Gyroscopic Investing

Hey everyone, I'm a total newbie to the PP and by new I mean I don't use it (yet?).  I've done some reading and have some questions that maybe could help me transition (at least partially) to the PP.  I'm sorry if these questions have already been addressed in the past - I tried searching the forums but couldn't find what I was looking for.

I've arranged all my anxieties by topic - feel free to reply to all or just a particular issue.  Thanks in advance for your thoughts!

Cash

I have no real way of investing directly in a Treasury MM - my best alternative would be a short term treasury bond fund (or a regular MM).  But if cash is for stability it seems like this would be a bad idea - I haven't found a single fund that doesn't fluctuate its share price and many of them have been on downward trends.  I feel nervous about putting cash in an account that isn't stable.  I know inflation erodes away its value over time but in a ST bond fund it seems like the potential is for it to lose its value more quickly.  Would a MM not be an acceptable alternative?  I know these have broken the buck in the past but this seems rare.

Bonds

LT Treasuries, and TLT specifically, seem like a bad option right now and the future doesn't look good.  If interest rates rise (which is all they can do at this point, right?) won't these fall in value even more?  Even over the last 10 or so years it seems like these funds have gone up and down quite a bit.  I guess this also makes me nervous since they seem a bit unpredictable. 

Stocks

Most of my investments right now are in stocks (85/15) and this has been my traditional go to place for investments.  25% seems so small - almost everyone else seems to think so as well. I know that herd mentality isn't always right but even 50/50 seems safer. How many 30 year periods have seen an overall loss for stocks? 

Gold

Here's my biggest concern.  I actually became interested in the PP because I wanted some gold exposure but gold seems so fickle.  It seems like it's had two big run ups in the past 40 years and then done nothing all other times.  And it seems like it's on the way back down right now.  Furthermore my reading seems to indicate that it does very well during times of very high inflation or panic but not necessarily just normal inflation.  It seems like a crisis investment.  Insurance I think is the word I've heard before.  25% seems like a large allocation for insurance. 

Furthermore, I read Rowland's book and he states explicitly that Gold is a tool not a religion but it seems like that even on these forums gold has a numinous aura surrounding it.  People seem to be cheering for its price to rise, but doesn't that mean we're cheering for the instability of the markets and crises?  I'm not trying to start a fight I'm just pointing out my limited observations.  I'll admit that buying gold makes me feel a little like being an initiate into an alternative society (at least of investors) but that may just be my perception.  Speaking of this...

Politics

I don't want to offend anyone or ruffle anyone's feathers but it feels like I need to be a libertarian to really embrace the PP.  Will this work if I'm a liberal?  Or a RINO? Or an independent who doesn't care?  I mean it appears that a lot of people not only have deep suspicions about the government but are expecting (hoping?) for some kind of apocalyptic scenario a la "Doomsday Preppers." 

Again I don't mean to belittle anyone's beliefs but it does seem the PP is tied to a certain social and political alignment.  Am I wrong?  If I don't believe the world will end or that the government will roll back our rights and declare martial law is this still an investment plan for me? 

General Anxiety

One thing that attracted me to the PP was its consistent returns over the last 40 years with very few years with a loss.  It looks like 2013 will be one of those years and that if I jump in now I'm putting in money into three asset classes all headed down.  I know that predicting the future is impossible but I don't understand how the theory behind the PP is operating in reality right now.  Is this a time of prosperity?  Stocks are up but everyone seems nervous.  How do I make sense of this economic climate with HB's paradigm? 

I should add that most people on here seem to have a lot more financial knowledge than I do.  I've heard of QE on the news, for example, and vaguely understand that the Fed is somehow propping up the economy and stocks but don't really get the specifics of how that works.  So if you mention something like QE it'd be helpful to explain briefly just what that is (or whatever you bring up).

Finally I wanted to thank everyone again for reading and commenting.  I know that tone is one of the most important things lost over written communication so I want to say again that I'm not here to start a fight but really am interested in learning from all of you. 

Thanks!

dr ratdog wrote: Politics

I don't want to offend anyone or ruffle anyone's feathers but it feels like I need to be a libertarian to really embrace the PP.  Will this work if I'm a liberal?  Or a RINO? Or an independent who doesn't care?  I mean it appears that a lot of people not only have deep suspicions about the government but are expecting (hoping?) for some kind of apocalyptic scenario a la "Doomsday Preppers." 

Again I don't mean to belittle anyone's beliefs but it does seem the PP is tied to a certain social and political alignment.  Am I wrong?  If I don't believe the world will end or that the government will roll back our rights and declare martial law is this still an investment plan for me? 

Politics   no you don't need to be a "anything" politically to really embrace the PP, it is a investment based on agnosticism and an understanding that the economic future is "difficult" or possibly even "impossible" to predict,  While some here lean towards a healthy distrust of government and others an optimistic blind faith in it, we all agree that we don't know what the next economic condition will be and hedge our bets to cover all four. That doesn't stop us from discussing predictions about the direction we are headed in, or making bets on them in a VP, or discussing other ways to be ready for anything in areas outside of our investments, or questioning the PP, or prepping, healthy diet, or any number of other interesting topics that that get a thread.  This forum may lean libertarian but when you get to know the posters you will find we have close to a full spectrum of political leanings from anarchists to communists, combined with an exceptional ability to get along and debate in a friendly way that no other forum i have visited compares to..

Brace youself, this is going to be a long one!!!

dr ratdog wrote: Cash

I have no real way of investing directly in a Treasury MM - my best alternative would be a short term treasury bond fund (or a regular MM).  But if cash is for stability it seems like this would be a bad idea - I haven't found a single fund that doesn't fluctuate its share price and many of them have been on downward trends.  I feel nervous about putting cash in an account that isn't stable.  I know inflation erodes away its value over time but in a ST bond fund it seems like the potential is for it to lose its value more quickly.  Would a MM not be an acceptable alternative?  I know these have broken the buck in the past but this seems rare.

An option you could pursue for this would be buying T-Bills directly from the treasury via treasury direct.  There are some good tutorials in the cash section of this forum I believe.  If you don't have a significant amount your investing you may wanna consider just leaving it in a Bank Savings account.  You have the risk the bank could go under, but that is very small.

dr ratdog wrote: Bonds

LT Treasuries, and TLT specifically, seem like a bad option right now and the future doesn't look good.  If interest rates rise (which is all they can do at this point, right?) won't these fall in value even more?  Even over the last 10 or so years it seems like these funds have gone up and down quite a bit.  I guess this also makes me nervous since they seem a bit unpredictable. 

Interest rates can rise or fall.  They can drop to 0 in theory, and have come pretty low as they are.  Everytime someone says there is nowhere to go buy up, the treasury surprises them by going down!  You can't predict the future.

As for the volatility of these, please see my last comment at the end of this post.

dr ratdog wrote: Stocks

Most of my investments right now are in stocks (85/15) and this has been my traditional go to place for investments.  25% seems so small - almost everyone else seems to think so as well. I know that herd mentality isn't always right but even 50/50 seems safer. How many 30 year periods have seen an overall loss for stocks? 

The goal of the PP is to insulate you from risk.  Each asset in it carries a risk, but more importantly they each carry a DIFFERENT risk.  In essence there is no single catastrophe that can eliminate a large chunk of your portfolio.  If you are 85% stocks, and stocks drop 50%, you lost 42% of your whole portfolio.  With the PP you would only lose 12%, and that's assuming none of the other parts increased in value (unlikely).

dr ratdog wrote: Gold

Here's my biggest concern.  I actually became interested in the PP because I wanted some gold exposure but gold seems so fickle.  It seems like it's had two big run ups in the past 40 years and then done nothing all other times.  And it seems like it's on the way back down right now.  Furthermore my reading seems to indicate that it does very well during times of very high inflation or panic but not necessarily just normal inflation.  It seems like a crisis investment.  Insurance I think is the word I've heard before.  25% seems like a large allocation for insurance. 

Furthermore, I read Rowland's book and he states explicitly that Gold is a tool not a religion but it seems like that even on these forums gold has a numinous aura surrounding it.  People seem to be cheering for its price to rise, but doesn't that mean we're cheering for the instability of the markets and crises?  I'm not trying to start a fight I'm just pointing out my limited observations.  I'll admit that buying gold makes me feel a little like being an initiate into an alternative society (at least of investors) but that may just be my perception.  Speaking of this...

Gold is the inflation hedge.  By that I mean that as the dollar decreases in value it increases.  Again, remember the goal of the portfolio is to insulate you equally from all risks.  Inflation is a big risk, and Gold serves the purpose of protecting you from that.

In a case where things really go bad, you are right that it serves as a crisis protection, but in general, it's for inflation.  The important thing to remember is that you want your money protected in all circumstances.   The PP meets that goal by taking into account disasters as well as prosperity.

dr ratdog wrote: Politics

I don't want to offend anyone or ruffle anyone's feathers but it feels like I need to be a libertarian to really embrace the PP.  Will this work if I'm a liberal?  Or a RINO? Or an independent who doesn't care?  I mean it appears that a lot of people not only have deep suspicions about the government but are expecting (hoping?) for some kind of apocalyptic scenario a la "Doomsday Preppers." 

Again I don't mean to belittle anyone's beliefs but it does seem the PP is tied to a certain social and political alignment.  Am I wrong?  If I don't believe the world will end or that the government will roll back our rights and declare martial law is this still an investment plan for me? 

Libertarian tends to be the demographic here because of what the Permanent portfolio offers, not the other way around.  By it's nature the PP is designed to survive all the things that libertarian's fear most (Inflation, Government default, etc...)  Often on these boards you'll hear apocalypse type hypotheticals, but that doesn't mean we are doomsday preppers so much as it means we like to tout the strongest advantage of the PP.  That advantage is this:

Not only does the PP serve as a decent portfolio for growth, it is the only portfolio that can boast saving at least some of your assets even if the world went to hell!

You can see how that would lead to discussions about how effective the PP is when martial law is declared, but in reality we talk about those hypotheticals because we like to sit back and say "Even if the government collapses I can sleep easy knowing my money is safe, or at least safer than anyone elses."

dr ratdog wrote: General Anxiety

One thing that attracted me to the PP was its consistent returns over the last 40 years with very few years with a loss.  It looks like 2013 will be one of those years and that if I jump in now I'm putting in money into three asset classes all headed down.  I know that predicting the future is impossible but I don't understand how the theory behind the PP is operating in reality right now.  Is this a time of prosperity?  Stocks are up but everyone seems nervous.  How do I make sense of this economic climate with HB's paradigm? 

I should add that most people on here seem to have a lot more financial knowledge than I do.  I've heard of QE on the news, for example, and vaguely understand that the Fed is somehow propping up the economy and stocks but don't really get the specifics of how that works.  So if you mention something like QE it'd be helpful to explain briefly just what that is (or whatever you bring up).

The way you make sense of the climate, and the way you deal with the volatility are the same.  You accept that you have no idea what is going to happen in the future, and hedge you bets against whatever happens, by owning the PP.  The PP doesn't assume to know every economic condition, but it does expect to have at least one winner in any climate.

Are we in (or entering) a time of prosperity?  Perhaps, but perhaps we aren't.  You don't know, and I don't know, so that's why I have 25% in stocks, in case we are, and 75% in Gold/Bonds/Cash in case we aren't.  If we enter prosperity, I'm prepared, if we instead get hyper-inflation, I'm still prepared.  That's the goal.

The volatility that worries you is because you are looking that assets in isolation.  You see "Gold down 10%!!!" and you say "I could never own that, I'm sticking with stocks!"  But what happens when the market crashes and the headline reads "Stocks down 30%!"  No matter what you own it will be volatile.  The way you get around that is to own volatile assets that counter act each other.  That's what the PP does, and that's why I'm sticking with it.

Will it be up every year?  No, There is no portfolio that can promise that.

Will it survive the next crash?  Yes, and a lot better than most portfolios.

Doesn't that make it a bearish portfolio?  Yes and No.  Some of it is geared towards bearishness, some of it is bullish.  It's a portfolio that assumes no matter what the bears and the bulls do I want to keep my money safe.

Welcome! These are really great, thoughtful worries you've got. Let me see if I can address some of them.

First of all, I actually think libertarians have a tougher time with the portfolio than others since half the assets are in government bonds. The truth is that it's a tough portfolio for most irrespective of their politics because it's full of volatile and extreme assets, such as gold, bonds and stocks. Now, we've all been told not to worry about the volatility of stocks for all our investing careers but the truth is that stocks are ridiculously volatile and often fall in the dumps for decades. 30 years usually yields you a positive return, at least historically in the American stock market, but not 10:



Unless you're fully financially independent or are willing to tolerate a decade or more of wasted investment dollars, 10 years of negative returns is devastating, and so demoralizing that you'll probably pull out after 2 or 3 and miss the rally. You need to moderate that volatility!

The first thing to get out of your head is the idea that an 85% stock portfolio is any less terrifying than an 85% gold portfolio or an 85% bond portfolio. If either of those gives you the willies, so should an 85% stock portfolio!

30 Government bond yields are nearing 4% right now. The idea that rates have "nowhere to go but up" has been a common refrain for literally decades. People said it when rates were 8%, then 6%, then 3%… and then the rate on a 30-year government bond dipped to just a bit over 2.5% and everybody lost their shit over it. Yes, bonds are volatile, and when when interest rates rise, they experience losses. But we don't know when they'll rise or how far. If we knew that, we wouldn't need a neutral portfolio like the PP. Are they going to keep going up from here? Or will they fall back down? If I knew that, I'd be a far richer man.

Gold is also a volatile asset, and you're not wrong that owning gold can kind of feel like cheering for the end of the world. Gold also does well during period of negative or increasingly negative real interest rates (basically, when CPI is higher than the rate on a 10-year government bond or so). So when rates rise but inflation doesn't, it can feel like a one-two punch as both bonds and gold fall, which is what's been happening over the past year. And it sucks.

My reading of the situation is that we're in a Fed-fueled asset bubble. By demolishing interest rates, the Fed has forced people into stocks and real estate, which is why the stock market is rising without much visible prosperity and real estate prices are getting pumped up again even as mortgage rates rise and without any meaningful increase in the purchasing power of the average homebuyer.

These bubbles can't help but pop eventually, but we're all in uncharted waters here. Stock-heavy portfolios will be massacred if and when the bubble pops. The PP is always kind of a "best of the worst" type portfolio since if the PP isn't working, what's better? All the alternatives either sacrifice returns in their quest for low volatility, or take great risks with concentrated bets that can leave you holding the bag… that turns out to be full of poo… and on fire… napalm fire…

dr ratdog wrote:
Cash

I have no real way of investing directly in a Treasury MM - my best alternative would be a short term treasury bond fund (or a regular MM). 

Bonds

Can you list the available funds?  Also, do you have access to ETFs?

LT Treasuries, and TLT specifically, seem like a bad option right now and the future doesn't look good.  If interest rates rise (which is all they can do at this point, right?) won't these fall in value even more?  Even over the last 10 or so years it seems like these funds have gone up and down quite a bit.  I guess this also makes me nervous since they seem a bit unpredictable. 

"No place to go but up" (regarding interest rates) is the type of conventional pseudo wisdom that the PP saves an investor from falling prey to.

Interest rates can absolutely continue to drop (think Japan).  We've had some pretty detailed discussions about this here, and if you're interested you could probably search the forum and read about it.  Bottom line is that it's not a good idea to make this kind of assumption.  It's just the kind of the thing that will burn you.

Stocks

Most of my investments right now are in stocks (85/15) and this has been my traditional go to place for investments.  25% seems so small - almost everyone else seems to think so as well. I know that herd mentality isn't always right but even 50/50 seems safer. How many 30 year periods have seen an overall loss for stocks? 

The returns say otherwise.



Basically the same return as the stock market, with a much smoother ride.

Gold

...but gold seems so fickle. 

That's exactly the point.

It seems like it's had two big run ups in the past 40 years and then done nothing all other times. 

But they were huge run ups that basically rescued the portfolio.

Gold gets a bad rap this way.

When gold does well, it tends to get downplayed as having had a "run up" that was due to some kind of odd political circumstance. 

When stocks do well,  it's viewed as normal, as if things are "back on track"

In reality, both are volatile.

Politics

I mean it appears that a lot of people not only have deep suspicions about the government but are expecting (hoping?) for some kind of apocalyptic scenario a la "Doomsday Preppers." 

If you stick around, I think you'll see that this isn't the mentality most PPers have.  We all realize that in a Doomsday scenario we will all have bigger problems than what our investment portfolios look like. 

The nice thing about the PP, though, is that it does give you some protection against bad things that happen outside of just normal investment risks, not just Doomsday scenarios.  You have a hard asset (gold) for a currency crisis.  You have assets with multiple investment brokerages, banks, etc, in case there a problem with an individual institution, and you have plenty of cash to deal with life's emergencies (which, IMO, are a much bigger risk than a Mad Max event).

General Anxiety

One thing that attracted me to the PP was its consistent returns over the last 40 years with very few years with a loss.  It looks like 2013 will be one of those years and that if I jump in now I'm putting in money into three asset classes all headed down.  I know that predicting the future is impossible but I don't understand how the theory behind the PP is operating in reality right now.  Is this a time of prosperity?  Stocks are up but everyone seems nervous.  How do I make sense of this economic climate with HB's paradigm? 

I think everyone feels like this before they start.  There always seem to be some kind of weird thing going on with one or two of the assets that make people feel like they're overpriced or about to crash or that they're never going to be worth anything. 

It always seems like it would have been easier to have started at some time in the past b/c you already know the outcome.  The truth is that it's always difficult.  Once you hold it for a few years and see that it works, this anxiety starts to go away.

I will say, however, that if you have so much anxiety about the PP that you won't be able to stick to it, then you need to try to find something else that you will be able to stick to.  The worst thing you can do as an investor is hop around from strategy to strategy.  You need to find something you're comfortable with and trust it. 

If long term treasuries and gold bother you, you might consider using something like the Vanguard Wellington Income Fund and then buying some gold coins.  90%/10% (or whatever percentages you're comfortable with).

I should add that most people on here seem to have a lot more financial knowledge than I do. 

I know how you feel. 

I've heard of QE on the news, for example, and vaguely understand that the Fed is somehow propping up the economy and stocks but don't really get the specifics of how that works.  So if you mention something like QE it'd be helpful to explain briefly just what that is (or whatever you bring up).

Just search the board for QE and you'll find plenty of discussion and explanation.

The reality, though, is that's it's just noise and not really relevant to the PP, IMO.

AdamA wrote: "No place to go but up" (regarding interest rates) is the type of conventional pseudo wisdom that the PP saves an investor from falling prey to.

Interest rates can absolutely continue to drop (think Japan).  We've had some pretty detailed discussions about this here, and if you're interested you could probably search the forum and read about it.  Bottom line is that it's not a good idea to make this kind of assumption.  It's just the kind of the thing that will burn you.

I would say it is no failure to be prepared for rising interest rates, this would not mean that you get burned when it doesn`t come. Just avoid REITs, Bonds and any stock with high debt load. When you think interest rates rise, you pack your portfolio full with banks and insurance companies. And because most of them are currently cheap this could be a wise move. But will i get burned when interest rates fall further? no, because there are plenty of stocks that are not dependend on interest rates. (like msft,ibm,aapl or orcl)

Investing is easy when you use your brain .

frommi wrote: I would say it is no failure to be prepared for rising interest rates, this would not mean that you get burned when it doesn`t come.

But the PP is already prepared for rising interest rates.  Removing bonds from the PP just limits its ability to profit from declining interest rates. 

Investing is easy when you use your brain .

I think that for most people the opposite is true (myself included). 

frommi wrote: I would say it is no failure to be prepared for rising interest rates

Unless of course interest rates don't rise.

AdamA wrote:
But the PP is already prepared for rising interest rates.  Removing bonds from the PP just limits its ability to profit from declining interest rates. 

Only when gold rises. And when you look at what gold did in may and june you will see that that is not given. You simply don`t know what will happen with the PP when interest rates rise, because  we never had that situation for longer than a year or two in the past 40 years. And that is my main critic on the PP, if interest rates rise for 10 or 20 years you are in uncharted water. And that they do that is not unusual, when you look at this chart:

http://www.multpl.com/interest-rate/

frommi wrote: Only when gold rises. And when you look at what gold did in may and june you will see that that is not given. You simply don`t know what will happen with the PP when interest rates rise, because  we never had that situation for longer than a year or two in the past 40 years. And that is my main critic on the PP, if interest rates rise for 10 or 20 years you are in uncharted water. And that they do that is not unusual, when you look at this chart:

http://www.multpl.com/interest-rate/

The chart you linked to shows a period of time from 1972 to 1981 where interest rates more than doubled. And the PP did fine during that decade. Do you have any reason to believe that the same kind of thing won't happen if this condition recurs?

Pointedstick wrote: The chart you linked to shows a period of time from 1972 to 1981 where interest rates more than doubled. And the PP did fine during that decade. Do you have any reason to believe that the same kind of thing won't happen if this condition recurs?

Only when gold rises . Can you assure that?

frommi wrote:

Pointedstick wrote: The chart you linked to shows a period of time from 1972 to 1981 where interest rates more than doubled. And the PP did fine during that decade. Do you have any reason to believe that the same kind of thing won't happen if this condition recurs?

Only when gold rises . Can you assure that?

No. Can you assure it won't?

Also, during that time, the interest on short-term debt and cash went up dramatically. Is that going to be missing this time too?

Finally, stocks were in the shitter that time around. Maybe they'll be great this time.

If on the other hand, we can't count on stocks to rise at all, then we'd be looking at a portfolio where rising interest rates crush bonds, gold doesn't rise, stocks don't rise, and the interest rate on short-term debt doesn't rise. I think you'd be hard-pressed to find any portfolio that would survive that time. Maybe you think you could skillfully pick the individual stocks that are undervalued and poised to explode. Maybe. Maybe not. Would you be willing to bet everything on it?

Thanks everyone for your feedback.  It's really helpful.  I don't have the time to comment on everyone's posts but I have a few thoughts below and a few new questions:

Politics

Ok, you're right.  I can see how the PP would not necessarily be a libertarian-friendly AA since it is relying heavily on government securities.  Good point.

Performance

A lot of you mentioned the diversity of assets that the PP offers as a hedge against risk, as opposed to my current 85/15 portfolio, which I'll admit is very risky itself.  Point taken. 

But it seems like that the PP needs at least TWO asset classes to be doing well for it to get returns.  If three classes fall even 10% in a year (for a total of 30%) then my other asset would need to net over 40% (~43%) to just get me back to break even point.  It seems like each decade at least two assets did alright - 2000's it was gold and bonds, 1990's it was stocks and bonds, 1980's it was stocks and cash (the 70's seem like it was rescued by gold alone). 

Is this right?  That is, are the four economic conditions the PP is meant to protect against basically two unrelated axes (Prosperity vs. recession and deflation vs. inflation) so that two asset classes are usually expected to perform well?  I bring this up because currently stocks are doing great but everything else, including cash, is down, which is bringing PP returns down. Right?

I will say that I appreciated the poster who mentioned that backtesting is always a danger: "I'd be better off getting in ten years ago."  I'm notorious for this kind of thinking.  Thanks for the reality check.

Gold

At this point if I implement the PP I plan to use IAU ETF for Gold but I'd want to purchase physical gold at some point, at least partially.  But the expenses seem so high.  In addition to a bid/ask spread it seems like there's usually a 4% fee tacked on (not to mention fees for storing).  That means my gold, which produces no interest or dividends, has to at least make back over 6% just to break even.  Is there a way to buy gold without this steep markup?  Or do I get it back when I sell it again?  This seems like an unavoidable front-end load.

Also, is it more advantageous for me to buy coins locally at a dealer or over the internet?  Any thoughts about that?

Also is there any chance the gold coins will fluctuate in value based on anything besides their gold content?  That is, for example, that American Eagle coins will fall in value because they are seen as a collector item or what not? 

Cash

I use Vanguard, so the Treasury MM is closed to me.  I could use any of Vanguard's ST Treasury funds but they don't seem ideal.  I have a brokerage through them so I could purchase SHV or SHY but I hate paying trading commissions, esp. when I'll already be doing it for TLT and IAU. 

Stocks

Thanks for the chart on overall stock performance.  I think the psychology of it is really helpful: could I really ride out 10 years of negative returns for stocks even if they eventually rebounded in another 20 years?  That would be really hard and I think at some point I'd bail.  Good point.

Thanks again for all the comments.  Really appreciate everyone's feedback.

dr ratdog wrote:
Performance

But it seems like that the PP needs at least TWO asset classes to be doing well for it to get returns.  If three classes fall even 10% in a year (for a total of 30%) then my other asset would need to net over 40% (~43%) to just get me back to break even point.  It seems like each decade at least two assets did alright - 2000's it was gold and bonds, 1990's it was stocks and bonds, 1980's it was stocks and cash (the 70's seem like it was rescued by gold alone). 

Is this right?  That is, are the four economic conditions the PP is meant to protect against basically two unrelated axes (Prosperity vs. recession and deflation vs. inflation) so that two asset classes are usually expected to perform well?  I bring this up because currently stocks are doing great but everything else, including cash, is down, which is bringing PP returns down. Right?

Even during a (relatively) "bad" year like this, the PP is barely down.

Look back at the returns for each asset class from year to year to see how things tend to pan out.

https://web.archive.org/web/20160324133 ... l-returns/

Might not be the logical explanation you're looking for, but it gives you an intuition as to how the PP tends to land on its feet in reality.

Cash

I use Vanguard, so the Treasury MM is closed to me.  I could use any of Vanguard's ST Treasury funds but they don't seem ideal.  I have a brokerage through them so I could purchase SHV or SHY but I hate paying trading commissions, esp. when I'll already be doing it for TLT and IAU. 

All of these options are fine.  VFISX is okay.  It does't fluctuate that much.  You could split the money between the prime money market fund the VFISX, or you could just use one of the ETFs you mention if you don't mind paying a transaction fee from time to time.

dr ratdog wrote: Cash

I have no real way of investing directly in a Treasury MM - my best alternative would be a short term treasury bond fund (or a regular MM).  But if cash is for stability it seems like this would be a bad idea - I haven't found a single fund that doesn't fluctuate its share price and many of them have been on downward trends.  I feel nervous about putting cash in an account that isn't stable.  I know inflation erodes away its value over time but in a ST bond fund it seems like the potential is for it to lose its value more quickly.  Would a MM not be an acceptable alternative?  I know these have broken the buck in the past but this seems rare.

IMO a pure Treasury MMF is best for PP cash, but as long as the yield on T-bills stuck close to zero, few of those are available. In the mean time I think a conventional MMF is an acceptable compromise; I have been using Vanguard's Prime MMF in one of my accounts. Currently that fund is about 55% Treasury and government bills, which is obviously worse than 100%, but better than it could be. I'll be switching that account to Vanguard's Treasury MMF the day it reopens.

dr ratdog wrote: Politics

I don't want to offend anyone or ruffle anyone's feathers but it feels like I need to be a libertarian to really embrace the PP.  Will this work if I'm a liberal?  Or a RINO? Or an independent who doesn't care?  I mean it appears that a lot of people not only have deep suspicions about the government but are expecting (hoping?) for some kind of apocalyptic scenario a la "Doomsday Preppers." 

Again I don't mean to belittle anyone's beliefs but it does seem the PP is tied to a certain social and political alignment.  Am I wrong?  If I don't believe the world will end or that the government will roll back our rights and declare martial law is this still an investment plan for me? 

The whole idea of hedging a portfolio against inflation and deflation is based on the premise that the government's management of the money supply is imperfect. So a certain amount of skepticism about the government is built into the PP, as it is with any other portfolio including an inflation or deflation hedge. That kind of skepticism meshes well with libertarianism, and is probably incompatible with socialism and communism. But I think it can cohere with any political philosophy that accepts that government programs do not work 100% perfectly 100% of the time.

Also, Harry Browne was a Libertarian Party presidential candidate, and naturally some of his political supporters became interested in the PP because of of that. So it's unsurprising that PP investors are more likely to be libertarians than the general population.

dr ratdog,

I have a few thoughts for you.  The PP is great for a conservative investor, especially one who doesn't want to be an active manager.  You aren't going to hit a lot of home runs with it, but you should get a lot of base hits, and without spending a lot of time on batting practice.  That last point about needing little time for the PP is very attractive to me, because my interest in investing waxes and wanes, with a lot more time on the waning than the waxing.  I'm glad to be in a portfolio that is very unlikely to fall apart during the months and years that I may forget to check in on it.

The fundamental principle of the PP is that the future is unknowable.  A lot of people right now think that bond yields have no where to go but up.  That's just not true.  They still have room to go down, and they very well could go down if the floor falls out from under the stock market, which is not at all unlikely.

If you decide that the PP is for you, but you don't want to jump all in at once, there are at least two things you could do.  One would be to put say half your money in the PP, and keep your other half in a different asset allocation.  If you're like me, and don't really like that first approach, the other thing you could try would be to just put say 16% of your money into the assets you don't like (bonds, gold, and maybe cash), and put the rest into the assets you do like (stocks and maybe cash).  That would still be a big selloff in stocks for you, which may be a good idea right now anyway.  Then, just wait several months and watch it once in a while and see what happens.  If stocks keep going up, then good, and you can decide how to re-balance at that point.  If stocks tank, you'll be glad that you sold off a bunch of them.

Regarding cash, be aware that with the PP you're advised to count your emergency fund as part of your 25% cash portion.  That's different from how most investment asset allocations look at it, and it lessens the amount of cash in your non-emergency investments.  Also, be aware that a good place to invest non-IRA cash is with Treasury Direct (no expense ratio), and don't forget Treasury Direct I-bonds as a good place for non-emergency "deep" cash.

Regarding gold, right now looks like a great time to buy.  Nobody knows whether it's going up or down from here, but it's sure come down a lot from where it was.  I only wish I had bought it now rather than last April, right before the big drop, but that's water under the bridge.  I'm going to the coin dealer this coming Saturday to buy some more gold coins and put them in my safe deposit box.  A lot of the "experts" say that yeah it's great to have a little gold, but don't go over 5%.  How is only 5% of anything going to make a real difference in your overall return?  Do yourself a favor and get at least 10 to 15%.  That's a lot more "insurance" than most people have.  The gold really helps to smooth out the volatility of your portfolio, because it's uncorrelated to the stocks and bonds.  If it was worthless, why would the central banks hold so much of it?  I don't see the demand going down as millions of Chinese and Indians enter the middle class -- I'm pretty sure they won't have any qualms about buying as much gold as they can.

I hope some of this long post has been helpful.

And one more reason to invest in the Permanent Portfolio that is underrated....it is fun!

Reub wrote: And one more reason to invest in the Permanent Portfolio that is underrated....it is fun!

FUN?

Thanks friends.

This helps a lot.  I think I'm just jittery.  I'm feeling better about the cash, bonds, and stock part of things.  If it was just 33% each of stocks, bonds, and cash this would basically be a conservative Bogleheads AA (although probably too conservative for them).  I think gold is the sticking point.

Gold seems like Duke BB.  I went to Duke so I love me some Blue Devils but they are a team everyone seems to love or hate.  Gold seems the same way.  Anytime I try to find any kind of consensus on gold it's almost always extreme positions.  "You should have half to 75% of your assets in gold" the gold bugs say or "Gold is a shiny yellow metal with no income stream - what a ridiculous waste of money" the detractors argue.

It seems like there's even high disagreement over what it does and why.  I've read a lot of detractors argue that gold isn't really an inflation hedge the way it's claimed to be, but honestly all the data is so overwhelming for me.  I didn't study finance so I don't really know how to evaluate all the arguments.  Does anyone else seem confused by this?

I have already been leaning towards your suggestion, Stuper1, about implementing this slowly.  I'm thinking of doing both, actually.  If it split it (not quite 50/50, maybe 45/55) then I'll have a PP and a VP.  Additionally, my overall portfolio (PP and VP together) will be something like 60% stock, and 14% each of cash bonds and gold.  I think I'll stick to gold ETF's first and then slowly get into coins. 

Thanks again everyone for your comments.  If someone could de-mystify gold for me I think I'd be set. 

I think you'll find that PP adherents are actually more reasonable on gold than most other investors are. We have to be. People who hate gold want nothing to do with it, and people who love it want 75% of their portfolio or more in it. We have 25%, which generally satisfies neither of these groups; it's dangerously high to one and naively low to the other.

Gold is indeed an inflation hedge, but that's not to say that it tracks CPI well, or even much at all, as the mainstream financial press is fond of pointing out. Gold only really reacts to high inflation, and no matter what some will tell you, inflation just isn't all that high right now which is why gold ain't too hot. If true inflation were really 5 or 6% or more as some may claim, gold should be booming.

My interpretation is thus:

1. Gold benefits from extremely damaging high inflation -- say, 10%/year or more
2. When inflation is low, gold reacts primarily to low real interest rates as people perceive bonds as a worse deal compared to holding gold

dr ratdog wrote: It seems like there's even high disagreement over what it does and why.  I've read a lot of detractors argue that gold isn't really an inflation hedge the way it's claimed to be, but honestly all the data is so overwhelming for me.  I didn't study finance so I don't really know how to evaluate all the arguments.  Does anyone else seem confused by this?

If someone could de-mystify gold for me I think I'd be set.

Gold is definitely an inflation hedge. 

More accurately put, it's a hedge against negative real interest rates.  So if I can buy a bond with an interest rate of 3% and the inflation rate is only 1%, gold may not do so well (2% real return on the bond).  But if a bond is paying 3% and the inflation rate is 4%, gold is probably going to do well (-1% real return on the bond).

Search the site for "negative real interest rates" and you'll find a better explanation for this than the one I just gave (I think it was Moda who posted it).

But as you mention, the data is pretty overwhelming.  When there is true inflation gold is the asset you want to own.  Period.
Don't over think it.  (The PP is designed for people who aren't finance majors and may not have a detailed understanding of all of this stuff...it's supposed to keep things simple). 

 

Pointedstick wrote:

My interpretation is thus:

1. Gold benefits from extremely damaging high inflation -- say, 10%/year or more
2. When inflation is low, gold reacts primarily to low real interest rates as people perceive bonds as a worse deal compared to holding gold

The changing valuations of gold is a mystery, as are all investments, despite the avowals of those who claim to know what the markets are going to do next. At the end of each year I like to look back at the yearly investment predictions of various gurus, such as Bill Gross. Some of the gurus are better than others, but they are all highly fallible, despite their predictions of a "sure thing."

And to slightly amend PointedStick's statement about gold responding to high inflation, it is also noteworthy that gold responds not only to inflation but to the fear of inflation, no matter whether the prediction turns out to be true, partly true or false.

Gold prices went up considerably from 2002 to 2013, and inflation wasn't very high during that period.  The thing I like about gold is that it's uncorrelated to stocks and bonds.  If you try some backtesting on various portfolios, you'll start to see that once you add a good chunk of gold in (say 10%+), it smooths out the volatility without hurting the overall returns.  That's what sold me on gold, along with the central banks holding it, and millions of other people around the world who would like to hold it if they could afford to do so.  Some people like to use the greater fool theory to explain gold's value.  They may be right.  Maybe I'm one of the fools.  But I don't think it's going to hurt my returns, because there are millions of other "fools" who are coming into the middle class around the world who will be happy to take it off my hands.  I don't see that changing in my lifetime.

stuper1 wrote: Gold prices went up considerably from 2002 to 2013, and inflation wasn't very high during that period.  The thing I like about gold is that it's uncorrelated to stocks and bonds.

This is a great summary about why you should hold some gold.  Gold's price movements are just not predictable, regardless of whether we have perceived inflation or not.  In fact, William Bernstein, in his book "Deep Risk" (pgs. 18-19), posits that gold may actually protect poorly from inflation, siting a study by Dimson, Marsh & Staunton.  Their study showed that after examining annual gold returns and inflation rates in 19 countries over 112 years, gold had the highest returns under the least inflationary conditions, i.e. deflation, while the years with the highest inflation produced negative gold returns.  So, the conventional wisdom that gold does well during inflation may not be accurate.  In any case, the role of gold as a portfolio diversifier can certainly be appreciated.

stuper1 wrote: If you try some backtesting on various portfolios, you'll start to see that once you add a good chunk of gold in (say 10%+), it smooths out the volatility without hurting the overall returns.

One other interesting point that Bernstein makes about gold's place in the PP: from 1976-2013, if you left gold out of the portfolio entirely, and just had a portfolio of 1/3 each stocks/long-term bonds/cash, the annual returns and standard deviation numbers are slightly better than the conventional 4x25 PP. (For those of you with a copy of "Deep Risk", see the graph on page 16.)  I am not a huge fan of backtesting with cherry-picked dates, but the '76-'13 period significantly covers almost all of the recent period of legal gold ownership in the US.

My conclusion: nothing wrong with including some gold in your portfolio, but it just may not be necessary.

My other conclusion: Most folks on this forum would be well served by picking up a copy of Bernstein's "Deep Risk"  It is thought provoking and deals directly with lots of the issues discussed everyday on this forum.
http://www.amazon.com/Deep-Risk-History ... 466&sr=1-2