PP compared with 10/45/45

[Pointedstick]

Nah. From http://www.riskcog.com/:

PP:


Proposed alternative:

[craigr]

Here is the thing about these debates:

1) No matter what I post about the Permanent Portfolio, someone can go into a spreadsheet and juggle some numbers to come up with something that was just as good or better in a certain dimension.

2) They can also go into a spreadsheet and plug in different dates to make something look better or worse.

3) Anyone can go into a spreadsheet and find what worked best in the past. However it usually involved no thought other than to try to make a point to look at some single number and ignore many other aspects of portfolio design.

Spreadsheet results are only one factor to consider because they can only prove what didn't work, they can't prove what would work better. In the past 10% in gold could have been enough in some scenarios (it actually wasn't though in the 1970s and only marginally so in the 2000s). Of course, it may not be enough going forward. That particular portfolio they picked out of thin air looked fine on CAGR over 40 years, but rolling real returns were near zero at times. So it did not have the same real return consistency as the Permanent Portfolio, something that is frequently overlooked when looking at decades of data in a monolith block.

Finally, history doesn't repeat. So the idea of using a spreadsheet alone to validate a portfolio is fraught with danger. There needs to be more thought put into it.

[Pointedstick]

What I notice about Bogleheads discussions of the PP is that they're apt to say that the bull markets in gold and bonds were historical anomalies and aren't likely to repeat, but they generally ignore that a bull market in stocks is pretty much required for a stock-heavy portfolio to exhibit anything approximating decent performance. The whole argument seems to be a rejection of the PP's asset neutrality and a faith in stocks, but they also seem to ignore the fact that stocks have sometimes drifted sideways for decades at a time.

[TripleB]

Craig,

Poo Poo spreadsheets all you want but you can't argue with the fact that the following Portfolio Beat the PP significantly with lower standard deviation over the last 30 years:

3.5% Leveraged Chinese Small Cap Growth
24.75% Inverse USD
13.75% International MicroCap Value Financials exUS
4.8% Gold
53.20% Apple Stock

[craigr]

Craig,

Poo Poo spreadsheets all you want but you can't argue with the fact that the following Portfolio Beat the PP significantly with lower standard deviation over the last 30 years:

3.5% Leveraged Chinese Small Cap Growth
24.75% Inverse USD
13.75% International MicroCap Value Financials exUS
4.8% Gold
53.20% Apple Stock

That's true. You should patent that!

I avoid spreadsheet vs. spreadsheet arguments. It's like trying to nail jelly to the wall. No matter what you say, someone can go into a spreadsheet in 60 seconds and find some portfolio allocation that "beat" it. Again though, by only one dimension. Funny thing though is nobody ever puts their own allocation up against the same scrutiny.

But since I eat my own dog food I kind of take this far more seriously than the average spreadsheet jockey I suppose. In particular I look at:

1) Backtested results to show trends and obvious problems.
2) Review of financial history not just in the U.S. but other markets to see how things can go wrong.
3) Application of some business intuition about economics, risk and what I'd find to be an acceptable trade-off of returns vs. risk.
4) A healthy dollop of margin of error in case you're wrong about your assumptions.
5) A knowledge that you may still be so wrong that you can still have a problem you didn't expect, but at least you tried your best to limit the exposure.

So it's not a science though. I just found that Harry Browne had looked at a lot of these issues already. When I re-analyzed them I kind of came to similar conclusions. It's not perfect, but there is no perfect answer to all of this. You just do the best you can with your imperfect knowledge of the future. Spreadsheets are fine for what they are, but there is a lot more to portfolio design than coming up with the best CAGR in hindsight. Any moron can do that.

[clacy]

What I notice about Bogleheads discussions of the PP is that they're apt to say that the bull markets in gold and bonds were historical anomalies and aren't likely to repeat, but they generally ignore that a bull market in stocks is pretty much required for a stock-heavy portfolio to exhibit anything approximating decent performance. The whole argument seems to be a rejection of the PP's asset neutrality and a faith in stocks, but they also seem to ignore the fact that stocks have sometimes drifted sideways for decades at a time.

True

[frugal]

Hi,

happy 2013!

As much as I read about the HBPP, more I decrease the possibility to have a VP in the future. I'm not sure if it will add diversification to my savings, can you suggest me something?

[Pointedstick]

Hi,

happy 2013!

As much as I read about the HBPP, more I decrease the possibility to have a VP in the future. I'm not sure if it will add diversification to my savings, can you suggest me something?

If I had a VP, I would probably invest it in less-safe assets that had a higher yield. Probably a lot of corporate bonds, a small-cap value stock fund, maybe an emerging market fund. Maybe REITs and silver. But honestly, I see no reason to, personally. the PP already achieves my goals, which include preservation of capital and a real return in the rate of 3-6%, which are both important for my end goal of extreme early retirement.

[frugal]

Hi,

happy 2013!

As much as I read about the HBPP, more I decrease the possibility to have a VP in the future. I'm not sure if it will add diversification to my savings, can you suggest me something?

If I had a VP, I would probably invest it in less-safe assets that had a higher yield. Probably a lot of corporate bonds, a small-cap value stock fund, maybe an emerging market fund. Maybe REITs and silver. But honestly, I see no reason to, personally. the PP already achieves my goals, which include preservation of capital and a real return in the rate of 3-6%, which are both important for my end goal of extreme early retirement.

I made some calculations:

PP
return 7%/year

VP
return 12%/year


During 10 years, at the end we achieve:

2.25x the initial investment considering 75%PP+25%VP

1.96x the initial investment considering 100%PP


I don't know if it deserves the higher risk of having the VP.

Would you accept the higher volatily of having it?

Please advice.

[Pointedstick]

Nothing will return you a guaranteed 12%/yr. Nothing! What VP are you thinking will return 12%/yr? Beware relying on backtests too much. A simple backtest can only tell you what succeeded or failed in the past, not what will do well in the future.

Even if you find something that can yield that much on an occasional basis, only you can make the determination about whether the greatly increased volatility is worth it. How important do you find preserving principle vs growing it?

[k9]

Hi,

happy 2013!

As much as I read about the HBPP, more I decrease the possibility to have a VP in the future. I'm not sure if it will add diversification to my savings, can you suggest me something?

Something much more volatile but with a much higher potential yield. I particularly like small caps value, as their potential yield is really huge and actually does not necessarily depend on a given economic situation (it can go up in a recession or down during prosperity). For better results in this compartment you must pick stocks yourself rather than buy a SCV index. Such a VP should give you very good results ON AVERAGE, but be ready to lose almost everything, skyrocket or anything in between, though. As PS said, nothing can guarantee your VP will go to the moon.