HB on VP

[LazyInvestor]

It seems to me that when HB was talking about VP and speculation on his radio show, he was talking about the investments for which you believe you'll get returns in hundreds or thousands of percent. As such, most of the VP investments discussed here do not fit his idea of speculation. For example, whole world ETF that some are using is going to give back maybe 10-15% per year, and nothing even close to 700% or 1300%. As such, I feel HB wouldn't even bother having VP unless he's speculating on large scale.

[sophie]

That's how I read it too.

However, HB did not divide the investing world into "Permanent Portfolio" and "Variable Portfolio".  Instead, he said that the money you can't afford to lose should be invested, which he defined as earning what the market gives you.  Of course he recommended the Permanent Portfolio strongly, but not as the only "correct" answer. 

The VP is defined as money invested with the idea of beating the market average by timing or whatever - he called that "speculating".  Since your risk is higher, your potential reward should be as well, so if you're speculating you might as well pick something that could fail or succeed spectacularly, e.g. Bitcoins. 

A 100% stock fund bought speculatively for the short term would be part of your VP.  If you plan to hold onto it for years to get that average 9% annual return (and are willing to weather the occasional decade of negative or minimal gains), then HB would define that as investing.  Some people here do indeed hold stock funds or dividend stocks outside the PP, but I would not count that as VP.

[goodasgold]

This is one area where the HBPP and Bogleheads are in conflict, and I side with the Bogleheads on this one.

The BH approach is to invest a very large percentage of your portfolio in a diverse, non-speculative manner. At most, the BH way is to speculate with no more than 5%-10% of your portfolio. Market timing is fun, but the harsh but unescapable reality is that it frequently results in disappointment.

In contrast, the HBPP is vague as to how many of your hard-earned spendolas can be used in speculation. In fact, the HBPP allows us to gamble with any percentage of our holdings. As stated above, I tend to side with the BHers on this one (although as a precautionary measure I have split my portfolio roughly 65/35 between the HBPP and my old strictly Boglehead accounts.)

[Xan]

It doesn't sound like there's a conflict at all.  If your 5-10% allocation is compatible with both the PP and BH, then where's the argument?

[goodasgold]

It doesn't sound like there's a conflict at all.  If your 5-10% allocation is compatible with both the PP and BH, then where's the argument?

There is no argument, *if* your market timing allotment is limited to 5-10%, as recommended by the BH philosophy. In contrast, the HBPP approach says it's acceptable to use any percentage of your portfolio, no matter how high, for market timing purposes. So there is a big difference between the two schools of thought, at least on this subject.

[Kshartle]

I've read all of Browne's stuff. I think his point about the VP was not that you should look for investments that have a potential to go up 500 - 1000%.....that's just a pure matter of dumb luck. No one can do that with any kind of consistency.

His point was that you trade in your VP. You buy stock XYZ at $10 if that's a support level. You set the stop loss at say $9.75 where price should not reach if support holds. That's a risk of 25 cents per share.

His point was you should at least have a clear target 5 times higher than that...perhaps $11.25 or more. That should be a previous swing high or resistance level.

That way if your trade works out it will be a pick up of 5x the risk amount. Even if you only win 1/3 of these you are still cleaning up. His preference was for 10x the risk amount though.

$11.25 is only a 12% increase over the buy price, yet still results in reward to risk of 5/1.  Index funds are certainly appropriate for this type of speculation/trade. You just have to set the stop and make sure the trade parameters make sense.

Looking for investments with the potential to go up 500% or more is um......let's just say you'll probably have better luck playing the lotto.

[dualstow]

For me, the takeaway is that you don't tinker with the PP. Harry doesn't care if your VP contains Vanguard Total World, Munis, or Uranium mines. The point is that your PP is not missing cash, substituting this or that for one of the choices on the asset list, reducing your bond maturity to 5 years, using leverage to make the movements of treasurys 2x reality, or holding 10% in gold instead of 20 or 25%.

[sophie]

In contrast, the HBPP is vague as to how many of your hard-earned spendolas can be used in speculation. In fact, the HBPP allows us to gamble with any percentage of our holdings.

Actually you're allowed to gamble with whatever you want.  Harry Browne's recommendation was that whatever amount of money you do decide to speculate with, just make sure that if you lost it you wouldn't be upset.  I think that is a far better guide than a set percentage.

Personally, I decided that the amount of money I'm willing to gamble is quite small, so my VP is well under 1%.  It's just play money really.  However, not all of my holdings are in the Permanent Portfolio for a variety of reasons.

[mattymcmatt]

Having read a lot on Harry Browne and having finally setup the PP, I've noticed that I've become far more willing to spend money now to advance my career and setup a business.  Prior to the PP, I was much less willing to spend money in order to make money.  I think this comes from me reducing the risk I have in my retirement investments  which frees up risk taking in other areas.  It also comes back to Harry Browne's first rule of investing:

Rule #1: Your career provides your wealth.

You're probably not going to get hundreds of percent return by looking for "investments" in the traditional sense unless you just happen to be very lucky and in the right place at the right time.  However, by investing (or speculating) in your career and business, it is possible to receive such a return.  It's still speculating because a business could fail which is why Mr. Browne always advocated speculating with money you can afford to lose.

This is how I look at the VP.  I put a certain percentage of my income into the PP knowing that it's safe.  The rest left over after living expenses can go into my VP which I understand to mean my own career and business.  Some ideas will fail and I'll lose the money but some might succeed which could be very profitable.  Of course, if a stock tip or something similar comes along, I could also use it for that.  I do have some Bitcoin as well which I consider part of my VP.

I'd be curious if anyone else thinks of the VP in this way.

[dualstow]

Remember that thread about the role of cash in the PP?  Until I started playing with spreadsheets I didn't appreciate how having this uncomfortably large chunk of "unproductive" investments can make such a difference to maintaining a portfolio's value during retirement.  It just goes to show that HB knew what he was doing, and everything in the PP really is there for a reason.

I remember all twelve of them. ;-) I suppose for some the temptation to tinker comes from second guessing Harry because "he never saw these rates / this phenomenon." I'd like cash a lot better if it were earning 5%, just like everyone else would. For now I'll hold it and not like it.

I recently got some monoxidil in the mail. I've practically got "full coverage" but want to keep it that way. The instructions say to use 1ml at a time. I'm not going to wonder if using 90ml will have 90x the effect. I'm going to go with the instructions set forth by the product's inventor. Harry is the pp's inventor and fine-tuner, and I am in no way qualified to improve on his product with my own recipe.

I still don't understand this concept that withdrawing from cash during retirement in some way increases the "safety" of the portfolio

Me neither.

[MachineGhost]

There is no argument, *if* your market timing allotment is limited to 5-10%, as recommended by the BH philosophy. In contrast, the HBPP approach says it's acceptable to use any percentage of your portfolio, no matter how high, for market timing purposes. So there is a big difference between the two schools of thought, at least on this subject.

I really don't think HB advocated market timing the entire PP!  He was conservative, just not a neurotic cultist groupie like Bogleheads are.  Keep in mind the PP or Boglehead is for average people, those that work full-time and don't really have the time and resources to become a proficient investor, which requires being equal parts historian, mathematician, psychiatrist, accountant and trial lawyer.

[MachineGhost]

I've read all of Browne's stuff. I think his point about the VP was not that you should look for investments that have a potential to go up 500 - 1000%.....that's just a pure matter of dumb luck. No one can do that with any kind of consistency.

That will start to change with Startup Investing when it becomes legal for non-accredited investors.  For a few years anyway, then it will get too crowded.  But it is the next fad.

[rickb]

There is no argument, *if* your market timing allotment is limited to 5-10%, as recommended by the BH philosophy. In contrast, the HBPP approach says it's acceptable to use any percentage of your portfolio, no matter how high, for market timing purposes. So there is a big difference between the two schools of thought, at least on this subject.

I really don't think HB advocated market timing the entire PP!  He was conservative, just not a neurotic cultist groupie like Bogleheads are.  Keep in mind the PP or Boglehead is for average people, those that work full-time and don't really have the time and resources to become a proficient investor, which requires being equal parts historian, mathematician, psychiatrist, accountant and trial lawyer.

I think what goodasgold is saying here is that Browne didn't limit your VP to any specific amount of your total portfolio - and in your VP you can do anything you want (timing, speculating, betting on horses - literally anything you want).  The amount of your PP that Browne allows you market time is 0%.