Why do you use the PP?

[mathjak107]

in the mean time valuable space in the deferred account would be taken up by little compounding cash and bonds for years.

Or perhaps the big-compounding cash and bonds, from whom space is being taken up by the low-income-producing stocks.

As goodasgold pointed out so well, situations can change.  Interest rates can change.  They usually do.

long term ,  cash and bonds never  equal the compounding stocks see..

you need to have zero distributions  in the taxable account equity's  for the  capital gains rates to offset the tax deferred compounding .

even 1% a year over 20 or 30 years compounding is enough to make the equity's in the taxable account offset the capital gains rates assuming you are not in the zero % bracket.

stock funds are always better in a roth as opposed to a taxable account  or a  deferred account as opposed to a taxable account  unless it is short term , meaning less than 10 years or so. a taxable account is only good if you own non dividend paying individual stocks or gold .

last month Michael kitces took an interesting look at this in a paper.

[Reub]

Why do I use the PP? It seemed like a good idea at the time. There were a couple of guys on the Boglehead site who were so vehemently promoting it. Remember?

[Greg]

I use it because stock prices are a dart thrown at a dart board. How do you come up with the P in a P/E ratio? Why do we say certain P/E ratios are "good", and others are "not". Being lower is good, but that also could mean that people aren't expecting it to grow as much as something else and becoming more "value" versus a "growth" stock.

There just seems like there is too much that the price is built on, and not necessarily on fundamentals like earnings but on the market's expectations, that it could all fall apart at the drop of a hat and make almost a bank run.

Based on my normally conservative nature, I'd rather have the comfort for the rest of my life knowing that I might not have my assets shoot to the moon, but I can at least do good planning in advance with a good knowledge of how much I'll have AT LEAST, by a future point. I'd much rather as PS said, to have 10-11 years before retirement versus 5-14 with a much more aggressive portfolio. The 10-11 one I can plan in advance and when you plan, ideally life becomes much smoother and you just follow it.

I don't want to have to worry about a panic someday where I'm seeing my retirement wither away and not I'm not so sure how I'm going to be able to retire now as an example or I'll have to be a burden on my kids, etc.

Much better for my soul to have an overall portfolio that is less volatile, and more easily able to plan things from this for the future, and keeping a high savings rate to add to that portfolio over the years.

[mathjak107]

if you think stocks are a dart thrown at a dart board  which are actually viable business's  with profits and cash flow what would you call golds valuation  ?

[Pointedstick]

if you think stocks are a dart thrown at a dart board  which are actually viable business's  with profits and cash flow what would you call golds valuation  ?

A dart thrown at a different dart board?

[l82start]

Having a PP and a VP is like being a devout Christian with a mistress on the side!!! 

Yes!  As mathjak said in another post, your dollars/net worth don't know whether they're in the PP or VP.

dollars/net worth may not know if they are VP or PP, but we don't separate them for the moneys benefit  

the split is a mental construct for your benefit and is (should be) a carefully chosen separation of what you want preserved from what you want to risk, based on an analysis of your own psychology and risk tolerance, it is not against any rule to look at total portfolio and see where a VP + PP total investment puts you... and then go back to your mental VP / PP separation to keep funds from slipping from the preserved pile into the gamble pile...

[Greg]

if you think stocks are a dart thrown at a dart board  which are actually viable business's  with profits and cash flow what would you call golds valuation  ?

You misinterpreted what I wrote. Stocks are real with real profits and cash flows. Stock prices however are the dart to dart board. There is no true rhyme or reason of a price relative to earnings in my eyes.

[mathjak107]

that is true for every investment you can think of.

all that makes any investment worth what it is , is greed , fear and perception.

[Greg]

that is true for every investment you can think of.

all that makes any investment worth what it is , is greed , fear and perception.

Yep, I agree. That's why I liked the agnostic economic approach to investing. At least with that, with manipulations of markets or irrational exuberance as Alan Greenspan said, I am diversified across roughly negatively correlated assets. Essentially to spread out my risk as far as I could.

[mathjak107]

what i find interesting is this .

those who use the pp do so because they back test it and see how it worked in the past and then they assume the future will work as well as the  past with it.

yet  conventional portfolios have back tested just fine long term even longer , have grown way more money most of the time and except for some increased volatility have performed better .

yet when it is assumed the future will behave like the past the pp'er argues you can't use the past  going forward when talking about conventional portfolio's. but we can reference our past with the pp.

kind of a hypo critic way of dealing with a view of the future.

the reality is i can actually lose 1/2 my money and still be a head of where the pp would have left me the last 27 years and that money has grown sluggishly since 2000 too ..  so conventional investing works well by providing more gains to cushion the down turns over time .

the answer is that time and a plan will make anything work . odds are any plan and even a single asset will have it's day in the sun if you wait long enough .

in the end which way you go may be a moot point as far as risk  as in the end both  conventional investing and the pp have weathered some of  the worst  events to date just fine .

only conventional investing will usually produce the greatest growth but the hilliest ride to get that growth.

the same history that says the pp should work going forward is the same history that has demonstrated conventional portfolio's weather the same events but with more reward  and both stand a reasonable chance of performing  okay in the future too.

you can't assume anything else about the future than both will withstand what they already went through together . in fact conventional investing that passed through the great depression as part of its long term journey withstood that too as part of its history  , something the pp can't lay claim to.

here is a look at some of the long term data  spanning a 30 year retirement for a 50/50 mix over the nastiest time frames ever  for retirees ,if you picked the worst years to retire possible  .


1907 stocks returned 7.77% -- bonds 4.250-- rebalanced portfolio 7.02- - inflation 1.64--

1929 stocks 8.19% - - bonds 1.74%-- rebalanced portfolio 6.28-- inflation 1.69--

1937 stocks 10.12 - - bonds 2.13 - rebalanced portfolio -- 7.24 inflation-- 2.82

1966 stocks 10.23 - -bonds 7.85 -- rebalanced portfolio 9.56- - inflation 5.38

for comparison the 140 year average's were:

stocks 8.39--bonds 2.85%--rebalanced portfolio 6.17% inflation 2.23%

even the worst possible time frames had a way of falling out in range and did just fine .  something else interesting , notice rebalancing equity's also brought your performance down as well in every poor  time frame l as the overall 140 year average using shillers data  over the long haul  .

that struck me as surprising as i would have thought rebalancing during the horrible  down years would have helped performance 


there are those in life that carry a lot of extra insurance of all types  while most of the time all that insurance goes un-used but if they are comforted by it then let em have that insurance . they pay a price for it but that is what lets them sleep at night.

others will spend less for insurance , pocket more dollars and if they didn't need that insurance which has been their experience to date then they can self insure with what they saved.

heck , after 40 years of paying medical insurance after subtracting out a lifetime of what i paid i likely could self insure with little problem.


there is far to much fault finding on both sides  as to what is going to be when the reality is both have stood up well to the test of time and should continue to do so over time . .

in both cases investor self inflicted wounds are the only injury's either would have had to date .  you can't even say if you needed the money in the short term the pp would help.

since i still track what i owned in the pp even though i sold it  the pp is still down 18k since the downturn.  it was down 23k.

the same money in my conventional mix is up a few thousand already .

so if i needed my money back  short term the pp would have burned me more  .


in both cases of the pp or conventional investing you should have enough cash and bonds to meet short term needs and if not both can hurt you . which can hurt you more is going to depend on conditions at any point in time and can vary . neither one can be any better if the timing is poor..

[Stewardship]

those who use the pp do so because they back test it and see how it worked in the past and then they assume the future will work as well as the  past with it.

I think there's a bit more to why we use the PP.

[mathjak107]

ha ha ha i went to correct my spelling and i think i clicked on report to moderator .


there is a bit more to both sides but that is the argument you see over and over .  the pp is supposed to provide better results when things go badly , but so far that has not really been the case longer term  and it is only been a factor of less volatility.

over and over a pp'r will comment how the past with conventional investing is no indicator of the future  but then post select time frames with the pp in the past to show it is superior  .  but the truth is both ways are tried and tested. they just have different benefits and results .

[Stewardship]

there is a bit more to both sides but that is the argument you see over and over .

Shame on them!

Now that that's out of the way, I've seen a lot of arguments made here which I'm not certain you've fully addressed.

[Longstreet]

I use the PP because it's simple, based on theory, limits loss, and helps avoid daily checking and tinkering.  I was criticized in an earlier post because I didn't have any gold, and was bluntly told that I did not have a PP if I didn't have a 4x25, but yet those criticizing me admitted that they had VP's which greatly altered their allocations.  So, you can segment your investments into little pockets, or you can look at the total picture - I prefer to look at the total picture, but it's easy enough to mentally divide it into different segments if that helps justify your decisions.
I'm not a good loser.  I don't enjoy going to a casino because it hurts to put a quarter into the slot and not win.  Therefore, I'm very adverse to losing money.  As a result, I'm very conservative in my investments  At present, recently retired, I'm extremely cash heavy, and uncomfortable with the long term bond and gold allocations (28 equity, 17 LTB, 42 cash, 13 gold).  Many, mathjak in particular, have gone with shorter term bonds.  For those that have done that, what allocations and maturities do you recommend?  Still treasuries, or a mix of treasuries, corporate, and/or mutual fund total bond funds?  I have to plead ignorance in understanding how bonds work?  Any comments appreciated.
Thanks   

[Pointedstick]

As a result, I'm very conservative in my investments  At present, recently retired, I'm extremely cash heavy, and uncomfortable with the long term bond and gold allocations (28 equity, 17 LTB, 42 cash, 13 gold).

IMHO that's not at all an insane allocation, and still very PP-ish. That 42% cash is going to drag down your returns though. That's a lot of cash. I hope it's in instruments that earn more than 0%!

[Longstreet]

Small accounting item - many PP investors use Wellesley Income Fund.  How do you allocate that to your totals - all equity, all bond, all cash, 35-40% equity and 60-65% bond, 35-40% equity and 60-65% cash, or kept as part of your VP?

[mathjak107]

I use the PP because it's simple, based on theory, limits loss, and helps avoid daily checking and tinkering.  I was criticized in an earlier post because I didn't have any gold, and was bluntly told that I did not have a PP if I didn't have a 4x25, but yet those criticizing me admitted that they had VP's which greatly altered their allocations.  So, you can segment your investments into little pockets, or you can look at the total picture - I prefer to look at the total picture, but it's easy enough to mentally divide it into different segments if that helps justify your decisions.
I'm not a good loser.  I don't enjoy going to a casino because it hurts to put a quarter into the slot and not win.  Therefore, I'm very adverse to losing money.  As a result, I'm very conservative in my investments  At present, recently retired, I'm extremely cash heavy, and uncomfortable with the long term bond and gold allocations (28 equity, 17 LTB, 42 cash, 13 gold).  Many, mathjak in particular, have gone with shorter term bonds.  For those that have done that, what allocations and maturities do you recommend?  Still treasuries, or a mix of treasuries, corporate, and/or mutual fund total bond funds?  I have to plead ignorance in understanding how bonds work?  Any comments appreciated.
Thanks 

I never recommend anything for others but I can tell you I use  10% in  the vanguard total bond etf  and all the rest very short term.

I use fidelity floating rate  , vanguard short term bond and vanguard short term bond inflation-proof .

if inflation picks up they will be swapped for more TIPS AND a real return income fund like fidelity strategic real return. but at this point I am not anywhere near thinking about inflation issues  other than 10 % in the  vanguard short term inflation-proof etf

[Alanw]

Small accounting item - many PP investors use Wellesley Income Fund.  How do you allocate that to your totals - all equity, all bond, all cash, 35-40% equity and 60-65% bond, 35-40% equity and 60-65% cash, or kept as part of your VP?

My portfolio is approximately 60 - 70% PP with a VP (completely separate) of 30 - 40% Wellesley. This allows me to use 30/20 rebalancing bands with the PP. I also hold a little extra cash with Wellesley. My combined portfolio looks like this: 30% stock, 35% bonds, 15% gold and 20% cash. Wellesley holds about 2/3 investment grade bonds in their 60% bond allocation and mostly blue chip dividend paying stocks in their 40% stock allocation. They also pay about a 3% dividend. I know this is a conservative portfolio but since I am retired, wealth preservation is of upmost concern.

[mathjak107]

I instructed my wife if I die throw  it all in wellesly.  I never actually owned it  as I never had a need to. but it can make life so easy for her and I do like the fund a lot .

[Austen Heller]

For those that have done that, what allocations and maturities do you recommend?  Still treasuries, or a mix of treasuries, corporate, and/or mutual fund total bond funds?  I have to plead ignorance in understanding how bonds work?  Any comments appreciated.
Thanks 

I think that's an excellent portfolio.  If I held 42 pecent cash, I'd put a large portion into direct-purchased CD's.  You get safety exceeding short corporate funds, and yields higher than equivalent term treasuries.

The further we get from the 2008/09 crisis, the more recommendations I see for bank CDs.  Remember Wachovia, Corus and all those Puerto Rican banks that went under?  Sure it all worked out fine in the end, but why bother with that stuff?  I recommend buying treasuries instead of CDs.  The returns from CDs are entirely from interest, taxed as ordinary income at both the federal and state level, whereas the returns from treasuries come from A) interest (which is not taxed by the state), and B) capital gains from riding the yield curve, which if you hold the bonds for more than a year, will be taxed as long-term gains (which may be less than your ordinary income tax bracket).  It is unwise to compare the current yield on a 5-year CD to the current 5-yr treasury yield, and then pick the CD just because the interest rate is higher.  The after-tax total returns of both investments may be almost identical, but with the treasury it can be argued that you get more safety.

[Reub]

One thing about Wellesley is that it throws off a lot of dividends so I recommend it for tax advantaged accounts first and foremost.

[mathjak107]

but the consolation is it is helped by special capital gains rates . if you can stay in the zero capital gains brackets it can be especially nice .

[mathjak107]

what you have to remember is as tried as you think the pp  is it has never experienced what we are in  ever before . low rates , high stock valuations .  that combo can be a huge weight and assets fighting each other does not help the cause since nothing can develop a trend  . as these low rates rise the rise will likely be slowly after a knee jerk reaction and may take many years .that can put gold out of the picture too. for the pp it may be entering the perfect storm.

as I said , I am not trying to talk anyone out of it but I am telling you  take a good hard look at your plan and make sure it still makes sense because this perfect storm may be just getting underway for the pp. and it is possible the last few years it saw pretty much what it is going to see  going forward for quite some  time .

but that is for you all to evaluate , I made my decision ..

[dutchtraffic]

what you have to remember is as tried as you think the pp  is it has never experienced what we are in  ever before . low rates , high stock valuations .  that combo can be a huge weight and assets fighting each other does not help the cause since nothing can develop a trend  . as these low rates rise the rise will likely be slowly after a knee jerk reaction and may take many years .that can put gold out of the picture too. for the pp it may be entering the perfect storm.

as I said , I am not trying to talk anyone out of it but I am telling you  take a good hard look at your plan and make sure it still makes sense because this perfect storm may be just getting underway for the pp. and it is possible the last few years it saw pretty much what it is going to see  going forward for quite some  time .

but that is for you all to evaluate , I made my decision ..

ps: your 'perfect storm' would destroy your portfolio more than it would a PP.

[lordmetroid]

I acquired a sufficient amount of capital and didn't want to loose it so I made some research and found the Permanent Portfolio which theory made a lot of sense to me.
Then I found the Extremely Early Retirement community and the Permanent Portfolio makes even more sense.