Gyroscopic Investing

moda0306 wrote:

MediumTex wrote:

Adam1226 wrote: Edward--

I agree with you 100%.  Nothing is certain in investing.  However, I can think of no safer way to protect your wealth than with the PP.  Can you?

I feel the same way.  It's sort of like democracy--it's not perfect, but I can't think of any other system I would prefer to live under.

...except maybe a Constitutional Republic.  JK... just thought I'd be "that guy" in the conversation that will call someone out on calling the US a democracy.  It is interesting, though, how much LESS democratic our country was before Andrew Jackson.

Right.  I just mean that when we are talking about different mechanisms for facilitating some measure of personal freedom, I know nothing will ever be perfect, but some approaches are less flawed than others.

I have noticed the irony in the endless search for flaws in the PP approach when conventional approaches to investing have vastly greater flaws that no one seems to ever notice or talk about.

Remember the scene in "Dumb and Dumber" when Jim Carrey is trying to determine if he has a chance with the woman?  The "is the PP really that safe" discussions have that flavor to them.

"So what you are saying is that if the alchemists finally succeeded in spinning gold from straw, AND the U.S. dollar lost its reserve status, AND the world went into a depression, THEN the PP might not work as promised?"  Yeah, I guess I am saying that.

"So there's a chance." 

MediumTex wrote: Remember the scene in "Dumb and Dumber" when Jim Carrey is trying to determine if he has a chance with the woman?  The "is the PP really that safe" discussions have that flavor to them.

"So what you are saying is that if the alchemists finally succeeded in spinning gold from straw, AND the U.S. dollar lost its reserve status, AND the world went into a depression, THEN the PP might not work as promised?"  Yeah, I guess I am saying that.

"So there's a chance."   :D

Wow.  I just saw Dumb & Dumber for the first time in over 10 years last night.  Totally agreed, MT.  One really has to think to envision a scenario where the PP gets tripped up, and some other portfolio shines.  The thing that strikes me as interesting is, one would not think that something that works so well in far-out scnearios (hyperinflation, depression) could ever perform very well in relatively prosperous times.  It kind of feels like the PP is like a Porsche Cayenne Turbo (I'm a car guy, despite driving a junker).  The thing can be taken to the track, pick up the kids, haul a boat and be taken off road.  There may be better vehicles for each one of those scenarios, but you never know what tomorrow's going to throw your way.  Might as well have a vehicle that can do it all.

MediumTex wrote: "So what you are saying is that if the alchemists finally succeeded in spinning gold from straw, AND the U.S. dollar lost its reserve status, AND the world went into a depression, THEN the PP might not work as promised?"  Yeah, I guess I am saying that.

"So there's a chance."   :D

The follow up I always ask myself is, OK, so what do you (author) propose instead, and how would it work out in this kind of scenario?

Critics seem to use this double standard where the PP needs to be bulletproof against any conceivable science fiction hypothetical.  But then when we ask about how mainstream portfolios hold up against uncommon-but-realistic scenarios that I've witnessed myself, such as lost decades, deflationary years, government defaults, double digit inflation, and mass uprisings, we're dismissed as wacko worry-warts.

Ultimately though, other peoples' choice in portfolio and their opinion of my choice have no bearing whatsoever on my life, so I try not to dwell on it.

KevinW wrote: Critics seem to use this double standard where the PP needs to be bulletproof against any conceivable science fiction hypothetical.  But then when we ask about how mainstream portfolios hold up against uncommon-but-realistic scenarios that I've witnessed myself, such as lost decades, deflationary years, government defaults, double digit inflation, and mass uprisings, we're dismissed as wacko worry-warts.

Exactly!

I consider the last 39 years to be a pretty decent microcosm of reasonably possible events.  Nothing absoutely catastrophic has happened, but we've had plenty of political turmoil in the middle east, terrorist attacks, scary inflation, financial crises, a near deflationary spiral, 2 periods totalling 25 years where stocks have been flat, a 15-ish year period of phenominal prosperity and growth and the rise of the PC, internet and huge gains in productivity.  The PP kept reasonable pace with stocks during a period of some scary but plausible events and periods, not alien invasion or famine.  If you want to rag on MRE's and loading up on guns as a "portfolio," fine, but treating the PP as some kind of survivalists wet dream is a joke.

moda0306 wrote: If you want to rag on MRE's and loading up on guns as a "portfolio," fine, but treating the PP as some kind of survivalists wet dream is a joke.

Even in the area of preparation for catastrophes, people talk out of both sides of their mouths.

On the one hand, people will say the PP is a doomsday portfolio because it does protect well against unpleasant surprises.  OTOH, if you look into those peoples' personal finances, you will see storm insurance on their homes, collision insurance on their cars, income protection against disability and a cash payment upon their death in the form of life insurance.  Viewed in a vacuum you could easily say they have configured their entire lives around preparing for doomsday scenarios. 

Part of the reason people don't see typical insurance arrangements as doomsday preparation is that insurance salesmen are skilled at persuading them that they SHOULD prepare for doomsday scenarios, but they shouldn't WORRY about them too much, and the insurance helps to reduce that worry.

In many ways, the PP simply does for your investments what you may have already done with respect to the other things in your life that you value: your property, your health and your life--it provides insurance and allows you to live in an uncertain world without worrying too much about what's going to happen next.

Why do so few people see it this way?  I think part of it is that there isn't much money to be made selling the PP, though Cuggino and our friend from Florida seem to be doing okay with it.

The Permanent Portfolio is really not a "doomsday" portfolio. It's a realistic portfolio. Surprises in the markets are the norm so just expect them to happen and have a strategy to deal with it both good or bad.

As KevinW mentions, people will question about Scenario X, Y and Z and how the portfolio may not work. Yeah, I guess not. But what do they offer as a better option?

At my company we had several simple rules. One of the basic ones was this: "Don't whine at me about a problem unless you have a better way to solve it." The other basic rule was: "No drama."

I like the Permanent portfolio because it it addresses these two things for me. One is that it is a simple solution to a complex problem of market uncertainty. It has shown to work as designed and much better than other approaches I've seen. Two is that the diversification provides less chance of drama in my life savings compared to the alternatives.

I agree that the PP is not a "doomsday portfolio;" the PP assumes we still have an economic system, functioning markets, etc.  Those who want the well-stocked larder, armory, and survival garden are thinking of scenarios beyond what the PP can promise.

I've noted the arrival of interesting vehicles like TRND and TBAR and GTAA myself.  All three of those have no histories yet and rather high--but not outrageous--expense ratios.  One commentator has noted that TRND might serve as a viable and far less expensive replacement for variable annuities.  The ETN structure of both TRND and TBAR is great from a tax perspective; unfortunately, it also places you in the position of depending on the credit-worthiness of the issuer (in this case, the Royal Bank of Scotland, not so long ago bailed out).

EdwardjK wrote:
Craig, very well-stated.  Your's is the first comment I have seen that suggests that even the PP is not a guarantee or is fool-proofed.  I am not certain that all commentators on this board get that.

Edward, I have seen others refer to it as cheerleading; what you consider a lack of "getting" with regard to investment risks, I would suggest to you is more likely a sense of peace and satisfaction with our portfolios. The people that post here seem quite bright, and enjoy discussing details about alternatives, and possible improvements. But I cannot think of one regular poster that does not realize that all investing entails risks that we try to address, as best we can. I would fatigue of a forum that said after every post "past performance does not guarantee future returns".

As good as the Permanent Portfolio is, there is nothing to suggest you are limited only to this style of investing.

Beside building wealth in the first place, I find investing is a way to derive the income I need for living expenses (e.g., food, clothing, shelter, medicine, transportation, and so forth).  Companies who offer products and services usually require cash for payment, so an investment strategy for me has to be able to generate cash income somehow at some point.

(Note that if things get bad enough, some supplier might demand gold rather than cash.  During the dot-com bubble of the late 1990s, some commercial landlords in the San Francisco Bay Area were taking stock options for at least part of the rent payment.  The world gets weird whenever it gets out of balance.)

I've mentioned in other posts that I like dividend growth.  The strategy throws off cash dividends regularly that I can use to pay for living expenses.  I like global companies as dividend payers so that I tap into the global economy no matter where it is thriving.  But I also realize the global economy could come to a screeching halt if various countries get into currency wars and impose capital controls.

(From my reading of history, there was a thriving global economy before World War I.  After the war started, the British and French governments decided they didn't want German military suppliers raising capital on British and French stock exchanges, so capital controls were imposed.  It took decades for a less restrictive global economy to come back into being.  But even now, countries tend to impose capital controls whenever they get into trouble economically or financially.)

Historically, the Permanent Portfolio has a CAGR of 7-10% and a volatility that is much less than the S&P 500.  This means that if one has to sell investments to raise the cash needed for living expenses, the Permanent Portfolio is safer overall relative to stocks.  But it's not guaranteed.  That is why I like to have cash reserves of two or more years in place so that I'm not a "motivated seller" at a time when the markets have tanked.

When I learned finance in school, I was taught that the interest rate on short-term U.S. Government debt was the "risk-free rate of return."  Now the credit agencies are threatening to downgrade the U.S. credit rating from its AAA perch it it doesn't get its house in order.  If this happens, the rules of finance will change.

I expect to get at least some of my retirement income from Social Security (because I've been paying into the system all of my working life).  Financially, Social Security is a COLA'd annuity.  But entitlements from the U.S. Government are starting to look risky at this point, so the rules of retirement may be changing in the years ahead.

I sleep better knowing I have more than one way to get the cash I need to pay living expenses.  But there are a variety of scenarios I can't hedge against because whenever the world gets out of balance, things get weird.  I'll have to improvise if any of these "corner case" scenarios become the scenario I have to live with.

craigr wrote: The Permanent Portfolio is really not a "doomsday" portfolio. It's a realistic portfolio. Surprises in the markets are the norm so just expect them to happen and have a strategy to deal with it both good or bad.

It may not be a doomsday portfolio, but with 25% allocated to gold, and 25% in ultra-safe short-term Treasuries, it is certainly much closer to that description than most.  I have heard gold dealers suggest that gold should make up no more than 20% of one's investments, and even my ultra-conservative parents have CDs instead of treasuries.

But I agree that while no portfolio can protect against every conceivable calamity, the PP does a great job of dealing with surprises.

Pkg Man wrote:

craigr wrote: The Permanent Portfolio is really not a "doomsday" portfolio. It's a realistic portfolio. Surprises in the markets are the norm so just expect them to happen and have a strategy to deal with it both good or bad.

It may not be a doomsday portfolio, but with 25% allocated to gold, and 25% in ultra-safe short-term Treasuries, it is certainly much closer to that description than most.  I have heard gold dealers suggest that gold should make up no more than 20% of one's investments, and even my ultra-conservative parents have CDs instead of treasuries.

But I agree that while no portfolio can protect against every conceivable calamity, the PP does a great job of dealing with surprises.

I think that an appreciation of the PP has a bit to do with one's temperament.

I was drawn to it immediately, even though it took me a while to understand it fully.  For me, it was like one of those Thelonious Monk pieces where you sense an intricate internal order, but it's subtle and hard to completely grasp.

Great analogy to a phenomenal musician

I was the opposite of Tex. When I saw the portfolio I thought it was BS. I was only converted after doing my own research and review of financial history and economics. After that, I became convinced that a portfolio not designed around economic cycles is seriously broken. When I see investing experts talking about asset classes without mentioning the economic drivers behind the returns I simply think they are very uninformed now.

For me, Fail-Safe Investing: Lifelong Financial Security in 30 Minutes came back last year as one of the items in Amazon's "Customers Who Bought This Item Also Bought" list.  At first I thought the book was your typical investing sham because the title promised a lot, but something convinced me to order it (it could have been the Customer Reviews on Amazon or perhaps what I learned about Harry Browne after googling his name and checking him out).

As I was reading the book, I realized Fail-Safe Investing is in the same league as Benjamin Graham's The Intelligent Investor in terms of managing investment risk and uncertainty (the vocabulary may be different, but I see Graham's "margin of safety" concept as similar to Browne's idea of hedging your risk with vastly different non-correlated asset classes because you can't know or predict the future).  Both money managers also stress doing your homework and taking responsibility for the results you get (because no one else is as concerned about your success as you are).

Once I was convinced Browne was on to something that made a lot of sense, I lowered my defenses and started giving him the benefit of the doubt.  I checked out more information (from PRPFX to the forums on Bogleheads and this site) and decided to give the Permanent Portfolio idea a test drive.  So far, so good.

Clive wrote:

Lone Wolf wrote: Plus I am frankly a little envious that you get to play with all these cool backtests.   I wanna play!

http://www.jfholdings.pwp.blueyonder.co ... y_1927.xls

Lovely spreadsheet, thanks!

Timing an asset to its own relative strength (200 day moving average) is OK, but I'd like to see an ETF/ETN that offered timed rotation (riding the waves) between assets. Provided cash is one of those assets then riding whatever is the current leader out of a set of assets until it is overtaken and a new leader jumped into, can provide reasonable gains with limited losses (if everything else is down and cash is the leader you exit into cash). It does seem that you also need a stop loss trigger with this approach however for when the leader had pulled way ahead of the rest.

Isn't this the premise of GTAA?

Gotcha.  What do you think of GTAA's current approach, very wide ETF diversification and 200-DMA trend-following?

I wondered also about the extreme diversification given that his "Ivy" model on his website only uses, if memory serves, five ETFs.  (VTI VEU VNQ IEF DBC)

I'm pretty sure  Faber diversifies within those asset classes (look at the FAQ at his website).  Even so, just those five classes is much more diversification than most investors have.

Yes, he does.  I've looked over the GTAA portfolio.  Over 50 ETFs.  But my impression is that there's a lot of overlap there, that maybe some of the diversification is overkill, that some of the diversification is redundancy.  Still, time will tell.