What goal do you pursue with your Variable Portfolio

[AgAuMoney]

It's clear enough, it just doesn't make any sense.  Do you have an example of a scenario where this distinction was important?

Dude, it's my portfolio and I get to decide what's important.  I tell you what I think and what I do because of it.  That's all.

[HB Reader]

Minor correction:  Before 1975 it was legal to own certain low premium gold bullion coins, like the Mexican 50 peso piece and the British sovereign.  I still have some that I bought in the early 1970's.  There were always a few loopholes in the gold ownership prohibitions.

That's interesting.  Were the prices free to flunctuate or did they remain fixed at the USD$42 equivalent?

Bullion prices worldwide and "legally permitted" gold coin prices in the US actually fluctuated daily, but not by much -- seldom more than a few percentage points -- over and above the "official" price at which foreign central banks could covert dollars into gold until the US suspended gold convertibility in August of 1971.  The worldwide private gold market was then dominated by the so-called "London Gold Pool" of dealers.  So permitted gold coin prices in the US in the late 1960's remained pretty close to the equivalent of the US official price of $35 per ounce.  In the very early 1970's, the US actually raised the official price to the low $40's as a sort of last ditch effort to salvage the Bretton Woods system.  Both before and after the suspension of official dollar/gold convertibility in 1971, permitted coin prices in the US pretty much tracked world gold prices -- running up to a high of about $195 per ounce in late 1974, immediately before the removal of all US restrictions on gold ownership.  Gold then fell to a low of about $104 in mid-1976, before beginning its rise to about $850 in January of 1980.

The US gold ownership prohibitions imposed in the 1930's were never really intended to effect the market for numismatic coins or jewelry.  Obviously, that left a huge gray area.  With respect to coins, the Treasury simply used the striking date to determine whether they were "bullion" (i.e., new/prohibited) or "numismatic" (i.e., old/permitted) coins.  By the early 1970's, coins struck after 1959 (like the Krugerrand, a bullion coin first struck in 1967) were prohibited, but British Sovereigns (very common and struck up through the 1920's) and Mexican 50 peso pieces (all struck with the date 1947) were permitted, even though they clearly weren't significant numismatic coins and always traded very close to their metal value.  If you were a dentist or jewelry manufacturer you could legally own (or easily get a license to own) actual gold bullion for business purposes. 

Back then (like now) most Americans were woefully ignorant about gold -- both with respect to its historic monetary role and the specifics of US law.  Even internationally, the investment demand for gold was fairly low as many people throughout the world assumed the US government would be able to maintain the dollar/gold link and holding gold was seen by many as the equivalent of sticking non-interest bearing cash in your mattress. 

Even though I collected coins as a kid in the early 1960's, I really didn't understand much of this until I read HB's "You Can Profit From A Monetary Crisis" as a young adult in 1974.                

[stone]

Clive, currently I think some UK index linked gilts are trading at a premium. So when kept to maturity, you get back RPI-x%. Doesn't that thwart your strategy for combating inflation by replacing a 1x PP with a 3xPP + index linked gilts?

[Xan]

It's clear enough, it just doesn't make any sense.  Do you have an example of a scenario where this distinction was important?

Dude, it's my portfolio and I get to decide what's important.  I tell you what I think and what I do because of it.  That's all.

That's fine and all, but you don't get to be rude to Sophie about it, nor do you get to assume that anybody else will understand your position.

[AgAuMoney]

It's clear enough, it just doesn't make any sense.  Do you have an example of a scenario where this distinction was important?

Dude, it's my portfolio and I get to decide what's important.  I tell you what I think and what I do because of it.  That's all.

That's fine and all, but you don't get to be rude to Sophie about it, nor do you get to assume that anybody else will understand your position.

But Sophie gets to tell me that my criteria is nonsense and my preferences are not important?

I rarely see such favouritism outside of mother-child relationships or gamers with their little cliques.

[MachineGhost]

I rarely see such favouritism outside of mother-child relationships or gamers with their little cliques.

You forgot Apple fanboys.

[sophie]

Thanks Xan.

Not sure what your problem is AgAu$.  I wonder if you'd react the same way if my online screen name was "Bob".

Of course you can do what you like, it is your money!  I simply pointed out a mathematical fact.  But I respectfully request that you be civil.  Hello moderators????

[MediumTex]

Can we have a little courtesy among friends here?

Thanks.

[moda0306]

AgAu,

We respect your ability to do whatever you want for whatever reason you want.  However, if you have a certain way of looking at what you want out of investing that we're not understanding that might be valuable we'd surely have you explain it and see if there's some value to be had in our own investing philosophy.  Further, most ideas on improving the PP aren't diflected as irrelevant, but simply often diflected as great strategies to put in a VP.  I actually prefer to work my tweaks into the actual PP rather than mentally separating them, but I realize that it's 6 of one or half a dozen of another.

The reason most non-bond (and only non-callable bond) sources of income seem inadequate to most of us is because these aren't true promises to pay, but simply pay out until they decide they can't anymore.  A callable bond or REIT or preferred stock will do fine... until it doesn't.  For some people, they feel these quasi-promises are not only adequate, but preferable.  For some of us, they may seem ok, but there's still doubt there that some people wish to do away with.

I don't like assets with moderate upside and huge downside risk.  If I'm going to take on a lot of downside risk, I want huge upside.  That's why I don't like non-callable bonds or preferred stocks (or God-forbid MM funds invested in Euro-trash).  I think my reasons are pretty clear.  Maybe you can shed some light on where you want to get additional income and why it makes you feel like your portfolio is more sound.

[blackomen]

I'm still young (almost 30) and can take on more risk for more reward than what the HBPP provides.  If history is any guide, the current secular bear market in stocks still has a few more years to go..  I'm saving money into the HBPP until the next recession or cyclical bear market..  when I'll take a small fraction out to invest some undervalued companies and indices.

[AgAuMoney]

Maybe you can shed some light on where you want to get additional income and why it makes you feel like your portfolio is more sound.

Now that is a question I can answer.  You asked for it...

Background...

I am 100% convinced that selling assets to provide "income" in retirement is a fools' game.  You either take the risk of market volatility depressing asset prices and forcing you to sell more to get needed spending money, or you keep money out of volatile assets (keeping it instead in cash and/or bonds) so you are not forced to sell depressed assets, and then you take on the risk of lower returns.

I am 100% convinced about the merits of stock dividends from companies that historically have grown their dividends for one or more decades.  Investing in these companies is often called "dividend growth investing (DGI)" because you are investing for growing dividends, not to be confused with investing for "dividends and growth."  After much study and practice I believe it to be the best alternative to avoid the risk of asset sales.  I have been learning about this approach starting at age 14 or so.  I have been following this approach for 10 years, and partially following it for the 10 before that.  I know it works.  Because I am convinced, I will present what I have learned as fact.  I'm not interested in debating these facts in this forum.

Why and How...

Most market returns are from dividends, and dividend growth stocks typically outperform the market over the long term.  The dividends do not follow (are not correlated) with stock market price volatility and typically grow faster than inflation over the long term.  These are huge advantages in retirement because the dividend checks keep coming even if the market crashes or slumps.  Using dividends to buy more stock while "accumulating" is a huge boost to returns, and if automated provides automatic dollar cost averaging.

By watching for favorable valuations you can accumulate more shares when the opportunity presents, resulting in more dividend dollars than if you wait until retirement is near or arrived to "switch" your portfolio to dividend growth.  Furthermore, there is no guesswork or "monte carlo" analysis trying to predict if you have enough assets (to some always less than 100% certainty) to retire.  With dividend growth, when the income stream matches or exceeds your living expenses or desired income, you are done.  And by doing this for decades prior to retirement you gain the necessary experience with the concept and the comfort level that comes from knowing it works.

Results...

It worked great in 2007-2009 and the part of my portfolio that was invested this way it also worked great in 2000-2002 unlike my index and other funds.  In short, it has worked great for me (and others) thru the 1990's and 2000's and reportedly for many decades prior to that.  By eliminating or at least reducing the need to sell assets, I have eliminated or at least reduced the risk of selling increasing amounts of assets to meet current needs if/when the market declines.  And by keeping a higher percentage of assets invested for growth, my portfolio has experienced great results.  I have also eliminated the risk of market volatility, turning the risk into a huge advantage.  Yes I like to see the market go up.  But when the market goes down I rejoice at the deals I get on purchasing additional shares, and enjoy the 10-15% increase in income most every year.

Regarding the PP...

I also have a long experience with silver (Ag) and gold (Au).  The permanent portfolio allows me to and gives me a strategy to integrate and manage gold (and silver) as part of my overall portfolio.  The PP does not replace my need for income, and I have found dividend growth to be a nice complement to the PP.  As Harry Brown evolved from picking volatile stocks to using a low-volatility broad market index, I realized that the major components of a broad market index were the large cap stocks which are often (but not always) dividend growth stocks.  I realized that a selection of 10-20 such stocks was an almost identical (near perfect correlation) approximation to the index and would allow me to avoid the companies I didn't like, while putting me closer to my goal of growing dividend income.  So that's what I do, and so far it has exceeded my expectations.  (In the PP I do supplement my dividend growth stocks with a small-cap growth fund.  At least today.)

[AgAuMoney]

Thanks Xan.

Not sure what your problem is AgAu$.  I wonder if you'd react the same way if my online screen name was "Bob".

Of course you can do what you like, it is your money!  I simply pointed out a mathematical fact.  But I respectfully request that you be civil.  Hello moderators????

Honestly I never noticed your screen name until Xan called it out.

I perceived you were attacking me and responded in the same manner I have responded to similar attacks when talking face to face.  I did and do consider my response to be "civil".  Notice that what I said was all about me.  I did not in any way attack you or yours, but instead stated my position and stood my ground.  Perhaps the perceived incivility is a cultural difference.  In my experience it is uncivil to disparage someone, or their family, or their property/ideas, but it is always appropriate and expected to "draw a line" or "stand proud" or state one's boundaries, especially when one is being attacked.

I'm sorry if an attack was not your intent and I apologize for my misinterpretation.  But even on re-reading, to me your approach seems more intent on belittling than understanding.  Perhaps it is simply a problem with conveying ideas and intent thru a textual medium.

As for your mathematical fact, it is only true in theory and is completely inapplicable to the vagaries of the real world.

edit:  added 'be' in "response to [be] civil"

[moda0306]

I don't know about 2000-2002, but didn't dividend stocks get hammered in 2008?

[Storm]

I don't know about 2000-2002, but didn't dividend stocks get hammered in 2008?

Yes, but if you held them throughout the 2007-2010 years, and had your dividends automatically re-invested, you ended up coming out a winner because you were reinvesting dividends at historic lows, while the stocks eventually rose back to and above pre-2008 levels.

The trick is not to be fearful and sell out of your dividend stocks after taking a 50% paper loss.  It would take balls of steel to avoid panic in late 2008 after the Lehman collapse.  AgAuMoney, you must have great fortitude to be able to look at a 50% paper loss and stick with it.

[stone]

I guess the very hard thing to do is to predict dividend growth. You can see that dividends have grown and you can see that they currently are large but it is quite another thing to predict that they are going to grow for any given company. I'm sure I saw something about what proportion of the dividend champions as viewed 20years ago actually went on to do well over the intervening 20years. It was sobering.

[dualstow]

I am 100% convinced about the merits of stock dividends from companies that historically have grown their dividends for one or more decades.  Investing in these companies is often called "dividend growth investing (DGI)" because you are investing for growing dividends, not to be confused with investing for "dividends and growth."  After much study and practice I believe it to be the best alternative to avoid the risk of asset sales.  I have been learning about this approach starting at age 14 or so.  I have been following this approach for 10 years, and partially following it for the 10 before that.  I know it works.  Because I am convinced, I will present what I have learned as fact.  I'm not interested in debating these facts in this forum.

Welcome to my vP. 

[MachineGhost]

Most market returns are from dividends, and dividend growth stocks typically outperform the market over the long term.  The dividends do not follow (are not correlated) with stock market price volatility and typically grow faster than inflation over the long term.  These are huge advantages in retirement because the dividend checks keep coming even if the market crashes or slumps.  Using dividends to buy more stock while "accumulating" is a huge boost to returns, and if automated provides automatic dollar cost averaging.

How does dividend growth investing rate in terms of excess returns compared to value, momentum, yield or quality?

[AgAuMoney]

I don't know about 2000-2002, but didn't dividend stocks get hammered in 2008?

Not mine.  Dividend income growth every year since 2002.

2008-2009 was GREAT because it allowed me GREAT deals on a LOT of companies.

Or if you are talking about net portfolio value, my peak to trough drawdown was less than 30% (and fully recovered by January 2010).  The S&P 500 was almost 2x that.

In general with DGI I don't care about price except when I'm buying, and then I like a LOW price.

[AgAuMoney]

I guess the very hard thing to do is to predict dividend growth. You can see that dividends have grown and you can see that they currently are large but it is quite another thing to predict that they are going to grow

"currently are large" is not typically an important criteria.  Many DGI investors require "minimum yield" but even that isn't a hard rule.

At least in the U.S. there are hundreds of companies with 10+ years of growing dividends and a few dozen with many decades.  While nothing is certain, dividends tend to be a lot more predictable than market value.  And with a suitably diverse portfolio, the occasional company which cuts or freezes doesn't significantly affect the whole.  With a little bit of monitoring, it is even possible to foresee signs of trouble.  For example, if payout ratio starts climbing because company earnings are falling, and the trend continues...

[AgAuMoney]

How does dividend growth investing rate in terms of excess returns compared to value, momentum, yield or quality?

I don't know about "excess" returns from other strategies.

It turns out that DGI typically has market returns, plus some or all of the dividends.  In other words, the dividends tend to be "excess" above the market, at least partially.

There has been a lot of research on the returns of dividend paying stocks.  dividend growth takes this a bit further with the due diligence required to uncover the better managed companies that have grown dividends consistently and have the wherewithal to continue.

But again, in general market value isn't the goal.  The goal is increasing income without selling assets.

[Gosso]

Ag,

Just out of curiosity, did you own GE pre 2008?  It seems to fit the bill of a blue chip with rising dividends (pre 2008).  If you didn't own it then what criteria did you use to screen it out?  Or were you able to spot a potential dividend cut before the stock fell?

[AgAuMoney]

Just out of curiosity, did you own GE pre 2008?  It seems to fit the bill of a blue chip with rising dividends (pre 2008).  If you didn't own it then what criteria did you use to screen it out?  Or were you able to spot a potential dividend cut before the stock fell?

GE is a sore spot...

Yes, I definitely owned GE.

I sold about 1/2 of my position because I thought they would be in trouble.

I kept the other 1/2 because the CEO (spit) said they were fine and would pay the dividend.  Almost immediately (I'd like to think it was the next day, but it was probably longer) they announced a dividend cut and the price tanked.

I bought more when it was dirt cheap.  I'm still a bit underwater in that position.

The other real sore spot was WaMu.  They had plenty of cash to cover and would have been fine if given the typical care and attention from the federal reserve.  However they had earlier spurned a buyout offer from JPM Chase, and, well, JPM had more pull with the fed than did WaMu.  I sold my WaMu for 17cents/share.

With those and a couple of more speculative positions that bit it, my peak to trough was under 30%.  (Way smaller hit than the S&P 500.)  Also my dividend income grew every year so I considered it a success.  I typically hold about 40-50 individual positions with roughly equal market value, and a handful of more speculative at no more than about 1/2 weight.  So a complete loss like WaMu is only 2% off the top.  GE cost me less than 1%.

Taking advantage of the deals in late 2008 and early 2009, plus dividend reinvesting, plus getting laid off and rolling my pension lump sum into an IRA...  Things turned out really well.

Hard to tell for the future if the wheels are going to stay on or if that wobble we all feel is going to wipe us out...  But with about 40% of my portfolio as Permanent Portfolio, and most of the rest as a 3-legged version (no bonds), I am as comfortable as I know how to be for whatever comes next.

[MachineGhost]

It turns out that DGI typically has market returns, plus some or all of the dividends.  In other words, the dividends tend to be "excess" above the market, at least partially.

So what has been your average yield through this strategy?  I don't mean cash on cash yield, but the average CAGR net of the capital gains.

[Gosso]

Just out of curiosity, did you own GE pre 2008?  It seems to fit the bill of a blue chip with rising dividends (pre 2008).  If you didn't own it then what criteria did you use to screen it out?  Or were you able to spot a potential dividend cut before the stock fell?

GE is a sore spot...

Yes, I definitely owned GE.

I sold about 1/2 of my position because I thought they would be in trouble.

I kept the other 1/2 because the CEO (spit) said they were fine and would pay the dividend.  Almost immediately (I'd like to think it was the next day, but it was probably longer) they announced a dividend cut and the price tanked.

I bought more when it was dirt cheap.  I'm still a bit underwater in that position.

The other real sore spot was WaMu.  They had plenty of cash to cover and would have been fine if given the typical care and attention from the federal reserve.  However they had earlier spurned a buyout offer from JPM Chase, and, well, JPM had more pull with the fed than did WaMu.  I sold my WaMu for 17cents/share.

With those and a couple of more speculative positions that bit it, my peak to trough was under 30%.  (Way smaller hit than the S&P 500.)  Also my dividend income grew every year so I considered it a success.  I typically hold about 40-50 individual positions with roughly equal market value, and a handful of more speculative at no more than about 1/2 weight.  So a complete loss like WaMu is only 2% off the top.  GE cost me less than 1%.

Taking advantage of the deals in late 2008 and early 2009, plus dividend reinvesting, plus getting laid off and rolling my pension lump sum into an IRA...   Things turned out really well.

Hard to tell for the future if the wheels are going to stay on or if that wobble we all feel is going to wipe us out...  But with about 40% of my portfolio as Permanent Portfolio, and most of the rest as a 3-legged version (no bonds), I am as comfortable as I know how to be for whatever comes next.

Thanks for the response.  I guess the key is to diversify across the various dividend growers, to eliminate the pain of a few bad apples.

[AgAuMoney]

So what has been your average yield through this strategy?  I don't mean cash on cash yield, but the average CAGR net of the capital gains.

When talking stock investing, "yield" is typically the dividend.  It sounds like you are asking for total return?

Go to longrundata.com and see what holding PG since 1993, JNJ since 1995, and CVX, MO and SJM since 2002 would have done for you...  I realized in 2002 that those companies were the only things I had that were worth holding.  So since then I've been looking for more like them.

I started transitioning to div-growth approach in 2002.  I've had a few dividend growers since the early 1990's and got rid of my last mutual funds and "growth" stocks in 2006 or 2007, except for the 401(k).  The 401(k) rolled into an IRA in early 2010 and became my PP which was initially invested VTI/TLT/IAU/mmf.  Mostly transitioned now and in 2.5 years is up 24%, just over 8% ytd.  My most pure dividend growth account (still has about 5% each gold and silver but not much cash) is averaging just under 15% CAGR since 2006 but also has the 2nd lowest yield (the PP is the lowest).  2008-2009 helped that account a lot, but it also holds BP...

Primarily the dividends were reinvested into the paying company, but sometimes I turned that off if it was overvalued and let them accumulate to invest in an undervalued choice.  I don't think any of my other "total return" numbers would be a valid representation of dividend growth since they conflate too many other things, but a few holdings are interesting...

PG and JNJ I've held since the early and mid-1990's, respectively.  JNJ not so hot, but PG has done well and I've picked up some SJM because of it and that has also done quite well.  I did not reinvest dividends in either PG or JNJ but I did put them toward additional SJM a few times.

CVX and MO I've held since about 2002 and have done pretty good.  I kept PM when MO spun it off and it has done great, but I sold KFT since they froze their dividend.

Compare that with things like Plug Power, Ballard Energy, Ener1, ...  Or don't, as there is no comparison.