Would HB modify the PP based on direction of global economies?

[murphy_p_t]

Would HB modify the PP based on direction of global economies?

I ask because I recall that HB developed the PP after having been primarily invested in precious metals...and having done very well. He felt he had been lucky in being in the metals & developed the PP to respond to all scenarios.

Would HB be shrinking his PP & expanding his VP to play the metals based on the current instability? Maybe a VP of just gold to minimize exposure to the financial system? I ask because HB must have thought he had very good reasons to go into the precious metals  when he did. His stating that it was just luck that he was in the precious metals then (1970s)...was this a slight exaggeration of humility?

[craigr]

The best time to speculate profitably is before the markets have made big moves. A lot of the turmoil we are seeing now has been priced into the markets already. IMO.

In response to what would HB do? Nobody knows!

[murphy_p_t]

The best time to speculate profitably is before the markets have made big moves. A lot of the turmoil we are seeing now has been priced into the markets already. IMO.

Craig...I agree w/ the first part...but I don't think we've seen big moves in our 4 assett classes lately, for instance when compared to 2008, except perhaps LTT.

In respond to what would HB do? Nobody knows!

You are right...perhaps a more useful question is: should we, following HBs (early) example of anticipating market direction, take assets out of the financial system? This would mean owning gold, silver, land, real estate, collectibles.

I ask because it seems to me that the amount of *systemic risk* at present *seems to be* greater than at any time since the 1970s.

[craigr]

The best time to speculate profitably is before the markets have made big moves. A lot of the turmoil we are seeing now has been priced into the markets already. IMO.

Craig...I agree w/ the first part...but I don't think we've seen big moves in our 4 assett classes lately, for instance when compared to 2008, except perhaps LTT.

Perhaps of course. But the thing is that an asset can move so quickly and unpredictably I don't know how to guess which it will be.

So let's say the Euro blows up tomorrow and all countries leave at once. Will it be gold that benefits or the dollar which helps cash/bonds? I don't know honestly. It could be both. Or it could be neither.

Then again, the markets may not consider Greece leaving the euro a big deal (I don't) and the core Euro remains with all the other countries. In fact, I would say that if anything, Greece leaving the Euro would be a good thing and the markets are likely to do nothing with gold/bonds except perhaps a little and stocks will likely recover. Gold/bonds may actually fall in price as more certainty returns to the stock market.

That's probably the closest I've ever come to making a prediction on this forum. BTW. But even still, I'm not going to adjust my portfolio on it because I could be dead wrong.

You are right...perhaps a more useful question is: should we, following HBs (early) example of anticipating market direction, take assets out of the financial system? This would mean owning gold, silver, land, real estate, collectibles.

I ask because it seems to me that the amount of *systemic risk* at present *seems to be* greater than at any time since the 1970s.

With 25% gold in allocated storage I think there is enough off the table to hedge your bets. Going any more and you could get scalped if the hard asset market tanks.

[MachineGhost]

Would HB be shrinking his PP & expanding his VP to play the metals based on the current instability? Maybe a VP of just gold to minimize exposure to the financial system? I ask because HB must have thought he had very good reasons to go into the precious metals  when he did. His stating that it was just luck that he was in the precious metals then (1970s)...was this a slight exaggeration of humility?

No way!  25% in gold is already a freakin' huge position that causes the most damage to the PP under "tight money" conditions.  If anything, HB would probably advocate diversifying into a few other hard assets that aren't so correlated to gold and would cover more severe systemic risks.  But I sure doubt they would be anything more than minor carve outs.  Nothing else would make sense within the existing framework except maybe for a risk parity portfolio.

[WildAboutHarry]

Reviewing Harry's published books and his radio programs (I wish all of his newsletters were available) he undoubtedly would have had quite a bit to say about the PP in the years since his death.  He was not opposed to modifying the "permanent" portfolio and did so fairly regularly during the 1980s.

I suspect he might have made a few tweaks based on events since 2008, but as CraigR says, "Nobody knows?"

[dualstow]

Before the pp, there was 'The Coming Devaluation.' Since we can't know what Harry would have done or said -- although he shot down most modification ideas on his radio show -- perhaps we should turn it around and ask, "Would we have been ok with a permanent portfiolio before there was ever a Harry Browne to tell us specifically what to do in response to every new event?"

[WildAboutHarry]

perhaps we should turn it around and ask, "Would we have been ok with a permanent portfiolio before there was ever a Harry Browne to tell us specifically what to do in response to every new event?"

That is a great question, but I think the answer, at least for me, is No.

A vast number of fixed or formulaic portfolios have been developed over the years (Dogs of the Dow, et al.).  I remember a mutual fund (called Lexington Corporate Leaders) that bought and held a fixed portfolio of stocks (note the use of the term "permanent portfolio"):

This fund identified 30 of America's bluest chips during the depths of the Depression and decided to retain them as part of a more or less permanent portfolio.

Six stocks have been sold along the way because they no longer met the definition of industry leaders, but 23 of the original companies are still there. (The remaining stock, Praxair, is a spinoff from an original holding, Union Carbide.) About half are components of the Dow Jones industrial average.

The fund is prohibited by its charter from investing in new companies. As such, it does little trading and has no active portfolio management. Another oddity is that it buys an equal number of shares in all its holdings. When new money comes in, it gets apportioned to each stock.

One of the appeals of the HBPP is seeing how it developed over the years.  The variations, the whys and hows, etc.  I don't think the HBPP as an asset allocation would be nearly as compelling without the Harry Browne pedigree.

[Gumby]

Keep in mind that the direction of the global economy could turn around on a dime — even if the fundamentals are generally still poor. European leaders could agree, in one day, to hit the print button or form a fiscal union to save Europe. Even actions that merely kick the can down the road can temporarily turn around the global economy. For instance, LTRO was introduced on December 11, 2011 (and Operation Twist and Dollar Swap Lines were implemented shortly before this) — at the time, Europe looked like it was on the verge of implosion. Within a few days, the meltdown turned into an asset buying spree that lasted for a few months. We see the same liquidity effect with QE. Of course, kicking the can down the road doesn't solve anything, but bears were caught off guard on those central bank actions.

The point is that you never know what's going to happen. Global markets are highly manipulated. Things change very quickly, and it's always darkest before the dawn.

[Xan]

Clive wins the forum.

Risk parity is subjective. For instance gold and T's have a modest inverse correlation, gold however is around 3 times as volatile as T's so for magnitude parity you might hold three parts T for each one part gold i.e. 25% gold, 75% T.

Variable yield (stocks) and fixed yield (T's) generally correlate over the longer term, but have shorter term inverse correlation. Stocks are around twice as volatile as T, so you might split the 75% 'T' down into 25% stocks, 50% T.

Rather than holding T's (10 year), a barbell of STT and LTT works as equally as well, so split the 50% T down into 25% STT, 25% LTT. 

[Xan]

Before the pp, there was 'The Coming Devaluation.' Since we can't know what Harry would have done or said -- although he shot down most modification ideas on his radio show -- perhaps we should turn it around and ask, "Would we have been ok with a permanent portfiolio before there was ever a Harry Browne to tell us specifically what to do in response to every new event?"

When reading this forum, I picture Harry Browne as a Hari Seldon-like character, who was able to know exactly what would happen at a macro level from his studies of "psychohistory" in the Foundation series.

[craigr]

Ultimately it's not the person, but the ideas that need to stand on their own.

For instance I think Jack Bogle did a great thing by making index funds widely and cheaply available to investors. What he says or doesn't say about the economy is separate from the great idea he had of bringing in low-cost index funds.

Harry Browne did a great thing by pushing a portfolio concept that, fundamentally, is much different than the industry because it is built upon economic cycle diversification and not blindly following guru wisdom or other tactics. Again, his ideas are separate from the other things he did.

So I don't dwell on what Harry Browne would or wouldn't do because I simply don't know. What I do know is that the core idea he had was very good and perhaps because we've been writing this book that I realize how radical it really was and really ahead of its time. I'm not just blowing smoke either. It is a really good idea and has proven itself. Yes, it may have problems here and there, but it's light years ahead of other approaches I typically see.

I guess maybe sure we could say it could be modified and perhaps it may have to one day (talk to me when LT bond rates are around 1% and we'll see how I feel for instance). But mostly I am not going to try to change the core because I just don't know what will work better.

Now this isn't to say that someone can't split their money in half and do 50% PermPort and 50% VariablePort as a hedge against itself. But what to put in the VariablePort? What asset mix can we use to improve things that doesn't involve gut feelings or other nebulous analysis? I don't know that right now. That's why I just stick with the basic strategy. It may not be perfect, but I don't get the feeling I'm going to get really badly blindsided by anything following it. I just don't feel the same when I move outside of the structure.

[craigr]

And I just thought of something that I thought I should add.

Yes it may be that the portfolio idea should be changed if something very obviously has been altered in the equation.

For instance I argued many years ago that the Permanent Portfolio fund should dump the Swiss Franc. This is because it totally lost its gold connection in the early 2000s and was no longer safe from central bank manipulation as it once was.

Turns out in 2011 and even today, the Swiss Central Bank in fact did manipulate the price and set a ceiling on the value vs. the Euro to protect their exports. They have pledged to buy euros in order to maintain this ceiling as well.

So in this case something very obvious did change and yes it was time to re-evaluate the situation.

But so far in the 4x25 portfolio I've not felt the need to make any changes. Not to say it won't happen, but so far nothing so fundamental has changed to make me want to touch it.

[dualstow]

Well said, Craig.

One of the appeals of the HBPP is seeing how it developed over the years.  The variations, the whys and hows, etc.  I don't think the HBPP as an asset allocation would be nearly as compelling without the Harry Browne pedigree.

I know just what you mean. Harry's intelligent, charismatic, etc. to the extent that I'm using the present tense here instead of the past. I could hardly follow the PP if it were the Jim Cramer Permanent Portfolio. But, what I meant was, since we don't have Harry to rely on to suggest future changes, should we just hold fast no matter how crazy the economy & markets get? No matter how sweet the siren song of other portfolios get?

Once upon a time, I tried to hold fast to Bogleheads until I abandoned it (kind of) for the pp. That's Craig's fault. It would take a lot for me to modify the pp at this point. The most I'd do is put lots of money into the ten-YR treasury (PP) if the rates went up.



{No Edit, actually. I meant to quote myself in the next post and ended up wiping out this one, so I'm merely restoring it}.

[WildAboutHarry]

what I meant was, since we don't have Harry to rely on to suggest future changes, should we just hold fast no matter how crazy the economy & markets get? No matter how sweet the siren song of other portfolios get?

We do have Harry's published works to provide some general idea about his thought process (and I continue to wish his newsletters were widely available).  His books are kind of like the Articles of Confederation, the Constitution, and the Bill of Rights.  I view the newsletters as his version of the Federalist Papers.  So we could interpret the HBPP as a living document, or we could be strict constructionists.  This almost sounds like a MediumTex-ism.

There were different PP compositions in 1977, 1978, 1981, and then finally the 4x25 (1986?).  The 4x25 was a fairly radical departure from its predecessors, and the logic of its structure was well documented by Harry.  If it does appear that one of the four legs is developing a wobble, there is ample information to modify the HBPP consistent with the process that developed it in the first place.

I do agree with Craig that there is no good reason now to change the orthodox, 4x25 portfolio.

[hoost]

Yes it may be that the portfolio idea should be changed if something very obviously has been altered in the equation.

Yes, I think at the end of the day we have to examine the fundamental assumptions of the portfolio concept.  It assumes you have four different economic scenarios: inflation, deflation, prosperity, and recession.  It assumes gold responds well to inflation.  It assumes government bonds have no default risk.  It assumes interest rates drop in a deflation.  It assumes US stocks in general increase in price during boom times.

I think to consider changing the portfolio would require one to ask whether or not any of those assumptions have changed.  At that point one could figure out how they have changed and why, and formulate something new based on the reality of the new system.

Currently, I think the principles are still sound.  If we ended up with a change in the monetary system, I think that would have huge implications for the portfolio that I haven't fully considered.  It mostly depends on how the new system functions.

[dualstow]

One small correction.

It would take a lot for me to modify the pp at this point. The most I'd do is put lots of money into the ten-YR treasury (PP) if the rates went up.

I meant VP of course.