Reasoning behind SCV+EM instead of Total Market

[BobS]

The overall PP did fine in 2008.  That's the point--it didn't require you to correctly guess when it was time to exit the stock market and then decide when to re-enter.  Trying to guess those things correctly is at the opposite extreme of what the PP is premised upon--i.e., avoiding the need to guess.

The PP certainly isn't the only game in town, and you may have success with your strategy, but I don't know if what you are describing is a PP approach, either in spirit or in practice.

If I understand what you are saying, you contend that once a PP has been established then one should not be concerned about the other
rules HB put forth?

I was under the, perhaps mistaken impression, I was following the rules?  Such as -

Rule 15 - Ask the Right Questions

15.1 "Is there any risk?"

• In what economic circumstances is the investment's price likely to go down?
• Are other investments in your portfolio likely to take up the slack by gaining in those same circumstances?
• What is the most you can lose on the investment?

15.2 - "Is this investment safe?"

• Under what circumstances could I lose substancial share - 20% or more - of my investment?
• Under what circumstances could my entire investment be lost?
• Would I have any residual liability - that is, can I lose even more than the cash I invest?

And, what seemed to be HB's highest priority rule -

Rule 17 - Whenever You're in Doubt, Err on the Side of Safety

[MediumTex]

The overall PP did fine in 2008.  That's the point--it didn't require you to correctly guess when it was time to exit the stock market and then decide when to re-enter.  Trying to guess those things correctly is at the opposite extreme of what the PP is premised upon--i.e., avoiding the need to guess.

The PP certainly isn't the only game in town, and you may have success with your strategy, but I don't know if what you are describing is a PP approach, either in spirit or in practice.

If I understand what you are saying, you contend that once a PP has been established then one should not be concerned about the other
rules HB put forth?

I was under the, perhaps mistaken impression, I was following the rules?  Such as -

Rule 15 - Ask the Right Questions

15.1 "Is there any risk?"

• In what economic circumstances is the investment's price likely to go down?
• Are other investments in your portfolio likely to take up the slack by gaining in those same circumstances?
• What is the most you can lose on the investment?

15.2 - "Is this investment safe?"

• Under what circumstances could I lose substancial share - 20% or more - of my investment?
• Under what circumstances could my entire investment be lost?
• Would I have any residual liability - that is, can I lose even more than the cash I invest?

And, what seemed to be HB's highest priority rule -

Rule 17 - Whenever You're in Doubt, Err on the Side of Safety

HB proposed the PP as an answer to all of the criteria for a safe investment that he outlines in his rules in "Fail Safe Investing."

I don't think he was saying to use the rules he outlines as a rationale for tinkering with the PP once it is established.

As I said above, there is nothing wrong with tinkering, if that's what an investor wants to do, but the PP is a strategy that doesn't require any tinkering--it is a turn key solution.  When one takes a turn key solution and then begins to tinker with it on an ad hoc basis based upon personal intuitions and perceptions of market psychology what we are talking about is no longer a "permanent" portfolio, but rather a market timing strategy that is vulnerable to all sorts of dangers.

I want to be clear here--there is nothing wrong with actively managing your investments, but when applying the principles HB outlined, this active management should only occur on the VP side.  The PP should only contain money that you can't afford to lose and which you are comfortable not tinkering with.

[MediumTex]

Let me offer another perspective on the idea of applying HB's rules for investing safety from "Fail Safe Investing" to the PP itself.

I don't think it is an unreasonable thing to apply HB's own logic to the allocation he recommends for safety in the form of the PP.  However, I think that applying HB's rules for investing safety should be applied to the PP as a whole, not to its individual components.

Thus, if the PP as a whole began to experience large drawdowns over a multi-year period (e.g., 10%+ per year over a two or three year period or longer) or underperform other conservative asset allocations, then it might make sense to revisit the decision to use the PP, because the PP would no longer be providing the safety that it was advertised as providing. 

However, the activity within one PP asset class is, to me, totally irrelevant to the question of whether or not the PP meets HB's criteria for a safe investment.  Thus, if stocks lost 90% of their value I would look to see how the overall portfolio was doing.  Similarly, if bonds or gold were tanking I would want to know what the overall portfolio was doing, because it's the performance of the overall portfolio that really matters.

This is the approach that HB took as well in evaluating the history of the PP.  During the period beginning in 1972 and ending at various points later when HB was tracking PP performance, he always noted that there was one or more PP assets that were struggling--stocks and bonds in the 1970s, gold in the 1980s and 1990s, etc.  However, no matter how poorly a PP asset was doing, HB never suggested that it would have been appropriate to exit that asset entirely or otherwise tinker with the PP.

I believe that HB's goal in creating the PP was to truly create a "permanent" asset allocation that would provide safety and stability and allow one to enjoy life without having to be endlessly babystitting his investments.  To a great degree I believe he succeeded.  However, in order for one to enjoy the benefits of HB's success in developing such a subtle and effective strategy, one must accept that the design is solid and not subject to improvement through ad hoc tweaks and idiosyncratic departures from the core approach.

BobS, I appreciate you raising the topic, because I think it provides an opportunity to touch on these points, which I think really go to the heart of what the PP is all about, and how effective it can be for investors who are tired of trying to predict the future or find the market wizard who can.

[hrux]

I would love to see Paul and Craig on a podcast to discuss the merits of VTI/VEU versus Small Cap Value/Emerging split?