Where Are Permanent Portfolios Going?

[foglifter]

I think this wasn't posted yet. MyPlanIQ came up with a performance comparison of a number of PPs, including classic HBPP and PRPFX.

http://www.myplaniq.com/articles/201502 ... ios-going/

As usual, HBPP shines and it's hardly a news for any reader on this board. What drew my attention was the second part of the article where they discuss the outlook for PP and list several scenarios depending of how the asset classes behave. Scenarios 1 and 2 rely on John Hussman's recently publicized opinion regarding stock market valuations and draw a dire picture of pretty low returns. Gold in all 3 scenarios is a wild card, which is not completely unrealistic, but I can't agree with the author on this as I think the price of gold can influenced by many factors.

I'm just wondering what you folks think about PP's performance in the next 10-20 years.

[ochotona]

2% over inflation. Since you asked for a number. Lever it slightly by decreasing cash, squeeze out 2.5% with more risk

[barrett]

To answer the OP's question, I have no idea where the PP is going but my guess is that we'll continue to see real returns that beat inflation by 4-5% over time. What this means in a low-interest-rate environment is that we'll most likely see a larger number of years when the PP loses money in nominal terms. That's simply because the yearly returns will now be a series of numbers clustered around 4-5%. Some of those are bound to be negative because the "cluster point" is lower. When inflation is at 5% and nominal returns are in the 9-10% range on average, we get very few negative years (again, in nominal terms).

This is all assuming that interest rates stay low for a number of years.

[MachineGhost]

I'm just wondering what you folks think about PP's performance in the next 10-20 years.

Stocks will tank 50%+ and that will re-setup the PP to earn its normal historical returns.  Bonds will go into a bear market.  Gold will depend on how bad we transition to the one world currency, but it should act as hedge for the rebalancing extremes and provide a long-term real return of exactly zero.  The worst case scenario is an extended deflation with loss of sovereign debt confidence; in that case the PP will be majorly destroyed in nominal terms (see Iceland).  There's also the Japan scenario, but I think that one is played out and is unlikely to repeat in the USA.  America will come out on top as usual, but then pass the torch to China.

[ochotona]

Would PP perform "less badly" than a Boglehead 50% stock 50% bond portfolio in an extended deflation? That would be good enough, that and physical gold.

[MachineGhost]

Would PP perform "less badly" than a Boglehead 50% stock 50% bond portfolio in an extended deflation? That would be good enough, that and physical gold.

Yeah 'cuz Bogleheads are money morons that load up with all the non-Treasury issues that are Prosperity kickers.  That only works up to the point there is still confidence in sovereign debt, though.  After that Rubicon is crossed, capital will shift from public to private and that may benefit AAA corporate bonds.  It happened a bit in the 1930's, but before 1935 the Fed directly stimulated the economy by buying up corporate bonds not Treasuries, so that could have been a factor.

I do believe intra-asset diversification is best, but you must follow the PP dictum exactly.  Put the prosperity kickers into Prosperity and keep deflation protection solely for Rome's debt.

[foglifter]

Thank you, guys, for sharing your thoughts. 

[murphy_p_t]

Would PP perform "less badly" than a Boglehead 50% stock 50% bond portfolio in an extended deflation? That would be good enough, that and physical gold.

Yeah 'cuz Bogleheads are money morons that load up with all the non-Treasury issues that are Prosperity kickers.  That only works up to the point there is still confidence in sovereign debt, though.  After that Rubicon is crossed, capital will shift from public to private and that may benefit AAA corporate bonds.  It happened a bit in the 1930's, but before 1935 the Fed directly stimulated the economy by buying up corporate bonds not Treasuries, so that could have been a factor.

I do believe intra-asset diversification is best, but you must follow the PP dictum exactly.  Put the prosperity kickers into Prosperity and keep deflation protection solely for Rome's debt.

"Put the prosperity kickers into Prosperity and keep deflation protection solely for Rome's debt." Please translate this for my benefit.

MG...i'm trying to grasp the full implications of this...if I understand, you're suggesting holding AAA corp bonds in place of some portion of the UST bonds in a PP?

[MachineGhost]

"Put the prosperity kickers into Prosperity and keep deflation protection solely for Rome's debt." Please translate this for my benefit.

MG...i'm trying to grasp the full implications of this...if I understand, you're suggesting holding AAA corp bonds in place of some portion of the UST bonds in a PP?

It means put all the economically-sensitive investments into 25% and keep Treasury bonds as pure as virgin white snow in another 25%.

The corporate bond thing is just to show you what could happen when people lose confidence in sovereign debt; but it doesn't apply to the world's currency issuer as we'll be the last man standing before transitioning to a one world currency.  But if things really got bad and the U.S. Treasury went on the chopping block, then capital will find a Grade A alternative.

[chesser]

it looks like about 0.5-1% expected real yearly returns for the pp over the next decade or two
that is, cash and ltt's net around zero, gold zero, stocks about 3%
sum and divide by 4 = 0.75% for the whole. give or take some from there b/c above is imprecise, so about 0.5-1 result
this is expected yearly and actual could be quite different either way
also w. Bernstein expects 2% on a 50/50 traditional portfolio and pp is typically a lower risk/reward portfolio than that
it's depressing but with the asset bloat that's happened it makes sense to me

[goodasgold]

it looks like about 0.5-1% expected real yearly returns for the pp over the next decade or two... also w. Bernstein expects 2% on a 50/50 traditional portfolio...

I believe the future is unknowable, which is the main reason why I like the 4X25 HBPP, which covers all the bases.

For this reason, it makes me uneasy when highly regarded folks like John Bogle and Bill Bernstein, who established their reputations by also stating that the future is unknowable, make predictions about future earnings. Will our confidence in them by maintained now that they gaze into their crystal balls and make predictions about the future?

Anything can happen. For example, how many people predicted a year ago that oil prices would drop by 50 percent? So far as I know, neither Bogle nor Bernstein did so.

[chesser]

of course we and they know that anything can happen and that none of us can predict what will actually happen.
having said that, we have data that allows us to calculate expected results of portfolios for the purposes of planning, knowing full
well that in retrospect there is a good chance we were significantly off in our results compared to expectations. the expected number lies in the middle of the range of expectations. in this case, there will likely be wide swings yearly of portfolios around the middle expected number, but over a decade will average about this real return/yr based upon the data we have, and may not be this number on any one year. again, our expectations could be way off when we get there and look back, but looking forward we try to make an educated guess rather than just 'anything can happen' mindset

[MachineGhost]

Keep in mind when so-called experts say that stocks are only going to return 2%, they really mean:

1) You're a fool who currently holds overvalued stocks and a bigger fool holding them during the downtrend of the inevitable 50% correction. i.e. your net return will be that low or lower.

2) They're extrapolating currently overvalued conditions into the future ad infinitum without a correction which is not historically supportable.

Stocks will correct and at the secular bear market bottom they will offer double digit gains again to those who are smart and load the boat at that time, or a PPer who rebalances.

[buddtholomew]

With low forecast real returns, the only adjustment I intend to make is to contribute more to the portfolio. In other words, my savings rate will increase to account for the lower returns.

What is the alternative?

[Pointedstick]

a solar hot water heater

Not cost-effective almost anywhere in a residential setting (and where it is, solar PV is better)

http://www.greenbuildingadvisor.com/blo ... eally-dead

solar panels

Cost-effective, but far more so in very sunny climates. In CA, AZ, NM, or CO, could pay for themselves in just a few years. Probably not worth it in Seattle--but rainwater capture with a cistern could work there to eliminate your water bill!

attic insulation

With blown cellulose and in conjunction with air-sealing the attic floor using caulk and canned spray foam, nearly always cost-effective in a very short amount of time, especially in places where it gets very cold. Very high bang for buck.

Basement rim joists are also in the "always cost-effective in a very short amount of time" category but you have to do it right, with spray foam or rigid foam boards.

New windows are almost never cost-effective, but sometimes it's necessary anyway because the old windows are horrendous.