Still hesitant about the PP

[catacomb]

The current absurd economic environment highlighted by negative real interest rates suggests that if you save your money (CD's, money market funds, etc),  you will generally lose purchasing power over time, unless you invest in volatile assets.

The problem is that all volatile assets, including those of which the PP is composed and that are supposed to check and balance each other, are heavily inflated bubbles. These bubbles were  inflated by investors' money that found its way there due to lack of other alternatives given the zero rate interest rates.

The problem is that when interest rates will eventually climb up, all other assets will lose heavily.

Interest rates are low because central banks try to promote growth. If everyone starts saving money instead of consuming valuable things, the banks will lower interest rates even more, which will further erode the value of money.

Sorry for my english

[AgAuMoney]

The problem is that all volatile assets, including those of which the PP is composed and that are supposed to check and balance each other, are heavily inflated bubbles. These bubbles were  inflated by investors' money that found its way there due to lack of other alternatives given the zero rate interest rates.

The problem is that when interest rates will eventually climb up, all other assets will lose heavily.

What is your alternative, or what do you consider to be non-volatile assets?

When will all volatile assets "lose heavily" ?

If you know the future, you can do better than putting your money in the PP.  The PP is based on the assumption that you can not know the future.


I don't know the future.  I believe many things are in a bubble now, and I believe in the future they will lose heavily.  But I do not know when.

Will they lose 50% from today's value?  Or will they go up 100% and then lose 50%?  Or will they go up 1000% and then lose 50%?  I don't know.

You might consider putting a small portion of your assets into a PP.  I'd say that if using a 4 ETF version of the PP, that $1000 into each category would be the minimum.  Trading fees and management hassle might be too large for a smaller amount.  But you may want to consider putting 10% of your investable assets into a PP, 2.5% of assets into each category.  Watch how it performs until you are comfortable or for a year or two before giving up on the idea.

I have about 40% of my assets in my PP.  It is limited to that because I cannot swallow buying more gov't bonds.  I also have additional gold and silver, cash, stocks and some whole-life life insurance.

If you have an alternative that is more stable and has less risk of loss (either directly or due to inflation), you should describe it.

[catacomb]

thank you for your answer sir

[MediumTex]

Sorry for my english

The first time I read that I thought it said "Sorry for my anguish."

Investing isn't science.  It's an art that will always be deeply influenced by greed and fear.

There are no guarantees with the PP,  but I think that it will provide you with about as much security as you can find in the uncertain world we live in.

[Pointedstick]

This seems to be a fairly common line of worry about the PP, and I sympathize. But this affects every portfolio, not just the PP, and as AgAu said, what's the alternative? If cash is negative, and stocks, bonds and gold are all in bubbles, what's left? TIPS? Real estate? Farmland? Diamonds? 50% equity in your shady brother-in-law's payday loan shop?

It could be that we're only halfway up in those bubbles and pulling out now will ruin returns over the next few years. We just don't know. Nobody does.

[BearBones]

The problem is that all volatile assets, including those of which the PP is composed and that are supposed to check and balance each other, are heavily inflated bubbles. These bubbles were  inflated by investors' money that found its way there due to lack of other alternatives given the zero rate interest rates.

If one believes that gold, equities and bonds are all in a bubble, then cash looks pretty attractive, even with negative real rates of return. Cash is one of the things that I like about the PP. Not many investment strategies keep such a large stash in hand to be deployed when/if several bubbles pop simultaneously.

[melveyr]

Yeah I think it just appears to be a really tough investment environment in general right now. The interest rate environment is affecting all asset classes so I doubt you could find an alternative that looked better to you.

The only way for you to express your fears would be to 100% cash, but that just doesn't seem right to me. I think the best way to approach uncertainty is to have wide diversification, and the PP has that in spades.

[BearBones]

The only way for you to express your fears would be to 100% cash, but that just doesn't seem right to me. I think the best way to approach uncertainty is to have wide diversification, and the PP has that in spades.

Agree. Between my VP and PP, I am 35% cash. I am hoping that the other asset classes make up for the negative real return on cash. And, if 1-3 other asset classes crash, I will likely lose less than most folks. At least that is my hope.

[BP]

I understand completely.  If one accepts the fact that one cannot predict the future, then one must also accept the fact that the PP may not perform as it has done in the past.  So instead of relying on any one investment theory (e.g., PP, world portfolio, etc.) you may wish to consider more than one theory based portfolio based on your personal determination of the risk in each portfolio.  In other words, you could split your money into several different portfolios (each with its own investment theory) with the same risk profile.  This way you are diversifying your risk across several portfolio theories instead of relying solely on the past performance of the PP.

[dualstow]

Sorry for my english

Your English is excellent, actually.

[melveyr]

I understand completely.  If one accepts the fact that one cannot predict the future, then one must also accept the fact that the PP may not perform as it has done in the past.  So instead of relying on any one investment theory (e.g., PP, world portfolio, etc.) you may wish to consider more than one theory based portfolio based on your personal determination of the risk in each portfolio.  In other words, you could split your money into several different portfolios (each with its own investment theory) with the same risk profile.  This way you are diversifying your risk across several portfolio theories instead of relying solely on the past performance of the PP.

What other strategies do you like with roughly the same risk profile as the PP?

[Tortoise]

On the one hand, the psychological challenge with a market-agnostic strategy like the PP is that most investors think they have an idea about how the market is likely to move over the next few years. Going against your gut is often hard to do.

On the other hand, the psychological challenge with a market-timing strategy is that people want to be rewarded when their predictions are correct but insulated from losses when their predictions are wrong.

To avoid the aforementioned psychological hurdles, there needs to be a "Too Big to Fail Fund" for retail investors (ticker symbol: TBTF). It would provide generous returns when the fund manager's gambles are successful, and it would be bailed out by taxpayer dollars when the gambles blow up--keeping the fund return flat or slightly positive. I would so invest in that fund.

[BP]

melveyr,

We like 25% SCV, 50% 5 year treasuries, 25%  TIPS.  PP and Bogle like.  Improvements or other ideas are welcome.

From Simba's spreadsheet (rev. 12c I think):

2002-2012
SD 4.41
CAGR 7.76      versus  PP SD 4.44 (split the MMF and 2 year treasuries)  CAGR 8.86

1975-2012
SD 6.24
CAGR 10.28  versus  PP SD 7.91 (same MMF/2 yr split) CAGR 8.89

[AgAuMoney]

If one believes that gold, equities and bonds are all in a bubble, then cash looks pretty attractive, even with negative real rates of return.

I'm based in the U.S. so when you say "cash," I think "U.S. Dollar."

I think cash is in a bubble.

Right now it seems to have some safety premium on top of the "reserve currency of the world" attribute.  But definitely the reserve currency part is fading, and the safety premium is nothing but pure emotion so could disappear almost instantly.  Where would that leave cash?

Not anywhere near its current place on the U.S. Dollar Index, I expect.

[BearBones]

If one believes that gold, equities and bonds are all in a bubble, then cash looks pretty attractive, even with negative real rates of return.

I'm based in the U.S. so when you say "cash," I think "U.S. Dollar."

I think cash is in a bubble.

Good point. There are really two issues at play, aren't there?:
1. Are bonds, equities, and/or tangible assets inflated in price? Could it be that the Fed has driven up the prices of multiple asset classes to unsustainable levels?  If so, it may be helpful to have dollars on hand to purchase when/if prices plummet.
2. Is the dollar in a bubble relative to other currencies?

I tend to think yes and no (but I also failed economics and monetary policy). What's your take?

[MachineGhost]

Under the general equilibrium theory, all assets must go up in price to decrease their relative comparative dividend yields.  Likewise, the reverse will happen when investors start demanding higher returns on their risk capital.  That may come about due to an expanding economy and/or increasing inflation expectations.  The former would be classified as "Prosperity", the latter as ultimately "Tight Money".

What's tricky to figure out is the historical analog.  My best guess is we are in the equivalent of an extended Fed Monetarist experiment of the late 70's long before a Volcker arrives to take away the punch bowl.