PP/VP Strategy Sanity Check

General Discussion on the Permanent Portfolio Strategy

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pmward
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Re: PP/VP Strategy Sanity Check

Post by pmward » Thu Jan 31, 2019 8:05 pm

Yeah and all said and done, 75% savings rate might actually be realistic for me. I'm currently saving 52% of my net base salary. I've so far done all my calculations based just on this amount. I also get about another 50% of my base salary in company equity every year, which then vests at ~6% per quarter for 4 years. This is my first year at the company, so for the next 3 years it will kind of snowball where by the 4th year I'll be vesting for parts of 4 years worth of equity grants (2x my base salary at issue price). Now, I do not count this because I work for a mid cap growth tech company and the shares are pretty volatile, so what price I'm issued at and what price I can sell for are two different things. I could make out like a bandit or get severely disappointed depending on how the market goes, and whether or not growth tech names stay in favor. I'll probably also spend some of it on fun stuff and home renovations, but most of it will be plowing into my brokerage accounts. Either way, I should be able to hit FI in under 10 years bar any unforeseen circumstances.

It definitely was a shock to me though to see how 100% equities was actually not that far ahead (and not always ahead either) for my calculations. The traditional way of being super aggressive early, and moderating over time seems to work out better for people with longer time frames to let the gains compound. For someone that is saving as aggressive as I am, it doesn't seem to work out that way. It actually has me leaning a little more conservative than I was originally planning. I mean, in most cases 100% equities had me FI only 3-6 months earlier than a more conservative approach. So why assume all that extra risk just to reach my goal 3-6 months earlier? That really doesn't seem worth it to me, ya know? This has really been eye opening to say the least. For the first time I've begun to think about not just total absolute returns, but the cost and risk associated with those returns as well.
Jeffreyalan
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Re: PP/VP Strategy Sanity Check

Post by Jeffreyalan » Thu Jan 31, 2019 8:58 pm

Just a thought but I have been using The Desert Portfolio for over a year and I am extremely pleased with the returns and low volitility. It has really helped me sleep at night and not be overly concerned with the daily market gyrations.

I am in ETFs:

IEF 60%
MGC 15%
SLY 15%
GLDM 10%

It may not be to your liking but I feel more confortable with the backtesting over the traditional PP.
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Re: PP/VP Strategy Sanity Check

Post by stuper1 » Thu Jan 31, 2019 9:55 pm

55/15/15/15 seems like a very good portfolio to me.

Have you seen the website portfoliocharts.com yet? You may find that very interesting.
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Re: PP/VP Strategy Sanity Check

Post by pmward » Fri Feb 01, 2019 8:18 am

stuper1 wrote:
Thu Jan 31, 2019 9:55 pm
55/15/15/15 seems like a very good portfolio to me.

Have you seen the website portfoliocharts.com yet? You may find that very interesting.
I had stumbled there a couple of times, but never did a deep dig through the site. Just went back on your recommendation and spent a few looking at the portfolios there, and also modeling the 55/15/15/15 that I'm contemplating. I must say, I do really like the way it models out. We also have not really had to deal with any high inflation years in a long time. I think most common portfolios don't really take inflation into account, and if they do it's either through REIT's which could be hit or miss (sure the value of the underlying real estate will go up, but at the same time the dividends will be less attractive compared to safer treasuries), or TIPS which thus far are untested in an era of high inflation (and likely to only be meh at most considering what inflation would do to the rest of the portfolio). At 37 years old, I have a very hard time believing that we will stay at these goldilocks inflation levels for the rest of my life. A period of high inflation would really make any PP style portfolio shine in comparison. I'm trying my damndest to poke holes in the 55/15/15/15 approach, but it's not proving to be an easy task. So we may have a winner. Golden butterfly also looks interesting, though I am not really a believer in growth or value factors these days as I think the market has become efficient to the point that both growth and value factors will even out in the end. If I were to overweight small caps at some point along the way I would probably just use the normal balanced S&P 600 and call it a day.
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Re: PP/VP Strategy Sanity Check

Post by pugchief » Fri Feb 01, 2019 8:42 am

stuper1 wrote:
Thu Jan 31, 2019 9:55 pm
55/15/15/15 seems like a very good portfolio to me.

Have you seen the website portfoliocharts.com yet? You may find that very interesting.
Is the 55 stocks or intermediate treasuries?
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Re: PP/VP Strategy Sanity Check

Post by Kbg » Fri Feb 01, 2019 10:02 am

If anyone is interested I’m running a leveraged Desert of 70 UST/20 TQQQ/10 VGSH and post performance from time to time in the VP PP inspired leveraged thread.
pmward
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Re: PP/VP Strategy Sanity Check

Post by pmward » Fri Feb 01, 2019 10:17 am

pugchief wrote:
Fri Feb 01, 2019 8:42 am
stuper1 wrote:
Thu Jan 31, 2019 9:55 pm
55/15/15/15 seems like a very good portfolio to me.

Have you seen the website portfoliocharts.com yet? You may find that very interesting.
Is the 55 stocks or intermediate treasuries?
55 stocks / 15 gold / 15 LTT / 15 STT
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Re: PP/VP Strategy Sanity Check

Post by pmward » Sat Feb 02, 2019 4:51 pm

Ok, so I officially wrote up my IPS. I'm going to sleep on it for a little over a week. If I'm still feeling in alignment with it on Monday the 11th then I will print it up, sign it, and rebalance all my accounts. So what I decided:

I was really leaning towards that 55/15/15/15. But when I sat down to try to figure out the logistics of how to balance between my 401k and all my Fidelity accounts (taxable, Roth IRA, rollover IRA, and HSA) it just became apparent that it was going to be a logistical nightmare. One of the things I need in a plan is simplicity, and building out complex spreadsheets to figure out how I can balance between my 401k (that only allows me to rebalance by percentages, not dollars), and my other accounts just seemed like a bit over the top. It was more trouble than it was worth.

So I'm going to lean on the bucket approach here just for my 401k and have that be a self contained 60/40 3 fund portfolio. It's not what I think is best, but it's not worth the additional headache otherwise. The only crappy thing is that my 401k has nothing available for an inflation hedge. And any bond funds other than the total bond index fund are active bond funds with .4 expense ratios. So I'm just going to do 40% total U.S., 20 % international, and 40% total bond. Really, the international is the only thing that might give me a tiny smidgen of protection if we have a bout of inflation . But, with limited options good enough really is going to have to be good enough in this case. I don't love a 60/40 portfolio, but it will work for this purpose and the important thing is that I will be able to sleep at night. Since I also have automated rebalancing my 401k is literally the very definition of set it and forget it. My 401k is also much smaller than my Fidelity accounts, and the 19k yearly contribution limit is less than I will be contributing to my Fidelity accounts each year. So, the overwhelming majority of my money will be protected.

For the rest of my accounts I'm going to do a modified golden butterfly. Since I have no gold or LTT's available in my 401k and since I'm going with a 60% stock allocation in my 401k I figured that a decrease to 40% in stock and a boost to 20% in the other assets was a fine tradeoff here. I also really like the way this portfolio models. The only modification I'm making is instead of doing 20% TSM and 20% SCV I'm just going to do a plain 40% TSM. Once again, this is mainly for ease of balancing across these accounts, and minimizing spreadsheet work I have to do every two weeks when I make new contributions. I can just do all TSM for the stock portion and not have to worry about balancing between TSM and SCV funds. Also, I believe that both small cap and value premiums have been mostly arbitraged away. They are too well known, too common, and in the days of ETF's and index factor funds too easy to implement (i.e. if it still existed it would be a free lunch, imo). I believe that there will be times both large caps and small caps have some time in the sun, and I believe that there will be times that both growth and value will have their time in the sun. By owning the haystack I at least know that I will be covered either way.

A couple things I will do from a logistics standpoint is I will prioritize LTT's in my IRA's for obvious tax reasons. I will prioritize stocks in my HSA, as my HSA is my most limited and most valuable retirement account so the more growth I can get here the better. I will prioritize cash, gold, and stocks in my taxable accounts (in that order). For cash I will hold 1 year of expenses as cash in an emergency fund money market. Everything above that I will invest in short term treasuries. I also decided that I'm not going to roll my rollover IRA into my 401k. This means I will not be able to do backdoor Roth contributions, which is a bummer. But the tradeoff is that those funds stay fully protected in this account, and I save the 60 bp bullshit "administration" fees my 401k charge. For Roth, I'm just going to have to do a conversion ladder later in life. Maybe at some point when I reach FI I'll take a year long sabbatical to travel and have fun, and the would be a good year to do a large conversion. We will see. I can cross this bridge when I come to it.

So that's it. I have it written down in an IPS contract to myself. Just going to sleep on it for a week and hopefully I'll still be on board and I can start making the changes. I think I will be able to sleep much better this way, and I will be able to place my day to day attention on things in my life that are more important than the stock market. I feel safe with this plan. I'm also currently halfway through Craig's book on the PP, and I have HB's "Why the best laid plans..." on the way. Hoping to be through both of those books by the 11th before I make any changes. Figured I would let you guys know where I ended up. You all have been very helpful, and I'm very glad I came here to get your take on things.
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Re: PP/VP Strategy Sanity Check

Post by sophie » Sun Feb 03, 2019 7:28 am

Sounds like a fine plan. The contract is an interesting idea, if it helps keep you from tinkering. You might think about a spreadsheet tab with some auto checks for rebalancing - it will contain your chosen asset allocation right there to see, and that might help you stick with the plan also.

Are you scrapping SCV because the funds are hard to find? That's certainly true at Fidelity. Their SCV index fund has an eye-popping 0.91 ER. I'm using VBR, which is not commission-free but its ER of 0.09, compared to 0.25 for the commission-free IJS, ends up saving more than the commission for a reasonably sized investment held long term.
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Re: PP/VP Strategy Sanity Check

Post by pmward » Sun Feb 03, 2019 8:56 am

Yeah I am an engineer, so I’m naturally a tinkerer. So the contract is to stop me from tinkering, haha. My biggest risk to my plan is me tinkering and changing things mid stream. My plan is long term, and anything less will produce suboptimal results. That's also why I'm trying to hash everything out now and look at things from all angles, so I know I've thought of everything and can get 100% full buy in on my plan.

My reason for not using SCV is mostly that I feel that the value premium has either been arbitraged away, or that it didn’t really exist to begin with and was just random for the timeframe with which we can back test. Value definitely performed well in the 70s and 80s, but since it's been rather meh. You can see here, at least over the last two decades there has been no real statistically significant value premium in the strategy, but there was a slight small cap premium:

https://www.portfoliovisualizer.com/bac ... 0&Gold3=20

I mainly was thinking that doing full on TSM would cover all bases and be easier to implement. However, now that you have me thinking, maybe doing S&P 600 and TSM at 20% each might not be so bad. S&P 600 performs great, and the ETF averages ~2% more per year than the Russell 2000 ETF historically because of the quality and liquidity filtering as well as more sensical rebalancing strategies. Each asset would just be 20% so I guess that really wouldn’t be much more complex than a straight 40% TSM. IJR also has only a .07% ER. I guess I didn’t look at that from all angles. I can see how having a small/large stock barbell would be complimentary to the short/long bond barbell. I would be much happier with S&P 600 core than with making a bet on a value tilt that I’m very skeptical will ever show back up in the future.

EDIT: See difference here between S&P 600 (IJR) and Russell 2000 (IWM). Now that is what I call a statistically significant difference in performance! Almost 2% more CAGR!

https://www.portfoliovisualizer.com/bac ... ion2_2=100
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Re: PP/VP Strategy Sanity Check

Post by pmward » Sun Feb 03, 2019 11:31 am

Also, before everything is set in stone next week, I would love to hear any counter arguments as to why small cap value would be a better pick than just the plain S&P 600. I'm just not seeing anything compelling in the data in the last 20 years to really make a case for SCV, it has basically performed inline with the S&P 600. Any difference has been so small in this timeframe that it's basically just noise. SCV also costs more, as I either have to pay commissions or a .25% ER vs .07% ER. But I could be missing something?
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Re: PP/VP Strategy Sanity Check

Post by pmward » Thu Feb 07, 2019 10:53 am

Looks like I got some nice unintentional market timing. I decided to pull the trigger on my modified GB. I just sold stock over the last 2 days to reallocate into my gold, bond, and cash holdings. I also rebalanced my 401k 2 days ago from 100% equities into 60/40. Today the market is down 1.5% so far. Talk about great timing or what? And the nice thing is that with the market down like this, even though I'm still waiting to receive my bonds from the 30 year auction today, I don't have a worry in the world. I will be going to bed and sleeping just fine tonight regardless of what the market does :)
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