Kevin K. wrote: ↑
Sat May 04, 2019 7:48 pm
A couple of quotes from Jazon Zweig's synopsis of William Bernstein's "Deep Risk" (the best analysis of the PP I've read) come to mind:
"Deflation, the persistent drop in the value of assets, is extremely rare in modern history, Mr. Bernstein says. It has hit Japan but almost nowhere else in the past century, thanks to central banks that print money to drive up prices. The best insurance against deflation is long-term government bonds. Diversifying your portfolio into international stocks also helps, since deflation often doesn’t hit all nations at once.
While bonds protect you from deflation, they expose you to inflation — far and away the likeliest source of deep risk. Mr. Bernstein notes that inflation can destroy at least 80% of the purchasing power of a bond portfolio over periods as long as 40 years.
That is deep risk at its deepest — a hole so profound most investors can’t get out of it in a lifetime. That happened in, among other places, France, Italy and Japan from 1940 through 1979, Mr. Bernstein says.
The best insurance against inflation, he says, is a globally diversified stock portfolio with an extra pinch of gold-mining and natural-resource companies. Treasury inflation-protected securities, U.S. bonds whose value rises with the cost of living, also can help."
Bernstein points out that not all of the events the PP is designed to protect against are equally likely to occur (or equally devastating if they do) so allocating equal parts of the portfolio to each threat doesn't make sense. Tyler's Golden Butterfly is, it seems to me, a sensible way to tilt towards prosperity while diversifying the stocks in a simple way. On the bond side, from playing around endlessly on Portfolio Charts and looking at actual returns during market panics I see little advantage to the PP barbell over holding almost entirely ITT's with perhaps a year or two in STT's or a Treasury MM account.
Remember that Browne recommended gold as an inflation hedge when it isn't that at all (that's what the stocks are for). I still believe in including it in the portfolio for the reasons that Tyler mentions but I think that Tyler and Desert have shown that intelligently tweaking the PP in light of the many changes in the markets that have occurred since Mr. Browne gifting us with the PP can work well. Browne was a genius but "paper" gold, 30 year treasuries yielding less than short term and a government so dysfunctional it's willing to make treasury defaults into a political football probably weren't visible in his crystal ball.
Eh I don't agree with a lot of this.
First, deflation happened in 2008 here, it's happening currently in the EU and Japan, and we are still having some deflationary forces at play here (which is why growth and inflation have both been anemic over the last decade). It would be foolish to pass judgement on the likelihood of deflation, especially since it is the current global trend, and our population is going to continue to exhibit deflationary pressures for at least the next few years to decade while the boomers retire and millennials come of age. And since it's a global trend... good luck with international diversification helping you here. International diversification benefits become less and less as global economies over time become more and more integrated. Did global diversification help in the deflation of 2008? Nope, even though the deflation started in the U.S. international diversification actually hurt you, as the international stocks (especially emerging markets) dropped more than the U.S. and have recovered slower.
Bonds do expose you to inflation risk... but it's only 25% of your portfolio. The other 75% would benefit from an uptick in inflation. I don't disagree with the fact that over long periods 10 year treasuries tend to perform similar to the barbell, but I still think the barbell has benefits in the shorter term (with intermediate you expose 50% of your holdings to inflation risk, and LTT's provide a bit more oomph in a deflation) and is more flexible as the cash holdings give you some optionality (treasury bills, short term treasury notes, I-bonds, corporate short term debt, CD's, TIPS, etc).
As for gold and inflation... we all know that gold is not correlated to "inflation", gold is correlated to fear. Aside from periods of fear gold marches to the beat of it's own drum, sometimes going up and sometimes going down. But in times of fear (like high inflation) gold will shoot up and can be counted on.
Stocks are *NOT* an inflation hedge. Slightly increasing inflation within the normal ranges is good for stocks. Fast increasing or high inflation is not. Look at the 70s in the U.S. as an inflation adjusted chart to see how bad of a beating stocks took that decade. A nominal chart hides the true destruction. Also, see any country ever that went into a hyperinflation, stocks lose substantial money in real after inflation terms when inflation is high and/or increasing fast.
Modifying the PP is ok if your intentions are good. The principles matter much more than the exact 4x25 weighting’s. Desert swapped the barbell for intermediate (simply for simplicity is my understanding) and then did approximate risk parity on the weightings. Tyler in the golden butterfly did a PP with a 20% built in VP in a passive SCV tilt. I think these are fine, but their decisions to make these changes were not based on fear, greed, or what they expected the short to medium term trends in the market to be.