Permanent Portfolio for younger investor

[doodle]

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[moda0306]

You're close enough IMO... just be sure you can handle the bigger dips that may result.

How do you feel about GTU?  Have you filed your first tax return with the required form yet?

What are your rebalance bands?  With 5 assets you'll probably rebalance more often, so the tax-efficiency piece may bring your "virgin" returns down a little bit.

Just thoughts... congrats on a solid, simple portfolio.  You're ahead of 99% of the pack out there IMO.

[MediumTex]

Anyone else see that Colonel Sanders is more recognized in China than Chairman Mao?

IMHO, that's the reality of slower economic growth in the U.S. and its effect on U.S. companies.

As for the dollar, I think it will be around and viable for much longer than many people imagine.

[doodle]

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[Plumbline]

Anyone else see that Colonel Sanders is more recognized in China than Chairman Mao?

Yes, the Chinese love the Colonel for everyday, but when they dress-up and go out on the town they choose Pizza Hut.  PH is very upscale in the Far East.  Interesting that MickeyDs is so far behind KFC.

[KevinW]

My advice is to keep that allocation, but think of it in terms of a standard 4x25 PP with 20% in a variable portfolio for the international stocks.  This works the same way in all regards, except for the rule that you can't rebalance from the PP into the VP.

IMO I think the "firewall" between the two pieces is important psychologically because it curbs the impulse to keep tinkering.

FWIW I'm your age and I can't fault your analysis.  However IMO the structural problems are just as bad, if not worse, in the rest of the developed world, we just don't hear about it every day.  Emerging markets have a lot of room to grow but they are also hampered by business-unfriendly climates, not just in regulations but also unreliable utilities, corruption, scarcity of specialized labor, etc.  Working at an S&P500 it's easy to take for granted that the electricity is always on and world-class IT and legal departments are a phone call away.  I don't currently have a VP but if I did I'd let the market decide and buy the total world stock index.

I don't know about you but I was trying to get my professional career started during the dot-com crash and have watched a lot of my peers struggle during the current recession.  This has made me more financially conservative than I probably would have been otherwise, which is how I ended up here.  Most people my age are similarly disillusioned about the financial system, but sadly they seem resigned to living paycheck to paycheck and have no interest in investing.  I try to tell them there's another way, but it mostly falls on deaf ears.  I'm not looking forward to what happens when this cohort starts getting too old to work.

[moda0306]

doodle,

Historical CAGR (and probably volatility somewhat) improves as you allow larger bands to 35/15... and beyond, but risk gets out of wack once you get beyond 35/15 if you ask me.  One strategy I look to employ to minimize risk but also minimize tax drains is using 35/15 bands but doing a partial rebalance back to 30/20 (also, don't rebalance assets that are between 20 and 30 at the time of rebalance).

This is a way of acknowledging the exponential risk of letting an asset go out of wack, but only bringing it back so far as to keep the "machine" functioning with equilibrium, and not doing it excessively so as to generate all sorts of unnecessary capital gains.

Other strategies, such as loss harvesting and individual security identification basis recognition method, when combined with partial rebalances, really keep the tax efficiency at a maximum.  Also, contributing to your most lagging asset first always helps, too.

[moda0306]

Typo:  Volatility does NOT improve as you allow your bands to get out of whack... it gets worse, historically.

My bad.

[foglifter]

Everyone likes to tinker with this portfolio somewhat and I was wondering if anyone had any opinions regarding dangers, pitfalls with this potential breakdown:

20 US Stocks (VTI)
20 International Stocks (10 developed world, 10 emerging mkts) (VEU, VWO)
20 Short US Bnd (SHY)
20 Long US Bnd (TLT)
20 Gold (GTU)

I know it isn't a big deviation from the traditional portfolio but I feel the 20% international equities somewhat limits my exposure to the US dollar as well as give me exposure to higher growth rates of emg. mkts.

doodle, your portfolio is fine overall. I also include a hefty chunk of international stocks into my PP.
I'll throw a couple of minor points for you to meditate on:

1. VEU is not a pure developed world play - it's a world ex-US and includes emerging markets. So you have some overlap with adding both VEU and VWO. If you want to clearly split developed and emerging parts perhaps VEA would be a better option to replace VEU. But I wouldn't really recommend that because:

2. Developed markets have become highly correlated with the US so in my opinion US total market or large caps fund + emerging markets fund adds simplicity and lowers potential assets correlation. A hefty chunk of S&P 500 revenue (I believe it's getting closer to 50%) comes from the multinational companies, so VTI captures both US and foreign growth. So, you could simplify your stocks exposure to VTI and VWO.

3. VWO is a great low-cost fund, but due to the heavy natural resources orientation of the emerging countries it is very correlated with commodities. On the other hand VWO doesn't adequately reflect the growth in local consumer markets, which are mostly served by small companies. Personally, I like to use small cap ETFs for my emerging markets exposure. Another option worth consideration is VSS, which combines small caps of developed and emerging world.

[steve]

Rebalancing to me seems to be a key piece of the Permanent Portfolio that hasn't been analyzed with enough depth....(then again, maybe it has and I just haven't come across the info yet.) I would be curious to find out (based on tax bracket) what the ideal rebalancing levels are to maximize CAGR and minimize std. dev.

For my proposed portfolio (I haven't implemented it yet) I was thinking 5% rebalancing bands. I am not sure however if these are large enough to let the winners run or if the tax implications from relatively narrow rebalancing bands will cause capital gains taxes to cut down on returns.

I haven't sold any GTU yet so I can't comment on the paperwork but supposedly it qualifies for lower cap. gains tax rate.

One strategy I was thinking about with GTU was that if the price of gold dropped one could sell GTU and buy physical...do these two investments qualify as different enough to not set off a wash rule? This might be a way to harvest some losses on a potential fall of the shiny stuff if it is legit.

As far as I know the paper work for GTU has to be filed with your taxes the first year you buy it with the proper election (FORM 8621) and required attachments and for each subsequent tax year in which the election applies , the shareholder must also Complete the applicable lines of Part II and required attachments

[AdamA]

Rebalancing to me seems to be a key piece of the Permanent Portfolio that hasn't been analyzed with enough depth....(then again, maybe it has and I just haven't come across the info yet.) I would be curious to find out (based on tax bracket) what the ideal rebalancing levels are to maximize CAGR and minimize std. dev.

I think it's impossible to determine.  From what I've read it doesn't really matter when you rebalance, as long as you have a consistent strategy that you stick to. 

As you mention, the most important thing is cost/tax efficiency.  The reason I think it's impossible to determine the ideal strategy is that everyone's circumstances tend be a little bit different as far as tax bracket, assets in taxable vs nontaxable accounts, and the type of fund being used. 

20 International Stocks (10 developed world, 10 emerging mkts) (VEU, VWO)

I know it isn't a big deviation from the traditional portfolio but I feel the 20% international equities somewhat limits my exposure to the US dollar as well as give me exposure to higher growth rates of emg. mkts.

Personally, I don't see the point in this.  Extra funds just complicate things.  International markets are popular investments for people who think the dollar is going to crash.  This is a prediction that may or may not come true.  Why not just stick to a total market fund like VTI and let the other asset classes take care of things if the dollar has some problems.

Just a personal preference, but I really think simplicity is the great thing about the PP. 

I'm not a tweaker.

Adam