A short departure for today.We had a helluva scare yesterday with two of the little dogs. Everyone is fine and accounted for but it was a legitimate freak out for about 40 minutes.
Everyone has their own priorities but hopefully your money is not priority number one or priority number two. Hopefully it is a couple of pegs lower than that even.
In my absence maybe there can be some follow through on a discussion that started late yesterday. The Permanent Portfolio would seem to be the opposite of what the endowments are trying to do, or are they?
How are they different, how are they similar and what can you pull from both for your portfolio?
27 comments:
Priorities:-
1/ Health
2/ Family
3/ Leisure
4/ Work
5/ Investing
But without money these ALL take a beating.
RE: The Permanent Portfolio would seem to be the opposite of what the endowments are trying to do, or are they?
Stocks, Gold and Bonds individually beat to their own drum-beat. Sometimes those beats align, other times they don't.
http://ih.fotothing.com/90860.gif
The endowments are preemptive, PP is reactionary. Both however strive to spread themselves across holdings that are likely to drum to different rythymes to avoid synchronicity.
To me, the PP is pre-emptive. It tries to preserve capital in the face of 4 different economic situations.
What I can learn about it is more/different ways of looking at asset allocation in order to understand how different asset classes will behave. Learned a lot about it this week and have a ton to read this weekend.
Me also (different ways of looking at asset allocation).
Until recently I was not inclined to consider pairing of assets to form a virtual stock. Pairing gold with bonds (and stocks with cash) aka PP has the effect of turning an inflation pacing only investment (gold) into a more stock like investment (gold+bonds) with some income and capital gain potential, whilst also potentially reducing volatility.
For me, identifying low/inverse correlations between holdings has seemed to be an endless dynamic task. PP has highlighted that there are fixed alternatives, albeit that they might not be optimal.
For those of your promoting a permanent portfolio, how often does it need to be rebalanced? How does tax efficiency affect the total return? I'm guessing that there can be a lot of short term gains that should be taken into consideration for those who don't have much room in tax sheltered accounts. I don't see how you can preserve capital when you're potentially writing checks wiping 40% of your profits for federal and state taxes (assuming short term gains). I think this is why Larry Swedroe's portfolio is so appealing, it is very tax-efficient.
My family and I have been researching different investing strategies for several years, ranging from hedge funds, active investment advisors, passive buy hold via broad based indices, DFA equilibrium investing and most recently Harry Browne's and Larry Swedroe's reduce the left tail concepts.
In summary we are leaning towards a variation of Harry Browne's strategy however have not finalized it as of yet. Trying to determine if it makes more sense to use equal weights in US large, US small cap value, Int'l small cap and emerging market versus simply using total stock market?
Anon 6:28- the perm portfolio is likely more tax efficient than Swedroe's, very minimal re-balancing is necessary.
You rebalanace when one of the 25% pieces hits either 15% or 35% of the portfolio.
anon 6:29: check out the boglehead discussion we've been referring to the last few days. In the last few pages of the discussion, a user makes several charts looking at exactly that.
Anon 6:31,
I was wondering if you could elaborate. You say "likely more tax-efficient", but two of the asset classes pay interest taxed at the highest rate, not even to mention the capital gains taxes. Are bands of +/- 5% used to maintain the allocation? Swedroe uses tax-exempt bonds, and dividends from stock funds get preferred tax treatment (at least for now).
I'll have to check in later, got to go to work.
Interesting article yesterday in cxoadvisory.com, about finding an optimal long term moving average. It’s called “Is There a Best SMA Calculation Interval for Long-term Crossing Signals?”
Here it is:
http://www.cxoadvisory.com/blog/
Look for the June 11, 2009 entry. Scroll down till you find it.
Any thoughts on this, anyone?
This chart and the Nasdaq 2000 popping should all be fair warning to anyone who looking for a big rebound in stocks after this credit collapse. Bubble collapses take a long, long time to recover from.
I need to find the analysis, but I once read a study saying that some large % of people NEVER EVER come back to stocks after a big bubble crash. It basically takes an entirely new generation to grow up and have money before the stocks can start their next secular bull market.
The point is a lot of “money on the sidelines” are folks who will NEVER EVER consider buying stocks again, after getting screwed by the Nasdaq.bomb collapse and now the trashing the market took last year.
Unfortunately, these things can take decades to unwind and work themselves out.
Roger- I would consider reducing your tech/equity exposure, look out below! My guess is June 30th is it
Some more random portfolio junk. I setup a test "Ultimate Buy and Hold" portfolio pretty much at the market top in November of 2007.
Bills ultimate buy and holed
It's really neat to see the drawdown is significantly less than the overall market. It has a lot less ground to cover getting back above water. Just kinda neat to see this stuff happen in practice instead of backtesting.
It is sweet, isn't it? Too bad I didn't follow those allocations to the letter.
I had his ETF balanced portfolio down about 16.5% and his Vanguard balanced portfolio down a little less than 21%.
I need to get to work on all the changes for that page.
[humor attempt]
The dog problem at Roger's house last night
[/humor attempt]
But seriously, glad to hear everything is all right. We're a foster house, so the dog thing hits close to home.
"permanent portfolio, how often does it need to be rebalanced?"
As a guideline, if you reviewed once yearly and rebalanced if any of the components were at <= 15% of the whole or >= 35% of the whole (as per the Permanent Portfolio suggestion), then 9 years out of the last 38 would have required a rebalance action.
When I first read about permanent portfolio and began implementing it a range of 15-35% would have been considered wide but, as a practical matter, less volatile portfolio segments such as cash equivalents had to be allowed to grow larger to achieve some balance (their beta was small), it was the more volatile segments that had to be more constrained less they over-leverage the portfolio as a whole; it's interesting to see the wider range is allowed now but, apparently, it can be allowed in any of the four segments which is something I would think increases risk.
The above should be "...a range of 15-35% would have been considered too wide ..."
I think along the same lines as some other posters, that the similarity of the PP and the endowments is an unconventional (or at least non-traditional) mix of assets. In the case of the endowments, the mix and weightings add alpha, while in the case of the PP, more beta. It's the correlations, or lack thereof, that gives each a unique opportunity to outperform in different economic/business conditions.
I wouldn't emulate either per se, but the whole exercise of the last few days reminds me to maintain a diversified portfolio that's tailored to meet my personal, long term objectives.
As an aside (maybe someone already mentioned this,) Swedroe's port feels like Taleb has influenced his thinking.
Hello,
I run the website Crawling Road that Roger mentioned a few days back. I like the Permanent Portfolio so much I actually started this blog to discuss it with others.
A few things.
1) The portfolio only needs to be rebalanced when one asset is 15% or less or 35% or more. If it's 15% you buy it back up to 25%. If it's 35% you sell it down to 25%. You can look at this yearly but it doesn't mean you need to make any adjustments yearly. So overall tax efficiency is greatly improved because you are tinkering with it less.
2) The portfolio does not use Muni bonds because muni bonds have call and credit risks. The tax savings over treasuries is not as great as believed because you only pay federal tax on the interest and they are exempt from state tax. The generally lower yield of munis does not offset the other risks when the markets are mis-behaving. 2008 for instance showed that LT treasuries can trounce munis under bad conditions. I have an entire FAQ that discusses the bond allocation for the portfolio here:
http://crawlingroad.com/blog/2009/02/09/permanent-portfolio-25-bond-allocation-faq/
3) Gold is a funny asset. Nobody wants it until everybody wants it. Usually the time people want it is when the dollar is under some type of inflation pressure or other crisis. It's at this time that your stocks and bonds are normally doing quite poorly so it's nice to have an asset like gold that has the power to wipe out losses from the other portions of the portfolio.
4) The stocks can be a simple broad based index fund. Others have been proposing the use of multiple small/value assets for this portion. My feeling is it's best to keep it simple. But you are not going to do damage to the portfolio using these other index funds as long as you can contain the costs and not do a bunch of transactions.
5) The permanent portfolio over the past 30 years has ranged from 8-10% a year CAGR with the worse losing year being 1981 where it lost around 4-6%. This is a portfolio that provides reasonable gains with very low volatility. The idea with this portfolio is to build and protect the wealth you create during your career without giving you exposure to serious losses in the market.
6) There are other portfolio ideas out now that people are looking into. One of which is the Taleb/Swedroe model of keeping 80% or so of your assets in very safe T-Bills and take wild crazy speculative risks with your stocks. I think these are trying to do the same things the Permanent portfolio is looking to do. However I think there are some exposures in these strategies to serious deflationary markets (ala 1930s) that could have some risks. But these strategies are another interesting option to consider if you want to have a portfolio that limits downside risks.
Thanks to Roger for his great blog.
Craig, thank you for stopping by and for adding some color. Obviously your site has given us all a lot to ponder.
Off topic, but I have decided GM and Chrysler want to get rid of 1000 dealers each because 1 to 10 years from now they can sell 1000 dealerships for 1 to 3 million a pop. Nice way to leave bankruptcy with 1 to 3 billion in the bank.
On topic,
Everybody (including me) seems to want a "safe" portfolio with 70% bonds. Does that mean we are to bearish? Does that mean this rally will become a bull market?
Who knows, but seems like a reasonable contrarian point of view to the recent discussions here. When I see everybody here saying we need to be 100% in equities I think I will buy my 70% bond permanent portfolio :)
IMO, HB's perm portfolio's diversified approach is the best approach. And this is truly diversified, not like some of the "make believe" diversification you see sometimes: Long equities, corporate bonds and commodities is NOT diversified. As we have seen, many asset classes tend to correlate to ONE during boom and bust cycles. So, it's the treasury and gold component of Harry Brownes mix that gives you the true diversification.
Here's the other thing to keep in mind with diversification....and this gets a little complicated...... you must rebalance or change the weighting of your mix as the markets move around...
i.e.
25% Gold
25% Cash (short term treasuries)
25% Long date treasuries
25% Equity
During the nosedive of last year, equities were terrible while everything else on the list did great. At some point those assets will become "unbalanced". i.e. if you had started that portfolio in mid-2007, the equity portion of that portfolio was no longer 25% by late 2008. So, you have to force yourself to sell the big winners and buy the big losers periodically (every quarter? every six months? every year? that's a tougher question). The single biggest issue with most investors is they CANNOT bring themselves to rebalance like this.
in re: gold....The gold is in there for an inflation-hedge....I would prefer a better inflation hedge...something like the CRB index. Inflation hedges are supposed to protect your purchasing power in the future. With that in mind, I would rather be doing hedges on things I'll actually need to buy in the future (energy/food). So maybe instead of 25% gold, I'd go with 25% linked to some commodity index??
Who's everyone? There's probably only 1% of the population that even knows/thinks about an asset allocation like that.
I utilize a Permanent and Speculative Portfolio in conjunction with other investments for a more holistic portfolio.
I have been writing about the Browne Permanent Portfolio for years on my blog. While I admire this often ridiculed Renaissance Man, I do not use his ratios.
After rebalancing and expenses, it is quite possible that the perfect
Permanent Portfolio according to Browne and some responders here would have a net long term return of 0%.
T
Good post everyone. According to my copy of Hulbert Financial Digest, dated from 1992, Brown’s permanent portfolio underperformed the market on a risk adjusted basis. His combined permanent and speculative portfolios did just as bad.
Still, the graph for his portfolios looks very smooth, if rather anemic.
9:33 You're mention of risk-adjusted returns is an important idea. The conventional wisdom is that if we take risk and make our money less safe by moving from cash to securities that we will be rewarded with greater returns.
Guys like Browne, Taleb, and others are actually answering the question 'how can I make my money (purchasing power) be MORE safe than cash and equivalents?'
T- what are you allocations for the permanent portfolio than? Can you post a link to your blog?
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