Changing to global stocks and gold only

[Marc De Mesel]

Have you seen this: http://www.peakprosperity.com/crashcourse ?
What do you think of this?

Looks like he's got a newsletter, only $30.00/mo, which is great considering exponential debt growth will soon render the dollar worthless.  What a saint. 

I get the impression that selling newsletters is scorned upon by some here. I think this is throwing the baby out with the badwater.  Sure many newsletters are not worth their money. As Hulbert proves most do not outperform the PP, but some do. And even if they fail doing that some offer other value. Also note that Harry Browne himself lived from selling a payed newsletter for decades I believe. MediumTex and Craig are also selling a book, which is great I think.

Investing is about knowledge mostly. Asking money in exchange for your knowledge is fair and square. You are free not to buy it and the fact that you sell information says nothing about the value of the content you sell.

[Marc De Mesel]

I think I found an interesting solution. Would value anyone's feedback.

PP3 Managed Value
-33% Stocks (Global & Value)
-33% Gold (Physical)
-33% Bonds (Local & Value)


The goal is to outperform the traditional PP and not have 7% per year on average, and only 2% real return, but 9% on average, and thus 4% real return while keeping volatility, required research, and risk of being wrong much lower than a purely managed variable portfolio. This is accomplished by keeping a strict balance of asset classes that has proven to protect you in all economic climates but only buying value within those classes.

The stocks are global as to avoid local stock market crashes but preferably stocks that are clearly undervalued and again in an uptrend. For example Cyprus stocks, Iceland stocks, and Precious Mining stocks are worth investigating many of whom contain solid companies that have fallen by 90% to 98% the last few years.


Indeed Bonds/Cash remains important for stability of your portfolio, and to offer that stability they need to be in your local currency. But by lending your money only to entities that offer value (interest considerably higher than true inflation and credit risk acceptable) this part will very likely bring stability while at the same time offering real returns. Maybe in 10 years long term gov bonds can be used here if they offer a good risk/reward again, and short term gov bonds maybe already in a few years. But since currently risk/reward is bad according to almost all indicators they are not acceptable. I think some p2p loans, corporate bonds, and maybe even some local states are worth investigating. As long as you get proper real reward for the credit risk taken it is acceptable. 


Since this requires more management it is only worthwhile if you have a considerable amount of capital OR if you simply copy someone else that you trust (for example Doug Casey sells a report on which stocks he advises in Cyprus). Of course volatility will be a lot higher but here the perspective is that long term there is more safety in undervalued volatile assets, than in overvalued non-volatile assets. And in case you do need money, but your PP3 is temporarily down, very likely you will still have an asset that did perform well, going from undervalue to fair value and can be liquidated.  In 2008 for example that was short term local value loans and bonds that did not go broke and payed up as agreed. By the end of the year gold was also up in USD so could also be liquidated in case you needed emergency cash.

You can start with this portfolio with simple index funds like the traditional PP but the idea is that you keep your eyes open for opportunities in the stocks and bonds segment and over time have more hand picked value and less index. The extra energy required for this can also be acceptable I think since many of the value can be held for decades. For example buying Cyprus stocks today with a small part of the 33% stocks you can hold for decades probably. Unless they go from extreme undervaluation to clear overvaluation within a few years already which is unlikely.

I would value your critical objective feedback.

[jay]

Marc,

I like the approach in principal, but personally prefer to keep it simple and limited to cap-weighted passive index funds. Worth noting is that since Nov 2004, a 33x3 PP made of BND/VTI/GLD would've resulted in a CAGR of 9% annually, assuming annual rebalancing. A 25x44 would've returned 8.2%. I believe the 33x3 PP would also beat over the last 1-7 years (assuming November to November). Note that I'm using a backtesting called EzbackTest tool which is a free download and uses Yahoo data.

The best beat is over the last 5 -year period by 2.5% annually (12% vs. 9.5%).

So bottom line, you might already be ahead with a simple 33x3 PP.

As far as additional gain: HB recommended a 15/35 holding zone. Which meant that a single asset would've had to go up or down 40% (25*0.4 = 10) in order to trigger a rebalancing event. I am not 100% sure, but I think that alone, compared to 5% bands or yearly rebalancing, added an additional 0.5 - 1% to a yearly balanced 25x4 PP.

So similarly: If a single asset in a 33x3 PP dropped or gained 40%, that would bring it down to to 20% or up to 46.7%, respectively. It remains to be back-tested, but that might actually give you what you need.

[jay]

Note that i used VTI because VT didn't go as far back. I would prefer VT or similar world index fund/ETF going forward

[AdamA]

I think I found an interesting solution. Would value anyone's feedback.

PP3 Managed Value
-33% Stocks (Global & Value)
-33% Gold (Physical)
-33% Bonds (Local & Value)

What if you have an emergency and need some cash?

[smurff]

Newsletters can have lots of value, especially if they have a well-performing portfolio and offer lots of information about how they decided to pick particular securities for the portfolio.  They can take the time to educate their readers about investing.

Some newsletters, however, are just rants (about politics or whatever kind of bug the person is) with a bit of stock picking thrown in.  Good for catharsis if you believe as the writer-ranter, a waste of mental bandwidth if you don't.

[Pointedstick]

Marc,
Your 33x3 portfolio seems very sane to me, but I would suggest partitioning the index and speculative/value components into a PP/VP framework. This would allow you to cleanly separate them into different mental buckets as well as benchmark them against one another to make it really easy to see if your speculations are beating the rest of your portfolio. It will also reduce the urge to tinker with the PP part, which, let's face it, is a real risk for you.

So you would have:

PP:
33% global stock index
33% physical gold
33% total local bond index

VP:
33% value stocks and high-risk/high-reward stock speculations (TSLA, NFLX, etc)
33% Physical silver, currency speculations (Bitcoins etc)
33% high-risk/high-reward bond speculations (from Puerto Rico, Greece, Portugal, etc)


Let me also repeat my previous worry about a lack of cash. Since this is a cashless portfolio, you should really make sure you have a few years' living expenses in your local currency outside the portfolio. Even if you think the cash will get slaughtered by inflation, its value is not in its growth (there may not be any in this era of ZIRP) but in the mitigation of the risk that your income will be cut off or you will suddenly need a lot of cash to help you out of sticky situation or something. If your sister gets kidnapped by Mexican drug lords, you're going to want to be able to purchase the veritable arsenal you'll need to rescue her in a daring hollywood movie style adventure without having to sell your more volatile investments.

…But if you're going to do that, why not integrate cash into the portfolio itself? It's kind of 6 of one, half a dozen of the other since in either event, you'd have the cash under your control. I believe that the integration of cash is one of the real under-appreciated aspects of the PP for a variety of reasons. If you haven't seen this thread on the subject yet, I think you'll be intrigued and surprised:

http://gyroscopicinvesting.com/forum/ot ... or-a-myth/

By re-integrating cash to reap the benefits illustrated in that thread, you would have something like:
25% global stocks
25% physical gold
25% cash
25% local bonds

Of course then the portfolio starts to look an awful lot like the PP…

[Marc De Mesel]

Pointedstick, do you mean with cash, physical cash, t-bills or 2 year bonds?

[frommi]

Let me also repeat my previous worry about a lack of cash. Since this is a cashless portfolio, you should really make sure you have a few years' living expenses in your local currency outside the portfolio. Even if you think the cash will get slaughtered by inflation, its value is not in its growth (there may not be any in this era of ZIRP) but in the mitigation of the risk that your income will be cut off or you will suddenly need a lot of cash to help you out of sticky situation or something. If your sister gets kidnapped by Mexican drug lords, you're going to want to be able to purchase the veritable arsenal you'll need to rescue her in a daring hollywood movie style adventure without having to sell your more volatile investments.

…But if you're going to do that, why not integrate cash into the portfolio itself? It's kind of 6 of one, half a dozen of the other since in either event, you'd have the cash under your control. I believe that the integration of cash is one of the real under-appreciated aspects of the PP for a variety of reasons. If you haven't seen this thread on the subject yet, I think you'll be intrigued and surprised:

That is the kind of thing that i really don`t get about the PP. The amount of cash needed is totally independend of the portfolio size. It is just a function in the form of
cash needed=expenses-dividends-interest. When you are living of your portfolio your dividends and interest payments should cover your expenses, so additional cash is not needed for your expenses. While building your nest egg you have an income stream from your job, so why lower your returns with additional cash? (especially these days with negative cash returns)

So holding cash is only necessary to use it for investment opportunities (market corrections), but as a PP user, you don`t do this, you will allways hold 25% cash. Why?

[Marc De Mesel]

When you are living of your portfolio your dividends and interest payments should cover your expenses, so additional cash is not needed for your expenses. While building your nest egg you have an income stream from your job, so why lower your returns with additional cash? (especially these days with negative cash returns)

So holding cash is only necessary to use it for investment opportunities (market corrections), but as a PP user, you don`t do this, you will allways hold 25% cash. Why?

To have your overall portfolio being less volatile?

(Living from you dividends/interests seems very hard since it is very low these days, so I see capital gains (above 5% for inflation) also as income streams. But it does vary wildly year to year. The cash serves to make it go less down in bad years (at the expense of long term returns). But this way my income stream is more stable, and I am willing to pay a fee for that?)

Interested in your feedback.

[Pointedstick]

That is the kind of thing that i really don`t get about the PP. The amount of cash needed is totally independend of the portfolio size. It is just a function in the form of
cash needed=expenses-dividends-interest. When you are living of your portfolio your dividends and interest payments should cover your expenses, so additional cash is not needed for your expenses. While building your nest egg you have an income stream from your job, so why lower your returns with additional cash? (especially these days with negative cash returns)

So holding cash is only necessary to use it for investment opportunities (market corrections), but as a PP user, you don`t do this, you will allways hold 25% cash. Why?

Did you read the thread I posted?

Cash is important to the PP since it's a portfolio that has a fairly low income stream. Right now its effective yield is about 1.5%, give or take. That's not enough to live on unless your portfolio is monstrously large and inflation is near zero. The PP's ability to provide an income comes from harvesting capital gains, not receiving interest and dividend payments. But the assets that yield capital gains are highly volatile. It would be a disaster if you had to sell some of a volatile asset when it was down just to take some income from your portfolio to live. That's the kind of thing that destroys your portfolio. Removing money from the cash allocation allows you to avoid having to sell your volatile assets until you're ready, and the income stream from those assets can go right into cash.

You're partially right that in theory, cash needed is mostly a function of your expenses, but one thing you are forgetting is inflation. "cash needed=expenses-dividends-interest" will result in a growing "cash needed" figure as long as inflation causes "expenses" to rise. This is why bonds alone are so risky; they provide a nominal return, not a real return.

Dividend growth investing seems to at least partially allay this concern if 100% of your income stream is in the form of dividend payments that grow yearly by the rate of inflation or more, but does this really happen? Is your dividend growth portfolio seeing a dividend growth rate of 2-4% or more every year? If not, your dividend payments aren't even keeping up with inflation and you're going to need to keep adding to your portfolio to preserve your purchasing power. I'll admit I haven't done a lot of research on this so I'd be happy to see some more favorable numbers.

The argument that you can remove cash while you're still working isn't a terrible one, since it will indeed increase your returns during the accumulation stage, at the expense of more volatility. But that kind of thing is really up to your own individual risk tolerance preference. I mean, in theory, you don't even need an emergency fund since you're not going to experience an emergency, right? I think it's a mistake to focus on the fact that cash isn't providing much of a return, if any. That's not the point. Cash is there for stability and flexibility. No, us PP users aren't going to robotically keep 25% of our portfolio in cash 100% of the time. I think a lot of people are planning on using their cash allocation for a house down payment, for example. That's sure safer than keeping your house down payment fund in stocks!

[Pointedstick]

Pointedstick, do you mean with cash, physical cash, t-bills or 2 year bonds?

It depends on what you're most comfortable with. Since you'd have 25% gold, keeping the cash in higher-yielding commercial paper like high-yield insured savings accounts would make sense. But T-bills or 2-year bonds would probably be fine too.

All I'm saying is that regardless of its form, cash can add value to a portfolio beyond its interest payments. Reducing volatility, delaying the sale of other assets until the appropriate time, etc.

[frommi]

My dividend stocks have a dividend growth rate of 7% per anno based on the last increases, so that should be enough to cover inflation and give an additional return in the future. But its not set in stone, as is the performance of the PP. 

Cash as emergency reserve is like an insurance, you are paying for it. For me selling assets in case of an emergency costs less than holding cash, especially now with cash yields of 0-0,25% (EU) (and real -1 or -2%). In the PP you should have at least one asset which is at a "top", so selling this shouldn`t hurt. Its not that we have 2008 every 3 or 4 years, this was an exception which happens every 30 years.

@Marc yes its perhaps only for volatility control, but this comes with a cost. When you look at historic PP returns leaving cash gives you 1% higher returns, but the historic returns were with much higher cash yields, so now you can calculate with 1,5-2% higher returns in the future leaving cash out. I don`t want to pay for my convenience of lower volatility. It has only a psychological value, but when you can`t stand a 30% drawdown, can you live with a 20% drawdown?

[rickb]

Its not that we have 2008 every 3 or 4 years, this was an exception which happens every 30 years.

Really?  Here's DJIA peak to trough drops since 1960 (from http://stockcharts.com/freecharts/histo ... a1900.html).  I count 13 over the last 53 years - about one every 4 years. If you count only drops of 20% of more there are 11 (one every 5 years or so).  If you restrict it to drops of 30% or more there are 5 (one every 10 years or so).

54% drop in 2008
31% drop in 2002 (after a 29% gain)
27% drop in 2001
19% drop in 1998
21% drop in 1991
35% drop in 1988
15% drop in 1984
24% drop in 1982
27% drop in 1978
45% drop in 1975
36% drop in 1970
25% drop in 1966
27% drop in 1962

[frommi]

Its not that we have 2008 every 3 or 4 years, this was an exception which happens every 30 years.

Really?  Here's DJIA peak to trough drops since 1960 (from http://stockcharts.com/freecharts/histo ... a1900.html).  I count 13 over the last 53 years - about one every 4 years. If you count only drops of 20% of more there are 11 (one every 5 years or so).  If you restrict it to drops of 30% or more there are 5 (one every 10 years or so).

54% drop in 2008
31% drop in 2002 (after a 29% gain)
27% drop in 2001
19% drop in 1998
21% drop in 1991
35% drop in 1988
15% drop in 1984
24% drop in 1982
27% drop in 1978
45% drop in 1975
36% drop in 1970
25% drop in 1966
27% drop in 1962

I don`t count the ones under 30%. 2001 and 2002 where after a visible and easy to see bubble. 1987 was in effect a one-day crash of 23% which was eliminated at the end of the year.
The hard crashes occured in 1929, 1975 and 2008, they were combined with a great recession.

[Marc De Mesel]

Marc, I think I understand what you are trying to do. But having listened to the HB broadcasts recently I have the impression that he did not design the PP as an investment vehicle. I believe he designed the PP so that he had a "fail safe" way of keeping his purchasing power of money that he earned otherwise intact. I can imagine him being absolutely content even when the PP yield would be negative in successive years, if there was an offsetting price deflation going on at the same time.

Having followed the discussions here I have come to the conclusion that I am looking for an investment vehicle, not a way to maintain my purchasing power. Maybe that also typifies you.

Personally I do not believe that there is a way to ensure that purchasing power is kept. There may be methods (like PP) that work for long periods of time, but I also expect all such methods to break down at some point in time.

As such, I look behind the reason to want to maintain purchasing power. I believe that humans want to maintain their purchasing power in order to be able to assure our self of continued existence. I.e. we ache for certainty. Unfortunately HB never got to write the book "How I found certainty in an uncertain world"
Such certainty means access to the primary necessities of life. I now believe that this can never be achieved through investing in financial products. It can however be achieved through relations and self-sufficiency. Hence my (well, me and my wife) decision to buy a house now and try to get at least partly on the road to self-sufficiency.

That then leaves me free to turn my financial attention to investing for gain, or dare I say, even speculating. Though not leveraged high level gambling 

I have not made up my mind conclusively. But at present I will probably not turn to the PP. Based on past experience I will likely turn to the AIM investing algorithm in selected area's of the stock market. Most probably energy. I am internally debating if PMs have a place here as well.

Anyway, this post was more about clarifying my own thoughts than anything else, but if somebody wants to shoot holes in this,  fire away ....

Thank you so much Rien for validating my impression about the PP. It's really great to see that I am not alone in my view that the PP is only for preservation, not growth.

You say your impression was that Harry Browne also saw it as such, do you remember specific things he said that confirm this, since many see this very different.


Indeed, I am not satisfied with this any longer. I still believe that the safety the PP provides can be accomplished almost equally well by simply diversifying over different good speculations and this way also offer growth.

The hard thing for me now is to find enough good speculations. Since I'm fully occupied with bitcoin myself, I would prefer to outsource this and find a bunch of newsletters, hedge funds or mutual funds that have proven to outperform the PP in the past. But they are so hard to find. 

Nice talking to you

[Tyler]

It's really great to see that I am not alone in my view that the PP is only for preservation, not growth.

...

I would prefer to outsource this and find a bunch of newsletters, hedge funds or mutual funds that have proven to outperform the PP in the past. But they are so hard to find. 

I fully admit I have not read this thread in its entirety.  Still, I find this juxtaposition in a single post interesting.  The investing mind often utilizes a curious logic.

Do what helps you sleep well at night without selling at market lows.  In diversified investing, that's 80% of the battle.

[Libertarian666]

The hard thing for me now is to find enough good speculations. Since I'm fully occupied with bitcoin myself, I would prefer to outsource this and find a bunch of newsletters, hedge funds or mutual funds that have proven to outperform the PP in the past. But they are so hard to find. 

Nice talking to you

There's a good reason those are hard to find. 

[AdamA]

I would prefer to outsource this and find a bunch of newsletters, hedge funds or mutual funds that have proven to outperform the PP in the past. But they are so hard to find. 

Let us know what you find!

[Marc De Mesel]

The hard thing for me now is to find enough good speculations. Since I'm fully occupied with bitcoin myself, I would prefer to outsource this and find a bunch of newsletters, hedge funds or mutual funds that have proven to outperform the PP in the past. But they are so hard to find. 

Nice talking to you

There's a good reason those are hard to find. 

Yeah, yeah, you can laugh and suggest they don't exist. I know better. My average return is currently 18% per year since 2008. That's between 5 and 10 times more real return than the PP.

I think the reason why they are hard to find is exactly the same why many successful entrepreneurs have few or no investors when the getting is good.

They don't need other people's money to be successful and prefer not having to bother with outside investors.

[Tyler]

Yeah, yeah, you can laugh and suggest they don't exist. I know better. My average return is currently 18% per year since 2008. That's between 5 and 10 times more real return than the PP.

And only 2%/yr  better than VTSMX over the same timeframe (not including your trading fees & taxes).  Now what I'm really interested in is how you did including the 2008 dive.  My assumption is there must be a reason you're here exploring alternative portfolios to your own. 

For reference, the PP made about 9.5%/year over the same timeframe (per ETFreplay).  One could clearly make more with riskier investments.  But for me that's more than enough and certainly counts as "growth" and not simply "preservation".  That said, if your primary goal is maximum return, I can see how you might keep looking.

I genuinely hope you settle on an investment plan that works for you, PP or not.  Please report back with things you find -- we certainly like discussing investments here! 

[Marc De Mesel]

Tyler, that is 2008 included. You can see my returns year per year here: http://europeanpermanentportfolio.blogspot.com/      (top page column 'My portfolio')

My returns are expressed in € but exchange rate vs $ stayed about the same since start 2008, dollar went up around 5% over whole period.

Could you review your post and see if your critique still stands?

[Tyler]

Sure.  Thanks for the data.  Looks like you did alright in 2008 -- nice work.

Still, if you invested $10k in the traditional PP and $10k in your portfolio in January 2008 (I presume when your data starts), then by January 2013 the PP would have $14k while your portfolio would have under $13k.  You beat the PP in 2 out of 5 years.  Let's just call that similar returns, which makes sense seeing that your blog promotes the PP and you started with that as a baseline.  Were you unhappy with your portfolio this time a year ago? 

In my opinion, a 102% return in 2013 is an obvious outlier that completely skews everything else so your averages don't tell the whole story.  But if you feel like you discovered something in the past year you believe you can dependably repeat and that overshadows your previous record, more power to ya.  I'm not one to begrudge a good speculative investment that worked out.  I just perhaps wouldn't be so quick to dismiss what worked for you pre-2013.

Happy investing.

[Reub]

Tyler, that is 2008 included. You can see my returns year per year here: http://europeanpermanentportfolio.blogspot.com/      (top page column 'My portfolio')

My returns are expressed in € but exchange rate vs $ stayed about the same since start 2008, dollar went up around 5% over whole period.

Could you review your post and see if your critique still stands?

Marc, did you begin your blog in July, 2009? What were you were invested in for the 2nd half of 2008 into 2009?

[Rien]

You say your impression was that Harry Browne also saw it as such, do you remember specific things he said that confirm this, since many see this very different.

It was in the first few episodes, but since I was driving while listening I was not able to make notes.
I do remember quite distinctly that he said something to the effect: "The PP is meant to safeguard your precious money, if you want to increase your wealth you should look for other means."

The hard thing for me now is to find enough good speculations. Since I'm fully occupied with bitcoin myself, I would prefer to outsource this and find a bunch of newsletters, hedge funds or mutual funds that have proven to outperform the PP in the past. But they are so hard to find.

Maybe time for a confession here: I have at times used newsletters, some of them were decent, some bad and some had spectacular returns. But all of them failed over the long haul. TDL (The Dines Letter) for example has identified trends well before they became mainstream and has had spectacular stock picks. But it failed at capitalizing on these gains. Of course every newsletter always stresses they they are not responsible for your returns (and they are right in this). But after trying maybe 6 or 7 NL's I have come to the conclusion that they just don't work for me. Though I also admit that I have learned quite a bit from them, so it was not all wasted money.

There is only one method that has always paid me well whenever I tried it: Automatic Investment Management (AIM). It was developed by R. Lichello in the 1970's. This is also where I will return to once I get back into investing. AIM will sell on the way up, and buy on the way down. In a nutshell: It splits the portfolio in 50% cash and 50% investments. Then as the investments go up it starts selling, but never sells out completely. As the investments go down it starts buying, but it will not spend all the cash in one fell swoop. It uses a simple algorithm (1 minute work on paper, a few milliseconds using a spreadsheet) to determine the size of the sell resp buy. Or with a little more arithmetic it can calculate the GTC buy and sell orders (this is what I always used).

AIM thus tries to capture volatility. And it is reasonably good at it imo. The proceeds of this capture flow into the investment as well as the cash portion.

I am currently considering what would happen if I cross AIM with PP. It should be possible to AIM each sector, Stocks, Bonds and Gold individually using the cash portion as the reserve for AIM. The idea is that as one sector goes up, it would generate additional cash (through AIM directed sell's) it could use for AIM directed buy's in the other declining sectors. The original 25% reserve would act as a buffer because the buys and sells will of course never be synchronous.
When any one sector gets too big (or small) it would be rebalanced according to the PP principles.

I am hoping this would give a portfolio with both qualities: growth and protection.

Of course I will need to make a simulation of this and see how it would have worked in the past. This however will need to wait until my live stabilizes a little after the current events (buying a house & becoming an entrepreneur).

When I have results, I will post them to this forum. But don't hold your breath until that happens.