SGOL, TLT, VB vs SGOL, TLT, VTI

[arizonafan1]

PP Forum-

need some help.  I discovered the PP in '10 as a result of the '08 crash (don't ask).  I've read HB's book (fail safe investing) and adopted the PP after further research (read Bogle, Jim Cramer, and dummies (stock investing, indexing, etf's, mutual funds, options, technical analysis)).  Everything pointed me to the PP.  What I need help with is comparing my PP ETF portfolio setup vs the one most discussed on this forum.  I have SGOL, TLT, cash (MM account), and my stock portion is VB instead of VTI.  How does my allocation of SGOL, TLT, and VB compare to SGOL, TLT, and VTI?  appreciate any input.

[MediumTex]

PP Forum-

need some help.  I discovered the PP in '10 as a result of the '08 crash (don't ask).  I've read HB's book (fail safe investing) and adopted the PP after further research (read Bogle, Jim Cramer, and dummies (stock investing, indexing, etf's, mutual funds, options, technical analysis)).  Everything pointed me to the PP.  What I need help with is comparing my PP ETF portfolio setup vs the one most discussed on this forum.  I have SGOL, TLT, cash (MM account), and my stock portion is VB instead of VTI.  How does my allocation of SGOL, TLT, and VB compare to SGOL, TLT, and VTI?  appreciate any input.

Let's see, SGOL looks pretty good for the gold piece.

TLT is good for the LT bonds.

Money market account is okay for cash, though I would get into a fund that holds ST treasuries if possible.

VB is a small cap ETF.  It's probably not as good as a broad market index (since the market can decide at any time that it hates small caps and do so for a long time if it wants to), but it's probably not going to hurt anything.

Just pick something you can personally stick with.  The permanent portfolio is only as strong as the operator's commitment to it.  Think of it like a seat belt in a car--it only works if you wear it.

[AdamA]

How does my allocation of SGOL, TLT, and VB compare to SGOL, TLT, and VTI?  appreciate any input.

You should definitely try to get your cash portion into short term US treasuries instead of a run-of-the-mill money market.  I think, if you're using ETFs, SHV or SHY are the ones most people use.

Vanguard has a mutual fund that's pretty good too. VFISX, I think.

VB is probably okay, but don't expect your PP to mirror the more standard PP.  Your annual returns will possibly be very different (sometimes better, sometimes worse), which may make it mentally difficulty to stick to it when things are going poorly.

Don't discount this last point.  If bonds, gold and short term treasuries are stagnant for 5 or 10 years and the S&P 500 rallies in a Nifty-Fifty kind of way, while VB returns 1-2% or takes a loss or whatever, will you be able to stick to your guns? 

If you have an account that has access to VB, it should be easy enough to get VTI or an S&P index...why not just sell VB and buy the S&P?

[MediumTex]

If you have an account that has access to VB, it should be easy enough to get VTI or an S&P index...why not just sell VB and buy the S&P?

I would guess it's because the chart makes VB look like an easy winner over VTI, but that's just because the chart doesn't go back far enough to capture the Nifty Fifty mania. 

During secular bear markets for stocks, all sorts of stupid things can happen, and the Nifty Fifty is just one example, but you want to be prepared for whatever the market decides to throw at you.

[arizonafan1]

Appreciate all the help.  I will definetely take a look at the short term treasury option and relook VB vs VTI.  Medium Tex called it, the VB chart looks good.  thanks again.  I guess i couldn't resist tinkering.

[Lone Wolf]

I concur with what others have suggested.  I hold a slice of SGOL for part of my gold allocation as well, so that looks good.  I'd do VTI (for the total stock market) over VB but I don't hate what you've got.  TLT is great.  I'd move to a SHV\SHY blend for the cash.

Just ponder any tax consequences before transitioning from VB to VTI (if you choose to do so) and I think you will be all set!  Welcome and congratulations on your start.

[AgAuMoney]

Appreciate all the help.  I will definetely take a look at the short term treasury option and relook VB vs VTI.  Medium Tex called it, the VB chart looks good.  thanks again.  I guess i couldn't resist tinkering.

Mine is similar to yours... 

Probably not particularly critical, I did not do SGOL.  Premium too high, history too short.  I have the PP (this is an IRA) in IAU (with other stuff outside the IRA).

Two particularly relevant differences in light of others' comments:

I put 2/3 of the cash into SHY and left the other 1/3 in the MM (lower transaction costs for rebalancing, plus dividends, etc. goes into MM by default so I'm dealing with a balance there anyway).

I have VB for about 1/2 of my stock allocation (and maybe dropping in the future).  I'm considering VBK to further tilt the small-cap portion.  The rest is in about a dozen individual dividend growth stocks (like MCD, INTC, PM, and etc).  I get the dividend growth that I firmly believe in, plus the large cap exposure, plus exposure to the small cap growth potential.  Call it my own version of the market index, but on the large caps which typically are overweight in the index I cut the weight by leaving out what I choose to leave out, which may hurt or help.

In a way a small-cap tilt hearkens back to HB's earlier versions of the portfolio where he was looking for more volatility from stocks.  I'm comfortable picking the dividend growth stocks, and doing that in addition to the small-cap index moves me a little towards HB's more recent "entire market index" position.

[arizonafan1]

AgAuMoney-

Thanks for the insight.  Upon further review.....i reread fail safe investing and as you stated, HB discusses volatility in the stock portion.  That's one of the reasons i chose it (VB) in the first place (and as medium tex said, "the chart looks great").  i guess i'm a little worried now that small caps will go out of favor and being worried defeats the purpose of having the PP in the first place.

[MediumTex]

I guess i'm a little worried now that small caps will go out of favor and being worried defeats the purpose of having the PP in the first place.

Bingo!

[Gumby]

What will you think of the PP when its down -15% or -20% at some point in time. Would you be inclined to capitulate at that time? Or would you maintain faith that it generally has had the qualities of recovering back from such losses in a year or two?

If you're looking for a pleasant/smooth constant ride over all of time then be aware that even the PP does hit the occasional pot hole in the road. Also be mindful that the cost of that smoother ride can be half the real (after inflation) gain of alternative investments - would you be inclined to throw in the towel and performance chase?

This is a great question.

Personally, I think I can easily handle a 20% loss (I've had worse) simply because the PP allows me to have access to so much cash. Harry Browne wanted the PP to hold 25% cash for exactly this reason. It would be a very different story if I didn't have that much cash on hand. I actually think it would feel pretty awesome having access to so much cash when times are tough.

As for performance chasing, I'm not worried at all. I used to own one of those portfolios that afforded a high (real) return. But, I didn't really enjoy the roller coaster ride, or the occasional 40%-50% losses that came with those types of high performance portfolios. I remember it was a terrible feeling to ride that awfully bumpy ride. I'm just not convinced that most people can hang on to those high performance portfolios whenever they hit a crisis. The smoother ride of the PP (and all of the cash) makes it much easier to hang on when times get tough.

I can't speak for others, but the PP is a nice change of pace for me.

[MediumTex]

Clive,

Some investors are going to capitulate out of ANYTHING when it goes south.

It's just an unfortunate part of investing that many people are going to react poorly to market volatility and experience losses as a result, and they often never think about it until it actually happens.

[Gumby]

Another of Paul's also showed max drawdown and real gain respective figures of

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I'm not suggesting the PP is bad - but rather that expectations should be realistic - perhaps 2% to 5% real (after inflation) with periodic declines perhaps down -20% or possibly more, but typically for relatively short periods of time (year or two to recover losses).

Clive,

You may not remember, but Paul got that data from me last year (see my discussion with Paul, here).

When we were discussing the data (most of which was from Harry Browne's own chart, that I digitized with graph digitizing software), Paul showed us that the 24.2% "real" max drawdown of the PP occurred in Feb, 1982.  And the 54.3% "real" max drawdown for S&P 500 occurred in Mar, 2009.

One important note about the data....I never calculated the inflation adjustments on a monthly basis. I simply took the nominal PP returns for each month and applied the respective yearly average inflation adjustment to every monthly return. (Though, it's worth nothing that the S&P 500 data was adjusted with monthly inflation data by Robert J. Shiller).

In reality, the typical PP investor would have never noticed a 24.2% drawdown in Feb 1982 (the nominal drawdown was significantly less dramatic). Those investors wouldn't have been able to calculate a "real" drawdown accurately until weeks or months later. They would have had to go looking for the inflation data, when it was published, and hoped that the government inflation data was somewhat accurate to reflect what was actually happening in the economy. (The government actually changed their inflation computations in late 1980). By the time they would have been able to calculate the "real" drawdown, their PP's would have been well on the road to recovery. I seriously doubt that a PP investor would have been spooked by their drawdowns in Feb 1982.

As far as max drawdown is concerned — in terms of one's short-term reaction to a crisis — the nominal max drawdown is far more important — since that's what investors would actually be reacting to in real time. The monthly returns, from 1970-2010, actually showed that the Permanent Portfolio only had a nominal max drawdown of 13.5% (in Nov 2008):


(Note that the S&P 500 is Total Real and the PP is Total Nominal in this chart)

However, after further research, I was able to determine that the nominal max drawdown was closer to 14.88% (specifically from Mar 18, 2008 - Nov 19, 2008). The very worst of it was for a very brief period, and the actual drawdown varied slightly depending on when you started your PP and when you last rebalanced. (Click on those dates to see what the news was like on the days of the PP top and PP bottom!)

Now, I'd normally be the first to say that the "real" return is more important than the nominal return. But, in this case, I do not think it's practical to worry about how one would hypothetically react to a "real" max drawdown. Investors really only have the means to react to a nominal drawdown because the accurate inflation data takes too long to be calculated and published.

[Gumby]

From the PP silver backtest I ran the yearly drawdowns were very low, excepting the 1930's crash http://gyroscopicinvesting.com/forum/in ... opic=664.0

I've never really understood why Silver is supposed to be a proxy for Gold. It's not. It doesn't really tell us anything.

Whilst I'd guess you might add on a third or perhaps more if you measured drawdowns over more frequent periods, generally the PP has been very stable, but perhaps not totally immune to being capitulated at the worse possible time by some as MT says.

And as MT said, any and every investment can be capitulated at the worst possible time. Having so much cash in the PP is one of the reasons why it's so easy to stick to, when money is tight.

What I endeavor to highlight is that whilst investing might yield a 5% real longer term gain, over the shorter term the valuations can vary/zigzag widely around that average. From between high and low zigzag points the rewards might be 0% real, between low and high the rewards might be 10% real. Yet many investors appear to more closely track the buy-high/sell-low path by buying after the investment has fallen into favour and selling and turning paper value losses into real losses when the journey hits a pothole.

Nobody tracks their "real" inflation-adjusted performance in real time. Nobody. Nobody would ever notice a short-term "real" drop in their PP. People only notice nominal changes in their portfolio, over the short term. When was the last time you heard someone say, "My inflation-adjusted returns this week have been terrible!" ??  That doesn't ever happen.

If you read through the http://gyroscopicinvesting.com/forum/in ... pic=1009.0 paper I linked to, you'll get the drift of how a Talmud blend of one third in each of business (stocks), land (commodities) and cash, when adjusted to include a bit of Markowitz (perhaps splitting down each of the stock and commodity allocations into 75-25 stock/cash blends (i.e. along 60-40, 80/20 type stock/cash blend similar reward for less risk type allocations)) can yield some good results.

I always had a suspicion that the Talmud held the secret to investing I'll take a look!

[Lone Wolf]

I get the impression that some anticipate much lower levels of drawdown risk, typically from those who appear to have capitulated out of stocks at the worse of times (2009 after the deep down's such that the subsequent strong rebound recovery was missed). Which flags to me that such investors might capitulate out of the PP having sought greater safety, possibly at the worse possible time to do so - after such a downward spike when it is encountered.

I don't think that's true of a lot of us.  Although 2008 is what brought me to the PP, I didn't capitulate out of stocks.  I bought and bought into the post-crash lows.  Even though I thought that I'd win the bet, this was stressful.  Once my portfolio recovered its full original value (buoyed by the purchases at market lows), I diversified into the Permanent Portfolio.  The cap gains and cap losses fought it out that year so all in all it was fairly consequence-free.  I learned that I can take a punch without capitulating but I also learned that I'm not interested in signing up for another high stakes wild ride any time soon. 

I play devils advocate in the hope that others might benefit by being better prepared for when the PP might not be running smoothly. Its like a big extended family on this board, polite and very knowledgeable so please don't take my devils play to heart. It's better IMO to add a bit of spice to what otherwise could fade into a a dull quiet board.

Yeah, I think you do the PP investor a real service in reminding them of the dangers of capitulation.  The PP's not immune.  Also, when you talk about the PP being tested, I think that the periods of relative underperformance (generally stock bull markets) create the greatest danger of capitulation versus "shock" periods like 2008.  The PP, relatively speaking, shrugged off 2008 with very little damage at a time when most portfolios were spraying blood.  In most cases where the PP loses some money, other stock-heavy portfolios are being torn apart.  In the 90s, however, PP "slow and steady" behavior would have seemed dreadfully out of style IMO.  I could see people throwing in the towel and going to stocks there more than any other time.

[Gumby]

Nobody tracks their "real" inflation-adjusted performance in real time. Nobody. Nobody would ever notice a short-term "real" drop in their PP. People only notice nominal changes in their portfolio, over the short term. When was the last time you heard someone say, "My inflation-adjusted returns this week have been terrible!" ??  That doesn't ever happen.

I track mine, but admittedly not in real time. For instance if a 'cash' rung matured today I'd be looking at the potential differences between rolling that into fixed or inflation linked income based on whatever I opined was the better net reward for the next few years (based on the likes of inflation projections etc). I also track my own personal rate of inflation (which is currently quite a bit higher than average inflation rates).

Inflation in itself is quite volatile over time and its all an averaging game to try and not lose out too heavily to inflation/loss of purchase power. Ignore that at your peril IMO.

And that's why we have our gold, and rebalance out of it when the time comes. After everything was averaged out, the PP survived 1982 quite nicely — assuming one rebalanced properly. So, I suspect a typical PP holder in 1982 would have felt pretty smart about how their PP handled the severe crisis at the time.

Inflation is most definitely a serious issue, but there's a reason why they call it a "hidden tax" on citizens. It's not readily visible. Over the short term, the nominal return is what 99% of investors focus on. This is intentional. I suspect if Wall Street actually focussed on "real" returns (as they probably should), people would be constantly freaking out.

I think that the periods of relative underperformance (generally stock bull markets) create the greatest danger of capitulation versus "shock" periods like 2008.  The PP, relatively speaking, shrugged off 2008 with very little damage at a time when most portfolios were spraying blood.  In most cases where the PP loses some money, other stock-heavy portfolios are being torn apart.  In the 90s, however, PP "slow and steady" behavior would have seemed dreadfully out of style IMO.  I could see people throwing in the towel and going to stocks there more than any other time.

I completely agree, Lone Wolf. And we know for a fact that PRPFX struggled to keep many of its investors during the late 90's — which clearly supports your theory.

I would imagine that, for most investors, the urge to capitulate has a lot to do with whether you are beating the market or not. Whereas in a short-term crisis, the 4x25 PP certainly gives you access to enough cash to survive, while other investors — who don't have access to so much cash — are far more worried about their invested life savings during a crisis.

[AdamA]

I would imagine that, for most investors, the urge to capitulate has a lot to do with whether you are beating the market or not.

I think that another circumstance that might try a PPers dedication would be severe inflation.  It would be very hard to sell gold for rebalancing purposes when the currency in which all your other assets are denominated is rapidly devaluing (at least for me).

[Gumby]

I would imagine that, for most investors, the urge to capitulate has a lot to do with whether you are beating the market or not.

I think that another circumstance that my try a PPers dedication would be severe inflation.  It would be very hard to sell gold for rebalancing purposes when the currency in which all your other assets are denominated is rapidly devaluing (at least for me).

You would think so. But, it's important to keep in mind that gold tends to "pop" before severe inflation is entirely over. Inflation was still quite severe in 1982, but gold had already gone down because the worst of it was already over. You don't want to be that guy who holds onto too much gold for too long because gold can drop at a moment's notice. Besides, you could always rebalance into a more stable currency (Swiss Francs?) or a basket of currencies if you were so opposed to US Dollars. But, unless you move to another country, you're probably going to need those worthless US Dollars to buy your $39.0099/gallon gas.

[Lone Wolf]

I think that another circumstance that might try a PPers dedication would be severe inflation.  It would be very hard to sell gold for rebalancing purposes when the currency in which all your other assets are denominated is rapidly devaluing (at least for me).

I agree.  I think it'd be hard to puzzle out the best way to handle this.  I found the discussion you guys were having on this pretty interesting, so I broke out a new thread on it.

[dualstow]

Clive,

Some investors are going to capitulate out of ANYTHING when it goes south.

It's just an unfortunate part of investing that many people are going to react poorly to market volatility and experience losses as a result, and they often never think about it until it actually happens.

It seems to me that people would be more likely to abandon the pp when the stock market is soaring and a pure stock portfolio is temporarily but wildly outperforming the pp. When the pp is going down, most other strategies are also looking bad.