Gyroscopic Investing

Is it safe to say that the Permanent Portfolio wins the Olympic gold medal for passive investing? If so, what wins silver and bronze?

I would give conservative Boglehead-style portfolios the silver medal.

Reub wrote: Is it safe to say that the Permanent Portfolio wins the Olympic gold medal for passive investing? If so, what wins silver and bronze?

Haha, we're only a portion of the way through the race, so its tough to award medals based on the early leaders.  Stock heavy portfolios sprinted off the start line during the 80's and 90's, but became winded during the 00's.  The PP has maintained a steady pace throughout the race (only pausing occasionally for water breaks), and is slowly gaining on the stock heavy portfolios.  The stock heavy portfolios have depleted the majority of their glucose reserves, while the PP has been burning an even ratio of fat and glucose, giving it plenty of energy to finish the race.

If one goes back to 1972, I would say that yes, the HBPP wins the gold for passive investment portfolios. The silver would go to Jack Bogle's 50/50 which produced comparable forty year returns but with more volatility. Although it's only been around for thirty years I would give the bronze to PRPFX which might have taken the silver, but its long term CAGR was dragged down by the fund's high ER.

Ad Orientem wrote: Although it's only been around for thirty years I would give the bronze to PRPFX which might have taken the silver, but its long term CAGR was dragged down by the fund's high ER.

Give it the silver...it's safer and more diversified than a Boglehead 50/50.

AdamA wrote:

Ad Orientem wrote: Although it's only been around for thirty years I would give the bronze to PRPFX which might have taken the silver, but its long term CAGR was dragged down by the fund's high ER.

Give it the silver...it's safer and more diversified than a Boglehead 50/50.

PRPFX is admittedly much safer. But its ER was above 1% for most of its life and around 1.5% for its first twenty years or so. That just kills your long term returns.

I think that a 35% stocks/65% bonds mix like Vanguard Wellesley uses is also a very good strategy.  I would put that in the top three with the PP.

I think that the PP would have to get the gold medal, in part because it is about the safest way I can imagine of holding 25% of your assets in gold.

Wellesley is an excellent fund. Anyone who told me they were putting 80-90% of their money in that and the rest in gold would not get a stiff argument from me.

For most investors, I don't think that there is any reason to ever own more than 35% in stocks.  To me, the extra return you might get from going higher than 35% in stocks is simply not worth the stress and volatility that goes along with it. 

IMHO, most people are just not psychologically equipped to make good investment decisions in an allocation with more than 35% in stocks.  Too many things can go wrong.

MediumTex wrote: For most investors, I don't think that there is any reason to ever own more than 35% in stocks.  To me, the extra return you might get from going higher than 35% in stocks is simply not worth the stress and volatility that goes along with it. 

IMHO, most people are just not psychologically equipped to make good investment decisions in an allocation with more than 35% in stocks.  Too many things can go wrong.

Again I agree with you. My general rule of thumb is that unless you are very wealthy, equities should probably not make up much more than a third of ones portfolio. For the very wealthy who can handle the added volatility I might make a few adjustments aimed at improving long term returns while sacrificing a little near term stability. But only for people who can take a 2008 style hit and get a good night's sleep afterward.

Ad Orientem wrote: For the very wealthy who can handle the added volatility I might make a few adjustments aimed at improving long term returns while sacrificing a little near term stability. But only for people who can take a 2008 style hit and get a good night's sleep afterward.

The thing is, the really wealthy don't need to take this kind of risk.  It's pretty easy to live off of 2% a year, when you have tens or hundreds of millions of dollars.

That's the paradox. The people that don't need the extra returns can afford the risk. Those that need the returns can't.

AdamA wrote:

Ad Orientem wrote: For the very wealthy who can handle the added volatility I might make a few adjustments aimed at improving long term returns while sacrificing a little near term stability. But only for people who can take a 2008 style hit and get a good night's sleep afterward.

The thing is, the really wealthy don't need to take this kind of risk.  It's pretty easy to live off of 2% a year, when you have tens or hundreds of millions of dollars.

I think that if I were designing a portfolio for someone with a hundred million or more and assuming they were willing to handle a tad more volatility I would suggest 50% in intermediate term high grade munis, 20% in VTI, 10% in VEU and 20% in gold. The munis won't hold up as well as Treasuries in a deflationary environment and there is a slightly higher element of risk, though not unacceptable for someone with that kind of money. But when you are that wealthy the 35% + Federal tax bracket can bite pretty hard. Taxes like the ER of a mutual fund are a form of compound negative interest on your long term returns. Over the long haul, muni bonds (which I generally don't like) do start to make sense for the uber-wealthy.

Ad Orientem wrote: Wellesley is an excellent fund. Anyone who told me they were putting 80-90% of their money in that and the rest in gold would not get a stiff argument from me.

Wellesly has a good track record, but if I were picking a single non-PP fund I'd go with Vanguard Target Retirement Income. Or maybe LifeStrategy Conservative Growth (40/60) now that they finally purged the Asset Allocation Fund holding. Those two funds are fully indexed and have very low expense ratios.

...if I were picking a single non-PP fund I'd go with Vanguard Target Retirement Income.

Be careful with those target retirement funds.  They are way too stock-heavy and most have entirely unjustified expense ratios.  For example, TIAA-CREF charges ERs between 0.4 and 0.5 for their stock and bond funds, but 0.88 for the 2025 Lifecycle fund, which is nothing more than a straightforward 80/20 stock/bond mix.  Vanguard is quite the exception at an ER of 0.18, but it's still 71% stocks.

I ended up creating a Wellesley equivalent at TIAA (35% stocks, 50% bonds, 15% guaranteed income) with automatic yearly rebalancing for half the cost of their target date funds.  That's truly a set and forget option.

Reub wrote: That's the paradox. The people that don't need the extra returns can afford the risk. Those that need the returns can't.

I think about this a lot. Do we have a thread that discusses differences for those who have, say, one million dollars to invest and those who are just starting out? I know that the pp works great whether you have a little or a lot. Still, as discussed at bogleheads years ago, I cannot shake the feeling that one can hit some critical mass where you say to yourself, "I am rich enough to start gambling with my money" or, conversely, "I am rich enough that I never need to be risky again. I just need to focus on preserving capital."

dualstow wrote:

Reub wrote: That's the paradox. The people that don't need the extra returns can afford the risk. Those that need the returns can't.

I think about this a lot. Do we have a thread that discusses differences for those who have, say, one million dollars to invest and those who are just starting out? I know that the pp works great whether you have a little or a lot. Still, as discussed at bogleheads years ago, I cannot shake the feeling that one can hit some critical mass where you say to yourself, "I am rich enough to start gambling with my money" or, conversely, "I am rich enough that I never need to be risky again. I just need to focus on preserving capital."

Harry Browne never said everyone should have all their money in a PP. He suggested it for that money you can't afford to lose. That said a million dollars isn't wealth anymore. In fact I am not sure its even financial security for most people unless they are elderly and their remaining life expectancy is not very high. But yes, I do tend to think that the rules might be a bit different for the very wealthy (middle eight figures or more in assets).

For one thing they can generally handle volatility that might make the rest of us uncomfortable. For another, taxes become an issue at that level of income.  The yield on LTTs and STTs is fully taxable by the Feds. Over the long term a 35% tax bite (which is very likely to go up in coming years) will detract from your long term returns just like a high ER in a mutual fund. At what point do you say its time to sacrifice a little bit of the safety of LTTs for the slightly less safe but tax exempt benefits of muni bonds? In general I don't like munis. But if you are fortunate enough to be in the top 1% of the top 1% the argument for them starts to carry some weight.

But I still don't see a great advantage to being much more than a third in stocks. And I still think you need to have some cash (maybe not 25%) and some gold.

sophie wrote: Be careful with those target retirement funds.  They are way too stock-heavy and most have entirely unjustified expense ratios.  For example, TIAA-CREF charges ERs between 0.4 and 0.5 for their stock and bond funds, but 0.88 for the 2025 Lifecycle fund, which is nothing more than a straightforward 80/20 stock/bond mix.  Vanguard is quite the exception at an ER of 0.18, but it's still 71% stocks.

I was referring specifically to Target Retirement Income (VTINX) which has a fixed 30% stock allocation and 0.17% ER.

Dualstow

You should check out Daniel Kahneman's awesome TED lecture on the subject of experience and memory. Be sure to stick around for the question at the end, because it provides an actual dollar figure starting place to think about your paradox. Lecture is 20 minutes long. Completely worth the time.

http://www.ted.com/talks/daniel_kahnema ... emory.html

Ad Orientem wrote: That said a million dollars isn't wealth anymore. In fact I am not sure its even financial security for most people unless they are elderly and their remaining life expectancy is not very high.

Just depends on your expenses.  With a paid off house, I could live pretty comfortably in an affordable area of the country on $30k a year.  That's a 3% SWR on a million dollars.  Throw in a mortgage up to $175k or so and you're still at less than 4%.  

But your point that even with $1mm it still may not be wise to take great risks with investments is totally true.  Actually, when IS the right time to throw your money around?

Tyler wrote: Actually, when IS the right time to throw your money around?

When you are comfortable with the possibility of losing it.

Good point.  I guess that's why I'm 100% PP. 

Good responses. Cowboyhat, thanks for that link! Can't wait to check it out with my Sunday morning coffee.

Follow-up: that was a great lecture! I also liked the Dan Ariely lecture that it linked to: 'Are We In Control of Our Own Decisions?'
I've watched TED lectures before on youtube, but I didn't realize that on the official site you can click on a specific word on the transcript and the video will jump to that portion of text. Very cool.

Gold Medal: The rare trading strategy based on Quant Models (maybe just a select few from the top-tier high frequency trading firms like DE Shaw and Susquehanna)  The vast majority of high frequency trading strategies, even those  designed by Math olympiads at these elite firms, are junk IMO.  The Gold Metal, however, strategies will typically have Sharpe Ratios over 3 and have rarely/never seen a single losing month in over a decade.

Silver Medal: Permanent Portfolio

Bronze Metal: Yale University's Endowment