Looking ahead - PP/VP % when the Secular Bear ends

[brick-house]

I adopted a Permanent Portfolio in 2004 and have held a pretty consistent 75% PP with 25% Variable Portfolio split.  The PP has returned better than expected, which is ironic because I implemented the PP as a rejection of the expected stock market return sales narrative.  The PP could not have asked for a better period than the current secular bear stock market-  declining interest rate environment, several flights to quality, an increasing gold value, and a yo-yo-ing stock market. 

As a believer in demographics and secular bull/bear stock markets - my guess that this secular bear market  will end later this decade.  If history rhymes (I am rapping 1978 - except that interest rates are low instead of high), a question is how to handle the inevitable secular cycle change in terms of my PP to VP %.  For example if a period like 1982-1984 (no Orwell pun intended) returned with a good demographic pyramid (young to old) and strong long term stock valuations (PE 10), should I increase my VP% - maybe 50% PP and 50% VP.  Anybody else giving this some thought??

On the Thanksgiving tip - Very thankful that the PP has provided the stability/returns/perspective to look ahead...   

[AdamA]

Anybody else giving this some thought??

Yup. 

I am almost certain that I cannot come up with a anything in terms of a VP that will outperform the PP.

0% VP 100% PP

[brick-house]

adam a wrote: 

Yup.

I am almost certain that I cannot come up with a anything in terms of a VP that will outperform the PP.

0% VP 100% PP

Nothing wrong with 100% PP.  The PP is like barbecue - low and slow.  Just watch those flames by vigorously re-balancing...

I use the PP for money I cannot afford to lose.  However, I fully expect the PP to under-perform simple to implement VPs such as Vanguard Wellesley, Wellington, or Balanced Index in times of prosperity.  I did not hold the PP from 1982 -2000, but understand that I would have had some tracking error regret unless I had a VP for part of my holdings.  Shoot, even in this perfect PP storm environment (since 2000) - I still feel the need to tinker with a 25% VP. 

I count myself as fortunate to have discovered and implemented the PP through this period.  I intend to always hold at least a 50% PP for left tail protection, but if times are more prosperous (solid demographics of young to old) with low stock valuations - I will consider increasing my VP% for more exposure to the right tail. 

[Early Cuyler]

I've never had a VP before, but I've certainly considered it. My idea (that I stole from melveyr) was 90% PP plus a 10% slug of something like vxus to guard against the possibility of rebalacing to death in a hyperinflation scenario. I don't expect anything close to hyperinflation, but lord knows I've been wrong before.

[rickb]

(snip)

I use the PP for money I cannot afford to lose.  (snip)  Shoot, even in this perfect PP storm environment (since 2000) - I still feel the need to tinker with a 25% VP. 

I count myself as fortunate to have discovered and implemented the PP through this period.  I intend to always hold at least a 50% PP for left tail protection, but if times are more prosperous (solid demographics of young to old) with low stock valuations - I will consider increasing my VP% for more exposure to the right tail.

I'm having a little trouble reconciling these statements.  It sounds like you're saying you can afford to lose 50% of your money - and you're really 50% PP, 50% VP with half your VP currently in a 25/25/25/25 allocation.  Any money you might consider moving out of a 25/25/25/25 allocation and into a (performance chasing - or any other) VP is not really part of your "PP".  The first P is "permanent".  Do whatever floats your boat with however much of your money you're comfortable treating as a VP (money you can afford to lose) - but never reallocate from PP to VP, not even (perhaps especially not) based on what macroeconomic cycle you think we're currently in.  Even if you're right about where we currently are in the "cycle" you have no idea how long we'll remain here this time.

Rule #4: No one can predict the future.

Rule #5: No one can move you in and out of investments consistently with precise and profitable timing.

[frugal]

Hello,

100% of your savings are in PP and VP?

What assets you have on VP?

[murphy_p_t]

"As a believer in demographics and secular bull/bear stock markets..."

I'm curious about this possibility (expectation?). Can you outline what precipitates a favorable change in the demographics in the western world? Maybe you can share an article that holds out this possibility. Especially in the next decade turning around this situation.

[brick-house]

frugal wrote:

Hello,

100% of your savings are in PP and VP?

What assets you have on VP?

The first line of this thread is: 

I adopted a Permanent Portfolio in 2004 and have held a pretty consistent 75% PP with 25% Variable Portfolio split.

25% of my investments are in a Variable Portfolio.  75% are in the Permanent Portfolio.  I also have savings and rental real estate that I do not consider part of my investments.  I am considering in the future (especially if there are low stock valuations and favorable demographics) increasing my Variable Portfolio to 50% while decreasing my Permanent Portfolio to 50%.

[l82start]

brick, does that mean under certain economic conditions you will change you mind about being able to afford to lose some of your "permanent" money and transfer out of the PP, or that you will change up contribution amounts away from the PP into the VP till you hit the 50/50 goal

[brick-house]

murphy p t wrote:

"As a believer in demographics and secular bull/bear stock markets..."

I'm curious about this possibility (expectation?). Can you outline what precipitates a favorable change in the demographics in the western world? Maybe you can share an article that holds out this possibility. Especially in the next decade turning around this situation.

Secular bull/bear stock markets are written about extensively at Crestmont Research. 

http://www.crestmontresearch.com/

Robert Seawright has a blog titled Above the Market.  Here is a good article about secular bull/bear.

http://rpseawright.wordpress.com/2012/0 ... ong-cycle/

As for demographics,

http://www.voxeu.org/article/demographi ... uctuations

Here is a link and abstract to Rob Arnott and Denis Chaves paper.

http://papers.ssrn.com/sol3/papers.cfm? ... id=1810985

Abstract:   
It seems natural that the shifting composition of a nation’s population ought to influence GDP growth and perhaps also capital markets returns. As the baby boomers have aged, many people have studied past demographic data in an effort to extract indications for the future influence of the boomers on many aspects of the economy. We extend this body of literature by analyzing the effect of demographic changes on three measures of great importance for countries all over the world: real per capital PPP-adjusted GDP growth, stock market excess returns, and bond market excess returns.

We confirm what others have already demonstrated, but we extract markedly more statistical significance by adapting a polynomial curve-fitting technique pioneered by Fair and Dominguez (1991), to this new purpose. In our work, we find that a growing roster of young adults (age 15–49) is very good for GDP growth, a growing roster of older workers is a little bad for GDP growth, and a growing roster of young children or senior citizens is very bad for GDP growth.

We find surprisingly powerful results when we apply the same technique for exploring the links between demography and capital markets returns, net of the strong and well-documented effects of valuation and yield levels. Stocks perform best when the roster of people age 35–59 is particularly large, and when the roster of people age 45–64 is fast-growing. Bonds follow a similar pattern, with an age-shift: they’re best when the roster of people age 50–69 is growing quickly. We carry out three different forms of robustness checks, each of which provides statistical significance in different ways: applying different country weights, testing alternative demographic variables, and confirming GDP results on out-of-sample countries.

It would be dangerous to forecast the future based on these results. Tacitly, we would be assuming that past relationships between demography and either GDP growth or capital market returns will hold unaltered in the future. However, given the high levels of statistical significance in the historical relationships, it is too tempting to resist exploring the possible implications for future GDP growth and capital market returns. These implications—with all the caveats that must necessarily be offered—are sobering, to say the least.

[brick-house]

l82 start wrote:

brick, does that mean under certain economic conditions you will change you mind about being able to afford to lose some of your "permanent" money and transfer out of the PP, or that you will change up contribution amounts away from the PP into the VP till you hit the 50/50 goal

My wife and I are middling earners, but strong savers and fill up our tax advantaged buckets (403b and Roth IRA).  Not sure if we would gradually fill the VP with new savings or sell part of the PP. 

I have not changed my 75% PP, 25% VP since 2004 except for some occasional laziness because my PP has outperformed my VP.  Thus, if anything since I adopted my 75% PP and 25% PP in 2004, I have let the PP get bigger rather than smaller. 

My default risk tolerance is conservative, plus I think we are in a secular bear stock market.  Thus, many times my VP sits more conservative than the PP.  I do take some risk with my VP, but have been bearish lately.  In fact, I have been on the sidelines for this latest run up since October 2011.  I have no illusions of being able to time the market in the short run.  However, if a secular bull appears then I may decide to take more risk - knowing full well I could be wrong.  Since I know I could be wrong, I do not plan on ever being less than 50% in the PP. 

[l82start]

that seems reasonable, i don't know how i would handle feeling the PP wasn't my best option either, i have a hard time imagining such conditions but possibly a roaring prosperity might make me consider changes i suspect would likely lean toward the changing contributions option, more than reducing my pp. my VP is somewhat conservative as well right now and leans toward inflation at the moment, but it is mostly due to holding on to old gold bug leanings than believing i can make good predictions..

[rickb]

However, if a secular bull appears then I may decide to take more risk - knowing full well I could be wrong.  Since I know I could be wrong, I do not plan on ever being less than 50% in the PP.

I really don't care how much you want to allocate to PP and how much you want to allocate to VP, but please don't delude yourself.  If you're willing to sell your PP down to 50% of your assets and do anything else with the rest (because we're in a secular bull market for stocks, or because your uncle says tiddlywinks will outperform over the next 5 years, or because the Mayan calendar "ends" on 12/21 and you want to throw a hell of party), you're saying your allocation is 50% PP and 50% VP. 

It's OK.

Just don't say that you're 75% PP.  Because you aren't.

And I'll repeat - it's OK.

[melveyr]

Yeah the point of the VP isn't to make tweaks to the PP. The whole idea of the VP/PP separation is that no rebalancing occurs between them. If you aren't doing that then it is probably more accurate to say that you are 100% VP. Your VP just happens to have some PP assets in it.

[brick-house]

rickb wrote:

I really don't care how much you want to allocate to PP and how much you want to allocate to VP, but please don't delude yourself.  If you're willing to sell your PP down to 50% of your assets and do anything else with the rest (because we're in a secular bull market for stocks, or because your uncle says tiddlywinks will outperform over the next 5 years, or because the Mayan calendar "ends" on 12/21 and you want to throw a hell of party), you're saying your allocation is 50% PP and 50% VP.

It's OK.

Just don't say that you're 75% PP.  Because you aren't.

And I'll repeat - it's OK

Thanks for the early morning laugh!  I like the juxtaposition of really not caring followed by a great rant that includes self delusion, tiddlywinks, and the Mayan Calendar...

[Ad Orientem]

On the question of whether or not to increase one's VP allocation; I would answer that with two questions.

1. How much of your money can you afford to lose without causing severe pain, emotional or otherwise?
2 How confident are you in your ability to predict future events?

Once you have those answers the rest will follow.

[Wonk]

Anybody else giving this some thought??

I have a very similar view on secular cycles, which explains my extreme overweight to all things precious.  I still run an 80/20 VP/PP, with the 80 in gold/silver/miners.  I switched out of a 100%PP in early 2009.  Like you, I'm also expecting an end to this cycle in the latter part of the decade--maybe 5 (+/- a couple) years away.

I'm planning on shifting out of my VP positions as we run up and move more of it into a traditional PP--possibly even 100% PP.  I might overweight cash if/when gold gets to a parabola.  If we get PE10 valuations like we had during previous cycle lows, I'll probably overweight the stock portion of the PP to 30% or hold a separate VP for equities.  I don't see anything wrong with overweighting a sector if you see value.

[melveyr]

Anybody else giving this some thought??

I have a very similar view on secular cycles, which explains my extreme overweight to all things precious.  I still run an 80/20 VP/PP, with the 80 in gold/silver/miners.  I switched out of a 100%PP in early 2009.  Like you, I'm also expecting an end to this cycle in the latter part of the decade--maybe 5 (+/- a couple) years away.

I'm planning on shifting out of my VP positions as we run up and move more of it into a traditional PP--possibly even 100% PP.  I might overweight cash if/when gold gets to a parabola.  If we get PE10 valuations like we had during previous cycle lows, I'll probably overweight the stock portion of the PP to 30% or hold a separate VP for equities.  I don't see anything wrong with overweighting a sector if you see value.

How do you know when you are wrong for the PMs?

Is there an underlying narrative that will tell you or are you letting prices be the guide? That is, do you simply sell when the trend breaks?

[Wonk]

Anybody else giving this some thought??

I have a very similar view on secular cycles, which explains my extreme overweight to all things precious.  I still run an 80/20 VP/PP, with the 80 in gold/silver/miners.  I switched out of a 100%PP in early 2009.  Like you, I'm also expecting an end to this cycle in the latter part of the decade--maybe 5 (+/- a couple) years away.

I'm planning on shifting out of my VP positions as we run up and move more of it into a traditional PP--possibly even 100% PP.  I might overweight cash if/when gold gets to a parabola.  If we get PE10 valuations like we had during previous cycle lows, I'll probably overweight the stock portion of the PP to 30% or hold a separate VP for equities.  I don't see anything wrong with overweighting a sector if you see value.

How do you know when you are wrong for the PMs?

Is there an underlying narrative that will tell you or are you letting prices be the guide? That is, do you simply sell when the trend breaks?

Positive real interest rates.  When short money is a more attractive store of value than gold, the ride is over.  That, along with gold price metrics in the ballpark of secular highs.