Gyroscopic Investing

Another thing to keep in mind is that so far today's one-day decline is 1.25%. Find me a portfolio that can't fall that much or more in a day that isn't chronically losing to inflation. Certainly a 60/40 portfolio has had much bigger one-day drawdowns. I guess I just don't get what Budd realistically wants. A zero-downside portfolio with greater than zero upside? Yeah, I want that too.

At some point, you just have to say "Goodbye, and thanks for all the fish."
Either to the portfolio, or to people who have decided it has failed.

When I look at when I started the Permanent Portfolio in the middle of September 2011, and then look at the SPY, I do feel like kicking myself since the permanent portfolio is only treading water, while the SPY is up 37.9%.

"Imagine if I had simply kept all my money in stocks since 2011?" I ask. "I would be 40% richer!"

Of course, I gloss over the fact that to get to 37.9% up, there were still some scary-looking drawbacks in the day-to-day or week-to-week trajectory. Had I been watching my portfolio daily, I might have gotten scared out of stocks at some point as well.

P-envy is a very real thing.

(Portfolio-envy)

There's always somebody doing better than you. It's a hard thing to define your own goals rather than comparing yourself to others. But ultimately it will lead you to greater peace of mind.

Seriously though Budd, you are voicing the sentiment that others have about the Permanent Portfolio, but in this forum it can get drowned out. Keep your voice heard. It's good to have a dissenting opinion, or a devil's advocate on this board so we keep ourselves thinking.

My attacks against you have been me attacking my own insecurities about the Permanent Portfolio. And I tend to use sarcasm and humor as a coping mechanism.

- I'm not a psychiatrist, but I did stay at a Holiday Inn Express last night.

Khisanth wrote: "Imagine if I had simply kept all my money in stocks since 2011?" I ask. "I would be 40% richer!"

Meditate on the recent ten years when the S&P trod water. 

My comments were directed to the recent performance of the PP and not the individual PP investor. A few board members have capitulated publicly and I'm sure many have privately. I plan to stay the course, but wonder whether we will have the same conversation years from now. Re-read some of Clive's posts as he seemed to have reached a similar conclusion regarding LTTs and gold before abandoning the portfolio. What makes the rest of us believe that he is/was wrong?

These drawdowns literally have me excited to buy lagging assets.  When there is blood in the streets...

Before the PP my mentality was "only buy stocks; because I save an insane amount in the first place, trust in DCA completely, and know historically it has the highest long term return."  Even though I DCA through the .com bubble and 08 crash, smoothing out my returns.  I have learned my lesson; I need to value cost average asset class against asset class.  This will force me to buy low, sell high.

Also, remember people get excited about the stock market, but they always forget a couple things:

1) If it goes down 50% it has to go 100% back up to get to par
2) Stocks are zero sum, outside of dividends
3) If you trust stock prices in dollars, you trust the FED entirely too much.  Stocks should be measure against other assets, like gold to temper their manipulation
4) The US was an emerging economy on all of these historical returns people get force fed; we are a developed economy now.  Still think we can keep that emerging economy pace?
5) The market will do whatever it wants, right when you need it to go up.  It is like the weather in northern Indiana. 
6) You are a little fish

Clive may well have been right.  IIRC, his thesis was that the PP had outperformed a bit, and was due to tread water to make up for it.  It does seem prescient.

A few things:
* Who knows when things will turn back around.
* Just because his prediction was right doesn't mean that leaving the PP was the right choice.  For example, a coach might go for it on an impossible fourth down, and succeed by a fluke, but that doesn't mean that his choice was actually the best one to have made.  (Actually, the statistics seem to indicate that coaches are way too conservative re: going for it on fourth down, but the point still stands.)
* Where else would we go?  I certainly wouldn't feel safer giving up my wide diversification and preparation for anything that might happen just to chase some short-term yield.  If I were to abandon the PP, I really wouldn't have any other place to go.

Xan, I feel the same way. If I were to abandon the PP, where else would I invest? Pretty sad when you are locked into a position and have to continue to watch it decline.

buddtholomew wrote: My comments were directed to the recent performance of the PP and not the individual PP investor. A few board members have capitulated publicly and I'm sure many have privately. I plan to stay the course, but wonder whether we will have the same conversation years from now. Re-read some of Clive's posts as he seemed to have reached a similar conclusion regarding LTTs and gold before abandoning the portfolio. What makes the rest of us believe that he is/was wrong?

It's over for the pp investor.

I plan to stay the course.

Ok, but it's getting hard to reconcile all your statements.
Years from now: no one knows. In the meantime, at least we can collect dividends and interest.
Clive: I suppose it's irrelevant for me. Clive and I don't have a relationship in which he tells me what to buy, when to buy it, and when to sell it. And if he did have a newsletter, there would be a Bizzaro Clive (named Evil C) telling us exactly why Clive's analyses are wrong and why we should jump ship.

Admittedly, things are easier in the accumulation phase. When I retire, I may feel differently about holding very much in gold or stocks. But that's decades away. For those who are 65 and older, I understand how they may want to put everything in 5-year notes IF they can afford to do so.

EDIT: like Bean, I feel good that some assets are becoming "affordable". In fact, I have been wishing for the price of gold to go down. Even so, it's not fun to see 5-digit losses, and I have my days of doubt. But it's exactly what I wished for.

If single digit losses are causing this much grief to an investor they need to be in 100% cash at a bank. They should not be investing that money at all.

And that advice is for any investment strategy, not just the Permanent Portfolio.

Life is too short to worry about this if it is an issue.

So, Clive makes a single negative prediction on the PP — a few years ago, mind you — and now we are supposing he's "right" simply because 'cash is king' at the moment and the PP goes down a little bit?

Please...

Clive is just a guy with a computer who spends every day obsessing about thousands of different portfolio permutations. He makes countless predictions and recommended thousands of different portfolios to perfect strangers and then deletes every single one of his musings so that we forget all of the whimsical and contradictory statements he makes.

If all asset classes go down for an 18 month period, that doesn't make Clive, or anybody, "right". It just makes them masters of the obvious. Even Harry Browne and John Chandler made it crystal clear that all asset classes could dive for 18 straight months. That's just the nature of markets.

Here's a quote from Harry Browne's Investment Radio Show where Harry Browne and John Chandler explain further...

Harry Browne's Investment Radio Show wrote:HARRY BROWNE: Bob — out in cyberspace asks — what combination of events were in effect when the Permanent Portfolio produced a loss? Well, over the last 35 years, the Permanent Portfolio has had only four losing years. And it has averaged a [annual] gain of 9% for all of the 35 years. Now, the worst year that it had was in 1981, when it lost 6%. And the reason it lost 6% was because that year everything went down. Gold went down, stocks went down, bonds went down, commodities, currencies — everything went down. But, of course, that's a situation that cannot sustain itself. It's a recessionary situation. And the following year, 1982, everything went up, and really sprang up. Gold had big gains, stocks had a big gain. Bonds even moved up a bit. And the result was that the portfolio gained something like 22%. I don't have the figures in front of me, but it was over 20%. And that was as unusual as the 6% loss was the year before. So, given the two years, there was a net gain — quite a big net gain — bigger than we should expect in an average year for the Permanent Portfolio. But that's the only time that I know when you really had an inundation of losses in all of the investments. And otherwise, we always have at least one winning investment that's strong enough to pull the portfolio upward. And so, I hope that answers the question.

JOHN CHANDLER: It does, Harry. I would like to add one thing and that is that the world doesn't really work according to the calendar. The calendar is there for I think maybe the benefit of accountants.

HARRY BROWNE: And to remember our birthdays.

JOHN CHANDLER: Well, something of that nature. A lot, a lot of harm has been done because of the calendar. And one of the harms is trying to make everything fit neatly into a 12 month, or four week, or seven day pattern. The idea of the Permanent Portfolio is is that it invests in asset classes, which respond differently in different economic conditions. The economic conditions that makes one thing goes down, is the same condition that makes another asset go up. But, here is the key and that is that it does not happen overnight. It does take time for these economic forces to take hold. And I rememember back in the seventies, early eighties when we were doing research on the Permanent Portfolio, we found periods as long as 18 months where the portfolio could lose money. But, now that was about the longest we found. Now bear in mind that this is not a promise. It's not a guarantee without — saying that with only 18 months it can work. I can simply say, during the periods when it was being tested. The prices... doing tests on the Permanent Portfolio and what would happen in the different situations over long, long, long periods of time — about 18 months is the maximum we found where the portfolio could lose money before the economic forces took hold and balanced the portfolio out.

HARRY BROWNE: Yes, if you were to invest on day one, you did run the risk that maybe you would not show a gain for 18 months. But, as you say that's a unique situation. An unusual situation. But, it was a possibility, and it must be recognized. But, in any event, we know that the portfolio does right itself, and it doesn't take very long. That's the value of the stability. You look at the chart of the stock market, and you see these rollercoaster swings. But, you don't see that in a chart of the Permanent Portfolio, and you can see that at my website. You can get to a chart of the Permanent Portfolio and you just see the slow steady growth. Stability is very important, because if it's not stable, you'r going to be tempted to abandon the whole approach, and probably at the worst time.

craigr wrote: If single digit losses are causing this much grief to an investor they need to be in 100% cash at a bank. They should not be investing that money at all.

And that advice is for any investment strategy, not just the Permanent Portfolio.

Life is too short to worry about this if it is an issue.

Its not the magnitude of the loss, but how the overall portfolio is responding to current market conditions that has me concerned. The rising dollar and rates have affected gold and treauries and we already agree that the equity portion of the portfolio is inadequate to cover losses in the other assets.

As long as you guys are happy with the performance, what can I say?

buddtholomew wrote: As long as you guys are happy with the performance, what can I say?

Nobody's happy with the performance. Nobody likes losses. But we all knew that if rates rose faster than inflation, that would cause gold and bonds to fall. Heck, ordinarily it would drive down stocks as well if not for the Fed desperately trying to make everything else look worse than equities. This is pretty close to the "tight money recession" condition and it's generally a disaster for every portfolio, but historically it hasn't lasted very long, and it represents a good opportunity to pick up stuff while it's on sale.

Budd: I just noticed that I had some shares of Krispy Kreme (KKD) lingering since I bought them in late 2004. I was unhappy about the falling price years ago so and since it was a small initial investment, I took it out of my google sheet since it was depressing me. I don't look hard at my monthly statements, especially at nibbles, and at some point I completely forgot that I owned the thing.

Today, I saw it in my June statement and noticed that it's now up 101%. (CAGR is 8.57%). Am I happy with the performance? Of course. Am I going to sell the pp and buy KKD? Heck no. I just sold all KKD this instant. If it continues to go up, that's fine. I'd rather be balanced.

Finally, something that I was able to not look at.

frugal wrote:

Khisanth wrote:

buddtholomew wrote: Im not predicting anything. Are yields rising, has gold plummeted and has the rise in equities failed to buoy the portfolio. Seems factual to me.

You've predicted it's over for the Permanent Portfolio investor. You are extrapolating the recent declines of gold and bond principals and extending them into the unforeseeable future. This is a common trait that is exploited by the markets again and again.

Is there something in the present that will keep you optimistic about this portfolio?

In a sense you've thrown in the towel for this portfolio. We have tried to offer you alternatives, such as the VP, or reducing the % of volatile assets and having a larger ratio of cash. We have offered optimistic viewpoints, and comforting sympathies. We have offered dismissive judgements of your viewpoints.

You've dug in your position, and so have we. What will you choose to change in your current portfolio? I believe even Bogleheads will say 3 years is not a long time from an investment perspective.

budd,

a) how old are you?

b) When will you need the money that you have now in PP?

c) How much % of your savings you have on PP?

d) What is the frequency of consulting your portfolio per week?


Regards.

BUDD,

can you answer please my post above.

After a bad year will come a GOOD year 

I tend to avoid checking the portfolio when I expect the news to be bad but I decided to take a look today after reading somewhere about the PP being hit with a "perfect storm" of rising interest rates and gold crashing. According to Morningstar I am down about 3% YTD. If that's what a  "perfect storm" does to the PP I'm happy.

buddtholomew wrote: Xan, I feel the same way. If I were to abandon the PP, where else would I invest? Pretty sad when you are locked into a position and have to continue to watch it decline.

No-one is 'locked' into the PP. There's nothing magical about it, it's basically a conservative boglehead portfolio with a big chunk of gold. The 4x25 allocation is probably more for convenience than anything else. If you can't handle the volatility you should lower it. Or feel sad watching it decline....

The PP is a fine asset allocation, as long as cash interest rates hold up with inflation and longterm-bonds deliver interest rates above inflation. From 1970-2009 this was the case. From 1940-1970 this was not the case and therefore the PP delivered only <1% real returns. You can now argue that we were on the gold standard, but gold was tradeable in the rest of the world. The only thing that worked in that decade was stocks, stocks and stocks. In the long run the PP will not destroy your wealth and 3 years from now it will be in green territory as it has ever been over 3 years. But it will not grow your wealth either, so i decided to put new money as a VP only to stocks.

After reading the Intelligent Investor, i am more confident than ever that buying stocks under their intrinsic value and holding until they are really overvalued (or forever) is the best and probably only real way to grow wealth currently and for the next 10-20 years . I am in the PP and will stay the course, but the next time the stock market tanks my gold and bonds will get replaced mostly by undervalued stocks. Buying bonds for the long run is probably not a good idea and was never since 2009. I wish i had the knowledge from the book at the start of the year, it was obvious that gold and bonds were overvalued and that cash looses longterm to inflation. I have really no problem with the volatility, as long as i am confident in doing the right thing.

The lesson i learned was that thinking and common sense is the only way to protect your wealth. Copying what others are doing will never do that, because of missing confidence!

To Budd and other portfolio watchers...

Portfolio-watching and "financial stress" is bad for your health. You wouldn't think that looking at a few numbers on a screen could cause harm to your body, but it can. When you log on to your portfolio screen and your portfolio is up, your body releases serotonin, dopamine, and endorphins. Your body becomes addicted to that reward signal and your brain craves more of it until you are hooked on it.

But, when your portfolio goes down, your body releases cortisol — the stress hormone.

Cortisol is important if a bear is chasing you, but it will wreck your body if you have chronic exposure to it. Stress and cortisol diverts your hormone pathways away from DHEA (which feeds your sex hormone pathway) and steals its precursor to feed cortisol production. Elevated cortisol disrupts sleep, increases insulin resistance and blood sugar disregulation, which leads to weight gain and all sorts of health issues. This is known as the "Pregnanolone Steal" and it is extremely common in our modern society:

See: http://vimeo.com/3818805

Eventually this leads to adrenal fatigue as your body struggles to make its cortisol at the expense of all your other hormones and it becomes very difficult to reverse.

If your incessant portfolio watching and "financial stress" is making you upset, that is what's happening to your body over time. In a terrible twist of irony, worrying about money you won't have for retirement makes you live a shorter life.

The only proven way I'm aware of to lower cortisol and raise DHEA naturally is to remove your stressors, get lots of sleep (getting to sleep early is key), and practicing HeartMath biofeedback tools (using their InnerBalance app or an emWave2) — backed by tons of quality studies and used by the military. It's no joke.

Cortisol has a half-life of about 3 weeks, so it takes that much time for it to noticeably wash out of your body after you begin — and are consistant with — HeartMath. But, it works very well. Within a few weeks, you will care much less about portfolio watching and care more about living your life. Your energy, sleep and overall mood should improve too.

frommi wrote: I wish i had the knowledge from the book at the start of the year,
...
I am in the PP and will stay the course, but the next time the stock market tanks my gold and bonds will get replaced mostly by undervalued stocks.

Good post, Frommi, but is it possible you're suffering from recency bias? It seems like you read the book at the same time that stocks started to pick up and gold stopped its steady rise, breaking the spell it had on everyone for the past 10+ years. I admit, if I had just stayed stock-heavy near the end of the last decade before I discovered the pp I'd be far richer now, but I honestly have no regrets.

Seems like just yesterday I was telling myself, next time the stock market surges and gold and bonds tank, I will buy the latter and make the pp a larger portion of my total (vp+pp). Of course, it wasn't yesterday. It was when gold was at 1800.

frommi wrote: The PP is a fine asset allocation, as long as cash interest rates hold up with inflation and longterm-bonds deliver interest rates above inflation. From 1970-2009 this was the case. From 1940-1970 this was not the case and therefore the PP delivered only <1% real returns. You can now argue that we were on the gold standard, but gold was tradeable in the rest of the world.

Interesting argument, frommi, could you deliver the source or prove the data for the time from 1940 to 1970? Would be nice to know, what returns gold did produce in those areas ofthe world where it could be traded.

I tested that on longtermreturns.com, but the site is down since some days .

I really don't see how pre-1972 results have any bearing on the PP.  The PP is designed for a fiat-currency world.  In a world where gold and dollars were the same, then an attempted PP would have 50% cash, 25% long bonds, and 25% stocks.  That's not a PP.