Relative Newbie... Not happy with 1 year performance

Discussion of funds that implement the Permanent Portfolio strategy

Moderator: Global Moderator

pc

Relative Newbie... Not happy with 1 year performance

Post by pc » Sat Jun 23, 2012 1:59 pm

Hey everyone,

I've been educating myself for the past several years, bought PRPFX about 10 months ago (early Aug 2011), and I'm down about 5.5%.  Doesn't please me, of course. 

I would have thought the fund would hold it's own in a climate like the past year; that indeed, it's diversification would be well-suited, and while I might not be up, I wouldn't be down either.  But it's been more volatile then expected, and doing pretty poorly regardless of the up's and downs of the larger markets.

So, I'm starting to consider cutting my losses, bailing on the principles of the PP.  But before I go, wanted to invite any comments, words of encouragement or enlightenment.

Appreciate it -
User avatar
Pointedstick
Executive Member
Executive Member
Posts: 8864
Joined: Tue Apr 17, 2012 9:21 pm
Contact:

Re: Relative Newbie... Not happy with 1 year performance

Post by Pointedstick » Sat Jun 23, 2012 3:20 pm

Welcome to the forum! I'm sorry you haven't had good results with PRPFX. However, I believe this is because PRPFX isn't really a "real" PP. The overview reveals substantial unnecessary and dangerous differences from an orthodox 25/25/25/25 PP:

20% Gold
5% Silver
10% Swiss Franc Assets
15% U.S. and Foreign Real Estate and Natural Resource Stocks
15% Aggressive Growth Stocks
35% U.S. Treasury Bills, Bonds and Other Dollar Assets

In addition to unnecessarily speculating in real estate, natural resource stocks, and Swiss francs, PRPFX seems to seriously underweight long-term treasuries, which have been going nuts during your timeframe.

I only just started my PP two months ago, but a quick and dirty Google backtest reveals that it would have done substantially better than PRPFX:

Image


I would recommend ditching PRPFX and building your own PP using the individual assets. You'll get substantially better performance, a great deal more fund/brokerage/manager diversification, and a lower total expense ratio.
Human behavior is economic behavior. The particulars may vary, but competition for limited resources remains a constant.
- CEO Nwabudike Morgan
pc

Re: Relative Newbie... Not happy with 1 year performance

Post by pc » Sat Jun 23, 2012 4:35 pm

Thanks -- I appreciate your substantive response.  Are you willing to share how you compile your PP?  The funds you use, etc? 

Either way, thank you -
User avatar
Pointedstick
Executive Member
Executive Member
Posts: 8864
Joined: Tue Apr 17, 2012 9:21 pm
Contact:

Re: Relative Newbie... Not happy with 1 year performance

Post by Pointedstick » Sat Jun 23, 2012 5:04 pm

I'd be happy to! I actually have 3 PPs, one for each type of tax treatment. One PP is split across my wife and my Roth IRAs, one PP is entirely in my 401(k), and a third PP is in a taxable account. Each of these PPs are all-mutual-fund-and-ETF which I know isn't totally ideal from a counterparty risk standpoint, but I'm working on getting some physical bullion, and most of the funds are with different companies and brokerages.

Roth IRA PP in Vanguard Brokerage Services accounts
Cash: VFISX
Gold: IAU
Stocks: VTSMX
Bonds: EDV

401(k) PP in Schwab self-directed brokerage account
Cash: SCHO
Gold: SGOL
Stocks: VITSX
Bonds: TLT

Taxable PP in TDAmeritrade account
Cash: SHY
Gold: GTU (for more favorable tax treatment than IAU, GLD, etc)
Stocks: VTI
Bonds: EDV


I do worry a bit that 100% of my stock exposure and 66% of my long bond exposure is through Vanguard funds, and I have toyed with the idea of switching out the VTI in the TDAmeritrade taxable account with IVV, but that's issued by BlackRock, the same company that offers TLT, IAU, and SHY, so I feel like it would be kind of a wash. I could also swap out the VITSX in the 401(k) for SCHB, but it hasn't been around very long, and I like having access to the institutional share class of Vanguard's total stock fund.
Last edited by Pointedstick on Sat Jun 23, 2012 5:17 pm, edited 1 time in total.
Human behavior is economic behavior. The particulars may vary, but competition for limited resources remains a constant.
- CEO Nwabudike Morgan
User avatar
Pointedstick
Executive Member
Executive Member
Posts: 8864
Joined: Tue Apr 17, 2012 9:21 pm
Contact:

Re: Relative Newbie... Not happy with 1 year performance

Post by Pointedstick » Sat Jun 23, 2012 5:15 pm

If you're still looking for a simple one-fund approach that's better than PRPFX, PERM may be a good choice. It's very young (bad), but in its short life, it's done a pretty good job of  tracking my conventional PPs (good):

Image


I see it's trading commission-free at eTrade right now. Among the downsides are that you've got your eggs in a single basket, violating one of the big principles of the PP. It's also got a 0.49% ER, which is a bit high for my tastes. Finally, it has some unnecessary exposure to silver, REITs, and international stocks, and overweights long bonds compared to cash. I'd still recommend setting up your own PP.
Human behavior is economic behavior. The particulars may vary, but competition for limited resources remains a constant.
- CEO Nwabudike Morgan
pc

Re: Relative Newbie... Not happy with 1 year performance

Post by pc » Sat Jun 23, 2012 5:20 pm

Thank you very much.  I'm going to look at setting-up my own PP, with the help of your input.

And I've decided to sell PRPFX either way... in fact, just submitted my sell order.

Thanks again -
jackely

Re: Relative Newbie... Not happy with 1 year performance

Post by jackely » Sat Jun 23, 2012 5:59 pm

pc wrote: Thank you very much.  I'm going to look at setting-up my own PP, with the help of your input.

And I've decided to sell PRPFX either way... in fact, just submitted my sell order.

Thanks again -
I also lost money last year on PRPFX. And I can't afford to lose it because I'm now 63 and retirement is only a few years away. I went into the PP because I lost a lot of money rolling over a terminating pension plan in 2008 into a target-date retirement fund (T.Rowe Price) and didn't want to lose any more.

So I also called it quits with PRPFX and I'm never looking back. But I'm still convinced about the PP overall. To me it's a simple matter of looking at the charts. Mutual funds like PRPFX can't guarantee you a return on investment but there is one thing they can absolutely guarantee you year in and year out no matter what. And that is the fee they charge you for doing absolutely nothing more with your money than you can do very simply by yourself. And it is very simple once you invest a few minutes in figuring it all out.
Last edited by jackely on Sat Jun 23, 2012 6:01 pm, edited 1 time in total.
User avatar
Pointedstick
Executive Member
Executive Member
Posts: 8864
Joined: Tue Apr 17, 2012 9:21 pm
Contact:

Re: Relative Newbie... Not happy with 1 year performance

Post by Pointedstick » Sat Jun 23, 2012 6:18 pm

pc wrote: Thank you very much.  I'm going to look at setting-up my own PP, with the help of your input.

And I've decided to sell PRPFX either way... in fact, just submitted my sell order.

Thanks again -
That's great, I'm happy to help! If you happen to want to open an Ameritrade account, I can give you a referral that's good for 60 days of free trades (full disclosure, I'd also get $50). I made use of this while setting up my first PP and it was very helpful because I changed out some of the funds in the first few weeks once I learned some of the nuances.
Human behavior is economic behavior. The particulars may vary, but competition for limited resources remains a constant.
- CEO Nwabudike Morgan
User avatar
AdamA
Executive Member
Executive Member
Posts: 2336
Joined: Sun Jan 23, 2011 8:49 pm

Re: Relative Newbie... Not happy with 1 year performance

Post by AdamA » Sat Jun 23, 2012 7:49 pm

pc wrote:
So, I'm starting to consider cutting my losses, bailing on the principles of the PP.  But before I go, wanted to invite any comments, words of encouragement or enlightenment.
Not sure I would bail on PRPFX just like that.  

The main problem with PRPFX is that the bonds it holds are only 10 year US Treasuries.  They just don't have the duration to keep the fund from taking losses during deflationary periods.  

Rather than selling the fund into a loss of 5.5%, you could just buy some TLT (30 year Treasury ETF) or EDV (30 year Zeroes).   The percentage that has been tossed around on this website is around 10-15% of your portfolio.  This is an idea that MT came up with a while back that surfaces from time to time.  

Just make sure you understand whichever ETF you decided to use, if you do this.  
Last edited by AdamA on Sun Jun 24, 2012 6:53 pm, edited 1 time in total.
"All men's miseries derive from not being able to sit in a quiet room alone."

Pascal
pc

Re: Relative Newbie... Not happy with 1 year performance

Post by pc » Sat Jun 23, 2012 10:55 pm

JackH,

I agree that the fee is the final consideration.  If it was a little more reasonable for what should be a relatively passive fund, then I might hang.  But it kills me to lose 5.5% and pay the fee. 
User avatar
Pointedstick
Executive Member
Executive Member
Posts: 8864
Joined: Tue Apr 17, 2012 9:21 pm
Contact:

Re: Relative Newbie... Not happy with 1 year performance

Post by Pointedstick » Sun Jun 24, 2012 12:06 am

AdamA wrote: Not sure I would bail on PRPFX just like that.  

The main problem with PRPFX is that the bonds it holds are only 10 year US Treasuries.  They just don't have the duration to keep the fund from taking losses during deflationary periods.  

Rather than selling the fund into a loss of 5.5%, you could just buy some TLT (30 year Treasury ETF) or EDV (30 year Zeroes).


Let me channel Harry Browne here, from the Previous Investment Trap in How I Found Freedom In An Unfree World (p. 96):
Harry Browne wrote: In every case, the question is: With what you have now, what is the best way to use that to get the most in the future? What you’ve paid to get to where you are now is irrelevant; those resources are gone and can’t be retrieved, no matter what you do.

...

The mark of a good financial investor is his ability to recognize when has made a mistake, sell out, and prevent his losses from getting worse. Most investors become emotionally attached to the decisions they’ve made, so they hang on in hopes of recouping the investment later — and they usually wind up losing more.
Human behavior is economic behavior. The particulars may vary, but competition for limited resources remains a constant.
- CEO Nwabudike Morgan
User avatar
AdamA
Executive Member
Executive Member
Posts: 2336
Joined: Sun Jan 23, 2011 8:49 pm

Re: Relative Newbie... Not happy with 1 year performance

Post by AdamA » Sun Jun 24, 2012 11:04 am

Pointedstick wrote:
The mark of a good financial investor is his ability to recognize when has made a mistake, sell out, and prevent his losses from getting worse. Most investors become emotionally attached to the decisions they’ve made, so they hang on in hopes of recouping the investment later — and they usually wind up losing more.
Yeah, I agree with that statement.

Still, there's more than one way to skin a cat.  If he likes the simplicity of PRPFX, a 90%/10% mix might be a good option. 

I'm a fan of PRPFX in spite of its flaws.  It's been around for relatively long time compared to some of the ETFs one might use to set up a 4 x25% and has a pretty good performance history.  It had a little bit of a bad year, but I don't think that's much of a reason to abandon an investing strategy.  I mean...what if he sells his PRPFX, and then his 4 x 25% has a losing year?  Will he abandon that and try something else?



 
"All men's miseries derive from not being able to sit in a quiet room alone."

Pascal
User avatar
Pointedstick
Executive Member
Executive Member
Posts: 8864
Joined: Tue Apr 17, 2012 9:21 pm
Contact:

Re: Relative Newbie... Not happy with 1 year performance

Post by Pointedstick » Sun Jun 24, 2012 11:27 am

If an orthodox 4 x 25% PP has a losing year, it's hard to imagine a portfolio that would do better without being a lot riskier. It's possible that PRPFX could outperform a PP in any given year, but I could say that about any ETF or mutual fund, so at that point you're not really talking about a PP anymore. I think the OP's issue was that he thought he was getting PP-like performance when there's no guarantee that's true. We all know the PP can have a down year, but I think it's easier to stomach your investment choices falling because of unfavorable market conditions rather than because you hadn't invested in what you thought you had.

Testing your suggestion, going 90% PRPFX and 10% EDV would indeed juice the returns a bit. A backtest shows a small gain in the OP's timeframe:

Image


... But it still gets destroyed by a real PP, and with a tad less volatility too:

Image
Human behavior is economic behavior. The particulars may vary, but competition for limited resources remains a constant.
- CEO Nwabudike Morgan
User avatar
Ad Orientem
Executive Member
Executive Member
Posts: 3483
Joined: Sun Aug 14, 2011 2:47 pm
Location: Florida USA
Contact:

Re: Relative Newbie... Not happy with 1 year performance

Post by Ad Orientem » Sun Jun 24, 2012 3:05 pm

PRPFX is a good fund. That's not something I say lightly since I have a strong prejudice against actively managed mutual funds. But its asset allocation is based on an early incarnation of Harry Browne's PP and it is definitely weighted towards an inflationary scenario. Thus it tends to perform more poorly in a deflationary/depression environment like what we saw in 2008 and are experiencing right now. If and when the Fed starts cranking up the printing press again PRPFX will likely do better than a straight 4x25 PP.

One way to fix the imbalance as suggested by Medium Tex is simply to add a little EDV to your PRPFX. Say a 90/10 ratio should really help counterbalance the heavy weighting towards inflation.
Trumpism is not a philosophy or a movement. It's a cult.
User avatar
craigr
Administrator
Administrator
Posts: 2540
Joined: Sun Apr 25, 2010 9:26 pm

Re: Relative Newbie... Not happy with 1 year performance

Post by craigr » Sun Jun 24, 2012 4:24 pm

pc wrote: So, I'm starting to consider cutting my losses, bailing on the principles of the PP.  But before I go, wanted to invite any comments, words of encouragement or enlightenment.
First I will say that no investing system will guarantee you will never have losses. Even putting all your money in cash right now guarantees a -3% loss due to inflation. But if a -5.5% loss is really bothering you, you may want to consider significantly increasing your cash allocation to the portfolio so it is even less volatile.

The fund's main benefit is that it is convenient. It has some warts, but it mostly has done what it set out to do in the early 1980s and that is provide a relatively smooth moderate growth with limited drawdown in bad markets. I personally think DIY works better because it holds a more balanced allocation, but the fund is very convenient for people that simply do not want to do that. The new PERM ETF may be a better option, but it is so new I'm a little cautious about recommending it (especially for taxable investors). However if your funds are in a tax-free account that may be a good option for you.

But again I would say that no system is going to be 100% certain. The benefit of the Permanent Portfolio allocation is, IMO, it doesn't make you concentrate your bets. So even if something were to go very wrong in any one asset, the impact on the entire portfolio is muted somewhat. I know people that lost over 30% of their life savings in 2008 for instance and that kind of loss in the Permanent Portfolio is very unlikely (but I would never say *impossible*, just unlikely). The reason it is unlikely is that the major assets are split 25% each so even a 50% loss in any one of them would be only about at -12.5% loss overall. That is not great, but it's a long way away from the kinds of losses I've seen in other strategies.

Finally, I would say that one year is not long enough for investing. In fact both Browne and Chandler talked about this in their shows as well. The problem is that the world does not run on a calendar year so you have this artificial deadline wrapped around the world of investing and sometimes the markets just aren't going to cooperate in that time period. But over time I have found the portfolio will continue to weather the ups and downs and post gains. It just may take more than 12 months at a time to do it.
dragoncar
Executive Member
Executive Member
Posts: 1111
Joined: Wed Aug 10, 2011 7:23 pm

Re: Relative Newbie... Not happy with 1 year performance

Post by dragoncar » Mon Jun 25, 2012 7:10 pm

craigr wrote:
Even putting all your money in cash right now guarantees a -3% loss due to inflation.
I expect more from you, craigr.  In what world is inflation guaranteed?  Don't we hold 25% cash in case of deflation?
User avatar
Pointedstick
Executive Member
Executive Member
Posts: 8864
Joined: Tue Apr 17, 2012 9:21 pm
Contact:

Re: Relative Newbie... Not happy with 1 year performance

Post by Pointedstick » Mon Jun 25, 2012 7:32 pm

dragoncar wrote: I expect more from you, craigr.  In what world is inflation guaranteed?   Don't we hold 25% cash in case of deflation?
Inflation is virtually guaranteed by living under a debt-based monetary system in which new money is constantly being created by the banking system and a low level of inflation is beneficial to the heavily-indebted populace. Notice how even now, with substantial deflationary pressures, we're not actually experiencing any deflation. Just a lower level of inflation than normal.
Human behavior is economic behavior. The particulars may vary, but competition for limited resources remains a constant.
- CEO Nwabudike Morgan
User avatar
craigr
Administrator
Administrator
Posts: 2540
Joined: Sun Apr 25, 2010 9:26 pm

Re: Relative Newbie... Not happy with 1 year performance

Post by craigr » Mon Jun 25, 2012 7:41 pm

dragoncar wrote:
craigr wrote:
Even putting all your money in cash right now guarantees a -3% loss due to inflation.
I expect more from you, craigr.  In what world is inflation guaranteed?   Don't we hold 25% cash in case of deflation?
Yes, but the main point is the loss was -3% over the same time if all in cash. Just because we can't see the decline in value doesn't mean it's not there!

As someone else pointed out the returns can vary quite a bit even by just the time you happened to buy in. One month it may be peaches and cream and the next month (or even next week) and it could be a much different outcome at least short term. But again over time as interest, dividends and capital appreciation add up the result is likely going to be a positive return.
User avatar
Pointedstick
Executive Member
Executive Member
Posts: 8864
Joined: Tue Apr 17, 2012 9:21 pm
Contact:

Re: Relative Newbie... Not happy with 1 year performance

Post by Pointedstick » Tue Jun 26, 2012 5:04 pm

MangoMan wrote: Apologies if this has been answered elsewhere [I searched the boards, but came up empty]:

1. If EDV is held in a taxable account, are you taxed annually on imputed income [which then increases your cost basis] like the American Century Zero-coupon funds [e.g., BTTRX] are? Is EDV any more tax efficient in a taxable account than TLT, all other things being equal?

2. If GTU is taxed as a trust [K-1], even though the tax rate is better, aren't you taxed each year rather than only upon selling like you would be with IAU or GLD? Am I missing something here?

Thanks for any clarification.

1. I don't hold EDV for the tax efficiency, but rather because of the larger percentage of the fund assets that are actually long-term bonds. I also like the greater volatility and the slightly lower ER.

2. I'm still a n00b at this as well, but I believe GTU is taxed as a PFIC (IRC Form 8621) which taxes yearly distributions, but not unrealized gains.
Human behavior is economic behavior. The particulars may vary, but competition for limited resources remains a constant.
- CEO Nwabudike Morgan
notsheigetz
Executive Member
Executive Member
Posts: 684
Joined: Mon Aug 06, 2012 5:18 pm

Re: Relative Newbie... Not happy with 1 year performance

Post by notsheigetz » Wed Sep 05, 2012 4:44 pm

Sounds like you are right about where I was 2 years ago. I started out with PRPFX and wasn't happy with the performance either. After spending time in this forum I decided to go all in with setting up my own PP. It was a lot easier than I thought it would be and I've been very pleased with the results.
pc wrote: Hey everyone,

I've been educating myself for the past several years, bought PRPFX about 10 months ago (early Aug 2011), and I'm down about 5.5%.  Doesn't please me, of course. 

I would have thought the fund would hold it's own in a climate like the past year; that indeed, it's diversification would be well-suited, and while I might not be up, I wouldn't be down either.  But it's been more volatile then expected, and doing pretty poorly regardless of the up's and downs of the larger markets.

So, I'm starting to consider cutting my losses, bailing on the principles of the PP.  But before I go, wanted to invite any comments, words of encouragement or enlightenment.

Appreciate it -


This space available for rent.
User avatar
Pointedstick
Executive Member
Executive Member
Posts: 8864
Joined: Tue Apr 17, 2012 9:21 pm
Contact:

Re: Relative Newbie... Not happy with 1 year performance

Post by Pointedstick » Wed Sep 05, 2012 5:13 pm

FYI, in the months since I posted in this thread, I've accumulated about 12K in PERM that I consider as a sort of high-risk, extra-volatile, supercharged savings account. Knowing all the risks going in, I'm very happy with its performance so far. On most days, it very closely tracks the performance of my orthodox 4x25 PP.
Human behavior is economic behavior. The particulars may vary, but competition for limited resources remains a constant.
- CEO Nwabudike Morgan
User avatar
Ad Orientem
Executive Member
Executive Member
Posts: 3483
Joined: Sun Aug 14, 2011 2:47 pm
Location: Florida USA
Contact:

Re: Relative Newbie... Not happy with 1 year performance

Post by Ad Orientem » Thu Sep 06, 2012 8:23 pm

Pointedstick wrote: FYI, in the months since I posted in this thread, I've accumulated about 12K in PERM that I consider as a sort of high-risk, extra-volatile, supercharged savings account. Knowing all the risks going in, I'm very happy with its performance so far. On most days, it very closely tracks the performance of my orthodox 4x25 PP.
I find that quite interesting since I haven't been tracking PERM. I hope it works out as advertised and becomes a cheaper alternative to PRPFX.
Trumpism is not a philosophy or a movement. It's a cult.
User avatar
Pointedstick
Executive Member
Executive Member
Posts: 8864
Joined: Tue Apr 17, 2012 9:21 pm
Contact:

Re: Relative Newbie... Not happy with 1 year performance

Post by Pointedstick » Fri Sep 07, 2012 4:03 pm

MangoMan wrote: PS, aren't you even a little worried that, considering the thin trading volume, if for some reason everyone wanted to cash out the price would drop like a rocket? Or even if someone needed to liquidate $100,000 worth for an emergency, that the excess volume would push the price way lower than NAV?
Yes, but I don't let it keep me up at night. This is VP-ish money in that I can afford to lose it and don't need it right away. I'd be able to wait until the NAV recovered.
Last edited by Pointedstick on Fri Sep 07, 2012 6:17 pm, edited 1 time in total.
Human behavior is economic behavior. The particulars may vary, but competition for limited resources remains a constant.
- CEO Nwabudike Morgan
User avatar
jediclampet
Junior Member
Junior Member
Posts: 20
Joined: Fri Dec 02, 2011 10:02 pm

Re: Relative Newbie... Not happy with 1 year performance

Post by jediclampet » Fri Sep 07, 2012 11:24 pm

MangoMan wrote:
Pointedstick wrote: FYI, in the months since I posted in this thread, I've accumulated about 12K in PERM that I consider as a sort of high-risk, extra-volatile, supercharged savings account. Knowing all the risks going in, I'm very happy with its performance so far. On most days, it very closely tracks the performance of my orthodox 4x25 PP.
PS, aren't you even a little worried that, considering the thin trading volume, if for some reason everyone wanted to cash out the price would drop like a rocket? Or even if someone needed to liquidate $100,000 worth for an emergency, that the excess volume would push the price way lower than NAV?
Forgive my ignorance... but is that why sometimes PERM does not always seem to follow the HBPP on a day-to-day basis but does follow pretty closely over somewhat longer time frames (like a few days to a week)?

And although PERM’s expense ratio (0.49%) is about 3 times higher than a 4 ETF HBPP (e.g., VTI, IAU, SHY and TLT), does not having to rebalance PERM compensate for the ER?  In a taxable account you’d be paying 28% on IAU’s capital gains when you rebalance.  Would a reasonable strategy be to put as much IAU (and TLT?) in your Roth IRA as possible and offset that with the appropriate amount of VTI (and maybe some SHY above emergency cash in a checking/savings account) and any remaining PP in a taxable account would go into PERM?

Seems to me that, for a taxable account, the most attractive thing about PERM and PRPFX as opposed to a 4 ETF HBPP is that all long-term capital gains in PERM and PRPFX are taxed at 15%. Couldn't make a big difference if gold takes off?
User avatar
Pointedstick
Executive Member
Executive Member
Posts: 8864
Joined: Tue Apr 17, 2012 9:21 pm
Contact:

Re: Relative Newbie... Not happy with 1 year performance

Post by Pointedstick » Fri Sep 07, 2012 11:46 pm

You can easily get the capital gains tax on gold down by using GTU instead of IAU, and I do this in my DIY taxable PP. I am under no illusions about the safety of a single-fund PP in the event of a bank panic, brokerage seizure, monetary crisis or even a severe recession. I mostly use PERM for the convenience factor of being able to buy a single fund commission-free at eTrade where I already had an account, and it's used for medium term savings because I can tolerate fluctuations and it does better than the piddly 0.8% interest on my savings account. My long-term investments are in three DIY PPs, two of which are tax-sheltered in a 401k and two Roth IRAs.
Human behavior is economic behavior. The particulars may vary, but competition for limited resources remains a constant.
- CEO Nwabudike Morgan
Post Reply