Long/ short PP

[SanMiguel]

Has anyone tried a long/short version of the PP using timing?
This would involve being either long or short the 25% allocation for one area.
eg at present you might be short 25% equities,
long 25% bonds,
long 25% gold,
long 25% cash (always long on this allocation).

[MediumTex]

Shorting anything violates the whole premise behind the permanent portfolio.

Shorting strategies should be reserved for the variable portfolio.

[SanMiguel]

Shorting anything violates the whole premise behind the permanent portfolio.

Shorting strategies should be reserved for the variable portfolio.

Ok, so 50% PP and then 50% can be used to go long.short on...same difference really.
Out of £10,000 we end up with
£1250 long equities
£1250 long gold
£1250 long bonds (long dated)
£2500 long bonds (short dated or just any old money market fund)

£1250 to play equities
£1250 to play gold
£1250 to play bonds

[MediumTex]

That's fine, but the PP warranty only applies to the PP piece.

Note that your allocations for the PP need to be equal.  It looks like you have an extra 1250 in the cash.

There is perhaps a bit more subtlety to the PP strategy than you are appreciating.  Look into it a bit more deeply and you might like what you see.

[SanMiguel]

That's fine, but the PP warranty only applies to the PP piece.

Note that your allocations for the PP need to be equal.  It looks like you have an extra 1250 in the cash.

There is perhaps a bit more subtlety to the PP strategy than you are appreciating.  Look into it a bit more deeply and you might like what you see.

Yeah, sorry I gave the extra 1250 to cash since I didn't see any point in going short on short bonds but i guess the better way would be to go:
PP 25:25:25:25 and then have a variable portfolio that I do whatever I need to, maybe 33:33:33

[MediumTex]

That's fine, but the PP warranty only applies to the PP piece.

Note that your allocations for the PP need to be equal.  It looks like you have an extra 1250 in the cash.

There is perhaps a bit more subtlety to the PP strategy than you are appreciating.  Look into it a bit more deeply and you might like what you see.

Yeah, sorry I gave the extra 1250 to cash since I didn't see any point in going short on short bonds but i guess the better way would be to go:
PP 25:25:25:25 and then have a variable portfolio that I do whatever I need to, maybe 33:33:33

That's exactly the sort of PP/VP strategy Harry Browne described in "Fail Safe Investing".

Just keep them separate and don't dip into the PP to fund VP adventures.

[AdamA]

£1250 to play equities
£1250 to play gold
£1250 to play bonds

Just keep in mind that every pound you end up losing in your VP is a pound that your PP could be earning 8-10% per year with. 

If you're going to cultivate a VP, you should feel very confident that you can consistently do better than this. 

I have a lot of pie in the sky ideas for VP stuff, but, every time I think about it in a realistic way, I don't think I'd be able to accomplish this. 

[SanMiguel]

£1250 to play equities
£1250 to play gold
£1250 to play bonds

Just keep in mind that every pound you end up losing in your VP is a pound that your PP could be earning 8-10% per year with.  

If you're going to cultivate a VP, you should feel very confident that you can consistently do better than this.  

I have a lot of pie in the sky ideas for VP stuff, but, every time I think about it in a realistic way, I don't think I'd be able to accomplish this.  

True.

Has anyone done a test of a 13/34 EMA crossover strategy on the weekly charts for the assets. It seems to have worked very well for equities in the last 10 years but not sure before that.

Also, if someone had started their PP at the height of the last gold boom, how would the PP have performed in the next 10 yrs when gold sold off (was that in the 70s)?

[AdamA]

Has anyone done a test of a 13/34 EMA crossover strategy on the weekly charts for the assets. It seems to have worked very well for equities in the last 10 years but not sure before that.

Moving average strategies are gaining a lot of attention these days.  My opinion is that they probably work, but that there will be extended periods wherein they do not work at all and suffer large losses.  Right about the time that everyone writes them off as "no longer valid" is when they start to work again. 

You have to ask yourself if you have the stomach to get whipsawed in and out of a position for years at time before having some success.  For all the sleepless nights you probably wouldn't outperform the PP by that much. 

I know others on this site think differently.  Some really like Mebane Faber's ideas.  http://www.mebanefaber.com/

A lot depends on your mentality as an investor.  Moving average strategies involve trend following (jumping on when everyone else is and getting out around the same time).  The PP is more of buy low, sell high, reversion to the mean strategy, which kind of appeals to the contrarian in me.

It's also harder to hold physical gold when you are buying/selling entire positions on a relatively frequent basis.

[SanMiguel]

Has anyone done a test of a 13/34 EMA crossover strategy on the weekly charts for the assets. It seems to have worked very well for equities in the last 10 years but not sure before that.

Moving average strategies are gaining a lot of attention these days.  My opinion is that they probably work, but that there will be extended periods wherein they do not work at all and suffer large losses.  Right about the time that everyone writes them off as "no longer valid" is when they start to work again. 

You have to ask yourself if you have the stomach to get whipsawed in and out of a position for years at time before having some success.  For all the sleepless nights you probably wouldn't outperform the PP by that much. 

I know others on this site think differently.  Some really like Mebane Faber's ideas.  http://www.mebanefaber.com/

A lot depends on your mentality as an investor.  Moving average strategies involve trend following (jumping on when everyone else is and getting out around the same time).  The PP is more of buy low, sell high, reversion to the mean strategy, which kind of appeals to the contrarian in me.

It's also harder to hold physical gold when you are buying/selling entire positions on a relatively frequent basis.

I suppose that depends on how efficient the trader's timing of the market is.
I am not saying strictly buy when  the crossover happens. I am more of a "the crossover confirms the trend", I then wait for a retrace to get in and buy - this can actually be buying low as well (eg July 2010) it just depends on how you look at it waiting a few percent before you actually buy.
OOI, the 10 month SMA approach he uses probably isn't far off a 13/34 ema crossover strategy. Markets have been trending a lot in the last 10-15 years and during ranging periods this would lose out especially on the dividends but that's not such an issue if you are doing a 50:50 PP:VP type scenario.

Actually that brings me onto another note. What would be the best ratio of PP:VP.
Because if you are going long in the VP then at some point your entire portfolio could be 100% long, yet you can only ever be 50% short.

[SanMiguel]

I personally prefer to use a stop-loss approach.


I also time diversify the approach, running 12 smaller versions, each a year long, but each started in a new month as that is more likely to have started one or more positions near the year low price level.

For gold, just keep the proceeds from any stopped positions in a non-domestic currency in order to preserve a degree of domestic currency crisis hedge that gold might otherwise have protected against.

Is this long only or do you also short?
Reason I ask is that I am reading Mebane's approach and it is long only, he chooses to go to cash when the 10month MA is broken whereas you could possibly make more by going short at that point - being careful to note that the price could whipsaw up and down through the 10 month MA for a while before deciding direction.

[SanMiguel]

I used to use guaranteed stops, but a number of years ago I switched over to just checking once each day to see if the prior days intra-day low was below the stop loss price and if so close out that position asap. Some gap down lower than intended, others are closed out at a higher price than the stop, overall averages out to quite close to the mathematical stop loss value over all such stopped positions.

Rather than just perhaps alternating between starting a stock SL position one month, gold the next, stocks again the next...etc, I instead pick what I consider to be the best choice for each new position. There's no reason why that couldn't be a short based ETF in some circumstances if that's what you considered to be the more appropriate at that time.  Bottom line is that if your choices do better than average you add value, if they do worse you detract value. As income and dividends averaged around 6% over the 1972 onwards periods, combined with the 10% historical average capital gain amount = 16% total average. Monitor and compare your actuals with that sort of virtual index and if your choices improve upon that simple comparison so much the better. If you're doing worse then you might want to reconsider your selection process.  A strong point is that generally no worse year will be greater than a -10% loss.

Personally I prefer value/bottom-fishing as potential candidates rather than looking at recent relative strength. Those that have endured large declines but appear to have bottomed out and started an up side breakout from those lows.

So, my options seem to be:
1/ 100% PP
2/ VP but using a 10 month long only strategy moving to cash when necessary
3/ VP but using long and short depending on the 10 month MA or a 13/34 EMA crossover plus retrace entry
4/ PP plus a completely separate VP buying value stocks.

It's difficult to monitor as this is such a long term strategy that by the time you had decent stats you might already be ahead/behind.
If the 10MA strategy has outperformed PP then why don't people choose that over the PP?

In the above you have to consider that commissions plus spread account for a 1% loss each time a trade is made on an ETF.

[SanMiguel]

In some respects the PP is a form of a third in each of stocks, loans (LTT) and gold, but then with a Markowitz 75-25 stock/cash split against each. So a 10 month moving average (same as 200 day moving average) play against stocks, LTT, gold would likely average much the same overall exposure, but does so with higher costs/effort.

Many would prefer the simpler core PP approach, buy once and review once yearly. Personally I've been using SL since the 1990's, well before I became familiar with the PP and have the SL approach ingrained. I enjoy the extra effort - I guess a form of a hobby, and I've also been 'lucky' with my choices. I accept the extra costs/effort in a business overhead like manner and whilst the additional gains for the extra effort works out at a relatively modest 'wage' its a lifestyle choice that I'm happy with.  One of the few occupations where you can 'work' at any time of your choosing, from anywhere of your choosing.

But you only go long? Never any shorts in there?

[AdamA]

If the 10MA strategy has outperformed PP then why don't people choose that over the PP?

 
1.  HB's Rule #6: No trading system will work as well in the future as it did in the past.
You'll come across many trading systems or indicators that seem always to have signaled correctly where your money should have been, but somehow the systems never come through when your money is on the line.

2.  Doesn't really allow you to hold physical gold (too difficult to buy and sell in a timely, tax efficient manner), and therefore may offer less protection in times of crisis/illiquidity.

3.  Not as tax efficient.

4.  Whipsaws are psychologically difficult to tolerate (don't underestimate this one).

5.  Also psychologically difficult to be 100% in cash when none of the asset classes you're tracking are buys.

[SanMiguel]

If the 10MA strategy has outperformed PP then why don't people choose that over the PP?

 
1.  HB's Rule #6: No trading system will work as well in the future as it did in the past.
You'll come across many trading systems or indicators that seem always to have signaled correctly where your money should have been, but somehow the systems never come through when your money is on the line.
Including the PP

2.  Doesn't really allow you to hold physical gold (too difficult to buy and sell in a timely, tax efficient manner), and therefore may offer less protection in times of crisis/illiquidity.
Agreed as physical gold has a high percentage spread in the shops to the spot price but I subscribe to the hold 5-10% of your net worth in physcial, the rest can be on paper gold.

3.  Not as tax efficient.
We have tax shelters in the UK called ISAs meaning any profit on stocks is CGT free.

4.  Whipsaws are psychologically difficult to tolerate (don't underestimate this one).
Agreed but need to test the mechanical strategy first.

5.  Also psychologically difficult to be 100% in cash when none of the asset classes you're tracking are buys.
Agreed.

[gizmo_rat]

If the 10MA strategy has outperformed PP then why don't people choose that over the PP?

In essence it's a completely different mindset, you either like mathematical modelling or you don't.

Some people look at the PP as a simple 'folksy' investment that they can comfortably take responsibility for.

Some people look at it as a sophisticated portfolio based on macroeconomic modelling, that they can embrace and extend.

Of course it's both, but uniquely it attracts people of completely different mind sets.

If you've not read it, I'd recommend Harry Browne's "Why the best laid investment plans usually go wrong", it really is a book of two halves that reflects the different mind sets of people in the PP.

[SanMiguel]

We have tax shelters in the UK called ISAs meaning any profit on stocks is CGT free.

For gold hold mostly Brittannia's or Sovereign's - legal tender so VAT and CGT exempt. Hold a little in paper gold (5% of total (20% of gold allocation amouint) perhaps) - for trading/rebalance purposes.

For LT/ST hold gilts directly. For the ST end of things buy into a 5 year gilt ladder within an ISA and hold/roll each rung to maturity (gilts with 5+ years to maturity can be bought in an ISA and gross income = net income). Gilts are also CGT exempt inside or outside of an ISA anyway.  Personally I prefer the option to just 5 year ladder the full 50% rather than holding a LT/ST barbell - but that's just me. Also consider N&SI index linked bonds (just buy whatever was yielding the most at the time out of conventional or Index Linked). Review the PP at the time a gilt matures and adjust the roll amount up/down as appropriate at that time according to whether a PP rebalance event was indicated.

For stocks - outside of an ISA, unless your ISA has sufficient space, and make sure to use your yearly CGT allowance appropriately.

An extension to the above might be to hold some in tax efficient, some outside of tax efficient and whenever a gain has occurred then look to reduce the tax efficient and add to the tax inefficient. Whenever a loss occurs then visa versa. That might also build up some capital gains offset ('losses'). This all depends upon the amounts/costs etc. involved as to whether its viable or not.

I still don;t really understand the 50% allocation to bonds in the PP. I understand it's short and long but surely both types of gilts/treasuries will become adversely affected in an interest rate increase world and having 50% allocated to them might cause issues?

Most ISAs only allow stocks to be held. I know of IGLT in the UK for multi tiered and INXG for index linked but that's about it.
Should I put 25% into each?
The alternative is to put 25% into a money market fund that mainly uses bonds.

[AdamA]

I still don;t really understand the 50% allocation to bonds in the PP.

T-bills are bonds in only the loosest sense of the word.  Think of them as cash (that's what they are) that's "dry powder" so that when all the other assets are slumping, you have some money to buy them on the cheap.  This serves a totally different purpose than long bonds do.

[AdamA]

Some people look at the PP as a simple 'folksy' investment that they can comfortably take responsibility for.

Some people look at it as a sophisticated portfolio based on macroeconomic modelling, that they can embrace and extend.

Of course it's both, but uniquely it attracts people of completely different mind sets.

Well said.

[SanMiguel]

IGLT has these holdings and there seem to be a range most of which is weighted towards maturity in the next 5-10 years with some 20+ yr dated ones.
Yielding about 2.8% to maturity minus the ETF fee: http://uk.ishares.com/en/rc/products/IG ... 0000/false
In the absence of being able to buy bonds through someone like TDW (it would take me a while to swap my SIPP), would it be best to hold 25% INXG and 25% IGLT?
I'm a bit worried that INXG overlaps IGLT in maturity dates to some extent.
Alternatively 50% in IGLT might be close to your 5 year ladder.
I'm also still wondering if it isn;t better to use the 25% allocation for a VP as 50% allocation to bonds seems pretty high.

Think of them as cash (that's what they are) that's "dry powder" so that when all the other assets are slumping, you have some money to buy them on the cheap.

You mean buy more equities, gold, and bonds on the cheap or buy more t-bills on the cheap?
Surely if all assets were slumping, then so would the tbills and as they locked up in t-bills you wouldn;t have any cash to buy anything anyway?  ???

ALso, I haven't even touched on inflation much yet. anything yielding less than 5% at present is actually losing money.

[AdamA]

Think of them as cash (that's what they are) that's "dry powder" so that when all the other assets are slumping, you have some money to buy them on the cheap.

You mean buy more equities, gold, and bonds on the cheap or buy more t-bills on the cheap?

Yes, I mean equities, gold and bonds.

Surely if all assets were slumping, then so would the tbills and as they locked up in t-bills you wouldn;t have any cash to buy anything anyway?

Actually it tends to be the opposite.  There are definitely times when everything slumps, but, when everything is slumping, people tend to really want cash, b/c they need it, so the dollar tends to strengthen.  

Also, you can redeem T-bills whenever you want, and it's especially easy if you hold them in a treasury only money market fund.

[SanMiguel]

Give your SIPP provider a call as I suspect you would be able to buy/hold gilts in that. Likely purchase/sales would be via telephone based orders only.

T-Bills are priced below par and progressively rise over time, so they're cash like. But yes you have to sell them to buy whatever else with the proceeds rather than being pure cash like.

If you were running with a ladder then currently the N&SI 5 year RPI+0.5% would appear to be one of the best choices for rolling current maturing into. £15K per person, children aged 7+ can also hold them, so a family of four = £60K. Tax free and guaranteed to stay at par if deflation (negative inflation) is encountered. More normally they issue both 3 and 5 year series, so potentially £120K of tax free per issue.

I'll see what they say.
At present, these are the top 10 holdings in IGLT:
Security Coupon Maturity Price Country % Weight
1 UK CONV GILT 5 09/07/2014 5.00 07/09/14 111.03 United Kingdom 4.47
2 UK CONV GILT 4.75 09/07/2015 4.75 07/09/15 111.66 United Kingdom 4.37
3 UK CONV GILT 4.5 03/07/2013 4.50 07/03/13 106.27 United Kingdom 4.20
4 UK CONV GILT 4.75 03/07/2020 4.75 07/03/20 112.01 United Kingdom 4.04
5 UK CONV GILT 2.25 03/07/2014 2.25 07/03/14 102.65 United Kingdom 3.84
6 UK CONV GILT 4 09/07/2016 4.00 07/09/16 108.80 United Kingdom 3.63
7 UK CONV GILT 8 06/07/2021 8.00 07/06/21 140.34 United Kingdom 3.59
8 UK CONV GILT 5 03/07/2018 5.00 07/03/18 114.41 United Kingdom 3.39
9 UK CONV GILT 2.75 01/22/2015 2.75 22/01/15 103.68 United Kingdom 3.38
10 UK CONV GILT 5 03/07/2012 5.00 07/03/12 103.31 United Kingdom 3.34

Think of them as cash (that's what they are) that's "dry powder" so that when all the other assets are slumping, you have some money to buy them on the cheap.

You mean buy more equities, gold, and bonds on the cheap or buy more t-bills on the cheap?

Yes, I mean equities, gold and bonds.

That would involve market timing to buy the bottom wouldn't it?

[KevinW]

You might be surprised at how well a mostly bond, a little stock blend actually has performed. Even more so if you swap out TSM and hold large cap value instead for the 25% stock part.

Yes.  The returns of a 30/70 stock/bond portfolio isn't that far off from a 70/30.  Vanguard Wellesley holds approximately 1/3 dividend stocks and 2/3 bonds and has done well for itself.

I've toyed with the idea of running a index-based clone of Wellesley with 1/3 Value Index and 2/3 intermediate treasuries.  Such a portfolio backtests well and is convenient to implement, although I prefer the PP due to its bulletproofing against currency problems.

[pershing83]

Vanguard Wellesley has outperformed Wellington over YTD, 5 yrs and 10 yrs though not by much.

However, PRPFX has done much better. 5yrs, 10% and 10 yrs ,11%..

I'm still new here, how has the HB's standard pp done? It seems to me it outperformed PRPFX prior to 1999, trailed after that, correct?

Looking at Cuggino's stock picking, it looks good to me.

For the record, I hold a large amount of VWINX and even larger amount of PRPFX. Family owns large amount VWELX as well as PRRPFX..

[KevinW]

I'm still new here, how has the HB's standard pp done? It seems to me it outperformed PRPFX prior to 1999, trailed after that,

Please read the FAQ.  The standard PP is a 25% allocation to each of: total stock market index, long term treasury bonds, treasury money market, and gold bullion.