Author Tweeks PP

[Coffee]

Don't know if this has already been posted in the forum?

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[craigr]

I think in 2008 this thing would have completely blown up. You would have been out of LT bonds most likely just when they were about to go through the roof at the end of the year.

People are always trying to beat the market. If they just left things alone with a simple portfolio they'd probably find they would beat 99% of all investors over their lifetime.

[Coffee]

I think we have something in us, that makes us want to tweak and personalize everything we get our hands on.  I don't know if that's a uniquely American trait or not?

[MediumTex]

I think we have something in us, that makes us want to tweak and personalize everything we get our hands on.  I don't know if that's a uniquely American trait or not?

Sometimes when faced with an uncertain situation people have the sense that doing something is better than doing nothing.  Since investing is sort of the process of managing constant uncertainty, I think people get in the habit of making changes just do make changes because it makes them feel like they are being proactive.

[foglifter]

The approach is very similar to Mebane Faber's Ivy Portfolio, although the latter uses only 5 funds instead of 9, which makes it simpler. But both of them are more complex than PP 

The second point is: I don't understand why having 9 funds in a portfolio? Silver, emerging markets bonds? That's silly.  It really seems that the author wanted to make it look sophisticated and hence trustworthy. 

[julian]

I think in 2008 this thing would have completely blown up. You would have been out of LT bonds most likely just when they were about to go through the roof at the end of the year.

People are always trying to beat the market. If they just left things alone with a simple portfolio they'd probably find they would beat 99% of all investors over their lifetime.

Craig, u r so right. People always trying to beat the market is why the PP will never be in a bubble and over the long term, will always prevail.

[longeyes]

Well, we can compare the HBPP and PRPFX to GTAA in a year and see how they fare head to head.

[Lone Wolf]

Craig, u r so right. People always trying to beat the market is why the PP will never be in a bubble and over the long term, will always prevail.

I think that's true.  Even beyond the temptation to beat the market, there's a temptation to try to match the returns of the best-performing sector of the overall market.  This can lead to all kinds of performance-chasing.

The real test of mettle for Permanent Portfolio investors (as William Bernstein rightly pointed out) is when an equities bull market returns.  The PP will keep doing what it does best -- protecting and slowly, safely growing purchasing power.  However, we will be watching stock investments of all varieties (even what appear to be poor ones) do very well.

[EdwardjK]

"Craig, u r so right. People always trying to beat the market is why the PP will never be in a bubble and over the long term, will always prevail."


I mentioned in another post that I am currently reading Harry Browne's book, "Why the Best Laid Investment Plans Usually Go Wrong".  Therein Harry explains that many/all investment strategies are flawed and fail once you incorporate them into your personal strategy.  It is a very good book that I recommend you read.

Having said that, the PP is another investment strategy.  Yes, it has a very good track record, but there are no guarantees that the relationships between the four asset classes will continue.

I write this due to the quote above.  Words like "never" and "always" are absolutes and there is nothing absolute in investing.  These words are no more than wishful thinking.

I wish Harry were alive today so we could have this discussion.

[MediumTex]

Well, we can compare the HBPP and PRPFX to GTAA in a year and see how they fare head to head.

I would be more interested in seeing how the two compare over the next 30 years.

I like things that work all the time, not just under a certain set of market conditions.

[AdamA]

GTAA uses a moving average trading system.  

In my opinion, moving averages might be an okay trading system for a very disciplined investor.  There will be long periods where one is whipsawed in and out of trades or will be out of the market altogether.  

Moving average traders are trend-followers, which is quite different from a reversion-to-mean "trading" (for lack of a better word) such as that used by the PP.  To trend follow, you have to realize that many of your trades will be losers, and that you also have to be able to hold an asset class as it rallies without selling off and taking profits.  It's not easy.

Harry Browne is much harder on moving average systems in "Why the Best-Laid Investment Plans Usually Go Wrong," and spends a good deal of time discussing them in the chapter "Going Wrong With Trading Systems."

For me, I prefer PP to something like GTAA philisophically.  With trend following, you're trying to jump on a band wagon relatively early and then beat the majority of the crowd off.  With the PP, you're trying to buy assets when no one else wants them, and sell them when they are most popular.  It fits my personality better, and will therefore be easier for me to stick to in tougher times.

Adam

[moda0306]

Using rebalance bands (especially 35/15 with partial rebalances), while tax efficient as well, also allows some of these trends to work within the PP.  That's all I really feel like giving the trend any clout... 2007 - 2009 are a few examples of why one shouldn't over-rely on trend-based investing.

[AdamA]

Also note that GTAA has an annual expense percentage of around 1.3%.  In the white paper that Faber used to introduce this strategy, Faber calculates his moving average timing system would have returned 11.3% from 1973-2008.  Minus the expenses, this would be around 10% versus buy and hold which was around 9.8%.

So it's a difference of .2% (between buy and hold and market timing) after expenses...not to mention taxes from all of the shuffling in and out of positions.  

[dualstow]

As far as I'm concerned, any tweaking whatsoever constitutes another variable portfolio, and nothing more. I know that's what the author calls his portfolio in the article linked in the OP, but really: *any tweaks* = PP no longer.

[craigr]

"Craig, u r so right. People always trying to beat the market is why the PP will never be in a bubble and over the long term, will always prevail."


I mentioned in another post that I am currently reading Harry Browne's book, "Why the Best Laid Investment Plans Usually Go Wrong".  Therein Harry explains that many/all investment strategies are flawed and fail once you incorporate them into your personal strategy.  It is a very good book that I recommend you read.

Having said that, the PP is another investment strategy.  Yes, it has a very good track record, but there are no guarantees that the relationships between the four asset classes will continue.

I write this due to the quote above.  Words like "never" and "always" are absolutes and there is nothing absolute in investing.  These words are no more than wishful thinking.

I wish Harry were alive today so we could have this discussion.

I don't think he used the word "never" but did use "not likely" to describe the portfolio. I'm careful to not phrase things in absolutes. The best we can do is diversify as well as we can. No investment portfolio can promise endless good returns and no losses. But I think that the underpinnings of the Permanent Portfolio give it a much better chance than what I typically have seen. The economic theory behind it is very well thought out and the track record we do have at least has shown it can take some serious punches and still stay on its feet. I don't know if it's the best way to do things, but so far it's proven to be not a bad way to approach the problem of uncertain investing markets.

[LifestyleFreedom]

a reversion-to-mean "trading" (for lack of a better word) such as that used by the PP.

"Asset allocation" approaches to investment depend on having a mixture of non-correlated asset classes that react independently (as much as possible) to Mr. Market's spasms of fear and greed.  You then rebalance regularly when the mixture gets out of proportion, which forces you to "sell high and buy low" to bring the mixture back into balance.

Most asset allocation systems in the mainstream investment world depend on stocks (e.g., large U.S. cap, small U.S. cap, and international) or stocks and bonds in some proportion that might be dependent on the investor's age (e.g., percent in stocks = 100 - age, the rest in bonds with perhaps a 5% reserve in cash).  Browne's genius is in using stocks, bonds, gold, and cash as the non-correlated asset classes (and provides excellent reasoning of why these are the four best asset classes to choose and hold in equal proportion).

I've read where international stocks have become highly correlated with U.S. stocks since 2000 (versus having a correlation of less than a third as recently as the mid 1990s, which is when I first looked into this).  I suppose it's possible the lack of correlation between stocks, bonds, gold, and cash could change under alternative futures that are vastly different from what we've experienced during the past many decades.

Under a peak resources scenario, for example, the planet might go back to a pre-industrial era where barter is used by most people (i.e., stocks, bonds, and cash are worthless) and the rich own all the gold.  But I consider this to be an extreme situation where staying alive day-to-day will take precedence over even having an investment portfolio.

[moda0306]

LifeStyle,

I would also add that the importance of treasury vs other bonds is something that HB was smart enough to emphasize, as well as the importance of gold over other commodities.  These are subtleties lost on most novice investors (gold vs commodity index, treasuries vs AAA corporates & munies), but when you look at the economics of why you're hedging in the first place, it makes all the difference in the world when you actually need them to perform.  The way the PP performed in 2008 compared to standard portfolios was nothing short of beautiful.  The fact that LT treasuries skyrocketed, just as their corporate and municipal counterparts were actually losing value, is astonishing to see (I literally have a picture of Craig's 2008 LT bond graph printed to remind me NOT to chase yields on LT bonds... EVER (I do a little with cash with my Ally account)).  Further, Gold, vs almost every other commodity that was falling like crazy, held its ground.

If someone would have had a total bond fund and a commodity basket in in 2008 in place of LT treasuries and gold, respectively, they would have lost their shirt.  I just wish that I would have known about the PP sooner, and been able to experience my portfolio threading the needle through all the problems with stocks, most commodities, and even a lot of bonds in 2008.  I really wish HB could have been alive to see it.  I'm sure it would have filled him with a much-deserved sense of pride.

Though 2008 was one of the PP's "worst" performing years, I think it's probably the PP's "best" year, in that it's two most hated assets, gold and LT treasuries, performed while their "peers" completely fell apart.  Though it wasn't an inflationary year, I think 2008 spoke so many volumes about gold that the 70's and early 80's couldn't necessarily show people.  When the crap hits the fan and deleveraging starts, industrial commodities are going to dive like stocks.  Monetary metals will be relatively stable.

[EdwardjK]

I don't think he used the word "never" but did use "not likely" to describe the portfolio. I'm careful to not phrase things in absolutes. The best we can do is diversify as well as we can. No investment portfolio can promise endless good returns and no losses. But I think that the underpinnings of the Permanent Portfolio give it a much better chance than what I typically have seen. The economic theory behind it is very well thought out and the track record we do have at least has shown it can take some serious punches and still stay on its feet. I don't know if it's the best way to do things, but so far it's proven to be not a bad way to approach the problem of uncertain investing markets.

Craig, very well-stated.  Your's is the first comment I have seen that suggests that even the PP is not a guarantee or is fool-proofed.  I am not certain that all commentators on this board get that.

[moda0306]

Edward,

I will say, a severe deleveraging by our society could cause the PP to have some bad years.  I think the hypothetical backtests of a silver PP at the time of the depression has it losing 15% of its value.  Even so, 15% may seem like a real hit, but in the context of the times, I would have taken it in a heartbeat.  In that case, your heavy cash allocation would definitely serve you well.

I think people can envision scenarios where the PP doesn't perform, but it still stands that I find it hard to find a portfolio where you have to do so much pontificating to imagine scenarios where it will falter.  Look at 2008.  Stocks faltered within the PP, but at a time when some non-treasury mm accounts were siezing up, all non-monetary commodities and real estate were collapsing, and the only LT bonds performing were of the treasury variety, I think "fool proof" isn't complete hyperbole when seeing a "one size fits all" portfolio manouver through that with such poise. 

[AdamA]

Edward--

I agree with you 100%.  Nothing is certain in investing.  However, I can think of no safer way to protect your wealth than with the PP.  Can you?

[MediumTex]

Edward--

I agree with you 100%.  Nothing is certain in investing.  However, I can think of no safer way to protect your wealth than with the PP.  Can you?

I feel the same way.  It's sort of like democracy--it's not perfect, but I can't think of any other system I would prefer to live under.

[moda0306]

Edward--

I agree with you 100%.  Nothing is certain in investing.  However, I can think of no safer way to protect your wealth than with the PP.  Can you?

I feel the same way.  It's sort of like democracy--it's not perfect, but I can't think of any other system I would prefer to live under.

...except maybe a Constitutional Republic.  JK... just thought I'd be "that guy" in the conversation that will call someone out on calling the US a democracy.  It is interesting, though, how much LESS democratic our country was before Andrew Jackson.

[moda0306]

Thanks Clive.

[moda0306]

Though if you WERE retiring shortly after the depression you would have been the benficiary of SS that you didn't have to pay into to receive. 

[Lone Wolf]

Just to clarify, that -15% drawdown for the silver PP was the real gain based value. In nominal terms the PP lost -27% over the Wall St Crash period.

I was curious how you put together a PP for that time period.  It sounds like you swapped silver in for gold, so I think I understand that part.  Where'd you find data on 30-year government bonds?  Were those even being issued at the time?  The reason I ask is that the deflation protection is terribly crucial when talking about the Great Depression.

Plus I am frankly a little envious that you get to play with all these cool backtests.  I wanna play!