Planning to set up a portfolio

[belgo]

Hello,

This is my first post. I discovered the permanent portfolio idea only 10 days ago and have been frantically reading up in the evenings on this exciting plan.  I found this forum only yesterday night.

About myself, I am in fact director of a Swiss online broker and I have thus seen quite a few things in financial markets and I am supposed to know a few things. However I see some clients win, some clients lose. Hard to say what is the winning strategy in the long run.  This is the first time I think I found an idea that I can live with. I have not been that successful myself with shares, I guess I am not better than anyone else.  Trying to time the market, sell the winners too early, keep the losers with the hope of recovery etc.  I don't want to lose sleep over virtual losses and I have therefore become quite conservative in recent years.  But as we sold our big house a few months ago and buying something a lot smaller and returning to Belgium (which we left 19 y ago) and have our 3 kids at public school, we will reduce spendings a lot this way compared to Geneva.

And we are now sitting on a lot of cash (well we believe this is really a lot) after 20 years of working hard and successfully.  I have been thinking it's time to do something else for myself and without really knowing what.  So I am planning to give up the big money job and do what I like (I just turned 46).  We have 1 million Euro that we could invest.  My plan is a 80% PP and 20% variable portfolio.  Using a 4% safe withdrawal rate (which I read hear is quite safe) could give us 32K per year, this is not enough for a family of 5 but not that bad either and I am pretty sure we will find ways to top it up with other income (only doing things we like).    It's tempting to make the move and see what happens. The idea of financial freedom is tempting. 

My questions to the experts here (sorry if I ask questions that may have been answered already)

Currency: I understand Harry Browne said one should not take currency risk and have the portfolio in the currency of the country you live.  But I see people here suggesting to diversify.  What should we do? Some people are indeed quite bearish on the Euro and its long term survival prospects but who can predict currency rates really. Why should I have x% USD risk in my portfolio unless I think we will once live there.

Geographic diversification for stocks: I understand we should buy an ETF covering the European market (stoxx 600 for example) if we strictly follow Harry Browne. But I read some make a wider geographic diversification. Is a total world diversification better?

Stocks: The guy that is a bit my inspiration recently (you can read about him here:  http://www.bravenewlife.com/09/the-brave-new-portfolio/
uses a selection of quality dividend stocks instead of the full index.  I am quite tempted by this idea as well.  It's nice to receive dividends instead of taking from your capital and recently I saw a statistic about how dividend stocks beat the index over the last 10 years.  Or is "concentrating" on dividend stocks a kind of risk we should not take in the PP and leave to a small variable portfolio?

Bonds: This is of course the tricky one.  I should use the 30 year German Bund for 25% of my portfolio to cover the scenario of deflation. But everyone in the financial industry will call me a lunatic if I invest 25% of my portfolio in the bond at the current rate of ... 1.2%  It must be the lowest yield since 40 years so it looks like a sure loser to invest so much at this rate now.  But I know it has to be done as the PP only works as a package. 

Timing: I understand trying to time the market is useless.  However should I thus invest all our money "at once". Or is it recommended to build the PP over time (for example 10% per month) ?

Thanks a lot for any feedback.

[barrett]

Welcome, belgo. That's a lot of info and I'll only address a bit of it here.

First of all, if the PP is a good plan now, it will be a good plan a month or a year from now. No need to rush to set it up. And, yes, I would say to ease into it over time. I got lucky with my entry point in January of 2014 but it doesn't always work out that way. For example, investing exactly one year ago would mean that you'd be looking at a loss of 6% or so in your portfolio. From January of 2014 to January of 2015, the PP was up about 14% when inflation was around 1-2%. So, while a drawdown was likely, investors who whose entry point was around 2/1/15 really took a hit.

Play around with different time periods on peaktotrough.com and see if you are comfortable with the volatility of this portfolio. It goes up and down like most other investments. I think a lot of people see that steady upward crawl on a 30-40 year graph and don't really understand how much turmoil there is within the individual assets. And check out Tyler's Portfolio Charts for other passive portfolios.

I really like the PP but I don't know the answer to the European long bond conundrum. I don't think I could commit 25% of my assets to bonds if I were in your position. But I'd love to hear what others have to say. Good luck!

[belgo]

Thanks a lot barrett for that information.  I will have a look at these charts and websites.  What attracts me to the PP is the low volatility for a reasonable return over time but looks like it does fluctuate more in the short term than I thought. The more reason to gradually build the portfolio over time. 

[LazyInvestor]

I think one should not underestimate the role of USD as the world reserve currency in the design of the PP. HB was right that world crisis likes USD not gold. I think this is what we are witnessing now. For example, EUR is shrinking for quite some time and you're not having rise in gold since USD is not under inflationary risk. So, I'm skeptical about non-US-PPs. My advice is either run US PP or do a Bogleheads portfolio if you want bond portion in your country or EU in general.

Given your new interest for PP, can you make your online brokerage a paradise for PP investors by giving us commission free trading on LSE VUSD and Swiss exchange ZGLDUS :-).

[dutchtraffic]

I think one should not underestimate the role of USD as the world reserve currency in the design of the PP. HB was right that world crisis likes USD not gold. I think this is what we are witnessing now. For example, EUR is shrinking for quite some time and you're not having rise in gold since USD is not under inflationary risk. So, I'm skeptical about non-US-PPs. My advice is either run US PP or do a Bogleheads portfolio if you want bond portion in your country or EU in general.

Given your new interest for PP, can you make your online brokerage a paradise for PP investors by giving us commission free trading on LSE VUSD and Swiss exchange ZGLDUS :-).

I'm really not seeing any reason whatsoever why a non-US PP wouldn't work.
Running a US PP while living in Europe seems like a horrible idea to me.

[belgo]

haha, I would love to make you a special PPP offer (permanent portfolio paradise) if only that having US clients is a big no no for us (and for virtually all banks here) but that's an entirely different story.  But if you are saying that PP only works in USD, I have a problem.  Let me check on what a Bogleheads portfolio is.

[belgo]

To try and illustrate my fear of the eurobond section of a PP portfolio at current yield, this is the graph of long-term German bond yield since 1815.

http://qz.com/241890/the-complete-histo ... la-merkel/

(sorry, i couldn't find how to insert a picture so I copied the link instead)

[LazyInvestor]

I think one should not underestimate the role of USD as the world reserve currency in the design of the PP. HB was right that world crisis likes USD not gold. I think this is what we are witnessing now. For example, EUR is shrinking for quite some time and you're not having rise in gold since USD is not under inflationary risk. So, I'm skeptical about non-US-PPs. My advice is either run US PP or do a Bogleheads portfolio if you want bond portion in your country or EU in general.

Given your new interest for PP, can you make your online brokerage a paradise for PP investors by giving us commission free trading on LSE VUSD and Swiss exchange ZGLDUS :-).

I'm really not seeing any reason whatsoever why a non-US PP wouldn't work.
Running a US PP while living in Europe seems like a horrible idea to me.

Well EUR is getting hammered and gold is not reacting (because USD is doing just fine). Isn't this already breaking PP idea?

Yes, it's probably not good to have US PP in Europe, but I'd rather have something like 40% intermediate local govnmt bonds 50% total world market and 10% gold than EU PP.

[LazyInvestor]

haha, I would love to make you a special PPP offer (permanent portfolio paradise) if only that having US clients is a big no no for us (and for virtually all banks here) but that's an entirely different story.  But if you are saying that PP only works in USD, I have a problem.  Let me check on what a Bogleheads portfolio is.

Here, it's the biggest forum on passive investing. PP was heavily discussed there until this forum was established. You'll get much more info there that will help you digest PP pros/cons and expose you to other passive portfolios https://www.bogleheads.org/forum/

[Kike Moreno]

Here you can see the performance of the Euro PP:  http://www.carterapermanente.es/evoluci ... ermanente/

It looks like it's working pretty well.

[dutchtraffic]

I think one should not underestimate the role of USD as the world reserve currency in the design of the PP. HB was right that world crisis likes USD not gold. I think this is what we are witnessing now. For example, EUR is shrinking for quite some time and you're not having rise in gold since USD is not under inflationary risk. So, I'm skeptical about non-US-PPs. My advice is either run US PP or do a Bogleheads portfolio if you want bond portion in your country or EU in general.

Given your new interest for PP, can you make your online brokerage a paradise for PP investors by giving us commission free trading on LSE VUSD and Swiss exchange ZGLDUS :-).

I'm really not seeing any reason whatsoever why a non-US PP wouldn't work.
Running a US PP while living in Europe seems like a horrible idea to me.

Well EUR is getting hammered and gold is not reacting (because USD is doing just fine). Isn't this already breaking PP idea?

Gold was up in euros.
Gold has nothing to do with whatever fiat currency.

[dutchtraffic]

Yes, it's probably not good to have US PP in Europe, but I'd rather have something like 40% intermediate local govnmt bonds 50% total world market and 10% gold than EU PP.

Most of the companies in whatever index are multinationals operating all over the world, so a european index is hardly euro-only.
And 40% int. govt bonds, 50% stocks, and 10% gold, is completely something else compared to the PP.

[LazyInvestor]

Gold was up in euros.
Gold has nothing to do with whatever fiat currency.

EUR just dropped. Gold wasn't really moving anywhere. Also, USD was up in EUR pretty much the same as gold if not even more. You could have held USD instead of gold and have the same result.

From what I understand, according to HB in his talk shows, gold is included in PP exactly because of its relationship to USD. Gold is hedge to USD inflationary risk. USD is hedge for various other world risks. Once there is inflationary risk to USD, gold is supposed to shoot up a lot, not just stay the same (as if it is another currency as it is the case for EUR wrt USD/gold).

[dutchtraffic]

Gold was up in euros.
Gold has nothing to do with whatever fiat currency.

EUR just dropped. Gold wasn't really moving anywhere. Also, USD was up in EUR pretty much the same as gold if not even more. You could have held USD instead of gold and have the same result.

From what I understand, according to HB in his talk shows, gold is included in PP exactly because of its relationship to USD. Gold is hedge to USD inflationary risk. USD is hedge for various other world risks. Once there is inflationary risk to USD, gold is supposed to shoot up a lot, not just stay the same (as if it is another currency as it is the case for EUR wrt USD/gold).

You don't get it.
The euro dropped, so you got more euro's for your gold, simple.
Saying that "you might as well held US dollars" really makes no sense.

Gold is gold, that's it, an ounce of gold is an ounce of gold to anyone on this planet.

[koekebakker]

Gold is gold, but it doesn't offer the same protection when you combine it with non-US assets. Gold reacts primarily to the US-dollar.
So a non-US PP could still be a good and diversified portfolio, it won't offer the 'bulletproof protection'.

[LazyInvestor]

Gold was up in euros.
Gold has nothing to do with whatever fiat currency.

EUR just dropped. Gold wasn't really moving anywhere. Also, USD was up in EUR pretty much the same as gold if not even more. You could have held USD instead of gold and have the same result.

From what I understand, according to HB in his talk shows, gold is included in PP exactly because of its relationship to USD. Gold is hedge to USD inflationary risk. USD is hedge for various other world risks. Once there is inflationary risk to USD, gold is supposed to shoot up a lot, not just stay the same (as if it is another currency as it is the case for EUR wrt USD/gold).

You don't get it.
The euro dropped, so you got more euro's for your gold, simple.
Saying that "you might as well held US dollars" really makes no sense.

Gold is gold, that's it, an ounce of gold is an ounce of gold to anyone on this planet.

Hmmm, if you're right then I'll probably end up running away not just from EU PP but also from US PP. The relationship between the "reserve currency" and gold as per HB is critical for me to have necessary confidence in PP...

[LazyInvestor]

Gold is gold, but it doesn't offer the same protection when you combine it with non-US assets. Gold reacts primarily to the US-dollar.
So a non-US PP could still be a good and diversified portfolio, it won't offer the 'bulletproof protection'.

That's my understanding too. It's critical that USD is the "world reserve currency" in the design of the portfolio... Just take a look at what's going on in China right now. Holding Chinese PP just doesn't make any sense IMO.

[Kike Moreno]

You have to consider also that the USD monetary policy and the EUR monetary policy have been, and are, both very similar.  Basically zero-interest.  So if in the future we have a significant inflation in euros, we will probably see a significant inflation in USD also.  And in addition EUR is not a small currency, so if it has a significant inflation this will have an impact in gold price price (beyond the obvious direct impact of the currency depreciation).  So I think that Euro PP also has a decent protection against inflation.

[Cortopassi]

Sure gold provides local protection.  Look below.  You'd be up 20+% if your currency was the Rand, for example.

[Kike Moreno]

Yes, but this is the direct impact of currency deprecation.  What I mean is that in the case of big currencies like the euro, a local high inflation will cause an increase in gold demand from europeans and an additional gold price increase.

[dutchtraffic]

Gold is gold, but it doesn't offer the same protection when you combine it with non-US assets. Gold reacts primarily to the US-dollar.
So a non-US PP could still be a good and diversified portfolio, it won't offer the 'bulletproof protection'.

Gold offers protection to anyone on this planet, you can talk any kind of financial wizardry, an ounce of gold is an ounce of gold and has exactly the same value for anyone in the world.

[LazyInvestor]

Sure gold provides local protection.  Look below.  You'd be up 20+% if your currency was the Rand, for example.

Yes, but in the last year:

USD/ZAR close:16.39524 low:11.27764 high:17.19697

so if one has held USD instead gold in South Africa, he'd be up 45%. So gold definitely doesn't "care" about whatever is happening to ZAR. However imagine the threat of 45% inflation to USD and the effect on gold. I think gold would reach 10K due to the outflows from USD. If I remember well, I think HB was mentioning that 5-6% inflation risk to USD should lead to doubling in gold if not even more. This is not the effect that outflows from other currencies can have.

[koekebakker]

Gold offers protection to anyone on this planet, you can talk any kind of financial wizardry, an ounce of gold is an ounce of gold and has exactly the same value for anyone in the world.

It does, in a way. But when you add gold to non-US assets it's perfectly possible that your bonds go down at the same time gold goes down. For example: rising interest rates in your own country might happen at the same time US rates are falling. This can lead to unexpected and outsized portfolio volatility.
Sure, gold can offer protection to any portfolio, but not to the same level or with the same consistency as it can protect within a US PP.
At least, thats how I understand it.

[dutchtraffic]

http://www.marketwatch.com/story/golds- ... 2015-03-26

http://www.marketwatch.com/story/what-h ... 2015-04-10

[dualstow]

Stocks: The  (bravenewlife) guy that is a bit my inspiration recently ... uses a selection of quality dividend stocks instead of the full index.  I am quite tempted by this idea as well.
...
  Or is "concentrating" on dividend stocks a kind of risk we should not take in the PP and leave to a small variable portfolio?

Dividends are always tempting and I started with div stocks long ago, before I got into indexing. Ultimately the choice is up to you, but if I could do it all over again, I would just stick with a broad stock index and not only because it's far simpler (which it is). 
The pp already has such a small allocation to stocks. If the force driving stocks up happens to be some non-dividend-paying, high flying tech stock, you don't want to lose out with your dividend stocks.

Again, though, it's also simpler to sell down the index fund when stocks hit your rebalancing band. With an assortment of div stocks, you'll have to pick which ones to trim, and if they're raising their dividends every year you may feel a psychological pull to leave them alone. Then, you won't be implementing your pp properly.

Therefore, if you want to hold individual div stocks at all, I vote for putting them in the Vp.
Full disclosure: I still keep many of mine, and they are most definitely not part of my pp.

Finally, before index funds were widely available, Harry Browne recommended volatile growth stock funds. (Source: "Best Laid Plans" book).

In the pp, 3 of the four assets, not cash, are very volatile, while the entire package is non-volatile. Dividend stocks? Probably not so volatile.