The PP and me: What I believe, what I struggle with, what I have decided.

[Maestro G]

• Greetings all,
  
  First off, I would like to offer many thanks to Craig Rowland for initiating this forum, his recent podcast and the Crawlingroad website to so clearly and succinctly describe and champion Harry Browne's economic and investment philosophy and strategy behind the PP. This has obviously taken and continues to take a considerable amount of time and effort on his part, and all that are interested in and espouse (and even those who don't I suspect) the strategy are indebted to him for facilitating this exchange of information and these stimulating conversations about the strategy, investing and macro economics in general. In this regard, I would also like to express appreciation to Medium Tex and Clive for their considerable contributions to the discussion, particularly (in the case of Medium Tex) for illuminating many of the macroeconomic issues, Austrian School of Economics, Hayek, larger world issues etc... and (in the case of Clive) as an often fascinating and impressive alternative voice/view (not to mention an effective array of visual analysis and data  frequently presented and updated) to the strategy, while still employing much of what seems to be at the heart of PP philosophy.
  
  I have learned an enormous amount this past, roughly, two years, and it has provoked me to question some of the more conventional "Boglehead" wisdom that I have mainly employed in my investments to this point. Still, I struggle with completely adopting the PP strategy for the majority of my assets, the "money that you cannot afford to lose," while forgoing the wisdom and good council of investment minds much more experienced and smarter then mine: Bogle, Swedroe, Bernstein (William and Peter), Swensen, Schultheis and many others of a similar bent. The struggle principally results not from how dissimilar the strategies are, but actually how, in some important ways, they are the same. I find myself in a kind of shifting, analysis/paralysis mode of asset allocation and strategy decision making that I know is counter productive and frankly must stop. I am spending far too much time thinking about some of  these issues (as interesting as they are) and would be better served by deciding on an allocation/strategy and sticking to it through thick and thin.
  
  Now I can imagine you are thinking: "why not employ the PP for most and a variable port for the rest?" Well, I just prefer to think of and organize my portfolio as a whole and not some isolated bucket of assets with a different function/purpose. To my way of thinking, psychology, it's a simplicity issue.
  
  Here is what I believe:
  
  • The future is unpredictable and uncertain.
  • Simplicity: "Everything should be made as simple as possible but not simpler."
  • Passive, low cost, total asset class indexing to the extent possible.
  • Diversification, diversification, diversification is the only free lunch.
  • Equity allocation should include some foreign.
  • Some form of hard assets should be included in all portfolios.
  • Periodic re-balancing, when appropriate, is critical to risk adjusted returns.
  And so here is the allocation I have decided on based on a kind of "best of the best" in investment thinking relative to my own personal situation:
  
  GLOBAL EQUITY 40%
  
  VTI 20%
  VG Total Inter. (new MSCI-ACWI Ex US index etf when launched) 10%; VWO/EWX 10%
  I understand and except the currency/political risks, but believe in global diversification beyond multinational corporations, particularly emerging, where, IMHO, 3 billion plus people cannot be ignored in the long term.
  
  GLOBAL REITS 10%
  
  VNQ 5%/VNQI 5%
  Though essentially equity, I do believe that global real estate is a separate asset class underrepresented in total market indexes and quite different then owning your own home, which I agree is a consumption item. And now there is a relatively inexpensive way to capture this market globally.
  
  US TREASURIES 10%
  
  TRSY (new PIMCO broad treasury etf)
  I prefer to stay more middle of the road (intermediate) here with respect to duration. Also, I like the idea of a "total bond market," without the credit/call risk, employing only US treasuries of almost all durations (current average approx. 7 yrs)
  
  US TIPS 10%
  
  LTPZ (PIMCO 15+Yr)
  I am not convinced that in the long term, going forward, that gold will be optimum in all degrees of inflation and/or crisis or that TIPS will not function well in other climates (deflation, crisis) in addition to mild to moderate inflation. So, I'm hedging here.
  
  HARD ASSETS 15%
  
  GCC (Greenhaven Continuous Commodity index) 10%
  I prefer the equal weighting and greater exposure to broader range of commodities as well as the treasury collateral. The ER is higher then I would like, but that's the trade off for the strategy that I'm willing to except.
  
  IAU (I-Shares Gold) 5% Lowest ER and simpler for me then holding physical.
  
  CASH 15%
  
  Alliant Credit Union Savings/Emergency fund (1.30% interest); I-Bonds
  One asset with no fluctuation in value (outside of inflation and what I spend! ) which I would hope the I-bonds will protect against.
  
  I plan on re-balancing annually at most, or if one or more assets move 5% or more in any direction. That is, if a 10% allocation becomes 15% or 5% etc.... If this does not occur, I would probably forgo an annual re-balance. I have already implemented much of this portfolio. It will be fully in place once Vanguard launches the new Total Int. etf early in 2011. The portfolio will have a blended ER of approx. 25 bp I believe (I'll update later).
  
  I realize this completely breaks the specific PP "Warranty" (though not completely the general philosophy) which is why I have posted in the Variable Portfolio section of the forum. I have committed this to writing to aid and stengthen my persistence, perseverance and resolve, and to lend some credibility to performance results in the future. FWIW, I will check into the forum periodically (quarterly? semi-annually?) with a performance update and try not to peak too often!
  
  I'm going to call it the [glow=red,2,300]Permanent Maestro Portfolio[/glow] and it will be very interesting (at least for me) to experience the results going forward relative to the PP, a Global PP (substituting VT for VTI), the Permanent Portfolio mutual fund, a conventional 50/50 Boglehead stock/bond portfolio and GTAA (Mebane Faber's new Global Tactical Asset Allocation etf). YTD, the Permanent Maestro Portfolio has be doing quite well on both a relative and absolute basis, and I have in fact enjoyed some of this return.
  
  Going forward, who knows? But my expectation and hope is that it should potentially offer a bit more growth (and some drawdown protection) for an accumulator seeking (and needing) more then a wealth preservation strategy, notwithstanding the PP's impressive long term historic CAGR. In any event, I am content with its diversification and feel confident that I can stick with the investment policy, which I believe is what's most important at this time.
  
  Here's wishing all PP forum members the happiest of holiday seasons and a healthy and prosperous New Year!
  
  Cheers!
  
  Maestro G

[6 Iron]

Maestro, you have clearly put a great deal of thought into this, and I hope that you have good luck with your portfolio. Always enjoyed your input at the bogleheads forum, and hope you come back and let us know how things are going.

And to you, and everyone, Merry Christmas!

[craigr]

Glad to see you found a solution that works for you. Ultimately it's your money and you have to be comfortable with how it is invested. Otherwise, there is a big temptation to second-guess yourself and that can lead to problems.

[MediumTex]

That portfolio looks very PRPFX-like to me.

I'm sure it will do fine (and will probably have returns comparable to PRPFX).

As is the case with PRPFX, though, deflation triggered by global deleveraging may catch portfolios like these by surprise, while the PP will rock on.

If you do not take the global deflation thesis seriously (based, in part, on the likes of Bernanke successfully preventing it), then I think your approach is unlikely to lead to future regret.

Just be mindful of the blind spots because they tend to surprise us in unexpected ways and at unexpected times.

[Storm]

Good luck, and be sure to post back and let us know of your results (and lessons learned) from time to time.

[Maestro G]

Dear Clive, Craig, Medium Tex, Storm and 6 Iron,

Thanks much for your feedback and good wishes!

Clive,

I am intrigued by your RS momentum based strategy as well as the nod to the FF 3 factor, Swedroe like Fat Tail minimisation approach, and you have clearly made a very strong back tested case for it on a number of occasions. I strongly considered it, but ultimately decided on a more static blended N1 heuristic "naive" approach with as many asset classes as I felt appropriate. For me, this is a bit simpler to implement and, perhaps more importantly, is (I hope) somewhat more copacetic with my "marginal utility of wealth" and long term growth needs. Of course, only time will tell the tale there. Best of luck with your strategy!

Medium Tex,

Well, perhaps it's a bit more similar to PRPFX then the PP. However there are many differences: the PMP (if I may) will have much greater and more diversified exposure to equities in general and foreign/emerging in particular; PRPFX has no exposure to TIPS from what I can tell; PRPFX has much greater exposure to silver and less to broad commodities; and then there is that significant exposure to Swiss Francs. The treasury exposure seems similar and also the real estate and cash allocations. One big difference: my portfolio is going to be a lot cheaper then the .82% that Cuggino is charging! Again, only time will tell if he is worth it going forward.

As for the global deflation issue: yes, the PMP is clearly more vulnerable to deflation then the PP (though it will have some protection with the TRSY, Cash and LTPZ to a certain extent). I am wary of this scenario. However, as you point out, Bernanke has the air pump going 24/7 and seems determined to avoid deflation at all costs! Whether he will be "successful" or not who knows? But, with recent trends, I am wagering more on the inflation side, and besides, who am I to fight the fed!

Full disclosure: as we move in to the New Year a few changes from my original Permanent Maestro Portfolio below.

Global Equities: 40% remains, but now split roughly 18% IWV (Russell 3000 more closely tracks and is reflective of the costs associated with the vehicles in 401k and 403b accounts); 12% VG Total Inter ETF (when available); 7%/3% VWO/ECNS ( I believe in the China story for the long term).

Global REITS 10%: no change

TRSY, LTPZ bumped up to 12% each

Hard Assets[/b] reduced to 12% but split evenly between IAU (more gold) and USCI. Further academic research made the backwardation/contango active strategy and the broader basket options more attractive then GCC going forward despite the additional 10bps in cost. Hope I don't regret this one nod to active (albeit rules based) monthly management. Should help, but we'll see......

CASH: no change.

Ok. That's it. No more tinkering. Here we go!

Happy New Year!

Cheers!

Maestro G

[Maestro G]

Full disclosure: as we move in to the New Year a few changes from my original Permanent Maestro Portfolio below.
...
Ok. That's it. No more tinkering. Here we go!

It's probably better for everyone if you just call it the "Maestro Portfolio." By definition, a "Permanent" portfolio is really something that will never need tinkering. Good luck!

Well, what's "permanent" to me are the general guiding principals and this particular portfolio for the foreseeable future starting now. I can't imagine that I will be confusing anyone who bothers to recognize the differences or even cares that much to begin with. 

Good luck to you as well!

Maestro G

[MediumTex]

Maestro,

What are your rebalancing points?

[Maestro G]

Well, what's "permanent" to me are the general guiding principals and this particular portfolio for the foreseeable future starting now.

Yes, but that's the justification for every MPT portfolio. The only way it can be permanent is if it can handle every possible outcome so that you never need to tinker with it ever again. When you say "no more tinkering," does that mean no more tinkering until next year? in five years? Or no more tinkering ever again? It's a point that's worth discussing because you've chosen this approach for its permanence and its "simplicity," yet you also have 10+ funds you'll have to watch and manage! That's a fairly complex portfolio. Slicing and dicing 5% here, 5% there, 10% over here — those allocation percentages are very speculative. (Not to mention speculating that the Fed will beat deflation). I'm not sure I understand how that is simple or permanent?

One definition of permanent is:"lasting or intended to last or remain unchanged indefinitely."

I understand HB's intention for the PP. And, there is no denying the impressive 40 yr. CAGR resulting from the strategy, assuming (and that's a big assumption) one steadfastly held the portfolio or something close to it over that period of time. However, I think it is a little dangerous to confuse the definition of permanent with the expected returns or behavior of any portfolio. One can hold any portfolio "permanently" without it actually "handling every possible outcome" as you put it. And then, of course, one has to define what one might mean by "handle". This is probably different for everyone. But let's not get to wrapped up in semantics.

To answer your question more directly, I plan to hold the PMP at least a year and re-balance according to my 5% bands if necessary. My intention is to hold it indefinitely or until serious personal life changes might dictate otherwise. As far as its complexity, is it more complex then the PP? Yes. However, I don't find it all that complex. I've tried to incorporate all asset classes that I decided are worth owning, with the most cost effective and suitable investment vehicles currently available to me in constructing what I've decided is a diversified portfolio. I've strived for equal weighting with the major asset allocation percentages, except for the cash holding, where I was more comfortable with a higher percentage, given that this also serves as my emergency fund.

As for the inflation/deflation debate, who knows? My expectation/speculation of a greater chance for inflation might prove to be totally wrong at some point. If deflation comes I will have some protection, and the same for inflation. How my portfolio will withstand either will probably depend on the severity of either scenario. In 2008 (when I was 100% cash btw), the PMP would have suffered some serious pain (though not as bad as some) but also would have recovered nicely in 2009 and 2010 if one held on.

So, my intention is to split the difference here between a somewhat conventional Boglehead portfolio and the PP. Whether or not this proves to be a prudent decision relative to my expectations and objectives remains to be seen.

Time will tell and the future is uncertain.

Best,
Maestro G

[Maestro G]

Maestro,

What are your rebalancing points?

Hi Medium Tex,

I've decided on at least 5% bands either way for each major asset class.

Maestro G

[Maestro G]

One can hold any portfolio "permanently" without it actually "handling every possible outcome" as you put it.

Your definition of "permanent" refers only to your intended duration of holding your portfolio — so long as events play out as you expect them to. Whereas Harry Browne's definition of "permanent" requires that the assets never change no matter what happens to the economy — so that you are more likely to stay the course for the long term. There's an important distinction between those two definitions of "permanent."  Most people on this forum don't believe that a long-term portfolio and a permanent portfolio are the same thing.

For instance, most people who read this forum believe that there are two different types of portfolios: "Variable" and "Permanent." One may intend to hold their successful Variable portfolio indefinitely — but that doesn't mean that their Variable Portfolio is "Permanent." Intending to have a portfolio's allocation be permanent and requiring that your allocation be permanent in all economic conditions are two completely different things.

To answer your question more directly, I plan to hold the PMP at least a year and re-balance according to my 5% bands if necessary. My intention is to hold it indefinitely or until serious personal life changes might dictate otherwise.

My question wasn't how long do plan on holding this allocation. My question was specifically whether or not you will constantly re-tweak your portfolio going forward. Let me try again. Do you plan on allowing yourself to tweak your portfolio when events change? Or will you make the allocations absolutely "permanent" so that you stay the course? I'm asking if your strategy is truly a permanent strategy for the ages. I'm not asking if your intentions are long term.

You'll need to know the answer to this before things get tough.

In 2008 (when I was 100% cash btw), the PMP would have suffered some serious pain (though not as bad as some) but also would have recovered nicely in 2009 and 2010 if one held on.

If your portfolio demands that you have nerves of steel in order to eek out a recovery, it's going to make it that much more difficult to stick to. That's my ultimate point here. The only way you can truly believe in a permanent allocation strategy is if it can perform in every possibly economic environment so that you are less likely to want to change it.

I understand HB's intention for the PP. And, there is no denying the impressive 40 yr. CAGR resulting from the strategy, assuming (and that's a big assumption) one steadfastly held the portfolio or something close to it over that period of time.

Please understand that the main reason why the Permanent Portfolio is so easy to stick to is it's low volatility. The low volatility makes it far more permanent than a portfolio that makes you suffer. If you listen to the Feb 20, 2005 radio show and HB talks about this (@23m 45sec). I'm quoting from the show here:

CALLER: [PRPFX] has done extremely well over the life of the fund, has it not?

HARRY: Yes. Now there are going to be other funds that have a higher yearly return over a long period. But, they get that return with what I keep referring to as the 'roller coaster ride.' You have these wide swings where you're up one year by 30% and then the next year you're down 15%, and so on. Whereas if you could look at a graph of the Permanent Portfolio Fund or the kind of personal Permanent Portfolio that I recommend, what you'd see is just steady growth year after year, after year, of a more modest amount. In the case of the personal Permanent Portfolio that has gained 9% a year, over the last 30 years, and the Fund return has been similar with no big losing years at any time. So it's much easier to stay with that kind of a program, because you don't get into a period like 2000 or 2002 when the stock market is falling and your favorite mutual fund is doing badly and you think, 'Gosh, I gotta abandon this,' and do something else and you drop out of it right at the bottom as it starts to go back up again.

CALLER: [chuckling] That's kind of what I do with the Stock Market, as a fatter of fact!

HARRY: Well, it's not the least bit unusual. And that's why stability is just as important as performance. Because a lack of stability can cause you to be anxious about it all the time. And secondly, to make poor decisions because the swings in the market affect you, and you can only ride it down so far, so you finally get out of it. And you may get out of it halfway down or you may get out of it right at the bottom.

This is what I'm talking about. We are trying to be realistic here given that we may all want to change our minds at some point. Everyone has good intentions of long term investing, but Harry Browne feels that you are more likely to stick to his permanent 4x25 allocation that will never changes.

Yes, I understand the volatility argument, and historically the PP has demonstrated great merit in this regard. I suspect that the PMP may have greater volatility going forward. But, we'll see....

With respect to "tweaking", I thought I had made myself clear a few posts ago when I wrote: "that's it, no more tweaking."

The only changes I intend to make will be re-balancing when appropriate to my bands and/or if a better investment vehicle (i.e. cheaper, more inefficient, easier to implement etc..) comes along that better provides the investment returns of the particular asset class that I have chosen in the PMP. I do not intend to arbitrarily adjust the allocation percentages, or switch or add asset classes, or market time. New money/savings will be used to re-balance and will initially go to cash.

Again, if some major life changing event personally were to occur, I might need to re-evaluate all things financial. However I don't intend to react to market conditions in a way that would "tweak" the PMP.

Maestro G

[6 Iron]

I find this thread interesting, from an investor psychology perspective. I think we all know that the permanent portfolio will never be adopted by a large percentage of investors. Still, we are all subject to confirmation bias. Seeing someone whose opinion we value reject a strategy that we find to be the best option is challenging.

For me personally, over at the Bogleheads forum, the permanent portfolio is occasionally denigrated and it means nothing to me, as it usually comes from a point of ignorance. But there are a hand full of posters there that are extremely thoughtful in their posts, and while recognizing the strategy as sound for some investors, still reject it.

And that is life. One size does not fit all.

[LNGTERMER]

6 Iron,
Ask your self what is the alternative? People can be brainwashed even if they do poses high IQs.
The idea of putting one's money in the market and then forgetting and going to sleep for 20 years and waking up at retirement assuming it will be there does not work.
The 60/40 strategy has merits since the two assets are not correlated, however it has holes. The type of bonds and stocks you buy matter but also are not enough to diversify risk away. How about commodities and currencies? How about addressing volatility. It's not good to wake up one day feeling euphoric when your folio gains large and the next panicking because it lost large percentage or gave back profits.

The PP addresses all these by placing the portfolio in best of class assets which are non correlated. It deployed cash properly as a shock absorber. It has a commodity and currency hedge component. Steady as it goes and sleep well is what you get, which gives protection and peace of mind.  Lastly it has a sister portfolio the VP to let your talents shine.
People look at the PP and look at it from the prism of their built in biases and then forget about the VP. HB was brilliant when he also proposed the VP, you can manage your VP to complement any weaknesses you perceive in your PP and see if you can actually make it work.

[Maestro G]

With respect to "tweaking", I thought I had made myself clear a few posts ago when I wrote: "that's it, no more tweaking."

Ah, very good. Understood. Once you started switching things around, it wasn't clear if you were only done tweaking for 2011, and would then re-evaulate in 2012 and again in 2013. Let's hope that the wind is at your back! 

In my opinion, you have a very strong and diversified long term portfolio (and I wish you luck with it!). But, Harry Browne wouldn't call it a "permanent" portfolio. If you listen to his radio shows, he often talked about why even a highly diverse portfolio (which includes REITs and TIPS and highly precise allocation percentages) isn't very permanent at all. That's why labeling your slightly speculative buy-and-hold long-term strategy as "permanent" seems a bit strange within the context of this forum. Your portfolio just seems to have more in common with other well-known and highly diverse lazy portfolios with a little bit of hard assets added in for stability. Again, I wish you lots of luck. It does seem like a nice way to speculate without taking on as much risk. It's just that "permanent" is an odd label within the context of this forum since HB was against trusting all of your life savings to portfolios like this one.

Agreed. But, as I mentioned in my original post, that's why I started this thread in the Variable Portfolio discussion section; because I realize that my entire portfolio, regardless of what I choose to call it, would be viewed as one big VP as HB defined it.

In any case, thanks for your good wishes for the future and the same to you.

I believe interesting times lie ahead, which, like the ancient Chinese proverb suggests, may or may not be a good thing.

Best,

Maestro G