Gyroscopic Investing

I am interested in the board's view on this hypothetical.

If you had to choose between the following 2 options for the next 20 years starting today, which would you choose?

1) A Guaranteed 5% annual return
2) Whatever the traditional 4x PP gives you

Where would you put your savings? Assume you have no other savings so you need this savings to be all that it can be in 20 years.

MangoMan wrote: ↑Sun Nov 08, 2020 11:22 am

jalanlong wrote: ↑Sun Nov 08, 2020 10:59 am I am interested in the board's view on this hypothetical.

If you had to choose between the following 2 options for the next 20 years starting today, which would you choose?

1) A Guaranteed 5% annual return
2) Whatever the traditional 4x PP gives you

Where would you put your savings? Assume you have no other savings so you need this savings to be all that it can be in 20 years.

Is that 5% nominal or real?

5% nominal.

The Permanent Portfolio has consistently produced (with no sign of fading) a real return of 4-5% a year over every 20-year period since 1970. I'll take that over the 5% nominal.

I was wondering with ST rates at 0 and LT rates at 1.54 if people still had confidence of that performance over the next 20 years.

jalanlong wrote: ↑Sun Nov 08, 2020 3:08 pm I was wondering with ST rates at 0 and LT rates at 1.54 if people still had confidence of that performance over the next 20 years.

simple answer is no one knows ....40 years of falling rates has created a very different environment never seen before in the modern investing world .

jalanlong wrote: ↑Sun Nov 08, 2020 3:08 pm I was wondering with ST rates at 0 and LT rates at 1.54 if people still had confidence of that performance over the next 20 years.

No question, the Fed has intended for its Zero Interest Rate Policy (ZIRP) to lower the entire Treasury yield curve, end-to-end, since 2008.

Despite 12 years of non-stop ZIRP, the shape of the yield curve is still "normalized," with a uniformly upward sloping from 3 month T-bills (0.09%) to 30 year T-bonds (1.70%). I should add here that periods of negative real returns on Treasury securities are not unusual at all, if that is what concerns you. The effect of negative real returns on Treasurys seems largely to have been an unprecedented boom in the stock market.

jhogue wrote: ↑Mon Nov 09, 2020 8:43 am

jalanlong wrote: ↑Sun Nov 08, 2020 3:08 pm I was wondering with ST rates at 0 and LT rates at 1.54 if people still had confidence of that performance over the next 20 years.

No question, the Fed has intended for its Zero Interest Rate Policy (ZIRP) to lower the entire Treasury yield curve, end-to-end, since 2008.

Despite 12 years of non-stop ZIRP, the shape of the yield curve is still uniformly upward sloping from 3 month T-bills (0.09%) to 30 year T-bonds (1.70%). I should add here that periods of negative real returns are not unusual at all.

That was sort of the reason for my poll. What is the confidence level that over the next 20 years the PP will beat a 5% return?

jalanlong wrote: ↑Mon Nov 09, 2020 8:44 am

jhogue wrote: ↑Mon Nov 09, 2020 8:43 am

jalanlong wrote: ↑Sun Nov 08, 2020 3:08 pm I was wondering with ST rates at 0 and LT rates at 1.54 if people still had confidence of that performance over the next 20 years.

No question, the Fed has intended for its Zero Interest Rate Policy (ZIRP) to lower the entire Treasury yield curve, end-to-end, since 2008.

Despite 12 years of non-stop ZIRP, the shape of the yield curve is still uniformly upward sloping from 3 month T-bills (0.09%) to 30 year T-bonds (1.70%). I should add here that periods of negative real returns are not unusual at all.

That was sort of the reason for my poll. What is the confidence level that over the next 20 years the PP will beat a 5% return?

Whenever I doubt the bonds, I look at Japan 30Y bonds : https://tradingeconomics.com/japan/30-year-bond-yield. Like looking into the future.

We are not Japan

mathjak107 wrote: ↑Fri Nov 13, 2020 12:31 pm We are not Japan

Really ? We aren't ? Of course we aren't exactly like Japan...

My point was yield can still go lower on the 30Y and I wouldn't be surprised to see the Fed buy equities in the next crisis like BOJ did.
I am not saying the conditions are the same here as they are there, but the central bank actions are very similar.

You disagree with that ? Now care to elaborate your point ?
Thanks

jalanlong wrote: ↑Mon Nov 09, 2020 8:44 am

jhogue wrote: ↑Mon Nov 09, 2020 8:43 am

jalanlong wrote: ↑Sun Nov 08, 2020 3:08 pm I was wondering with ST rates at 0 and LT rates at 1.54 if people still had confidence of that performance over the next 20 years.

No question, the Fed has intended for its Zero Interest Rate Policy (ZIRP) to lower the entire Treasury yield curve, end-to-end, since 2008.

Despite 12 years of non-stop ZIRP, the shape of the yield curve is still uniformly upward sloping from 3 month T-bills (0.09%) to 30 year T-bonds (1.70%). I should add here that periods of negative real returns are not unusual at all.

That was sort of the reason for my poll. What is the confidence level that over the next 20 years the PP will beat a 5% return?

The PP being a real-return portfolio, its performance will depend on inflation. About 4-6% ahead of inflation, if you believe past performance.

I would ask this question a different way. What is YOUR confidence level that over the next 20 years, inflation will remain at or below 1%?

My answer to that question: NONE WHATSOEVER. I am sticking with the PP.

We're kind of back to the reasons why the GB makes sense as one possible evolutionary iteration of the PP. The PP allocates equal percentages of assets to address different macroeconomic challenges that aren't equally likely to happen and don't cost the same to insure against.

LTT's are for deflation, the least likely situation and the most costly to insure against. They've looked great anyway because of a decades-long bond market tailwind but with negative real yields they're only going to keep looking good if we really do see Japan-like stagflation. William Bernstein and others have already done a good job of explaining why this is unlikely.

As Tyler has shown cash is surprisingly helpful in combating inflation but a paltry 25% in all-U.S. TSM equities isn't likely to help much. Gold is for SHTF insurance and (as, again, Tyler has brilliantly explained) while it's not an inflation hedge does do very well during times of low interest rates and money printing.

I think if you'd asked about the PP vs. a 5% real return you might have gotten a few folks to make a different choice.

Kevin K. wrote: ↑Sat Nov 14, 2020 1:28 pmI think if you'd asked about the PP vs. a 5% real return you might have gotten a few folks to make a different choice.

Definitely. That one I'd take the guarantee for sure. But a more interesting question would be a guaranteed, say, 3% return. Tough one.

I'd take a 5% guaranteed real return any day, because the PP does just about that well but with some ups and downs.

However I don't think such an investment exists. If anyone knows of one please post it here!!

It won't let me select poll but I will take the 5% nominal.
I would probably even take 3% nominal.

20 year treasury is at 1.4%. How wrong can the buyers of 20 year treasuries be?

Scary to think growth will be so low though.

Edit: I just checked. 20 year treasury was almost 7% 20 years ago. Put that in context of previous 20 years.