Gyroscopic Investing

The 60/40 portfolio isn't an acceptable alternative to the PP any more or less than the PP is an acceptable alternative to the 60/40 portfolio. I don't even need to pull up a spreadsheet to verify their historical performance is very similar. The only thing that was different is how the gains and losses were distributed over time.

If you (mentally) need to gain when equities rise and preserve capital (i.e. lose less) when equities fall, go with a 60/40 or 50/50, or 40/60, whatever. You gain less, you lose less, but you follow the "normal" pattern. The PP's ride is much more flat and has little correlation with equities.

Not sure why anyone would stick with a PP if it's gain/loss pattern makes them uncomfortable compared to a boglehead style portfolio. Over time it's very unlikely you'll end up in better or worse shape either way.

I've said it before and I'll say it again:  I find having both a PP and VP to be very psychologically beneficial.  I get to exercise more control and take more risk with my VP, so I enjoy bigger gains when the markets are rising, but then I also have the PP which has much less volatility when the SHTF. 

So when I'm sad about my PP, I just look at my VP to cheer myself up, and vice versa. 

rocketdog wrote: I've said it before and I'll say it again:  I find having both a PP and VP to be very psychologically beneficial.  I get to exercise more control and take more risk with my VP, so I enjoy bigger gains when the markets are rising, but then I also have the PP which has much less volatility when the SHTF. 

So when I'm sad about my PP, I just look at my VP to cheer myself up, and vice versa. 

+1

It is a fact that over the long term stocks have historically outperformed the other asset classes in the US. Yes, Japan has been an exception to that rule but for various reasons I believe it is an anomaly. If you put the money you don't want to lose in a PP, and the rest in a VP consisting of a broad stock index fund (I suggest global) with the understanding you will not rebalance or play with it for at least 20 years, your VP has a good chance of outperforming your PP.  But you have to reinvest the dividends and really be prepared to leave it alone. That means enduring those stomach wrenching market crashes that come along periodically. In my experience few people can do that.

But for those who can handle it I like 80% HBPP and 20% VT. Maybe add a little to your VP now and then as your comfort level allows, but don't sell or rebalance out of the VP until you reach your target date which should be at least twenty years down the road. Past performance is no guarantee of future returns but that said there has never been a losing twenty year period in the history of US stocks. The Second World War coming on the heels of the Great Depression represent the only such period that I am aware of in global stocks.

So the risk is there but IMHO it's small IF YOU HAVE A TWENTY YEAR INVESTMENT HORIZON.

Risk vs Time Horizon brings up an interesting point for me as someone approaching post-accumulation age and thinking about retiring in the next 4-5 years...

When a survey was taken of this forum about a year and a half ago, about 55% of the respondents were less than 40 years old, about 25% were between 40-50 years old while the remaining 20% were above 50... 

Is the PP approach seen as basically more appropriate/safer/better risk/reward than say a Boglehead or age-in-bonds allocation for those in the post-accumulation phase than for those who have a longer investment time horizon to ride out the drawdowns?

That's a great point, PP67. In general, yes, I would say that a more stock-heavy portfolio is probably better for people in the following circumstances:

1. Long time horizon (25+ years)
2. Reasonable certainty of never having to dip in to the portfolio funds in an emergency (Murphy's law says that these will tend to occur during drawdowns)
3. Emotional compatibility; do you find larger drawdowns (-40% or more) upsetting?

Personally, I find that #1 and 2 are the most problematic for me, since my ERE time horizon is short and I don't believe I can predict that I'll never need to use the portfolio funds in an emergency.

For those in the 10 year window for retirement I would definitely be conservative with investments. Unless you are wealthy and can afford to maintain your anticipated lifestyle on no more than half of your retirement savings I would eschew a VP altogether. And yes, I do think the HBPP is a safer choice than the traditional bond heavy Boglehead retirement portfolio. Rising interest rates and inflation, both of which are at or near historic lows, can devastate a bond heavy portfolio.

It is a myth that stocks are safer the longer you hold them:
http://www.bogleheads.org/forum/viewtop ... 0&t=115941

Everyday, it seems to be getting worse and worse. I'm a newcomer to the PP, and I've lost upwards of 6% in gold and 3% in bonds already. The meager returns in equities aren't bridging the gap and my total portfolio is down 2% for the year. 
I wish there was some way I could stop the bleeding, because I feel like it's just going to get worse.

Prepare2BFleeced wrote: Everyday, it seems to be getting worse and worse. I'm a newcomer to the PP, and I've lost upwards of 6% in gold and 3% in bonds already. The meager returns in equities aren't bridging the gap and my total portfolio is down 2% for the year. 
I wish there was some way I could stop the bleeding, because I feel like it's just going to get worse.

Down 2% YTD isn't all that bad, really. My VP went down 3% today alone. There's still plenty of time left for a recovery. But we could be headed for a year of lousy performance, that's a possibility. But note "lousy performance", not "huge losses." IMHO we are primarily here to avoid the latter, not attempt to rack up big gains.

Ad Orientem wrote: It is a fact that over the long term stocks have historically outperformed the other asset classes in the US. Yes, Japan has been an exception to that rule but for various reasons I believe it is an anomaly. If you put the money you don't want to lose in a PP, and the rest in a VP consisting of a broad stock index fund (I suggest global) with the understanding you will not rebalance or play with it for at least 20 years, your VP has a good chance of outperforming your PP.  But you have to reinvest the dividends and really be prepared to leave it alone. That means enduring those stomach wrenching market crashes that come along periodically. In my experience few people can do that.

It's important to remember that many stock market returns have a subtle survivorship bias built into them in the sense that countries like Cuba, Argentina, Lebanon, Rhodesia/Zimbabwe and others that have proven to be especially proficient in creating capital at one point in time and then even more proficient in destroying it later on tend not to be included in stock market return data. 

There was a time when investing in the the capital infrastructure of the countries listed above would have been thought of as a terrific investment with high expected returns, but then something unexpected happened in each case and investors in many cases lost everything.  This risk in stock investments is not widely appreciated because no one likes to think that today's political and economic stability could be tomorrow's complete chaos, even though this is the pattern that has been repeated constantly through all of recorded history.

Of course, the same could probably be said about buying bonds in those countries--corporate or government alike.

There is only one investment I know of that doesn't have a similar problem of survivor bias...

Libertarian666 wrote: There is only one investment I know of that doesn't have a similar problem of survivor bias...

And that's why us PP holders own more of it than 99.9% of everybody else! 

Pointedstick wrote:

Libertarian666 wrote: There is only one investment I know of that doesn't have a similar problem of survivor bias...

And that's why us PP holders own more of it than 99.9% of everybody else! 

Because when it is working, it works very, very, very well to provide the protection you need for certain conditions that always come along sooner or later.

See Tipsymandias for more information about why there is no substitute for this asset.

MediumTex wrote:

Pointedstick wrote:

Libertarian666 wrote: There is only one investment I know of that doesn't have a similar problem of survivor bias...

And that's why us PP holders own more of it than 99.9% of everybody else! 

Because when it is working, it works very, very, very well to provide the protection you need for certain conditions that always come along sooner or later.

See Tipsymandias for more information about why there is no substitute for this asset.

Agreed on all counts. I do have trouble understanding why otherwise sensible people don't get that. On the other hand, if they did, the price would have at least one more zero on it...

All investments have risks. There is no way to escape it. The best an investor can do is diversify with low-cost passive strategies. Everything else goes down from there in terms of increased risk and potential for trouble (market timing, concentrated bets, gut feelings, etc.).

The stock market is on a tear. But the thing is it's been on a tear since 2009 back when the doomsayers were predicting Dow 3,000. It's only now, when the market is at an all time high, that people really want to flood into it.

The Permanent Portfolio owns a mix of assets that are nowhere near 100% stocks and is not designed to be 100% stocks in terms of returns (or the risk). So yes it's going to lag the market when the markets are doing well. 

The portfolio turns like a rudder on a large ship and not like a race bike. It can show negative returns and then suddenly an asset takes up the slack. When this happens is not instantaneous in my experience. It could take months. Or in the past it took a year or more. These things cannot be guaranteed nor predicted and there is no magic formula that will win all the time. I wish there were because I'd be using it. For all I know next week the stock market will dive.

Investing is volatile. Investing is risky. Investing is unpredictable. There is no way to avoid it. Even sitting in 100% cash has inflation risk eating away at it. With rates at historic lows this is more apparent than ever. But the message from the Fed basically is that savers should grin and bear it. The only alternative really is to ratchet up yield chasing and overweight stocks. These are options of course, but carry significant risks as well. There is no free lunch here and this is just how it works. This is why I'm so big on investor psychology and employing tricks like not looking at the portfolio to avoid regret and angst short-term.

At one time I was in a very heavy stock allocation and took a serious pounding during the tech crash in the early 2000's. All the experts told me that owning a lot of stocks was the path to instant riches and I was not cautious and got creamed. Every time I look at the market returns and get envious, I just try to remember what a shellacking I took trying to goose my returns and I snap myself out of it. Each person's experience is going to be different in how they handle these things. But, my perspective is still that I'm going to stay diversified and if I take a loss every now on a widely diversified portfolio then that's just how these things go. Same for being envious of others taking huge risks in the stock market. I'm happy for them, but I'm not going to join them. I learned my lesson and will take the good with the bad.

With all that said, each investor needs to decide what is best for their own situation. If the volatility of the Permanent Portfolio is too much, then they might just want to consider sitting in cash and taking the inflation hit. The effects of inflation will still be present, but at least the balance will not be showing it on the monthly statements. If someone wants some more stock market action, then owning more stocks could be a good option for them. I'm a diehard capitalist myself and believe in investing in the productive capacity of the economy so this is my personal bias. But I also know that the markets are very volatile and fickle and it takes a long time horizon sometimes to have it pay out. Even then, there are no guarantees.

I could give a crap about falling gold prices.  I'm young(ish) and my savings are still small enough that one of my major concerns at the moment is getting gold prices low enough to where purchasing physical gold is more manageable.  I personally think everyone betting up the market is nuts because the economic growth is illusory and I anticipate a crash in the next couple of years, hopefully not too severe.

RuralEngineer wrote: I could give a crap about falling gold prices.  I'm young(ish) and my savings are still small enough that one of my major concerns at the moment is getting gold prices low enough to where purchasing physical gold is more manageable.  I personally think everyone betting up the market is nuts because the economic growth is illusory and I anticipate a crash in the next couple of years, hopefully not too severe.

Thank you RE!!!

I'm trying to take the long view.  The PP will have us buying gold while the stock market party continues, for which we will be inordinately thankful when the parents come home, the party is over, and gold shoots back up.  Whether it happens next month, next year, or 5 years from now doesn't really matter.

The hard part is figuring out how to buy the gold.  It seems many of us are faced with the choice of overbuying in taxable, reducing 401K contributions and accepting the tax hit, or reducing the scope of the PP to private brokerage accounts.  Right now I'm sticking with option #4:  not checking the PP after today's gold drop, so I don't have to find out if I've hit a rebalancing band.

Prepare2BFleeced wrote: Everyday, it seems to be getting worse and worse. I'm a newcomer to the PP, and I've lost upwards of 6% in gold and 3% in bonds already. The meager returns in equities aren't bridging the gap and my total portfolio is down 2% for the year. 
I wish there was some way I could stop the bleeding, because I feel like it's just going to get worse.

I had a similar experience last year when I started my portfolio.  Looking backward, I had chosen the worst month of the year to start a PP; I still ended the year up 4 or 5%.  It all evens out eventually, but starting out it can be painful to watch.

hoost wrote: I had a similar experience last year when I started my portfolio.  Looking backward, I had chosen the worst month of the year to start a PP; I still ended the year up 4 or 5%.  It all evens out eventually, but starting out it can be painful to watch.

Starting a PP in a bad month sure beats ending a VP in a bad month.

The grass is always greener until it catches fire.

Tyler wrote: The grass is always greener until it catches fire.

Ooh, I really like that.

Pointedstick wrote:

Tyler wrote: The grass is always greener until it catches fire.

Ooh, I really like that.

For some reason that reminds me of the great Jack Handey line:

Dad always thought laughter was the best medicine, which I guess is why several of us died of tuberculosis.

Pointedstick wrote:

Tyler wrote: The grass is always greener until it catches fire.

Ooh, I really like that.

+2

Most of what we experience is a matter of personal perspective.... For someone like me who felt like keeping all my investments under a mattress given the state of the economy, getting a 12 month return (as of yesterday) of 4.04% sure beats a Treasury-only return of 0.16% and 0% if in cash under said mattress... Someone else who wants/needs/expects 6-8% returns every year may yearn the flammable "greener grass" ...  To each his own...

Prepare2BFleeced wrote: Everyday, it seems to be getting worse and worse. I'm a newcomer to the PP, and I've lost upwards of 6% in gold and 3% in bonds already. The meager returns in equities aren't bridging the gap and my total portfolio is down 2% for the year. 
I wish there was some way I could stop the bleeding, because I feel like it's just going to get worse.

Don't forget that your PP has 25% in cash, so if things really take a turn for the worse you can snatch up some bargains on the way down with a portion of your cash, which lowers your cost basis.  It also puts more of your PP at risk, so just be aware of the trade-offs.