Are Other People Independently "Discovering" The PP? If So To What Effect On Us?
Posted: Mon Oct 29, 2012 7:36 am
Most of us are buy-and-hold PPers who understand how and why it works.
Is it possible that others, including hedge funds and pension funds, may "independently discover" the PP? For example, they may not be aware of HB's implementation but they may think:
"We should add some gold to our portfolio to protect us against inflation" (this thought may include silver and oil ETFs)
"We should add some long term treasuries to our portfolio to protect us against deflation"
"We should increase our cash reserves for opportunistic buys that may present themselves if the stock market dips."
Doubtful they would end up with 4x portfolio but they might be 50% stocks, 10% cash, 10% gold, 10% LTTs, 10% "regular" bonds (like a total bond market fund)
If this happens, what effect does it have on the PP? The reason the PP works is because in different economic climates, one asset will do well. But what if everyone did the PP and was always buying all of the assets? Then the system no longer works because we'll all be buying LTTs that lose to inflation (because yields are the same or less than inflation typically), gold that has no long-term gain since it's just gold and doesn't "do" anything, cash that matches inflation if we're lucky.
I suppose the answer to this question is the same as the one frequently posted on Bogleheads: "What if everyone indexed?" - if that were the case then all stocks would essentially move up and down together but what would happen is, a single person would look at that and say "indexing is stupid, there's some arbritrage to be had here" and withdraw from the indexing market, and re-equilibrate the correct price of stocks.
The same thing would like happen "if everyone PP-ed" it would drive up the cost of gold (because everyone would want 1/4 of their money in gold so demand would be constant), it would drive down the yields on LTTs to make them perform even worse relative to inflation, and stocks would be the only thing that's actually possibly gaining money.
However, someone in this total PP world would step back and withdraw from the PP market and re-equilibrate like the hypothetical 100% indexing world scenario.
Is it possible that others, including hedge funds and pension funds, may "independently discover" the PP? For example, they may not be aware of HB's implementation but they may think:
"We should add some gold to our portfolio to protect us against inflation" (this thought may include silver and oil ETFs)
"We should add some long term treasuries to our portfolio to protect us against deflation"
"We should increase our cash reserves for opportunistic buys that may present themselves if the stock market dips."
Doubtful they would end up with 4x portfolio but they might be 50% stocks, 10% cash, 10% gold, 10% LTTs, 10% "regular" bonds (like a total bond market fund)
If this happens, what effect does it have on the PP? The reason the PP works is because in different economic climates, one asset will do well. But what if everyone did the PP and was always buying all of the assets? Then the system no longer works because we'll all be buying LTTs that lose to inflation (because yields are the same or less than inflation typically), gold that has no long-term gain since it's just gold and doesn't "do" anything, cash that matches inflation if we're lucky.
I suppose the answer to this question is the same as the one frequently posted on Bogleheads: "What if everyone indexed?" - if that were the case then all stocks would essentially move up and down together but what would happen is, a single person would look at that and say "indexing is stupid, there's some arbritrage to be had here" and withdraw from the indexing market, and re-equilibrate the correct price of stocks.
The same thing would like happen "if everyone PP-ed" it would drive up the cost of gold (because everyone would want 1/4 of their money in gold so demand would be constant), it would drive down the yields on LTTs to make them perform even worse relative to inflation, and stocks would be the only thing that's actually possibly gaining money.
However, someone in this total PP world would step back and withdraw from the PP market and re-equilibrate like the hypothetical 100% indexing world scenario.
