Gyroscopic Investing

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Clive, I avidly read all your thoughts and backtests as they cover ground so thoroughly with number crunching to back everything up.

I can't help wondering though whether if your recommended variations to the PP are collated over a five year period and then a consensus weighting is built from that; does that give a recommendation for 25%:25%:25%:25% ?
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Clive wrote: I think we're quite fortunate in the UK as potentially a couple might build a tax efficient $1M portfolio relatively easily. Above that however

Hi Clive, what creates that $1M ceiling in the UK past which tax efficiency becomes difficult?  I'm not well-versed in UK tax law.

From the historical performance stats I've seen aren't the PP returns already pretty close to the stock market's return over the long term? In which case, is the goal of the tweaks to do the near impossible and beat the market (consistently)?  Or is there some other benefit I'm missing?

T

Clive wrote: The bottleneck is tax efficiencies on the cash component. After about 150K GBP cash (i.e. 600K GBP/1M USD total PP) of tax exemption via something similar to IBonds you start entering negative real return territory on those cash holdings.

That's a handy exemption!  Does that apply only to government bonds or to interest \ dividend income in total?

This is sort of the direction that I'm gravitating to.  Not necessarily that exact asset allocation formula, but I do think that you can have a wider, more diversified portfolio, that has higher returns and similar volatility to the HBPP.  Possibly lowering gold and cash, and adding some EM stocks/bonds as well as Reits, Tips, etc but staying within the same relative framework of Harry Browne is likely what I will do eventually for my HBPP portion of investable funds.

Paul Boyer asked a similar question last year...

http://madmoneymachine.com/2010/10/11/p ... ome-stock/

...but he seems to think 25% makes a lot of sense.

You gotta own some stocks, but how much? I took the Paul Boyer Permanent Portfolio and varied the percentage of stock ownership from 0% to 100% in 5% increments while keeping gold, long term bonds, and cash divided equally among the remaining amount. Then I plotted each portfolios return vs. risk for 1975 through 2009. Take a look at the resulting graph. It turns out that portfolios with less than about 25% stocks were generally the same level of risk or even (surprise) a higher level of risk than holding 25% stock. Each of the numbered portfolios P0 through P100 split their stock ownership between Small Cap Value (VISVX) and Emerging Market (VEIEX). I also plotted the pure Harry Browne Permanent Portfolio and a simulated PRPFX.

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It looks like Harry Browne was really onto something with his recommendation of owning 25% in stocks.

Source: http://madmoneymachine.com/2010/10/11/p ... ome-stock/

...And Harry Browne got this question on his radio show once. He said that if we knew which asset was going to do the best over the long run, he would just only invest in that one winning asset. But, since it's impossible to know, he just left them as equal — since there's an equal chance of each asset winning.

I think it's also important to remember that 25% is just a starting point. Most people's PPs don't look anything like 4x25 after a few months anyway.

Clive wrote: Our Index Linked Savings Certificates (like IBonds ?) typically pay 1% real returns, tax free. The most recent issue however was at a 0.5% real rate as they've made them less attractive in the hope of prolonging the issue. Any individual over the age of 7 can buy into ILSC's, but only to around a £15,000/$24,000 amount per issue. Generally a ladder of 5 such issues (5 year ILSC ladder) with a couple maxing into such = £150,000/$240,000.

Yes, that's almost precisely like I-bonds.  You've got larger limits, though, and our I-bonds are paying 0% real!

Those are some really nice options for the UK PP.  Thanks for the lesson.

Clive wrote: Out of interest, do you see the GBP £ symbol - or a hash or some other character?

Nope, looks good here!  British money thingie on my screen. 

Cool, so sounds like even if you went with a variant where you did 10% cash, 40% Gilts (great name), then 25% gold, 25% stock would still give you the same high level of tax efficiency then, right?

Impressive.  If or when interest rates climb, this tax efficiency for the cash\bond portion would come in handy.

What are the tax consequences of a realized gain in gold in the UK?  (Meaning you needed to sell a gold coin.)  IIRC, do you pay... no tax at all??  In the United States, you wind up paying a higher rate for gold gain in many circumstances (depending on your tax bracket and whether you can offset the gain with some other capital loss.)

Lone Wolf wrote:
What are the tax consequences of a realized gain in gold in the UK?  (Meaning you needed to sell a gold coin.)  IIRC, do you pay... no tax at all??  

Fear not for Caesar he doesn't starve, the UK PP just sits in his blind spot (for now).

You have to register to purchase more than £5K of physical gold, so he knows where to find you.

Clive wrote: Out of the 25 Lazy Portfolio's tracked in Simba's Backtest spreadsheet the PP came last for annualised gains. Over a 40% difference between the best (Ultimate buy and hold) and worse (PP) annualised gains.

...so I was missing something! Thanks for the info Clive.

Tim.

tbone wrote:

Clive wrote: Out of the 25 Lazy Portfolio's tracked in Simba's Backtest spreadsheet the PP came last for annualised gains. Over a 40% difference between the best (Ultimate buy and hold) and worse (PP) annualised gains.

...so I was missing something! Thanks for the info Clive.

Tim.

I guess applying that best performing portfolio to Iceland in 2008 would have led to a wipe out. What appeals to me about the PP is not that it did especially well for say the UK from 1975-2011 but rather that it coped for Japan 1989-2011, Iceland 2000-2010 etc etc. I just want to preserve the purchasing power until we need it and realize that historically people have tended to need their reserves most when times are worst.

Clive, its true though isn't it that an Icelandic 60:40 stock:bond portfolio would have fared very badly as would an Icelandic 70:10:10:10  cash:stocks:LTT:gold? Would any popular  portfolios have coped anywhere near as well as the PP? Even Icelandic farmland would have been little use if you had been made unemployed and wanted to sell up to emigrate.

Clive wrote:

stone wrote:(PP) coped for Japan 1989-2011

Based on a Japanese PP that held the longest term treasuries of 20 years upwards between 1989 to 2002 inclusive (14 years), the PP barely kept up with inflation. If you were relying upon it to provide say an inflation uplifted 4% retirement income you'd have drawn funds down significantly over those years to near all-spent (inflation averaged just over 1% p.a over those years). The PP was worse than even a simple money market.

But Clive, what should a Japanese investor have done over that period? If you compare the Japanese PP with what every other Japanese investor had, those who went with the PP would have come out on top by far. A Japanese PP would have done far better than 100 per cent Nikkei stocks which still haven't recovered two decades plus later.

I think we as investors have a tendency to look at an investing strategy and look solely at returns. If you look at how it did in certain environments compared to other portfolios then you get a better picture of its abilities.

Clive I don't think anyone living in Japan at that time would hold the portfolio you suggest. Most people would have been caught up in the irrational exuberance of the time and would have been 100 per cent in equities. This is how stock bubbles form, with most of the population invested solely in stocks and caught up in hysteria. If you consider the fact that Japanese society frowns upon odd contrarian behavior, anyone who was invested mostly in treasuries and money markets would be seen as a lunatic.

The danger with backtesting is that you can find any bizarre combination of stocks and bonds that would outperform anything. But is it realistic that someone would have held that? You need to see that the stock market moves up and down not because of mathematics and probability but because of the group psychology of investors at the time. This is why backtesting is largely useless for predicting future returns.