PP in today's world

[portart]

Cash - not paying anything to speak of - you have what you have - peace in the valley when the world turns volatile in the wrong direction

Gold - moves like a freight train both up and down - recently the train is moving in reverse - everyone is starting to hate it in their portfolio as it moves lower - can go much lower forcing out all the weak hands - can sit and do nothing for twenty years

Bonds - really?? Ok, low rates for how many more years?  Rates, if they do ever move up, they will get sold in a hurry

Equities - Can't go down in a world where nothing else pays anything worth investing in - Uh, they can can go down but everyone thinks they will so they won't - It's where the action is in so far as positive earnings.

What do you do? I don't know what Harry would say today. Wish I could ask him.

One thing Harry would say. You make your money in your trade and saving every year, taking what ever gains (or losses) everyone else gets. However, what if you are retired and not able to add each year? Then what?

[mortalpawn]

Yes - the PP is the worst possible portfolio, except for all the rest...

I think the stock and bond markets are overdue for an adjustment, but I've felt that way for the last two years.

I think one problem is that anyone who seriously might invest in a portfolio with 25% gold and 25% cash is not an "average investor".  Most people in the PP have a pending sense of doom - either from having been burned in the 2000 and 2008 crashes or from fear of the "unprecedented" Fed printing, excessive government spending, shadow banking mess, Ukraine, ISIS, Ebola, Wesley Mouch, GLaDOSor the the coming zombie apocalypse (The cake is a lie!).

I try very hard to force my brain to overcome my fear, and when I have more money to add I just add it evenly across the four assets and let it ride.  Occasionally if I see one asset class get close to a rebalance band, as is the case with bonds and stocks now, I'll rebalance a bit early just so I can sleep better at night.

Try not to over-think things or you'll just end up making stupid market timing decisions.  The markets are not rational anymore, so applying logic to them is really not a good thing to do.

[dualstow]

I guess that's why my permanent portfolio is smaller than my variable portfolio (vp), so I can remain true to it and still have more than 25% in stocks in (vp+pp). I was nearly 100% stocks, pre-pp, and did not enjoy 2008-9.

I was on a forum that had nothing to do with investing near the beginning of that crash, and some anonymous woman saw gold going up. She announced that she was going to sell all her stocks and put everything into gold, which was probably between US$800-1000/oz at the time, can't remember. I was among the voices who ridiculed her, saying something along the lines of, "Congratulations getting in(to gold) at the top." You never know.

All the same, I'd rather have gold go down now so I can buy a bit more, because that's what I have the least of. More gold would mean a larger pp core for me. In fact, I've been wishing for gold to go down ever since I got into the pp. I guess you have to be careful what you wish for.

[KevinW]

We keep coming back around to this: the PP was willfully designed to have 4 very different assets, so by its nature it will always be possible to be bearish on one or more of its assets. But, it was also willfully designed to work in spite of this (or maybe because of it), and the empirical evidence seems to support that the portfolio does indeed work as advertised. To be a tranquil PP investor you just have to accept that and not get too worked up about what's going on with each individual asset.

[buddtholomew]

Our perception of the portfolio is determined by the performance of the asset we dislike the most.

[barrett]

I would be curious how many of the folks who are anxious about the PP are checking their balances every day or even more frequently. The people on this forum who seem to have peace of mind generally say that they don't check very often. Either that or they are young, accumulating quickly, and can buy the dips in the portfolio. July was crappy, August was great and September has stunk. But YTD the return is in line with what one might reasonably expect.

A thought I have had recently is that there is a lot of "noise" on this forum and that maybe I shouldn't be checking in here so often. But I have to say that I have learned a lot of pretty important stuff on here.

[l82start]

I would be curious how many of the folks who are anxious about the PP are checking their balances every day or even more frequently. The people on this forum who seem to have peace of mind generally say that they don't check very often. Either that or they are young, accumulating quickly, and can buy the dips in the portfolio. July was crappy, August was great and September has stunk. But YTD the return is in line with what one might reasonably expect.

A thought I have had recently is that there is a lot of "noise" on this forum and that maybe I shouldn't be checking in here so often. But I have to say that I have learned a lot of pretty important stuff on here.

i think that is why the "other-discussions" section, and its threads on everything under the sun are so darned popular, once the PP "let it do its thing" philosophy is internalized you can spend your time studying fun stuff like MMR, diet and nutrition and what camping gear to buy.

[I Shrugged]

I think it is a great portfolio for a gloom and doomer who has realized that he might go broke waiting for, and betting on, the doom.  I don't spend as much time thinking about how to improve the PP as some of you.  I wonder if something else could be better for the 0% interest environment.  But I can't come up with anything.  Not that I try very hard.  I'm in very lazy portfolio land at this point. 

I don't see anything wrong with tilting the PP to suit your situation or views.    I'm using short term bonds for much of my cash component.  Those funds took some beating in the last crash, though.  But that is my adjustment for today's situation.

[AdamA]

What do you do? I don't know what Harry would say today. Wish I could ask him.

Has that much really changed since he died?  I think he would say to stay the course.

[Tyler]

However, what if you are retired and not able to add each year? Then what?

You live off the large cash buffer for multiple years and wait out any short-term wobbliness in the other assets.  Cash is a retiree's best friend.

[buddtholomew]

I don't see an issue with the cash component of the portfolio, as a combination of long-term treasuries and cash held in a 1:2 ratio (e.g. 100K LTT, 200K Cash) produces a weighted average of 5.6 years (VG IT-Bond Index Fund) and an SEC yield of 1.6%. Replacing cash with CD's or short-term bonds for one side of the barbell would increase the duration and the yield to approximate the bond index fund. This comprises 60% of the portfolio (20% long-term treasuries and 40% cash).

This leaves 40% to allocate to equities and gold.

1. BH investors would allocate all 40% to equities.
2. Dualstow and others see benefit in a 30% equities, 10% gold allocation.

I prefer #2 above for taxable accounts, but decided on 25% equities, 15% gold as abandoning the precious metal at this time is akin to closing the barn door after the horses have run out. I'm leaving the door partially open in the hopes that these same horses will return home.

[dualstow]

2. Dualstow and others see benefit in a 30% equities, 10% gold allocation.

Well, I follow the pp rules and rebalancing bands, so 25%.
It's just that I have enough stocks outside of the pp that it ends up being about 55% stocks overall.

[buddtholomew]

2. Dualstow and others see benefit in a 30% equities, 10% gold allocation.

Well, I follow the pp rules and rebalancing bands, so 25%.
It's just that I have enough stocks outside of the pp that it ends up being about 55% stocks overall.

I should be clear. You put forward that allocation as a possible option for those who cannot overcome the 25% position in gold.

[dualstow]

Yeah, that's true.

[Libertarian666]

What do you do? I don't know what Harry would say today. Wish I could ask him.

Has that much really changed since he died?  I think he would say to stay the course.

Some things have changed greatly, and not for the better.
But he would probably still say to stay the course.

[DragonJoey3]

Cash - not paying anything to speak of - you have what you have - peace in the valley when the world turns volatile in the wrong direction

It was just 7 years ago that Cash was yielding around 5%.  Then the stock market tanked 40% and President Keynes decided to drag out the misery as long as possible.  However the expectation I would have would be rising yields as rates go up over the next couple of years.

Gold - moves like a freight train both up and down - recently the train is moving in reverse - everyone is starting to hate it in their portfolio as it moves lower - can go much lower forcing out all the weak hands - can sit and do nothing for twenty years

Gold is always very volatile, but if I had to guess I would say that it'll start going stagnant over the next few years as it cools off from it's massive run up over the past few years.

Bonds - really?? Ok, low rates for how many more years?  Rates, if they do ever move up, they will get sold in a hurry

I would say that the fed reserves prediction for rate rises is about on track.  They won't "get sold in a hurry" since that would mean a spike in rates which I'm sure Janet Yellen won't allow.

Equities - Can't go down in a world where nothing else pays anything worth investing in - Uh, they can can go down but everyone thinks they will so they won't - It's where the action is in so far as positive earnings.

Equities are tied to earnings and fear.  With the short term memory most people have, I expect equities will start rising as people start up consuming resources again. Frugality won't hold out forever, and they will likely bull for a little more.  But don't forget the labor participation rate in the US is dropping, and china's economy is starting to cool off too.  We could pull a japan at some point.

What do you do? I don't know what Harry would say today. Wish I could ask him.

I do what Harry did, and would continue to do "No one can predict the markets"  I gave my guesses, and any reply to this will probably have different guesses or different reasons.  No one knows, that's the point. That's why we hold the maximum diversification.

[LC475]

One thing Harry would say. You make your money in your trade and saving every year, taking what ever gains (or losses) everyone else gets. However, what if you are retired and not able to add each year? Then what?

Then nothing.  Fundamentally and absolutely there is nothing you could reliably do.  The only way to reliably make money?  Do something productive.  Do something so valuable that people take the extreme step of actually taking money out of their pockets and handing it over to you.  Out of the business of being productive?  Out of luck.

Investing can help, but it cannot work magic.  If there's no gains to be had because the economy is that bad, there's no gains to be had.

[Pointedstick]

One thing Harry would say. You make your money in your trade and saving every year, taking what ever gains (or losses) everyone else gets. However, what if you are retired and not able to add each year? Then what?

Then nothing.  Fundamentally and absolutely there is nothing you could reliably do.  The only way to reliably make money?  Do something productive.  Do something so valuable that people take the extreme step of actually taking money out of their pockets and handing it over to you.  Out of the business of being productive?  Out of luck.

Investing can help, but it cannot work magic.  If there's no gains to be had because the economy is that bad, there's no gains to be had.

+100,000

[sophie]

If we do "pull a Japan", there will still be gains to be had.  Cash and bonds won't yield much and gold will fluctuate but stay in "stagnant" territory.  But stocks will still yield dividends, and prices will continue to run up as people compare dividend yields to CD rates, forget about risk, and go running after dividend stocks.  That has certainly been happening for the past several years, and continues to be true now. Meanwhile the other assets will provide gains through buying & selling when you hit rebalancing bands.  Rebalancing is a key contributor to PP earnings that is sometimes overlooked when you emphasize performance of individual assets.

There are threads somewhere deep in the bit bucket where Japanese PP yields were meticulously researched.  Apart from the absence of 30 year bonds, the PP would have done quite well there compared to almost any other investment scheme.

[barrett]

Then nothing.  Fundamentally and absolutely there is nothing you could reliably do.  The only way to reliably make money?  Do something productive.  Do something so valuable that people take the extreme step of actually taking money out of their pockets and handing it over to you.  Out of the business of being productive?  Out of luck.

Investing can help, but it cannot work magic.  If there's no gains to be had because the economy is that bad, there's no gains to be had.

I love this post. Essentially it says that investing in the PP is not a guarantee that one will make money, but it's the best option we have if we want to be well positioned for most economic scenarios.

[WildAboutHarry]

[quote=AdamA]Has that much really changed since he died?  I think he would say to stay the course.[/quote]

LTT rates in the toilet, primarily, with negative real rates on cash and nearly so elsewhere on the yield curve.

The years Harry was writing LTT rates went from low, to very high relatively quickly, and from very high to very low relatively slowly.  Harry frequently modified his investment strategy when things were relatively fluid (late 1970s, early 1980s), and came to and stuck with the HBPP when things were relatively stable.

It is hard now to remember how crazy the late 1970s were.  A popular book from that time:  William E. Donoghue's Complete Money Market Guide: The Simple, Low-Risk Way You Can Profit from Inflation and Fluctuating Interest Rates.  An investment strategy based on money market funds!  Imagine that!  (The book is available for a penny at Amazon).

I suspect Harry would have responded in some way to present circumstances with changes to the HBPP, but who knows how?

[hljockey]

I would be curious how many of the folks who are anxious about the PP are checking their balances every day or even more frequently. The people on this forum who seem to have peace of mind generally say that they don't check very often.

I wonder if there shouldn't be a 17th rule added to HB's 16 that says not to check your balance too often (or maybe there is and I missed it when I just skimmed over them).

I actually developed this habit early on when 401k statements arrived only once or twice a year via snail mail. If the market was bad I tended to just toss it aside and not even look.

The only time I ever paid close attention was when I first started the PP several years ago but I'm over it now. I just don't see the point in looking more than once per year. It's just going to give you a lot of angst, cause you to question the strategy, and maybe do something you'll regret later.

[Tyler]

Then nothing.  Fundamentally and absolutely there is nothing you could reliably do.  The only way to reliably make money?  Do something productive.  Do something so valuable that people take the extreme step of actually taking money out of their pockets and handing it over to you.  Out of the business of being productive?  Out of luck.

Investing can help, but it cannot work magic.  If there's no gains to be had because the economy is that bad, there's no gains to be had.

Well said.  There's no such thing as guaranteed returns, and there's a reason Harry's rule #1 is that "your career provides your wealth". 

The only thing I'd add is to point out that rule #2 is "your wealth may be non-replaceable", meaning there's no such thing as guaranteed income, either.  Job markets can be just as dynamic as investment markets, and in the era of job specialization one can get on the wrong side of a career bet as well.  In the wrong business for today's market?  Out of luck.

I like the PP as an investment philosophy because it acknowledges both sides of the career coin.  Working and saving are the most important factors to building your wealth, but your investment decisions should be structured intelligently and conservatively with the knowledge that the steady income you've come to expect is unlikely to last forever. 

Speaking personally, I also mix in a healthy dash of frugality, minimalism, and self-sufficiency as alternatives to drawing down wealth altogether.  Market dips only stress you out if you feel like you really -need- the money. 

[Longstreet]

I'm confused.  I like what I've read about the HBPP and agree with the concept.  However, the suggested distribution is 4x25, yet I see many panel members with deviations to the recommended format.  Are you really following the plan if you vary from the 4x25?  One current position advanced on this thread is 40 cash, 20 long term treasuries, 25 equities, and 15 gold.  With the current volatility in the market, threat of rising rates, gold dropping, and a possible 10% pullback in the stock market, the altered plan appeals to me, but that is contrary to the HBPP's basic premise that none of us can predict the market  Also, never having been a long term treasury bond or gold investor, I have trouble committing 40% of my resources to those assets in this market.  Finally, many of you "cheat" by having a separate "voluntary" portfolio.  How does that work, how do you decide what is part of the PP and what isn't?  By using the variable portfolio, you can set the percentages at anything you want, and still tell yourself that you are following the HBPP plan.  Not meant to be insulting, but I guess I'm too black and white - either you are pregnant or you are not, with no middle ground.

Who knows what the future will bring, but fortunately, my current monthly living expenses are within my monthly income levels.  I've seen one suggestion that you put money you don't need in the variable portfolio, but that concept doesn't work for me.  I don't need my retirement savings, but I sure don't want to loss the funds.

So, not to be misunderstood, I've learned a lot from these boards and I appreciate everyone's comments and suggestions, but as a novice I am confused and I'm looking for someone to make sense of all of this for me.

  As a beginner, would you go 4x25, or would you go 40-20-25-10, and would you go all in, or if you believe the bull still has some run in it, would you keep enough in a voluntary portfolio to increase stocks to 55% in the overall port (My current distribution is 60  stocks 40 cash/short term bonds/Wellesley. 

[Pointedstick]

It's an investment portfolio, not a religion. If you feel more comfortable tweaking it a bit, I see no reason not to, as long as you're doing it for the right reasons (e.g. making you feel better, not chasing better performance this year/month/week). Personally I run with 4x25 standard PPs in my primary accounts, but have more typical stocky-and-bondy portfolios in IRA accounts where I can't easily or cost-effectively implement a PP.