A "Simple" Portfolio

[AdamA]

http://seekingalpha.com/article/259680- ... _watchlist

Simple?  

[AdamA]

This one is funny too. 

I only watched the beginning of the video (because I eventually got bored) but it (the beginning at least) is hilarious.

http://sn112w.snt112.mail.live.com/defa ... wsignin1.0

[moda0306]

I don't know whether to laugh or cry.  There are times I feel like maybe I'm just drinking the PP koolaid and am blinding myself to wiser opportunities that I don't take the time to read through or judge without reading more about them (as many probably do with the PP).

This is not one of those times. 

I picture an editor trying to get his minions to fill a financial site with loads of (garbage) articles every day to increase readership.  Said minions are like radio football announcers, just trying to fill "dead air" with the most useless rhetoric you've ever heard.

[MediumTex]

I view the permanent portfolio the way I view brushing my teeth.

There was a time when I was a child that I didn't brush my teeth.  As my teeth came in and the adults around me helped to shape my worldview, brushing my teeth became part of my daily rituals, and it became so deeply embedded in the things I do more or less unconsciously that I now brush my teeth at least twice a day and it is truly something that I don't think about much (I also floss).

You might say I have fully internalized teeth brushing.  It is part of me.

I view the permanent portfolio in this way.  I want it to simply be one more habit that eventually becomes fully internalized and which eventually just becomes part of me.  No doubts, no hesitations, no insecurity.  Just one more deeply embedded habit.

Now, when it comes to tooth care, there are all sorts of things that come and go--different types of electric toothbrushes (and there are some good ones), different types of toothpaste, different types of mouthwash, flavored flosses, etc., and I will try these things from time to time, but I always know that it is unlikely that any of these tooth care gadgets are likely to become as permanent a part of my daily rituals as the basic habit of brushing my teeth.  I simply have not internalized any of these improvements upon the basic task of brushing my teeth.

You might say that your VP is the way you express your desire to dabble in passing fads, the same way you might use an electric toothbrush for six months before returning to a regular brush. 

The only thing that would cause me to consciously reappraise my tooth care habits would be if I started getting cavities.  Happily, my current routines have kept my teeth healthy and I am comfortable with my current approach.

The permanent portfolio would certainly need to be reappraised if it began delivering the investment equivalent of cavities--e.g., large losses, greater volatility or a general lack of responsiveness to underlying economic conditions.  Absent such an appearance of investment "cavities", however, I enjoy the permanent portfolio being something that is simply part of me, a more or less unconscious thing that makes my life a little bit simpler and helps me to meet my financial goals without too much excitement.

Most investment strategies are like flavored dental floss or bubble gum flavored mouth rinse.  I don't really think anyone thinks of them as "permanent" features of their investment lives.  It's just something to do for a while, until something better comes along.  As we know, this is the basis for performance chasing, and the reason many investors are not successful.

I don't think the permanent portfolio is perfect, but I think that in the hands of someone who understands it and whose temperament is consistent with the underlying assumptions of the strategy, I think that one of its best features is that eventually it just becomes an almost unconscious habit, delivering desirable results without demanding too much mental energy or attention along the way.

[Storm]

MT, you should seriously collect these posts and make a book out of them...  Not to belittle it at all, but some of your posts are like the amazing parables that a good religious leader can tell that make you think about life in a different way.  At the very least you could make a book that is much better than "The Richest Man in Babylon."

[MediumTex]

MT, you should seriously collect these posts and make a book out of them...  Not to belittle it at all, but some of your posts are like the amazing parables that a good religious leader can tell that make you think about life in a different way.  At the very least you could make a book that is much better than "The Richest Man in Babylon."

I appreciate the comment very much.

I think about this sometimes, but I always remember how much easier it is to make your friends laugh than it is to make strangers laugh.

I think it's similar with writing in general.  What we disuss here is very much a niche application (the PP) of a niche concept (HB's thinking on investing), and even if I am occasionally able to really capture an idea in a nice package, it's still an idea that would have meaning to very few people, simply because the PP really makes sense to so few people.

The book I do sometimes think about writing would be called "The Affluent Peasant", and it would discuss the way we have built this world where people aspire to appear affluent even though they often own nothing and typically have a negative net worth.

[moda0306]

MT,

It is the very eye-opening nature of some of your language that probably would make you more successful at reaching people than you might think.  Some people have an "inside joke" type of sense of humor with their friends and that's who you're referring to.  Some people just have a hilarious way about them that is infectious with almost everyone.  While some of your comments speak first and foremost to the PP faithful, often your way of putting things is pretty eye-opening and almost poetic, at least to the intellectually curious.

[MediumTex]

It's a pleasure to be able to contribute to the important topics we cover here.

Thanks for the great feedback.

[Coffee]

"It's still an idea that would have meaning to very few people, simply because the PP really makes sense to so few people."

This is what worries me about the PP.  But then again, I feel the same way about not carrying any type of debt, too.

[moda0306]

Coffee,

I'm more worried the assets of the nontraditional PP assets will be come TOO popular (before I can get enough money in there that is) and therefore lose their macroeconomic subtleties.  

I think now it seems like for years gold and LT treasuries were on such few balance sheets that they could just "do what they were supposed to do" and not many noticed.

Now with 2008 in our rear view mirror, the subtleties of gold and LT treasuries are screaming at us (well, those of us that choose to listen).  This could weaken the PP's desired "gyroscopic" performance.  It's one thing to say why LT treasuries will grossly outperform in a deflationary recession, that gold's role as a monetary metal will keep it holding it's ground, or that a prolonged deflation is even possible.  It's another to actually see it happen.

[6 Iron]

I'm more worried the assets of the nontraditional PP assets will be come TOO popular (before I can get enough money in there that is) and therefore lose their macroeconomic subtleties.  

I think now it seems like for years gold and LT treasuries were on such few balance sheets that they could just "do what they were supposed to do" and not many noticed.

Moda, at present, I do not share your concerns, but agree that at some point it is possible. Here is a thought: when the prevailing wisdom at Bogleheads includes a 5-10% allocation to gold, or a substantial portion of bonds in long term treasuries, I will become concerned that the assets may no longer perform their roles in each economic condition. However, until I have consistent evidence that one or more of the assets no longer performs its job, I will keep adding money to the dog of the bunch.

[AdamA]

Here is a thought: when the prevailing wisdom at Bogleheads includes a 5-10% allocation to gold, or a substantial portion of bonds in long term treasuries, I will become concerned that the assets may no longer perform their roles in each economic condition.

If that happens I think the PP will work just as designed. 

Would you say the same thing about stocks? 

[6 Iron]

Here is a thought: when the prevailing wisdom at Bogleheads includes a 5-10% allocation to gold, or a substantial portion of bonds in long term treasuries, I will become concerned that the assets may no longer perform their roles in each economic condition.

If that happens I think the PP will work just as designed. 

Would you say the same thing about stocks? 

No, but I would wonder if the normal function of the asset (gold- high inflation/insecurity, bonds- deflation) might be overwhelmed by a bubble or bubble bursting. Even then, I suspect it would be transient; I am just not sure how long transient is.  When/if investing in Gold is no longer treated derisively by the general population at Bogleheads, I will be very glad that I will then be adding or rebalancing into bonds, stocks and cash.

[AdamA]

I am just not sure how long transient is. 

Exactly...

Trying to avoid so-called bubbles in various asset classes can cause you to miss out on huge gains. 

Rebalancing is designed to help you avoid taking a fall when an overvalued asset class takes a dive.

In my opinion, even if they are both overvalued, it is very unlikely that gold and long term treasuries would tank at the same time.  More likely, if one "bubble" bursts, the other asset will do well, probably with a reversal after a year or two.

That's one of the thing I've noticed in looking at historic returns of the PP.  Year to year, the returns of the various asset classes are very unpredictable.  So much so, that it barely matters if an asset class forms a bubble. 

[moda0306]

One could argue that because of the machine like nature that LT Treasuries and gold add to a diversified portfolio, that they have been persistently "under-priced" form the aspect of a PP-type investor.  Since they provide more for us (PP investors) than they do on their own or to other investors that don't know how to properly diversify.  Hence, the "underpriced" nature of the assets to us.

If people start seeing the LTT/Gold pieces and how well they fit into a more traditional stock/st bond or cash portfolio (which they may have already started to), LTT's yields will drop (improving return) and gold will rise (improving return).  This may have already begun, but I don't think it's over, and keep in mind this will be GOOD for people already invested in the PP.  The question is, what kind of correction is possible if the secrets of these assets start to become popular to the "shoe shiner" is pushing the PP to his customers.

The one thing I'll say is this though, I think there's a few natural defenses to this: 1) It's tough to swallow the PP until you know about macroeconomics.  It's not something that the average Joe would "internalize" (as MT puts it).  2) the very nature of our economy would mean to me that by the time gold and/or LTT are looked at in awe, they've done their job in spades.  3) The very nature of LT bonds and gold performing well makes it difficult to believe that they'll continue to.  Think of it this way:

1) For LT treasuries to do extremely well, rates have to drop.  Getting someone to buy into the idea that a 30-year bond at 4.5% is a lucrative investment is EXTREMELY difficult.  Even more difficult at 3.7%, or 2.9%... see where I'm going?  LTT's have a natural defense as they perform.  Conversely, they almost have an equally negative appearance as rates rise and they're losing value.  LT bonds never "look good" to someone without some macroeconomic perspective.  In fact, most people don't even know how their pricing/return work.

2) Gold: When one looks at the idea of spending $1,420+ on one ounce of a shiny yellow metal that doesn't do anything, it can be difficult to swallow if you don't know the macroeconomics behind it.  Like bonds, as gold's price rises, it feels so "odd" to be paying so much for so little.  It has that natural defense to people getting on in bandwagon form.

Stocks don't seem to have this natural stabilizer.  How many retail investors felt like the stock market was too expensive in 1999, or 2007?  Stocks are something people are usually already invested in, so all the gains that have been had feel "more real" than popping into gold at $1,400 or LTT's at 4.5%.  Like many have said before, it's hairy exterior will probably always keep the masses at bay and the machine working properly.

[AdamA]

Like many have said before, it's hairy exterior will probably always keep the masses at bay and the machine working properly.

I think many people start to look into using the PP because they have come to view other options with some degree of skepticism.  It's no surprise that one would wonder if the PP was legit, or just more of the same...so I think that's why these questions come up so often in the beginning.  

It really helps to understand the macroeconomic theory behind the strategy.

The reason I have such confidence in the PP is that I have waffled between over-investments in each of the asset classes over the years b/c I heard Peter Schiff say that gold was good or Robert Prechter say that cash was the best place or John Boggle say to just own an SP index fund.  

I knew the basic reason to hold each position, I just didn't know how to hold them together.  It's a relief to be able to stop guessing.  

Too many people still view it as a timing game, and I doubt that will change any time soon.    

[moda0306]

I don't think most people realize how long bond pricing works, or that gold is a monetary metal and not a traditional commodity, and even if they do get the gold piece they don't understand the implications of that.

If you don't understand how long-bond pricing works, the subtleties of treasuries vs corporates/munis/etc will be totally lost on you.

If anything, most people that are "rethinking their portfolios" are going to come to the conclusion to just reduce their debt, have more liquid savings, and add more bonds/cash to their portfolio than they otherwise would have.  That's probably all most people "learned" from 2008.  And to be honest, if that's all they learned, they're still way better off than before.  There are several people I know of that at or close to retirement were 70%+ stocks in 2008...

[Lone Wolf]

Yeah, it's really hard for me to imagine long-term bonds becoming that popular outside of insurance companies and the handful of us that are following the Permanent Portfolio.  Even though I know the exact purpose that I bought them for (and understand that my stocks and gold are guarding me against their risks), I think I'll always feel queasy at the thought of lending money to the government for 30 years at a fixed rate of interest, all while the printing presses run red-hot.

As for gold, it'll get flattened again at some future time of prosperity and stability.  Everyone will rediscover their hatred for our shiny yellow friend and instead pour their money into the stock market.  The gold bugs and the PP adherents will quietly buy it up at the new low prices.  Also hanging onto some gold: central bankers.  Bet on it.

[moda0306]

I find it funny with gold that people argue that it's over-compensated for its inflation protection status.... but in 2000, they probably would say that it wasn't doing it's job as an inflation hedge after 13 years of almost consistant losses.  So when SHOULD we buy gold?  NOT after 13 years of proving it can't keep up with inflation, and not after a decade of over-inflation performance therefore indicating it's overpriced... so when?

When stocks and bonds are poised to beat inflation handily, gold has no purpose, and will therefore likely drop.  When stocks and bonds are poised to struggle to beat inflation and institutions that were once taken for granted are being questioned, gold will explode.  It's never going to behave in a way that most people will understand and be able to price in traditional ways.  When you compare the last 40 years of golds performance to macroeconomic trends, institutional risks, and stock/bond outlook it has moved how someone would expect within reason for a monetary metal.  I've gained so much more respect for it that I fear most will never feel.

[smurff]

The book I do sometimes think about writing would be called "The Affluent Peasant", and it would discuss the way we have built this world where people aspire to appear affluent even though they often own nothing and typically have a negative net worth.

That's actually a great idea for a book, MT.  Lots of folks out there are trying to get off the rat wheel, and a book like yours will give them inspiration, if not ideas on how to do it.

( sorry about the lousy formatting-- it's hard to peck out messages on an iPod.)

[TBV]

I find it funny with gold that people argue that it's over-compensated for its inflation protection status.... but in 2000, they probably would say that it wasn't doing it's job as an inflation hedge after 13 years of almost consistant losses.  So when SHOULD we buy gold?  NOT after 13 years of proving it can't keep up with inflation, and not after a decade of over-inflation performance therefore indicating it's overpriced... so when?

When stocks and bonds are poised to beat inflation handily, gold has no purpose, and will therefore likely drop.  When stocks and bonds are poised to struggle to beat inflation and institutions that were once taken for granted are being questioned, gold will explode.  It's never going to behave in a way that most people will understand and be able to price in traditional ways.  When you compare the last 40 years of golds performance to macroeconomic trends, institutional risks, and stock/bond outlook it has moved how someone would expect within reason for a monetary metal.  I've gained so much more respect for it that I fear most will never feel.

Lots of folks object to the fact that gold does not contribute to the production of goods and services, nor does it pay dividends. So, for them, the answer is that it's NEVER a good time to invest in gold.  For everyone else who doesn't think that way, I suppose the best course of action is to ignore them.  Gold serves a purpose,  but an investor may not need it to perform that service for 10 or 20 years.  In the meantime, gold may just sit there doing nothing, just like insurance.  Folks who are not prepared for that should stay away.  Everyone else should be unperturbed. 

[longeyes]

The book I do sometimes think about writing would be called "The Affluent Peasant", and it would discuss the way we have built this world where people aspire to appear affluent even though they often own nothing and typically have a negative net worth.

Sounds very like the de facto impoverished nobility of Europe in days of yore: keeping up appearances while slowly dissolving into penury.