Author Topic: Permanent Portfolio: What Do You Think?  (Read 34026 times)

Flaneur

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Re: Permanent Portfolio: What Do You Think?
« Reply #50 on: April 01, 2014, 06:14:10 PM »
William Bernstein covers TIPS in his booklet Deep Risk. There's no reason to be incredulous of them and they are certainly a viable asset class for certain people.

grantmeaname

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Re: Permanent Portfolio: What Do You Think?
« Reply #51 on: April 01, 2014, 07:08:14 PM »
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.
they are certainly a viable asset class for certain people.
Yes. I just don't think the ER crowd is that class of people. Perhaps I should have worded that statement in a more careful, limited way. TIPS are good for a lot of things, but they don't produce a meaningful amount of retirement income and don't do much to support ER. There are plenty of other uses for which they're appropriate.

Nords

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Re: Permanent Portfolio: What Do You Think?
« Reply #52 on: April 01, 2014, 09:59:57 PM »
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.
they are certainly a viable asset class for certain people.
Yes. I just don't think the ER crowd is that class of people. Perhaps I should have worded that statement in a more careful, limited way. TIPS are good for a lot of things, but they don't produce a meaningful amount of retirement income and don't do much to support ER. There are plenty of other uses for which they're appropriate.
I think if you posted this on Early-Retirement.org or (especially) Bogleheads then you'd get a hundred rebuttals from ERs.  I think ER people are just as much emotional investors as the crowd on Yahoo! Finance.

But I don't own TIPS (or even I bonds) and I don't have a dog in this debate... just reporting what people are doing. 

blackomen

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Re: Permanent Portfolio: What Do You Think?
« Reply #53 on: May 23, 2014, 01:46:38 PM »
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.

Lol, I'm also in the CFA program (small world, haha) and I've been religiously using the Permanent Portfolio since 2011..  actually, I got in right when the US had its debt downgraded.  The low volatility lets me sleep at night, not to mention that it doesn't seem to be very correlated to the boom and bust in the Financial Industry (wouldn't it suck if you lost your job AND your investments got hit hard?)  Sure, it was down a little last year but nobody could have accurately predicted the massive rally in stocks or the crashes in gold and bonds.

bo_knows

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Re: Permanent Portfolio: What Do You Think?
« Reply #54 on: May 27, 2014, 08:30:24 AM »
The low volatility lets me sleep at night, not to mention that it doesn't seem to be very correlated to the boom and bust in the Financial Industry (wouldn't it suck if you lost your job AND your investments got hit hard?)  Sure, it was down a little last year but nobody could have accurately predicted the massive rally in stocks or the crashes in gold and bonds.

Serious question: The low volatility may let you sleep at night, but does the low growth let you sleep at night?  For a 30-yr retirement timeframe, PP does great.  But if you're going any longer than that, it seems like a giant loser to me.

Assumptions:
$1M Portfolio
40 yr timeframe
Varying spending between $32k - $44k depending on market conditions.
Generous 3% growth assumption for cash assets.

The PP version of this scenario (http://www.cfiresim.com/input.php?id=62478) gets absolutely hammered compared to the standard 75/25 stock/bond split (http://www.cfiresim.com/input.php?id=59078). 68% historical success rate vs. 99%.   Yes, the standard deviation (volatility) of the PP version is far lower... but failure is a far more important stat to me.

Tyler

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Re: Permanent Portfolio: What Do You Think?
« Reply #55 on: May 27, 2014, 08:54:07 AM »
The low volatility lets me sleep at night, not to mention that it doesn't seem to be very correlated to the boom and bust in the Financial Industry (wouldn't it suck if you lost your job AND your investments got hit hard?)  Sure, it was down a little last year but nobody could have accurately predicted the massive rally in stocks or the crashes in gold and bonds.

Serious question: The low volatility may let you sleep at night, but does the low growth let you sleep at night?  For a 30-yr retirement timeframe, PP does great.  But if you're going any longer than that, it seems like a giant loser to me.

Assumptions:
$1M Portfolio
40 yr timeframe
Varying spending between $32k - $44k depending on market conditions.
Generous 3% growth assumption for cash assets.

The PP version of this scenario (http://www.cfiresim.com/input.php?id=62478) gets absolutely hammered compared to the standard 75/25 stock/bond split (http://www.cfiresim.com/input.php?id=59078). 68% historical success rate vs. 99%.   Yes, the standard deviation (volatility) of the PP version is far lower... but failure is a far more important stat to me.

Cfireisim doesn't really work all that well for the PP.  The biggest reason is that dollar came off the gold standard in 1972, so any gold data before that is useless from the PP perspective because the underlying market for gold behaved differently.  Also, remember that bonds in cfiresim represent the total bond market and not 30 year treasuries, and that cash in the PP is short duration treasuries that have historically had pretty high interest rates.  If you limit it to post-1972 with 25% stocks, 25% gold, and 50% bonds that probably simulates it the best but you won't get too many runs.

As an alternative, think about it this way.  The worst year since 1972 to retire with the PP was in 1987.  However, a person retiring in 1987 still could have used a 3.8% SWR and maintained the same inflation-adjusted portfolio value after a decade.  Note that this performance is much better than typical stock/bond portfolio that the 4% SWR rule is based on.  A person retiring in 1972 with a 50/50 stock/bond mix would have had a -2.5% SWR over the next ten years (meaning if they didn't add 2.5% every year, they would have lost principal).  With a recommended 4% SWR, would you have been able to watch your buying power drop 6.5% every year for a decade without abandoning the plan? (such a retiree would have survived in retrospect, but that's a damn scary ride without the benefit of hindsight.) 

Lots more info here if you're interested:  http://gyroscopicinvesting.com/forum/permanent-portfolio-discussion/role-of-cash-in-the-pp/

So no, the PP growth doesn't concern me.  Consistently beating inflation by 3-6% with a smooth ride is a fine track record for a retirement portfolio.   

« Last Edit: May 27, 2014, 09:08:30 AM by Tyler »

blackomen

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Re: Permanent Portfolio: What Do You Think?
« Reply #56 on: May 27, 2014, 08:57:12 AM »
I'm using Portfolio Visualizer and can't seem to get a 99% success rate for the 75/25 allocation..

Is the 25% bonds in Total Bonds or Long-Term Bonds (which is what the PP uses)?

Here's the simulation for the PP

And Here's the simulation for 75/25

matchewed

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Re: Permanent Portfolio: What Do You Think?
« Reply #57 on: May 27, 2014, 09:04:54 AM »
Because you're using two different calculators which calculate a success rate by two different methods. You're using different time frames...etc.

bo_knows

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Re: Permanent Portfolio: What Do You Think?
« Reply #58 on: May 27, 2014, 09:36:19 AM »
The low volatility lets me sleep at night, not to mention that it doesn't seem to be very correlated to the boom and bust in the Financial Industry (wouldn't it suck if you lost your job AND your investments got hit hard?)  Sure, it was down a little last year but nobody could have accurately predicted the massive rally in stocks or the crashes in gold and bonds.

Serious question: The low volatility may let you sleep at night, but does the low growth let you sleep at night?  For a 30-yr retirement timeframe, PP does great.  But if you're going any longer than that, it seems like a giant loser to me.

Assumptions:
$1M Portfolio
40 yr timeframe
Varying spending between $32k - $44k depending on market conditions.
Generous 3% growth assumption for cash assets.

The PP version of this scenario (http://www.cfiresim.com/input.php?id=62478) gets absolutely hammered compared to the standard 75/25 stock/bond split (http://www.cfiresim.com/input.php?id=59078). 68% historical success rate vs. 99%.   Yes, the standard deviation (volatility) of the PP version is far lower... but failure is a far more important stat to me.

Cfireisim doesn't really work all that well for the PP.  The biggest reason is that dollar came off the gold standard in 1972, so any gold data before that is useless from the PP perspective because the underlying market for gold behaved differently.  Also, remember that bonds in cfiresim represent the total bond market and not 30 year treasuries, and that cash in the PP is short duration treasuries that have historically had pretty high interest rates.  If you limit it to post-1972 with 25% stocks, 25% gold, and 50% bonds that probably simulates it the best but you won't get too many runs.

As an alternative, think about it this way.  The worst year since 1972 to retire with the PP was in 1987.  However, a person retiring in 1987 still could have used a 3.8% SWR and maintained the same inflation-adjusted portfolio value after a decade.  Note that this performance is much better than typical stock/bond portfolio that the 4% SWR rule is based on.  A person retiring in 1972 with a 50/50 stock/bond mix would have had a -2.5% SWR over the next ten years (meaning if they didn't add 2.5% every year, they would have lost principal).  With a recommended 4% SWR, would you have been able to watch your buying power drop 6.5% every year for a decade without abandoning the plan? (such a retiree would have survived in retrospect, but that's a damn scary ride without the benefit of hindsight.) 

Lots more info here if you're interested:  http://gyroscopicinvesting.com/forum/permanent-portfolio-discussion/role-of-cash-in-the-pp/

So no, the PP growth doesn't concern me.  Consistently beating inflation by 3-6% with a smooth ride is a fine track record for a retirement portfolio.

Well, the Shiller data set (what cFIREsim uses) actually uses GS10 bonds, not a "total market"... and I would think that giving cash a 3-3.5% growth number would be generous enough.  I limit the data years to 1972-present, and still get pretty brutal results.   *shrug*   I'm just trying to understand the theory behind this, but I personally would never invest like this.

That link is blocked at my office, but I'm pretty sure I remember reading about PP using cash as a buffer during bad times.  I'm just not convinced of the whole "cash buffer" strategy.  There are a lot of reasons to discount the idea, mostly having to do with the drag that cash puts on a long-term portfolio.
« Last Edit: May 27, 2014, 09:39:43 AM by bo_knows »

Tyler

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Re: Permanent Portfolio: What Do You Think?
« Reply #59 on: May 27, 2014, 10:08:48 AM »

Well, the Shiller data set (what cFIREsim uses) actually uses GS10 bonds, not a "total market"... and I would think that giving cash a 3-3.5% growth number would be generous enough.  I limit the data years to 1972-present, and still get pretty brutal results.   *shrug*   I'm just trying to understand the theory behind this, but I personally would never invest like this.

That link is blocked at my office, but I'm pretty sure I remember reading about PP using cash as a buffer during bad times.  I'm just not convinced of the whole "cash buffer" strategy.  There are a lot of reasons to discount the idea, mostly having to do with the drag that cash puts on a long-term portfolio.

Read the link when you get home.  It's informative, and specifically addresses cash as well.

The Permanent Portfolio exclusively uses 30 year treasuries for bonds, and they perform quite a bit differently than the 10-year ones.  And the average interest rate on cash doesn't account for when it is higher and lower  (for example, T-bills peaked at over 15% in the early 80s).    The reason I mentioned using 50% bonds and zero cash in Cfiresim is that it best simulates the PP "barbell" -- average 30-year treasuries and 1-year treasuries together and you get the general performance of bonds with a 15-year duration.  That's much closer to 10-year treasury performance. 

To really understand the PP you'll need to read a bit about how it works and why and not simply look at a cfiresim run (because of the shortcomings I mentioned, as well as a few more like how the PP drawdown method and rebalancing works).  I recommend browsing the blog at the link I provided, or reading the book the author wrote. 

BTW, I personally use the PP and plan to keep doing so in retirement but I don't think it's the only good retirement portfolio.  From all my research it's an excellent option, but do what helps you sleep at night and never invest in something you don't understand.   

phred

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Re: Permanent Portfolio: What Do You Think?
« Reply #60 on: May 27, 2014, 11:56:37 AM »
Grant summed it up nicely.
and one part (cash) will lose value to inflation.

the cash part doesn't have to be actual cash.  It can be laddered CDs, second mortgages you've issued, tax liens, interest bearing notes for short-term loans you've financed.

blackomen

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Re: Permanent Portfolio: What Do You Think?
« Reply #61 on: May 27, 2014, 12:01:29 PM »
The low volatility lets me sleep at night, not to mention that it doesn't seem to be very correlated to the boom and bust in the Financial Industry (wouldn't it suck if you lost your job AND your investments got hit hard?)  Sure, it was down a little last year but nobody could have accurately predicted the massive rally in stocks or the crashes in gold and bonds.

Serious question: The low volatility may let you sleep at night, but does the low growth let you sleep at night?  For a 30-yr retirement timeframe, PP does great.  But if you're going any longer than that, it seems like a giant loser to me.

Assumptions:
$1M Portfolio
40 yr timeframe
Varying spending between $32k - $44k depending on market conditions.
Generous 3% growth assumption for cash assets.

The PP version of this scenario (http://www.cfiresim.com/input.php?id=62478) gets absolutely hammered compared to the standard 75/25 stock/bond split (http://www.cfiresim.com/input.php?id=59078). 68% historical success rate vs. 99%.   Yes, the standard deviation (volatility) of the PP version is far lower... but failure is a far more important stat to me.

Cfireisim doesn't really work all that well for the PP.  The biggest reason is that dollar came off the gold standard in 1972, so any gold data before that is useless from the PP perspective because the underlying market for gold behaved differently.  Also, remember that bonds in cfiresim represent the total bond market and not 30 year treasuries, and that cash in the PP is short duration treasuries that have historically had pretty high interest rates.  If you limit it to post-1972 with 25% stocks, 25% gold, and 50% bonds that probably simulates it the best but you won't get too many runs.

As an alternative, think about it this way.  The worst year since 1972 to retire with the PP was in 1987.  However, a person retiring in 1987 still could have used a 3.8% SWR and maintained the same inflation-adjusted portfolio value after a decade.  Note that this performance is much better than typical stock/bond portfolio that the 4% SWR rule is based on.  A person retiring in 1972 with a 50/50 stock/bond mix would have had a -2.5% SWR over the next ten years (meaning if they didn't add 2.5% every year, they would have lost principal).  With a recommended 4% SWR, would you have been able to watch your buying power drop 6.5% every year for a decade without abandoning the plan? (such a retiree would have survived in retrospect, but that's a damn scary ride without the benefit of hindsight.) 

Lots more info here if you're interested:  http://gyroscopicinvesting.com/forum/permanent-portfolio-discussion/role-of-cash-in-the-pp/

So no, the PP growth doesn't concern me.  Consistently beating inflation by 3-6% with a smooth ride is a fine track record for a retirement portfolio.

Well, the Shiller data set (what cFIREsim uses) actually uses GS10 bonds, not a "total market"... and I would think that giving cash a 3-3.5% growth number would be generous enough.  I limit the data years to 1972-present, and still get pretty brutal results.   *shrug*   I'm just trying to understand the theory behind this, but I personally would never invest like this.

That link is blocked at my office, but I'm pretty sure I remember reading about PP using cash as a buffer during bad times.  I'm just not convinced of the whole "cash buffer" strategy.  There are a lot of reasons to discount the idea, mostly having to do with the drag that cash puts on a long-term portfolio.

Well, if you don't like the idea as is, there's nothing stopping you from improving or adapting it..  although most in the PP community may frown upon changes.  For example, I use the 2x leveraged ETFs for Stocks, Gold, and LT Bonds in my IRA and no cash since I can still take additional risk when I'm young..  2x ETFs may sound risky due to the time decay but periodic rebalancing helps mitigate some of it (mostly due to the fact that you're also buying the underweight ETFs after they've been hit with the decay so you're also taking advantage of the decay to reduce your rebalancing costs.)  I still stick with the standard PP in my taxable accounts though.

dragoncar

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Re: Permanent Portfolio: What Do You Think?
« Reply #62 on: May 27, 2014, 12:02:34 PM »

Well, the Shiller data set (what cFIREsim uses) actually uses GS10 bonds, not a "total market"... and I would think that giving cash a 3-3.5% growth number would be generous enough.  I limit the data years to 1972-present, and still get pretty brutal results.   *shrug*   I'm just trying to understand the theory behind this, but I personally would never invest like this.

That link is blocked at my office, but I'm pretty sure I remember reading about PP using cash as a buffer during bad times.  I'm just not convinced of the whole "cash buffer" strategy.  There are a lot of reasons to discount the idea, mostly having to do with the drag that cash puts on a long-term portfolio.

Read the link when you get home.  It's informative, and specifically addresses cash as well.

The Permanent Portfolio exclusively uses 30 year treasuries for bonds, and they perform quite a bit differently than the 10-year ones.  And the average interest rate on cash doesn't account for when it is higher and lower  (for example, T-bills peaked at over 15% in the early 80s).    The reason I mentioned using 50% bonds and zero cash in Cfiresim is that it best simulates the PP "barbell" -- average 30-year treasuries and 1-year treasuries together and you get the general performance of bonds with a 15-year duration.  That's much closer to 10-year treasury performance. 

To really understand the PP you'll need to read a bit about how it works and why and not simply look at a cfiresim run (because of the shortcomings I mentioned, as well as a few more like how the PP drawdown method and rebalancing works).  I recommend browsing the blog at the link I provided, or reading the book the author wrote. 

BTW, I personally use the PP and plan to keep doing so in retirement but I don't think it's the only good retirement portfolio.  From all my research it's an excellent option, but do what helps you sleep at night and never invest in something you don't understand.   

I also think the cash average is higher than 3%.  See:

http://www.crawlingroad.com/blog/2008/12/22/permanent-portfolio-historical-returns/

BFGirl

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Re: Permanent Portfolio: What Do You Think?
« Reply #63 on: May 27, 2014, 12:12:09 PM »
I have read this book and I have a question for those of you who use the Permanent Portfolio.  How are you holding the gold portion?  Do you actually have bullion stored somewhere, are you buying a gold fund or how are you accounting for this portion?

Tyler

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Re: Permanent Portfolio: What Do You Think?
« Reply #64 on: May 27, 2014, 12:34:52 PM »
I have read this book and I have a question for those of you who use the Permanent Portfolio.  How are you holding the gold portion?  Do you actually have bullion stored somewhere, are you buying a gold fund or how are you accounting for this portion?

I personally use IAU for its convenience and low expense ratio.  I understand that the classic PP recommendation is to only hold physical bullion, but you'll find many PP investors take the ETF route especially in a retirement account.  I do plan to buy a few coins eventually and store them in a safe deposit box. 

hodedofome

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Re: Permanent Portfolio: What Do You Think?
« Reply #65 on: May 27, 2014, 02:03:12 PM »
It helps to remember why the PP was developed in the first place. Stocks in the 1970s dropped more on an inflation-adjusted basis than they did during the GREAT DEPRESSION. Can you imagine how scary that was? How many people survived that without giving up? What if you were in retirement and had to sell shares at the bottom for your expenses? It's quite possible that you were bagging groceries after that.

For all the criticism that the PP gets, it was designed to never let that environment destroy your portfolio again. It wasn't meant to make you rich, but rather to survive an unknown future. The '70s showed that a portfolio of stocks and bonds wasn't enough to protect the downside.

FWIW, if you are concerned about returns, here's the past 10 years of using the previous 6 month's returns to decide which PP asset to invest in, rebalanced monthly. https://drive.google.com/file/d/1oUrcf1g9x3iQT2ufCl9K3dWUqzRVf5vdd3xg9pcA23dtvEXCn3S1F3BuAuIoZOMBbW-ftfLtJo9_Wgjh/edit?usp=sharing

A lot more volatile than the standard PP, but it does give you the chance to be invested in the asset that's actually going up, and leave the other assets that are going down.


grantmeaname

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Re: Permanent Portfolio: What Do You Think?
« Reply #66 on: May 27, 2014, 03:12:36 PM »
A lot more volatile than the standard PP, but it does give you the chance to be invested in the asset that's actually going up, and leave the other assets that are going down.
Buy high sell low?

hodedofome

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Re: Permanent Portfolio: What Do You Think?
« Reply #67 on: May 27, 2014, 08:38:52 PM »
Buying high and selling low has worked for hundreds of years, not a horrible strategy if done correctly. Obviously, you are betting that it continues to go in the direction of the trend you are buying into.

butchmonkey

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Re: Permanent Portfolio: What Do You Think?
« Reply #68 on: May 27, 2014, 09:17:15 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.

Opinions are like Asshats, Everyone's got one.
Here's mine. The next 20 years will not be like the last 20.
I don't know the future, so I use an investment strategy that takes that into account.
I am contrarian, so when you say I am wrong, you just confirm for me I am right.
I have a plan I stick to it, Already far in front of the unwashed masses.

I don't have an asshat. Unless you count my boxers.

Does this make me unwashed or indistinguishable from the crowd that I am  currently standing in?


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grantmeaname

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Re: Permanent Portfolio: What Do You Think?
« Reply #69 on: May 28, 2014, 12:28:00 AM »
Buying high and selling low has worked for hundreds of years, not a horrible strategy if done correctly. Obviously, you are betting that it continues to go in the direction of the trend you are buying into.
People have beeen timing the market wrong for hundreds of years? Fascinating.

hodedofome

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Re: Permanent Portfolio: What Do You Think?
« Reply #70 on: May 28, 2014, 06:18:24 AM »
Momentum has been used for hundreds of years for speculators to make money. It persists in every asset class and across asset classes around the world. It is well documented in finance and is a factor that is recognized by all the EMH professors you can think of. It is the phrase 'market timing' that gets everyone's panties in a wad. But you need to first define what that is. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2292544

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Re: Permanent Portfolio: What Do You Think?
« Reply #71 on: May 28, 2014, 06:27:38 AM »
Momentum has been used for hundreds of years for speculators to make money.
https://www.youtube.com/watch?v=RS2DJmyGI8Y&index=15&t=12m32s

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Re: Permanent Portfolio: What Do You Think?
« Reply #72 on: May 28, 2014, 08:16:57 AM »
Don't have time to watch that whole thing but most of the literature/research on momentum has found outsized returns in the 1-12 month prior period, with most of it in the 6-12 month period. Momentum (or lack thereof) over a few days doesn't tell us anything IMO. 

As far as the spectacular long/short momentum crashes which he describes in the video, the problem is the shorts, especially during a rebound after a market crash. http://mebfaber.com/2013/10/30/the-problem-with-market-neutral-and-an-answer/

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Re: Permanent Portfolio: What Do You Think?
« Reply #73 on: May 28, 2014, 08:33:45 AM »
To really understand the PP you'll need to read a bit about how it works and why and not simply look at a cfiresim run (because of the shortcomings I mentioned, as well as a few more like how the PP drawdown method and rebalancing works).  I recommend browsing the blog at the link I provided, or reading the book the author wrote. 

The problem is, that gives you how it works in theory.   I'm more interested in how it works in reality, and my readings have convinced me it's good for someone who can't handle volatility and is okay with lower returns.  Given that, however, they'll need to work a lot longer and build up a lot bigger stache in order to have long term portfolio survival.

I'd recommend someone going with the PP have an initial WR of about 2%.  Their portfolio will steadily decline in real terms (but much slower than someone in only cash and gold, for example), but there will be very little volatility and it should last long enough  with that WR.
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warfreak2

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Re: Permanent Portfolio: What Do You Think?
« Reply #74 on: May 28, 2014, 09:02:41 AM »
Don't have time to watch that whole thing but most of the literature/research on momentum has found outsized returns in the 1-12 month prior period, with most of it in the 6-12 month period. Momentum (or lack thereof) over a few days doesn't tell us anything IMO. 
I only refer to a few minutes of the video. It does go as far as about 40 days ahead and none of the autocorrelations are significant. Here's one which looks at 250-day intervals.

Quote
As far as the spectacular long/short momentum crashes which he describes in the video, the problem is the shorts, especially during a rebound after a market crash.
Well, if strategy A is always-long, strategy B is long-when-up/flat-when-down, and strategy C is long-when-up/short-when-down, then B is just the mean of A and C, so it can't outperform both in the long run.

Tyler

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Re: Permanent Portfolio: What Do You Think?
« Reply #75 on: May 28, 2014, 09:41:19 AM »
To really understand the PP you'll need to read a bit about how it works and why and not simply look at a cfiresim run (because of the shortcomings I mentioned, as well as a few more like how the PP drawdown method and rebalancing works).  I recommend browsing the blog at the link I provided, or reading the book the author wrote. 

The problem is, that gives you how it works in theory.   I'm more interested in how it works in reality, and my readings have convinced me it's good for someone who can't handle volatility and is okay with lower returns.  Given that, however, they'll need to work a lot longer and build up a lot bigger stache in order to have long term portfolio survival.

I'd recommend someone going with the PP have an initial WR of about 2%.  Their portfolio will steadily decline in real terms (but much slower than someone in only cash and gold, for example), but there will be very little volatility and it should last long enough  with that WR.

Fair enough.  It's just that cfiresim doesn't model the PP in reality.  It's a great tool, but isn't suitable for every task.

The data (I've run it myself with my own calculations -- see the previously supplied link) supports a 4% SWR using the PP with a much smoother ride than a typical stock/bond blend.  And the CAGR for the PP is virtually the same as a Boglehead portfolio over time.  There's plenty of documentation for that (see Dragoncar's link).  I'm targeting a 3% SWR, and am quite comfortable with that.
« Last Edit: May 28, 2014, 09:44:35 AM by Tyler »

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Re: Permanent Portfolio: What Do You Think?
« Reply #76 on: May 28, 2014, 12:44:19 PM »
To really understand the PP you'll need to read a bit about how it works and why and not simply look at a cfiresim run (because of the shortcomings I mentioned, as well as a few more like how the PP drawdown method and rebalancing works).  I recommend browsing the blog at the link I provided, or reading the book the author wrote. 

The problem is, that gives you how it works in theory.   I'm more interested in how it works in reality, and my readings have convinced me it's good for someone who can't handle volatility and is okay with lower returns.  Given that, however, they'll need to work a lot longer and build up a lot bigger stache in order to have long term portfolio survival.

I'd recommend someone going with the PP have an initial WR of about 2%.  Their portfolio will steadily decline in real terms (but much slower than someone in only cash and gold, for example), but there will be very little volatility and it should last long enough  with that WR.

Fair enough.  It's just that cfiresim doesn't model the PP in reality. 

I need to do some more reading to gain better perspective.  The whole reason I even put Gold on cFIREsim was to help folks with PP.  If you need 30yr treasury rates to better simulate bonds, what would you think is a good historical dataset for "cash"?

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Re: Permanent Portfolio: What Do You Think?
« Reply #77 on: May 28, 2014, 01:26:14 PM »
I need to do some more reading to gain better perspective.  The whole reason I even put Gold on cFIREsim was to help folks with PP.  If you need 30yr treasury rates to better simulate bonds, what would you think is a good historical dataset for "cash"?

Sweet.  If you could make adjustments that would be really helpful.

The Permanent Portfolio uses 30-year treasuries for bonds.  (practically speaking, a bond ladder between 20 and 30 years duration -- look at TLT).  For cash, it uses T-bills less than 1 year duration, although a bond ladder between 1-3 years is a common substitute (look at SHY).  The difference for cash may not seem like a big deal at today's interest rates, but keep in mind that historically cash has returned quite a bit more than that and is more volatile than many remember.



The trickier thing to simulate is how the PP uses the cash as a buffer.  A PP investor only rebalances when one of the four assets exceeds the 15% or 35% allocation bands.  A retiree would draw down exclusively from cash, and only sell stocks, bonds, or gold if a rebalancing band (including cash) is triggered.  That specific methodology prevented a PP retiree from selling a single non-cash asset during the 2008/09 market crash, which is part of the magic of how it weathers market gyrations while steadily generating reasonable returns. 
« Last Edit: May 28, 2014, 01:40:48 PM by Tyler »

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Re: Permanent Portfolio: What Do You Think?
« Reply #78 on: May 28, 2014, 01:29:44 PM »

I need to do some more reading to gain better perspective.  The whole reason I even put Gold on cFIREsim was to help folks with PP.  If you need 30yr treasury rates to better simulate bonds, what would you think is a good historical dataset for "cash"?

Shortest treasuries you can find for cash - 3 mo?
Longest for bonds - 30 year, except apparently there's a gap where those weren't offered and you have to estimate synthetically.

I really wish there was a good source for the backtesting data available on gyroscopicinvesting.com -- there are a lot of people on there that backtest but don't point to their data sources.  Others take issue with the quality of data in the bogleheads Simba spreadsheet.

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Re: Permanent Portfolio: What Do You Think?
« Reply #79 on: May 28, 2014, 01:49:13 PM »
Have you tried looking at quandl.com for data. They are trying really hard to get as much data on there as possible and it's free.

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Re: Permanent Portfolio: What Do You Think?
« Reply #80 on: May 28, 2014, 01:52:42 PM »
The trickier thing to simulate is how the PP uses the cash as a buffer.  A PP investor only rebalances when one of the four assets exceeds the 15% or 35% allocation bands.  A retiree would draw down exclusively from cash, and only sell stocks, bonds, or gold if a rebalancing band (including cash) is triggered.  That specific methodology prevented a PP retiree from selling a single non-cash asset during the 2008/09 market crash, which is part of the magic of how it weathers market gyrations while steadily generating reasonable returns.

That's not THAT tricky.  I already have the ability to do a "glide path" allocation change over X number of years... I'm familiar with changing the rebalancing rules in cFIREsim.  I could always add the PP-specific rebalancing rules as a drop-down option.

Frankly, I'm more worried about getting good enough data.  Shiller has 1yr interest rate data back to 1871, which could be used as a "cash" data point, but I need to find a 30yr treasury note data set.

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Re: Permanent Portfolio: What Do You Think?
« Reply #81 on: May 28, 2014, 02:07:54 PM »
I'm really surprised FRED only goes back a couple decades.

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Re: Permanent Portfolio: What Do You Think?
« Reply #82 on: May 29, 2014, 09:14:39 AM »
All the pro-PP analysis is underpinned by the 2 big bull markets in gold, especially the one in the early 80s as bond yields collapsed under inflation and stocks were declining. Stagflation. The impact of the big bear market in gold is hidden by the huge increase in stock prices.

Data is indeed only useful post 1971 when gold prices floated for the first time in an age.

This distorts the PP performance and hides my big issue with PP  -  50% is essentially in zero yield assets. Gold by definition does not produce any yield at all ( my coins won't magically get heavier or multiply). And isn't even an inflation defense.

True cash also provides no return unless there is significant deflation. 

Far too many gold bug charts fail to account for reinvested dividend or reinvested yield. These make gold look far more attractive as an investment than it really is.

And lastly, PP ignores real estate - a huge asset class that can generate real yield with inflation robustness better than gold.

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Re: Permanent Portfolio: What Do You Think?
« Reply #83 on: May 29, 2014, 10:08:28 AM »
All the pro-PP analysis is underpinned by the 2 big bull markets in gold, especially the one in the early 80s as bond yields collapsed under inflation and stocks were declining. Stagflation. The impact of the big bear market in gold is hidden by the huge increase in stock prices.

Data is indeed only useful post 1971 when gold prices floated for the first time in an age.

This distorts the PP performance and hides my big issue with PP  -  50% is essentially in zero yield assets. Gold by definition does not produce any yield at all ( my coins won't magically get heavier or multiply). And isn't even an inflation defense.

True cash also provides no return unless there is significant deflation. 

Far too many gold bug charts fail to account for reinvested dividend or reinvested yield. These make gold look far more attractive as an investment than it really is.

And lastly, PP ignores real estate - a huge asset class that can generate real yield with inflation robustness better than gold.

Once again, it was designed in the '70s during a real crisis. I wasn't living then but I imagine real estate was not an easy asset class to invest in for normal people. But you could easily buy gold, stocks, bonds and cash.

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Re: Permanent Portfolio: What Do You Think?
« Reply #84 on: May 29, 2014, 10:17:12 AM »
All the pro-PP analysis is underpinned by the 2 big bull markets in gold, especially the one in the early 80s as bond yields collapsed under inflation and stocks were declining. Stagflation.

All the pro-boglehead analysis is underpinned by the century long secular bull market in stocks and particularly the US economy at large.

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The impact of the big bear market in gold is hidden by the huge increase in stock prices.

That's the point?

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Data is indeed only useful post 1971 when gold prices floated for the first time in an age.

This distorts the PP performance and hides my big issue with PP  -  50% is essentially in zero yield assets. Gold by definition does not produce any yield at all ( my coins won't magically get heavier or multiply). And isn't even an inflation defense.

True cash also provides no return unless there is significant deflation. 

Far too many gold bug charts fail to account for reinvested dividend or reinvested yield. These make gold look far more attractive as an investment than it really is.

Yes I have a problem with the small sample size as well.  There are economic conditions not tested yet.  It's not necessarily true that gold and cash return zero, however.  And yes cash is partially there to protect you during deflation, again that's the point.  Stocks do not protect you, but you'll be happy you have cash to rebalance.

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And lastly, PP ignores real estate - a huge asset class that can generate real yield with inflation robustness better than gold.

Nothing in the PP precludes owning real estate.  That's like saying any lazy portfolio ignores real estate - you can buy it, it's just a separate portfolio (PPers call this a variable portfolio)