I'm Done!

[Alanw]

What is the alternative?  Outside of 100% cash or T-Bills what should we be investing in?  And wouldn't that be more dangerous than a Permanent Portfolio?  I'm still guilty of looking at my portfolio on a daily basis after having been in the PP for about a year.  Not sure why because I'm nowhere near a rebalancing band.  I guess I just can't quite accept the fact that the market is more efficient than I am, although I have already been taught that lesson. 

[dualstow]

Don't look now, bu it's another down day for the PP (as usual).

The pp that I set up for my father is a little below 0% in gains. It's about 0.3% of his entire holdings, so I don't think he's even looking. But yeah, the pp is going to have down days. Maybe 2012 will be a down year. I know you're worried about losing your job, but asking the pp to save you is like hoping V8 juice will cure cancer. The pp is nutritious, but it's not perfect. It's just the best thing out there, short of a working crystal ball.

[iwealth]

Personally I've been thinking about lightening up on the gold and LTT's and combining the PP w/ Larry Swedroe's minimalize fat tails approach.

So it'd be:

12.5% - Total US Market - VTI
7.5% - Small Cap Value - IWN
7.5% - Emerging Mkt - EEM
12.5% - Long Term Govt Bond - TLT
17.5% - TIPS - TIP
30% - 2 Year ST Treasury - SHY
12.5% - Gold - GLD

Gold scares me a bit because of the rampant speculation in the markets. I'd like to believe it is being driven by fundamentals but it's a favorite of traders for sure. Also, gold is so hot right now. Maybe for good reason, maybe not. I can't predict that.  Anyway I ran this through Simba's backtesting spreadsheet and got pretty good results. Comparable to PP for sure.

And since I'm in my early 30's, I'm going to keep 10% for a variable portfolio to either average into market dips or sell Apple puts every month till I'm stuck with the stock. I just love the Apple growth potential and it's relatively low P/E.  

[MediumTex]

It looks like it just went green for the day.

Hooray!

[MediumTex]

Personally I've been thinking about lightening up on the gold and LTT's and combining the PP w/ Larry Swedroe's minimalize fat tails approach.

You do know that Swedroe's portfolios have been stomped by the PP in recent years, right?

So it'd be:

12.5% - Total US Market - VTI
7.5% - Small Cap Value - IWN
7.5% - Emerging Mkt - EEM
12.5% - Long Term Govt Bond - TLT
17.5% - TIPS - TIP
30% - 2 Year ST Treasury - SHY
12.5% - Gold - GLD

You could call that "The Tinker House Portfolio".

Gold scares me a bit because of the rampant speculation in the markets. I'd like to believe it is being driven by fundamentals but it's a favorite of traders for sure. Also, gold is so hot right now. Maybe for good reason, maybe not. I can't predict that.  Anyway I ran this through Simba's backtesting spreadsheet and got pretty good results. Comparable to PP for sure.

I would say that gold is anything but hot right now.  It's basically been falling for a year.

And since I'm in my early 30's, I'm going to keep 10% for a variable portfolio to either average into market dips or sell Apple puts every month till I'm stuck with the stock. I just love the Apple growth potential and it's relatively low P/E.  

Apple is a great company for VP purposes, but once you become the largest company in the world I wonder if the growth story isn't closer to the end than the beginning.

[Tyler]

It looks like it just went green for the day.

Hooray!

Hey MediumTex - I've got a new PP timing method I'm going to tryout.  I'm going to watch the market every morning.  If it's in the red, I'll sell everything. In the green, I'll buy.

What do you think?  

Seriously, though - Part of investing is learning to address your mental hang-ups about money. Maybe that would be a good chapter for the book. 

[buddtholomew]

It looks like it just went green for the day.

Hooray!

Well, that changes everything...I feel reborn.

[Khisanth]

bud there were days that the PP had all 4 asset classes going up. Why weren't you questioning it then? If all four assets can go up at once, there can be days where they all go down.

PP is probably 90% of my available liquid assets, and the cash makes up my emergency fund. Like others have said, it's probably more comfortable if you increase your cash allocation until you stop stressing.

[iwealth]

Apple is a great company for VP purposes, but once you become the largest company in the world I wonder if the growth story isn't closer to the end than the beginning.

I can certainly see the growth leveling off in the next couple years, but w/ no debt and $110 billion in cash on the books, I believe their share price is relatively protected from falling below a certain level. Hence the put selling approach. Could be a decent income generator - and it's not a stock I'd mind owning given a market collapse.

As far as the tinkered portfolio goes, I agree, guilty as charged. Not sure what else to say besides that I have a strange fear that bonds particularly and maybe gold are in bubble territory. But if I'm totally wrong, the portfolio I outlined above would not perform as well as PP, but not be destroyed either. I did enter a 30% position into pure PP via ETF's. I have some more to allocate...just trying to figure out where to go with it.

[buddtholomew]

bud there were days that the PP had all 4 asset classes going up. Why weren't you questioning it then? If all four assets can go up at once, there can be days where they all go down.

PP is probably 90% of my available liquid assets, and the cash makes up my emergency fund. Like others have said, it's probably more comfortable if you increase your cash allocation until you stop stressing.

I feel equally uneasy when all assets are moving in the same direction, either upwards or downwards. Also, I am confident that other PP investors have a similar emotional reaction when the portfolio declines on consecutive days. Just look at the number of thread views for confirmation.

[MediumTex]

bud there were days that the PP had all 4 asset classes going up. Why weren't you questioning it then? If all four assets can go up at once, there can be days where they all go down.

PP is probably 90% of my available liquid assets, and the cash makes up my emergency fund. Like others have said, it's probably more comfortable if you increase your cash allocation until you stop stressing.

I feel equally uneasy when all assets are moving in the same direction, either upwards or downwards. Also, I am confident that other PP investors have a similar emotional reaction when the portfolio declines on consecutive days. Just look at the number of thread views for confirmation.

I have no doubt that there are lots of people who don't like to see their portfolios decline in value.  The question is what to do about it.  I think that a lot of people probably use the PP because it is so much more stable than many other strategies.

As others have said, though, anything but 100% cash is going to have ups and downs.  I assume people know this going in and shouldn't be surprised when it happens.

With all that said, we're still on track for a decent year with the PP.  It's nothing to complain about, IMHO, especially given that the last three years have been really strong.

[lazyboy]

bud there were days that the PP had all 4 asset classes going up. Why weren't you questioning it then? If all four assets can go up at once, there can be days where they all go down.

PP is probably 90% of my available liquid assets, and the cash makes up my emergency fund. Like others have said, it's probably more comfortable if you increase your cash allocation until you stop stressing.

I feel equally uneasy when all assets are moving in the same direction, either upwards or downwards. Also, I am confident that other PP investors have a similar emotional reaction when the portfolio declines on consecutive days. Just look at the number of thread views for confirmation.

I have no doubt that there are lots of people who don't like to see their portfolios decline in value.  The question is what to do about it.  I think that a lot of people probably use the PP because it is so much more stable than many other strategies.

As others have said, though, anything but 100% cash is going to have ups and downs.  I assume people know this going in and shouldn't be surprised when it happens.

With all that said, we're still on track for a decent year with the PP.  It's nothing to complain about, IMHO, especially given that the last three years have been really strong.

I've been learning this one the hard way, it seems, most of my life. But I'm finally starting to get it:

Don't believe what you think! (particularly feared based thinking). 

[Mark Leavy]

bud there were days that the PP had all 4 asset classes going up. Why weren't you questioning it then? If all four assets can go up at once, there can be days where they all go down.

PP is probably 90% of my available liquid assets, and the cash makes up my emergency fund. Like others have said, it's probably more comfortable if you increase your cash allocation until you stop stressing.

I feel equally uneasy when all assets are moving in the same direction, either upwards or downwards. Also, I am confident that other PP investors have a similar emotional reaction when the portfolio declines on consecutive days. Just look at the number of thread views for confirmation.

The one thing that has really impressed me about the PP allocation is that the four assets are very nearly *uncorrelated*.  A cross correlation between all four assets is nearly zero off the diagonal.  Not positive.  Not negative, but nearly zero.  I couldn't find any other asset classes to maintain this diagonal.

So... what this imples to me is that I need to see an equal number of days where all assets are down and all assets are up and two are up and two are down and three are up and 1 is down and three are down and one is up.  Seeing anything other than that worries me.

[Xan]

I pretty much assume that when all three "invested" assets are down, then people are running to dollars and my cash is going up.  This probably isn't literally true each and every such day, but in the long run I bet it would be.  This certainly helps me to get through the down days!

[sophie]

What a great thread!!!  Gumby, you should charge for your charting service.

Buddtholomew, I can sympathize and so can a lot of other people here.  No one can say it isn't demoralizing to watch one's hard earned money shrinking on a daily basis.

But in the grand scheme of things, is this "doing badly"?  I have no idea.  So far, my investing prediction record is perfect:  absolutely, positively, 100% wrong.  Just to take one example: I agonized about those LT treasuries for months, and finally, after reading through all the helpful posts on the subject on this board, bought them along with the rest of the package in much the same way that you might cannonball into an Alaskan lake in early spring.  Now they're the portfolio's saving grace.  Even if some other investment might be doing better right now (and there is always going to be "some other investment"), would that always be the case?

There is a Chinese fable that I find calms me down when I start going down into the panic vortex.  This is a version told by a friend from Taiwan:

There was once a farmer who owned an old plow horse. One day, the horse ran away.  The farmer's neighbors said to him, "Oh Chang, you are so unlucky!".  The farmer said only, "Who knows what is good, and what is not?"

A week later, the horse returned with a herd of other horses from the hills around the village.  This time, the neighbors said, "Oh Chang!  You are so lucky!"  The farmer said only, "Who knows what is good, and what is not?"

Then, when the farmer's son was attempting to tame one of the wild horses, he fell off its back and broke his leg so badly he was crippled for life.  The neighbors said, "Oh Chang!  How unlucky you are!"  The farmer said only, "Who knows what is good, and what is not?"

Months later, the army marched into the village and conscripted every able-bodied young man they could find.  Because of his crippled leg, the the farmer's son was let go.  The neighbors, broken-hearted from losing their sons, said, "Oh Chang!  You are so lucky!"  The farmer said only, "Who knows what is good, and what is not?"

[MediumTex]

What a great thread!!!  Gumby, you should charge for your charting service.

Buddtholomew, I can sympathize and so can a lot of other people here.  No one can say it isn't demoralizing to watch one's hard earned money shrinking on a daily basis.

But in the grand scheme of things, is this "doing badly"?  I have no idea.  So far, my investing prediction record is perfect:  absolutely, positively, 100% wrong.  Just to take one example: I agonized about those LT treasuries for months, and finally, after reading through all the helpful posts on the subject on this board, bought them along with the rest of the package in much the same way that you might cannonball into an Alaskan lake in early spring.  Now they're the portfolio's saving grace.  Even if some other investment might be doing better right now (and there is always going to be "some other investment"), would that always be the case?

Your experience is very similar to many others here.

Lots of us have bought LT treasuries with the near certainty that it was a big mistake, only to find them the best performing asset in the portfolio in the months and years after setting up the PP.

[Tortoise]

I pretty much assume that when all three "invested" assets are down, then people are running to dollars and my cash is going up.  This probably isn't literally true each and every such day, but in the long run I bet it would be.  This certainly helps me to get through the down days!

If we assume stocks, long bonds, and gold are all declining over a sustained period of time, that basically means people are piling into cash, and I would argue that prices must therefore be falling throughout the economy. But that's the definition of deflation, and deflation causes long bonds to rise. So to me, it doesn't make economic sense to assume that all three of the PP's volatile assets would decline together for a sustained period of time.

Maybe that's why we've only seen one year since the Dawn of PP History (1972) in which stocks, long bonds, and gold were all down for the year. That year was 1994, and even then, stocks were only barely down by 0.2%.

[Tortoise]

1946 Stocks down -8.07%, LTT's -0.1%, T-Bills +0.35%, PM (silver) -13.8%, inflation 18.16%. In real terms that was a -23.5% PP loss.

1947, saw another -10% loss in real terms.

If you'd also been taking an income, then the declines would have been even larger.

The primary cause, best as I can tell, is that treasury yields were being suppressed during those years (as they are now) and when inflation had suddenly spiked.

There are other examples, such as around 1919 when a similar effect occurred.

Isn't it a bit misleading, though, to refer to the existence of the PP for U.S. investors prior to Nixon's closing of the gold window in 1971? A true PP as Harry Browne defined it must be denominated in a fiat currency so that gold can respond appropriately in times of high inflation and uncertainty. In the examples you gave from the 1940s, the dollar still had ties to gold via Bretton Woods and was thus not yet a true fiat currency.

Also, it doesn't make a lot of sense to refer to a PP that holds 25% silver instead of 25% gold, because by HB's definition that's not a PP--that's some other portfolio altogether. The silver market is much smaller and more volatile than the gold market, and it doesn't respond in the same way as gold to monetary crises and extreme market uncertainty.

[sophie]

Quote from: Tortoise on May 11, 2012, 07:06:15 PM
If we assume stocks, long bonds, and gold are all declining over a sustained period of time, that basically means people are piling into cash, and I would argue that prices must therefore be falling throughout the economy. But that's the definition of deflation, and deflation causes long bonds to rise. So to me, it doesn't make economic sense to assume that all three of the PP's volatile assets would decline together for a sustained period of time.

Maybe that's why we've only seen one year since the Dawn of PP History (1972) in which stocks, long bonds, and gold were all down for the year. That year was 1994, and even then, stocks were only barely down by 0.2%.

1946 Stocks down -8.07%, LTT's -0.1%, T-Bills +0.35%, PM (silver) -13.8%, inflation 18.16%. In real terms that was a -23.5% PP loss.

I'm not sure the 1946 number for precious metals is valid.  Silver isn't always a good indicator of gold price, and dollars were not the same as dollars now, being on the gold standard.  Yes I know it's not EXACTLY 1-1, but if you assume gold was flat for the year which it was by definition, then the loss would have been a hair under 8%.   In the post-gold standard era for which the PP was designed, it's hard to imagine gold not going up with inflation that high.

Harry Browne himself gave an example of a condition under which stocks, long bonds and gold would all go down:  a tight money recession.   Since such recessions are short and would not affect cash, they might not necessarily translate to a calendar year loss.  There might, of course, be other conditions that would cause the same effect.  Perhaps the later stages of a very long-term deflation, when bonds have run out of gas?

If there is such a thing as judging current economic conditions from PP asset behaviors....it certainly looks, smells, and quacks like deflation.  The problem is that the two most volatile assets are both moving in lock step, and the long bonds aren't increasing fast enough to offset the losses.  No worries.  Either it's a transient effect, or we'll soon be rebalancing into gold and stocks, maybe just in time for them to swing back up.

 

[dualstow]

Personally I've been thinking about lightening up on the gold and LTT's and ~

It's too bad we don't have Harry around b/c we could call him on Money Talk and have him reassure us that it's still ok to hold gold (or tell us that, yes, speculation is rampant and that we should make a special adjustment). I'm fine holding the full 25%, and the whole pp is now about 30% of my pp+vp.

I suppose that if Craig or MT announced that we should cut back on gold, I probably would.

[craigr]

Personally I've been thinking about lightening up on the gold and LTT's and ~

It's too bad we don't have Harry around b/c we could call him on Money Talk and have him reassure us that it's still ok to hold gold (or tell us that, yes, speculation is rampant and that we should make a special adjustment). I'm fine holding the full 25%, and the whole pp is now about 30% of my pp+vp.

I suppose that if Craig or MT announced that we should cut back on gold, I probably would.

I have looked at this issue forwards, backwards, sideways, and any other way I could come up with to see what the right answer is. And for all of my looking and business experience, my answer still is to stick with the four way split. While there may be something that works better, I've yet to find it and I've done a ton of looking. This is especially true when you internalize the idea that the future is unpredictable and you want a strategy to deal with this uncertainty.

But you need to stick to your rebalancing bands also and not let your emotions drive your decisions. If the 15%/35% bands are too much to bear, then lower them to 20%/30% and realize it will drive up portfolio costs, but if you are sleeping better then it's a fine decision.

The thing I like most about this portfolio is that I truly do not worry about what is going on in the news any more. Greece, EU, US Elections, etc. none of it bothers me. Not just because I don't know how these events will work out (I don't), but because I own enough of each major asset class that I'll likely be OK no matter what happens.

As has been said a ton of times here, if I wasn't using the Permanent Portfolio because it was too volatile, then what would I use that would be better? Even cash, although outwardly appearing "stable" is really losing -3% a year right now in real terms. So just because it looks "safe" it really isn't!

[MachineGhost]

1946 Stocks down -8.07%, LTT's -0.1%, T-Bills +0.35%, PM (silver) -13.8%, inflation 18.16%. In real terms that was a -23.5% PP loss.

1947, saw another -10% loss in real terms.

As gold is the most volatile of the 4 assets, the negative real return risk can only be mitigated by using market timing or normalizing the risk of the portfolio assets.

I believe the [economic] situation is especially perilous at the moment with stocks still overvalued, bond yields near historical lows and gold up 10 years in a row.  A year or two of deflation would not be unusual.  There is no way 25% in long term Treasuries will make up for 50% of gold & stocks declining.  Recognize this and find a way to deal, whether that is sticking to the plan or being proactive.

MG

[MediumTex]

Personally I've been thinking about lightening up on the gold and LTT's and ~

It's too bad we don't have Harry around b/c we could call him on Money Talk and have him reassure us that it's still ok to hold gold (or tell us that, yes, speculation is rampant and that we should make a special adjustment). I'm fine holding the full 25%, and the whole pp is now about 30% of my pp+vp.

I suppose that if Craig or MT announced that we should cut back on gold, I probably would.

Once you fully grasp Harry Browne's ideas about there being a finite number of economic and monetary conditions, I think that the PP allocation is a lot less frightening.

One of the many benefits of the PP for me has been that it has turned unstable investment experiences akin to owning an experimental airplane or dating a rock star into something like having a refrigerator in your kitchen--i.e., as useful and technologically impressive as it is, you really don't think about it much because it does its job so well.

I have grown to really enjoy and appreciate a sort of Honda Accord approach to investing.  As dull as it can be much of the time, you tend to get carjacked a lot less often, your auto insurance rates are lower, and the overall quality of the ride is pretty good.

[MachineGhost]

But what is the advantage of owning more cash with tracking error-prone leveraged funds if the dollar gain or loss is more or less the same as with unleveraged funds and less cash?

Its like comparing a stock and option and a stock future.  They will all return the same $ for the same move, only the % gain off the capital base will be different and that only matters if you want more diversification ability.

MG

[metta2006]

As gold is the most volatile of the 4 assets, the negative real return risk can only be mitigated by using market timing or normalizing the risk of the portfolio assets.

I believe the [economic] situation is especially perilous at the moment with stocks still overvalued, bond yields near historical lows and gold up 10 years in a row.  A year or two of deflation would not be unusual.  There is no way 25% in long term Treasuries will make up for 50% of gold & stocks declining.  Recognize this and find a way to deal, whether that is sticking to the plan or being proactive.

MG

I feel the same way. I believe the reason why HB PP did so well in the last several years is the gold. Now gold is dropping everyday together with stocks and LTT is not enough to mitigate this with cash yield almost nothing. Especially Canadian LTT is not even as powerful as US LTT. Perhaps reduce gold allocation? PP seems more volatile than 40/60 bonds/stocks portfolio. Would you say this time is different?