Is this a crazy idea?

[beafet]

I just wanted to say I appreciate everyone's knowledge and inputs! I am learning a lot on here.

Gumby, what if you did reinvest all your dividends?

[moda0306]

I think dividend reinvestment really changes things, though I think the same conclusion can be taken away from certain periods of stock performance...

The stock market can lag bonds for a long, long, long period of time.  We can get into detail but if you just post the right charts of the historical US markets or the Nikkei in your office, that should serve as a decent reminder.

[jackely]

Has there ever been a 40 year period with negative returns for the stock market?

Not in my lifetime, I don't think, assuming you owned the whole market. I actually did have a fund I held for 40 years from an old job and it was 22 times the original investment of $2k when I finally rolled it over.

Along with that anecdotal evidence however, I should share that the year my wife was diagnosed with the lung cancer that eventually killed her was the same year the dot-com bubble burst and I saw my portfolio cut in half. I was unable to work full time for a period of almost 10 years after that and had to dip into those investments that had been cut in half just to get by. Moral of the story is that 40 year plans don't always work out the way we hope they will.

As to your original question, Is this a crazy idea? Of course not. Sounds like a pretty good plan to me. Wish I'd done the same thing when I was 27.

[MediumTex]

I just wanted to say I appreciate everyone's knowledge and inputs! I am learning a lot on here.

If I could only get you do to one thing, it would be to learn your biases.

From your posts, my take is that you probably have an optimistic bias, which causes optimistic assumptions about future scenarios to get more traction in your mind than less optimistic ones.  The problem, of course, is that reality doesn't care at all about what biases a person may have--reality just happens and if a person doesn't have a strong grasp of the blind spots in his own thinking, sooner or later reality deals with him harshly.

The PP investor seeks to neutralize this problem of biases by attempting to identify the entire continuum of possible future economic environments, and then seeking to locate assets that will serve as suitable proxies for each possible economic environment so that whatever reality decides to throw at him he is able to absorb it without too much damage to his portfolio.

For many people, the PP looks like a purely defensive strategy.  It looks that way to them because they are not accustomed to seeing a portfolio that is equal parts defense and offense.  For people who lived through the Great Depression, they might look at the PP and say it was way too aggressive for them and they would prefer something more conservative.  That would be their pessimistic bias preventing them from seeing what is simply a neutral stance toward the future.

[jackely]

I just wanted to say I appreciate everyone's knowledge and inputs! I am learning a lot on here.

This is a great forum, and not just for discussing the PP, but for forums in general. I don't know why but it just doesn't seem to attract the kind of A**H**** you find in other forums, or else the moderators are doing a good job of keeping them away. Maybe it has to do with the temperament of people drawn to the PP or something but everyone here is pretty helpful.

[MediumTex]

I just wanted to say I appreciate everyone's knowledge and inputs! I am learning a lot on here.

This is a great forum, and not just for discussing the PP, but for forums in general. I don't know why but it just doesn't seem to attract the kind of A**H**** you find in other forums, or else the moderators are doing a good job of keeping them away. Maybe it has to do with the temperament of people drawn to the PP or something but everyone here is pretty helpful.

I have found that Harry Browne's thinking seems to attract thoughtful, serious and courteous people. 

Over time, it has been a very pleasant surprise.

[Gumby]

I just wanted to say I appreciate everyone's knowledge and inputs! I am learning a lot on here.

Gumby, what if you did reinvest all your dividends?

If you did reinvest all your dividends, there wouldn't have been any 40 year periods of negative real returns in the US stock market. But, that's only if you didn't pay any taxes. The thing that nobody likes to talk about with dividends is that you have to pay taxes on them every time they are issued. It's not exactly efficient — particularly if/when dividend taxes go up when the Bush Tax Cuts expire.

Keep in mind that the US Stock market has not had typical results — when compared to the rest of the world. Robert Shiller, who wrote Irrational Exuberance, warns that even a 20 or 30 year holding period is not necessarily risk free. This is because the 20th century was the most economically successful century in the short history of the United States and will not necessarily repeat itself.

Over the course of human history, countries tend to peak at some point. Infinite growth isn't possible. The real question is whether we just witnessed our peak or not.

[MediumTex]

Over the course of human history, countries tend to peak at some point. Infinite growth isn't possible. The real question is whether we just witnessed our peak or not.

Note that economic peaks tend to correspond with demographic peaks.

[Gumby]

Over the course of human history, countries tend to peak at some point. Infinite growth isn't possible. The real question is whether we just witnessed our peak or not.

Note that economic peaks tend to correspond with demographic peaks.

There is a lot of evidence to support that. Here is some interesting data to consider:

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[align=center]Source: The World in 2030: Super-cycle or Grey Age?[/align]

If it weren't for the "Baby Boomers" would stocks have done as well during the 1980s and 1990s? I don't believe they would have.

[dualstow]

I turned 41 in October. My 21-year-old self still stubbornly insists that, like Oscar Wilde quipped, the older generation can teach the younger generation nothing. If I'm hearing my 61-year-old self right, he's neglecting to comment on that and instead telling me to just enjoy being 41 before I suddenly find I'm 61. 

27-year-old Beafet might be doing 47-year-old Beafet a big favor by sticking to the PP.

41 year old MediumTex has periodic discussions with 21 year old MediumTex.  We enjoy covering some of the hard lessons that have been learned along the way.

41 year old MediumTex also listens for any subtle messages that 61 year old MediumTex may be sending through time.  While the signal is normally very faint, the theme of these messages is normally something like: "A lot of stuff is going to happen that will be very surprising to most people.  Be careful."

[MediumTex]

I turned 41 in October. My 21-year-old self still stubbornly insists that, like Oscar Wilde quipped, the older generation can teach the younger generation nothing. If I'm hearing my 61-year-old self right, he's neglecting to comment on that and instead telling me to just enjoy being 41 before I suddenly find I'm 61. 

One of the absolute best things about the PP is that if you let it, it will free your mind from the constant worry that investing seems to become for many people.

Freeing up your mind from worrying so you can more fully enjoy being 41 should make your 61 year old self proud.

One of the memorable pieces of guidance I have received from my 61 year old self is to have fun, but to make sure I don't give him any diseases, extra body fat or legal problems to deal with.  He tells me he has his own plans, and it doesn't include dealing with the consequences of my poor decisions.

[6 Iron]

This is a great forum, and not just for discussing the PP, but for forums in general. I don't know why but it just doesn't seem to attract the kind of A**H**** you find in other forums, or else the moderators are doing a good job of keeping them away. Maybe it has to do with the temperament of people drawn to the PP or something but everyone here is pretty helpful.

This is true, and something I really appreciate. Reading here, this is a quite varied group politically and socially, and I draw comfort in the fact that the permanent portfolio concept has appeal to people with such a variety of backgrounds and world views. This common bond, predicated on our inability to reliably tell the future, tends to attract people who are willing to listen and learn from others, realizing that none of us came equipped with the answer key of life.

[HB Reader]

This is a great forum, and not just for discussing the PP, but for forums in general. I don't know why but it just doesn't seem to attract the kind of A**H**** you find in other forums, or else the moderators are doing a good job of keeping them away. Maybe it has to do with the temperament of people drawn to the PP or something but everyone here is pretty helpful.

This is true, and something I really appreciate. Reading here, this is a quite varied group politically and socially, and I draw comfort in the fact that the permanent portfolio concept has appeal to people with such a variety of backgrounds and world views. This common bond, predicated on our inability to reliably tell the future, tends to attract people who are willing to listen and learn from others, realizing that none of us came equipped with the answer key of life.

I agree.  I hope it stays this way.

[stone]

I'm also 41 - that's spooky

Perhaps one way to reconcile your stock centric view with the PP would be to appreciate that much of the potential gains from stocks come in the form of volatility capture. For non-dividend stocks with a finite life span; all of the potential gains come from volatility capture. In order to capture all of that volatility by rebalancing you would need a portfolio with enough assets non-correlated/negatively correlated to stocks such that the overall portfolio had no overall volatility. The PP could be rationalized as an attempt to do that if you fancy.

There's a very good piece about demographics and real GDP per capita in Japan versus the USA:-
http://www.thoughtofferings.com/2011/04 ... about.html

[HB Reader]

Beafet, have you seen Gumby's chart of inflation adjusted PP versus SP500 returns 1972-2011? That chart makes it look as though the 1999 bubble was just a transient poking through of the PP level of returns. Best of luck though.

Here it is:

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Stocks tend to beat the Permanent Portfolio is if you accumulate stocks at the right time and you reinvest every dividend back into your stocks, as shown in this chart. Since stocks are more volatile, your performance is greatly tied to when you begin and end your investments.

See: The One Missing Investing Ingredient: Luck

In other words, if I started the chart at any other point in time, the results for stocks would look very different.

The reason we all prefer the PP is because its low volatility virtually eliminates the issue of buying at the wrong time. I think to fully embrace the PP, you will need to admit to yourself that stocks could go down — in "real" terms — for another 10 years, or more.

Stocks don't have to go up.

Gumby --

This is a great chart.  I don't know how much work is involved, but I would love to see some stock/cash (say 75%/25%) or stock/bond (say 60%/40%) component added.  That would show true comparability between the PP and a "normal" stock heavy portfolio  -- i.e., even most stock bulls would agree that people should have some kind of cash or short term bond "emergency" fund.  Of course, adding an additional component would dilute the simplicity of the current chart.

One of the best things about the PP is that the cash reserve (along with catastrophy/extreme instability insurance in the form of gold) is such an intregal part of the overall design.  That is hard to emphasize enough.  

[DonM]

The wisdom of these forums is truly wonderful.

I'm going to probably say too much, I'll try to keep myself under control, but if this gets irritating just let me know. 
Let me first try to establish some credibility.
I am 60 years old.  I too have those conversations...with the 16 year old ("start sooner, get another job", no you don't need a car."), the 20esh year old ("What were you thinking?  Oh, you were thinking with that, well, explains a lot"), the 30esh year old ("the market hasn't done anything worthwhile in 8 years, time to forget this"), and the 80 year old that can't stop laughing at my arrogance long enough to answer a simple question.  He really bugs me.
It gets pretty busy sometimes keeping all of these conversations straight.  I think I can safely conclude that I am an idiot and I have repeated the same mistakes over and over waiting for a different result.

I started watching markets very early, stopping by the stock broker on the way to school.  But I now have nearly 50 years of watching the financial industry wiggle and squirm as it tries to part with some of its consistently obscene profits to it's customers. 

The little book, "Where are the customers yachts?" was written a long time before me.  My own adage...."you don't get marble floors for nothing."  (okay, I'm still working on that one, but when I see marble floors I get nervous.)  I even had a few licenses way back when I thought I could make a living selling securities.  I learned a lot and I learned that I couldn't make a living selling securities.

Early in my life I kept all stock portfolios and found myself to be reasonably lucky.  In those days you couldn't easily buy bonds because of the high cost and you paid a premium for less than a 100 shares of stock.  When financial planning became popular in the 1970-80s I began to think that a mix of investments might make sense.  I had accumulated concentrated holdings in companies that I felt I knew very well.  The basis so low that to even consider selling would get the tax man excited.  I was buying and I was holding.  I managed to weather the lows and I don't recall the highs ever being all that exciting...not like the pre-tech drop or the pre-financials drop.  Maybe they existed, but I don't remember a bubble until 2000.

As I learned and experienced more economic conditions and my income increased I found myself naturally moving to a diversified portfolio of stocks, bonds, real estate and eventually gold.  I didn't worry about ratios very much. 
I remember when indexes became the popular thing to measure your success against and then to actually own.  I wondered, why would I want to be happy with such mundane returns?  Brokers want to be paid to sell me mediocrity?

I remember my mother worried that the government would go after her gold nugget jewelry.  What were we legally allowed to own..was is 8 oz or something like that?  I hold physical gold between $40 and $225.  I stopped buying at 225 I thought it was too high.  Many of my stocks have basis numbers in the pennies.    I have zero coupon treasuries in my IRA that I bought in the 1980s.  (thank you Ben Weberman of Forbes)  I hold an overseas account (and I pay tax on the earnings every year...and it was darn difficult to figure out!  I also noticed that once the SEC began approving the investments I was allowed to buy I stopped making money.)  There is a reason why the world's bankers and brokers want to have offices in the US and it's not to help clients.  I find it really odd that in this country structured products are non-existent. 
 
I'm convinced I've lost money or nearly with every professional manager I have ever hired...either directly, through a contract shared program, through a mutual fund...heck I was just warming up to ETFs when I started reading in these forums of some of the nonsense that they are pulling.  Most managers aren't that good for very long - okay there are maybe two that I still use and we seem to stick it out.  I keep several brokerage accounts because I have weathered many storms (MFGlobal at the moment and not the first or the last).  I don't think they are going to take care of me when their latest and greatest blows up. 

Something happened to me when I heard John Hospers speak in 1972.  Years later, reading Harry Browne's books...when he said...something like..."every investment is a great idea until I get into it"...it sounded very familiar.  In fact he said a lot of things that felt familiar. 

I even used Treasury Direct for a time.  It was too limiting but easy and then they changed their system around (producing a legacy program and a new program and I ended up with one account stuck in the middle) and I just got frustrated with the idea that if I let the government mess with it, they will. 

My broker started complaining about my concentrated positions, (I should sell stocks with a price of $70 that cost me 40 cents so that I could diversify into the same crap they were selling everyone else?  and pay tax on the sale as well?)  I was sent a nice letter from the compliance office and I admit the timing wasn't good as I had just finished straightening out my overseas account.  The European bank was so frustrated that if I didn't want to have them manage the whole thing I would have to close it and bring that money back to the US.  My US broker's compliance folks noted the incredible gains I had in good years and the equally devastating losses of 2008.  Yes, it went deep enough to scare me.  I wrote a nice letter back with lots of graphs noting back that while true, my approach still ended with more than their stupid index.
 
It got me to thinking and I started looking at portfolio design differently.  I am 60 and I am not sure that I want to spend every day thinking about this anymore.  My wife wants to go for a walk as the market is closing!  I want to travel around for the winter (I find great companies out there as I travel by the way...I recommend it).  If I die, will she be able to manage this?  I compared a series of portfolio designs and found that I while I had done better overall, I did not do well enough for the effort.  And none of the nicely balanced programs did as poorly as I had in 2008.  If you don't lose it to begin with you don't have to make it back.

It is also true that over the years of my experience the financial industry, the regulatory agencies, the taxation agencies, the laws and regulations and securities are not the same.  My old companies aren't the people I knew when I grew up.  People go to school to learn how to run a company now.  Somehow the results aren't inspiring confidence. 

Do you remember in the early 1990's when take over artists were using 'over funded pension funds' to take over companies, strip out the cash and throw away the hulk?  Any wonder 10-20 years later we have 'underfunded pension funds?" 

The PP allows me to design an approach that works for me.  I have to substitute my existing holdings (bond portfolio for bond fund), (stock portfolio for stock fund), etc.  as I work toward the conventional approach and I may never get there. 

The PP convinces one to hold all of those things that I believe one should have.  And so while because of my desire to control taxes and my portfolio it might be difficult for me to embrace completely I do believe in it.  I am working my way to the Permanent Portfolio and added some of the PRPFX to my IRA.

And I promote the PP to my sons who don't have as many advisers in their heads to talk to.

But back to the question...is this a crazy idea?
It is a crazy idea not to start with this to begin with.  Because now you know better!  The PP is like a castle and a moat.  It is a system that you and your loved ones can easily manage for many many years.  To build it is to do the job that is yours and no one else's..to protect yourself and your loved ones.  Use the idea of the VP to take risks or practice your special skills if you still have time after going for a walk with you wife as the market closes.

[MediumTex]

Really outstanding post Don.

Thanks for sharing your thoughts and experiences.  I think you will find a lot of good stuff here.

Successful investing is a lot harder than it looks.  As obvious as this statement sounds, it has a near infinite number of dimensions.  Every time we think we have found a purely rational way to profit consistently, our emotions begin invading the mental framework and eroding whatever rationality may have been at work in the first place (which is often not very much).

I see wisdom in the PP because it seems to recognize the frailties of both human institutions in general and the individual human mind in particular.  Finding a strategy that takes all this into account and spits out consistent gains is truly impressive. 

It's a shame that it takes so long to fully internalize these truths, because life gets a lot easier when you figure some of this stuff out.  One of the problems is that a lot of the parties who make a living by separating you from your money have conditioned themselves with clever rationalizations for so long that I'm sure a lot of them really do think they are helping you by convincing you to buy the risk they are selling.  When it all blows up the people who sold you the garbage in the first place are often there to comfort you with assurances about how "no one could have seen this coming." 

It's really nice to hear a perspective that comes from such long experience.

[KevinW]

Great post!

I compared a series of portfolio designs and found that I while I had done better overall, I did not do well enough for the effort.

Rule #1: Your career provides your wealth.

I'm convinced that wage-earners are better off investing surplus wealth-building time and energy into their career or side business, rather than in managing their portfolio.

The arithmetic is pretty simple.  Suppose you have a salary of $60k, $100k invested.  Suppose you can spend 10 hours/week to boost investment returns by, say, from 8% to 9%; or spend that time to boost your career income 20%, say.

Active management: $60k salary + $9k investment income = $69k
Career advancement: $72k salary + $8k investment income = $80k

Common sense explanation: time spent in your career leverages your human capital, which is substantial since you have considerable experience and expertise in your career.  Time spent investing leverages your investment capital, which is a drop in the bucket of billionaires and hedge funds.

[Lone Wolf]

I'm going to probably say too much, I'll try to keep myself under control, but if this gets irritating just let me know. 

Great stuff.  This is decades of hard-won, useful knowledge.  It's a privilege to read it.

[Gumby]

DonM, that was a fantastic post. Thank you for sharing.

This is a great chart.  I don't know how much work is involved, but I would love to see some stock/cash (say 75%/25%) or stock/bond (say 60%/40%) component added.  That would show true comparability between the PP and a "normal" stock heavy portfolio  -- i.e., even most stock bulls would agree that people should have some kind of cash or short term bond "emergency" fund.  Of course, adding an additional component would dilute the simplicity of the current chart.

I would love to get the monthly data for the Total "Real" Return of a 60/40 portfolio going back to 1970. Oddly, I've never been able to find it anywhere. I believe Morningstar offers some professional software that will export the data with the click of a mouse. But, for some reason, nobody seems to be releasing this particular data set. It's odd because you'd think people would really want to easily see it. I suspect investment advisors have realized that showing nominal returns entices more retail investors.

[DonM]

I love being a "junior member", makes me grin.
And I love the graphs.  This is great!

[Gumby]

Thanks Clive. In order to get that into my chart, it will be easier for me if you just provide the raw nominal prices, for each data point, starting with the initial $100 investment (not the % change).

Something like...
1970  $100
1971  $96
1972  $99
1973  $103
1974  $114

I can convert the nominal to "real" using BLS data.

Also, Harry Browne's data starts in 1970 (not 1972), so if you can start the 60/40 in 1970, that would be great. Thx!

[HB Reader]

If I die, will she be able to manage this?  I compared a series of portfolio designs and found that I while I had done better overall, I did not do well enough for the effort. 

If you don't lose it to begin with you don't have to make it back.

The PP is like a castle and a moat.  It is a system that you and your loved ones can easily manage for many many years.  To build it is to do the job that is yours and no one else's..to protect yourself and your loved ones.  Use the idea of the VP to take risks or practice your special skills if you still have time after going for a walk with you wife as the market closes.

DonM -- This matches many of the conclusions reached by this 59-year old investor.  I don't think I started quite as far back as you, but it was before gold bullion ownership became legal again and the brokerage industry was deregulated in 1975.  I had the good fortune to stumble across HB when I was 22.     

[Gumby]

Nicely done, Clive. Thanks. I'll chart this out when I have a chance. Can't wait for the 2011 results

[DonM]

HB Reader...You really are way ahead of me.  I may have come across Harry Browne, but was too stubborn to seriously consider it.