Gyroscopic Investing

Hi All,

So I've got a favor. I've recently implemented the PP and I've started to have a bit of buyers remorse and need some fellow investor consolation.

Prior to using the PP as my allocation strategy, I structured our portfolio based on Bogle principles and strategies more heavily weighted towards equity as I'm more than 30 years from retirement. I came across CraigR's website, the discussion on Bogleheads, and devoured Harry Browne's info. I read his book Fail Safe Investing, and listened to nearly all his radio shows. The more I listened the more I understood and dug his PP philosophy.

However, I find myself now trying to reconcile the PP with my past portfolio structure. I say this because - since I'm at least 30 years from retirement - I'm a little concerned that a PP allocation strategy may not grow my retirement account sufficiently in order to be able to retire.

I understand the concept of the PP, but am struggling to feeling comfortable that it can grow the portfolio sufficiently. For instance, the PP is less weighted towards equity and more towards bonds (if you use the LT and ST T-bills). But based on Jeremy Siegels data going back quite a ways (200 years), stocks outperform bonds 100% of the time over 30 years.

http://www.fool.com/investing/general/2 ... rfect.aspx

Also, regarding the Gold portion, Gold seems to under perform other assets as well.

http://www.fool.com/investing/value/201 ... -gold.aspx

Given the lack of equity, is the PP really a viable option for someone in the accumulation phase 30+ years out? I know CraigR has documented the pretty good CAGR of the PP, but still not sure.

Don't get me wrong, I still dig the PP and Harry Browne. But perhaps I should implement it at some point later a little closer to retirement? And yes I know that we don't know what will happen, and that's one of the many advantages of the PP, but given the 200+ years of data that's pretty darn good to go off of.

Any thoughts?

-b

Being a junior expert (or senior novice) myself I will leave the heavy stuff to experts and will try to answer in simple terms:

You are not alone. I'm a tad closer to retirement than you (less than 30 years) and always keep these concerns in mind. That's why HB suggested VP in addition to PP. A very important point here is to divide the money you can't afford to lose (PP) and money that you invest more "adventurously" in hope of a better return (VP). I realize that it's simpler to have one portfolio, but it is very dangerous because you expose ALL your money to much bigger volatility.

I would recommend to look at the numbers: how much money you have in your current retirement portfolio and how much money you can add annually. Then you need to determine the $ amount (both the current balance and annual contributions) you ABSOLUTELY CAN'T lose and invest it as your PP. The rest will go to your VP. You can do a simple math or run some Monte Carlo simulations (which many brokerage firms now offer for free) - it's up to you. But keep in mind, that all these things are backward-looking.

A very rough starting point (actually this was discussed here by someone else) could be to do 5x20%, that is 2 buckets would go to stocks and the rest to gold, cash and LTT. So what we have is 80% of the total portfolio in PP and 20% in VP. What you do with VP is up to you: some people use it for international stocks, or dividend stocks, or you could slice-and-dice it in any way you want. Of course, it all depends on your risk appetite and many other factors - your actual VP could be much smaller (say 5%) or bigger than 20%.

Again, as you get all excited with your VP you should always keep in mind that you can lose some or all of it. Or you could get some nice gains, but it's better to consider them an icing on the cake named PP.  ;) From the personal experience: before I discovered and embraced PP I sliced-and-diced like crazy trying to find "the perfect allocation" by "marrying" Merriman's portfolio with Swensen/Ferri/Swedrow etc. Now I sleep much better and don't look at the markets daily knowing that PP - a conservative portfolio - won't fail me.

The relatively large portion devoted to bonds, and cash in particular, is one thing that made me immediately want to modify the PP.  When I found it I was actually in the process of converting to the "own your age in bonds" approach.  Being less than 50, the PP seemed a bit conservative for someone my age.  But after doing more research and studying the risks involved with an equity-heavy portfolio I became more comfortable with the PP approach.  I also did not want to take the risk of another "lost decade" where stocks provided little or no real return, even if it did cost me some potential upside.

Currently I am reading a great book by Jim Rodgers and one of the things he said in it was how important it is when investing to NOT lose money as it can completely destroy the magic of compounding.  This sounds obvious but I think it is a great piece of advice that is lost on many people, including (or perhaps, especially) so-called investment advisors.  While no investment can guarantee you won't lose money, you are certain to go through many ups and downs in the stock market and you never know which side you are going to land on when you need the money.  Having significant chunks in assets that can move inversely or not at all to equities smooths out the ride and may result in the same or better return as more stock-heavy investments.  As craigr said in another post, don't get hung up on returns of one particular component. The PP is a package, it doesn't matter which asset is driving the portfolio.

Personally I think a young person would be well-advised to follow the PP fully, but I understand not everyone warms up to the idea completely.  My advice would be to keep a pure PP and if you want allocate a little more to the VP where you can try other strategies.  Maybe use a 401K for the PP and an IRA for the VP, for example.  Bottom line is do what is comfortable to you.

Bonafede wrote:However, I find myself now trying to reconcile the PP with my past portfolio structure. I say this because - since I'm at least 30 years from retirement - I'm a little concerned that a PP allocation strategy may not grow my retirement account sufficiently in order to be able to retire.

If you feel uncomfortable with any investing strategy you don't need to implement it for 100% of your portfolio. In the Permanent portfolio strategy you also know there is a variable portfolio. If you think you need to own more stocks, and can do it with money you can afford to lose, then by all means buy more stocks and use the permanent portfolio as your core foundation. Nobody's feelings will be hurt.

I understand the concept of the PP, but am struggling to feeling comfortable that it can grow the portfolio sufficiently. For instance, the PP is less weighted towards equity and more towards bonds (if you use the LT and ST T-bills). But based on Jeremy Siegels data going back quite a ways (200 years), stocks outperform bonds 100% of the time over 30 years.

Let me be blunt: Siegel's data is ridiculous.

Nobody invests on a 200 year time horizon for personal retirement reasons. Your investing timeline is more like 20-40 years. So while it may be nice to be able to wait out 10+ years of market underperformance because you have a 190 year timeline, the reality is that people can't do this.

Secondly look back over this 200 year period. How many of those companies he cites are still in existence? How many investors could have really captured those prior returns to the degree Siegel states? I'll tell you: NONE. That's how many. It's all 20/20 hindsight.

Further, over the prior 200 years in the US you had two major world wars, a massive depression, bad inflation, a civil war, War of 1812, some minor rebellions up north and the collapse of the early continental currency (among others). It's fine and dandy that things worked out along the timeline that Siegel plots out, but I wonder how the investors in the Confederacy managed? Or how about investors in Germany during the early 20th Century?

I say the above because history is replete with examples of things not going according to plan. Wars. Market crashes. Rogue governments. Etc. Things happen that we can't predict and thinking that you can just buy stocks and be OK is a preposterous idea for the individual investor.

I can look back over the past 80 years and find decade long stretches where stocks did quite poorly. I can also find periods where bonds did quite poorly. Likewise for gold. At any time there is something in the doghouse. Now it may be that an investor just happens to pick the right asset to concentrate their wealth in and things go great (say buying stocks in 1980 and selling out in 2000). But really this is not a good plan because we just don't know what is going to do best.

http://www.fool.com/investing/general/2 ... rfect.aspx

I read this article. He is referring to the Permanent Portfolio fund which does overweight inflation assets and this can impact performance in bull stock markets. However, I think that the Motley Fool is predominantly a market timing and stock picking site and they are always going to recommend being stock heavy (using their newsletter subscription of course to pick the winners).

Also, regarding the Gold portion, Gold seems to under perform other assets as well.

http://www.fool.com/investing/value/201 ... -gold.aspx

I should write an article on gold the way I see it because I understand the confusion.

Here's the short rundown. There are two primary kinds of assets in a portfolio:

1) Those that grow money.
2) Those that keep money.

Assets that grow money are stocks and bonds. They can generate returns from growth of company profits and interest payments. Pretty straightforward. However sometimes the plan has some hiccups and it takes time for the growth to happen due to starts and stalls.

Assets that keep money are those that can be relatively stable (like cash) or those that have a history of surviving pretty catastrophic financial events with the same purchasing power more or less (like gold).

When the "grow money" assets are doing great it's a fine time to use those profits to buy some "keep money" assets. This is because history shows that the grow money assets are eventually going to hit a snag. Sometimes these snags can be really nasty (like bad inflation) and wipe out much wealth very quickly. This is where the "keep money" assets come in. Your keep money assets can be harvested in bad times to buy grow money assets at deep discounts.

Over time, this combination of having money between grow money and keep money can keep the portfolio profitable. Yes, this even happens with assets like gold that over time are expected to not have any growth over inflation. This is because gold prices vary up and down depending on market sentiments and by rebalancing you are able to capture these returns when it is to your advantage.

Given the lack of equity, is the PP really a viable option for someone in the accumulation phase 30+ years out? I know CraigR has documented the pretty good CAGR of the PP, but still not sure.

Yes it is a viable option because the portfolio is very stable and allows investors to "Stay the Course" through good or bad markets. Most investor's worst enemy is their self. They market time, buy on hunches, sell stocks when they fall in price during a panic and buy back in near the top. Etc. A portfolio that allows an investor to leave it alone and just do its job is far more likely to reach growth goals over one that is constantly fiddled with. This debate goes beyond the glossy charts of hockey stick growth that stock bugs always show people. It's a matter of dealing with the psychology of investors who are watching their life savings bob up and down wildly or even not grow at all for a decade or more (like 1966-1982 and 2000-2010).

I know of people who were retired and had to go back to work because they took too much stock risk and the crashes of 2000-2002 hurt them badly. The latest market problems compounded the situation. I know of other people that wanted to retire but couldn't because of the stock market gyrations. If these folks had a widely diversified portfolio they wouldn't have been in these positions, even though the hypothetical growth of an all-stock portfolio said they'd do better. The reality is that a stock heavy portfolio was a very bad choice because of how the odds played out over that time period.

BTW. I started investing in 1994 and some of the first books I read were from the Motley Fool. Those books cost me a ton of money in market losses. They did not advocate good diversification, relied on stock picking, and used mechanical screens that were backtested in faulty ways and completely blew up in 2000.

In fact here are the returns from 1994 to 2009 for three portfolios. One was 50% Total Stock Market and 50% Total Bonds. The second is 100% total stocks. The last was 25% Permanent Portfolio split. I'd put up a Motley Fool portfolio recommendation, but they close them down when they do poorly so you can't track the results.

50/50 CAGR: 7.35%
100% Stocks CAGR: 7.52%
Permanent Portfolio CAGR: 7.16%

These returns are essentially identical with the small differences being market noise that could go up or down each year (any difference less than 0.50% I ignore).

But the Permanent Portfolio had a Standard Deviation of only 5.84% vs. 11.03% for the 50/50 and a whopping 20.99% for the 100% stocks. That means the portfolio was far less volatile than the stock portfolio. The worst loss the Permanent Portfolio had over this time was -2.58% in 1994. The worst the 50/50 had was -16% in 2008. The worst the 100% portfolio had was a massive -37% in 2008 (and had -10.57%, -10.97% and -20.96% in 2000,2001 and 2002 respectively)!

Then when you look at the last 10 years it's downright ugly. The 50/50 portfolio had a CAGR of 3.60% (barely beating inflation). The 100% stock portfolio had -0.27% (losing to inflation significantly). The Permanent Portfolio had a CAGR of 7.17% (handily beating inflation). In fact, over any 10 year period the past 40 years you'll find the Permanent Portfolio beat inflation by about 3-5%. This is something that other allocations can't claim. When you're looking at returns, real returns after inflation is what matters.

So from my perspective, I'm willing to give up the (theoretical) stock outperformance and get the stability through a variety of markets. But the reality is when I look back on the portfolio returns the past 40 years an investor in the strategy gave up basically nothing to the stock portfolio but had tremendously less risk and beat inflation the entire time.

I second that, they are in the business of selling their market timing subscription newsletters.
One question one needs to remember is that if they are so good in stock picking then why not keep the secret to themselves.
The answer is self evident.

Craigr's point of viewing assets in terms of those that store money and those that generate it is so wise and valuable. The draw downs are also critical
since when they occur you are faced with two choices either bail out and risk locking in the losses or risk losing even more and being wiped out.
I'll take a steady 6-10 returns over a wild +30s and -20s that no one knows how long they will last. Of course you may think you are smart and maybe
able to time and beat the market. You will be sadly tough a lesson the hard way. Remember all these firms selling you the latest gadgets and systems
know that they themselves cannot make money with them so they appeal to your greed and you become their business plan. Always remember if the
tool/gadget/whatever it is so great why not keep it themselves.

You can always look back at a chart or some assets that performed well in the past and design a system that would have captured the profits,
the questions can you design a forward looking one that can capture future returns. Mostly you won't and the a few that work will perform just
like the average market. The point is I have come to realize that PP is one of the great systems out there with it's low draw downs and built in
money store components.

You also need to remember all those Wall street firms that you are hearing about which are making billions are basically steeling money and using
schemes as such as front running or built inside advantages to extract money from the public who is unaware and using pension funds and mutual funds.
I have come to learn one secret and that is the business plan of Walls Street is us. They are in the business of extracting money from us, the folks in
Motley Fool are no different.

Hope this helps, I appreciate the effort and wisdom being shared here and do not want any of us to be part of the next greater fool :-)

Man I love this forum! CraigR and company, thanks for the insightful thoughts and recommendations. I know I and the rest of the peeps really find the info / insights from the more experienced investors extremely valuable. 

I did want to follow-up on one thing. Although I'm a younger investor, I've never bought into the whole market timing / chasing so many investors fall into. From the get go I've been a fan of Bogle, Index Funds, and a buy and hold strategy that is well diversified and balanced across asset classes.

My challenge now is that I'm getting weighed down in the various 'lazy' style portfolios, and weighing the returns of those more weighted towards equity. For instance - and just as an example - the Lazy Portfolios listed on Market Watch:

http://www.marketwatch.com/lazyportfolio.

There are various thoughts/philosophies behind these, but they share several things in common including low cost indexing, buy and hold, etc. etc. etc., and Share a lot in common with Harry Browne. And in fairness several of the individuals are pretty sharp here too. Bill Schulltheis, David Swensen just to name a few.

They just vary in how to structure the portfolio, but seem to advocate a 60/40 or 70/30 typical mix. Seems reasonable, and has produced comparable returns - if not a little better - than the PP over the long run. At the same time, these seem fairly conservative as well, even though they did take a hit in 2008.

At the end of the day I'm convinced of a balanced and well diversified portfolio using index funds. Where I'm struggling the most is how best to execute this. Does it make sense to be more heavily weighted towards equity earlier in my investing career (as is typically recommended), and then scale back to a more 'conservative' portfolio such as the PP?

Thanks again for all the feedback!!!

I wish I had started out more conservatively personally. I lost more money early on trying to get the fabled double digit returns than if I had just stuck to something better diversified. One of Browne's rules is that your career builds your wealth. This is really good advice. It's important to try to grow your money with investing. But you need to balance this with the idea that you can't go back and re-earn that money so you need some protection as well.

I knew someone who years ago told me about his investing plan where he was going to "just" earn 15% a year and then, so the spreadsheet said, he could retire early and drink fruity cocktails or whatever. So he invested in many speculative tech stocks and did Ok for a few months...then he lost almost everything in the dot com crash. It took him years to rebuild his savings from what I gathered. So there is this idea that you can concentrate your wealth in a single asset and get rich. And yes it can happen. But I'd just suggest that it happens far less often than people think.

But again if you want to speculate that stocks will do best you can do so. Just make sure you keep the principles of the variable portfolio in mind and only do it with money you can afford to lose.  
 

Bonafede wrote: My challenge now is that I'm getting weighed down in the various 'lazy' style portfolios, and weighing the returns of those more weighted towards equity. For instance - and just as an example - the Lazy Portfolios listed on Market Watch:

http://www.marketwatch.com/lazyportfolio.

There are various thoughts/philosophies behind these, but they share several things in common including low cost indexing, buy and hold, etc. etc. etc., and Share a lot in common with Harry Browne. 

The problem is these portfolios differ from from PP in the most crucial aspect: real diversification. They slice-and-dice what seems to be distinct asset classes. But these combinations of assets do not work well as a portfolio across different economical climates, like PP does. For example, REIT index or total bond fund is not going to save the portfolio when everything else tanks. But Gold or LT Treasuries will.

Bonafede wrote: At the same time, these seem fairly conservative as well, even though they did take a hit in 2008.

And this is where PP shines. When all that revered "diversification" disappears on a wave of - surprise! - rising correlations between MOST asset classes PP works. BTW, the behavior of PRPFX in 2008 is a good example of "improving" the classic PP - although the fund did great overall it still dropped a bit thanks to 40% in equities. The fund's name is, in fact, Permanent Portfolio, but what it has under the hood is very different.

Bonafede wrote: At the end of the day I'm convinced of a balanced and well diversified portfolio using index funds. Where I'm struggling the most is how best to execute this. Does it make sense to be more heavily weighted towards equity earlier in my investing career (as is typically recommended), and then scale back to a more 'conservative' portfolio such as the PP?

I can't say better than craigr did in his excellent write-up. Shortly: do any heavy lifting in your VP! Later on you can always shift money (but not the approach  ) from VP into PP.

Thanks for the feedback everyone. Much appreciated!! I guess at the end of the day simplicity is key, and staying the course with a solid PP foundation make for a happy and much less stressed life.

Thanks again! and Keep these posts/forum going. Love it!

-b

craigr wrote:Let me be blunt: Siegel's data is ridiculous.

Nobody invests on a 200 year time horizon for personal retirement reasons. Your investing timeline is more like 20-40 years. So while it may be nice to be able to wait out 10+ years of market underperformance because you have a 190 year timeline, the reality is that people can't do this.

Craig's point is so incredibly important so it needs to be said again...and again.....and again.  200 year charts are completely useless to the average investor.  More relevant are rolling 10 year returns of either assets in isolation or assets collectively in a portfolio.  The average investor has about 30-40 years as a time horizon in the accumulation period.  Let's assume a few mistakes have been made and a "make up" is in need.  That may cut the useful accumulation period to 20-30 years, possibly less.  It's delusional to rely on returns based on 200 years.  It's helpful to know long-term returns, but investors should be keenly aware of how losses affect their (rapidly approaching) retirement years.  If you are one of the unlikely investors caught in a Japanese-style prolonged deflation, 200 years of data is not going to be a nice consolation prize.

I am in a similar situation.  I started investing around 2006 using a stock-heavy lazy index fund portfolio.  Right now my portfolio is worth less than the sum of all contributions.  I would have been better off with a checking account at 0% interest over this time period.  I know that empirical evidence says that a stock-heavy portfolio will *probably* perform better over the remainder of my accumulation phase, but I have to square that with the *possibility* that the next 30-40 years could play out like the last 4 did.

Maybe it's a personality thing, but I find "never treat the improbable as the impossible" more compelling than "reversion to the mean."  Meaning, it's well and good to know what happens to a hypothetical average person, but I worry about being the unlucky guy who gets caught way out on the left tail.  You only get one shot at life, and the whole point of investing is to feel *more* financially secure.  I actually think my losses are a blessing in disguise; I'm glad I learned these lessons with a five-figure portfolio early in my career, when the stakes are still low and there's time to change course.

There's an unassuming sentence on page 57 of Fail-Safe Investing that I like a lot: "...conservative investing can be very powerful because it focuses on realistic goals."

We can compare two plans for saving for retirement:
(1) diligently put 10%-15% into a target retirement fund for decades, never look at it or sell it; rely on the inevitability of stock returns
(2) invest a higher percentage (another 5%?) in a conservative portfolio, look at it whenever you want but never be worried or tempted to sell; rely on compounding and consistent, if low, returns

I think alternative (2) is safer and more behaviorally realistic.  The downside is that you need to contribute more.  I am OK with this.  It seems like you can pick your poison about being called upon to contribute more than you expected.  Under option (1) there is a chance that you will wake up, 2 years from retirement, and see that you're underfunded to the tune of 5-10 years' salary, as some of my co-workers did in 2009.  Scary stuff.  Under option (2) you get a signal early on that you need to bump up your contributions.  You can plan around that and live a serene life.  I prefer option (2).  But some people prefer to roll the dice and try to get away with saving less under plan (1).  What's frightening is that a lot of people choose (1) without any awareness of the risks they're taking.

I think there is some sound advice in this string, so thanks for the feedback. I do have one additional comment/thought that I still can't quite reconcile with the PP.

I can't seem to get my head around how the PP is more advantageous that a more 'traditional' portfolio strategy. What I mean by this is that several powerhouse index advocates such as John Bogle, Burton Malkiel, Charles Ellis, etc. advocate for more equity as an Accumulator, and then start moving towards more weight towards more of a balance towards fixed income in the Transition and Distribution phases of the investor's life.

My question is....does this strategy make sense? And wouldn't the PP play in very well in the Transition and Distribution phases? If I'm 30+ years from retirement, and especially since people (and myself) are living longer, would it not make sense to try and maximize returns in the Accumulator phase? And given that people are living longer, the Accumulator phase could actually be extended??

I don't know......I started the post confused with a bit of buyers remorse. With all the great feedback...moving the right direction.

Thanks for the continued help!

- b

Where is the evidence that a stock heavy portfolio outperforms the Permanent Portfolio over the past few decades? I've looked and outside of the big 1980-2000 bull market, they isn't any. So if we hit a big stock bull market then being heavy in stocks is a great idea, but if we don't then all bets are off.

Also, the markets are not some linear abstraction where stocks always go up in value. There are fits and starts and by holding some powerful non-stock assets you can obtain good returns with a smoother ride with rebalancing.

Lastly, there is this fallacy of time diversification. This is the idea that stocks get less risky the longer you hold them - this is a lie. They in fact get riskier the longer your are in the game. John Norstad wrote a paper on this very subject:

http://homepage.mac.com/j.norstad/finan ... -time.html

So there is absolutely no guarantee that a stock heavy portfolio will outperform. In fact, there are many significant risks in this idea. But again, if you think stocks are a good buy, then overweight them in your variable portfolio. If you asked me about doing this in 2009 I would have said it was a good idea. Today they are much less of a good bargain however. But you never know...

CraigR you are a posting ninja! Thanks for your and the rest of the forum's patience as I ask these questions. I truly appreciate all of your help with everything. Thanks again!!

One other choice that wouldn't be considered a PP pure play is to 'tweak' the PP to be more aggressive without going too far outside the basic allocation framework.

For example, changing to an allocation of 15% Small cap value, 15% emerging markets, 25% LT Bonds, 20% Cash, 12.5% Gold, 12.5% Commodities would have produced a CAGR of 11.03% from 1985-2009 with a Sharpe and Sortino ratio much better than a standard PP over that same timeframe. 11.03% would be the second best return out of the 25 lazy portfolios tracked by the Simba backtest spreadsheet over that same timeframe and the best one was only .04% better.

This gives you an overall allocation that is still in the spirit of the PP, but more aggressive yet less concentrated in the stock and hard asset categories.

Your mileage may vary.

I think the point is that stocks in all their slices are one asset class, which will generally appreciate during prosperity periods. And yes, during that period the different slices might appreciate in varying degrees to each other and hence the classical approach of slicing. The problem here is no one known when the prosperity period will start and the built in risk. The PP is supported by empirical evidence so what is the rational for tinkering with it other than some perceived gain that one might miss out.

What is clearly obvious from the paper Craigr referenced are the following:
1- The probability of some bad thing happening increases with time.
2- The weight or severity of that bad outcome is worse with time, since the magnitude of the loses impact is larger on your portfolio.
3- One might not recover from this lose, given the asset over weighted might stay where it's for a decade or more and one's earning  
    potential might not be replicated.

The idea of the variable portfolio might not be a bad option for the purposes of implementing other ideas. Personally, I find myself faced with the same dilemma that attracted me to the PP in the first place for safety and real tangible diversification so I find it shooting myself in the foot, but that is my opinion.

"What I mean by this is that several powerhouse index advocates such as John Bogle, Burton Malkiel, Charles Ellis, etc. advocate for more equity as an Accumulator, and then start moving towards more weight towards more of a balance towards fixed income in the Transition and Distribution
phases of the investor's life."

However, Bonafede's question as to why these investment powerhouse advocate slicing of one asset and diversifying across time does need some answer, which I don't.

"For example, changing to an allocation of 15% Small cap value, 15% emerging markets, 25% LT Bonds, 20% Cash, 12.5% Gold, 12.5% Commodities would have produced a CAGR of 11.03% from 1985-2009"

This period was a prosperity period. This probably would not have been achieved in other periods. We can always hand pick one span of time in hindsight and then device a strategy that have worked. The problem is going forward.

LNGTERMER wrote:
"For example, changing to an allocation of 15% Small cap value, 15% emerging markets, 25% LT Bonds, 20% Cash, 12.5% Gold, 12.5% Commodities would have produced a CAGR of 11.03% from 1985-2009"

This period was a prosperity period. This probably would not have been achieved in other periods. We can always hand pick one span of time in hindsight and then device a strategy that have worked. The problem is going forward.

Yes, that was a prosperity period (except for the last few years).

Let's pick a relatively non-prosperous period: 1972 - 1984 (Quickly formatted as best as I could)

PP        60/40 15,15,25,20,12.5,12.5 APP (Aggressive permanent portfolio)
Average 12.49% 8.86% 13.77%
Std. Dev. 10.88% 13.72% 7.40%
Down SD 2.62% 7.71% 1.38%
Up SD 9.73% 7.27% 6.41%
CAGR 12.03% 8.04% 13.55%
Sharpe 0.41 0.06 0.78
Sortino 2.86 0.50 6.36
Worst year -4.13% -14.75% 0.02%

Still looks pretty good I would say.

But, of course, this is backwards looking and bends some rules and there are other scenarios where this might not work out as well.

Given the choice of something like this that is still roughly within the framework of the PP vs. going to a more traditional 60/40 stock/bond allocation, I think it might be worth a look.

LNGTERMER wrote: "What I mean by this is that several powerhouse index advocates such as John Bogle, Burton Malkiel, Charles Ellis, etc. advocate for more equity as an Accumulator, and then start moving towards more weight towards more of a balance towards fixed income in the Transition and Distribution
phases of the investor's life."

However, Bonafede's question as to why these investment powerhouse advocate slicing of one asset and diversifying across time does need some answer, which I don't.

I think that the preference for stocks is heavily influenced by a few choice periods where they did spectacularly well. The last such period was 1980-1999 where CAGR was somewhere around 15-17% CAGR. But this time is sandwiched now between the 1966-1980 and 2000-2010 which have been miserable for stocks. This has had the effect of pulling the overall returns way down. Yet those golden years of returns still influences thinking quite a bit. It would be nice to have them again, but again it may not happen on our timetable.

Could there be reversion to the mean? Maybe. But what's to say the new mean going forward isn't going to be in the 7-10% range and not the previous higher area? A lot of these historic stock analyses also fail to consider that America was essentially a rapidly growing emerging market from the 1800s to the early 1900s. After that we were a mature economy. It is therefore reasonable to expect that stock returns may not be as they once were.

Finally, the monetary system of the US is radically different than it was even four decades ago. This also can have a drastic effect on the markets depending on how policy is set.

But, of course, this is backwards looking and bends some rules and there are other scenarios where this might not work out as well.

That is exactly my point, before we arrive into any conclusions as to the superiority of the prosperity tilted PP, numbers need to be run for more periods. Also, the PP performance in other countries during different periods needs to be seen as well. Until there is a solid empirical studies/evidence over different geographies/countries and time I personally would not buy into picking some specific periods that worked.

The other important point is that the PP is not designed to outperform all other strategies, but for to return competitive returns with solid risk protections. Even under the numbers you provided the PP lags only by 1.28 %. I don't see that a reason for tinkering and in the process exposing one self to added risk.

LNGTERMER wrote: [quoteI don't see that a reason for tinkering and in the process exposing one self to added risk.

Please understand the context of my remarks - they were a response to someone who was considering going back to a traditional slice and dice stock / bond portfolio vs. the PP.

I was simply pointing out an alternative that would ally some of his fears of under-performance within the PP structure.

For the record, I do appreciate your postings and the fact you actually ran some numbers to back up your hypothesis. I use AmiBroker platform and write my own code to back/forward test systems. I found the PP tests very well for all sorts pf periods and investing climates. The PP in my opinion is not a buy and hold system but rather requires that you re-balance assets within the 15/35 bands. I used to be solidly in the camp of the slice dice of stocks and was frustrated by the prolonged periods when they are out of favor. I have stumbled recently into the PP and I am amazed into how well it tests. I am not done with my research, and one day I will post those finding, since for now I am still a junior novice to borrow a phrase from foglifter. The fact is it's backed by empirical data so why tinker.

I am not saying the PP is perfection neither I think HB was a profit, but so far all the other conventional strategies have a built in prosperity assumptions which may not be correct. The other flow as Craigr's referenced paper shows is that time in fact increases risk not the other way around and these strategies assume the reverse. Time is an asset and once waisted is never recovered.

The questions is can one improve on the PP? Well maybe but if the answer is found I don't think it lies in tilting towards one asset, because that reintroduces an imbalance risk. To mitigate that you are back to squarer one i.e you need timing. Then the question can you time, well to do that you will either need inside info like Wall Street or perfect extrapolation of the future. Public technical analysis techniques are for public consumption and do not work. Hope this is of help of some sort.

Clive, thanks for participating, I have enjoyed many of your postings.

The trick is not to linger in such markets but instead seek out alternatives that are not in that phase of the cycle but are instead starting to exit from such a cycle and are in the earlier stages of a bubble formation.  Failing that - cash is king.

The things is one cannot tell the ending of a good cycle or the start of it in any asset. You cannot tell that from a 1 min chart or from a yearly chart. The other things is that assets even in bear phase oscillate between some times large ranges. The fact that the PP does not make any assumptions or favors any asset. Furthermore, it uses re-balancing to capture gains even within ranging markets gives it its power.

I am sure I am not telling you any thing you do not already know, for I have been reading your posts and enjoying for quite awhile. :-)

Clive and Possum, thanks for posting. This information is extremely useful. I've particularly found the resources you posted very insightful. Any other resources you'd recommend?

One I came across today was from the Journal of Financial Planning about T-Bills and how it relates to inflation. Pretty interesting:

http://www.fpajournal.org/CurrentIssue/ ... Inflation/

Also, CraigR, fair enough on the response regarding Bogle/others in how they typically advocate for Accumulators, Transition, and Distributors. Would definitely agree that the economy is drastically different now, and might I add perhaps even favors a PP for the next several years due to burdening debt we face, higher taxes, etc.

However, it is still difficult to fully grasp the PP fully given how different the world is today. You mentioned that the US was once an emerging market. That to me seems to indicate that perhaps there should be a little different slice and dice of the PP to the world economy.

Your Q&A about several areas are fantastic, and do address several important questions about investing abroad in relations to bonds and stocks. But I'm wondering given that the US really only represents about 40% of the world economy, why not expand the equity in half? Even with currency exchange risk, it seems that given the other emerging markets around the world this would more than compensate the added risk??

And just to reiterate....this is a great forum. I'm learning a ton!

The key error that Bogle and others make is evaluating portfolio components in isolation instead of looking at a whole portfolio.

I personally am comfortable with the point of view that the PP can be thought of as a family of well diversified portfolio options. Yes varying from the 4x25 may be the first step on the road to perdition, but it might help someone have a very good Browne like portfolio which still meets their personal needs.

base PP stats: '79-'09
Portfolio Allocation: 25.0% ST Trsry , 25.0% GOLD , 25.0% LTGB , 25.0% MKT-TSM
Compound return = 9.75%
Worst year: 1981 -4.28%

Optimize for Minimum historical drawdown (in this period) with same return
Portfolio Allocation: 18.9% ST Trsry , 17.0% GOLD , 31.6% LTGB , 32.4% MKT-TSM
Compound return = 9.75%
Worst year: 1981 -2.99%

Optimize but aim for lower 8.75% return
Portfolio Allocation: 16.1% GOLD , 67.5% ST Trsry , 0.0% LTGB , 16.4% MKT-TSM
Compound return = 8.75%
Worst year: 1994 -0.98%

Now optimize for 10.75%
Portfolio Allocation: 40.3% GOLD , 8.3% ST Trsry , 5.3% LTGB , 46.2% MKT-TSM
Compound return = 10.75%
Worst year: 1981 -13.50%

Slice and dice with small cap value and emerging
Portfolio Allocation: 35.9% GOLD , 37.5% ST Trsry , 3.6% EM , 5.6% LTGB , 17.5% SCV
Compound return = 10.75%
Worst year: 1994 -2.15%

http://www.riskcog.com/portfolio-theme2 ... e1lca7811i

Long bonds got squeezed down pretty far there. I personally would probably add to that category rather than taking the optimized portfolio without question.

macclary wrote: The key error that Bogle and others make is evaluating portfolio components in isolation instead of looking at a whole portfolio.

This is great info you provided macclary. I'll have to take a look closer at the information and link you provided.

Yet regarding the comment that Bogle and others only look at portfolio components in isolation, I'll have to completely disagree with you there. Harry Markowtiz is credited with pioneering modern portfolio theory - the basic premise of which is the relationship of risk, return, correlation, and diversification of portfolios. In fact, Bogle, Malkiel, Ellis, etc. were/are all advocates of this same principle...as seemingly was Harry Browne given the PP.

Sure there are similarities among the names mentioned, such as low cost index funds, broadly diversified, etc., but the key difference I see in their approaches is starting out more agressive, and scaling back closer towards retirement. The biggest thing they all preach is broadly diversified, start saving young, etc.

Now as CraigR mentioned, and I think he makes a good point, Bogle, Malkiel, Ellis, and others have helped promote a 'take' on portfolio diversification that has been based on the longest bull run in history. So that makes sense. In fact, in Bogle's book..."Bogle On Mutual Funds," he makes a comment on Page 4 on the Caveat Emptor section: A Lantern in the Stern...

"Beware of concluding too much from past returns in the financial markets. Especially beware of past returns for the periods that seem long enough but are not (such as Post WW2, and almost continuous bull market period."

In light of that, I think the PP does have credence. But I wouldn't discount Bogle and others, as what they have to say is extremely important to investing wisely, even in today's world.