Time To Overweight Stocks? (perhaps in VP)

[TripleB]

This economic climate makes me wish I had a separate VP set up to overweight stocks. The last few weeks have been very dramatic, with gold and LTTs going up together, and stocks going down significantly.

However, due to the structure of the PP, when 50% of the portfolio goes up (Gold and LTT) and 25% goes down (stocks), you still make money.

How about when the reverse starts to happen? Stocks start to go up but LTTs and Gold go down as people pull money out of them and into stocks.

The only reason why LTTs or Gold are worth anything is because of supply and demand. The more money flowing into them, the higher the market price is. The more money leaving, the less the market price is. Since both have been considered safety havens the last few weeks, it seems plausible to believe that once the economy recovers, both will go down together at the same time.

Thus, if I was willing to screw with my PP, I would do something like 40% stocks, 20% gold, 20% LTT, 20% cash. - This leads me to believe if I had 20% of my portfolio designated as VP, then I could do 20% VP = 100% stocks, and then 4x20% for the other 80%.

I can't imagine an environment where I would want to overweight any one asset by more than 40% because that would make things too risky. Thus, I think I have established a 20% VP as a good goal for myself.

Since I really like the PP most of the time, I would just do the PP within that 20%, and make my whole portfolio as 4x25% during most periods. However, when I see an opportunity, I might pull out the 20% as a dedicated VP, isolate that money in my imagination so if I lose it, I don't start stealing from the rest of the PP. Once I decided I juiced my returns enough by beating the market (or lost enough due to bad decisions), then I put that VP back into the PP, and go 100% PP again.

How does that sound as an option?

[Gumby]

it seems plausible to believe that once the economy recovers, both will go down together at the same time.

What makes you think the economy is going to recover?  :)

But, in all seriousness, the rebalancing bands already take care of this. Gold and LTTs would go down by a factor of 20%, 40% or 50% and stocks would likely double or something along those lines.

But, truthfully, it's unlikely (though not impossible) to happen anytime soon. Most people seem to think another recession is brewing on the horizon. The only question is how severe it will be.

[MediumTex]

The only reason why LTTs or Gold are worth anything is because of supply and demand. The more money flowing into them, the higher the market price is. The more money leaving, the less the market price is. Since both have been considered safety havens the last few weeks, it seems plausible to believe that once the economy recovers, both will go down together at the same time.

But how do we know when the economy is going to recover?

Typically, after a credit fueled asset bubble bursts, it takes many years for the underlying economy to return to health.

If/when the economy recovers and stocks take off, I'm sure that stocks and t-bills will keep the PP humming along just fine.

Until, however, stocks break through their levels from 10 years ago, I'm not going to be all that impresed with the stock market.

[TripleB]

If the economy doesnt recover then where will the money that is currently pumped into gold and LTTs go? People will have to sell their LTTs and Gold to pay for food, if the economy never recovers.

Also, in my scenario, being 40% stocks, 20% gold, 20% LTTs, means that if stocks go down, then LTTs and Gold will go up, and using these ratios, you still wont be losing money because you're 40% gold/LTTs to your 40% stocks.

My basic argument is that in the short term, gold and LTTs will likely remain highly correlated, and the PP is based on holding uncorrelated assets. If all 4 assets in PP were correlated they could drop at the same time. PP works due to the fact that they aren't. When assets start moving in lock-step, like CCFs and Stocks and REITs did in 2008, you lose diversification abilities.

Since gold and LTT are becoming closely correlated, it seems reasonable that in the short term, if one wanted to make a bet within the VP, it would be to overweight stocks.

[MediumTex]

If the economy doesnt recover then where will the money that is currently pumped into gold and LTTs go? People will have to sell their LTTs and Gold to pay for food, if the economy never recovers.

"Recovers" is sort of a fluid term.  There are many different ways that an economy can stay sick for a long time.  See the 1970s and 1930s for two examples of different kinds of broken economies.  Even in the 1930s when people desperately needed money there was still enough demand for t-bonds tht rates stayed very low.

[Gumby]

If the economy doesnt recover then where will the money that is currently pumped into gold and LTTs go? People will have to sell their LTTs and Gold to pay for food, if the economy never recovers.

Most average Americans don't have their money in Long Term Treasuries or Gold. If they did, they'd be worth a lot more than they are right now. Most average Americans are largely in cash.

My basic argument is that in the short term, gold and LTTs will likely remain highly correlated

I wouldn't say they are highly correlated. They have some correlation during US market hours. But gold is a 24/hour market and makes giant moves that are unrelated to Long Term Treasuries during off hours. Gold has been moving much more violently than Long Term Treasuries over the past few days.

If all 4 assets in PP were correlated they could drop at the same time.

There is no evidence that all four assets would ever be correlated (other than during a severe recession, which is terrible for stocks). The markets would have to be pretty messed up for that to happen.

When assets start moving in lock-step, like CCFs and Stocks and REITs did in 2008, you lose diversification abilities.

Not sure I see your point. No asset is safe in that situation. Most of 2008 was a terrible time to be overweight in stocks.

Since gold and LTT are becoming closely correlated, it seems reasonable that in the short term, if one wanted to make a bet within the VP, it would be to overweight stocks.

That doesn't sound reasonable at all. What if we have a 20-year Nikkei situation in front of us? You'll need all the deflationary help you can get.

Gold has been accelerating much more strongly than Long Term Treasuries in recent days. The two assets are not in lock step. And keep in mind that if LTTs and Gold both continue to strengthen, they will cause you to hit a rebalancing band and take some large profits off the table. For both Gold and Long Term Treasuries to crash we would need a sudden jackpot of prosperity or a flight to cash. The idea that stocks are going to emerge as the winner over the next year or two is a bit overly-optimistic given the huge problems and demographic headwinds we face.

The economy is at stall speed, and on the verge of possibly having another recession. Perhaps we'll have another round of QE and stocks will surge, but that would only push Gold even higher.

[Storm]

Overweighting stocks must mean you can predict the future with a certainty.  This pretty much goes against all of the rules and philosophy of the PP.

It's just as likely that we have another 2008 type scenario as we have a 2009 type scenario.  I would say the 2008 scenario is probably more likely due to the fact that we have to worry about insolvent banks on two continents instead of just one.

[rickb]

Since I really like the PP most of the time, I would just do the PP within that 20%, and make my whole portfolio as 4x25% during most periods. However, when I see an opportunity, I might pull out the 20% as a dedicated VP, isolate that money in my imagination so if I lose it, I don't start stealing from the rest of the PP. Once I decided I juiced my returns enough by beating the market (or lost enough due to bad decisions), then I put that VP back into the PP, and go 100% PP again.

How does that sound as an option?

Rather than view this as "taking" 20% from your 100% PP, what you're basically saying is you only want 80% of your (current) assets in your PP.  In your 20% VP you can do whatever floats your boat.  If what makes you happy is to typically split your VP 25/25/25/25 and occasionally take it all and bet it on black at a roulette table, go for it.  But - if you lose it all you're now 100% PP and MUST replenish your VP from other sources.  Don't confuse yourself into thinking what you're doing with your VP, whatever it is, has anything to do with your PP.  As long as you keep your PP and VP permanently (!) separate, and never transfer anything in the direction of PP to VP, you're perfectly within Browne's recommendations.

Of course, maybe you're asking whether folks here think this is a reasonable way to run a VP, but since you posted this in the PP topic area you're getting responses saying this is a bad idea (and, indeed, it's not a good way to manage a PP since it presumes you're able to predict the future).  If you're able to consistently match and occasionally beat the PP in your VP (by whatever means), it's a fine strategy.    I suspect most folks here would caution that outperforming the PP is extremely difficult.  Of course, maybe you're a 1 in 1,000,000 market savant able to consistently pick market tops and bottoms.

[Gumby]

Here's an interesting viewpoint I just came across:

Fear and Fear

Correlations are breaking down, and each asset class seems to be trading more and more in its own little world.  Sometimes retaining old correlations and other times moving counter-intuitively.  Each of those markets now seem to be driven primarily by fear.  The markets have been split into two camps, those that are afraid of rallies and those that are afraid of sell-offs.  The breakdown of many correlations is making it harder to hedge or to balance portfolios.  It is adding the broken feeling in the market.

Normally the markets are portrayed as a battle between fear and greed, but more and more it looks like greed left town and all we have is fear.  Fears of rallies, fears of sell-offs, and fears that someone knows something that you don't, fears of jobs, fears of tap on the shoulder, fears on redemptions, fears that the summer is almost over and you didn't enjoy it, and worst of all, the fear that your starting quarterback will be injured and the team will sign Brett Favre.

Source: Fear and Fear

I wasn't tracking the PP in 2008, but I imagine that the asset correlations broke down that year as well.

[Lone Wolf]

I'd say just keep it simple and only "play" in this way with your Variable Portfolio.  If you've got "money you can afford to lose", that might be a great way to place a bet on stocks.

I'd leave the Permanent Portfolio alone.  It works well just like it is IMO.  Any predictions about what the future holds are VP situations.  I really can't think of any exceptions to that guideline.