If The Stock Market Crashes Which Asset Will Save Us?

[Don]

I'm looking at a market crash ahead. Which asset in the PP will save us? Also, any non PP assets, possibly like TBT?

[dockinGA]

I'm looking at a market crash ahead. Which asset in the PP will save us? Also, any non PP assets, possibly like TBT?

I think there is a distinct possibility that no asset class will 'save' us. The PP will have to take it's medicine just like everyone else, just to a much lower extent. I'm just hoping to 'not be as bad as that guy.'

[PrimalToker]

I'm looking at a market crash ahead. Which asset in the PP will save us? Also, any non PP assets, possibly like TBT?

The cash. In a market crash people sell everything. I use VXX as a play on volatility for when I think they'll be some fireworks.

[ppnewbie]

IMHO - Cash and LTT’s (unless the dollar starts to lose its reserve status).

[glennds]

Cash and to a lesser degree LTT.
Cash especially if you have the guts to rebalance and buy the depressed assets at a discount. Easier said than done though.

FWIW, planning for a crash has proven to be much more expensive in terms of opportunity cost than actually suffering through one, at least for me. Peace of mind is important, no doubt, but everything has a cost.

[dockinGA]

FWIW, planning for a crash has proven to be much more expensive in terms of opportunity cost than actually suffering through one, at least for me. Peace of mind is important, no doubt, but everything has a cost.

Glenn, I assume you're referring to your lost gains by being invested in the PP vs a more aggressive portfolio? Or maybe I'm completely off base.

[dualstow]

I'm looking at a market crash ahead. Which asset in the PP will save us? Also, any non PP assets, possibly like TBT?

future stocks.

[glennds]

FWIW, planning for a crash has proven to be much more expensive in terms of opportunity cost than actually suffering through one, at least for me. Peace of mind is important, no doubt, but everything has a cost.

Glenn, I assume you're referring to your lost gains by being invested in the PP vs a more aggressive portfolio? Or maybe I'm completely off base.

Yes, pretty much.
Don't get me wrong, I'm a PP fan, and maintain one. For context, in 2011 when the 2008 crash was still fresh in all our minds, I was almost entirely invested in a PP, for safety. By 2012, I decided to break some assets away and put them 100% in stocks, some in index funds, and some in individual tech stock choices, but mostly bigger names you would know like AAPL, AMZN, MSFT, TSLA, ADBE and a few others. The difference in performance has been staggering. I tried not to get too excited thinking there would be large drops in the aggressive portfolio and it would revert to a more modest mean like the backtesting suggests. But 10 years in, my PP has averaged a CAGR of 5.5% and the variable portfolio has been close to 19%. Had I remained 100% PP, I would have left a LOT of money on the table, hindsight being 20/20.

Again, I'm a fan of the PP, but for me the important thing is to have no more invested in it than that certain amount that you absolutely cannot afford to lose. I try not to make decisions based on impending crashes or plan for failure.
As much certainty as some have that there is a crash around the corner, fiat money is about to collapse, the Fed is incompetent, the whole system is rigged, etc, there is a counter argument that maybe no crash is coming, maybe the Fed knows what they are doing, maybe the system isn't rigged. Can you afford to not fully participate if the latter argument wins?

So I now set aside my personal biases and try to keep a foot in each camp, but the past 12 years has shown me there is an opportunity cost to the PP that you need to consider depending on your personal situation, time horizon being one.

Quick story - a good friend and enthusiastic investor called me up in Feb 2020 and predicted that the virus spreading in China would make its way to the US and we would have a market crash. So he cashed out. Of everything. Asked me what I was going to to. I told him nothing, I planned to ride it down and ride it back up again. Well it wasn't pleasant watching my portfolio crash with the markets, but the comeback a few months later was beyond what anyone would have predicted and I'm in a much better position than I was in Feb 2020.
My friend looked and felt brilliant for dodging the crash bullet, but then he looked not so brilliant writing his tax check and sitting on the sidelines missing the recovery because he was too paralyzed with fear to get back into the market. As I see it he dodged a bullet but missed an even bigger party. He's still mostly invested in the single worst (depreciating) asset IMO, cash.

That's one great thing about the PP, the guardrails against the temptation to market time, and the forced rebalancing that would otherwise be hard to do for all but the most disciplined investors. But keep it in moderation.

[dockinGA]

FWIW, planning for a crash has proven to be much more expensive in terms of opportunity cost than actually suffering through one, at least for me. Peace of mind is important, no doubt, but everything has a cost.

Glenn, I assume you're referring to your lost gains by being invested in the PP vs a more aggressive portfolio? Or maybe I'm completely off base.

Yes, pretty much.
Don't get me wrong, I'm a PP fan, and maintain one. For context, in 2011 when the 2008 crash was still fresh in all our minds, I was almost entirely invested in a PP, for safety. By 2012, I decided to break some assets away and put them 100% in stocks, some in index funds, and some in individual tech stock choices, but mostly bigger names you would know like AAPL, AMZN, MSFT, TSLA, ADBE and a few others. The difference in performance has been staggering. I tried not to get too excited thinking there would be large drops in the aggressive portfolio and it would revert to a more modest mean like the backtesting suggests. But 10 years in, my PP has averaged a CAGR of 5.5% and the variable portfolio has been close to 19%. Had I remained 100% PP, I would have left a LOT of money on the table, hindsight being 20/20.

Again, I'm a fan of the PP, but for me the important thing is to have no more invested in it than that certain amount that you absolutely cannot afford to lose. I try not to make decisions based on impending crashes or plan for failure.
As much certainty as some have that there is a crash around the corner, fiat money is about to collapse, the Fed is incompetent, the whole system is rigged, etc, there is a counter argument that maybe no crash is coming, maybe the Fed knows what they are doing, maybe the system isn't rigged. Can you afford to not fully participate if the latter argument wins?

So I now set aside my personal biases and try to keep a foot in each camp, but the past 12 years has shown me there is an opportunity cost to the PP that you need to consider depending on your personal situation, time horizon being one.

Quick story - a good friend and enthusiastic investor called me up in Feb 2020 and predicted that the virus spreading in China would make its way to the US and we would have a market crash. So he cashed out. Of everything. Asked me what I was going to to. I told him nothing, I planned to ride it down and ride it back up again. Well it wasn't pleasant watching my portfolio crash with the markets, but the comeback a few months later was beyond what anyone would have predicted and I'm in a much better position than I was in Feb 2020.
My friend looked and felt brilliant for dodging the crash bullet, but then he looked not so brilliant writing his tax check and sitting on the sidelines missing the recovery because he was too paralyzed with fear to get back into the market. As I see it he dodged a bullet but missed an even bigger party. He's still mostly invested in the single worst (depreciating) asset IMO, cash.

That's one great thing about the PP, the guardrails against the temptation to market time, and the forced rebalancing that would otherwise be hard to do for all but the most disciplined investors. But keep it in moderation.

This in an excellent perspective, and I feel similarly. I'm now at a point where I have enough assets in PP/GB portfolios to (using historical predictions) support me from now till the day I die. No one can know for sure, but the PP would have to be completely broken for me to have any issues whatsoever, and that's assuming that I don't make lifestyle changes to adapt in a pinch. So, prior to me recently leaving a dead-end job in a toxic environment that was slowly killing me, I've been toying with the idea of going 100% stocks with all future 'stockpiled' funds. I guess at the end of the day it's essentially the whole PP/VP concept as laid out initially by HB. In my case I've determined that the money to support me and my wife for the rest of our lives is money we can't afford to lose and have it invested in the PP, and everything else will be VP money with the intention of becoming filthy rich.

Now to just get my batteries recharged and back to work in a few months so I can start stockpiling again....

[joypog]

I'm just getting into the world of PP. I've held random indexes but we had gone pretty high in cash in part due to the pandemic and in part due to wanting to buy a house until the market skyrocketed beyond our willingness to purchase.

I read Craig's book and really loved the concept so we're going to start moving in over the next few months. However, we have enough savings we might actually still keep a portion as VP.

What metric have you used to determine your PP versus your VP? I love my job so I'm not a FIRE afficianado but I remember an interview where someone said 20x or 30x your monthly spending. Does that feel right to y'all?

[Hal]

I'm just getting into the world of PP. I've held random indexes but we had gone pretty high in cash in part due to the pandemic and in part due to wanting to buy a house until the market skyrocketed beyond our willingness to purchase.

I read Craig's book and really loved the concept so we're going to start moving in over the next few months. However, we have enough savings we might actually still keep a portion as VP.

What metric have you used to determine your PP versus your VP? I love my job so I'm not a FIRE afficianado but I remember an interview where someone said 20x or 30x your monthly spending. Does that feel right to y'all?

Hi Joypog,

Craigs book was very good. You might also want to listen to https://www.youtube.com/channel/UCzu55W ... QIQ/videos.

Personally, I use a maximum of a 20% VP of my total assets with a 10% target. Why? Being retired, I won't be able to earn back the VP funds if they are lost. Also just remember, your job might be great today, but if they change management it might go from a great place to hell on earth. This I have experienced In that environment, financial independence is a godsend!

Best of luck in your endeavours.

[joypog]

Thank you for the link, yes I will check out those radio shows!

And yes you're correct. I finished undergrad right before the dotcom bust and grad right before the recession so yeah, I'm always paranoid about how fast things change. I suspect that's why we built up such a heavy cash position over the past few years....

[dockinGA]

I'm just getting into the world of PP. I've held random indexes but we had gone pretty high in cash in part due to the pandemic and in part due to wanting to buy a house until the market skyrocketed beyond our willingness to purchase.

I read Craig's book and really loved the concept so we're going to start moving in over the next few months. However, we have enough savings we might actually still keep a portion as VP.

What metric have you used to determine your PP versus your VP? I love my job so I'm not a FIRE afficianado but I remember an interview where someone said 20x or 30x your monthly spending. Does that feel right to y'all?

Also just remember, your job might be great today, but if they change management it might go from a great place to hell on earth. This I have experienced In that environment, financial independence is a godsend!

Excellent point that I've somewhat recently personally experienced. Changed jobs several years ago, realized pretty quickly I'd made a mistake, but things only got worse and worse and worse by the year, with career burnout getting worse and worse as a result. I held on long enough to reach FI, which eventually allowed me to have the mindset to leave the job with nothing else lined up with the goal of taking a few months off to figure out what to do with the rest of my life. There were a lot of jealous coworkers that are still there working who weren't financially able to walk away, even for a short term recharge.

[joypog]

There were a lot of jealous coworkers that are still there working who weren't financially able to walk away, even for a short term recharge.

A decade ago I worked in a corporate firm for a two years. Some of my old coworkers are still stuck there, still hating their jobs, still understaffed and overworked.

My wife and I might not be great at investing, but we've been awfully good at saving. So we've always been free to make moves without having to worry our income (in our case we moved to live closer to parents even though it resulted in a resulted in a 33% paycut of my salary...not including the fact she decided to start staying at home with the kids). To be fair, our parents paid our way through school so we had zero debt.

But points well taken about the vagaries of work life. To bolster your point, the administrator in my division recently retired. Hopefully they'll find a good replacement, but if not, y'all might well be precient. At the worst I need to make it to another 16 months to vest in the pension....

[Vil]

My wife and I might not be great at investing, but we've been awfully good at saving.

According to Paul Belanger's new book (which is discussed in another thread) savings rate is if not important, at least equally important to the investing strategy you choose. He provided some very simple, but insightful graphics starting from the very extreme (0% return case).
I am in full agreement with his statements. Do not really like ''possum living" type of frugality, but if I have to choose in between brand new BMW versus the freedom to drink coffee late in the morning reading a book... you get it

[buddtholomew]

Why would you bother investing in a portfolio that fails during the most in-opportune time?

Case in point, YTD stocks down 13%, LTT’s down 16%, Gold up 5% and Cash down whatever inflation is at the moment.

Case 2, today, stocks down 3.5%, LTT’s down 1.35% and Gold down/flat as well.

Seems like a loser to me and glad I sold out when I did.

Just think long and hard about your decision as I too was smitten by Craig and Medium Tex after reading their book.

Sounds great in principle, in practice it lets you down over and over.

[joypog]

Fair warning. I think we'll have to just try it and find out.

What I do know is that a decade of feeling that I should just do a a 60/40 bogle split resulted in keeping us at 70% cash during one of the great stock runups in history..fortunately inflation was low during this time so we weren't punished (apart from missed gains). But its clear that the bogle mantra was ineffective in getting us into the market.

The PP gives us a conceptual framework that gives us a gameplan moving forward (beyond the usual BH refrain of "buy moar!!"). We're well aware that it is not optimized for gain. But all we're hoping for is keeping a percent or two ahead of inflation (hence the desire to get out of the cash heavy position) and minimize the chance of a brutal slaughter ala 2008 (why I'm not going into the 3-fund portfolio).

Maybe it will be fools gold. Hard to say. Unfortuantely we'll only find out in 20 years....

BTW, how are you investing nowawdays as a recovering PPer? Thanks!

[dockinGA]

Why would you bother investing in a portfolio that fails during the most in-opportune time?

Case in point, YTD stocks down 13%, LTT’s down 16%, Gold up 5% and Cash down whatever inflation is at the moment.

Case 2, today, stocks down 3.5%, LTT’s down 1.35% and Gold down/flat as well.

Seems like a loser to me and glad I sold out when I did.

Just think long and hard about your decision as I too was smitten by Craig and Medium Tex after reading their book.

Sounds great in principle, in practice it lets you down over and over.

By my calculations, that means the PP is down 6% YTD. If you were all stocks, you're down 13%. 60/40 would be down 11% or so. Explain to me how this portfolio has failed?

If you (or anyone else) signed up for the PP or something like it expecting that it would NEVER LOSE MONEY then you didn't fully understand what you were getting in to.

I understand I am talking to a wall.......

[buddtholomew]

Why would you bother investing in a portfolio that fails during the most in-opportune time?

Case in point, YTD stocks down 13%, LTT’s down 16%, Gold up 5% and Cash down whatever inflation is at the moment.

Case 2, today, stocks down 3.5%, LTT’s down 1.35% and Gold down/flat as well.

Seems like a loser to me and glad I sold out when I did.

Just think long and hard about your decision as I too was smitten by Craig and Medium Tex after reading their book.

Sounds great in principle, in practice it lets you down over and over.

By my calculations, that means the PP is down 6% YTD. If you were all stocks, you're down 13%. 60/40 would be down 11% or so. Explain to me how this portfolio has failed?

If you (or anyone else) signed up for the PP or something like it expecting that it would NEVER LOSE MONEY then you didn't fully understand what you were getting in to.

I understand I am talking to a wall.......

...and prey tell what did you give up the last 12 years in gains? I could fall 50% and still be ahead of the PP, maybe more. Also, why are you comparing to a 60/40? That’s not equivalent to a portfolio that has 25% in stocks. Take a little of your own medicine friend.

[boglerdude]

> minimize the chance of a brutal slaughter ala 2008

The PP is the highest yielding emergency fund. I'm in it in case I need to sell almost everything overnight. If you want the best return do what Buffett does, large enough emergency fund and the rest stocks

[Hal]

For portfolios with 25% in shares...
PP is blue, 25% Shares 75% 10Y Treasuries red

If you take out the inflationary period of the 70's/early 80's they both track similarly.
Appears the PP is just like a 25/75 portfolio hedged against inflation.

Want super high returns? Try something else.

[dualstow]

Maybe it will be fools gold. Hard to say. Unfortuantely we'll only find out in 20 years....

It won’t be. The pp is has no glitter. It’s all about stability and robustness, and not squeezing every last % out of the principal. For that there is stock options and leveraging, sports betting etc.

…
The PP is the highest yielding emergency fund. …

I like that.

[joypog]

Maybe it will be fools gold. Hard to say. Unfortuantely we'll only find out in 20 years....

It won’t be. The pp is has no glitter. It’s all about stability and robustness, and not squeezing every last % out of the principal. For that there is stock options and leveraging, sports betting etc.

Yes, that was my opinion after finally understanding the system - it's all about missing out on big busts (and yes, at the cost of big gains).

Over the past week I've developed two main critiques of mainstream passive investor commentary on the PP system

1) The first is in terms of perspective and mindset. They are approaching PP they would their typical optimization exercise with tilts and percentages. It's a reasonable way to double check the proposed system, but it's not looking at PP on its terms. The assets in PP are there to do specific jobs that come together to minimize volatility. I would be amenable to critiques of the PP that challenges HB's fundamental claims about the four different economic conditions or questions the efficiacy of a particular asset class to do it's assigned job. I haven't seen any of the former (aside from some comments about probility weighing, but it always results in a loss of simplicity). And while there is consternation about the heavy gold holdings, none of the critqiures propose a better alternative to fulfill the role that gold does in the PP system. Notably, Bill Bernstein does not make these mistakes, and even though he doesn't follow the PP it was his article that made me look at the system seriously.

2) Conventional reviews of the PP always ignore the Variable Portfolio portion of the HB system. I'm not an FI'er but they have a rule of thumb of 25x annual expenses. If someone who uses $24k/yr quit right when they hit $600k, I guess the critique could be reasonable, though I would respond that's a risky life play. If that person has saved up beyond the line, their VP could weigh the allocation back to more conventional passive AA's. For example, with $1M in savings with a 600k PP and all stock 400k VP the allocation would be 150x3 + 550k in stocks. A classic bogle would be $24k emergency cash/586stock/390bond. In that scenario, I suspect the final chart would look quite similar to Hal's chart.

3) That said, there may be a reasonable critique about whether PP is appropriate for a young gun early in their accumulation phase. But I'm happily in middle age and have no interest in ruminating about the my misteps. Even there - I'd say having a PP as an emergency fund would have been an improvement over my heavy cash holdings. Psychology might be key here.

Indeed, behavioral risk is my biggest fear with the PP. I'm curious whether my wife and I will have the stomach to handle the upcoming turmoil that the US is heading into (my guess). Psychology is weird in trying times and I'm not immune.

Then again TINA....unless I get distracted by another shiny investment theory.

[dockinGA]

Why would you bother investing in a portfolio that fails during the most in-opportune time?

Case in point, YTD stocks down 13%, LTT’s down 16%, Gold up 5% and Cash down whatever inflation is at the moment.

Case 2, today, stocks down 3.5%, LTT’s down 1.35% and Gold down/flat as well.

Seems like a loser to me and glad I sold out when I did.

Just think long and hard about your decision as I too was smitten by Craig and Medium Tex after reading their book.

Sounds great in principle, in practice it lets you down over and over.

By my calculations, that means the PP is down 6% YTD. If you were all stocks, you're down 13%. 60/40 would be down 11% or so. Explain to me how this portfolio has failed?

If you (or anyone else) signed up for the PP or something like it expecting that it would NEVER LOSE MONEY then you didn't fully understand what you were getting in to.

I understand I am talking to a wall.......

...and prey tell what did you give up the last 12 years in gains? I could fall 50% and still be ahead of the PP, maybe more. Also, why are you comparing to a 60/40? That’s not equivalent to a portfolio that has 25% in stocks. Take a little of your own medicine friend.

I'm comparing the 60/40 because it's a commonly held portfolio, moron. I wish you would leave like Mathjak did. Surprisingly, I think you have EVEN LESS to provide to this forum than he did, and that's a remarkably low bar to clear.

[buddtholomew]

Why would you bother investing in a portfolio that fails during the most in-opportune time?

Case in point, YTD stocks down 13%, LTT’s down 16%, Gold up 5% and Cash down whatever inflation is at the moment.

Case 2, today, stocks down 3.5%, LTT’s down 1.35% and Gold down/flat as well.

Seems like a loser to me and glad I sold out when I did.

Just think long and hard about your decision as I too was smitten by Craig and Medium Tex after reading their book.

Sounds great in principle, in practice it lets you down over and over.

By my calculations, that means the PP is down 6% YTD. If you were all stocks, you're down 13%. 60/40 would be down 11% or so. Explain to me how this portfolio has failed?

If you (or anyone else) signed up for the PP or something like it expecting that it would NEVER LOSE MONEY then you didn't fully understand what you were getting in to.

I understand I am talking to a wall.......

...and prey tell what did you give up the last 12 years in gains? I could fall 50% and still be ahead of the PP, maybe more. Also, why are you comparing to a 60/40? That’s not equivalent to a portfolio that has 25% in stocks. Take a little of your own medicine friend.

I'm comparing the 60/40 because it's a commonly held portfolio, moron. I wish you would leave like Mathjak did. Surprisingly, I think you have EVEN LESS to provide to this forum than he did, and that's a remarkably low bar to clear.

You’re an angry fella aren’t you and you display your ignorance for everyone to see by calling me names. Do you always harass others that don’t share your same opinions?

Now, to highlight your stupidity, I will explain why a 60/40 allocation is a bad comparison. If you know how to use the search functionality, you can query this board and see countless examples why 60/40 should not be used. I know firsthand you see because I used that very example and others pointed out it was a poor comparison since the PP only had 25% in stocks.

To prove your point that a 60/40 allocation has underperformed the PP YTD you chose to use the same allocation that others have chastised me for in the past.

You can’t have it both ways...use the comparison when stocks are down (PP winning) and conversely disallow the comparison (PP losing) when stocks are up.

I’ve read the books, listened to HB’s podcasts, love the idea of the PP, but it doesn’t live up to expectations. It’s like putting and coming up short of the hole every time.