Article: Is the Permanent Portfolio Broken?

[Ad Orientem]

http://www.thestreet.com/story/12169118 ... roken.html

I think most of us would answer no to that question. But I post the article for discussion purposes. Sadly I don't have a lot of time for commentary or I would have responded in the combox at the site.

Merry Christmas to everyone!

[dualstow]

Yesterday I was reading a Seeking Alpha article about retiring early. There were some individual stock recommendations. In the first comment a guy said, "Great article. I used to use the (pp) but it didn't work so I dropped it." Hmm.

I guess I like investing in the pp when most everyone else thinks it's broken.

I also think it would be strange if there weren't articles like this as long as stocks are soaring and the pp only calls for 25% stocks.

[Kshartle]

Yesterday I was reading a Seeking Alpha article about retiring early. There were some individual stock recommendations. In the first comment a guy said, "Great article. I used to use the (pp) but it didn't work so I dropped it." Hmm.

I guess I like investing in the pp when most everyone else thinks it's broken.

Probably means cash and gold will have a good 2014 since everyone else looks at stocks and bonds as the alternative.

I've said that I think cash and gold are the safest if the FED tapers but I'm having a tough time when I consider selling stocks now.

[Tyler]

From the article:

An investor who built the portfolio himself or herself with the SPDR S&P 500 (SPY), SPDR Gold Trust (GLD), iShares 20+ Year Treasury Bond ETF (TLT) and a money market fund for the cash would be down 15% for the year through last Friday.

That's simply not factually correct.  The portfolio is down a mere 2.5% YTD despite the horrible year for gold and bad year for bonds.  They pretty much lost me there, and everything else is (as usual) pure speculation.

[Tyler]

Yesterday I was reading a Seeking Alpha article about retiring early. There were some individual stock recommendations. In the first comment a guy said, "Great article. I used to use the (pp) but it didn't work so I dropped it." Hmm.

I guess I like investing in the pp when most everyone else thinks it's broken.

I also think it would be strange if there weren't articles like this as long as stocks are soaring and the pp only calls for 25% stocks.

I always wonder what people consider "working".  Generally, that's code for "matching whatever is hot in any given year so that I never question my choices".  Investing is so emotional.

I'm with you -- the fact that many think the PP is broken (despite protecting your money pretty well, as advertised) most likely means it's due for a breakout. 

[Kshartle]

Every investment concept is left for dead right before it turns around. That's just the nature of bottoms. This was in the two standard deviation for the PP on the downside this year right? I think it would pretty amazing to see a repeat of that in 2014 although with 50% in bonds and rates about to explode and 25% in extremely overbought stocks and omg don't get me started on gold (so worthless).



Ok I actually do think rates are too low to justify bond ownership unless you are about 70 with a heart condition.

[Kshartle]

Average return following a down year is 17.9%

Granted this is only 3 years but I think there is a very good reason for this which I'm sure everyone already understands.

If you take the year after the PP only does 4.0% or less you've got 8 years averaging 12.2% according to my numbers.


This was a rare year for it and I think 2014 will be much better in terms of nominal return. Now we know cash isn't going to do anything so a portfolio of LTB/Gold/S&P would need to turn in about 16.5% to make up for the cash and meet 12.2%.

To meet the average historical return following a down year would require about 24% from LTB/GOLD/S&P.

24% is very dog gone good for 3 non-correlated asset classes. There would have to be a big winner in there. Which one will it be?

[dualstow]

....

I always wonder what people consider "working".  Generally, that's code for "matching whatever is hot in any given year so that I never question my choices".  Investing is so emotional.

I'm with you -- the fact that many think the PP is broken (despite protecting your money pretty well, as advertised) most likely means it's due for a breakout.

2014 could bring even lower gold prices and of course everyone is waiting for bonds to just die already. I could wait another 1-2 years before the pp turns around. Still, I'm going to feel like a schmuck if everyone else leaves and I'm the last one here. 

[Tyler]

I hear ya.

To me, the beauty of the PP diversification (and unlike most other portfolios) is that the last one holding the PP bag will still have a sizable amount of money inside. 

[ns2]

I think possibly the PP may be broken for a while. If you look at the long term history it is a good strategy but past performance is no guarantee of future success as the sophisticated investors here understand much more than the average investor.

I'll give it another year. If it's down again this year I'm moving on. Should probably post a poll. How many of you feel the same way?

[dualstow]

There are two threads on that, though they are not polls either.

http://gyroscopicinvesting.com/forum/pe ... on-the-pp/
http://gyroscopicinvesting.com/forum/pe ... of-the-pp/

[Wonk]

Average return following a down year is 17.9%

This.

If an investment strategy did not have down years, everyone would be invested in it all the time.  A loss of 2-3% is a pittance.  The vast majority of my investable assets are held in precious metals, so a big drawback like this allows me to plow a ton of fresh cash into the same positions.  While nothing is guaranteed, I feel pretty darn good putting money in an asset after it's lost 30%.  Stay the course.

[frugal]

Average return following a down year is 17.9%

Granted this is only 3 years but I think there is a very good reason for this which I'm sure everyone already understands.

If you take the year after the PP only does 4.0% or less you've got 8 years averaging 12.2% according to my numbers.


This was a rare year for it and I think 2014 will be much better in terms of nominal return. Now we know cash isn't going to do anything so a portfolio of LTB/Gold/S&P would need to turn in about 16.5% to make up for the cash and meet 12.2%.

To meet the average historical return following a down year would require about 24% from LTB/GOLD/S&P.

24% is very dog gone good for 3 non-correlated asset classes. There would have to be a big winner in there. Which one will it be?

thanks for the numbers

Average return following a down year is 17.9%

This.

If an investment strategy did not have down years, everyone would be invested in it all the time.  A loss of 2-3% is a pittance.  The vast majority of my investable assets are held in precious metals, so a big drawback like this allows me to plow a ton of fresh cash into the same positions.  While nothing is guaranteed, I feel pretty darn good putting money in an asset after it's lost 30%.  Stay the course.

yeah!

[portart]

I agree a lot of what has been written. Is it tough to be down a tiny bit while other things are soaring? If you are demanding growth no matter what, I would say yes. However, it is a fact that it hurts far more to lose substantial gains then to miss upside. You always have the opportunity to grow your money as every day some new investment goes ballistic if you still have your money. If you have a VP, you can give it a shot. However, if you lose your capital, then mentally you become depressed and risk averse. You are not likely to see those opportunities. The value of PP as it keeps you in the game, protects what you have earned, and provides growth over time but not always in lock step with the markets. I look at my acct in kind of passive way when I see my balance is similar to what it was the last few years. I know I am positioned correctly when eventual rebalancing will work in my favor. I know for a fact the market will not go up forever as trees don't grow to the sky. I also know that gold will find it it's true place when extreme volitilty threatens others peace of mind.
 

[RuralEngineer]

I'm not prepared to bail out on the PP, but I'm also not seeing any scenarios where 2014 yields anywhere close to 17%.

Stocks simply don't have the growth left in them to pull up the other assets to those levels IMO.  If we have a good year for stocks with 8 or 9% gains that isn't going to do gold or LTT any favors, which is going to eat into our stock gains again.  Cash will likely remain flat and even if it doesn't, at most we could expect a couple of percent there.

A cataclysmic collapse might do great things for certain assets, but it isn't necessarily going to be good for the portfolio in general.  While I'd like to see $2000 gold again I don't want to see the DOW drop 50% for it to happen either.

I'm just curious and would be interested in seeing someone lay out a plausible scenario where the PP returned more than 12% in 2014.

[portart]

I am thinking 3% to 5% this year for PP. It has a long way to go to even out all the up years in the face of market headwinds. I don't see a scenario where we go up much from there considering market conditions of a market at all time highs and gold entering the "hated" period after falling so hard. The other two components are not in the high growth area. My thinking is this is a good time to work hard on your VP to add another 4% to your portfolio making your entire portfolio more competitive while you bind you time.

[stpeter]

Good thread. As someone who is new to PP, I struggle with these questions. I've been 100% cash starting in 2009 (before that I was an uninformed 60/40 investor) and since then I've done a lot of research and reading on possible investment strategies. Recently I've become (mostly) convinced that PP is the way to go, but I find it hard to take the plunge given the stratospheric level of equities and the ultra-low interest rate environment. (Yes, I know, I'm not supposed to time the market!)

One thing that puzzles me most is how HB or PP advocates would characterize the last 5 years. It seems to me that we have a no-growth economy, negative real interest rates, and a booming stock market with exceedingly high corporate profits. It's not prosperity, it's not a deflationary depression, it's not a tight-money recession, and it's not a period of high inflation (unless you count negative real interest rates as a form of inflation). Until this year PP did quite well in the recent environment, but I can't quite connect the dots between HB's four-fold theory of economic environments and PP performance. As someone who likes to understand the causes for things, this bothers me. :-)

[EdwardjK]

Stpeter,

You and I are alike with respect to the PP.  Study, study and more study.  in the meantime, the world passes us by.  It's time to act or get off the pot.

My hesitation centers on LTT.  With interest rates near zero the only direction is up, meaning bond values go down.  I just need to get over that and commit to the concept.

I have to disagree with your comment about corporate profits.  Year over year profits are up around 8%.  So with the market up almost 30% his year, We are seeing a reach for growth/yield.  In 2014 I would not be surprised to see a 10-15% market correction.

[stpeter]

Hi EdwardjK,

What I've spent most of my time studying over the last 4+ years has been dividend investing. Only in the last few months have I learned about PP, so I haven't spent all my time dithering over PP. :-) Unfortunately, to me it appears to be a sub-optimal time to go from 100% cash to PP, since I see stocks as ready for a significant decline and long-term treasuries as unlikely to shine. I know some here (and CR and MT in "the book") say to just take the plunge and not dollar-cost average or ease your way into the 4x25 allocation, but I find that a bit difficult to stomach.

As to corporate profits, they're about 70% above historical averages right now. Trees don't grow to the sky, so that seems unsustainable.

My perception of the current and recent environment is colored by my understanding of Austrian-school economics. As far as I can see, the benefits of credit expansion are going to those closest to the money: the banks, corporations that are able to issue bonds, those who engage in stock-market speculation, etc. Very little of this has trickled down to the real economy, which has merely kept pace with the underlying growth of population. It's a stagnant, sideways economy ("none of the above" in terms of HB's categories). Thus it's not a surprise to me that PP (along with many other strategies) is having trouble here.

I'm continuing to absorb the PP philosophy and if I can get comfortable with it then I'll move in that direction, although perhaps not all at once.

[Gumby]

My hesitation centers on LTT.  With interest rates near zero the only direction is up, meaning bond values go down.  I just need to get over that and commit to the concept.

People have been saying that for a long time. This article appeared on the front page of the NYTimes almost half a decade ago...

NYTImes: Interest Rates Have Nowhere to Go but Up (April 2010)

They were dead wrong.

In 2014 I would not be surprised to see a 10-15% market correction.

A Market correction of 10-15% implies a significant rise in LTTs as Wall Street would clamor for Treasuries.

[stpeter]

The Japanese 30 year bond rate is currently 1.68%.  While we may never end up where Japan is today, the present rates comparison makes our 3.92% yield look pretty rich.  Oh, and the 10 year bond hit 3% today. 

At the beginning of the year, the 10 year rate was 1.86% and the 30 year was at 3.04%.  I'm thinking it's a lot better time to buy LTT now than it was a year ago.  And gold also.  I now officially like three of the four PP assets: gold, LTT and cash.  That probably means stock will be up 50% in 2014... 

Thanks for the healthy perspective. :-)

While I realize that no one can know the future, it does seem to me that there are better and worse times to move a large amount of money into stocks. Just because one happened to discover PP in, say, February 2000 doesn't mean it would have been a great idea to buy a lot of equities at that point...

[buddtholomew]

The Japanese 30 year bond rate is currently 1.68%.  While we may never end up where Japan is today, the present rates comparison makes our 3.92% yield look pretty rich.  Oh, and the 10 year bond hit 3% today. 

At the beginning of the year, the 10 year rate was 1.86% and the 30 year was at 3.04%.  I'm thinking it's a lot better time to buy LTT now than it was a year ago.  And gold also.  I now officially like three of the four PP assets: gold, LTT and cash.  That probably means stock will be up 50% in 2014... 

Thanks for the healthy perspective. :-)

While I realize that no one can know the future, it does seem to me that there are better and worse times to move a large amount of money into stocks. Just because one happened to discover PP in, say, February 2000 doesn't mean it would have been a great idea to buy a lot of equities at that point...

Even if you are correct, the other assets in the portfolio would in theory counter-balance any losses in equities. The recommendation is to purchase all assets at the same time and not "limp" into the portfolio based on your perception of the current value of each holding. Put assumptions aside, forget about timing your entry and contribute a portion of the available cash to the PP. Muddle over this approach and you will realize the behavioral benefit of being half in and half out.

[Dieter]

Everything's going down in 2014:
  Stocks down 40%
  Gold to $600
  LTT to 6%
  Inflation kills cash
  Dollar tanks

Or some. Or none.

Can always dollar cost average - 20% into PP is 5% of your total portfolio in Stocks, LTT, and Gold....

[Gumby]

The Japanese 30 year bond rate is currently 1.68%.  While we may never end up where Japan is today, the present rates comparison makes our 3.92% yield look pretty rich.  Oh, and the 10 year bond hit 3% today. 

At the beginning of the year, the 10 year rate was 1.86% and the 30 year was at 3.04%.  I'm thinking it's a lot better time to buy LTT now than it was a year ago.  And gold also.  I now officially like three of the four PP assets: gold, LTT and cash.  That probably means stock will be up 50% in 2014... 

Thanks for the healthy perspective. :-)

While I realize that no one can know the future, it does seem to me that there are better and worse times to move a large amount of money into stocks. Just because one happened to discover PP in, say, February 2000 doesn't mean it would have been a great idea to buy a lot of equities at that point...

After awhile, those who get comfortable with the Permanent Portfolio learn to stop looking at the individual pistons of the PP engine. The whole reason why the volatility of the PP is so low is because there are always sinking assets to offset the winners. If you didn't have sinking assets, you'd just have a more volatile portfolio. In other words you need sinking pistons to turn the crankshaft smoothly.

[annieB]

And I'm happy I started with just 40% of my PP funds at the start of 2013.
But,I agree that no one knows.