Gyroscopic Investing

I've been following the PP discussion since the mega-thread on Bogleheads.  I had read some of Harry Browne's books back in the 1980s and thought his permanent portfolio looked a bit strange, although I also thought its simplicity and underlying basis were interesting.

I decided to take the plunge with a small test, so on May 4th I bought positions in the S&P 500 (VOO), Long-Term Treasuries (TLT), gold (GTU), and cash (SHY).  I added a bit more of each on June 3rd.

The three-month performance of my experiment has been extremely interesting, coincidentally ending on August 4th with the stock market downdraft.  I'm up about 3.25% over that period.  The stocks (obviously) lagged, but the performance of long-term bonds and gold more than offset that.  I also benefited from buying GTU at near-NAV, with GTU currently trading at a bit of a premium.  I tracked my mini-PP daily (indicating a self-acknowledged tendency to tinker), and the parts worked together exactly as advertised.  So I am going to slowly convert my mini-pp to at least a midi-pp.

There are a couple of issues I still need to get comfortable with in the Harry Browne PP.  While I think he is spot on with using only Treasuries for the cash and bond parts, Clive's discussions about using a 5-year ladder instead of the barbell make some sense.  Long-term treasuries do provide impressive performance in a deflation, but if the deflation is not sustained for a fairly long period then that out-performance is transitory. 

Another problem I have with long-term treasuries is that these are the only assets in the PP that one must sell (assuming you are holding individual treasuries).  I haven't worked out the math yet on having to sell under various interest rate scenarios (rising, falling, etc.).  But it does occur to me that when Harry was originally writing, interest rates on long-term treasuries were such that a ten-year holding period would have returned about the face value of the bond in coupon payments.  That isn't the case now, of course.

Anyway, I consider my experiment successful and educational.  Let's see what another three months brings.

Thanks to Craig and MediumTex for providing the forum and the great discussion.

Be careful - I don't think any treasury maturity shorter than 20 years would have saved you from the conditions of the last few days, or 2008 for that matter.

Chasing Amy... err Chasing yield is a tricky game.  Sometimes when you're picking up nickels in front of the steamroller you get turned into a pancake... 

Nice!

It's always interesting to see how we all slightly object to different parts of the PP. However, one nice thing about going Vanilla PP, is that you get a sense of comradery with all of us who are along for the same ride 

When you go all in, you might want to consider diversifying the gold a bit. I think a combination of GTU,GLD,IAU, and physical bullion is the safest course. I know the ETFs are slightly scary, but I would be more scared about having all of my gold with GTU as well as taking on the additional variability of premium/discounts to bullion.

I have brought this up before. Since HB's book was published in 1999, might the broad mkt mean today, if he was with us, saying it means the world? Well, anyway, are there thoughts on the board about buying this broader mkt to satisfy HB's 25% broad stock allotment?

I know I do not read all posts so if it has been well discussed just bear with me.

I think the broad market is not the world because that is bringing in lots of non-home country currency risk into the stocks.

But with that said, my stocks are about 20% Total Stock Market and 5% Total International. That's about as high as I feel like taking it. Many US countries have significant exposure to overseas markets already.

As for avoiding LT bonds, I've looked at the issue in many ways and ultimately I think the LT allocation works well enough that I wouldn't touch it myself.

Thanks for the replies.  I've penciled in 5% for international equity when I expand my PP.  I wonder how many PP users actually hold a "pure" 4x25 portfolio?

craigr wrote:As for avoiding LT bonds, I've looked at the issue in many ways and ultimately I think the LT allocation works well enough that I wouldn't touch it myself.

I do understand the power of LT bonds in deflation, but the need to rotate out of them periodically in the face of uncertain future interest rates (and bond values) is troubling.  In the LT Bond podcast (I think) the point is made that even if bonds (TLT) were purchased at the absolute highest price (December 2008), the PP would still be in the black today.  But that bond position would also still be showing a loss. 

I have thought that a combination of EDV and IEF might be a useful LTT equivalent.  An equal portion of each behaves similarly to TLT, and the volatility of EDV (and the relatively low volatility of IEF) might offer some rebalancing opportunities between the two funds that might boost returns somewhat.  Or maybe not.

Clive, that is a very interesting approach to retirement funding.  I've considered a split portfolio, half in TIPS and half in the PP, spending the income from TIPS and drawing the balance of spending from the PP half.  The point of your 30:70 split, with the 70 hopefully regenerating to 100 over time assumes the portfolio should last in perpetuity.  Although I'm going to give it my best shot, I don't plan on living that long  

craigr wrote: I think the broad market is not the world because that is bringing in lots of non-home country currency risk into the stocks.

But with that said, my stocks are about 20% Total Stock Market and 5% Total International. That's about as high as I feel like taking it. Many US countries have significant exposure to overseas markets already.

As for avoiding LT bonds, I've looked at the issue in many ways and ultimately I think the LT allocation works well enough that I wouldn't touch it myself.

What r ur thoughts on SHY vs short cd's as YTM on SHY is about 35bps with a1.75 duration that could be a negative impact if short rates ever rise.

Clive, I'm probably muddled about this but when they are really needed don't TIPs end up being traded at an above par price so that if bought at such times, they underperform the "conceptual TIPs" as you describe  for your historical back test? In the UK we have (sometimes) index linked savings certificates which are rationed to a certain amount per person and pay out inflation plus 0.5%. I totally agree that they are a  gift and using up the allowance is a no-brainer. Regular tradable index linked bonds aren't like that though are they?

Clive, in my household, I deal with the "non-cash" and my better half deals with the "cash" savings with, at the moment, 82% of the savings in cash (the ratio has been  easing from 100% cash). I would be very happy with that if the cash were in index linked savings certificates but it isn't . Index linked savings certificates were not available when I started thinking about what to do with our savings. When they became available again I was certain that we should make use of them but apparently they are going to come from our "non-cash allocation" . I'm not inclined to sell anything to get the ILSC but was planning to convert our 33:33:33 PP to being 25:25:25:25 with ILSC as the cash 25% and just have the other 82% cash as something I pretended didn't exist .

I also have a query about REITs for inflation protection. The inflation we have now in the UK seems different from that in previous decades because there is not wage inflation at the moment and there is an expectation for wages to continue falling as prices rise. I don't see how REITs can protect against such "stagnent wage currency slide inflation". Real estate in Iceland did not protect at all against the similar but much faster inflation of that type they have had there. It seems to me that, of domestic stocks, those that export to countries with rising currencies (eg Diageo?) are the best bet for our current style of inflation. Perhaps the backtests need to be extended back to 400AD and the fall of Rome or something.