Gyroscopic Investing

Hello everyone! I heard about the PP a long time ago, and recently I was convinced that it is a great plan. But I have some questions about it, especially regarding options in Japan.

I saw the data that was posted on this forum regarding the historical performance for Japan, and it wasn't nearly as good as in the US... Firstly I'll give you a brief overview of what I'm holding.

Stocks - an index fund for Japanese stocks (about 45% of this section), an S&P 500 index fund (about 50%) and some individual Japanese stocks which give special benefits to customers (5%).

Bonds - as I'm sure you're aware, Japanese bonds are almost the same as cash in a checking account these days, but "world bond funds" are very popular here. I'm holding 100% of this section in a world bond (a basket of long term bonds from Australia, France, Germany, Sweden, Uk, and so on)

Gold - I'm holding 100% of this section in an SPDR gold fund.

Cash - as I said about the interest rates, this is currently literally just cash in my checking account.

Now for my questions. As for stocks, I heard that the PP works for any country, but that seems to imply a 100% ownership in only stock for your own country. Do you think splitting the stocks 50/50 with the US is good diversification or an added complication?

As for bonds, similar to above, ideally should bonds be Japanese bonds only, or does it still work with international bonds?

As for gold, is this fund a good choice? Or is holding physical gold preferred? Or even a 50/50 split between the fund and the physical asset?

As for cash, as long as I'm holding it in my account, I'm just getting a 0.02% return on it. Buying a short term yen fund would only increase that extremely marginally. Actually, since I'm still in the accumulation phase, I was considering lowering this part to 10% of the overall portfolio and raising everything else to 30%, until I want to preserve the capital. Is this completely against the PP idea?

Thank you in advance for any input!

Konichiwa Miyazaki-san. Welcome to the forum!

I'm going to let those more qualified than me answer your questions, but I think it's important to first highlight Harry Browne's own words on Foreign Permanent Portfolios...

Appendix G of Why The Best Laid Investments Usually Go Wrong is a short two page recommendation on Foreign PPs titled, "Permanent Portfolio Alterations for Non-Americans."

Harry Browne says:

Harry Browne wrote:Permanent Portfolio Alterations for Non-Americans

The suggestions in this book are made with American readers in mind. If you live outside the United States, some of the suggestions I've made for the Permanent Portfolio can be changed. Whether you should use U.S. investments or use investments of the country in which you live depends on how stable and useful you consider the investment markets in the country where you live.

If you are an American living abroad and you expect to return to the US to live within the next few years, it isn't necessary to make any changes from the suggestions I've made. If you don't know when or whether you will return to the US, consider making the changes.

The purpose of Treasury bills in the portfolio is to provide stable purchasing power through a default-proof investment in the currency you rely on. So, for US Treasury bills, you can substitute the equivalent investment in the country in which you live. That can be bills, notes, or bonds issued by the government and maturing in one year.

The long-term bonds can be bonds of the government of the country in which you live, so that you will have protection if there's a deflation in your country. Use the longest maturity available.

Stock-market investments are meant to provide profit when you country is prosperous and inflation is low. So, in general, you should buy stocks of the companies in your country.

However, you might prefer to use American stock-market investments instead. Usually, the stock markets of the world move upward or downward together. And the US securities markets offer a greater number of alternatives — including such things as warrants and specialized mutual funds.

The decision may depend upon how adequately you believe you can cover yourself with stock investments of your own country. One possibility is to split the stock-market budget between investments of your country and the United States.

There is no reason to alter the suggestions I've made for gold, no matter where you live.

Miyazaki
Welcome to the forum. In general you want to keep things as simple as possible in a PP. However when you live somewhere other than the United States sometimes you need to make some adjustments depending on the situation in your country. From my perspective (and you may be better informed than I) Japan has a powerful economy, a stable government and a good reputation for the rule of law and respect for property rights. So those really serious issues are removed from concern.

But Japanese long term bonds pay next to nothing. So looking at a long term international bond fund may be an alternative. But you want to be in strictly high grade sovereign debt and on the long end of the curve. Another alternative is to pick a currency you think is sound and buy their bonds directly if that is a viable option. All of this requires an element of speculation that is not generally encouraged in a PP but when your country's long term bonds are only paying 1% that distorts things.

For cash I would stick with short term Japanese Government Bonds. Cash is not intended to be profitable. It is there to help you ride out the rough times when the PP hits a bump or you have the central bank tightening the money supply which would hit all three of the other assets. With cash you want to emphasize safety over yield.

For stocks, unless you live in the USA I suggest a global stock market index fund or near equivalent ETF. Keep the fees and expenses as low as possible. To be honest even here in the US I think some global stock exposure is desirable.

For gold your first preference is physical gold coins which you should store somewhere safe. Second choice would be some form of custody account for physical gold at a bank or other reputable establishment like the Perth Mint. Last choice is a bullion backed ETF. If possible some diversification of your gold holdings to a place outside of Japan that you think is extremely safe would also be desirable.

This is not an ideal PP. But Japan is an unusual case because of the long deflationary depression and almost nonexistent yield on your long term bonds. One other alternative would be to simply do a US dollar PP which would basically be 25% LTTs 25% STTs and 25% global stock index fund. Gold is gold.

Again it's not ideal, but it might be more practical than trying to split your PP up among different currencies. The downside of course is the currency risk if the Dollar should fall sharply relative to the Yen.

Maybe Craig or MT have some other ideas.

Ad,

You've recommended a fair amount of international exposure for a country that has a, "powerful economy, a stable government and a good reputation for the rule of law and respect for property rights". While I see your point, I'm not sure that makes sense from a Yen perspective. You've recommended that he play with currency risk just to seek a higher foreign-denominated return. The problem is that even if International Bonds and International Stocks do well relative to the US Dollar, or the Euro, there's no guarantee that they'll do well relative to the Japanese Yen.

If the next 20 years is anything like the last 20 years, the Yen might very well keep getting stronger and stronger over time — making international investments worth less and less. In that case, I think worrying about low yields may be a non-issue. And it's worth pointing out that there are many FX investors who prefer holding Yen to preserve their purchasing power.

Also, I would imagine that the Japanese government taxes international investments differently from domestic investments. (Wouldn't the government offer an incentive to hold domestic government bonds?)

Thank you for the replies so far. I'm interested in hearing other opinions too, if there are any.

Choosing a different currency is attractive, but a little difficult. Every year it seems like the yen reaches a bottom against the dollar. Each time, it seems like a great time to buy dollars, but the price keeps going down about 10 yen per year. It's now around 77 per dollar. Will that go even further? To 60? 50? It seems unbelievable now, but less than 100 seemed unbelievable just a few years ago.

Also, you're right about benefits for holding Japanese stocks. They are only taxed at 10%, whereas foreign stocks are taxed at the rate in that country, plus another 10% in Japan. While I am confident about the innovation of Japanese companies, I'm worried about the decreasing workforce. If (when?) Japan's population falls below 100 million, there will surely be a lower growth rate in the companies profits. Or perhaps a smaller number of wages will lead to more profits for innovative companies... Of course, we cannot say for sure at this time.

I'm going to research about the Perth Mint and similar places from now.

Cash: I would stick with 100% yen.  There is no reason to do anything different that isn't essentially speculating on currency fluctuations.

Gold: Bullion for as much as you can, stored safely, and then one of the gold funds for perhaps a portion.

Stocks: Given that the Japanese stock market is the poster child for how punishing a secular bear market can be, I might look more widely, and perhaps do an all-world fund, or maybe 1/3 Japanese stock index, 1/3 U.S. stock index and 1/3 world index fund.  I suggest U.S. stocks because U.S. companies increasingly get their earnings from all over the world (as Japanese companies do as well, but the Japanese stock market doesn't seem to want to reward companies with higher stock prices in the aggregate no matter what happens).

Bonds: This is probably the toughest.  You could obviously just buy all Japanese 30 year bonds, but with yields under 2% that would take nerves of steel.  You might consider going with 1/3 Japanese bonds, 1/3 German bunds (if there is a way for you to get that exposure) and 1/3 U.S. long term treasuries.  Whatever you do make sure you go with 30 year bonds with at least 25 years to maturity in order to get the volatility you need.

It's great to have someone from Japan here.  Are you Japanese or do you just live in Japan?

What is the public's perception of the Japanese stock market?  A 22 year secular bear market where stocks lose 75% of their value would test people's resolve, I would think.  It certainly invalidates much of the conventional wisdom about stocks being the best long term investment.  22 years is over half of the lifetime accumulation phase for most investors.

Miyazaki-san, I too would love to hear about your impressions on what it's like to live through a long deflationary cycle. We occasionally hear unbelievable stories such as:

- A haircut is half the price it was a few years ago.
- Getting a mortgage on a house/apartment requires some interesting credit strategies, since the dwelling will likely be worth much less than it was purchased for. (Do people regularly walk away from mortgages?)
- Banks have been known to charge negative interest at times.
- Foreign investment is often considered risky, since the Yen seems to always be getting stronger.

I can't confirm if any of those are true or not, so perhaps you can tell us your perspective.

I think many of us here cannot relate to those kinds of conditions. So, many of us find ourselves wanting to get you higher yields while I get the impression that most Japanese seem to be used to low yields and nominal losses, while still finding ways to perhaps gain real purchasing power over time somehow.

Would you mind describing some of those challenges and how people tend to deal with those issues? I think we'd all be very interested to hear more, since most of us can't imagine anything other than inflation. I suspect hearing your perspective would help us to give you better advice.

Gumby wrote: Ad,

You've recommended a fair amount of international exposure for a country that has a, "powerful economy, a stable government and a good reputation for the rule of law and respect for property rights". While I see your point, I'm not sure that makes sense from a Yen perspective. You've recommended that he play with currency risk just to seek a higher foreign-denominated return. The problem is that even if International Bonds and International Stocks do well relative to the US Dollar, or the Euro, there's no guarantee that they'll do well relative to the Japanese Yen.

If the next 20 years is anything like the last 20 years, the Yen might very well keep getting stronger and stronger over time — making international investments worth less and less. In that case, I think worrying about low yields may be a non-issue. And it's worth pointing out that there are many FX investors who prefer holding Yen to preserve their purchasing power.

Also, I would imagine that the Japanese government taxes international investments differently from domestic investments. (Wouldn't the government offer an incentive to hold domestic government bonds?)

Gumby
Everything you said is a fair and reasonable counterpoint to my suggestions. And I concede that where the LTTs are concerned I am deeply conflicted. But to buy long term sovereign debt when it is yielding near 1% is something I think almost requires a suspension of common sense. If one approaches that segment of the PP from the point of view of volatility I just don't see a lot potential upside here. In short they seem to be an investment asset that has become very high risk and even under optimum conditions likely low return.

I note that both Craig and MT have in the past suggested that they would have to take a deep breath before adding to LTTs if the yield dropped significantly below 2%. And MT seems to be reiterating those reservations in his above comment. I am no fan of currency speculation but sometimes you have to just say that it is almost certainly safer than going with long term bonds where you KNOW that at some point your going to get killed when the yields start to rise. And one day they will. Like I said, I just don't see a realistic upside to owning long term Japanese government bonds right now that justifies the risk.

As for global stock index funds, I think that is something I would recommend to just about everyone who doesn't live in the US. America is the only country that has an economy and stock market big enough where I think you could safely just own that country's stocks. And even here I think people should have at least some exposure outside the US for exactly the reasons MT pointed out. A long term bear market can be a brutal thing. Adding to that point is Clive's often repeated and IMHO very valid observation that from a statistical and historical point of view inflation is a much greater danger to most economies than long term deflation. In this respect Japan has been an anomaly. And I wonder how much longer it can last? Maybe decades. But even if it does last that long (a perpetual deflation and the end of everything we ever thought we knew about economics?) I think a basket of long term sovereign bonds from countries with a strong currency and high end credit seems a safer hedge.

Again with the caveat that I don't own any foreign bonds; the countries I would look at would be Canada, Norway, Sweden and Switzerland. Yea yea I know. The Swiss have pegged the Franc to the Euro. Big deal. What they peg today they can unpeg tomorrow. The Franc is a much stronger currency than the Euro and Switzerland is a much safer bet than any Euro country including Germany for bonds.

Why?

Three reasons... First Switzerland has a debt to GDP ratio that is the envy of most of the world and is far better than any Euro country. Secondly unlike all of the Euro states Swiss debt is denominated in a currency that they have total control over and they can print money without having to ask anyone's permission. Thus like the US and unlike every country on the Euro there is a near zero danger of default. And lastly, on the off chance that the gold bugs are right and we see a global collapse of paper currencies, Switzerland has one of the highest per-capita gold reserves of any country in the world.

Were I a currency speculator I would call the Swiss Franc a buy.

On a related note I draw everyone's attention to an interesting post on the PP relative to Japan's brutal deflationary depression.

http://gestaltu.blogspot.com/2012/09/th ... anese.html

Ad Orientem wrote:But to buy long term sovereign debt when it is yielding near 1% is something I think almost requires a suspension of common sense. If one approaches that segment of the PP from the point of view of volatility I just don't see a lot potential upside here. In short they seem to be an investment asset that has become very high risk and even under optimum conditions likely low return.

Ad,

Perhaps I'm missing something, but I'm not sure what you mean by "yielding near 1%". According to Bloomberg, the 30-year Japanese Government Bond is yielding about 1.9%.

http://www.bloomberg.com/markets/rates- ... nds/japan/

The question is whether currency speculation is worth it or not. I'm not convinced that a Japanese investor would consider it to be wide to hold dollar-denominated or Euro-denominated bonds. If the Japanese Yen continues to strengthen versus global debasing currencies (say ¥10 to $1), it would not be wise for a Japanese investor to be holding foreign bonds.

In that case — where the Yen strengths further and rates stay low — the Japanese investor would be best positioned with domestic assets.

Ad Orientem wrote:I note that both Craig and MT have in the past suggested that they would have to take a deep breath before adding to LTTs if the yield dropped significantly below 2%.

Again, I don't think a 1.9% coupon on a 30-year bond qualifies as having "dropped significantly below 2%." And as far as I know, nowhere in Harry Browne's writings does he suggest abandoning Long Term Government Bonds after yields drop below a specific rate. That sounds like speculating to me.

Ad Orientem wrote:And MT seems to be reiterating those reservations in his above comment.

Yes, but I think we are all looking at this from an American viewpoint — where rates supposedly "have to rise". I suspect that Japanese investors view interest rate and currency risk a bit differently than we do.

And as Miyzaki confirmed, there's a foreign tax disadvantage to holding foreign investments!

I just don't see the value in recommending that he play with currency risk when Japanese investments are denominated in highly stable Yen and are not subject to foreign tax — particularly when he needs to buy food with possibly strengthening Yen.

Ad Orientem wrote:I am no fan of currency speculation but sometimes you have to just say that it is almost certainly safer than going with long term bonds where you KNOW that at some point your going to get killed when the yields start to rise. And one day they will.

There you go speculating... Why do rates have to rise? They don't. Ten years from now, the Yen could be twice as strong as it is now (relative to other currencies) and 30-year JGBs could be yielding half the coupon they are now. You just don't know. There's no reason why yields have to rise. Don't speculate on yields. You could easily get burned.

Ad Orientem wrote:Like I said, I just don't see a realistic upside to owning long term Japanese government bonds right now that justifies the risk.

The upside is that the bonds are denominated in the world's strongest currency — which he needs to own in order to buy things — and Japanese bonds aren't subject to foreign taxes.

Ad Orientem wrote:As for global stock index funds, I think that is something I would recommend to just about everyone who doesn't live in the US.

Not necessarily true when you have to pay all foreign taxes and the investments are denominated in possibly weakening dollars or Euros.

Ad Orientem wrote:First Switzerland has a debt to GDP ratio that is the envy of most of the world and is far better than any Euro country.

Debt to GDP ratios are basically meaningless.

Ad Orientem wrote:Were I a currency speculator I would call the Swiss Franc a buy.

Wait a sec... so you consider owning the Swiss Franc a "speculation"? Are you sure it's wise for Miyazaki to trade his strong Japanese Yen for speculative Swiss Francs — and pay additional foreign taxes — when he needs to buy food with Yen? I don't.

Ad Orientem wrote: On a related note I draw everyone's attention to an interesting post on the PP relative to Japan's brutal deflationary depression.

http://gestaltu.blogspot.com/2012/09/th ... anese.html

Hi Ad,

excelent article. Thank you very much. There is a sentence on that article that really explains the performance of PP against long deflationary stagnation periods, that Harry Brown couldn't study because he never experienced it before (as far as i know):

If we are right, and the permanent portfolio is vulnerable to synchronized losses, then it makes sense to explore some tactical or dynamic overlays to help avoid investing in asset classes in sustained downtrends

its obvious that the 3,2% PP CAGR is 'gold' for a japanese investor after 20 years of deflationary stagnation, but this is an exampe of poor PP performance that was not studied before.

What is scary about this sentence is that after 20 years of serious and discipline PP investment, you have to turn to hypothetical "dynamic overlays" based on speculation in stead of investing, once, as a japanese investor, and after 20 years of long patient, you are getting burned.

And US and Europe is moving towards the same path: coming from debt piramid and applying QE's

Arturo wrote:

Ad Orientem wrote: On a related note I draw everyone's attention to an interesting post on the PP relative to Japan's brutal deflationary depression.

http://gestaltu.blogspot.com/2012/09/th ... anese.html

Hi Ad,

excelent article. Thank you very much. There is a sentence on that article that really explains the performance of PP against long deflationary stagnation periods, that Harry Brown couldn't study because he never experienced it before (as far as i know):

If we are right, and the permanent portfolio is vulnerable to synchronized losses, then it makes sense to explore some tactical or dynamic overlays to help avoid investing in asset classes in sustained downtrends

its obvious that the 3,2% PP CAGR is 'gold' for a japanese investor after 20 years of deflationary stagnation, but this is an exampe of poor PP performance that was not studied before.

What is scary about this sentence is that after 20 years of serious and discipline PP investment, you have to turn to hypothetical "dynamic overlays" based on speculation in stead of investing, once, as a japanese investor, and after 20 years of long patient, you are getting burned.

And US and Europe is moving towards the same path: coming from debt piramid and applying QE's

Here is the line in the article that jumped out at me:

Clearly the Japanese Permanent Portfolio (PP) delivered much better total returns over the past 20 years than the Japanese stock market on its own, and indeed performed better than the traditional Japanese 50/50 stock bond portfolio that we explored in great detail in "Rebalancing Japan."

I think that I would be happy with those results.

Are we talking about 3.2% nominal return in a deflationary environment?  What's to complain about there?

One thing to consider about Japanese PP results is that we should be using real inflation adjusted numbers. They have had deflation for much of the past 20 years. So a return of 2-5% as shown in Ad's article (nice analysis BTW), is probably 3-6% real return CAGR which is what the portfolio does in the US.

Personally I do not target a particular CAGR. I focus only on real returns over time. Only real returns matter. CAGR figures that are not adjusted for inflation do not show the whole story.

EDIT: Xan beat me to it. 3.2% returns in a deflationary environment is not a bad return for the portfolio. It's much better than stock holders received.

I'll try to reply to all of the questions here, but some of them are quite complicated, so would require a multi-page essay, so I'll try to keep it simple!

First, actually I'm not a native Japanese person, but I am soon to be naturalized, so I will be legally Japanese and permanently living in Japan. Regardless of the economy, the quality of life is the main thing that drew me here.

"What is the public's perception of the Japanese stock market"

If you mention to anyone that Japan has the world's third largest economy, nobody believes it. Everybody feels the economy is doing badly. As for the stock market, a lot of people participated in it years back, but since everyone got burned, they have been too scared to enter into it again. The only people who invest these days are largely business people, or those who get benefits for buying their own company's stock. However, a lot of companies whose stock used to be 1000 - 3000 yen per share is now worth less than 200 yen per share. I personally know people who lost over half of their portfolio value, who went on to sell everything and vow never to even think about the stock market again. That's understandable enough for the majority of people.

Gumby: Personally, I cut my hair by myself, so I haven't noticed about that! But as for food and daily goods, I would say the price has been exactly the same for at least 10 years, probably longer. I haven't felt the prices going down. However, people's salaries have been going down recently. As for getting a mortgage, I don't think it's so hard. I'm not exactly sure, but I heard around 60-70% of people are home owners. However, there were (and still are) a lot of new houses regularly appearing on the foreclosure listings.

Banks don't explicitly have negative interest, but most banks give a 0.02% interest rate for checking accounts, and some (but not all) charge a yearly fee for using the account, so I guess that could be interpreted as sneaky negative interest?

Actually, regarding foreign investment, I feel that people are being encouraged to invest in other countries, or at least, in other currencies. If I go down to the local bank, I can see a lot of advertisements for US-Reit funds, US-Stock funds, BRIC (especially Brazilian and Chinese) funds, as well as US dollar savings accounts. There is the double tax issue (which is in small print), but the yield is in large letters at the top of the page!

As for how people deal with deflation, most people (especially older people) are just holding cash. I don't mean short term treasury bonds, I mean just bank accounts. Recently, there has been a scandal about bank customers who are over 100 years old, with hundreds of millions of yen in their account, and there is some doubt over whether they are still alive. Now, older people need to provide some proof that they are still alive to the banks once they reach a certain age. Anyway, in a deflationary environment, where people are scared of the stock market, cash is (supposedly) going to increase your purchasing power (I say supposedly because that could change at any time). Also, the sales tax is currently 5%, though that's going to raise to 7% and raise again to 10% very soon, which people have been strongly against.

As for Japanese bonds, I've searched and searched about this (even before posting here), and it seems that 30 year bonds just aren't available to individual investors. The most common ways to get bonds are through the post office, or through the Ministry of Finance. Both of them offer 3 or 5 year fixed rate bonds, or 10 year variable rate bonds. The rates offered on those are a maximum of 0.6 to 0.8%. The rate offered directly from the bank is worse than that, at 0.5% for a 10 year bond. 30 year bonds are not mentioned anywhere in the individual investor prospectus. There also seem to be no ETF's catering to these. Therefore, the only 30 year bonds available are those international ones that I mentioned before. If anyone happens to know exactly how to get a hold of 30 year Japanese bonds, I'd be happy to hear about it.

Having said all of that negative stuff, I actually personally feel like the economic environment has been getting better in recent years. Yields are (ever so slightly) increasing, slowly but surely. The complete lack of inflation means that we don't currently have to worry about the price of daily goods (so far!). Also, there have been more TV shows recently advertising slightly more "premium" products, that seem to be selling well. The biggest obstacle to overcome is people's mindset, and getting them to spend more of their money. I'm hoping that with a lot of aging cash-rich older people, that will mean big inheritances for their children, which may lead to a boom in spending some time within the next 20 years! Pure speculation and personal opinion, of course, but it makes sense to me.

Thanks for replying Miyazaki-san.

Obviously the long duration is pretty important. So, I guess you may have to either incorporate international government bonds after all or perhaps some really high quality long term domestic corporate bonds (really an oxymoron since corporate debt is more risky). Tough call. Perhaps a combination of the two would even be worth considering (12.5% international, 12.5% domestic).

Boy, between the taxes and the limitations, the Japanese government sure doesn't make it easy for you!

Are there no long term JGB bond funds? That wouldn't surprise me if there weren't, but it might be worth exploring to see if they exist. Pretty odd that the government won't let you own a long term risk-free investment.

craigr wrote: One thing to consider about Japanese PP results is that we should be using real inflation adjusted numbers. They have had deflation for much of the past 20 years. So a return of 2-5% as shown in Ad's article (nice analysis BTW), is probably 3-6% real return CAGR which is what the portfolio does in the US.

Personally I do not target a particular CAGR. I focus only on real returns over time. Only real returns matter. CAGR figures that are not adjusted for inflation do not show the whole story.

EDIT: Xan beat me to it. 3.2% returns in a deflationary environment is not a bad return for the portfolio. It's much better than stock holders received.

Hi Craig,

From my point of view, there is a big difference of real return of 2% and 5%, above all for the long run including comissions, fees, taxes, etc.

there is a research made at Marc's blog where he gave a CAGR value of 1,8% since 1990 until 2011. The oficial inflation during that period was 1,2%.

On Ad's blog, in Chart 7, PP CAGR obtains a value of 2,74%. If you substract inflation, we obtain similar values to Marc's blog data.

So maybe we could say that PP, in a long deflationary stagnation scenario like Japan, worked just for protecting the cash against inflation.

Arturo wrote: If we are right, and the permanent portfolio is vulnerable to synchronized losses, then it makes sense to explore some tactical or dynamic overlays to help avoid investing in asset classes in sustained downtrends

I've been saying that for awhile now.  Which is why I use market timing that "doesn't work".  Pffft!

Nonetheless, this article is a valuable contribution to the PP lore.  In the case of an extended disflation cum deflation, it clearly indicates that managing the volatility is much more important than any market timing.

Risk Parity continues to sound like a bad idea, but then I suppose it depends on how often you rebalance.  If bonds were to increase in volatility, i.e. go into a bear market, then the portfolio proportion could decrease over time rather than being overweight.  But its not a gamble I'm willing to make.

MachineGhost wrote:

Arturo wrote: If we are right, and the permanent portfolio is vulnerable to synchronized losses, then it makes sense to explore some tactical or dynamic overlays to help avoid investing in asset classes in sustained downtrends

I've been saying that for awhile now.  Which is why I use market timing that "doesn't work".  Pffft!

Nonetheless, this article is a valuable contribution to the PP lore.  In the case of an extended disflation cum deflation, it clearly indicates that managing the volatility is much more important than any market timing.

Risk Parity continues to sound like a bad idea, but then I suppose it depends on how often you rebalance.  If bonds were to increase in volatility, i.e. go into a bear market, then the portfolio proportion could decrease over time rather than being overweight.  But its not a gamble I'm willing to make.

But what makes me think twice is that this pattern hasn't been studied or debate before. You can't build up a system that works, as its advertised, only in one country.

Arturo wrote: But what makes me think twice is that this pattern hasn't been studied or debate before. You can't build up a system that works, as its advertised, only in one country.

Well, you seem new to the forum.  You should check out some older threads by Clive or myself, such as this: http://gyroscopicinvesting.com/forum/ht ... ic.php?t=5

The way I see at the moment, you have two concerns based on history.  A 1980-style synchronized collapse and a Japanese-style extended deflation.  Both can be ameliorated by volatility normalizing and/or market timing, but its important to realize they are not necessary!  The PP still works and thrives as is.  Don't confuse MT's or craigr's blase attitude with them being ostriches with their heads in the sand.

Miyazaki-san, what would  US or UK HBPP performance look like when converted into Yen? I guess in Yen terms it would not look great (I guess volatile and getting hit by the strengthening Yen). Although JGB have a low yield, I'm sure I heard somewhere that they were one of the few safe currency treasuries to have above inflation yields and that is what matters. Am I right in believing that in Yen terms, US LTT did not look great through 2008 (the 30% gain in USD terms was swamped by the JPY/USD gain)? Is there really nothing like the US treasury direct or the UK DMO where retail savers can buy JGB?
Perhaps the Japanese stock market has also bottomed out now? Perhaps when an asset really is unloved, then that is a good sign- like gold in 2000. Again, in Yen terms, the US stock market must stink too. Perhaps if it is impossible to buy JGB, then the next best option might be to hold 20%gold, 20%Japanese stocks and 60% Japanese Yen cash (post bank savings or whatever safe way is best). Clive has posted on here about how a similar very cash heavy portfolio back tests well for the UK and USA.

MachineGhost wrote:

Arturo wrote: But what makes me think twice is that this pattern hasn't been studied or debate before. You can't build up a system that works, as its advertised, only in one country.

Well, you seem new to the forum.  You should check out some older threads by Clive or myself, such as this: http://gyroscopicinvesting.com/forum/ht ... ic.php?t=5

The way I see at the moment, you have two concerns based on history.  A 1980-style synchronized collapse and a Japanese-style extended deflation.  Both can be ameliorated by volatility normalizing and/or market timing, but its important to realize they are not necessary!  The PP still works and thrives as is.  Don't confuse MT's or craigr's blase attitude with them being ostriches with their heads in the sand.

Hi Machine,

i am sorry, but i do not understand your point. Having a 0,5% CAGR during 10 years (1990-2000) can be evaluated as a working PP for a japanese? could you maintain iron nerves during that amount of years? me not :-)

Arturo wrote:

MachineGhost wrote:

Arturo wrote: But what makes me think twice is that this pattern hasn't been studied or debate before. You can't build up a system that works, as its advertised, only in one country.

Well, you seem new to the forum.  You should check out some older threads by Clive or myself, such as this: http://gyroscopicinvesting.com/forum/ht ... ic.php?t=5

The way I see at the moment, you have two concerns based on history.  A 1980-style synchronized collapse and a Japanese-style extended deflation.  Both can be ameliorated by volatility normalizing and/or market timing, but its important to realize they are not necessary!  The PP still works and thrives as is.  Don't confuse MT's or craigr's blase attitude with them being ostriches with their heads in the sand.

Hi Machine,

i am sorry, but i do not understand your point. Having a 0,5% CAGR during 10 years (1990-2000) can be evaluated as a working PP for a japanese? could you maintain iron nerves during that amount of years? me not :-)

Wait a second, I thought we were talking about a Japanese PP having a 3.2% return over that period against a mostly deflationary backdrop. 

That sounds to me like the real PP returns of 4-5% that we are all looking for.

Wait a second, I thought we were talking about a Japanese PP having a 3.2% return over that period against a mostly deflationary backdrop. 

That sounds to me like the real PP returns of 4-5% that we are all looking for.

That's not what Marc De Mesel's website shows. The returns from 2000-2009 were indeed a little over 3% nominal when there was actual deflation; the returns from 1990-1990 were 0.5% in nominal terms when inflation averaged around 1% annually over those 10 years. The PP actually manged to lose money in real terms for ten years and to be beat by cash for a decade (actually, the latter isn't what concerns me...the PP lost to short-term Treasuries in the US from 1981-early 2000s...what concerns me is it losing to STTs/cash when STTs cash actually beat inflation but the PP failed to do so).

Using 20-year JGBs (IIRC De Mesel's data used 10 or 15 year JGBs) helps during this period but not by much. Even tilting somewhat to LTTs (say 30% LTTs and 20% cash instead of 25% in each) to make up for the fact that 20-yr bonds aren't as powerful deflation/stock market crash protection as 30-yr ones doesn't give a real return for the Japanese PP anywhere near 3% for 1990-1999.

Adding foreign stock for 30, 33, 35, or 40% of the stock allocation helps more than LTT tilting; the 90s were golden for US stocks; not too bad for the non-Japanese EAFE countries' equities, and while the late 90s sucked for EM the period from 1990-1993 (when Japanese stocks crashed hard from the 80s bubble) saw EM outperforming both the EAFE and US indexes. Not a bad argument for including foreign equities as some of the PP's stock allocation IMO.

D1984 wrote:

Wait a second, I thought we were talking about a Japanese PP having a 3.2% return over that period against a mostly deflationary backdrop. 

That sounds to me like the real PP returns of 4-5% that we are all looking for.

That's not what Marc De Mesel's website shows. The returns from 2000-2009 were indeed a little over 3% nominal when there was actual deflation; the returns from 1990-1990 were 0.5% in nominal terms when inflation averaged around 1% annually over those 10 years. The PP actually manged to lose money in real terms for ten years and to be beat by cash for a decade (actually, the latter isn't what concerns me...the PP lost to short-term Treasuries in the US from 1981-early 2000s...what concerns me is it losing to STTs/cash when STTs cash actually beat inflation but the PP failed to do so).

Using 20-year JGBs (IIRC De Mesel's data used 10 or 15 year JGBs) helps during this period but not by much. Even tilting somewhat to LTTs (say 30% LTTs and 20% cash instead of 25% in each) to make up for the fact that 20-yr bonds aren't as powerful deflation/stock market crash protection as 30-yr ones doesn't give a real return for the Japanese PP anywhere near 3% for 1990-1999.

Adding foreign stock for 30, 33, 35, or 40% of the stock allocation helps more than LTT tilting; the 90s were golden for US stocks; not too bad for the non-Japanese EAFE countries' equities, and while the late 90s sucked for EM the period from 1990-1993 (when Japanese stocks crashed hard from the 80s bubble) saw EM outperforming both the EAFE and US indexes. Not a bad argument for including foreign equities as some of the PP's stock allocation IMO.

I would not have wanted to own Japanese stocks through the 1990s either. 

Losing 75% in value over a 10 year period in an asset that is supposed to provide superior long term returns would have really bummed me out.