Gyroscopic Investing

I am in the final phase of moving money into a PP, and I am trying to look carefully at all dire scenarios going forward (as you might tell from some of my other recent posts). I am particularly interested what would leave me feeling like I made a grave mistake, what would tempt me to abandon my original sound investment strategy. It just occurred to me yesterday that it may not be absolute drawdowns that would rock my confidence as much as significant drawdowns in the face of others around me making money (most likely in equities). There is, in fact, a dangerous component of ego wrapped up in all of this, one that I should be well aware of going forward. I imagine that I am not alone.

I recommend a 100% stock VP. That way, you can profit a bit more from equities when they're on fire, and when they're falling like a rock, you can take comfort in your PP.

Dr. Bernstein, in his Amazon.com review of Craig's book, predicted that some PP investors will become impatient and fall by the wayside during periods when the stock market is booming.

He is probably correct, since short-terms surges in equities can discourage Permanent Portfolio investors not satisfied with the "slow but (we hope!) sure" pace of the PP.

And even the PP does not always return a real profit, as opposed to nominal gains. In nominal terms, the PP has had only four losing years from 1972 to 2012. But in real terms, the PP has had seven losing years, in addition to years when the positive real return was quite low.

As for myself, I earned my retirement portfolio using the Boglehead approach. Now that I am retired, and with a pretty good pension, I am converting to the Church of the Permanent Portfolio, content to have lower volatility at the price of missing out during the stock market's boom times.

Yeah overweighting equities either through a VP or explicitly within the PP framework itself could offer a form of emotional hedging for you. At the end of the night when you are falling asleep you will "net" still be rooting for equities like everyone else, but without nearly as much of a roller coaster ride thanks to the wide diversification offered through the other asset classes.

Sometimes it can feel good to be part of the herd. I think we are wired to feel that way in lots of cases. I don't have a VP right now, but when I get more money I might have a brokerage account where I do bottoms up stock analysis. It will allow me to tilt towards equities (which I am a long term bull on) and I do enjoy the challenge of fundamental analysis of business. It helps me stay sharp.

Also, everyone should keep in mind that we have just gone through one of the greatest rallies since the great depression. If rising stock markets are cause for abandonment for you, you probably just passed one of the harder tests.

goodasgold wrote: Dr. Bernstein, in his Amazon.com review of Craig's book, predicted that some PP investors will become impatient and fall by the wayside during periods when the stock market is booming.

And of course it's already happened. The guy who runs PRPFX has mentioned in interviews about how many people fled during the "lean years."
I certainly don't worry about other people making more money than I will ever make. A friend of mine has done well with Apple, but I don't want to be him. I want to be diversified.
I feel pretty confident that I will be rewarded for staying the course and rebalancing during lean years, but my stock vp definitely produces endorphins.

I understand that the PP will under-perform a 100% equity portfolio during a period of economic prosperity, but will it stay on par with a 60/40 BH portfolio? If so, then I don't anticipate feeling any regret in choosing one investment strategy over the other. On the other hand, if the PP under-performs this conservative allocation, then perhaps SPY or even VTI is insufficient to counteract the declines in the other assets.

buddtholomew wrote: I understand that the PP will under-perform a 100% equity portfolio during a period of economic prosperity, but will it stay on par with a 60/40 BH portfolio? If so, then I don't anticipate feeling any regret in choosing one investment strategy over the other. On the other hand, if the PP under-performs this conservative allocation, then perhaps SPY or even VTI is insufficient to counteract the declines in the other assets.

budd,

There will be times when the PP underperforms the 60/40 and there will be times where the 60/40 underperforms the PP.

Any time two asset allocations are different one is always going to be doing better than the other. I think you are setting yourself to go crazy if you are comparing your allocation to different ones at any point in time. You need to ask yourself what you want from your portfolio, and compare it to that internal benchmark. For me I want consistent real returns over rolling 5 year periods. The 60/40 has already demonstrated that it won't do that, so for my goals I would never compare the PP to the 60/40. Nor would I ever compare the PP to 100% equities because equities have erratic rolling 5 year performance.

Melveyr speaks words of wisdom, as usual.

Budd, I think you need to step back and take a look at your expectations. It seems as though you want your investments to achieve whatever performance the best asset or portfolio is yielding, but without any downside risk. Is that a realistic desire?

melveyr wrote: You need to ask yourself what you want from your portfolio, and compare it to that internal benchmark. For me I want consistent real returns over rolling 5 year periods. The 60/40 has already demonstrated that it won't do that, so for my goals I would never compare the PP to the 60/40. Nor would I ever compare the PP to 100% equities because equities have erratic rolling 5 year performance.

Definitely true. But easier said than done, particularly late in career having transferred a lot of assets into a superficially "weird" portfolio, particularly soon after said portfolio has been on a multi-year streak compared to more traditional allocations. I think that it is the correct move. But I also think that it is important to to try to anticipate one's emotions surrounding such things as a 5 year 60% decline in gold in the midst of an equity rally. Or an as yet unheard of 5 year decline in the PP when your colleagues and neighbors are doing better. If one bails in such a situation, it will invariably be very bad timing.

But remember its not how much you don't or others make in the short-term, its how much they keep.

melveyr wrote:

buddtholomew wrote: I understand that the PP will under-perform a 100% equity portfolio during a period of economic prosperity, but will it stay on par with a 60/40 BH portfolio? If so, then I don't anticipate feeling any regret in choosing one investment strategy over the other. On the other hand, if the PP under-performs this conservative allocation, then perhaps SPY or even VTI is insufficient to counteract the declines in the other assets.

budd,

There will be times when the PP underperforms the 60/40 and there will be times where the 60/40 underperforms the PP.

Any time two asset allocations are different one is always going to be doing better than the other. I think you are setting yourself to go crazy if you are comparing your allocation to different ones at any point in time. You need to ask yourself what you want from your portfolio, and compare it to that internal benchmark. For me I want consistent real returns over rolling 5 year periods. The 60/40 has already demonstrated that it won't do that, so for my goals I would never compare the PP to the 60/40. Nor would I ever compare the PP to 100% equities because equities have erratic rolling 5 year performance.

My benchmark is a 60/40 BH portfolio as I would have 100% of my investments allocated in this fashion (currently 50%) if not for the PP.

Pointedstick wrote: Melveyr speaks words of wisdom, as usual.

Budd, I think you need to step back and take a look at your expectations. It seems as though you want your investments to achieve whatever performance the best asset or portfolio is yielding, but without any downside risk. Is that a realistic desire?

I realize my comments in the past are difficult to overlook when I raise a point or make a comment in a thread. However; I'm unclear how my above statement has anything whatsoever to do with an unrealistic desire. I was merely stating that I would have no regrets if the PP performs on par with a 60/40 BH portfolio [over the course of an investment lifetime]. You may have incorrectly assumed that I was referring to a shorter period of time and I completely understand.

Bones:

I quit over thinking my investment in the PP when I can't come up with a safe,alternative investment.
I don't believe many folks are exceeding the PP longterm returns.

annieB wrote: Bones:

I quit over thinking my investment in the PP when I can't come up with a safe,alternative investment.
I don't believe many folks are exceeding the PP longterm returns.

This is anecdotal, but I think it was Craig's accountant who told him that he had never had another client with such solid and consistent actual investment results.

MediumTex wrote:

annieB wrote: Bones:

I quit over thinking my investment in the PP when I can't come up with a safe,alternative investment.
I don't believe many folks are exceeding the PP longterm returns.

This is anecdotal, but I think it was Craig's accountant who told him that he had never had another client with such solid and consistent actual investment results.

MT,

Your anecdote reminded me that Bill Clinton once said that Hillary is the most honest person he knows.  Does that say more about Bill or Hillary?  ;-)

So, although I'm sure Craig's PP returns are solid, without knowing who his accountant and what his client portfolio looks like... it's hard to tell if he's saying anything significant.

Signed,
The Most Handsome Man Alive (according to my wife)