Author Topic: Permanent Portfolio: What Do You Think?  (Read 34025 times)

Den18

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Permanent Portfolio: What Do You Think?
« on: February 13, 2013, 07:13:57 PM »
I have been reading about this investment strategy and came across some discussion about it here on these forums. Originally I had thought it was pretty widely accepted but there seems to be some disagreement. So I would like to ask:

What do you think of the Permanent Portfolio strategy as vehicle for growth during the accumulation phase?

What do you think of the Permanent Portfolio strategy as a way to achieve the SWR once you are FI?

Do you think the Permanent Portfolio returns will continue and are sustainable?

If you have an opinion please post. Any discussion would be great! It would help me decide how much money I should invest in this strategy.

grantmeaname

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Re: Permanent Portfolio: What Do You Think?
« Reply #1 on: February 13, 2013, 07:56:20 PM »
Lots of people will disagree with you. It doesn't matter; lots of people will disagree with this too. Facts don't occur due to consensus, so it doesn't really matter if your investment strategy is en vogue, it matters if it works.

I think it's poor for growth and poor for guaranteed minimum returns amenable to a SWR. I think the returns will not continue and are due to recent, oddball secular trends, but I am by no means a master prognosticator. I don't even play one on TV.

Here's the way I look at it: debt and equity are the instruments by which the great human ideas of our age are brought to fruition; our society advances in large part by forming businesses, financing them, and then pursuing the founding goals of the businesses. Owning metal is only profitable if you can sell it to a greater fool -- unlike fractional ownership or the debt contract of a business, gold doesn't do anything. Owning assets that only keep up with inflation will never allow you a SWR of anything, because the real return is zero, so I'm pretty skeptical of TIPS too. You lose out on a lot of upside in order to protect yourself from downside by owning things like gold, and to me that's just not even remotely worth it.

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Re: Permanent Portfolio: What Do You Think?
« Reply #2 on: February 13, 2013, 08:52:52 PM »
I have been reading about this investment strategy and came across some discussion about it here on these forums. Originally I had thought it was pretty widely accepted but there seems to be some disagreement.
It seems as if you're trying to choose a portfolio without considering your other choices of your preferred asset allocation.  You could gain more perspective on this controversial investment by taking a step back, reading about AA on Bogleheads or from one of William Bernstein's books, and then exploring more asset classes.  You may find Harry Browne's book in your local library.  Maybe you'll come back to the PP or maybe you'll find a better solution to your goals.
http://en.wikipedia.org/wiki/Permanent_portfolio
http://www.retireearlyhomepage.com/reallife12.html (more books at this link)

The PP is designed to thrive during fear, uncertainty, and recessions... and the collapse of civilization (as long as you can get your hands on that bullion).  You need to decide how much you want to protect yourself from those events.  Most of us see those as investing opportunities by dollar-cost averaging into our AAs in autopilot.  You might ask yourself why the PP is so hotly debated and so vigorously defended with ad hoc attacks and pejorative language.  Perhaps it should stand on its own merits and not on the intense marketing campaigns of its adherents.

The more you strive for safety, the less your returns will meet (or exceed) inflation.  In general, that means you'll be working longer too.  At some burnout health crisis point you might be willing to give up a little of that safety in the hope of a shorter accumulation phase.

Tyler

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Re: Permanent Portfolio: What Do You Think?
« Reply #3 on: February 13, 2013, 10:50:02 PM »
I use the Permanent Portfolio, and find that it has greatly helped my peace of mind with investing.  Historically it has delivered a consistent 3-6% annual real return over a variety of time frames and market conditions with very low volatility, so I think it's a fine portfolio for someone in ER.  It focuses on diversification rather than market timing, so it will never beat stocks while they are hot.  But it also will never have a huge dive like stocks did in 2008.  Over 40 years it has a nearly identical CAGR to a typical Boglehead 60/40 stock/bond portfolio (my second choice if I was starting fresh). 

Everyone on the internet suddenly turns into a Buffet-level market expert (but strangely, none of them are rich -- me included) as soon as you start discussing portfolio decisions, so I'd prefer not to get into a debate about the merits of one strategy versus another.  I'll just say that I highly recommend the PP, and suggest you visit crawlingroad.com for all the information (history, theory, philosophy, implementation, etc) you'll ever need and make your own informed decision.  Be sure to read the forum to meet many PP investors (both old and new) who can share their experience.
« Last Edit: February 13, 2013, 11:45:43 PM by Tyler »

Kriegsspiel

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Re: Permanent Portfolio: What Do You Think?
« Reply #4 on: February 14, 2013, 05:54:05 AM »
What do you think of the Permanent Portfolio strategy as vehicle for growth during the accumulation phase?

It hasn't had as great of growth as a stocks-heavy portfolio, but it's been pretty consistent.  You do have the opportunity to "buy" 3 of the assets "cheaply," and if all 3 are expensive, just keep more cash for when one drops in price, so that part is pretty nice.  If you invest 100% in stocks, you'll be buying them no matter if they are "on sale" or "cheap," which is something being diversified protects you from.

Obviously, you don't have to have 100% of your assets in the PP, just like Harry Browne says.  I don't have all of mine divided between stocks/bonds/cash/gold.

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What do you think of the Permanent Portfolio strategy as a way to achieve the SWR once you are FI?

I think the money you live on doesn't have to come from dividends, or interest, but a combination of those and capital appreciation.  So as long as your portfolio as a whole is appreciating, you can SWR off that.

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Do you think the Permanent Portfolio returns will continue and are sustainable?

I think that stocks, bonds, and gold will have their up and down years, which will let me buy low and sell high.

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If you have an opinion please post. Any discussion would be great! It would help me decide how much money I should invest in this strategy.

I like having some of my assets in the PP.  I have a 401k set up as a "regular" 50-50 stock-bond index fund setup, and I'd like to own a rental property some day.  I'm a natural bet-hedger, so this fits pretty well with my personality.

tooqk4u22

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Re: Permanent Portfolio: What Do You Think?
« Reply #5 on: February 14, 2013, 09:18:42 AM »
Grant summed it up nicely.

Here is a comment I made in another thread - it goes without saying that I am not a fan of this strategy going forward - two of the four parts are grossly overvalued (bonds and gold) and one part (cash) will lose value to inflation.  Terrible strategy going forward at these levels and you get very little current return on top of it.

Quote
I may not have a crystal ball, but I will step out on the ledge and say (as I have elsewhere) that the Permanent Portfolio and those who believe in it are relying exclusively on bullish sentiment in those otherwise safe assets with gold and bonds rising ever so much over the last two decades due to monetary easing and low inflation and once inflation starts to show its head interest rates will rise and bonds and gold will fall - look at the link KingCoin posted to see the correlation in inflation/gold/rates.  I don't know when this will happen, but it is not as far off as you may think, and when it does your safe portfolio won't feel that safe. 

My basic view is that at best the PP provides capital protection with no upside (from these levels - not from 5-10 years ago) and possibly significant downside.   The risk/reward equation is significantly imbalanced right now with this investment allocation unless you think deflation is a major concern and even this is a maybe.   

Tyler

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Re: Permanent Portfolio: What Do You Think?
« Reply #6 on: February 14, 2013, 09:53:18 AM »
Two of the four parts are grossly overvalued (bonds and gold) and one part (cash) will lose value to inflation. 

However, a PP investor who held the Bonds and Gold while they became overvalued would have sold high by now and used the money to buy more stocks.  Rebalancing is a key component to any investing strategy that doesn't require predicting the market. 

But thats not to question Tooqk's approach.  As anyone reading this thread can see, reasonable people can have very different opinions when it comes to investing.  If there was one perfect method, everyone would be doing it and we'd all be rich. 

FWIW, once you look beyond the spreadsheets, the most important part of investing is being confident enough in your approach to be able to stick through it even in bad times rather than repeatedly selling low and trying something new. 

IMHO, anyone with a reasonably diversified portfolio (PP, Boglehead, Dividend Aristocrats, etc) with the mindset and ability to ride out storms and take the long view will do pretty well over time. The best thing you can do to give you the confidence you need is to educate yourself on different strategies and come to your own conclusion on what you're most comfortable with.
« Last Edit: February 14, 2013, 09:56:29 AM by Tyler »

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Re: Permanent Portfolio: What Do You Think?
« Reply #7 on: February 14, 2013, 10:01:20 AM »
I like the general idea of PP, but I personally stay far away from investing in gold.  *shrug*.

I'd rather stick with other lazy portfolio's though, and tend to just stick to a pre-deterimed percentage of Total Stock / Total Bond market funds like a lot of folks.

Nords

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Re: Permanent Portfolio: What Do You Think?
« Reply #8 on: February 14, 2013, 10:41:58 AM »
However, a PP investor who held the Bonds and Gold while they became overvalued would have sold high by now and used the money to buy more stocks.  Rebalancing is a key component to any investing strategy that doesn't require predicting the market. 
Which kinda puts the spotlight on the word "permanent".

But maybe Harry Browne was referring to survivability, not asset allocation...

tooqk4u22

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Re: Permanent Portfolio: What Do You Think?
« Reply #9 on: February 14, 2013, 11:47:44 AM »
Two of the four parts are grossly overvalued (bonds and gold) and one part (cash) will lose value to inflation. 

However, a PP investor who held the Bonds and Gold while they became overvalued would have sold high by now and used the money to buy more stocks.  Rebalancing is a key component to any investing strategy that doesn't require predicting the market. 

Maybe so but that would mean that today they would still have 50% of their assets in grossly overvalued assets and 25% in a losing asset all with little current return. 

PP has worked extremely well over the last two decades - but here is what people are missing, the economy over that time has grown as a result of a significant increase in debt (public, private, corporate) and a significant decline in interest rates - the fed twist really helped bonds.  The current downturn was the result of this and economic growth is slow primarily because of deleveraging combined with some individual and corporate (definitely not public) austerity.  Once the deleveraging cycle slows/ends and the replacement cycle picks up steam (already happening) the economy will return to more normal growth, employment will improve, interest rates will rise, and so will equity and home prices.  This is the basic problem that the government misses and is why all the cheap money and stimulus hasn't done squat.

The other thing is that while gold has historically been viewed as a hedge against inflation its price levels in the past few years is more attributed to the weak dollar and not to inflation - the good news is for goldbugs is that the government wants to keep spending and devaluing the dollar, the bad news is that this is already priced in so if it keeps up and inflation rises gold will stay about the same to normalize.   

Anyway when this happens - bond prices will fall, the dollar will strengthen and gold will go down, and equities will go up and cash will continue to lose to inflation.

To each his own, but I think the PP is fools wager going forward - I am not saying you shouldn't have any gold/bonds/cash but 25% of each right now is not good.

Tyler

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Re: Permanent Portfolio: What Do You Think?
« Reply #10 on: February 14, 2013, 01:09:44 PM »
You may well be right, Tooqk.  Time will tell. I understand the PP sounds crazy when you just look at the individual assets.

The basic premise of the Permanent Portfolio is that no one can reliably time the market (even the most prestigious professional fund managers eventually get burned).  As an alternative, one who maintains a permanent, diversified portfolio (with assets individually selected to perform well in specific, opposing economic conditions) can protect their earnings and modestly outpace inflation no matter what happens.

In brief, if you're the type of person who believes that they have enough macroeconomic knowledge to beat the markets, the PP is probably not for you.  If you think that the market is unpredictable, then the agnostic PP approach is worth a look.  To each his own - At some point you make an informed choice and roll with it. 

For the record, the PP also did fine in the 80s and 90s while stocks were booming and gold was tanking.  When a rebalancing band was hit, they sold stocks and bought gold, only to see gold carry the portfolio in the 00s under a very different set of economic conditions. Generally speaking, at least one PP asset is always losing money.  Sometimes a lot.  And that's ok - it's how the diversification works.  That's why they call it permanent, and it's also the biggest psychological reason why the PP isn't for everyone.
« Last Edit: February 14, 2013, 01:16:26 PM by Tyler »

tooqk4u22

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Re: Permanent Portfolio: What Do You Think?
« Reply #11 on: February 14, 2013, 01:38:30 PM »
Fair enough.

I would also point out that PP (PRPFX) has changed its stripes somewhat as what its target allocation is, so even PP is permanent. I still don't like the mix though.

35% in US Dollar assets (bonds, cash)
20% in gold,
15% in US real estate and natural resource equities,
15% in Aggressive Growth Stocks
10% in swiss franks (?),
5% in silver,

grantmeaname

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Re: Permanent Portfolio: What Do You Think?
« Reply #12 on: February 14, 2013, 05:13:18 PM »
I think that tooqivest company is much safer in the long term than Permanent Portfolio.

chucklesmcgee

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Re: Permanent Portfolio: What Do You Think?
« Reply #13 on: February 14, 2013, 07:19:17 PM »
Fair enough.

I would also point out that PP (PRPFX) has changed its stripes somewhat as what its target allocation is, so even PP is permanent. I still don't like the mix though.

35% in US Dollar assets (bonds, cash)
20% in gold,
15% in US real estate and natural resource equities,
15% in Aggressive Growth Stocks
10% in swiss franks (?),
5% in silver,

That sort of mix is something that I'd expect to weather any sort of financial calamity, but probably isn't the best for long term returns. Gold and other precious metals will probably only increase at about the rate of inflation BUT if currencies melt down or governments default on debt then it's an excellent safe haven. Swiss franks are just currency BUT Switzerland is an extremely stable country that will withstand Eurozone/US Debt Crises. Real estate and resources will always be worth something.

tooqk4u22

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Re: Permanent Portfolio: What Do You Think?
« Reply #14 on: February 15, 2013, 10:44:50 AM »
Fair enough.

I would also point out that PP (PRPFX) has changed its stripes somewhat as what its target allocation is, so even PP is permanent. I still don't like the mix though.

35% in US Dollar assets (bonds, cash)
20% in gold,
15% in US real estate and natural resource equities,
15% in Aggressive Growth Stocks
10% in swiss franks (?),
5% in silver,

That sort of mix is something that I'd expect to weather any sort of financial calamity, but probably isn't the best for long term returns. Gold and other precious metals will probably only increase at about the rate of inflation BUT if currencies melt down or governments default on debt then it's an excellent safe haven. Swiss franks are just currency BUT Switzerland is an extremely stable country that will withstand Eurozone/US Debt Crises. Real estate and resources will always be worth something.

To be clear that is not my portfolio, it is the new AA for the PP ETF.  I still don't like it anymore than the tradition PP AA - but if the world unravels then I will be proven a fool.

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Re: Permanent Portfolio: What Do You Think?
« Reply #15 on: February 15, 2013, 12:06:03 PM »
To be clear that is not my portfolio, it is the new AA for the PP ETF. 

Hah!

Did they rename it to the Temporary Portfolio, or perhaps Semi-Permanent Portfolio?

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Tyler

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Re: Permanent Portfolio: What Do You Think?
« Reply #16 on: February 15, 2013, 04:23:43 PM »
To be clear that is not my portfolio, it is the new AA for the PP ETF. 

PRPFX is a mutual fund that was opened in 1982 by Terry Coxon and John Chandler (who were Harry Browne's newsletter editor and publisher, respectively) and mimicked an early version of the PP concept.  It has stayed substantially unchanged since inception, and it departs from Harry Browne's writings in a few key ways -- such as a more complicated asset allocation and the fact that they use stock-picking rather than indexing for the stock component. 

Both PRPFX and the traditional 4x25 Harry Browne PP have stayed the course over the years without substantially changing asset allocations.  Both have done pretty well, although some recommend adding 5% EDV along with PRPFX to weight the treasuries more closely to Harry Browne's version.

If you're looking for a PP ETF, there's a new one out called PERM (also not affiliated with Harry Browne) that is a bit closer to the traditional 4x25 allocation.

EDIT : the info above is from the PP book you can find at Crawlingroad.com if you're really interested in learning more. 
« Last Edit: February 15, 2013, 05:05:14 PM by Tyler »

Kriegsspiel

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Re: Permanent Portfolio: What Do You Think?
« Reply #17 on: February 16, 2013, 05:05:06 PM »
Just saw this linked over on the Bogleheads forum.  A little food for thought.

Richard3

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Re: Permanent Portfolio: What Do You Think?
« Reply #18 on: February 16, 2013, 10:57:29 PM »
It always amazes me when stocks are considered one asset class by things like PP adherents.

They're pieces of a business and those businesses do things as different as "hold the shares in the SP500 index" to "buy mid level corporate bonds where reward appears to outweigh risk" to "mine potash" to "sell mobile phones" to "run a data center in malaysia" to "run car tunnels in Marseille" to "make movies in India." (seven of the ~40 stocks I own).

Kriegsspiel

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Re: Permanent Portfolio: What Do You Think?
« Reply #19 on: February 17, 2013, 06:51:58 AM »
It always amazes me when stocks are considered one asset class by things like PP adherents.

They're pieces of a business and those businesses do things as different as "hold the shares in the SP500 index" to "buy mid level corporate bonds where reward appears to outweigh risk" to "mine potash" to "sell mobile phones" to "run a data center in malaysia" to "run car tunnels in Marseille" to "make movies in India." (seven of the ~40 stocks I own).

First, I'm sure that view isn't isolated to us "things."

Second, why would that amaze you? 

Third, I think most people running the PP use Vanguard index funds, so they also own shares in pretty much every business in the US, and a lot around the world too.

grantmeaname

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Re: Permanent Portfolio: What Do You Think?
« Reply #20 on: February 17, 2013, 08:17:52 AM »
Just saw this linked over on the Bogleheads forum.  A little food for thought.
It's interesting but I think it's more about market returns than equities specifically... though the author probably doesn't want us to think about it that way, none of his arguments boosted alternative asset classes.

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Re: Permanent Portfolio: What Do You Think?
« Reply #21 on: February 17, 2013, 05:42:26 PM »
What do you think of the Permanent Portfolio strategy as vehicle for growth during the accumulation phase?
It is good as its made up of what I believe to be unrelated asset classes. Each will have its day in the sun.

What do you think of the Permanent Portfolio strategy as a way to achieve the SWR once you are FI?
Think about what Mustachianism retirement really means.
http://www.mrmoneymustache.com/2013/02/13/mr-money-mustache-vs-the-internet-retirement-police/

Do you think the Permanent Portfolio returns will continue and are sustainable?
Yes they will continue and are sustainable as it is designed to cover Growth, Inflation, Recession and Depression.

If you have an opinion please post. Any discussion would be great! It would help me decide how much money I should invest in this strategy.

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Reido

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Re: Permanent Portfolio: What Do You Think?
« Reply #22 on: April 23, 2013, 11:57:57 AM »
Let me start off by saying that I invest a good percentage of my portfolio in this manner.  I am glad to respect everyone's opinion - however there are many scenarios in which your 60/40 stock bond portfolio will be decimated - Deflationary recession in Japan from 1991 til now, Financial collapse such as Iceland, Brazil, Argentina and so on...  keep in mind this also happened in Britain as they lost status as the world's reserve currency.  Of course, the USD remains the world's reserve currency...  for now... 

Whenever you buy any investment you are effectively guessing what the future will be.  You are predicting that what you own will gain value - am I wrong?  In the case that you invest in stocks you are simply guessing that the companies will continue to profit in the future.  Over the last 20 years you have generally been correct - with few exceptions - but that doesnt mean that there aren't systemic threats to prosperity and business returns.

The permanent portfolio hedges against all possible outcomes - Inflation and currency devaluation by holding gold.   It holds stocks for prosperity, LT Gov. Bonds for depressions, and cash for recessions.  The thesis being that economic growth and disparity in returns in each asset class will allow for significant growth of the portfolio over future time periods.  Interestingly, this has worked out amazingly over the last 40 years with only a handful of down years and with minimal variance of returns.  If you are hoping for spectacular returns you will most likely be disappointed.

You can certainly make the argument that stocks and bonds could outperform over the long haul.  You can certainly make the argument that Gold and LT Gov bonds are overpriced.  However I can definitely argue that stocks are grossly overpriced, as well.  The stock market is trading significantly above the average PE10.  Currently corporate earnings represent an all-time high percentage of GDP.  A slight rise in interest rates and return of profits to a normal percentage could easily cause the market to drop once again.  This is just one of many possible scenarios that could play out in the future... 

There was a saying that "when the sh*t hits the fan, all correlations go to 1."  Basically meaning that you can own a telecom business in mexico, a US conglomerate, a Saudi Oil firm, a German automaker, and a French insurance company, but when the market goes down, it tends to do so in tandem.  There are few exceptions.  In 2008, the only investment that profited were Long term Gov. Bonds.  Gold and cash did very little, and the US stock market collapsed, along with the vast majority of world stock markets, REITs, real estate, and commodities.  Even corporate bonds fell initally.

I'm not saying everyone should invest in the PP - I don't invest all of my money in it either.  I'm just saying that investing requires a thesis and I believe that the thesis of attempting to buy highly varied investments in order to defend against as many possible future outcomes as you can is not an unreasonable idea. 

Mannerheim

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Re: Permanent Portfolio: What Do You Think?
« Reply #23 on: January 17, 2014, 10:16:49 AM »
Bumping an old thread but I'm too lazy to look up a newer one on the PP.

After many years of investing in a standard 4x25 PP strategy, I'm a confirmed fan and recommend it to friends and family for both accumulation AND wealth preservation in retirement. The best description I've seen is that it's like standing in the eye of a hurricane; in any given year 1 or more piece is usually down double digits, but another asset more than takes up the slack, and the net result for 40 years has been a nice smooth upward trend. Rebalance at year end, rinse, and repeat. In my experience most of the criticisms people make have already been anticipated and answered in the literature:

"The PP is just another faddish strategy designed to sell books": Nope. Just go to crawlingroad.com and you can find all the information you could possibly want for free (there are books for those who are interested but they are totally unnecessary as the strategy emphasizes simplicity and ease of use). As a passive strategy utilizing low-cost index funds, transaction costs and expenses are kept very low. No one is getting rich off selling you the PP, and the website is bracingly down-to-earth and free of hype or salesmanship (I love his random post about how he hates tapas).

"That's too much cash and not enough stocks! You are giving up a lot of return over the long haul": The long-term average annual return of the PP is about 1% lower than the S&P 500, but it has orders of magnitude less volatility. On a risk-adjusted return basis (which is what really counts) the PP absolutely crushes the S&P 500. People like stocks because they can increase by 50 or 60% in a single year and it feels like you're getting rich overnight, but they can also fall by half in a year (or 20% in a SINGLE DAY). People with stock-heavy allocations felt brilliant earning 30% in 2013, and horrible losing 40% in 2008. Who needs that kind of emotional roller coaster when you can get basically the same long-term return with 1/4th the volatility? As for the cash, it's essential for smoothing out the volatility, plus it makes a useful emergency fund. Yes, there are inflation losses, but it's the only asset with 0 risk of capital losses, and diversification is all about mixing sources of risk.

"PP historical returns were skewed because gold/bonds/whatever had a decades-long secular bull market that won't continue": Maybe so. If you have strong opinions about how this or that asset class is hugely overvalued/undervalued or this or that trend is due for a reversal any day now, I wish you luck cashing in on those insights. The vast majority of people who try, fail (including rocket scientists and Harvard grads), but maybe you are the exception. Certainly you will have a white-knuckle ride watching the market every day to see if your theory is panning out, and agonizing over whether to cut your losses or lock in your gains whenever a big move comes along. For people who believe the future is chaotic and unpredictable and just want to earn a decent real return over time with no headaches, all you have to do is diversify broadly and trim the winners/top up the losers once a year without speculating over what next year's winners/losers will be.

One thing I really like about MMM's writings is the emphasis on simplicity and developing a good underlying philosophy to guide specific actions. I have always been a little uneasy with his recommendation to put most of your savings in stock index funds though, since that simply doesn't provide the stability needed to properly support early retirement (or else you have to accumulate twice as much wealth to allow for the fact that you could lose half of it in the blink of an eye). The PP is rooted in long-standing common sense about investing: diversify, don't time the markets, keep fees and expenses low, stay the course over time, and don't expect your portfolio to make you rich overnight. I say this as a professional institutional investment manager and CFA: the PP is a great choice for retirement savings for retail investors, especially ones who prefer a simple, low-stress, hands-off approach.

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Re: Permanent Portfolio: What Do You Think?
« Reply #24 on: January 17, 2014, 07:11:20 PM »
I have have spent a fair amount of time looking at the PP because I like the concept of diversifying assets to cover all economic conditions which is actually how I have tried to structure my portfolio for many years. I wanted to see if the PP could inform any changes I might make in my asset allocation.

I like the basic concepts but I believe there are two major flaws.

1. The PP theory on Gold is just wrong. The idea is to hold 25% of the portfolio in gold as a hedge during times of inflation but there is absolutely no correlation between the price of gold and inflation. I have heard a lot of excuses and alternate explanations but the fact remains that this part of the PP theory is wrong. There are much better assets to hold to hedge inflation. I also believe one of the main reasons the PP portfolio has received so much attention as of late (including the new book) is because of gold's incredible run - which again had almost nothing to do with inflation. Without this extraordinary run, the returns of the portfolio would be much worse. I believe the run up in gold along with steel, oil, and lots of other commodities was caused by the incredible driving force of the Chinese market and other emerging economies - and I think we are unlikely to see anything like it again for a very long time.

2. Cash - Holding 25% cash carries a huge opportunity cost and is an unacceptable drag on any portfolio. It just sits there declining in value due to inflation while producing nothing for long periods of time. I understand the benefits of cash but 25% is just too much insurance (IMO).

Again, I believe in the PP concepts of broad diversification and maybe it's just a matter of degree. I hold gold (2%) and cash (3%) and would be happy with up to 5% of each but no more. I do believe strongly in, and own, other hard assets as a balance to my paper assets (equities and bonds).
I strive for a 1/3 equities, 1/3 bonds, 1/3 hard assets split in my portfolio.

One other thing. I am guessing from your last sentence that you may be considering putting some money in this portfolio and maybe some in portfolio(s) based on other ideas.

Any discussion would be great! It would help me decide how much money I should invest in this strategy.

If so, this is a very bad way to diversify. I second Tyler's comments about taking the time to thoroughly educate yourself - this will pay huge dividends. I would recommend educating yourself on Modern Portfolio Theory (the Bogleheads.org approach to asset allocation) as well as the PP. Then use your knowledge to build a single rock solid portfolio for the long haul.

Dabbling absolutely will not work in investing.

Buena suerte!
« Last Edit: January 17, 2014, 10:10:41 PM by prestojx »

steveo

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Re: Permanent Portfolio: What Do You Think?
« Reply #25 on: January 17, 2014, 10:35:35 PM »
I strive for a 1/3 equities, 1/3 bonds, 1/3 hard assets split in my portfolio.

I like this mix however I would argue that the bond allocation should be split between bonds and cash. Cash is great to use for reallocation purposes and to get you through any downturns.

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Re: Permanent Portfolio: What Do You Think?
« Reply #26 on: January 17, 2014, 11:06:23 PM »
From Tyler
Quote
IMHO, anyone with a reasonably diversified portfolio (PP, Boglehead, Dividend Aristocrats, etc) with the mindset and ability to ride out storms and take the long view will do pretty well over time. The best thing you can do to give you the confidence you need is to educate yourself on different strategies and come to your own conclusion on what you're most comfortable with.

This. I absolutely disagree with gold as an "investment" and even somewhat as an "asset", however, anyone saving more then they earn, and investing their money IMO is doing nothing wrong. To me it's like the winner's problem: Do I let my winners run or do I take some profits off the table? You know what? That's a very, very high quality problem to have. If you would sleep better at night having gold that can be stolen(if it's not the ETF), whose price is absolutely dependent on the person on the other end, which requires storage costs(if ETF), would be inaccessible during the end of civilization(if ETF), wouldn't matter as much as access to drinking water and the ability to farm/hunt(if physical), and doesn't actually produce anything, then if that's what it takes you to invest, do it. I would advise anyone thinking of gold to read Warren Buffett's thought's on it.

Warren Buffett's thoughts on gold:
Quote
"Look," he says, with his usual confident laugh. "You could take all the gold that's ever been mined, and it would fill a cube 67 feet in each direction. For what that's worth at current gold prices, you could buy all -- not some -- all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?"

That was from 2010, when the price of gold was ~1200. Which is where it's at today.

Is it my investment strategy? Nope. Is my strategy ideal for someone else? Nope, my different accounts would make tax efficient people cringe(early mistakes), it would make market efficient nazi's cringe(I believe in weak market efficiency), it would make dividend growth investor's cringe, etc.

But I see value in all of those strategies. My non-strict adherence to each of those strategies does not mean I disagree with them investing that way, investing period is fucking key.
« Last Edit: January 17, 2014, 11:11:46 PM by Khanjar »

dragoncar

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Re: Permanent Portfolio: What Do You Think?
« Reply #27 on: January 17, 2014, 11:11:41 PM »
From Tyler
Quote
IMHO, anyone with a reasonably diversified portfolio (PP, Boglehead, Dividend Aristocrats, etc) with the mindset and ability to ride out storms and take the long view will do pretty well over time. The best thing you can do to give you the confidence you need is to educate yourself on different strategies and come to your own conclusion on what you're most comfortable with.

This. I absolutely disagree with gold as an "investment" and even somewhat as an "asset", however, anyone saving more then they earn, and investing their money IMO is doing nothing wrong. To me it's like the winner's problem: Do I let my winners run or do I take some profits off the table? You know what? That's a very, very high quality problem to have. If you would sleep better at night having gold that can be stolen(if it's not the ETF), whose price is absolutely dependent on the person on the other end, which requires storage costs(if ETF), would be inaccessible during the end of civilization(if ETF), wouldn't matter as much as access to drinking water and the ability to farm/hunt(if physical), and doesn't actually produce anything, then if that's what it takes you to invest, do it. I would advise anyone thinking of gold to read Warren Buffett's thought's on it.

Warren Buffett's thoughts on gold:
Quote
"Look," he says, with his usual confident laugh. "You could take all the gold that's ever been mined, and it would fill a cube 67 feet in each direction. For what that's worth at current gold prices, you could buy all -- not some -- all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?"

That was from 2010, when the price of gold was ~1200. Which is where it's at today.

Is it my investment strategy? Nope. Is my strategy ideal for someone else? Nope, my different accounts would make tax efficient people cringe(early mistakes), it would make market efficient nazi's cringe(I believe in weak market efficiency), it would make dividend growth investor's cringe, etc.

But I see value in all of those strategies. My non-strict adherence to each of those strategies does not mean I disagree with them investing that way, investing period is fucking key.

Re buffet, luckily it's not an all or nothing proposition.  On the one hand if you owned all gold, you would have cornered the market and would be like a god.  On the other hand if you actually had that much money, it wouldn't matter what you invested in.  For those of us non trillion aires, diversification is good

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Re: Permanent Portfolio: What Do You Think?
« Reply #28 on: January 17, 2014, 11:16:12 PM »
Re buffet, luckily it's not an all or nothing proposition.  On the one hand if you owned all gold, you would have cornered the market and would be like a god.  On the other hand if you actually had that much money, it wouldn't matter what you invested in.  For those of us non trillion aires, diversification is good

Yes, but if you're a god, would you rather own a 67 ft cube of metal, or would you rather build several space elevators, start mining asteroids, have a hotel chain, a fast food chain, an automobile manufacturer, have a couple utilities providers, etc. all providing a return on investment?

Or a 67 ft cube of metal.

dragoncar

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Re: Permanent Portfolio: What Do You Think?
« Reply #29 on: January 18, 2014, 12:52:52 AM »
Re buffet, luckily it's not an all or nothing proposition.  On the one hand if you owned all gold, you would have cornered the market and would be like a god.  On the other hand if you actually had that much money, it wouldn't matter what you invested in.  For those of us non trillion aires, diversification is good

Yes, but if you're a god, would you rather own a 67 ft cube of metal, or would you rather build several space elevators, start mining asteroids, have a hotel chain, a fast food chain, an automobile manufacturer, have a couple utilities providers, etc. all providing a return on investment?

Or a 67 ft cube of metal.

Yes, and also own some of that metal

Richard3

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Re: Permanent Portfolio: What Do You Think?
« Reply #30 on: January 18, 2014, 12:54:07 AM »
If I was a god I'd drop 67 ft cubes of metal on people who annoyed me.

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Re: Permanent Portfolio: What Do You Think?
« Reply #31 on: January 18, 2014, 07:36:47 AM »
I have have spent a fair amount of time looking at the PP because I like the concept of diversifying assets to cover all economic conditions which is actually how I have tried to structure my portfolio for many years. I wanted to see if the PP could inform any changes I might make in my asset allocation.

I like the basic concepts but I believe there are two major flaws.

1. The PP theory on Gold is just wrong. The idea is to hold 25% of the portfolio in gold as a hedge during times of inflation but there is absolutely no correlation between the price of gold and inflation. I have heard a lot of excuses and alternate explanations but the fact remains that this part of the PP theory is wrong. There are much better assets to hold to hedge inflation. I also believe one of the main reasons the PP portfolio has received so much attention as of late (including the new book) is because of gold's incredible run - which again had almost nothing to do with inflation. Without this extraordinary run, the returns of the portfolio would be much worse. I believe the run up in gold along with steel, oil, and lots of other commodities was caused by the incredible driving force of the Chinese market and other emerging economies - and I think we are unlikely to see anything like it again for a very long time.

2. Cash - Holding 25% cash carries a huge opportunity cost and is an unacceptable drag on any portfolio. It just sits there declining in value due to inflation while producing nothing for long periods of time. I understand the benefits of cash but 25% is just too much insurance (IMO).

Again, I believe in the PP concepts of broad diversification and maybe it's just a matter of degree. I hold gold (2%) and cash (3%) and would be happy with up to 5% of each but no more. I do believe strongly in, and own, other hard assets as a balance to my paper assets (equities and bonds).
I strive for a 1/3 equities, 1/3 bonds, 1/3 hard assets split in my portfolio.

One other thing. I am guessing from your last sentence that you may be considering putting some money in this portfolio and maybe some in portfolio(s) based on other ideas.

Any discussion would be great! It would help me decide how much money I should invest in this strategy.

If so, this is a very bad way to diversify. I second Tyler's comments about taking the time to thoroughly educate yourself - this will pay huge dividends. I would recommend educating yourself on Modern Portfolio Theory (the Bogleheads.org approach to asset allocation) as well as the PP. Then use your knowledge to build a single rock solid portfolio for the long haul.

Dabbling absolutely will not work in investing.

Buena suerte!

This isn't the PP at all.  It's just you own asset mix.

Which is great, I just don't see how it's relevant to the PP. 

I do agree with this:
Quote
I second Tyler's comments about taking the time to thoroughly educate yourself - this will pay huge dividends. I would recommend educating yourself on Modern Portfolio Theory (the Bogleheads.org approach to asset allocation) as well as the PP. Then use your knowledge to build a single rock solid portfolio for the long haul.

Everyone should find their own comfort.

I don't think the PP is good for accumulating wealth.  It's okay for preserving it.  If someone built a stache of 33x their expenses (aka 3% SWR) and never wanted to think about their portfolio, worry much about volatility, etc., the PP is a decent tool for that.

They'll end up behind many other investment strategies, but it may be worth it to them for peace of mind.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
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prestojx

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Re: Permanent Portfolio: What Do You Think?
« Reply #32 on: January 18, 2014, 12:42:11 PM »

This isn't the PP at all.  It's just you own asset mix.

Which is great, I just don't see how it's relevant to the PP. 

I do agree with this:
Quote
I second Tyler's comments about taking the time to thoroughly educate yourself - this will pay huge dividends. I would recommend educating yourself on Modern Portfolio Theory (the Bogleheads.org approach to asset allocation) as well as the PP. Then use your knowledge to build a single rock solid portfolio for the long haul.

Everyone should find their own comfort.

I don't think the PP is good for accumulating wealth.  It's okay for preserving it.  If someone built a stache of 33x their expenses (aka 3% SWR) and never wanted to think about their portfolio, worry much about volatility, etc., the PP is a decent tool for that.

They'll end up behind many other investment strategies, but it may be worth it to them for peace of mind.

Hahaha - WTF?

arebelspy

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Re: Permanent Portfolio: What Do You Think?
« Reply #33 on: January 18, 2014, 09:57:19 PM »
Hahaha - WTF?

?

I don't understand anything about this post.

I was commenting that your "1/3 bond, 1/3 stocks, 1/3 hard assets" is not the PP, and that I do think everyone should find their own comfortable AA, then I went back OT and talked about the PP.

Which part of my post was unclear?
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AlmstRtrd

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Re: Permanent Portfolio: What Do You Think?
« Reply #34 on: March 31, 2014, 06:24:47 PM »
Quote from arebelspy:

Quote
I don't think the PP is good for accumulating wealth.  It's okay for preserving it.  If someone built a stache of 33x their expenses (aka 3% SWR) and never wanted to think about their portfolio, worry much about volatility, etc., the PP is a decent tool for that.

They'll end up behind many other investment strategies, but it may be worth it to them for peace of mind.

Hey arebelspy,

Just reading this old thread on the Permanent Portfolio...

Can you explain why you don't think the PP is good for accumulating wealth? I believe the annualized real returns over the last 40 years have been quite close to the returns of a 60/40 stock & bond split, no? Not trying to challenge you on this point, just understand what your thinking is. Thanks!

grantmeaname

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Re: Permanent Portfolio: What Do You Think?
« Reply #35 on: March 31, 2014, 06:45:00 PM »
It might be productive for you to reread this thread and then find the other permanent portfolio threads in this subforum rather than rehash the whole issue. Unless you have a more specific question?

AlmstRtrd

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Re: Permanent Portfolio: What Do You Think?
« Reply #36 on: March 31, 2014, 07:01:42 PM »
Have read the whole thread and many others. I am interested in arebelspy's answer to my question because I think he is generally supportive of the PP philosophy.

arebelspy

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Re: Permanent Portfolio: What Do You Think?
« Reply #37 on: March 31, 2014, 07:54:24 PM »
The PP, IMO, gives up higher returns for less beta.

WHat I said earlier (that you quoted) pretty much sums it up: you'll need a lower WR, but won't have to worry about sequence of returns risk as much.  You'll leave money on the table, as it will underperform other strategies.

I am interested in arebelspy's answer to my question because I think he is generally supportive of the PP philosophy.

Yeah, I'm good with it in certain circumstances/situations.  I'm not a fan of the rabid fanboys of it.  I also think you shouldn't just ask questions of people already supportive of ideas you prefer.  Find the people who hate the PP and find out why they do.  You'll learn a lot more.  ;)

Did I answer your question?  I may be missing what you're asking, because I feel like that quote already said what I'm saying now, so you may have to get more specific with what you're looking for.
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Re: Permanent Portfolio: What Do You Think?
« Reply #38 on: March 31, 2014, 08:26:59 PM »
Quote from arebelspy:

Quote
Did I answer your question?  I may be missing what you're asking, because I feel like that quote already said what I'm saying now, so you may have to get more specific with what you're looking for.

OK, I'll try to be more specific. My situation is that I am 55 and, considering my line of work, most of my good earning years are probably behind me. I'm not a real estate guy which I know is an area of expertise for you. Without getting too fancy in terms of strategies, what is a better way of accumulating (as opposed to preserving) wealth? It might help you to answer if I tell you that I am very risk averse. I am still accumulating, just not as quickly as before.

I am asking you precisely because you are not a rabid fan. With that in mind I figure there is some subtlety to your your line of thinking. Thanks.

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Re: Permanent Portfolio: What Do You Think?
« Reply #39 on: March 31, 2014, 08:34:02 PM »
Honestly, the best way to accumulate is take on some risk.  IMO, buy and hold and don't watch what the day to day price is doing.  If you have a decade of accumulation left (I'm just making an assumption here, so adjust accordingly), aren't interested in real estate, and are risk adverse, I'd be doing 60/40 equities/bonds, moving to 50/50 in five years, and 40/60 equities/bonds when you FIRE.  I wouldn't go below 40% equities (and while I personally would go above 60%, for someone who describes themselves as "very risk averse" I wouldn't go above 60%).

Something like 60% stocks (VTSAX maybe) and 40% bonds (VBTLX perhaps), and decrease the stocks and increase the bonds by 2% annually when you rebalance each year for the next decade.

Another good possibility is Target Retirement Funds: http://jlcollinsnh.com/2012/12/18/stocks-part-xv-target-retirement-funds-the-simplest-path-to-wealth-of-all/

IMO either of those ideas will grow more over the next decade than 25% bonds, 25% stocks, 25% gold, 25% cash.

I could be wrong, my crystal ball is in the shop, but that would be my preferred method for someone like you.
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dragoncar

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Re: Permanent Portfolio: What Do You Think?
« Reply #40 on: March 31, 2014, 08:44:26 PM »
Quote from arebelspy:

Quote
Did I answer your question?  I may be missing what you're asking, because I feel like that quote already said what I'm saying now, so you may have to get more specific with what you're looking for.

OK, I'll try to be more specific. My situation is that I am 55 and, considering my line of work, most of my good earning years are probably behind me. I'm not a real estate guy which I know is an area of expertise for you. Without getting too fancy in terms of strategies, what is a better way of accumulating (as opposed to preserving) wealth? It might help you to answer if I tell you that I am very risk averse. I am still accumulating, just not as quickly as before.

I am asking you precisely because you are not a rabid fan. With that in mind I figure there is some subtlety to your your line of thinking. Thanks.

I think he explained it already, but I'll give my take on it.  I don't have exact numbers off the top of my head, but let's assume ( big assumption) that the PP and SPY both return what they have historically.  I think the PP is about a percent less than spy per year.  This doesn't sound like a lot but can actually be huge when you are talking compound returns.  If you are quitting your job and don't expect to be able to call backsies, you might be worried that you are retiring at the very peak of a bubble and thus will be in the 5% or whatever that fails in fire calc.  The PP can lower this volatility (historically).  On the other hand, if you have 10-20 years to FIRE, then you might not care about short term market volatility.  In that case, while accumulating, it could make sense to choose SPY.  I'm just using spy here as an example but this can apply to other investments along the risk/return spectrum as well.

The problem with the above is that everyone knows past results are not guaranteed to indicate future returns.  Nevertheless people for the most part assume historical returns and don't account for the chance of say a japan economy.  The PP tries to respond moderately well to any economic climate, but of course there no guarantee that it will work in unexpected circumstances either.

Personally I would be happy with historical returns, but whenever I pick any asset allocation I'm always terrified that I've picked the exact moment that AA will permanently diverge from historical results.

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Re: Permanent Portfolio: What Do You Think?
« Reply #41 on: March 31, 2014, 08:56:16 PM »
from dragoncar:

Quote
Personally I would be happy with historical returns, but whenever I pick any asset allocation I'm always terrified that I've picked the exact moment that AA will permanently diverge from historical results.

Alas, I think I have more of a talent for jumping into something just as it's about to tank. Not to boast or anything. Thank you both for your replies. You both seem to be saying that stocks are likely to grow more over time that the PP 4X25 split. Appreciate the input!

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Re: Permanent Portfolio: What Do You Think?
« Reply #42 on: April 01, 2014, 07:41:43 AM »
Sounds like your buying the funds with the highest 5 or 10 years returns.


from dragoncar:

Quote
Personally I would be happy with historical returns, but whenever I pick any asset allocation I'm always terrified that I've picked the exact moment that AA will permanently diverge from historical results.

Alas, I think I have more of a talent for jumping into something just as it's about to tank. Not to boast or anything. Thank you both for your replies. You both seem to be saying that stocks are likely to grow more over time that the PP 4X25 split. Appreciate the input!

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Re: Permanent Portfolio: What Do You Think?
« Reply #43 on: April 01, 2014, 08:18:07 AM »
Owning assets that only keep up with inflation will never allow you a SWR of anything, because the real return is zero, so I'm pretty skeptical of TIPS too.

This isn't technically correct, otherwise all the numbers on this page would be zero. I do agree though that these real yields are small (and the short term ones are even negative), and I'd say they carry other risks too, like if CPI gets calculated differently, or no longer reflects purchasing power that well (some argue that's already the case).

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Re: Permanent Portfolio: What Do You Think?
« Reply #44 on: April 01, 2014, 08:58:51 AM »
The Permanent Portfolio strikes me as better at preserving wealth than growing it. Not that the PP doesn't earn real returns, just that its strength lies more in preserving purchasing power than building it. I'd expect a more traditional small/value tilted portfolio to earn much larger returns over the long run, though of course at the expense of much higher risk.

The PP is a great portfolio but it's not for everyone.

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Re: Permanent Portfolio: What Do You Think?
« Reply #45 on: April 01, 2014, 09:42:54 AM »
Quote
The PP is a great portfolio but it's not for everyone.

True. Just trying to take care of my own assets at this point. Preserving purchasing power is exactly what I am trying to do. Will check back with you in 20 years to let you know if it worked!

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Re: Permanent Portfolio: What Do You Think?
« Reply #46 on: April 01, 2014, 12:21:56 PM »
Owning assets that only keep up with inflation will never allow you a SWR of anything, because the real return is zero, so I'm pretty skeptical of TIPS too.
This isn't technically correct, otherwise all the numbers on this page would be zero. I do agree though that these real yields are small (and the short term ones are even negative), and I'd say they carry other risks too, like if CPI gets calculated differently, or no longer reflects purchasing power that well (some argue that's already the case).
It's perfectly technically correct that assets that only keep up with inflation earn a real yield of zero. It's not correct that all TIPS exactly only keep with inflation and thus have real yields exactly equal to zero, and that the yield on different maturities of TIPS are all identical, but then that was never what I was arguing.

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Re: Permanent Portfolio: What Do You Think?
« Reply #47 on: April 01, 2014, 01:40:33 PM »
Owning assets that only keep up with inflation will never allow you a SWR of anything, because the real return is zero, so I'm pretty skeptical of TIPS too.
This isn't technically correct, otherwise all the numbers on this page would be zero. I do agree though that these real yields are small (and the short term ones are even negative), and I'd say they carry other risks too, like if CPI gets calculated differently, or no longer reflects purchasing power that well (some argue that's already the case).
It's perfectly technically correct that assets that only keep up with inflation earn a real yield of zero. It's not correct that all TIPS exactly only keep with inflation and thus have real yields exactly equal to zero, and that the yield on different maturities of TIPS are all identical, but then that was never what I was arguing.

I thought "assets that only keep up with inflation will never allow you a SWR of anything" was your reason for being "pretty skeptical of TIPS", because of the "so" in between.

grantmeaname

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Re: Permanent Portfolio: What Do You Think?
« Reply #48 on: April 01, 2014, 02:19:01 PM »
I guess I was trying to assert that TIPS do approximately nothing for you as a part of your asset allocation, not that their real return is exactly zero.

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Re: Permanent Portfolio: What Do You Think?
« Reply #49 on: April 01, 2014, 04:50:15 PM »
I guess I was trying to assert that TIPS do approximately nothing for you as a part of your asset allocation, not that their real return is exactly zero.
I think TIPS (and I bonds) serve the valuable investor-psychology function of helping people sleep better at night and not sell out at the bottom of the market.