Gyroscopic Investing

As Craig can attest I have long been lurking and trying to determine if the PP is right for me.  The sole reason why I have not adopted the HB PP is due to my concern over treasuries. 

I realize that no one can predict the future however in my honest opinion one should consider being underweight both LT and ST US Treasuries for most of the next 10 years. Why?  Treasury bond rates are probably as low as they will go and once they begin to rise --- and rise they will because of Uncle Ben's addiction to Quantitative Easing virtually guarantees inflation down the road --- US treasuries of all flavors will lose value and give you losses that the dividends and other PP components will not be able to make up for?

Any help in overcoming this concern is greatly appreciated.
Thanks!
Heather

I too have some trepidation with LT treasuries, but I don't think you have too much to worry about with the ST treasuries. Shorter duration bonds have little exposure to inflation.  I reconcile holding the traditional PP (with long term bonds) due to its relatively massive gold holdings.  If inflation eats into the value of treasuries, gold should more than make up the difference.

The other thing to consider is that we really don't know what will happen going forward, no matter how "obvious" it may look now.  And if deflation, rather than inflation, should take hold instead, a PP without the LT treasury component will be exposed.  As HB always said, if you don't have the full package you don't have the security.  I hold the standard PP since I recognize that the future may unfold in an entirely different manner from what I expect to happen.

Heather,

I wish I knew what was going to happen with Treasuries but I don't. The reason I use this portfolio is because I gave up a long time ago trying to guess what the markets were going to do. I've been hearing about the death of long term treasuries now for years. I bought them anyway knowing the doom being predicted and they've done nothing but go up since and pay me interest twice a year. But the situation could change at any time and show some losses. This is just how the markets work.

In today's economy we have the Fed doing a lot of jerking around of the money supply behind the scenes because they are worried about deflation. If they are unsuccessful LT bonds could keep going up from here. If they are successful then we could have inflation and hopefully the gold will ease the pain of the bond losses.

But keep in mind that if you place a big bet on inflation leaning assets and we don't get inflation you could sustain large losses. The reason the portfolio holds all these assets all the time is so you don't get hammered if your gamble turns out wrong. I really think that if you don't own all the assets you don't have the full protection of the portfolio just as Browne stated many times.  

Also I would suggest you try to not look at assets in isolation. LT bonds may go down as a separate asset, but this doesn't mean you'll have a loss to total portfolio value. As the economy recovers it is quite likely that stocks could pull in big gains erasing losses in other parts. Consider that in 2009 the portfolio saw gains of around +8% yet the LT bonds dropped in price by -22%. So a loss in a single asset does not mean total portfolio destruction.

The PP is intentionally designed so that, no matter what's going on in the economy, one of the four assets will rally.

The flip side of this is that, no matter what's going on in the economy, one of the assets will feel overpriced and possibly in a bubble.  A key part of the strategy is refraining from making assessments like that, and holding all four assets at all times.

Also, you can make an efficient market argument that Treasuries are priced fairly right now relative to their attendant risks.  Yes, the outlook for long term Treasuries is poor, but everyone else in the world knows the same thing we do, and many are choosing to sell or forego Treasuries.  That pushes their market price down until they reach a fair price for buyers such as us.  In Browne's terminology, the PP invests (not speculates) in all four assets, which means accepting that the prevailing market price on any asset is a fair cost relative to the protection offered by that asset.

I just wanted to give you my point of view as someone that just recently started a PP.  I went "all in" with both taxable and tax deferred accounts just a little over two months ago around the beginning of September.

Since then my LT treasuries have lost about 7.5% of their value.  Sounds bad, right?  Well, gold is up about 15% and stocks are up 6.5% so actually I'm already showing healthy returns.

The only advice I would give you as a "lesson learned" is to go all PP on the same day.  I made the mistake of buying LT treasuries one day, then since I was waiting for cash to free up in my account I didn't buy my stock index funds until a couple days later.  I lost about 2% of gains in stocks due to bad timing and a couple really good market days in September.  If you need to, sell all your securities and let the money sit in cash for a day or two until you are ready to make all your buy trades at once.