Daily Reckoning, 4/4/12

[dualstow]

Just saw this:

{many investors} are driving race cars, not to win millions of dollars, but to win a $50 gift card to Dave & Busters. They are tight-rope walking across Iguazu Falls, not to obtain international acclaim and a possible movie deal, but simply to get to the other side. That’s not a good trade.

http://dailyreckoning.com/the-permanent ... revisited/

[alvinroast]

heh! I logged on mainly to post this. That is a great quote. He really puts the current risk situation into perspective. I've seen people analyzing how that can squeeze another fraction of a percent by taking on vastly more risk in a bond fund.

A week ago I would have commented on how silly it is for them to suggest tinkering. Now I really think that's a great way to get people to look at the HBPP. If you can't find a better way to do it then that it is a selling point for sticking with Browne's way.

Looking at my portfolio now after a few days away I'm struck by the correlation between investments in the current environment. I realize HB didn't create this for an environment where the Fed is buying 61% of Treasuries so while I'm happy with the HBPP a part of me hopes that someone does come up with a better ideas for the current situation.

[Khisanth]

I thought the 4x25 allocation came after PRPFX was established?

For example, the Permanent Portfolio mutual fund (PRPFX), although based on Browne’s strategy, has tweaked his original allocation somewhat. The mutual fund’s allocation is as follows:

20% gold, 5% silver, 35% US Treasury bonds and bills. 10% Swiss government bonds, 15% aggressive growth stocks, 15% natural resource stocks and/or real estate stocks.

This revised portfolio has been more volatile than the original, but it has also delivered greater returns, especially recently. During the last 15 years, for example, PRPFX has not only produced double the returns of the S&P 500 Index, but it has also outpaced the returns of that other permanent portfolio, Berkshire Hathaway.

But that was then. What about now? Is Browne’s original allocation still optimal? Or is the Permanent Portfolio mutual fund’s allocation an intelligent refinement? Or should investors be heading in an even more radical direction?

Read more: The Permanent Portfolio Revisited http://dailyreckoning.com/the-permanent ... z1r8hdex7m

[MediumTex]

I thought the 4x25 allocation came after PRPFX was established?

For example, the Permanent Portfolio mutual fund (PRPFX), although based on Browne’s strategy, has tweaked his original allocation somewhat. The mutual fund’s allocation is as follows:

20% gold, 5% silver, 35% US Treasury bonds and bills. 10% Swiss government bonds, 15% aggressive growth stocks, 15% natural resource stocks and/or real estate stocks.

This revised portfolio has been more volatile than the original, but it has also delivered greater returns, especially recently. During the last 15 years, for example, PRPFX has not only produced double the returns of the S&P 500 Index, but it has also outpaced the returns of that other permanent portfolio, Berkshire Hathaway.

But that was then. What about now? Is Browne’s original allocation still optimal? Or is the Permanent Portfolio mutual fund’s allocation an intelligent refinement? Or should investors be heading in an even more radical direction?

Read more: The Permanent Portfolio Revisited http://dailyreckoning.com/the-permanent ... z1r8hdex7m

As I recall, in "Inflation Proofing Your Investments" Browne and Coxon discussed several different "permanent" allocations, one of which turned into the PRPFX allocation, and one of which was the 4x25% allocation.

Browne obviusly became a greater fan of the 4x25% approach as time passed.

[MediumTex]

In Wiggin's article in the OP I love how he says the PP has done great for 30 years because no one can tell the future, and then he invites readers to essentially send in their predictions regarding what PP tweaks might work well in the future.

[craigr]

If someone wants to tweak the portfolio, then just set aside money in the Variable Portfolio and have at it. I have met plenty of people who do exactly that, keeping the Permanent Portfolio as their core asset and just investing the rest the way they feel best.

[Ad Orientem]

Nice article and a good primer for the non-initiated. It's not so long people won't read it, it's concise and well written and has all of the salient facts. I am going to book mark this one for reference when I am talking to people about the PP.

[Alanw]

If someone wants to tweak the portfolio, then just set aside money in the Variable Portfolio and have at it. I have met plenty of people who do exactly that, keeping the Permanent Portfolio as their core asset and just investing the rest the way they feel best.

I can't completely give up the urge to tweak so I have established a seperate  PP consisting of approximately 80% of my funds and a VP containing 20%.  Because I want to give my total portfolio a slight stock and bond slant, I use VWINX and VWELX.  This would make the total portfolio look like: 30/30/20/20.  My rebalancing will occur only in the PP.

I did not want to go into individual stocks, sectors, commodities, etc. in the VP because I have already learned that I cannot beat the market and I do not want to follow any of my investments on a daily basis.

[Ad Orientem]

If someone wants to tweak the portfolio, then just set aside money in the Variable Portfolio and have at it. I have met plenty of people who do exactly that, keeping the Permanent Portfolio as their core asset and just investing the rest the way they feel best.

I can't completely give up the urge to tweak so I have established a seperate  PP consisting of approximately 80% of my funds and a VP containing 20%.  Because I want to give my total portfolio a slight stock and bond slant, I use VWINX and VWELX.  This would make the total portfolio look like: 30/30/20/20.  My rebalancing will occur only in the PP.

I did not want to go into individual stocks, sectors, commodities, etc. in the VP because I have already learned that I cannot beat the market and I do not want to follow any of my investments on a daily basis.

Alan,
I am not a big fan of being dogmatic (at least outside of theology).  Neither was Harry. While I think the HBPP is your best bet for very low risk/volatility coupled with average returns I concede that everybody has different risk tolerances.  The important thing (and I am rather dogmatic on this point) is that you must be diversified across asset classes.  If you want to add a little weight to one or another based on your prognostications that's fine, as long as you can handle the increased downside risk.  Just make sure that you have enough of all the asset classes represented in your portfolio so that if you are wrong in your predictions that you don't get crushed.

Last week during the big lottery craze some friends and I had an email discussion about what we would do with the money if we were (un?)fortunate enough to be the sole winner.  A buddy sent out this portfolio...

40% VCADX
20% VTI
20% VEU
20% IAU

I thought about it and came to the conclusion that there was nothing there that gave me real heartburn.  Is it riskier than the PP?  Yes, but if you have a net worth deep in the nine figures you should be able to cope with a little more near term volatility for some better long term returns.  It's more growth oriented and I generally think muni-bonds are a lousy investment for all but the very wealthy.  But this portfolio is designed for someone in the top 1% of the top 1%.  In short, while I would probably tweek this (physical over paper gold), I could live with it.

Whatever you decide on just ask yourself if you can sleep at night without worrying about a really serious crisis like 2008 or a currency collapse.  If you can answer yes, then go for it.

[Alanw]

Ad Orientum,

My rationale for using the two Vanguard mutual funds is to increase my bond exposure slightly to corporates and to slightly increase my stock exposure without taking on too much stock risk.  The other reason is that I cannot completely convince myself to go 25% into gold and LTT's.  This may prove to be an unwise decision but time will tell.  Also, the 30/30/20/20 portfolio I described should not be a whole lot more volatile than a 4X25 PP.

I did experience the 2008 meltdown and saw my stock heavy portfolio crash.  After a complete portfolio overhaul, I am still not back to the highest levels the portfolio reached and may never reach that level again since I am semi-retired and living off my portfolio.  I don't believe I will have any sleepless nights with my current allocations but if I do I will reconsider going 100% into the HBPP.

[alvinroast]

I think the beauty of Wiggin's suggestion to try and tweak the PP is that it not only engages his readers but forces people to think about why it works and what situations it may not be right for. That is essentially what much of this forum is about. People make up scenarios where they think the PP might not work. Others explain how unlikely those scenarios are or how the PP would still work. Everyone has a good mental exercise and gains more knowledge of how things work. Then we all sleep soundly knowing that we're prepared and have bought a good insurance policy even though we're not sure if we're going to get a tornado, hurricane, earthquake or no storm at all. By engaging in the mental exercise of trying to tweak the PP (or even putting money into a tweak in a VP) it solidifies the case for a PP.