What makes the PP actually grow?
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ahhrunforthehills
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What makes the PP actually grow?
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Last edited by ahhrunforthehills on Thu Nov 19, 2020 7:56 pm, edited 1 time in total.
Re: What makes the PP actually grow?
Stocks and bonds drive growth as they are contributing interest and dividends to the portfolio along with capital appreciation. Gold can drive growth through capital appreciation during some markets but over the very long term will match inflation. Cash is a small player but contributes some interest income. Rebalancing between these assets can drive growth during market bubbles as you are selling down the popular and buying the unpopular at low prices.
The assets do not cancel each other out though because the markets are not a predictable machine. The markets are made up of millions of people making their own decisions in their own self-interest. As the asset prices move it is generally seen that while you could see one asset drop 25, 30, 40 or even more percent in a bad bear market you will find that another one can go up 100, 200, 300 or higher percent wiping out the losses and adding gains.
The assets do not cancel each other out though because the markets are not a predictable machine. The markets are made up of millions of people making their own decisions in their own self-interest. As the asset prices move it is generally seen that while you could see one asset drop 25, 30, 40 or even more percent in a bad bear market you will find that another one can go up 100, 200, 300 or higher percent wiping out the losses and adding gains.
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Reido
Re: What makes the PP actually grow?
In my opinion - there are a few things -
Like Craigr said - Stocks add value through dividends and capital gains
LT bonds add some returns - given the risk (from inflation) so I'd assume more than cash, but less than stocks
ST bonds/Cash add a little, but probably not much more than inflation
Gold - should be expected to just mimic inflation over long periods of time.
There is, however, a premium given to rebalancing - based on the correlations and variances and std. dev's of each component of the portfolio. I believe this is why the total seems to be greater than the sum of the parts. While the portfolio is only 25% stocks, it's return is nearly as high as stocks. I believe this is the reason.
Like Craigr said - Stocks add value through dividends and capital gains
LT bonds add some returns - given the risk (from inflation) so I'd assume more than cash, but less than stocks
ST bonds/Cash add a little, but probably not much more than inflation
Gold - should be expected to just mimic inflation over long periods of time.
There is, however, a premium given to rebalancing - based on the correlations and variances and std. dev's of each component of the portfolio. I believe this is why the total seems to be greater than the sum of the parts. While the portfolio is only 25% stocks, it's return is nearly as high as stocks. I believe this is the reason.
Re: What makes the PP actually grow?
I agree with what was already said, but I'll add a big-picture explanation since it sounds like that's what you're after.
Stocks are shares of business ventures, which apply human labor to natural resources to produce worthwhile things. People are generally successfull at creating stuff when they set their mind to it, so companies generally earn positive revenue. As an investor you get a share of that revenue stream which grows the portfolio.
Bonds are loans. People would rather have money now than later (time preference of money), and are willing to pay a premium (interest) for the privilege of spending money before they earn it. Sometimes the cash goes toward capital investments that increase the borrower's productivity enough to offset the interest (e.g. a college degree or a new factory). Other times it's used to smooth out irregular expenses to match regular income (e.g. financing a car or home). In either case as a lender you are fronting this capital and get paid interest accordingly, which grows the portfolio.
Cash and gold are both a store of wealth, so in their purest forms they don't grow. The PP uses very short term bonds as cash instead of greenback bills, and those bonds earn a modest real return, due again to time preference. The duration is shorter so the return is smaller, perhaps 0-1%. That modest return roughly cancels out the modest costs associated with storing gold bullion.
On top of those fundamental drivers, people, and hence markets, have a tendency to overreact. In hindsight, bull markets tend to peak too high and bear markets tend to trough too low. As a result it is possible to profit by buying low and selling high. Rebalancing is a mechanical and foolproof method for that. The three non-cash assets are volatile so in the long run you will earn a profit buying and selling according to the rebalance bands. In another thread Clive said this rebalancing bonus is in the ballpark of 1.5%.
I think of the rebalancing bonus as compensation for being an ant, as in the fable of the Ant and the Grasshopper. Sometimes the markets are disgusted with stocks/bonds/gold and sell them off at fire sale prices. Other times the markets are starving for stocks/bonds/gold and will buy them at practically any price. As a buy-and-hold "ant," a PP investor passively maintains a healthy stock of all assets at all times and earns a reasonable profit margin selling off reserves when they're in high demand.
Stocks are shares of business ventures, which apply human labor to natural resources to produce worthwhile things. People are generally successfull at creating stuff when they set their mind to it, so companies generally earn positive revenue. As an investor you get a share of that revenue stream which grows the portfolio.
Bonds are loans. People would rather have money now than later (time preference of money), and are willing to pay a premium (interest) for the privilege of spending money before they earn it. Sometimes the cash goes toward capital investments that increase the borrower's productivity enough to offset the interest (e.g. a college degree or a new factory). Other times it's used to smooth out irregular expenses to match regular income (e.g. financing a car or home). In either case as a lender you are fronting this capital and get paid interest accordingly, which grows the portfolio.
Cash and gold are both a store of wealth, so in their purest forms they don't grow. The PP uses very short term bonds as cash instead of greenback bills, and those bonds earn a modest real return, due again to time preference. The duration is shorter so the return is smaller, perhaps 0-1%. That modest return roughly cancels out the modest costs associated with storing gold bullion.
On top of those fundamental drivers, people, and hence markets, have a tendency to overreact. In hindsight, bull markets tend to peak too high and bear markets tend to trough too low. As a result it is possible to profit by buying low and selling high. Rebalancing is a mechanical and foolproof method for that. The three non-cash assets are volatile so in the long run you will earn a profit buying and selling according to the rebalance bands. In another thread Clive said this rebalancing bonus is in the ballpark of 1.5%.
I think of the rebalancing bonus as compensation for being an ant, as in the fable of the Ant and the Grasshopper. Sometimes the markets are disgusted with stocks/bonds/gold and sell them off at fire sale prices. Other times the markets are starving for stocks/bonds/gold and will buy them at practically any price. As a buy-and-hold "ant," a PP investor passively maintains a healthy stock of all assets at all times and earns a reasonable profit margin selling off reserves when they're in high demand.
Last edited by KevinW on Mon Oct 25, 2010 2:16 pm, edited 1 time in total.