What to Make of High Stock Allocation Proponents

Discussion of the Stock portion of the Permanent Portfolio

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buddtholomew
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Re: What to Make of High Stock Allocation Proponents

Post by buddtholomew » Mon Mar 12, 2018 4:46 pm

jhogue wrote:Budd,

That is baloney.

Anyone who invests in the HBPP ought to understand that it is bound to under-perform in an equity bull market.

That is how you get "conservative growth."
What is baloney exactly, the under-performance of the HBPP from 2008-present when compared to a more equity centric 70/30 allocation. I use 2008 since that’s the year I started investing.

I guess I’m lucky but that 70/30 made me a millionaire, PP not so much. Just the facts.
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Re: What to Make of High Stock Allocation Proponents

Post by glennds » Mon Mar 12, 2018 5:41 pm

I think I get some of Budd's thinking. I wouldn't call it baloney if what he's saying is that the HBPP trades upside in an equity bull market for downside protection in a bear market (or better put - a period of inflation, deflation or recession). The issue is the opportunity cost of the upside you missed out on - in other words, the money you left on the table by not participating - far outweighs the protection you got in trade. If this is your point Budd, I see where you're coming from.

The difficulty is you can only know the value of this trade in hindsight. It's like asking if you paid too much for insurance and the answer is yes only if you didn't have a claim, which you can only know after the coverage period.

The other difficulty is knowing yourself as an investor. If you are a person who cannot tolerate the downside either financially or emotionally, then this must be factored in and not be taken lightly.

Budd, if you've only been investing since 2008, then you started at an ideal trough where you haven't ridden a cycle down and seen your gains evaporate although you lived through some malaise before things took off. Mostly, though you've been investing in a goldilocks period. That will change at some point which is when the protective features of the HBPP will look more real. Up until now they've probably been mostly theoretical for you.
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Re: What to Make of High Stock Allocation Proponents

Post by jhogue » Mon Mar 12, 2018 5:43 pm

Budd,

If you need some facts (enough to paint some stunning statistical pictures), check out Tyler’s latest graphs comparing SWRs for 100% stock and standard HBPP portfolios over in the current thread at:

viewtopic.php?f=1&p=167863#p167863

I find Tyler’s analysis compelling. Perhaps you should consider it as well.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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buddtholomew
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Re: What to Make of High Stock Allocation Proponents

Post by buddtholomew » Mon Mar 12, 2018 6:31 pm

glennds wrote:I think I get some of Budd's thinking. I wouldn't call it baloney if what he's saying is that the HBPP trades upside in an equity bull market for downside protection in a bear market (or better put - a period of inflation, deflation or recession). The issue is the opportunity cost of the upside you missed out on - in other words, the money you left on the table by not participating - far outweighs the protection you got in trade. If this is your point Budd, I see where you're coming from.

The difficulty is you can only know the value of this trade in hindsight. It's like asking if you paid too much for insurance and the answer is yes only if you didn't have a claim, which you can only know after the coverage period.

The other difficulty is knowing yourself as an investor. If you are a person who cannot tolerate the downside either financially or emotionally, then this must be factored in and not be taken lightly.

Budd, if you've only been investing since 2008, then you started at an ideal trough where you haven't ridden a cycle down and seen your gains evaporate although you lived through some malaise before things took off. Mostly, though you've been investing in a goldilocks period. That will change at some point which is when the protective features of the HBPP will look more real. Up until now they've probably been mostly theoretical for you.
This is me on all accounts.
Remember, I have both a 70/30 and HBPP.
I see value in the PP design and appreciate the inherent firewalls as well as cash as an emergency fund perspectives. These are the best features in my opinion.

BUT...for this safety you give up stock market gains. For the accumulator I think you give up too much. I compare the 70/30 and PP and that’s a lot to give up for insurance.
The insurance is worth lower returns in a taxable account which ultimately serves as an EF, but not in retirement accounts where I feel I need the gains before retirement is a possibility.

Jhogue, with respect to SWR’s my opinion may be different. I am talking to accumulation not decumulation.
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Re: What to Make of High Stock Allocation Proponents

Post by Kriegsspiel » Mon Mar 12, 2018 7:51 pm

Hey budd, what's your rational for having bonds in your VP? The PP is sorta like a better bond, why not add that 30% chunk to the PP?
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buddtholomew
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Re: What to Make of High Stock Allocation Proponents

Post by buddtholomew » Mon Mar 12, 2018 8:14 pm

Kriegsspiel wrote:Hey budd, what's your rational for having bonds in your VP? The PP is sorta like a better bond, why not add that 30% chunk to the PP?
The 30% is for rebalancing within retirement accounts and is all intermediate term total bond index. Basically the only difference is gold which isn’t available to me through 401K or brokerage account.
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Re: What to Make of High Stock Allocation Proponents

Post by glennds » Mon Mar 12, 2018 11:19 pm

buddtholomew wrote:
This is me on all accounts.
Remember, I have both a 70/30 and HBPP.
I see value in the PP design and appreciate the inherent firewalls as well as cash as an emergency fund perspectives. These are the best features in my opinion.

BUT...for this safety you give up stock market gains. For the accumulator I think you give up too much. I compare the 70/30 and PP and that’s a lot to give up for insurance.
The insurance is worth lower returns in a taxable account which ultimately serves as an EF, but not in retirement accounts where I feel I need the gains before retirement is a possibility.

Jhogue, with respect to SWR’s my opinion may be different. I am talking to accumulation not decumulation.
Budd, I think you're well served by keeping a foot in both worlds. There are going to be times (like the last 8 years for example) where the HBPP will feel questionable to you in terms of the opportunity you are leaving on the table, but there will surely be times in the future where the VP and HBPP will switch places in this regard, although when the VP is out of favor you might see losses, not just lack of performance. Neither of us can know when that switch will happen, which is why I'm right there with you. I think we're in a similar situation which is why I can identify with some of your perspective.

One thing I've thought about doing is setting myself a ratio between my classic HBPP and my VP. Let's say 50/50 for argument's sake. Then rebalance annually or to a rebalancing band goal, maybe 65/35. This way I'm robbing from the performing portfolio to lock in gains and adding to the lagging one when it's theoretically on sale. May not be the most tax efficient thing to do, but taking chips off the VP table could keep from riding all the gains down when the time comes for a steep correction or bear market. I haven't done this yet, but it's just a thought. I guess this is basically a Golden Butterfly where the stock allocation is higher - 62.5% in my example, assuming the VP is 100% stocks. The way your 70/30 VP is configured it would be 47.5% stocks, 27.5% bonds, 12.5% gold and 12.5% cash overall. I raise this because I don't know if you think in terms of rebalancing your VP against your HBPP like this. I wasn't thinking about it like this until recently.
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Re: What to Make of High Stock Allocation Proponents

Post by buddtholomew » Tue Mar 13, 2018 8:45 am

Glennds, my overall allocation works out to be 55/37.5/7.5 - Equities, Fixed Income, Gold.
I manage the overall portfolio to this allocation which requires me to buy in both accounts and sell in retirement accounts only.
Sounds like we're on the same page :)
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Re: What to Make of High Stock Allocation Proponents

Post by ochotona » Tue Mar 13, 2018 10:40 am

buddtholomew wrote:Glennds, my overall allocation works out to be 55/37.5/7.5 - Equities, Fixed Income, Gold.
I manage the overall portfolio to this allocation which requires me to buy in both accounts and sell in retirement accounts only.
Sounds like we're on the same page :)
You only own what you own... you don't have a PP and a VP. Those dotted lines are fake news. Nice allocation, should work out well.
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buddtholomew
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Re: What to Make of High Stock Allocation Proponents

Post by buddtholomew » Tue Mar 13, 2018 10:47 am

ochotona wrote:
buddtholomew wrote:Glennds, my overall allocation works out to be 55/37.5/7.5 - Equities, Fixed Income, Gold.
I manage the overall portfolio to this allocation which requires me to buy in both accounts and sell in retirement accounts only.
Sounds like we're on the same page :)
You only own what you own... you don't have a PP and a VP. Those dotted lines are fake news. Nice allocation, should work out well.
Yes, thats correct it’s one single portfolio.
Difference is time frame for potential withdrawals.
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