PP exit strategy

[Hal]

Every gambler knows
That the secret to survivin'
Is knowin' what to throw away
And knowin' what to keep
'Cause every hand's a winner
And every hand's a loser

I am sure many of you have heard that snippet from "The Gambler" lyrics.

Now, since it's inception, the PP has been a winner however I was wondering under what circumstances it would be worth considering a different portfolio allocation.

The only circumstance I can conceive would be very high inflation, as you would not want to rebalance if the currency was being destroyed as in Zimbabwe or Weimar Germany.

I was curious to know what exit strategies other PP holders have.

All comments welcome !

[Cortopassi]

I would have to say I hope to not need an exit strategy other than drawing down in retirement.

I cannot conceive of a situation where I'd want to do anything more than just tweak the %'s a little bit like I have.

High inflation should mean gold and stocks rise, and cash and bonds drop. Are you saying that being in that situation you'd be better off not rebalancing into cash or bonds because they will continue to drop? I think many have been waiting literally years for the same to happen to the stock market, and bonds and it hasn't happened yet.

To have an exit strategy means you are predicting some specific situation in the future that will cause the PP or rebalancing of it to be the wrong choice. I don't think you have a better than 50/50 chance of getting that right.

[Xan]

An exit strategy implies that there's some background, normal, safe allocation to retreat to. The PP is that allocation.

[Smith1776]

Hmmmm, I suppose if there is any exit strategy, it would be, say, switching entirely to bank notes and gold & silver bullion in the event of an absolute calamity. Say, a Carrington Event disrupts power transmission and telecommunications around the world. (Interestingly, we are due for another such event about now.)

[stuper1]

Don't you have to switch to bank notes and bullion before the Carrington Event happens?

[Smith1776]

Don't you have to switch to bank notes and bullion before the Carrington Event happens?

Definitely!

I'm not an astrophysicist, but from what I understand the sun usually gives off warnings beforehand in the form of solar flares and such. Either way, I've elected to hold some physical cash and bullion just to satisfy the doomer in me.

[stuper1]

Don't you have to switch to bank notes and bullion before the Carrington Event happens?

Definitely!

I'm not an astrophysicist, but from what I understand the sun usually gives off warnings beforehand in the form of solar flares and such. Either way, I've elected to hold some physical cash and bullion just to satisfy the doomer in me.

Me too!

Funny thing, I almost was an astrophysicist, although I ended up changing course.

I wonder how many actual astrophysicists hold physical cash and bullion due to the possibility of a Carrington Event? I wouldn't be surprised if it was very few, maybe zero. But maybe I'm wrong.

[grapesofwrath]

I have an asset allocation. I hope I can stick to it. So hopefully my exit strategy is death.

[barrett]

Hal, I think what you are referring to is the danger of rebalancing into assets that are going all the way to zero, correct? That was a favorite theme of a former member on here (kshartle). My guess is that there will be glaring warning signals before you sell off your gold. For example, in Zimbabwe it was the seizure of private lands by the government that set a downward spiral in motion. In a case like that your bonds, stocks and cash are probably toast, but gold, provided you have some in physical form, gives you "nimble wealth".

I too like physical cash and gold but I'm not really a doomer. To me it's just part of being properly diversified.

[Smith1776]

Don't you have to switch to bank notes and bullion before the Carrington Event happens?

Definitely!

I'm not an astrophysicist, but from what I understand the sun usually gives off warnings beforehand in the form of solar flares and such. Either way, I've elected to hold some physical cash and bullion just to satisfy the doomer in me.

Me too!

Funny thing, I almost was an astrophysicist, although I ended up changing course.

I wonder how many actual astrophysicists hold physical cash and bullion due to the possibility of a Carrington Event? I wouldn't be surprised if it was very few, maybe zero. But maybe I'm wrong.

I think you make a very valid and interesting observation. I think the respective professions we work in makes each of us extra cognizant of specific risks in life. As an example, this article I read a few months back talks about a seismologist who refuses to park her car underground about every 14 months, because that's when "the big one" is more likely due to geological cyclicality. http://www.cbc.ca/news/canada/british-c ... -1.3794192

I suppose the same thing can readily be said for finance people like ourselves. We read all this historical and theoretical stuff about economic crises, hyperinflations, systemic risk, deleveraging events, etc. So we do fairly simple things like buy a few gold and silver coins, which is no big deal, but to many outsiders I guess it might seem rather eccentric hehe.

[Hal]

I asked the original question because I am interested in posters thought processes.

Barrett is right. In the original post I was wondering about rebalancing into assets that could go all the way to zero.

I suppose I see the PP as a bit like the Titanic. At the time "IT WAS" the safest ship afloat but on seeing the iceberg, maybe its worth considering options. And there may be "no better" options.

So, I was pondering on what the "Icebergs" may be, and how you would go about identifying/mitigating them.

There is "political risk", "physical risk" , "asset losing of its value" - just to name of few

[Libertarian666]

As most regular posters here probably know, I don't run a standard permanent portfolio at this time, mostly because I don't trust the stock or bond markets, or government debt.

However, the scenario that you are worried about is not terribly difficult to deal with. If you see things getting really really ugly, just don't rebalance out of gold into paper money until things clarify. That's about the only way you could get ruined by being too strict in following the standard protocol.

[Hal]

Thanks Libertarian666,

Did you have any hard criteria to judge against when you exited the PP? Eg. P/E ratio >30, negative bond yields etc.

Or was it more of "This cannot go on forever" type feeling?

[barrett]

He'll likely speak for himself but I don't believe Tech ever "exited" the PP. If one doesn't like holding stocks or USG debt, it's not possible to run a PP.

That said, Tech, I'd be very interested to know what your investment strategy was when you were younger. Didn't your "golden years" start in the early 2000s before the big run up in gold?

I believe it was Sophie who posited a while back that an environment where interest rates are slowly rising for a period of years might just be the one scenario that boils the PP frog. Sorry Sophie if I didn't get that exactly right.

I also like Tyler's idea of having a paid off home as a sort of "5th leg" of the PP. It's just another thing that gives an investor extra protection.

Another thing that has been discussed on here a few times, Hal, is at what point would people bail on their LTTs. Even Craig said that for him holding long bonds when rates are below 1% would be too "dogmatic." I don't think I could wait that long. But Medium Tex disagreed with that, I believe. Extremely low rates on LTTs is the one thing that I wonder about.

[sophie]

I think the slowly rising interest rates scenario might drag the PP returns, but it wouldn't be cataclysmic as long as stocks do OK. There only scenario that would make me seriously rethink the PP is: when the US dollar stops being the world's reserve currency, or when gold stops being the ultimate backstop.

I do believe the PP was designed with both these assumptions in mind - which is why I'm not sure the PP would work as well for international investors. I'm not sure how I'd figure out when another currency becomes the world's reserve, or what signs to look for. Maybe long bonds staying put when the stock market dips, and that other country's long bonds going up instead. Gold is easier - the U.S. will clear out Fort Knox, banks will sell their gold reserves to jewelry makers, and both will start plowing money into the alternative e.g. Bitcoin. Don't see that happening quite yet.

The rest of the OP can be reworded as a desire to predict the future, i.e. that the cataclysmic event will happen/will continue to happen/things won't get better. Predicting the future, however, is precisely what you don't want to be doing. If you all think back to 2009, that's exactly they way it felt then. People were afraid to buy into the stock market, and rebalancing the PP meant selling assets that were doing very well, to buy an asset that had lost 40% of its value and that people were predicting would go even lower. Of course, in retrospect, rebalancing at that time was exactly the right thing to do.

[dualstow]

I missed the paid off home as Part Five thing. Is that here or at PortfolioCharts?

[Tyler]

I missed the paid off home as Part Five thing. Is that here or at PortfolioCharts?

That's a here thing. ;) A lot of that is covered in this thread: viewtopic.php?f=1&t=7382

[dualstow]

thanks!

[Libertarian666]

He'll likely speak for himself but I don't believe Tech ever "exited" the PP. If one doesn't like holding stocks or USG debt, it's not possible to run a PP.

That said, Tech, I'd be very interested to know what your investment strategy was when you were younger. Didn't your "golden years" start in the early 2000s before the big run up in gold?

I believe it was Sophie who posited a while back that an environment where interest rates are slowly rising for a period of years might just be the one scenario that boils the PP frog. Sorry Sophie if I didn't get that exactly right.

I also like Tyler's idea of having a paid off home as a sort of "5th leg" of the PP. It's just another thing that gives an investor extra protection.

Another thing that has been discussed on here a few times, Hal, is at what point would people bail on their LTTs. Even Craig said that for him holding long bonds when rates are below 1% would be too "dogmatic." I don't think I could wait that long. But Medium Tex disagreed with that, I believe. Extremely low rates on LTTs is the one thing that I wonder about.

Actually, I did run a standard 4x25 HBPP for some time in the 1980s. I got out of it around 1998 when I started to worry about the Y2K problem. The only asset that I thought had very little chance of being wiped out if Y2K was bad was… Gold. The Swiss franc was a close second, because I expected that the Swiss would survive almost anything.

I've always had a fairly large allocation to gold, ever since I started reading Harry Brown's books in the 1970s. So that wasn't quite as traumatic a decision as it might have been for someone who had never had any gold before.

I've also recently added the "paid off house" asset class. The idea there was to reduce my monthly cash flow deficit, which is working.

[blue_ruin17]

If I have to abandon the PP, it is probably only because the financial system has seized, or collapsed altogether.

In that case, my "exit strategy" is to simply write-off my 100% paper losses and sit on my physical gold holdings until the dust settles.

In other words, the PP already comes standard with turn-key "exit strategy".

[Smith1776]

If I have to abandon the PP, it is probably only because the financial system has seized, or collapsed altogether.

In that case, my "exit strategy" is to simply write-off my 100% paper losses and sit on my physical gold holdings until the dust settles.

In other words, the PP already comes standard with turn-key "exit strategy".

You make a really good point. Browne did say that gold is the "asset of last resort."

Gold coins, silver coins, and a small wad of cash are good portfolio insurance. For one thing, there's a new type of diversification that people need to be wary of that has not really existed for most of investment history. That is, diversification away from holding our wealth in electronic infrastructure. I shudder when I think of how easy it is to have decades worth of wealth just sitting as vulnerable bits on a hard drive somewhere. Wipe out the drive, or even just cut off access to it, and years of sweat and toil are gone.

Having some wealth in tangible form that can't be hacked or otherwise wiped out digitally is definitely not a bad idea.

[ochotona]

"Hacked wealth" gets worse when you realize that most people don't download monthly brokerage and bank statements. They accept electronic delivery, but then don't get them. I have been guilty of this, too. At least if you have the latest monthly statement in a secure location you can help the provider to reconstruct your accounts.

[LC475]

An exit strategy implies that there's some background, normal, safe allocation to retreat to. The PP is that allocation.

True, I love and share this sentiment.

However, I would submit that there is an exception, just as Hal and a couple have mentioned:

The only circumstance I can conceive would be very high inflation, as you would not want to rebalance if the currency was being destroyed as in Zimbabwe or Weimar Germany.

If one were to keep rebalancing, one would not come out of the hyperinflation smelling like a rose, as the PP was designed to do. Instead, the 25% allocated to gold would keep getting smaller. And smaller. And smaller. And smaller.

If you diligently re-balance every month, or every time the gold gets over 35% (which could be even more often than monthly in a hyperinflation), you might wind up in the end with little or nothing.

Better, if inflation goes over 10%, to at least hold onto your gold and stop selling, but, probably even more rationally, to sell everything else and buy more gold, then just sit it out and see what happens. Gold is the ultra-cash.

[Smith1776]

"Hacked wealth" gets worse when you realize that most people don't download monthly brokerage and bank statements. They accept electronic delivery, but then don't get them. I have been guilty of this, too. At least if you have the latest monthly statement in a secure location you can help the provider to reconstruct your accounts.

Holy crap, you're right. I plead guilty to this, too. Time to get cracking on that for me...

[sophie]

This is a concern for me too! It's why I make a point of checking assets once a month. It means I get to notice if something's happened in time to act on it - and indeed I've found things like unauthorized charges. I've also discovered that small restaurants routinely charge my card an amount higher than I wrote on the receipt at the table. Or charged, since I no longer let those little f***rs have my credit card.

There's also the "inactive account" issue. It's good to systematically do something regularly that can be pointed to as "activity".