Questions about PP from Japan

[Ad Orientem]

Wait a second, I thought we were talking about a Japanese PP having a 3.2% return over that period against a mostly deflationary backdrop. 

That sounds to me like the real PP returns of 4-5% that we are all looking for.

That's not what Marc De Mesel's website shows. The returns from 2000-2009 were indeed a little over 3% nominal when there was actual deflation; the returns from 1990-1990 were 0.5% in nominal terms when inflation averaged around 1% annually over those 10 years. The PP actually manged to lose money in real terms for ten years and to be beat by cash for a decade (actually, the latter isn't what concerns me...the PP lost to short-term Treasuries in the US from 1981-early 2000s...what concerns me is it losing to STTs/cash when STTs cash actually beat inflation but the PP failed to do so).

Using 20-year JGBs (IIRC De Mesel's data used 10 or 15 year JGBs) helps during this period but not by much. Even tilting somewhat to LTTs (say 30% LTTs and 20% cash instead of 25% in each) to make up for the fact that 20-yr bonds aren't as powerful deflation/stock market crash protection as 30-yr ones doesn't give a real return for the Japanese PP anywhere near 3% for 1990-1999.

Adding foreign stock for 30, 33, 35, or 40% of the stock allocation helps more than LTT tilting; the 90s were golden for US stocks; not too bad for the non-Japanese EAFE countries' equities, and while the late 90s sucked for EM the period from 1990-1993 (when Japanese stocks crashed hard from the 80s bubble) saw EM outperforming both the EAFE and US indexes. Not a bad argument for including foreign equities as some of the PP's stock allocation IMO.

I haven't looked. Do these figures include reinvested dividends and bond yield?

[Exocet]

For quite some time, I've been looking at the implementation of PP from the perspective of a non-US resident.  I'm interested in the topic because I currently live in Australia.

Although some of the comments in this thread and other threads suggest that each component of the PP may be in different jurisdictions, I have my doubts whether that's the right approach.  For example, in previous postings, it was suggested that the bond component be in, say, German bonds and the cash component in, say, Japanese Treasuries, and the stock one in US.  I have the impression that this approach does not capture the essence of the countercyclical and uncorrelated dimensions of the PP portfolio.  For the PP to work, bonds, stocks, and cash must be within the same economy (even when there is a certain level of coupling among different economies).

My conclusion is that (putting aside the gold component), for an overseas investor, it is better to divide the entire portfolio into two or three components and each component to have a PP implementation within a certain economy.  So, for example, for a Japanese investor, the portfolio may be divided into three: one third to have a PP implementation in US, another third a full PP implementation in Australia, and another third a full implementation in Japan.  (I'm just suggesting US, Australia, and Japan as illustrations).  I acknowledge that there is more complexity in the sense that each component is going to have three funds/ETFs, plus a gold allocation make it 10 separate investments in total - but I believe, given my personal experience, that the overall performance is better.  It also keeps HB's philosophy.

[MachineGhost]

i am sorry, but i do not understand your point. Having a 0,5% CAGR during 10 years (1990-2000) can be evaluated as a working PP for a japanese? could you maintain iron nerves during that amount of years? me not :-)

The point is that the PP is a wealth preservation portfolio and that even a real .5% CAGR is not a loss.  Granted, its not even remotely near reasonable, but the PP did its job.  If you cannot accept an outcome like that -- as I can't -- then you have no choice but to enhance the PP with some tweaks or engage in some VPing.

EDIT: Well, that .5% was nominal not real.  I guess we have a PP failure here.  It would be prudent to have international stock exposure because of Asian or European overly export-lead economies.

[miyazaki]

Wow, I'm impressed to have got so much response considering the number of replies that other posts on this forum have! Keep them coming!

Stocks: I think I'm fairly happy with my 50/50 split of Japanese and US stocks. They both have a lot of very strong companies that I'm confident can keep growing in the future.

Gold: After reading around, I'm not so confident about what I bought any more. I got the SPDR gold shares (GLD). However, I found an ETF which is based in Japan, called Kin No Kajitsu (TSE: 1540), which trades at the price of gold, then 1 share is equal to 1 gram of gold. They have a program whereby you can request to swap your shares of the ETF for physical gold delivered to you at any time. I would keep the money in the ETF, but it's great to have the option of having it delivered. That seems like a similar system to the Perth fund.

Bonds: This is my problem area. I'm currently holding the Citigroup World Government Bond Index, which is less than ideal to be honest. It has a good yield, but it doesn't have the safety that I'm looking for. I've checked again, and yes, individual investors can only buy fixed rate 5 year bonds or variable 10 year bonds directly from the source, or ETF's on 10 year bonds. The 30 year bonds aren't available to the public. Another thing is the rating on Japanese bonds. They are rated as "A2", which is the same level as South Africa and Hungary, way below America and Canada's "AAA", or even Italy's "AA2", even below China and Botswana's "A1"... Probably due to the huge government debt, way beyond the levels of the USA and problem countries Italy and Greece (combined?). Perhaps that Citigroup WGBI is superior after all.

Regarding a US dollar or UK pound based investment, it looks attractive now since the yen is so strong, obviousy we can buy more dollars, but over the past 5 years it would have performed extremely poorly when converted back into yen.

The idea of a double or triple PP sounds interesting, though complicated. Well, I'm already splitting Japanese and US stocks. Gold is gold and cash would be easy to set up a foreign savings account through my bank. Again bonds are the problem area, which are currently all over the place.

Hmm... I really like the idea of the PP. But, is it possible that it just doesn't work in some countries?

[MediumTex]

Wow, I'm impressed to have got so much response considering the number of replies that other posts on this forum have! Keep them coming!

Stocks: I think I'm fairly happy with my 50/50 split of Japanese and US stocks. They both have a lot of very strong companies that I'm confident can keep growing in the future.

Gold: After reading around, I'm not so confident about what I bought any more. I got the SPDR gold shares (GLD). However, I found an ETF which is based in Japan, called Kin No Kajitsu (TSE: 1540), which trades at the price of gold, then 1 share is equal to 1 gram of gold. They have a program whereby you can request to swap your shares of the ETF for physical gold delivered to you at any time. I would keep the money in the ETF, but it's great to have the option of having it delivered. That seems like a similar system to the Perth fund.

Bonds: This is my problem area. I'm currently holding the Citigroup World Government Bond Index, which is less than ideal to be honest. It has a good yield, but it doesn't have the safety that I'm looking for. I've checked again, and yes, individual investors can only buy fixed rate 5 year bonds or variable 10 year bonds directly from the source, or ETF's on 10 year bonds. The 30 year bonds aren't available to the public. Another thing is the rating on Japanese bonds. They are rated as "A2", which is the same level as South Africa and Hungary, way below America and Canada's "AAA", or even Italy's "AA2", even below China and Botswana's "A1"... Probably due to the huge government debt, way beyond the levels of the USA and problem countries Italy and Greece (combined?). Perhaps that Citigroup WGBI is superior after all.

Regarding a US dollar or UK pound based investment, it looks attractive now since the yen is so strong, obviousy we can buy more dollars, but over the past 5 years it would have performed extremely poorly when converted back into yen.

The idea of a double or triple PP sounds interesting, though complicated. Well, I'm already splitting Japanese and US stocks. Gold is gold and cash would be easy to set up a foreign savings account through my bank. Again bonds are the problem area, which are currently all over the place.

Hmm... I really like the idea of the PP. But, is it possible that it just doesn't work in some countries?

What if you did 50% 10 year bonds and 25% gold and 25% stocks?

Can you buy 10 year Japanese bonds?

Japan's deflationary period has been unusually punishing.  When you look at other conventional investment allocations in a Japanese setting, I still think that the PP looks pretty good.

[miyazaki]

Yes, 10 year bonds are available to individual investors. Those are the longest term available. It's a good idea, so I'll have to do more research into it. Thank you for the advice and support!

[MachineGhost]

Bonds: This is my problem area. I'm currently holding the Citigroup World Government Bond Index, which is less than ideal to be honest. It has a good yield, but it doesn't have the safety that I'm looking for. I've checked again, and yes, individual investors can only buy fixed rate 5 year bonds or variable 10 year bonds directly from the source, or ETF's on 10 year bonds. The 30 year bonds aren't available to the public. Another thing is the rating on Japanese bonds. They are rated as "A2", which is the same level as South Africa and Hungary, way below America and Canada's "AAA", or even Italy's "AA2", even below China and Botswana's "A1"... Probably due to the huge government debt, way beyond the levels of the USA and problem countries Italy and Greece (combined?). Perhaps that Citigroup WGBI is superior after all.

Maybe what you can do is get the duration of 25% cash and 25% 30-year LT by buying 1-10 year JGB's with 50%.  30-year LTs have a duration of about 16, so halve that due to the cash, and you only need a net 8 years of duration exposure.

[stone]

Since you can get 10year JGB, I'd also have thought that 50% 10year JGB, 25% gold, 25% Japanese stocks would be very very close to being a HBPP.
When you say about JGB,  

They are rated as "A2", which is the same level as South Africa and Hungary, way below America and Canada's "AAA", or even Italy's "AA2", even below China and Botswana's "A1"... Probably due to the huge government debt, way beyond the levels of the USA and problem countries Italy and Greece (combined?).

I think you are noting how up the creek the rating agencies are. The very low yields on JGB are because they are recognised by the market as having no credit risk. Gumby posted a very clear thing about that:

MMR is just a mechanical description of why debt-based fiat monetary systems never have any trouble servicing their debt. It doesn't mean a country can't choose to default (as Russia did), but MMR just explains the mechanics of how a debt-based fiat country that owes no foreign debt and has a free-floating exchange rate can always issue an infinite amount of debt and never have trouble servicing it. (Much like a kid can explain why a pinball machine never runs out of pinballs). Most people use MMR for investing strategies, and it has been very successful in reading Macro environments.
Japan can issue an infinite amount of debt and never default. They've purposefully set up their system in this way. Those who dismiss MMR (and logic) have continued to get burned time and time again. For instance, the following article — not even written by an MMRer — explains why the whole 'Japan is going to default' argument is fundamentally flawed.

http://www.businessinsider.com/japan-is ... ult-2012-5

[Arturo]

What if you did 50% 10 year bonds and 25% gold and 25% stocks?

Can you buy 10 year Japanese bonds?

Japan's deflationary period has been unusually punishing.  When you look at other conventional investment allocations in a Japanese setting, I still think that the PP looks pretty good.

So the main question is: in case of suffering a long deflation stagnation in your own currency investment, does it exist a sistematic strategy (as it is PP) to fight against this situation? or the only strategy possible is to maintain the classic 4x25 PP, assume a lost decade for your investment, and ask your doctor for anti depressives? :-)

[Xan]

A "lost" decade is far from the worst thing that could happen.  Maybe the PP returns right around 0% over a decade, but that is achieving its primary goal of wealth preservation.  Virtually every other strategy was not just lost, but destroyed.

[Gumby]

So the main question is: in case of suffering a long deflation stagnation in your own currency investment, does it exist a sistematic strategy (as it is PP) to fight against this situation? or the only strategy possible is to maintain the classic 4x25 PP, assume a lost decade for your investment, and ask your doctor for anti depressives? :-)

When everyone around you has lost 50% of their life's savings — and you've lost a pittance — you won't need anti-depressants. You'll be thankful you dodged a bullet.

If the economy miraculously recovers, you'll be positioned to take advantage while everyone else misses the boat.

If the government ever fails, you'll have a hard asset you can hold in your hand while everyone else is stuck with worthless paper and account statements.

Not sure why anyone would need anti-depressants for a portfolio that provides that kind of stability and security.

[Gumby]

When everyone around you has lost 50% of their life's savings — and you've lost a pittance — you won't need anti-depressants. You'll be thankful you dodged a bullet.

There's a difference in opinions by some on this board as to pre-gold standard (1970's). Some claim that pre-70's was entirely different and the PP doesn't hold as cash was exchangeable for gold and as such was more or less the same thing. I beg to differ and from tests I've run that used poor-man's-gold (silver)

Clive, it really makes no sense whatsoever to use silver while the currency was tied to gold. In one breath you claim that using silver as an asset shows x, y, and z and in the next breath you admit that gold and silver tend to move in tandem. Well, guess what? If gold and silver tend to move in tamdem and your currency is tied to gold, then silver priced in dollars is the equivalent of pricing silver in gold. You've just admitted that they tend to represent each other, but then you forget that silver was, for all practical purposes, priced in gold.

Pricing silver in gold is a pointless exercise when trying to compare it to silver denominated in post-1970s fiat dollars. It makes no sense and proves absolutely nothing. The only way silver would work is if the currency it was denominated in was free floating. Think about it.

[Ad Orientem]

Well, that .5% was nominal not real.  I guess we have a PP failure here.

Marc's figures show a -11% loss of purchase power over the 1990's for a Japanese PP. If you were expecting a 4% real and were drawing a 4% income, then the 1990's might have seen a -50% or larger drawdown (-54% if you'd uplifted income (withdrawals) with inflation)...

Clive good points. But I would just add that I think the traditional 4% rule is really pretty risky even under normal economic conditions. I take a much more conservative view of safe draw-down rates favoring no more than 3% and 2% if one can manage it while maintaining a reasonable lifestyle.

2% is safe in anything except a catastrophic event. Japan's 20 year depression comes close to falling into that category.
3% is probably safe assuming you are prepared to make adjustments if economic conditions dictate.
4% is risky unless you are anticipating a very short retirement.
4<% and you had better have a taste for dog food.

[MediumTex]

Absolute faith that the minimum/worst case scenario for the PP is a 0% real return over a decade+ long period prior to any income that might also being withdrawn is perhaps a risk that should not be casually discounted. Whilst the downside might not have been as severe as for other asset allocations, in some cases (such as more stock heavy portfolio's) the prior or subsequent gains were sizeable enough to leave those asset allocations relatively ahead overall across the full cycle. If one AA gains 100% and then falls back -30%, whilst another gains 40% but then declines 0%, at that low the former is still no worse off overall. Subsequently the former might then also go on to more quickly advance compared to the latter.

Clive,

I don't think that it is absolute faith in the PP so much as relative faith in the PP compared to other strategies that creates the peace of mind that some PP investors enjoy.

The PP isn't necessarily the best game in town (though sometimes it is), but since we don't know which game will be the best one until the end of play, I like the chances for the PP to be in the same neighborhood as the best game, wherever that may be.

[D1984]

What has the better prospect of providing a 4% real reward (inflation uplifted income) for the next decade? Historically its taken small cap value on average 6.3 years to double in real terms (longest 16 years). For the past 10 years not once has that occurred (relatively poor performance compared to longer term average). 40% in a 10 year inflation bond ladder to provide 4% each year inflation uplifted (drawdown), 40% in small cap value (for growth to replenish the 40% income pot), 20% wherever, perhaps has just a good a chance or possibly better than that of the PP providing the same sort of rewards over the coming decade. Get the timing right (lucky) and the SCV part could even double in a single year (job-done) such that you could sell-up and sit in inflation bonds for the remainder of the decade with near zero risk.

Clive, for Japan even this wouldn't have worked. The closest thing we actually have for a Japanese SCV index is the Russell-Nomura Small Value Total Return Index (total returns of this index are in Yen); it has been around since 1980 so I have data for it going back that far. 1,000,000 yen invested in this would not have nearly doubled any time in the more than 22 years from 1990 to mid-2012. The closest it got was coming back (this is assuming one just left it invested and took no withdrawals whatsoever) was to just over 900,000 Yen in late 2005 and early 2006 but after the 2008 crash, the earthquake and Fukushima, the US debt celing debacle, the PIIGS financial crisis, and the dust-up with China over the islands it is now back down to around 550,000 Yen). If a Japanese investor was taking a 4% per year withdrawal (whether nominal or inflation/deflation adjusted) from one's inflation bond allocation with the hope that by the time 16 years was up the SCV allocation would have doubled in value one would have used up maybe 80-90% of one's inflation bonds. If Japanese SCV doesn't double in the next 3-4 years which is (possible but very unlikely) then the investor would have to start liquidating stocks to pay out their 4% and could eventually totally exhaust their capital.

Using a ten-year bond ladder instead of inflation bonds means that you'd still have roughly 82% of what you started with in your bond allocation (if you started with 1,000,000 then you'd still have around 820,000 left at the end of 2011...I'll update this for 2012 when the year ends); using a 7-year ladder means that you'd still have around 69% of what you started with). In either case you'd still have a nice chunk of dough left without even touching your SCV stocks. The reason you'd have this is because a nominal (non-inflation indexed) bond ladder ended up providing higher returns in Japan's deflationary environment than the inflation bonds did (I assumed the inflation bonds simply tracked inflation except during deflationary years they returned a nominal 0% so they did provide a retun in real terms in those years). The only two issues I'd be concerned with would be:

One, if serious inflation (15-20% a year or more for several years) hits, a 7-year or 10-year nominal bond ladder could be wiped out in three or four years if rates kept up with inflation and the bonds at the longer end of the ladder were torpedoed in value by these rising rates (theoretically it wouldn't matter because with a ladder one is not supposed to liquidate bonds until they mature at par so capital losses in the interim are a moot point....but what if inflation is so bad that one ends up having to sell bonds because the one rung of the latter maturing each year is no longer enough to meet the 4% withdrawal? ). A gold allocation might help in this situation but only if the BOJ deliberately kept rates suppressed in the face of high inflation (gold would likely do stunningly well in such a situation of highly negative real rates); if real rates were allowed to rise gold might pull another 1981. SCV is also supposed to do well in an inflationary situation like the above (if many small value companies are highly leveraged/indebted then sustained high inflation wipes away most of their debts while increasing their gross and net earnings relative to those debts) and in the US it indeed did do well in the inflation of 1972-1981 (it didn't do so hot in the 1946-48 inflation, however). The problem is that many (most?) Japanese SCV companies have spent the last 15-20 years (as have many of Japan's companies overall) deleveraging and paying down debt (I quote the following from Bloomberg, Zerohedge, and FT..this was in mid-2011 but I doubt things have much changed since then: "Two decades of falling prices have driven companies to replace debt with equity and lowered asset turnover”? ; “Furthermore, Japanese companies have reduced their indebtedness to such an extent that they are now net recipients of interest payments and dividends" ; "Then there is the margin of safety to consider. Japanese equities are priced at a discount to book value. Companies also sit on large cash balances and are less leveraged than their US counterparts." ). In a prolonge balance-sheet recession it makes sense to pay down debt, deleverage, and hoard cash. I don't know that a sustained burst of inflation would help Japanese small cap value companies wash away their debts as they don't appear to have much debt to wash away in the first place any more.

Two, the 4% withdrawal from the bond allocation (leaving the SCV untouched until using it to "replenish" the bond allocation) is only a 1.6% withdrawal total (4% x 40% of 100% = 1.6% of 100% ). Most people can't live on 1.6% of their assets per year, but if one could, then even a Japanese PP investor starting in 1990 might still have had an acceptable amount left after 22 years of withdrawals; a portfolio can last a lot longer on a 1.6% withdrawal rate than it can on a 4% one. This kind of defeats the purpose of going to a non-PP allocation in the first place.

[stone]

Clive

 from tests I've run that used poor-man's-gold (silver), and bearing in mind that gold and silver do somewhat move together in a broad sense, for years prior to the 70's there were periods that indicated a equal four-way of stocks, silver, LTT and STT endured sizeable negative real returns over extended periods of time (decade+).

I think there may be a muddle at the core of that argument. Gold and Silver may move together somewhat under a fiat system but that totally does not necessarily mean that silver's price movement under a gold standard system in any way mimics the price movements of gold under a fiat system. Gosso's chart http://gyroscopicinvesting.com/forum/ht ... ic.php?t=3 showed a key reason why gold is needed for the HBPP. The gold price surges at times when interest rates are less than inflation. If you were to put gold-standard era silver prices into an equivalent chart, then would it really show that strong, tight response to negative real rates of interest?

You also say that purposeful confiscations by the government could wipe out the HBPP. That certainly is true but I fail to understand how the HBPP is any more exposed to that than is any other strategy. There is ample historical precedent for all kinds of confiscations. Companies get nationalized, gold jewlery gets taken off people at the airport as they try to leave etc etc. The Ugandan Asians had everything they owned confiscated in 1972. I guess that is what geographical diversification is supposed to help for. I haven't personally bothered with geographical diversification but I think that is more relevant than portfolio composition for that problem. Japan (and Switzerland) is perhaps the place LEAST likely to be hit by such confiscations.
http://en.wikipedia.org/wiki/Expulsion_ ... rom_Uganda

The ethnic cleansing of Indians in Uganda was conducted in a Indophobic climate in which Ugandan government claimed that the Indians were hoarding wealth and goods to the detriment of indigenous Africans and "sabotaging" the Ugandan economy.

[D1984]

I don't think that it is absolute faith in the PP so much as relative faith in the PP compared to other strategies that creates the peace of mind that some PP investors enjoy.

MediumTex,

The problem is that being relatively the best strategy sometimes isn't good enough (that old chestnut about "you can't eat historical returns, you can't eat nominal returns, and you can't eat relative returns" comes to mind). If every other strategy is down by 50% and you are at break even but you have to withdraw 3 or 4% each year for living expenses then you've still lost money after withdrawals; keep this up long enough and you'll run out of money eventually too (yes, everybody else will run out of money sooner but the fact that everyone else was broke five or ten year sooner than you is cold comfort when you are broke as well...what you want is not to end up broke in the first place).

I'm also not sure the PP (at least with no international stocks) was "the best game in town" for Japanese investors from 1990-99. LTTs were the "best game in town" but assuming one did not know the future (who in Japan late 1989 would have predicted stocks down 75%, real estate losing 80% of its value,22 years of deflation, and the longest balance-sheet recession in history? No one I know of....the talk back then was about how Japan was going to own the world in the next twenty years) and still wanted to choose a safe portfolio, a modified Swedroe-type FTM of 68% in a 7-year JGB ladder; 17% in Japanese SCV, and 5% each in US SCV, non-Japan international SCV, and EM SCV would have provided a real (not nominal) annual return in Yen of over 2.25% from 1990-1999 and 3.8% real annualized from 2000-2011 (I can post annual numbers if you are interested).

[stone]

I don't think that it is absolute faith in the PP so much as relative faith in the PP compared to other strategies that creates the peace of mind that some PP investors enjoy.

MediumTex,

The problem is that being relatively the best strategy sometimes isn't good enough (that old chestnut about "you can't eat historical returns, you can't eat nominal returns, and you can't eat relative returns" comes to mind). If every other strategy is down by 50% and you are at break even but you have to withdraw 3 or 4% each year for living expenses then you've still lost money after withdrawals; keep this up long enough and you'll run out of money eventually too (yes, everybody else will run out of money sooner but the fact that everyone else was broke five or ten year sooner than you is cold comfort when you are broke as well...what you want is not to end up broke in the first place).

I'm also not sure the PP (at least with no international stocks) was "the best game in town" for Japanese investors from 1990-99. LTTs were the "best game in town" but assuming one did not know the future (who in Japan late 1989 would have predicted stocks down 75%, real estate losing 80% of its value,22 years of deflation, and the longest balance-sheet recession in history? No one I know of....the talk back then was about how Japan was going to own the world in the next twenty years) and still wanted to choose a safe portfolio, a modified Swedroe-type FTM of 68% in a 7-year JGB ladder; 17% in Japanese SCV, and 5% each in US SCV, non-Japan international SCV, and EM SCV would have provided a real (not nominal) annual return in Yen of over 2.25% from 1990-1999 and 3.8% real annualized from 2000-2011 (I can post annual numbers if you are interested).

In a currency collapse situation though, FTM portfolios die. The HBPP is a fortress against all manner of assults rather than being perfect for any particular scenario.

[MachineGhost]

I'm also not sure the PP (at least with no international stocks) was "the best game in town" for Japanese investors from 1990-99. LTTs were the "best game in town" but assuming one did not know the future (who in Japan late 1989 would have predicted stocks down 75%, real estate losing 80% of its value,22 years of deflation, and the longest balance-sheet recession in history? No one I know of....the talk back then was about how Japan was going to own the world in the next twenty years) and still wanted to choose a safe portfolio, a modified Swedroe-type FTM of 68% in a 7-year JGB ladder; 17% in Japanese SCV, and 5% each in US SCV, non-Japan international SCV, and EM SCV would have provided a real (not nominal) annual return in Yen of over 2.25% from 1990-1999 and 3.8% real annualized from 2000-2011 (I can post annual numbers if you are interested).

That's not a realistic strategy.  What would have worked in the past is no good for dealing with present conditions or future probabilities.  There is just no realistic alternative but to use dynamic tactical allocation to make sure you're always aligned with currently available evidence.

One of the best tactical allocation models I ever saw in my pre-PP era worked in the spirit of the PP in that it recognized the prevailing economic environment and invested in the proper asset class accordingly (including gold).  Unfortunately, I cannot find that article again after many, many, many attempts.

[D1984]

That's not a realistic strategy.  What would have worked in the past is no good for dealing with present conditions or future probabilities.  There is just no realistic alternative but to use dynamic tactical allocation to make sure you're always aligned with currently available evidence.

If by "that's not a realistic strategy" you mean going 100% into LTTs, then I agree with you (which is why I said "assuming one did not know the future" ). If you mean that a FTM (or a PP, or for that matter any type of portfolio that uses fixed allocations of assets and doesn't do market time using tactical asset allocation) is not a realistic strategy for dealng with present conditions or future possibilities then the correct answer is "we don't know" not that one is 100% sure that it will work in the future or it won't. I was only putting forth such a portfolio as a response to Mediumtex stating earlier that the PP was "the best game in town" of all the available presumably "safe" portfolios; I wasn't suggesting it as an asset allocation per se for a Japanese investor.

What model do you suggest as regards tactical asset allocation and market timing? 10-month MA? Lichello's AIM? Decision Moose? Something else entirely? My only concerns with market timing/tactical asset allocation are that one, it sometimes (depending on the system) puts you 100% into one asset (what happens if that asset gets killed over the next few days or the next week if something happens to suddenly reverse the trend...goodbye 25 or 30% of your portfolio...the trend is your friend....until it isn't), and two, that I have yet to find a pure rules-based system that can be backtested safely over multiple decades (yes, I know historical returns are just that-historical-but it's nice to see how the system might have worked in practice), that is purely-rules based (no emotion involved...and the rules can't be changed ether unless it was already written somewhere that rule x can change when condition y changes or something of that nature....i.e. no Monday-morning portfolio quarterbacking), and that provides some sort of fail-safe if the system guessed wrong and the asset it puts you into turns out to have been the worst possible asset to choose based on the (now changed) conditions.

One of the best tactical allocation models I ever saw in my pre-PP era worked in the spirit of the PP in that it recognized the prevailing economic environment and invested in the proper asset class accordingly (including gold).  Unfortunately, I cannot find that article again after many, many, many attempts.

This is why any time I see something containing info I may need or want to use in the future it immediately gets saved to my HD and put in my bookmarks (granted this may also be part of the reason why I have thousands of bookmarks and three hard drives). If you ever do find it again please let us on this forum know what it is and how it works.

[D1984]

At that time if the growth pot was up at 90% levels of the inflation adjusted original total investment amount, I think many would have been accepting to calling it a day, resetting and restarting at that point with perhaps 8% less in real terms in total to what they had in 1990. Had inflation bonds earned slightly more than inflation, they might even have been back closer to +/- 0%.

Perhaps I was not clear. The "growth pot" (Japanese SCV stocks) was NOT up to 90% of the initial total investment amount (the amount of inflation bonds and SCV combined); it was back up to 90% of the original amount invested in the growth pot. 1,000,000 yen invested purely in Japanese SCV stocks would be equal to less than 1,000,000 today and at any time between 1990 and today it would always have been equal to less than the starting value (the closest it got was in 2006/2006 and today's it would be back down to around 550,000). In other words, Japanese SCV stocks have still not reached the levels they were at in late 1989. If you had 50% in inflation bonds and 50% in SCV (let's say you started with 2,000,000 total so 1,000,000 in each) and things had gotten to the point (after more than 22 years of withdrawals) where all your inflation bonds were liquidated and you had to "refill the inflation bond pot" from your "growth pot" then you would be left with less than 50% of your original total amount (less than 50% of the 2,000,000) in the best case scenario and close to 28% of the original amount if you had to refill the bond pot as of today (although in reality I think the inflation bonds should hold out for 2-3 more years at a 4% withdrawal rate before they are all gone....but if SCV stocks haven't doubled by then our hypothetical Japanese investor's portfolio is screwed and so is he)

[stone]

it really makes no sense whatsoever to use silver while the currency was tied to gold. In one breath you claim that using silver as an asset shows x, y, and z and in the next breath you admit that gold and silver tend to move in tandem. Well, guess what? If gold and silver tend to move in tamdem and your currency is tied to gold, then silver priced in dollars is the equivalent of pricing silver in gold. You've just admitted that they tend to represent each other, but then you forget that silver was, for all practical purposes, priced in gold.

Pricing silver in gold is a pointless exercise when trying to compare it to silver denominated in post-1970s fiat dollars. It makes no sense and proves absolutely nothing. The only way silver would work is if the currency it was denominated in was free floating. Think about it.

http://www.jfholdings.pwp.blueyonder.co ... s_1926.gif

If gold=cash pre 1970's, it was very volatile both in nominal and real terms, and silver which has correlated with gold post 70's was volatile compared to money/cash/STT's. If you consider the PP as a bag of business (stocks), commodities (gold = commodity index), long dated loans and cash, then swapping out one commodity index (gold) for another (silver) is perhaps no different to swapping out GLD ETF for IAU ETF because GLD had opted to become a MM ETF.

(BTW I need to revisit that Callan as I believe there's errors, but not too dissimilar to actuals perhaps).

Clive, gold isn't just any commodity especially at those key moments when it really matters. It doesn't have the same nasty way of crashing in sync with stocks as happens for industrial commodities. I think the reason why gold works for the HBPP is that it provides fairly "pure" exposure to currency risk and not a lot else. Before the current free floating fiat monetary system, gold didn't do that and silver certainly didn't.

[stone]

If you were to put gold-standard era silver prices into an equivalent chart, then would it really show that strong, tight response to negative real rates of interest?

If money is losing purchase power, people will look for investments that are likely to retain future purchase power. If cash deposit type investments are failing in that respect, the next obvious choice is to buy portable/durable stuff that isn't. Gold post 70's, silver pre-70's.

Just because you now think that that would have made sense doesn't mean that that was what happened then . The massive problem with silver is that both consumption and production are unresponsive to price. It gets produced as a by-product of mining other metals and dumped on the market. People making mirrors or black and white photo film back then (or electronics/solar power stuff now) are going to buy silver whatever the price. That means that the silver price has wacky price spikes and crashes. Gold is available as a totally massive pool ready to be sold (or bought) if the price is right. In that important respect, it is the opposite of silver.

[Gumby]

If gold=cash pre 1970's, it was very volatile both in nominal and real terms, and silver which has correlated with gold post 70's was volatile compared to money/cash/STT's. If you consider the PP as a bag of business (stocks), commodities (gold = commodity index), long dated loans and cash, then swapping out one commodity index (gold) for another (silver) is perhaps no different to swapping out GLD ETF for IAU ETF because GLD had opted to become a MM ETF.

(BTW I need to revisit that Callan as I believe there's errors, but not too dissimilar to actuals perhaps).

Clive, everything was priced in gold pre-1970s — including stocks, bonds, silver, widgets, marbles, peanuts, etc. Post-1970s nothing (except gold) was priced in gold. You are taking two completely different worlds that have nothing in common and comparing them as if they are apples to apples. It proves nothing.

Likewise, if I asked you to price a post-1970s PP relative to the price of gold, it might be a fun exercise, but it wouldn't tell us anything useful.

The PP was designed for a sovereign free-floating monetary system. It wasn't intended to work pre-1970s.

[miyazaki]

I'm sorry, I feel this has gotten too much into a discussion about general PP theory. Could I ask you to keep it on topic related to how it directly affects individual investors in a Japanese context? Thank you.