PP with 15% gold allocation - what to do?

[BP]

My spouse will only agree to a 15% gold allocation for the PP.  Suggestions for the remaining 10% not allocated to gold?  TIPS?  More to stock?  Spread it equally to the other four corners?

Thanks.

[MachineGhost]

See PMPP: http://gyroscopicinvesting.com/forum/ht ... 4#msg39884

[melveyr]

I wrote a post about how TIPS can be used as a proxy for the LTT/Gold combo (not as a proxy for just gold so anyone thinking about having that argument please don't).

"Gold responds favorably to lowering growth expectations, and rising inflation expectations.

LTTs respond favorably to lowering growth expectations, and lowering inflation expectations.

When gold and LTT are held in combination, the rising/lowering of inflation/deflation projections cancel each other out. Thus, you are left with the the real growth component. A combination of LTT and Gold does best when real growth expectations are declining, irrespective of changes in the price level.

Now let's look at TIPs... In real terms, TIPs holders are hedged away from changes in expectations on inflation, and are left with changes in expectations about real growth in the economy.

So I think that the Gold/LTT combo is affected by the macroeconomy in very similar ways to TIPS. Thus if you absolutely couldn't stomach holding LTT/Gold because you look at assets in isolation, combination of TIPS and stocks held in risk parity proportions (where the weighted volatility are roughly identical) would be the next best thing. Additionally, if you really wanted to incorporate TIPs into a PP framework I would take a look at buying 30 year TIPs and taking equal amounts out of Gold and LTT. So your PP could look something like this...

25% Stocks
25% T-Bills
15% Gold
15% 30 Year Treasury
20% 30 Year TIP

There are many criticisms of TIPS that you can find on this board (I think a lot of it is overblown, but I see merit in skepticism) but I at least wanted to show how you could fold them into the PP framework."

The main thing to keep in mind is that PP works by having balanced risks towards rising/falling expectations of inflation as well as rising/falling expectations of growth. You can review this animation that I made to visualize this as quadrants. When the black dot moves in a direction different from expectations asset markets adjust.



To help you understand why I proposed the above allocation: LTT will do best when expectations are moving towards the lower left quadrant, gold will do best when expectations are moving towards the upper left quadrant. TIPS are agnostic about the price level and they do best when expectations are moving towards the left side of the graph but the vertical axis is irrelevant for them.

[buddtholomew]

What is her rationale for selecting 15%? Does the recent underperformance in the asset have any influence over the decision? I'm not suggesting that a 25% allocation is better or any other percentage for that matter, but it is important to identify what is driving the decision making process.

[KevinW]

I guess my first answer is "do or do not do, there is no try." There are good reasons why the PP involves holding all four assets in roughly equal proportions, and not trying to reason about the ideal allocation for each. Could you prevail on your wife, perhaps if she researched the issue in more depth on her own?

IMO, if the 15% allocation is set in stone, I would build a 4x25 PP with 60% of your assets and put the other 40% in a VP using a different conservative strategy. IMO that's safer and cleaner than tinkering with the PP. My plan B for when the PP is unavailable is a conservative Boglehead portfolio with <= 50% stocks.

[dualstow]

edit: Gaah! Kevin you beat me by, like, 5 seconds! :-)

You could make the pp 60% of your entire holdings.
That way gold could still be 25% of your pure pp, but only 15% of your investments. ( 0.25 x 0.6 = 0.15)
That leaves 40% to invest in more marriage-friendly assets. 

[KevinW]

Great minds think alike. 

[moda0306]

Does anyone else feel like just handing all their money to melveyr, likely the youngest guy who posts on this board, and let him manage it for us?

[BP]

Thanks all (don't let my response stop you from you commenting further as I find the input highly valuable).  My spouse, CPA trained, is looking at the past performance of gold in the PP more in isolation.  But even if one looks at gold as a part of the PP as a whole, the sudden drops in gold value in the past performance of the PP, as well as the long stretches of time in which gold has not performed well, gives my spouse room for concern (me as well).  Thanks to you all, HB's books and radio shows, Craigr's podcasts and blog, and Boglehead threads (Craigr and MT have been talking about the PP for a long time - thankfully) we have a far better understanding of the PP at this point. 

I have tried different 15% gold PP portfolios over various time periods using the Simba spreadsheet and wondered that perhaps someone here had considered a smaller gold allocation as I am forced to do. 

We decided to diversify the portfolio theory risk and will have a 50/50 split between PP (with the 15% gold allocation) and a Boglehead like portfolio (25% SCV, 50% five year treasuries, 25% TIPS) with the same or better risk profile as the PP as measured by past performance over various short and long term time periods.

[AdamA]

My spouse will only agree to a 15% gold allocation for the PP.  Suggestions for the remaining 10% not allocated to gold?  TIPS?  More to stock?  Spread it equally to the other four corners?

Thanks.

I would just use 15/28/28/29 and leave it at that.

[dualstow]

Does anyone else feel like just handing all their money to melveyr, likely the youngest guy who posts on this board, and let him manage it for us?

No, but if I were in finance class I would definitely hit him up for homework help!

That's the funny thing about investing. I don't know that nisiprius or grabiner or livesoft, or any of the other extremely bright people I read on bogleheads will necessarily wind up with a better return than my own. I don't know that BP's spouse can get a better return than BP, either.

[melveyr]

Thanks all (don't let my response stop you from you commenting further as I find the input highly valuable).  My spouse, CPA trained, is looking at the past performance of gold in the PP more in isolation.  But even if one looks at gold as a part of the PP as a whole, the sudden drops in gold value in the past performance of the PP, as well as the long stretches of time in which gold has not performed well, gives my spouse room for concern (me as well).  Thanks to you all, HB's books and radio shows, Craigr's podcasts and blog, and Boglehead threads (Craigr and MT have been talking about the PP for a long time - thankfully) we have a far better understanding of the PP at this point. 

I have tried different 15% gold PP portfolios over various time periods using the Simba spreadsheet and wondered that perhaps someone here had considered a smaller gold allocation as I am forced to do. 

We decided to diversify the portfolio theory risk and will have a 50/50 split between PP (with the 15% gold allocation) and a Boglehead like portfolio (25% SCV, 50% five year treasuries, 25% TIPS) with the same or better risk profile as the PP as measured by past performance over various short and long term time periods.

I wouldn't worry about the 15% spouse imposed constraint. I think AdamA's suggestion of 15/28/28/29 will do okay. I also think taking equal parts out of LTT/Gold to put some into long duration TIPS (rolled over periodically so that they maintain their "kick") will do okay. No one can predict the future and AdamA's solution is still much more diversified than most. It might be a little light on the gold, but from my personal testing I have found that gold has historically had the highest covariance to the portfolio, indicating that the PP might have been historically overweight gold from a risk allocation perspective.

Finance is ambigious. Just do something reasonable and maintain some discipline about sticking to it 

[MachineGhost]

Does anyone else feel like just handing all their money to melveyr, likely the youngest guy who posts on this board, and let him manage it for us?

My 21 years of experience with investing and trading says: HELL NO!   Youth is no substitute for wisdom.

[moda0306]

Does anyone else feel like just handing all their money to melveyr, likely the youngest guy who posts on this board, and let him manage it for us?

My 21 years of experience with investing and trading says: HELL NO!   Youth is no substitute for wisdom.

Wise

1. having the power of discerning and judging properly as to what is true or right; possessing discernment, judgment, or discretion.
2. characterized by or showing such power; judicious or prudent: a wise decision.
3. possessed of or characterized by scholarly knowledge or learning; learned; erudite: wise in the law.

Melveyr's one of the wisest one's on this board hands down.

[AgAuMoney]

Does anyone else feel like just handing all their money to melveyr, likely the youngest guy who posts on this board, and let him manage it for us?

Never crossed my mind.  And now that you ask, not in a million years.

[moda0306]

Does anyone else feel like just handing all their money to melveyr, likely the youngest guy who posts on this board, and let him manage it for us?

Never crossed my mind.  And now that you ask, not in a million years.

I hope it was obvious this was tongue-in-cheek.  Though the guy is smart.

[BearBones]

Does anyone else feel like just handing all their money to melveyr, likely the youngest guy who posts on this board, and let him manage it for us?

If/when I cannot do this any more, melveyr is at the top of my list.

[dualstow]

Poor Melvey, you didn't even ask. LOL
We all love you, ok Ryan? 

[craigr]

My spouse will only agree to a 15% gold allocation for the PP.  Suggestions for the remaining 10% not allocated to gold?  TIPS?  More to stock?  Spread it equally to the other four corners?

If you want to maintain the 25% high inflation hedge, without owning something like gold, you can consider other hard asset exposure.

However that is not income producing and doesn't sound like it will pass the sniff test here, so I would say you could look into allocating the last 10% to something like REITs that own properties as the underlying assets. TIAA is at the top of the list, but is restricted in who can buy it. A good REIT index would be second in that they own a wide array of REIT providers, many of whom do own the properties and are not just shell mortgage speculative vehicles under the covers.

The reason I mention real estate is it has a tendency to always match inflation as well and can also generate some income if you want that. It is probably not as reliable as gold for serious currency problems in terms of explosive growth, but real estate is usually one of the last assets standing in a serious inflation situation. No matter how bad a currency gets, the land is still the same.

But as others have pointed out, you could just punt and put the 10% into the other three assets and probably be just fine.

[Ad Orientem]

I really wouldn't sweat the 15% limit. It's not the end of the world and to be honest it's 15% more than 99% of the other investors out there have. One thing I would suggest to compensate for currency risk is to utilize a cap weighted (low cost obviously) global stock market index fund instead of a strictly domestic one (i.e. S&P 500 or TSM). I also like Craig's suggestion about using an REIT.

So maybe go...
25% LTT
25% GSM (VT?)
25% Cash
15% Gold
10% REIT (VNQ?)

[buddtholomew]

How many PP investors on this board maintain a strict 4x25 allocation as their model portfolio (ignore rebalancing bands for the purpose of this discussion)? If we deviate from this allocation by reducing and replacing one of the assets (e.g. GLD for REIT), at what point do we stray too far and no longer hold what Mr. Browne considered the core holdings of the permanent portfolio. On one hand, PP investores are meticulous about asset placement and protection (e.g. TLT in IRA's, holding physical gold,etc.) but are less strict when it comes to the percentages to hold in each asset (SPY, GLD, TLT and CASH).  Why is this not considered market and asset timing?

Sometimes it makes me feel as if I am the only sap who is holding 25% in GLD and TLT.

[melveyr]

How many PP investors on this board maintain a strict 4x25 allocation? If we deviate from this model by reducing and replacing one of the assets (e.g. GLD for REIT), at what point do we stray too far and no longer hold what Mr. Browne considered the permanent portfolio. Why is this not considered market timing?

Personally, I think if you set up a 4X25 allocation and then make adjustments because of market conditions then you are definitely market timing. I am 100% vanilla HBPP right now. Any other ventures I have done were compartmentalized and separated from the PP (to me that means having no impact on rebalancing decisions).

However, the scenario that BP laid out is different. BP does not have an allocation yet and is deciding on what to do. If BP implemented the gold-light edition of the PP and later decided it would be good to go with the full-gold PP I would probably consider that market timing as well.

[buddtholomew]

The OP has still not provided any rational for reducing GLD to 15 percent other than their significant other has mandated this arbitrary amount. I challenge them to consider whether this decision is based on the recent underperformance of GLD relative to other investments.

[Pointedstick]

Sometimes it makes me feel as if I am the only sap who is holding 25% in GLD and TLT.

For what it's worth, I'm in the same camp as you.

But inevitably, you're not going to remain at 25% for long, save for maybe cash.

[Coearth]

I really wouldn't sweat the 15% limit. It's not the end of the world and to be honest it's 15% more than 99% of the other investors out there have. One thing I would suggest to compensate for currency risk is to utilize a cap weighted (low cost obviously) global stock market index fund instead of a strictly domestic one (i.e. S&P 500 or TSM). I also like Craig's suggestion about using an REIT.

So maybe go...
25% LTT
25% GSM (VT?)
25% Cash
15% Gold
10% REIT (VNQ?)

I did some backtest of this allocation recently, on Singpore version of PP.

There is only 4 years of data for the FTSE index. My takeaway from this simple exercise is:
1. Singapore-REITS seems to be more volatile than stocks!
2. The FTSE Index of S-REITS comprises of at least 39 S-REITs - i suppose this will include good and poor performing REITs, hence making this index more volatile.
3. Based on these few years of data, adding S-REITs Index to core permanent portfolio in place of gold may not boost returns by much, while potentially exposing core PP to greater magnitude of loss.
4. High correlation between S-REITs and local stock market!

The FTSE S-REITs index may comprise of both good and not so good Singapore REITs. There is inflation of 4%~5% in Singapore for past few years, and core inflation of about 2%. Anyway, i dont know how U.S. REITs have performed, but it will be worthwhile to backtest performance of this 10% REITs allocation before really proceeding with it.