Gyroscopic Investing

I'm just curious if any of you ever worry that one day the pp will stop working? is it possible? And if so then what would we do? What do you think the weak link might be? If any one of the four investments became uninvestable for some reason I guess the ride would be over..

I don't worry about stuff I can't control. I'll deal with it when it happens. All I know is that other approaches I've used or studied have had significantly worse vulnerabilities over the Permanent Portfolio so they don't offer better solutions.

Investing is not a science. We can only diversify as best we know how and try to deal with the unexpected when it happens as best as we can.

My attitude comes from running or being involved in start-ups. There are just so many things that can go randomly wrong that you'll go nuts trying to plan for all contingencies. Even worse, what you think can happen almost never does. What usually happens is a total and unexpected surprise. So it's best to have a flexible attitude to deal with problems when they show up instead of Plan A, Plan B, Plan C, etc. Because those plans go totally up in flames when they collide with reality. IMO.

Do you have a second favorite investment strategy to HBPP

mandynshane wrote: Do you have a second favorite investment strategy to HBPP

Yes. I invest in my own companies and other start-ups. Either with actual money or my own personal time which is my most precious commodity. For most people this would be investing in themselves and their career. I believe this is the best investment you can make.

But other than that I don't really like the other investment strategies I've seen. They all have a lot of uncompensated risks.

If, god forbid, something happened that made the PP not function, or something happened that made my job disappear, I think I would become self employed and start my own company.

The tax breaks for being self employed are tremendous in this country.  You can write off almost everything - a portion of your mortgage/rent, utilities, etc, for home office.  Lease of a company vehicle, etc.

But, what is the best thing about being self employed is the SEP - Simplified Employee Pension.  You can contribute up to $49,000 of tax-free income.  This is huge compared to $16,500 401k limits.

If you were self-employed and only took in $75,000 annually in income - you could contribute $49,000 and lower your tax bracket to only $26,000.  With all the other write-offs chances are you wouldn't even pay a single cent of income tax.

I think the US tax code is great for small business owners.  Even self employed professionals that work on a 1099 basis have a great thing going for them.

Storm,

Except for SE tax, I'd agree with you... the marginal tax bracket for a small-business owner bringing in $50k per year (Single) is about 45% including state taxes.

moda0306 wrote: Storm,

Except for SE tax, I'd agree with you... the marginal tax bracket for a small-business owner bringing in $50k per year (Single) is about 45% including state taxes.

Where did you get that figure?  Maybe if you pay yourself 100% of your corporate income as a salaried W2 employee, where you pay both parts of social security/medicare/medicaid taxes, I could see that, but if you're smart you're going to pay yourself a very small salary and the rest will go towards legitimate business expenses like office space, transportation, marketing, "business" lunches, etc.

Federal Ordinary Rates for a mid-income person: 25%
State rate estimate: 5%
SE Taxes for FICA & Medicare: 7.65%x2

25+5+7.65+7.65=45.3%

Of course, since the 5% and one of the 7.65% are tax-deductible for federal purposes and both federal and state purposes, respectively, it pares back a bit, but you get the idea.

mandynshane wrote: I'm just curious if any of you ever worry that one day the pp will stop working? is it possible? And if so then what would we do? What do you think the weak link might be? If any one of the four investments became uninvestable for some reason I guess the ride would be over..

I think a lot of people tend to bail when gold and treasuries sink, and the perception that the pp has stopped working (when it hasn't) is more dangerous.
I guess some people used to worry that 30-YR treasuries would never come back*, but they did.
Perhaps there are fears that gold will become 'uninvestable'.
I'm 40, and I don't see any problems happening in my lifetime. I'm just very grateful that I discovered the pp when I did.

*"come back": read: 'be issued at all', not 'rise in price'.

I'm worried that gold and treasuries will sink in the short term, and stocks will not make up for that.  See, e.g., today.

dragoncar wrote: I'm worried that gold and treasuries will sink in the short term, and stocks will not make up for that.  See, e.g., today.

When you say "in the short term", I assume you are not talking about just one day, right?

These relationships have held pretty steady for several decades now--i.e., a winner will typically go up much more than a loser will fall, since losers CAN'T fall more than 100%, while winners routinely rise several hundred percent.  However, these relationships are not going to necessarily be present every single day.

The PP is down .29% today.  I like to think that this is a degree of volatility that any of us could handle.

Yeah, I mean more than one day-- the gold chart is scary.  I'm fine sticking with the allocations, but part of me is still trying to predict.

I was going to post "my pp is down .5% today, should I sell??" but I didn't want to start a flame war

dragoncar wrote: Yeah, I mean more than one day-- the gold chart is scary.  I'm fine sticking with the allocations, but part of me is still trying to predict.

I was going to post "my pp is down .5% today, should I sell??" but I didn't want to start a flame war

Gold is just inversing stocks. Take a look.

...Even more the reason to stay with the PP.

It would scare me more if gold didn't pull back a little at some point. 

I have my money invested in a PP and I see two potential vulnerabilities (both of which have been discussed extensively in this forum).

The first vulnerability is under performance due to repeatedly re-balancing into an asset class that that is undergoing a secular collapse. An example of this issue from the past is what happened with gold. As has been pointed out many times in this forum, the PP still did fine despite the gold drag, but for many years it lagged the performance of a standard 60:40 stock:bond portfolio. A possible future issue might be a collapse of the long bond in an environment of severe inflation. To me the best way to deal with this issue is to resist the urge to check performance frequently, and therefore avoid the temptation to re-balance too frequently or too soon. As I recall Harry Browne suggested looking at performance once per year or when financial news indicates something really dramatic has occurred. My personal rule is that apart from the once a year checkup I don't look unless financial asset prices appear in an article above the fold on the front page of my local newspaper. Buying the losers is one of the reasons the PP works, and the PP survived the 1980's gold price collapse, so the PP will probably be okay even when long bonds finally take their plunge.

The second vulnerability is a bigger picture issue. The PP is a relatively low-risk/low-reward investment strategy. Low-risk/high-reward strategies don't exist, so you have to make a choice whether you are going for broke or playing it safe. If you are playing it safe (which I think is logically the superior strategy) by investing in a PP then you aren't going to get a huge return from your investments. That means you need to be frugal and save a much greater proportion of your income during the accumulation phase of your life than most people you may know are doing. I recommend two books for perspective on this issue. One is a recent book called "Stumbling on Happiness" by Daniel Gilbert. The other is about 10 years old called "Die Broke" by Stephen Pollen.

cowboyhat,

If the PP is low-reward, and has had a historical return-rate of 10% annually, then what's high-reward?

Stocks, with not even 1% higher CAGR?

I'm not saying the PP will continue to have the returns it's had in the past, but to call it flat-out a low-reward strategy is a pretty strong critique, IMO.

I see the PP as having phenominal risk-adjusted returns in the past, and maybe even into the future.

Moda,

I believe that markets are somewhat efficient, by which I mean that I do not believe there are any simple (availible to retail customers) ways to routinely extract more from them than the average investor. I came by this belief from reading A Random Walk Down Wall Street by Burton Makiel and from listening to the lectures from Robert Shiller's excellent class on finance (availible for free at his Yale University website). And I think Harry Browne came to the same conclusion.

If you believe that markets are essentially efficient for practical purposes for retail customers, then it is a short logical journey to the concept that risk and reward are just two sides of the same coin. So it seems to me, that either the PP is risker than past performance predicts, or long term performance is lower. The data set for making estimates of either risk or reward is pretty limited, so we are left with guestimates. My guess is lower performance, but maybe that's wishfull thinking on my part.

A bigger question for me is whether or not there is any point at all in trying to maximize investment reward so long as all the risk the investor accepts is adequately compensated. If you consider all possible risks, the PP seems to be the strategy that comes the closest to a risk minimum. My point gets back to Harry Browne's first rule that your wealth comes from your career not your investing. I don't see the logic of taking any unnecessry investment risk.