HBPP compared to other strategies on The Retire Early Homepage

General Discussion on the Permanent Portfolio Strategy

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HBPP compared to other strategies on The Retire Early Homepage

Post by Pres » Sun May 01, 2011 1:14 pm

Last year I suggested to the author to include the permanent portfolio in his yearly comparison of investment strategies. And this year he did!

The charts speak for themselves:
http://www.retireearlyhomepage.com/reallife11.html
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Re: HBPP compared to other strategies on The Retire Early Homepage

Post by craigr » Sun May 01, 2011 1:37 pm

The charts do speak for themselves. Even during the late 90's stock boom and gold bust the portfolio did perfectly fine.

From a retirement income perspective, what drew me to the portfolio is that I didn't find any long rolling years of negative real returns. Something that many other strategies cannot claim. For instance the 1970s and 2000s have been bad for standard stock/bond allocations. Without gold, a portfolio is exposed to problems that can affect stocks/bonds for extended periods. Having negative real returns for 10 years is a bad position for someone using their portfolio for living expenses.
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Re: HBPP compared to other strategies on The Retire Early Homepage

Post by clacy » Sun May 01, 2011 3:10 pm

craigr wrote: The charts do speak for themselves. Even during the late 90's stock boom and gold bust the portfolio did perfectly fine.

From a retirement income perspective, what drew me to the portfolio is that I didn't find any long rolling years of negative real returns. Something that many other strategies cannot claim. For instance the 1970s and 2000s have been bad for standard stock/bond allocations. Without gold, a portfolio is exposed to problems that can affect stocks/bonds for extended periods. Having negative real returns for 10 years is a bad position for someone using their portfolio for living expenses.
Yes, exactly.  Multiple years with negative real returns will cause people to make bad decisions...ie getting out right at the bottom, etc.  If you never have to deal with that issue because the PP functions with low negative volatility, you're far ahead of the vast majority of investors.
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Re: HBPP compared to other strategies on The Retire Early Homepage

Post by TBV » Sun May 01, 2011 3:32 pm

Though it's nice to see the HB PP get good press, the portfolio shown in the link is listed as being: 25% VFINX, 25% VMMXX, 25% VUSTX, and 25% VGPMX.  Not quite what HB suggested.  VGPMX has lots of non-gold and non-bullion holdings, while VUSTX has Treasuries ranging from 15 to 30 years.  I wonder why the author didn't track the real thing.
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Re: HBPP compared to other strategies on The Retire Early Homepage

Post by LifestyleFreedom » Sun May 01, 2011 5:00 pm

What I notice from this data is that the value of a portfolio today depends a lot on when retirement started.  In 1994, we were having a "stealth bear market" in the United States.  In 1999, we were near the peak of the dot-com bubble.  As such, I believe in investment stye diversification because I don't believe any one style is "all weather" in terms of the market conditions and rogue events that are likely to happen in the future.  I respect Harry Browne, but he is only one of many successful money managers.

I'm currently using and testing more than one approach to investing:
  • One of my sub-portfolios, which currently is 80% of my overall portfolio because that is the style I started with in the early 1990s, uses index investing via asset allocation (which is up or flat after a 4% inflation-adjusted initial withdrawal rate).
  • Another of my sub-portfolios uses dividend growth, where I start with a dividend that initially yields 3% and grows 7% or more each year (which is a style not shown on The Retire Early Home Page, but I would never have to dip into principal because I would be using only the dividends to pay living expenses).  The trick to making this investing style work is to pick stocks that are able to continue to grow their dividends.  I visit http://www.dividendgrowthinvestor.com/ regularly for ideas and insights.
  • My sub-portfolio based on the PRPFX PP is used for "long-term cash" because historically, it grows at 7-10% a year, but declined only half as much as the SPY (25% decline for PRPFX versus 50% decline for SPY during the depths of the recent financial crisis).  For my cash reserves, my goal is to use money market and high-yield saving accounts for two years of cash, and have the PRPFX serve as additional "cash" for years 3-5 (should I ever need it).  If I continue to like the PP, I might expand its share of my portfolio and even use components in addition to the mutual fund.
I'm exploring other types of investment approaches, including "entrepreneurial investing" (which Harry Browne would call the variable portfolio) because I'm currently trying to find additional investing styles that make sense to me.  I treat investing as a profitable hobby I do in semi-retirement.

Note that I discovered The Retire Early Home Page in the late 1990s and it helped me a lot to understand financial freedom.  It's primary contribution to my success was it showed me that financial freedom and early retirement are possible, which was motivational.  It also recommended some excellent books that further contributed to my understanding of how to retire early.
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Re: HBPP compared to other strategies on The Retire Early Homepage

Post by Gumby » Mon May 02, 2011 9:34 am

Clive wrote:Whilst investing in something that averages perhaps 4% real rewards in a relatively consistent manner is relatively ok, compared to potential 9% or more real rewards that are periodically on offer that's quite a sizeable difference. A reasonably simple method to cost average into 9% real type rewards might be to run a virtual stock and actual PP 50-50 blend and rebalance into the virtual stock part over time. For example if you start with $100K then perhaps set up a $100K pretend all stock part and a $100K actual PP part. Then measure the relative valuations of both over time and if at some point the virtual stock value was say $80K whilst the actual PP value was $120K you might rebalance and move $20K from the PP into (actual) stock (making the stock side $20K actual holdings, $80K virtual holdings and the PP side $100K actual holdings). In practice you might not start with $100K virtual stock if you deemed that stock was at a relatively cheap price at the start date i.e. perhaps starting with $40K actual stock and $60K PP allocation for example. Also in practice its better to use the all periods type averaging that I outlined earlier when making relative valuations for 'rebalance' purposes as the actual values can/do sustain long periods of one out-running the other for example stocks outpacing the PP in the 1990's by such a wide margin that even the 2003 lows weren't sufficient of a pullback to flag up to add to stock.
Wouldn't that approach fail in extreme or unusual situations, such as high inflation or deflation? Sounds like the virtual stock portion should be a Variable Portfolio (i.e. money you could afford to lose).
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Re: HBPP compared to other strategies on The Retire Early Homepage

Post by gizmo_rat » Tue May 03, 2011 11:54 am

I liked this article, its the only example I've seen comparing strategies over that length of time. The performance of the "modern" strategies is quite surprising (to me at least).

The bit I couldn't square in an otherwise evidence based piece was the authors assertion:
Is now the time to jump on the Harry Browne bandwagon? It seems not. With gold at an all-time high and long-term interest rates near an all-time low, now is probably not the time to make outsized bets on those asset classes.
This seems to be an almost constant admonishment in any commentary on the permanent portfolio. I'm comfortable with the HB inspired reply of "How do you know that ?". However so many apparently knowledgeable commentators make the same observation it seems worth consideration .

The question that I can't answer is at what point would I know if I'm in trouble with the PP ?
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Re: HBPP compared to other strategies on The Retire Early Homepage

Post by MediumTex » Tue May 03, 2011 12:24 pm

gizmo_rat wrote: I liked this article, its the only example I've seen comparing strategies over that length of time. The performance of the "modern" strategies is quite surprising (to me at least).

The bit I couldn't square in an otherwise evidence based piece was the authors assertion:
Is now the time to jump on the Harry Browne bandwagon? It seems not. With gold at an all-time high and long-term interest rates near an all-time low, now is probably not the time to make outsized bets on those asset classes.
This seems to be an almost constant admonishment in any commentary on the permanent portfolio. I'm comfortable with the HB inspired reply of "How do you know that ?". However so many apparently knowledgeable commentators make the same observation it seems worth consideration .

The question that I can't answer is at what point would I know if I'm in trouble with the PP ?
Well, as others have noted, the permanent portfolio will virtually always be buying at least one asset at its all time high, so that, to me, is not a helpful argument for or against the strategy.

The basic problem, and I think this really gets to the core of the matter, is that most people deep down believe that the future can be predicted, and the whole concept of taking an utterly agnostic approach to future outcomes is so foreign to most peoples' way of thinking that it's very hard for them to truly wrap their minds around an investment strategy that asks you to simply accept that no one knows what is going to happen.

As far as how to determine when the permanent portfolio is no longer working, I would say that a rolling three year period of losses would be cause for a re-evaluation of the strategy.  As it is, however, the permanent portfolio has worked almost absurdly well.  I mean, the chart really says it all.  It works (or at least it has worked for almost 40 years). 

I think that the problem people have is they get tangled up in their own analysis--first, they think the PP shouldn't work at all, then they may concede that it appears to have worked in the past, then they say that it will probably stop working soon, but they aren't exactly sure why, and then they start offering their personal analysis of each asset class...and so on.

For people who pride themselves on being sophisticated, clever, intelligent, experienced, etc., I think the permanent portfolio just feels strange, and many of these people simply have no reference point for something so counterintuitive that apparently works so well. 

People often fancy themselves to be humble, but when faced with the real humility that the permanent portfolio asks the investor to embrace, many people struggle, and I think that's why so few investors will ever actually use the PP strategy.
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Re: HBPP compared to other strategies on The Retire Early Homepage

Post by moda0306 » Tue May 03, 2011 1:11 pm

Beautifully put, MT.  While I still get the urge to dream about other asset classes and improvements that can be made, I think people don't truly sink their teeth into the nuances of the macroeconomics surrounding the portfolio enough to really come up with something better from a safety point of view.

There is definitely humility involved that is difficult to come by and was difficult to get myself to accept.  Gold is either loved and hated, but those that love it (often) couldn't hate anything more than a long-term bond issues by the U.S. treasury.  It's almost laughable to think of my gold-bug friends even considering the idea, and it's almost ironic that both are in the same portfolio (yet that's what drives the beautiful machine), considering all the emotions and politics surrounding the implications of gold ownership.  For me the difficulty was accepting gold, a piece of metal that sat in a safe, as somehow being better than investing in an oil company or REIT, since they're not really any more volatile but return better over time.

And to anyone that says it's too conservative (which I often feel to this day), I'd say 1) if it's money you can't afford to lose, point me to a better investment, and 2) if it's money you can afford to lose, you can take more risk but sleep at night instead of worry.  The PP shouldn't be looked at as the perfect growth portfolio, but a portfolio that has an extremely uncanny risk-adjusted return. 

As an analogy, the Porsche Cayenne may not be the roomiest SUV or the most capable performance vehicle, but one still can't help but stand in awe at how it can do what it can do based on the difficulty of acheiving both performance and utility (think growth and safety in the PP).  Could Porsche lower it, make it a coupe, move the engine to the back and reduce weight to get it to perform better?  Sure, but then you wouldn't be able to haul more than your sugar-mama and her Pomeranian, and it'd be subject to all the disadvantages you were trying to avoid by buying an SUV: utility, safety, etc.
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Re: HBPP compared to other strategies on The Retire Early Homepage

Post by gizmo_rat » Tue May 03, 2011 3:13 pm

MediumTex wrote: I mean, the chart really says it all.  It works (or at least it has worked for almost 40 years).  
This is what throws me with this article, (assuming that all the calculations are correct) wouldn't your conclusion be something like "Most best practise portfolios have failed to deliver over the last 16 years, here's two unusual ones that have?"

I'd really like to see some analysis on why those best practise ones have failed, surely this would alter the entire premise of the financial services industry ? :)
moda0306 wrote: And to anyone that says it's too conservative
I think the PP needs relabelling to something like 'equity light', anything that makes you sweat bullets when you first buy into it is really not conservative by definition.
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Re: HBPP compared to other strategies on The Retire Early Homepage

Post by moda0306 » Tue May 03, 2011 3:20 pm

Gizmo,

It makes you sweat bullets because of the individual assets involved, not the risk of the portfolio as a whole.  My current guage for "conservative" is the degree to which sh*t can hit the fan and one still maintains purchasing power.  To that end the PP has proven quite conservative.

I see what you're saying though.  Saying that the PP is conservative to a new adopter is kind of like telling someone terrified of flying that planes are safe travel.... "conservativism" is in the eye of the beholder.
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Re: HBPP compared to other strategies on The Retire Early Homepage

Post by moda0306 » Tue May 03, 2011 3:45 pm

I think what bothers some of the PP observers is the fact that gold and LTT's have shown more correlation than one would expect, and gold has done WAY better than CPI inflation in the past 10 years.

The thing is they're going into their observations with the wrong assumptions of how gold should behave in the first place.  Gold is a gauge of fear & uncertainty, expected future inflation problems, and inability for businesses and governments to pay you enough on your investments to maintain purchasing power.  It took 15 years of disinflationary prosperity, huge gains in productivity, low fuel costs, lowering unemployment, lowering defecits and some surpluses, the internet, peace, low taxes and a demographic bulge of expansion to get gold down to its 2000 lows.  Look at where we are now compared to then: wars, balance-sheets (public and private), fuel costs, obligations to a growing senior population, terrorist threats, food, healthcare & education costs, etc.

Once one understands why gold behaves on a completely differerent plane than very limited-in-scope indicators like CPI, they can start to understand why gold should be much higher today than it was after such a long period of sustained prosperity and bright hopes for the future.

That's the crux of the problem IMO for most people that digest just enough of the PP to start trying to poke holes at its assets being too high... people think gold is so far out of line that 1) it unfairly skews the PP's performance during the last decade, and 2) hampers any home for the PP to continue its reign in the future.  The thing is gold's performance isn't all that unreasonable when you consider its nature as not a tracker of CPI but a gauge of scary things to come, mostly involving currencies and purchasing power.
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Re: HBPP compared to other strategies on The Retire Early Homepage

Post by moda0306 » Tue May 03, 2011 3:51 pm

Clive wrote: Where the PP potentially 'fails' - depending upon your definition of failure - is in the average rewards it provides. If you're content to accept an inflation pacing type total net return then the PP appears to more often than not fulfil that objective.
Clive,

I just don't see where you think 10% average annual return is merely matching inflation over the past 10 years.  If that's the gauge, then stocks themselves have barely beat inflation as well.

I know I could scour this board for where you're getting your "real return" figures but it seems to me that I'm not quite understanding or agreeing with your calculation of inflation over the past 40 years. 

Was a large portion of those U.S. 1930's losses silver?

Thanks again for all the useful input and infotainment.
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Re: HBPP compared to other strategies on The Retire Early Homepage

Post by MediumTex » Tue May 03, 2011 3:52 pm

moda0306 wrote: The thing is gold's performance isn't all that unreasonable when you consider its nature as not a tracker of CPI but a gauge of scary things to come, mostly involving currencies and purchasing power.
Saying that gold is related to the CPI is sort of like saying that the severity of a thunderstorm is related to the pattern on the weatherman's tie.    :D
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Re: HBPP compared to other strategies on The Retire Early Homepage

Post by MediumTex » Tue May 03, 2011 3:53 pm

Clive and moda,

I thought we all agreed that the PP's historical returns have been along the lines of inflation + about 4%.
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Re: HBPP compared to other strategies on The Retire Early Homepage

Post by moda0306 » Tue May 03, 2011 4:02 pm

MT,

Yeah that sounds about right... I am pretty sure if I wanted to juice my PP returns with a VP I'd probably add some foreign & EM stocks and some kind of small cap fund, maybe throw in some energy stocks... along with some of Clive's Relative Strength stuff but with other volatile PP assets as my hedge instead of cash... Just off hand without thinking about it much.

So I think Clive has some absolutely great input here, but I 1) don't trust what seem like repetative technical trends nearly as much as relationships based on fundamental macroeconomic principals (RSPP vs HBPP), and 2) think that we may have some disagreement on inflation.

Thanks Clive.
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Re: HBPP compared to other strategies on The Retire Early Homepage

Post by MCSquared » Tue May 03, 2011 4:08 pm

MediumTex wrote: Clive and moda,

I thought we all agreed that the PP's historical returns have been along the lines of inflation + about 4%.
MT, Simba's dataset reflects inflation + 4.5% (or so) since 1972 for the HB PP.  Note that this is a US investor and it is not an exact replication as the Vanguard Long Bond data does not match the duration of the Long Bond piece of the PP (as outlined by HB).
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Re: HBPP compared to other strategies on The Retire Early Homepage

Post by craigr » Tue May 03, 2011 4:53 pm

MediumTex wrote: Clive and moda,

I thought we all agreed that the PP's historical returns have been along the lines of inflation + about 4%.
The portfolio has returned in the +3-5% real after inflation range from my data as well. Harry Browne observed and stated the same thing.

The portfolio has not just matched inflation. In fact, I can't find a rolling 10 year period where it ever was zero or negative real returns at all. This is a very unique feature of the portfolio compared to its contemporaries. It has managed to pull off a real rate of return in that +3-5% range.

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Re: HBPP compared to other strategies on The Retire Early Homepage

Post by gizmo_rat » Tue May 03, 2011 4:55 pm

Clive wrote: Where the PP potentially 'fails' - depending upon your definition of failure - is in the average rewards it provides.
What got me thinking was that the original article does a good job of summarising and comparing the strategies available to a fairly average investor (with or without advisor assistance).

Failure would therefore be defined as choosing the strategy that failed to support a 4% annual withdrawal + inflation. On the face of it most strategies available to the average investor can't do that, which is shocking.
moda0306 wrote: I am pretty sure if I wanted to juice my PP returns with a VP I'd probably add some foreign & EM stocks and some kind of small cap fund...
Which was going to be my next question, but I'll save it for another time / thread.

Thank you both.
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Re: HBPP compared to other strategies on The Retire Early Homepage

Post by craigr » Tue May 03, 2011 5:58 pm

Clive wrote:
craigr wrote: The portfolio has returned in the +3-5% real after inflation range from my data as well. Harry Browne observed and stated the same thing.
T Bills (3 month duration) are sometimes considered as the risk-free rate.

Since 1980 (according to Simba's spreadsheet), T Bills have averaged 1.89% real.

Generally I'd expect T-Bills to pace inflation over the mid to longer term.

Relative to the risk-free rate therefore, any PP comparisons should deduct 1.89% from the 'real' PP figure for a fairer longer term average indication of the PP's potential.

3% to 5% declines to 1.1% to 3.1% (average 2.1%).
1980 is a peculiar year to start a comparison for T-Bills. A lot of turmoil going on. A look at the period of 1972-1982 shows a return of -0.38% for T-Bills during bad inflation. From 1972-2010 a rate of +1.07% is shown. This is about what I'd expect long term from T-Bills.


The portfolio has not just matched inflation. In fact, I can't find a rolling 10 year period where it ever was zero or negative real returns at all. This is a very unique feature of the portfolio compared to its contemporaries. It has managed to pull off a real rate of return in that +3-5% range.
Its not unique. Coffee House hasn't had a negative 5 year real return, which if you consider REIT and International to be commodity like, the Coffee House is a form of 40% stock, 20% commodity, 40% bond type blend.
REITs were not commonly available even 20 years ago. The ones that did exist were quite expensive. There was no investable REIT index going back through the entire data set people use. Same thing with Small Cap Value funds. The data probably is loaded with survivorship bias as well. So the Coffeehouse Portfolio is built on some assumptions which may be good, or may not.

But even if we assume the data is good, the portfolio was about 40% more volatile over the past 40 years. The past 10 years the Coffeehouse was more than twice as volatile as the Permanent Portfolio with slightly less return. In 2008 the portfolio also saw a -20% loss. In the years 1973-1974 the Coffeehouse portfolio experienced a -10% CAGR with the real losses being -18.5% after inflation was factored in. In those years the Permanent Portfolio saw real gains of +3.48% CAGR.
30% TSM, 20% 5 year T ladder
30% Commodity, 20% IBonds

also hasn't had a negative 5 year real. During rising rates (inflation) generally Commodity and IBonds do OK. During declining rates TSM and 5 Yr T do OK. Which is a 60-40 speculative/safe type blend where stocks and commodities have low/no correlation.
I-Bonds have not existed during a period of high inflation so no telling how they will do. Commodities will do better, but I suspect gold still wins.
The PP's comparable 1.65% real but with lower down years is a bit of an illusion as the PP also periodically can encounter -20% drawdowns, but in the US and UK that hasn't aligned to year end dates so it seems that they've not occurred when based on year end yearly reviews.
Dates are arbitrary, I agree. Markets are emotional creatures. My portfolio had about a -12-15% drawdown max in 2008, but that only lasted very briefly (less than a month, more like a week??? I don't recall). The drawdown then has lasted a much shorter time IMO than other approaches. Only fairly recently are stock/bond portfolios recovered/almost recovered to the prior 2007 highs. So you're talking about losses that have taken years to recover from vs. the Permanent Portfolio which recovered relatively quickly from these kinds of market shocks or wasn't affected at all.
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Re: HBPP compared to other strategies on The Retire Early Homepage

Post by AgAuMoney » Tue May 03, 2011 8:28 pm

Clive wrote:gold was fixed prior to the 1970's
After seeing that statement innumerable times on bogleheads and here, it is time to put it to bed.  The only fixed prices were the official government prices.  The U.S. is STILL a fixed price at $42 per ounce, but we only care about the market price.  The market trades at its own price, typically less than the official price if the currency is convertible.  It's complicated.  :)  For reference I've just posted a data source in the "daily gold price" thread of the gold sub-forum with gold prices back a few centuries (London and New York).
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Re: HBPP compared to other strategies on The Retire Early Homepage

Post by Gumby » Tue May 03, 2011 8:42 pm

Clive wrote:I've seen some posting on the board that look at the PP's volatility on an intra-day basis - which flags to me that those investors are likely to sooner or later be disappointed and might jump out of the PP as a result.
Clive, I have an enormous amount of respect for you. But, I'm not sure that it's more harmful than relying on Simba's spreadsheet to discover and recommend a "better" approach to the PP, based on past market conditions that will likely never happen again. I would think one would be far more likely to jump out of a never-previously-used-before Simba-generated portfolio than the Permanent Portfolio.

As Harry Browne wrote in, Why The Best Laid Investment Plans Usually Go Wrong...

"If anyone had found the magic key to investment riches, he wouldn't be telling you of the profits his system would have produced (hypothetically), he'd be telling you of the profits it did produce."
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Re: HBPP compared to other strategies on The Retire Early Homepage

Post by Gumby » Wed May 04, 2011 8:44 am

Thank you, Clive. That was a very good explanation of where you are coming from — and I think you make some excellent points.

What you've highlighted is simply a reality of investing in general. Harry Browne didn't design the Permanent Portfolio to generate wealth. He was very firm in his belief that wealth-building came from one's career — not one's investments. That being said, a Variable Portfolio (funded with money that one can afford to lose) seems like a much better way to make wealth-building speculative bets.

Harry Browne strongly believed that there needed to be a psychological wall between one's Variable Portfolio and one's Permanent Portfolio — so that one wasn't tempted to change their long term strategy no matter what the future held.

Here's what Harry Browne said of the PP/VP division in Why The Best-Laid Investment Plans Usually Go Wrong:

---
The first step in the search for safety is to separate your investment capital into two different portfolios. I call them the Permanent Portfolio (for investing) and the Variable Portfolio (for speculating).

The Permanent Portfolio is a permanent, balanced collection of long-term investments. Its main purpose is to assure that you're financially safe no matter what the future brings. Once established, it remains virtually unchanged for many years — even as the economy bounces from recession to prosperity to inflation. If properly arranged, it should produce a profit; but its primary goal is safety.

The Variable Portfolio is a separate, changeable portfolio, funded with money you can afford to lose. Its contents vary as conditions change. With the Variable Portfolio, you attempt to beat the market and earn a sizable profit by acting on your judgements about investment trends. You vary the portfolio's investments as you see the opportunities for profit changing.

It is vital that the two portfolios be treated separately when you make investment decisions. The choices you make for one have nothing to do with the decisions you make for the other. Each portfolio has its own purpose and its own rules. They are as unrelated as the portfolios of two different investors.
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Clive, those Simba-generated PP-hybrids rarely incorporate this critical psychological division into them. Why not devise a cohesive PP/VP strategy that PP investors can comprehend, stick with, and choose how much to risk with?
Last edited by Gumby on Wed May 04, 2011 8:50 am, edited 1 time in total.
Nothing I say should be construed as advice or expertise. I am only sharing opinions which may or may not be applicable in any given case.
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moda0306
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Re: HBPP compared to other strategies on The Retire Early Homepage

Post by moda0306 » Wed May 04, 2011 9:27 am

Jesus Clive you put a lot of effort into all this. You really bring about the best "but what if" and "but see how" arguments I think one could make against the PP.  I hope all the constant opposition (always friendly & constructive) doesn't discourage you, because I think you provide excellent insights on the markets, history, and even if people may disagree a bit on your PP assessment, they can probably take a lot away regarding what their VP options could be.

PS, Where did you get that bond price calculator?  That's something I've been wanting to have access to for a while.

Thanks again!
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Re: HBPP compared to other strategies on The Retire Early Homepage

Post by MediumTex » Wed May 04, 2011 9:30 am

Clive is one of those people who contributes much more than he probably takes away.

I really appreciate everything he does here.  Aways informative and provocative.
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