Merriman's style for equity part of PP

Discussion of the Stock portion of the Permanent Portfolio

Moderator: Global Moderator

Post Reply
LazyInvestor
Executive Member
Executive Member
Posts: 193
Joined: Thu Aug 02, 2012 5:37 am

Merriman's style for equity part of PP

Post by LazyInvestor » Tue Oct 02, 2012 11:04 am

What is your opinion about the Merriman's claims about TSM not really being diversified and his approach to solving the problem in his Ultimate Buy and Hold Portfolio (there are some old lengthy discussions on Bogleheads forum).

This is a summary:

http://www.fundadvice.com/fehtml/bhstra ... 0404a.html

"For years my firm has recommended that the U.S. part of an equity portfolio be divided equally into four asset classes: large-cap, large-cap value, small-cap and small-cap value."

Would it be worthwhile doing something like this for the equity part of the PP? (or maybe using the simplification presented at bogleheds forum of having 50% S&P500 and 50% small-cap value?)
User avatar
craigr
Administrator
Administrator
Posts: 2540
Joined: Sun Apr 25, 2010 9:26 pm

Re: Merriman's style for equity part of PP

Post by craigr » Tue Oct 02, 2012 11:09 am

LazyInvestor wrote: What is your opinion about the Merriman's claims about TSM not really being diversified and his approach to solving the problem in his Ultimate Buy and Hold Portfolio (there are some old lengthy discussions on Bogleheads forum).
IMO. Splitting up stock allocations offers minimal diversification benefit against downside risks as shown in 2008 and before. I've written about it here in terms of major vs. minor asset classes. Stocks are a major asset class. Smallcap, growth, microcap, etc. are minor asset classes within the major class:

https://web.archive.org/web/20160324133 ... -approach/
craigr wrote:Well, an effective way to diversify risks of a stock/bond portfolio is to hold hard assets (like gold) and cash as well. These simple assets can make a remarkable difference in diversification, volatility, and not impact overall results to a meaningful degree. The Permanent Portfolio follows a simple formula which is to diversify first and foremost with what I call “Major Asset Classes”? as opposed to “Minor Asset Classes”?

Way too much advice focuses on the Minor Asset Classes and not the Major ones. In the engineering world, this is what’s called Premature Optimization. In layman’s terms I guess you’d say it’s the cart before the horse. Many investors get too concerned with optimizing for returns and don’t consider what risks they could face in their strategy and, more importantly, whether their strategy has failed in the past and how it could fail again.
Would it be worthwhile doing something like this for the equity part of the PP? (or maybe using the simplification presented at bogleheds forum of having 50% S&P500 and 50% small-cap value?)
Could work to your favor, but might not. All depends on the markets. It will add more complexity and probably not add that much to overall diversification based on my experience and research. I like simple over complex.
Last edited by craigr on Tue Oct 02, 2012 11:11 am, edited 1 time in total.
tarentola
Senior Member
Senior Member
Posts: 100
Joined: Wed Aug 17, 2011 6:55 am

Re: Merriman's style for equity part of PP

Post by tarentola » Thu Oct 25, 2012 2:49 am

Craig
In the context of the Variable Portfolio discussion http://gyroscopicinvesting.com/forum/ht ... ic.php?t=3: apart from the four PP assets, what would you say are the major investable classes in the market that are worth considering?  I can think of REIT, oil, agriculture, metals, and maybe shorter-term bonds.
User avatar
melveyr
Executive Member
Executive Member
Posts: 971
Joined: Mon Jun 28, 2010 3:30 pm
Location: Seattle, WA
Contact:

Re: Merriman's style for equity part of PP

Post by melveyr » Thu Oct 25, 2012 1:18 pm

Leaving aside transaction costs and complexity, slicing and dicing has an interesting problem: frontrunning.

If you own shares in an index fund that is targeting a specific part of the market, when the underlying index is reconstituted the fund must change its allocation to reflect the index. If the market catches wind of how the underlying benchmark (index) has changed before the fund adjusts, the market will bid up the price of the stocks that will have to bought because they know they can sell it to the index fund that must buy the securities in order to stay true to its benchmark.

The best way to avoid this is by holding the TSM. You already own practically everything, so the concept of frontrunning is irrelevant to you. The only frontrunning you face is if there is an IPO that needs to be added to the TSM index.

I have some friends who did the reconstitution for some of the major Russell Indices this year, and when they release the data it is a HUGE trading day.
everything comes from somewhere and everything goes somewhere
User avatar
stone
Executive Member
Executive Member
Posts: 2627
Joined: Wed Apr 20, 2011 7:43 am
Contact:

Re: Merriman's style for equity part of PP

Post by stone » Thu Oct 25, 2012 3:10 pm

melveyr, I thought that  TSM funds were exposed to frontrunning whenever a company conducts a share buy-back or issues more stock by employee stock options or whatever ???
"Good judgment comes from experience. Experience comes from bad judgment." - Mulla Nasrudin
User avatar
melveyr
Executive Member
Executive Member
Posts: 971
Joined: Mon Jun 28, 2010 3:30 pm
Location: Seattle, WA
Contact:

Re: Merriman's style for equity part of PP

Post by melveyr » Thu Oct 25, 2012 9:32 pm

stone wrote: melveyr, I thought that  TSM funds were exposed to frontrunning whenever a company conducts a share buy-back or issues more stock by employee stock options or whatever ???
Could you post a link? I am trying to think about how it would happen but I am drawing blanks  ???
everything comes from somewhere and everything goes somewhere
User avatar
craigr
Administrator
Administrator
Posts: 2540
Joined: Sun Apr 25, 2010 9:26 pm

Re: Merriman's style for equity part of PP

Post by craigr » Fri Oct 26, 2012 7:28 pm

tarentola wrote: Craig
In the context of the Variable Portfolio discussion http://gyroscopicinvesting.com/forum/ht ... ic.php?t=3: apart from the four PP assets, what would you say are the major investable classes in the market that are worth considering?  I can think of REIT, oil, agriculture, metals, and maybe shorter-term bonds.
Depends what kind of investor you are. In general I stick to broader asset class types to diversify against company risk. Assets that a variable portfolio may want to consider are:

REITs
Developed International Stock Exposure
Emerging Market Stocks
Additional Domestic Stock Exposure
Vulture Investing

The REITs can provide an almost hard asset/equity quality at times. REITs that own property directly (e.g. TIAA CREF) are much preferred over those that are basically mortgage speculation vehicles. They obviously were a much better deal in 2009 than they are today.

The three stock categories could be embodied in separate funds, or perhaps just swapping out the 25% stock allocation in the portfolio with something like Vanguard Total World and just take it up from 25% to whatever you feel comfortable holding. Mostly when people ask me what to hold in a variable portfolio (if they *really* are sure they want one), is just allocate more to the stock market. Overall I'm an optimist and believe in the ability of companies to grow and protect themselves even in bad markets and still generate profits for investors. It doesn't always happen, but the probabilities are in their favor if someone just wants to overweight an asset.  

Private equity is very risky. Most people don't qualify for it anyway. Those that do qualify should probably stay away (angel investing, etc.). It's very speculative and risky. In the vast number of cases you are probably setting your money on fire.

Then there are what I call "vulture investing" opportunities. Meaning times when some kind of very bad news is out and people overreact to it. These are situation dependent. Totally speculative as well. I would only do this with very limited funds as pure play money.

EDIT: I'll post in that thread you linked to as well...
Last edited by craigr on Fri Oct 26, 2012 7:31 pm, edited 1 time in total.
User avatar
MomTo2Boys
Senior Member
Senior Member
Posts: 100
Joined: Tue May 15, 2012 9:42 pm
Location: The US

Re: Merriman's style for equity part of PP

Post by MomTo2Boys » Sat Oct 27, 2012 6:45 am

LazyInvestor wrote: What is your opinion about the Merriman's claims about TSM not really being diversified and his approach to solving the problem in his Ultimate Buy and Hold Portfolio (there are some old lengthy discussions on Bogleheads forum).

This is a summary:

http://www.fundadvice.com/fehtml/bhstra ... 0404a.html

"For years my firm has recommended that the U.S. part of an equity portfolio be divided equally into four asset classes: large-cap, large-cap value, small-cap and small-cap value."

Would it be worthwhile doing something like this for the equity part of the PP? (or maybe using the simplification presented at bogleheds forum of having 50% S&P500 and 50% small-cap value?)

The Merriman books/podcasts/investment strategy were some of the investing materials that I found very interesting when I started my journey toward learning more about investing many years ago. So much so that at one point my husband and I sat in the Merriman office in Seattle, ready to pull the trigger on having them manage our portfolio for us using their methods. But we ultimately didn't sign on the dotted line and I continued trying to read and learn, and I eventually settled on the PP.

My Merriman fascination is reflected, though, in the portfolio I ultimately settled on, which is PP except with the holdout that I sliced and diced the stock portions. Some PP folks would probably prefer me to say instead that I have a PP and a VP with slice and dice stock pieces, but I don't look at it that way because, quite frankly, all of my slice-and-dice stock pieces fit exactly into the 25% allotment of stock and, on top of that, I am cautious to the EXTREME and really don't need to remind myself that, oh, "This is the VP, or money I can afford to lose, and the other money is the PP and not money I can afford to lose." I don't need to play psychological games like that with myself because, as I said, I am overly cautious to the extreme and will never be prone to needing to remind myself not to touch certain money because something shiny and tempting came bouncing along.

For anyone tempted to slice and dice the stock portion Merriman-style, I will say this: The folks on these boards - Craig and Medium Tex, etc. - will be quick to tell you that adding more pieces just makes things more complicated, and they will be totally correct. Because I sliced and diced, I have had a difficult time trying to figure out exactly how to balance the sliced and diced stock portions with bond pieces, especially since I bought a nice amount of EDV and am still trying to figure out exactly how to balance directly purchased bonds + EDV with sliced and diced stock components, some of which tend to be more volatile than a VTI and some of which tend to be less volatile. It hasn't been half as easy as just buying bonds plus VTI or whatever and calling it a day. That and my departure from the typical PP has also led to my spending the last couple of months (the time after I first invested for the first time) trying really hard to analyze the pieces I had chosen and how they relate to one another, which has probably also led, in the short term, to my watching my portfolio way too closely, especially since I decided to DCA in monthly over a long period of time. And I am very grateful for my DCA decision, as well.

HOWEVER, in my defense I will say that my kinda-sorta-Merriman-style PP stock allocation was literally the only way that I would wade into any kind of investment strategy at all. My money has been on the sidelines in a money market account for years now, and I was very honest with myself in that the PP piece that I was the most scared of was stocks, and my stock slice-and-dice strategy was the only way I would wade into the waters. It may not be the "perfect" four-piece PP, but it is vastly better than staying 100% in a money market account, and in the end I am happy with my Merriman-type-PP-slice-and-dice stock portion, even though slicing and dicing stocks does complicate things.
(Trying hard to not screw up handling the money that my husband and I have traded untold life-hours to earn...)
User avatar
stone
Executive Member
Executive Member
Posts: 2627
Joined: Wed Apr 20, 2011 7:43 am
Contact:

Re: Merriman's style for equity part of PP

Post by stone » Sat Oct 27, 2012 12:30 pm

Momto2boys, your situation sounds very much like mine. What I do is keep the same proportion for each of the stock parts. In my case the stock part of the PP is split three ways and I keep those three parts equal.
"Good judgment comes from experience. Experience comes from bad judgment." - Mulla Nasrudin
User avatar
Dieter
Executive Member
Executive Member
Posts: 655
Joined: Sat Sep 01, 2012 10:51 am

Re: Merriman's style for equity part of PP

Post by Dieter » Sat Oct 27, 2012 2:01 pm

I now forget who suggested it, but there is an old thread on boggle heads about getting similar return with fewer funds, splitting value plays accross geography, such as:

  US Large Balanced (S&P 500)
  Intl Large Value
  US Small Cap Value
  Intl Small Cap Balanced

If you do REIT and the above, can put 5% in each for the PP 25% equity allocation.
As with all slice and dice, need to be prepared for tracking error va overall market, and I don't know how it interacts with the other assets in a PP.

I do something like above, around 1/2 of stock in TSM, equal parts of the rest. but I also have more than 25% in stock, so PP "inspired" portfolio I have.....
Post Reply