500 than the Intl TSM.
https://www.portfoliovisualizer.com/ass ... &months=60
SCV! 👍
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Re: Synthesis of the PP and GB portfolios

Post by TomWexler » Sat Aug 13, 2022 11:02 pm

joypog wrote:
Sat Aug 13, 2022 4:45 pm
For what its worth, my PP/GB inspired portfolio is split 6 ways in order to include international stocks as one of the equal parts to go with the GB

I think some home country bias is justified, especially since the US is currently 60% of the equities market, but I'd like some direct exposure to the world beyond just in case we end up in the 2000-2010 scenario.

After thinking about it a bit, I ultimately went with Intl SCV for my allocation, because it is notably less correlated to the SP500 than the Intl TSM.
https://www.portfoliovisualizer.com/ass ... &months=60
I was thinking about that last night as I was going to bed, and I ran it through the simulations this morning - you're right, ex-US SCV is a much better compliment to the portfolio than ex-US TSM and doesn't significantly hurt performance over the long-run either.
Last edited by TomWexler on Sun Aug 14, 2022 1:53 am, edited 1 time in total.
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Re: Synthesis of the PP and GB portfolios

Post by joypog » Sun Aug 14, 2022 1:25 am

Have you listened to Frank Vasquez at the Risk Parity Radio podcast? He takes a bit of a goofy approach to the presentation but he's well read generally references the established names, John Bogle, Bill Bengen, Rick Ferri, etc.

Binging through his podcast is what finally got me to settle into my "final" AA (I'm actually averaging into it over the next year).
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Re: Synthesis of the PP and GB portfolios

Post by Kevin K. » Mon Aug 15, 2022 4:25 pm

TomWexler wrote:
Fri Aug 12, 2022 10:49 pm
Hi,

I'm sure this has been mentioned before, but I've found an interesting synthesis of the Permanent Portfolio and the Golden Butterfly. I love the simplicity of the PP, but I'm not a fan of LTTs even though I know the arguments in their favor (liability matching, especially as TIPS, and bond convexity), and I needed more stock exposure anyway, so I came up with the following:

1/4 TSM/S&P 500
1/4 US SCV
1/4 ITT(/Intermediate TIPS)
1/4 Gold

It tests remarkably well, even during periods where the US TSM isn't doing so hot (2001-2008, 1965-1982, 1929-1945) when you substitute Gold for Tbills as a proxy (however accurate that is), and has held its own against the 60/40 and the GB along the way.

The only real downside to it is single-country risk, so two variants would be either (a) the 50% in stocks held at market weights between US and International, with or without SCV tilts, or, (b) go 1/3 S&P 500, 1/3 US SCV, and 1/3 Ex-Us. I don't favor these myself as I'm not keen on investing ex-US, and they add complexity and the more options and moving parts I see, the more I'm tempted to tinker.

I was just wondering what this board's thoughts were on this variation of the PP? It is a bet on interest rates/bond yields going forwards and there not being another 40 year bond bull market, but it has some currency protection in terms of the gold, the offsetting performance of TSM and SCV, and the historical sweet-spot for bonds (5 years). Any suggestions on how to improve it? Does adding international make it better, or is it not needed?
Couple of thoughts:

1. Tyler (of Portfolio Charts and Golden Butterfly fame) addressed the "why no international question" a few years back in a response to a question here by long-time poster Desert. I've shared it any number of times because it's a recurring question. Here goes:

"Desert wrote:
One additional question: Have you considered a slice of international, for diversification? I realize that past returns show it's always been a return-reducer (with the exception of very high risk EM).
I've looked into it several times, and have yet to find a convincing evidence-based reason to add international stocks to a US-based PP. The biggest proponents of international diversification generally cite the very reasonable assumption that US stocks won't always perform so well and you'll need something else to pick up the slack. I completely agree, but the data indicates that gold already fills that role particularly well which is why adding international never seems to improve the numbers. And in the GB, the small caps also pitch in by greatly diversifying away from the relatively small number of large caps that drive returns of a total market fund due to how the index is weighted. There's more to stock performance than the country it's domiciled in.

I'll note, however, that due to macroeconomic forces the negative correlation of gold to stocks is more pronounced in the US than in other countries. If I was a PP investor outside of the US, international investing would look more appealing. And if gold ownership is ever outlawed again in the future or if an individual investor simply has a mental block on owning gold, international stocks are a logical backup choice to fill that role in a portfolio."

2. Regarding TIPS: There's leeriness about them on this board for various reasons, including their poor performance vs. LTT's during the '08 financial crisis, their very short history and the old "don't buy your fire insurance from the arsonist-in-chief" argument. I used to buy into those arguments but stopped awhile ago after spending a lot of time reading about how companies like DFA and FA's like William Bernstein use them in liability-matching portfolios.

There's a really great thread about TIPS vs. nominal treasuries on Bogleheads at the moment. It's gotten to be a very long thread - almost as long as the legendary PP threads of old - but the gist of the argument (which no one refutes but many supplement and enhance in later posts) is in the first post by the OP, willthrill81. Here's the link:

https://www.bogleheads.org/forum/viewtopic.php?t=382830

Personally I've been all-in on the GB for a few years now but had been using intermediate-term Treasuries (specifically VGIT which has a weighted average duration of around 5 years) in lieu of the STT/LTT barbell, with about 10% carved out for cash in the form of iBonds. I've since transitioned to a 50:50 mix of intermediate and short-term TIPS in the form of SCHP and VTIP respectively. Fortunately I have room for the entire bond position in our IRA's; one does have to be careful with TIPS due to the "phantom" income they generate.

The Bogleheads thread goes into all of the reasons why someone might want a mixture of nominal Treasuries and TIPS (especially in the accumulation phase), why retirees should be all TIPS, and why the "buy LTT's for deflation protection" argument doesn't hold water.
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Re: Synthesis of the PP and GB portfolios

Post by Dieter » Mon Aug 15, 2022 6:39 pm

Kevin K -- thanks for all that information. Does get me thinking about TIPS
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Re: Synthesis of the PP and GB portfolios

Post by TomWexler » Tue Aug 16, 2022 2:08 am

Kevin K. wrote:
Mon Aug 15, 2022 4:25 pm
TomWexler wrote:
Fri Aug 12, 2022 10:49 pm
Hi,

I'm sure this has been mentioned before, but I've found an interesting synthesis of the Permanent Portfolio and the Golden Butterfly. I love the simplicity of the PP, but I'm not a fan of LTTs even though I know the arguments in their favor (liability matching, especially as TIPS, and bond convexity), and I needed more stock exposure anyway, so I came up with the following:

1/4 TSM/S&P 500
1/4 US SCV
1/4 ITT(/Intermediate TIPS)
1/4 Gold

It tests remarkably well, even during periods where the US TSM isn't doing so hot (2001-2008, 1965-1982, 1929-1945) when you substitute Gold for Tbills as a proxy (however accurate that is), and has held its own against the 60/40 and the GB along the way.

The only real downside to it is single-country risk, so two variants would be either (a) the 50% in stocks held at market weights between US and International, with or without SCV tilts, or, (b) go 1/3 S&P 500, 1/3 US SCV, and 1/3 Ex-Us. I don't favor these myself as I'm not keen on investing ex-US, and they add complexity and the more options and moving parts I see, the more I'm tempted to tinker.

I was just wondering what this board's thoughts were on this variation of the PP? It is a bet on interest rates/bond yields going forwards and there not being another 40 year bond bull market, but it has some currency protection in terms of the gold, the offsetting performance of TSM and SCV, and the historical sweet-spot for bonds (5 years). Any suggestions on how to improve it? Does adding international make it better, or is it not needed?
Couple of thoughts:

1. Tyler (of Portfolio Charts and Golden Butterfly fame) addressed the "why no international question" a few years back in a response to a question here by long-time poster Desert. I've shared it any number of times because it's a recurring question. Here goes:

"Desert wrote:
One additional question: Have you considered a slice of international, for diversification? I realize that past returns show it's always been a return-reducer (with the exception of very high risk EM).
I've looked into it several times, and have yet to find a convincing evidence-based reason to add international stocks to a US-based PP. The biggest proponents of international diversification generally cite the very reasonable assumption that US stocks won't always perform so well and you'll need something else to pick up the slack. I completely agree, but the data indicates that gold already fills that role particularly well which is why adding international never seems to improve the numbers. And in the GB, the small caps also pitch in by greatly diversifying away from the relatively small number of large caps that drive returns of a total market fund due to how the index is weighted. There's more to stock performance than the country it's domiciled in.

I'll note, however, that due to macroeconomic forces the negative correlation of gold to stocks is more pronounced in the US than in other countries. If I was a PP investor outside of the US, international investing would look more appealing. And if gold ownership is ever outlawed again in the future or if an individual investor simply has a mental block on owning gold, international stocks are a logical backup choice to fill that role in a portfolio."

2. Regarding TIPS: There's leeriness about them on this board for various reasons, including their poor performance vs. LTT's during the '08 financial crisis, their very short history and the old "don't buy your fire insurance from the arsonist-in-chief" argument. I used to buy into those arguments but stopped awhile ago after spending a lot of time reading about how companies like DFA and FA's like William Bernstein use them in liability-matching portfolios.

There's a really great thread about TIPS vs. nominal treasuries on Bogleheads at the moment. It's gotten to be a very long thread - almost as long as the legendary PP threads of old - but the gist of the argument (which no one refutes but many supplement and enhance in later posts) is in the first post by the OP, willthrill81. Here's the link:

https://www.bogleheads.org/forum/viewtopic.php?t=382830

Personally I've been all-in on the GB for a few years now but had been using intermediate-term Treasuries (specifically VGIT which has a weighted average duration of around 5 years) in lieu of the STT/LTT barbell, with about 10% carved out for cash in the form of iBonds. I've since transitioned to a 50:50 mix of intermediate and short-term TIPS in the form of SCHP and VTIP respectively. Fortunately I have room for the entire bond position in our IRA's; one does have to be careful with TIPS due to the "phantom" income they generate.

The Bogleheads thread goes into all of the reasons why someone might want a mixture of nominal Treasuries and TIPS (especially in the accumulation phase), why retirees should be all TIPS, and why the "buy LTT's for deflation protection" argument doesn't hold water.
Thanks for the great reply, especially the part about gold vs international stocks, I didn't know about that perspective at all, but it makes a lot of sense. I'm holding nearly the same set-up in my bonds (5% in iBonds, and then 10% in STIP and SCHP each) at the moment but am planning on transitioning to more intermediate length once the interest rate environment becomes more stable.

I know that these types of portfolios have low start date sensitivity, but what sort of DCA period would you suggest for this? I think William Bernstein said 6-12 months was optimal, and that's what I'm aiming for, but do you think a longer period, say 18 months until the end of 2024, makes more sense in the current environment?

What are your impressions of your variant of the GB so far, especially in this downturn? Has it performed the way you expected, and are you still happy with it going forwards?
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Re: Synthesis of the PP and GB portfolios

Post by Kevin K. » Tue Aug 16, 2022 9:08 am

TomWexler wrote:
Tue Aug 16, 2022 2:08 am
Kevin K. wrote:
Mon Aug 15, 2022 4:25 pm
TomWexler wrote:
Fri Aug 12, 2022 10:49 pm
Hi,

I'm sure this has been mentioned before, but I've found an interesting synthesis of the Permanent Portfolio and the Golden Butterfly. I love the simplicity of the PP, but I'm not a fan of LTTs even though I know the arguments in their favor (liability matching, especially as TIPS, and bond convexity), and I needed more stock exposure anyway, so I came up with the following:

1/4 TSM/S&P 500
1/4 US SCV
1/4 ITT(/Intermediate TIPS)
1/4 Gold

It tests remarkably well, even during periods where the US TSM isn't doing so hot (2001-2008, 1965-1982, 1929-1945) when you substitute Gold for Tbills as a proxy (however accurate that is), and has held its own against the 60/40 and the GB along the way.

The only real downside to it is single-country risk, so two variants would be either (a) the 50% in stocks held at market weights between US and International, with or without SCV tilts, or, (b) go 1/3 S&P 500, 1/3 US SCV, and 1/3 Ex-Us. I don't favor these myself as I'm not keen on investing ex-US, and they add complexity and the more options and moving parts I see, the more I'm tempted to tinker.

I was just wondering what this board's thoughts were on this variation of the PP? It is a bet on interest rates/bond yields going forwards and there not being another 40 year bond bull market, but it has some currency protection in terms of the gold, the offsetting performance of TSM and SCV, and the historical sweet-spot for bonds (5 years). Any suggestions on how to improve it? Does adding international make it better, or is it not needed?
Couple of thoughts:

1. Tyler (of Portfolio Charts and Golden Butterfly fame) addressed the "why no international question" a few years back in a response to a question here by long-time poster Desert. I've shared it any number of times because it's a recurring question. Here goes:

"Desert wrote:
One additional question: Have you considered a slice of international, for diversification? I realize that past returns show it's always been a return-reducer (with the exception of very high risk EM).
I've looked into it several times, and have yet to find a convincing evidence-based reason to add international stocks to a US-based PP. The biggest proponents of international diversification generally cite the very reasonable assumption that US stocks won't always perform so well and you'll need something else to pick up the slack. I completely agree, but the data indicates that gold already fills that role particularly well which is why adding international never seems to improve the numbers. And in the GB, the small caps also pitch in by greatly diversifying away from the relatively small number of large caps that drive returns of a total market fund due to how the index is weighted. There's more to stock performance than the country it's domiciled in.

I'll note, however, that due to macroeconomic forces the negative correlation of gold to stocks is more pronounced in the US than in other countries. If I was a PP investor outside of the US, international investing would look more appealing. And if gold ownership is ever outlawed again in the future or if an individual investor simply has a mental block on owning gold, international stocks are a logical backup choice to fill that role in a portfolio."

2. Regarding TIPS: There's leeriness about them on this board for various reasons, including their poor performance vs. LTT's during the '08 financial crisis, their very short history and the old "don't buy your fire insurance from the arsonist-in-chief" argument. I used to buy into those arguments but stopped awhile ago after spending a lot of time reading about how companies like DFA and FA's like William Bernstein use them in liability-matching portfolios.

There's a really great thread about TIPS vs. nominal treasuries on Bogleheads at the moment. It's gotten to be a very long thread - almost as long as the legendary PP threads of old - but the gist of the argument (which no one refutes but many supplement and enhance in later posts) is in the first post by the OP, willthrill81. Here's the link:

https://www.bogleheads.org/forum/viewtopic.php?t=382830

Personally I've been all-in on the GB for a few years now but had been using intermediate-term Treasuries (specifically VGIT which has a weighted average duration of around 5 years) in lieu of the STT/LTT barbell, with about 10% carved out for cash in the form of iBonds. I've since transitioned to a 50:50 mix of intermediate and short-term TIPS in the form of SCHP and VTIP respectively. Fortunately I have room for the entire bond position in our IRA's; one does have to be careful with TIPS due to the "phantom" income they generate.

The Bogleheads thread goes into all of the reasons why someone might want a mixture of nominal Treasuries and TIPS (especially in the accumulation phase), why retirees should be all TIPS, and why the "buy LTT's for deflation protection" argument doesn't hold water.
Thanks for the great reply, especially the part about gold vs international stocks, I didn't know about that perspective at all, but it makes a lot of sense. I'm holding nearly the same set-up in my bonds (5% in iBonds, and then 10% in STIP and SCHP each) at the moment but am planning on transitioning to more intermediate length once the interest rate environment becomes more stable.

I know that these types of portfolios have low start date sensitivity, but what sort of DCA period would you suggest for this? I think William Bernstein said 6-12 months was optimal, and that's what I'm aiming for, but do you think a longer period, say 18 months until the end of 2024, makes more sense in the current environment?

What are your impressions of your variant of the GB so far, especially in this downturn? Has it performed the way you expected, and are you still happy with it going forwards?
I don't have any answers to offer about start date sensitivity or dollar-cost-averaging into this or any other iterations of the PP or GB. I trust Tyler's meticulous work on these topics on Portfolio Charts though and the GB as you know has historically been among the steadiest performers during all market conditions. I don't see any reason why substituting TIPS for nominals would change that, but since U.S. TIPS have only been in existence since 1997 there's not enough historical data to be of much use anyway. Bottom line: you either buy the argument about asymmetric risk of TIPS vs. nominals in the Bogleheads thread I shared the link to or you don't. Honestly I don't think it's likely to make a whole lot of difference long-term, especially if you're only doing 25% in fixed income in your modified portfolio. The GB is supremely well-designed in its "stock" form.

By holding equal parts STIP and SCHP you already have what I would call an ideal intermediate maturity (2.6 weighted avg. for STIP + 7.4 for SCHP = 5 years between the two).

Regarding your last question, as a risk-averse retiree living off of assets and more concerned (as Will Rogers famously said) with return OF my principal than return ON it I think the GB (tweaked or not) is still a really good, robustly-defensive option. If I were younger, as you clearly are, I don't know whether I'd be doing the GB or choosing something a bit more volatile like the Pinwheel portfolio.
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Re: Synthesis of the PP and GB portfolios

Post by Kbg » Tue Aug 16, 2022 10:09 am

More of an FYI...the website Tipswatch has a really good breakdown of nominal, TIPs and ibonds in terms of how they are different and when it is/is not advantageous to go with one over the other and highlighting what to do if you have a preference/market view.

I think this info would be useful for someone trying to make a decision as well.
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Re: Synthesis of the PP and GB portfolios

Post by Jack Jones » Tue Aug 16, 2022 10:24 am

Kevin K. wrote:
Mon Aug 15, 2022 4:25 pm
2. Regarding TIPS: There's leeriness about them on this board for various reasons, including their poor performance vs. LTT's during the '08 financial crisis, their very short history and the old "don't buy your fire insurance from the arsonist-in-chief" argument. I used to buy into those arguments but stopped awhile ago after spending a lot of time reading about how companies like DFA and FA's like William Bernstein use them in liability-matching portfolios.

There's a really great thread about TIPS vs. nominal treasuries on Bogleheads at the moment. It's gotten to be a very long thread - almost as long as the legendary PP threads of old - but the gist of the argument (which no one refutes but many supplement and enhance in later posts) is in the first post by the OP, willthrill81. Here's the link:

https://www.bogleheads.org/forum/viewtopic.php?t=382830
https://www.bogleheads.org/forum/viewtopic.php?p=6799985&sid=7fbfbab1e2bbd183e384f70dfcbeb980#p6799985 wrote:3. What changed after WW II was not the magnitude of inflationary spikes but the disappearance of deflationary spikes. The last case of deflation of any moment was 1950 at about -2.0%; it was a snapback from the ferocious inflation in the late 1940s (there may have been a 12 month roll in 2008-09, not January to January, that matched it.)

Back to this thread. To worry about deflation—i.e., heed the Swenson argument in favor of holding nominal (long) bonds—you have to construct a framework in which deflation returns in 2023ff., after having been absent for the past seven decades. A restoration of the gold standard would do it; I would confidently predict that deflationary episodes would resume were that ever to occur.

But I cannot see how the gold standard returns; and I cannot see how a significant deflationary episode can occur under a fiat currency arrangement. Therefore—and I’m only channeling Bill Bernstein here—going forward, inflation risk is far more likely to be a problem than deflation risk.
Yeah, I don't understand the circumstances under which deflation would return.
Why the best-laid... wrote:Deflation: A fall in the general price level -- caused by a growth in the demand for money that isn't offset by a comparable growth in the money supply, or caused by a decline in the supply of money that isn't offset by a decline in the demand for money.

Demand for money: The portion of a person's wealth that he wants to hold in the form of money. Or the aggregate of the individual demands for money for an entire population.
Since there are no longer "Golden Fetters" to restrict the supply of money, why would the debt-laden federal government ever choose to do so?
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Re: Synthesis of the PP and GB portfolios

Post by boglerdude » Wed Aug 17, 2022 12:59 am

> Since there are no longer "Golden Fetters" to restrict the supply of money, why would the debt-laden federal government ever choose to do so?

Look at the tremendous lengths the government just went through to protect your health. Of course they are currently working on how to increase the purchasing power of the working class with some deflation.

We're in this together.
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Re: Synthesis of the PP and GB portfolios

Post by Kbg » Wed Aug 17, 2022 10:01 am

I think there's a not miniscule chance that deflation could fire up when China's population goes into decline mode. (I wouldn't put any money on it one way or another though. IIRC that begins somewhere in the 2030s.)

Swensen's 50/50 may not be a bad idea...but I think the BH OP brought up a pretty solid point on the asymmetrical nature of deflation vs. inflation.

Definitely one of those posts that was "Dang, wish I would have thought of that."

But whether inflation or deflation, actual real things are what really make one happen either way.
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Re: Synthesis of the PP and GB portfolios

Post by joypog » Wed Aug 17, 2022 10:13 am

I remember hearing a narrative that we are actually in a secular deflationary environment - that's why all the government money printing was only getting us 2% inflation (until last year).

But fund managers are always good at talking a good story....hence the appeal of a risk parity portfolio which hold some suboptimal bets that might do well in other possibilities.
I have no clue. Ask me next May.
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Re: Synthesis of the PP and GB portfolios

Post by Jack Jones » Wed Aug 17, 2022 6:54 pm

joypog wrote:
Wed Aug 17, 2022 10:13 am
I remember hearing a narrative that we are actually in a secular deflationary environment - that's why all the government money printing was only getting us 2% inflation (until last year).

But fund managers are always good at talking a good story....hence the appeal of a risk parity portfolio which hold some suboptimal bets that might do well in other possibilities.
Isn't technological progress deflationary? TVs have been getting better and cheaper over the years.
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Re: Synthesis of the PP and GB portfolios

Post by joypog » Wed Aug 17, 2022 8:45 pm

Jack Jones wrote:
Wed Aug 17, 2022 6:54 pm
joypog wrote:
Wed Aug 17, 2022 10:13 am
I remember hearing a narrative that we are actually in a secular deflationary environment - that's why all the government money printing was only getting us 2% inflation (until last year).

But fund managers are always good at talking a good story....hence the appeal of a risk parity portfolio which hold some suboptimal bets that might do well in other possibilities.
Isn't technological progress deflationary? TVs have been getting better and cheaper over the years.
Yup that was a big part of his story.
I have no clue. Ask me next May.
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