I danced around the PP and first heard about in 2008. My wife and I went all in PP in 2012 with the thought that perfect is the enemy of good, and we would tweak our long term allocations as our finances merged and we developed our retirement strategy. Throughout 2012 and 2013 we contributed to PP buying the trailing asset. In 2014 we mostly purchased Variable assets, with occasional PP purchases. That trend continues in 2015 where we are 50% purchasing variable assets, and 50% PP(mostly cash to replenish it after starting house building) . We really like the PP as a strategy for our entire life, and one that doesn't involve guessing or timing the markets. I love that it lets us track all of our assets across all accounts both taxable and retirement, while keeping healthy amounts of cash for liquidity.At the same time, I do think the PP has weaknesses in times of prosperity. It is not helped by the fact that we have near zero interest rates, which means all that lovely cash is getting eaten by inflation and that long term treasuries interest rates are what my savings account once gave. It does well, but psychologically it may be difficult to see single digit returns when the market is returning double digits. Additionally, we have concerns about Social Security availability by the time we retire, and will not have any pensions in retirement, so having income streams during times of unemployment or retirement is appealing. I have noticed that in the IT field a person's 50's tends to be a time of struggling to find employment at the wages they saw earlier in life, or their highest earning years and we want to be prepared for both scenarios with income streams outside of our jobs. All that said, there is no free lunch, so greater returns comes with greater risk and volatility.
So to combat that, we came up with a strategy that adds returns from stock, and income streams(dividends, bonds, real estate) The plan is to have us 60% PP, and 40% VP in retirement. Currently we are 84/16 with 2-3 decades to go until retirement. We re-balance with new cash contributions and try to avoid selling things. Our Variable will be made up of 25% blue chip/dividend aristocrats, 7% REITS/real estate, and 8% TBD.
My TBD category says this in our investing plan "• Other (determined by 2025), We will use this portion to plug in portfolio holes or weaknesses. Possibilities include Municipal Bonds, balanced stock/bond funds like VWINIX or Life Style Growth, total bond indexes, or just increasing existing asset classes(cash is most appealing). A mixture of approaches is a strong possibility, with current thoughts leaning towards bonds and cash "
Our final allocation looks like it will be 15% Stock Index(PP), 15% LT bonds(PP), 15% Gold (PP) 15% cash(PP) 25% Dividend Aristocrats(VP), 7% REITS/Real Estate (VP), 8% TBD(VP) (as said above, likely cash and bonds). That gives us roughly 40% stocks, 20% bonds, 15% gold, 18% cash, 7% real estate as our asset classes.
This follows Graham's advice of never having less than 25% stocks or more than 75%, while using Harry's PP principles to protect our core savings. Combining low expenses with living off our income from VP(dividends, interest, and rent) lets us rarely have to draw down PP cash. It does give us the cushion of PP withdrawing for Great Depression/Great Recession level events when dividends and rent can dissapear.
All in all we really like this strategy, and feel we can stick to it no matter what. Variable investing does not have to involve speculating, but does need to have identified goals, follow whatever rules you write down before you start, and be accepting of greater volatility and risks. If it involves stock picking(even giants like the Dividend Aristocrats) than rules for identifying and buying busineesses(stocks) needs to be developed. I used bogleheads and Joshua Kennon's investing guide princibles in writing our Financial Plan.
I enjoy stock picking of the Aristocrats. It is enjoyable picking out businesses, reading their financial documents, and reviewing the financial details and ratios. My wife and I view it as buying parts of a business and plan on holding these stocks our entire life. We definitely use the model of if the stock market closed for the next 10 years, are we OK owning this company, and if this company dropped 50% would we want to buy more of it(rather than panic selling). I spend many hours each month reading the data, and spend a hour or two discussing our purchase options with my wife where we then decide what we are purchasing next. I also spend many hours keeping an eye on what we own. There are always buying opportunities, even when the market as a whole is at all new heights. It often comes because Mr Market is freaking out about scandal or lower than expected earnings.
If that doesn't sound fun, stick with indexes, they take way less time
I would love to hear folk's thoughts and questions.