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Old 06-21-2009, 10:49 AM   #21
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but when the lid was taken off it soared to 900 bucks or so with the world events....its a little to hard to back test in my opinion...only think i care about is what its done since i started it in the late 80's
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Old 06-21-2009, 02:09 PM   #22
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Thanks for all the comments.

Answers to most of the questions asked about the PP can be found through a patient reading of the massive thread on Bogleheads I provided the link to in my first post.

An easier place to start is the site maintained by Craig R, whose post on page one of this thread is the best introduction to Harry Browne's work I've seen. There is a ton of information including great answers to FAQ's at:

About the Blog | Crawling Road

ESR Bob you're one of the smartest guys around and I appreciate your work greatly, but I don't know whether I share your optimism about sophisticated slice-and-dice portfolios such as those you advocate roaring back from their 24% plus losses last year. Maybe yes, maybe no. It seems like your asset enthusiasm lies outside the U.S. and outside of stocks, and there I tend to agree with you, but that kinda amounts to market timing.

As we saw last year (and in 1998-99, after 9/11, etc., etc.) during panics all the "non-correlated" asset classes become correlated. Unlike with the PP, you don't own enough of a truly non-correlated asset to rescue the portfolio; with PP, you do. I am dubious about the value of back-testing, but if you want to go by that the PP has a better return than the RIP portfolio with only a bit more than half the SD. I'd call that proven, not merely contrarian. On the evidence, for a retiree looking to live on ~4% with as little volatility as possible and enough growth of principal to preserve the porfolio the PP looks like a much better solution than the RIP or any other slice-and-dice portfolio out there. Clearly the PP is not suitable for everyone, but I wouldn't call a 10% CAGR a pure "capital preservation" strategy or a "bunker."

As for implementation costs, one possible hurdle is gold, whose price gains are taxed at 28% as a collectible (but unlike stocks or bonds gold, doesn't throw off taxable interest or dividends). The obvious choice is to do it with funds: GLD and/or IAU, though a Browne purist would insist on owning actual gold. The three other asset classes are easy as can be: TLT or individual long bonds from Treasury Direct for the long bonds; Vanguard TSM Admiral shares or the equivalent from others (Schwab's Total Stock Market fund currently matches the Vanguard funds .08 ER); a good money market fund (e.g. Schwab Bank's, currently paying 1.35%) plus maybe some IBonds for the cash. Total ER for the portfolio should be .28% or less. The total portfolio is certainly not ultra tax efficient, but not a nightmare by any means.

Quoting from Craig R's excellent post above, I think this is the crucial distinction that is hard to get one's mind around between the thinking underlying the PP and portfolios based on the work of Bernstein, Fama & French et al:

A usual stock/bond allocation is basing diversification on correlation between asset classes. The Permanent Portfolio looks only at how the assets correlate to the economy. Whether we have prosperity, inflation, recession or deflation you own an asset that can deal with it effectively and allow you to ride the wave or ride out the storm.

When you look at the historical return chart you truly do see this in action.

The discussion on the Bogleheads thread answers the speculative question about the PP in other currencies or economies, as well as touching on the research Harry Browne and his colleagues did into performance of various asset classes prior to 1970. It is worth taking the chunk of time to read that thread start to finish if the PP is of real interest to you.

After that, as I keep learning from Craig R, there's no substitute for reading Browne's books and listening to his radio shows.

I realize I'm coming off sounding like a convert to the PP and I'm not. I'm not at all eager to jettison the carefully crafted diversified portfolio I have, but I sure am eager to avoid another year of 20+% losses.

Kevin
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Old 06-22-2009, 10:23 AM   #23
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Originally Posted by kevink View Post
Thanks for all the comments.

Answers to most of the questions asked about the PP can be found through a patient reading of the massive thread on Bogleheads I provided the link to in my first post.

An easier place to start is the site maintained by Craig R, whose post on page one of this thread is the best introduction to Harry Browne's work I've seen. There is a ton of information including great answers to FAQ's at:

About the Blog | Crawling Road

ESR Bob you're one of the smartest guys around and I appreciate your work greatly, but I don't know whether I share your optimism about sophisticated slice-and-dice portfolios such as those you advocate roaring back from their 24% plus losses last year. Maybe yes, maybe no. It seems like your asset enthusiasm lies outside the U.S. and outside of stocks, and there I tend to agree with you, but that kinda amounts to market timing.

As we saw last year (and in 1998-99, after 9/11, etc., etc.) during panics all the "non-correlated" asset classes become correlated. Unlike with the PP, you don't own enough of a truly non-correlated asset to rescue the portfolio; with PP, you do. I am dubious about the value of back-testing, but if you want to go by that the PP has a better return than the RIP portfolio with only a bit more than half the SD. I'd call that proven, not merely contrarian. On the evidence, for a retiree looking to live on ~4% with as little volatility as possible and enough growth of principal to preserve the porfolio the PP looks like a much better solution than the RIP or any other slice-and-dice portfolio out there. Clearly the PP is not suitable for everyone, but I wouldn't call a 10% CAGR a pure "capital preservation" strategy or a "bunker."

As for implementation costs, one possible hurdle is gold, whose price gains are taxed at 28% as a collectible (but unlike stocks or bonds gold, doesn't throw off taxable interest or dividends). The obvious choice is to do it with funds: GLD and/or IAU, though a Browne purist would insist on owning actual gold. The three other asset classes are easy as can be: TLT or individual long bonds from Treasury Direct for the long bonds; Vanguard TSM Admiral shares or the equivalent from others (Schwab's Total Stock Market fund currently matches the Vanguard funds .08 ER); a good money market fund (e.g. Schwab Bank's, currently paying 1.35%) plus maybe some IBonds for the cash. Total ER for the portfolio should be .28% or less. The total portfolio is certainly not ultra tax efficient, but not a nightmare by any means.

Quoting from Craig R's excellent post above, I think this is the crucial distinction that is hard to get one's mind around between the thinking underlying the PP and portfolios based on the work of Bernstein, Fama & French et al:

A usual stock/bond allocation is basing diversification on correlation between asset classes. The Permanent Portfolio looks only at how the assets correlate to the economy. Whether we have prosperity, inflation, recession or deflation you own an asset that can deal with it effectively and allow you to ride the wave or ride out the storm.

When you look at the historical return chart you truly do see this in action.

The discussion on the Bogleheads thread answers the speculative question about the PP in other currencies or economies, as well as touching on the research Harry Browne and his colleagues did into performance of various asset classes prior to 1970. It is worth taking the chunk of time to read that thread start to finish if the PP is of real interest to you.

After that, as I keep learning from Craig R, there's no substitute for reading Browne's books and listening to his radio shows.

I realize I'm coming off sounding like a convert to the PP and I'm not. I'm not at all eager to jettison the carefully crafted diversified portfolio I have, but I sure am eager to avoid another year of 20+% losses.

Kevin
If you are investing in a taxable account why not just go with PRPFX and be done with it? Yes, I know all of the arguments here - manager risk, high expenses, etc. But, it is very tax effecient. Then once a year take 4% of your account value (not this fooshishness of 4% of your initial account value plus 3% per year for inflation). Thoughts??
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Old 06-22-2009, 10:24 AM   #24
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If you are investing in a taxable account why not just go with PRPFX and be done with it? Yes, I know all of the arguments here - manager risk, high expenses, etc.
I think an even bigger objection with some is that PRPFX isn't using the Harry Browne 4x25 allocations, but have tinkered with it (adding Swiss francs and silver, making it more heavy on stocks, et cetera).
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Old 06-22-2009, 12:51 PM   #25
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Yes as explained earlier PRPFX deviates so much from the actual Permanent Portfolio that they really ought not to be using the name.
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Old 06-22-2009, 03:22 PM   #26
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i agree, they were down last year slightly; the purist mix i use was up last year
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Old 06-23-2009, 11:46 PM   #27
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I've got PRPFX in my IRA; what four ETFs might I replace it with, to get Harry Brown's "purist" pp?
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Old 06-24-2009, 03:35 AM   #28
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gld
vti
TLT
money market
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Old 06-24-2009, 09:57 AM   #29
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Yep those are the obvious fund choices. Craig R in the Crawling Road blog I mention above has a great Q & A on what is and isn't allowable in fund choices to keep it a purist Permanent Portfolio. Human nature being what it is there is always the temptation to complicate proven simplicity.

Speaking of which, if you still aren't sated reading about the PP, there is a newer thread on the PP over at Diehards that looks at the likely and historical effects of tweaking the PP with a value and small cap tilt to the stock portion a la Larry Swedroe:

Bogleheads :: View topic - Matrix Redux: The Larry-Browne Permanent Portfolio

I also want to correct an error I made in my previous post: the historic standard deviation on the PP has been 7.84%, which is only one percent and change lower than Bob Clyatt's RIP portfolio.

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Old 06-24-2009, 10:03 AM   #30
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gld
vti
TLT
money market
Technically speaking, the "pure" PP's cash allocation is in T-bills. That would likely mean either a Treasury MMF (many are closed or yielding basically zero) or an ETF such as SHV.

For most people, an MMF is probably a decent approximation although in the general case they are not government-backed like the T-bills -- so that's something that needs to be considered.
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Old 06-24-2009, 07:12 PM   #31
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Thx, Kevin for the correction on the Standard Deviation of the PP -- it is about the same as a good slice-and-dice portfolio.

One concern I have is that 25% of the portfolio (the gold part) has gone from $32 per ounce in the regulated environment pre 1970s to $900 or so an ounce today, or a 30x over 35 years or so. Not sure if that is a repeatable situation. For a retiree looking at PP today and trying to see whether overall return going forward will match historical returns, that becomes an important question. Does the unique situation of Gold going from regulated to unregulated commodity skew things from the fair value and fair appreciation we might expect going forward?

I agree PP is interesting and poses a credible challenge to slice and dice portfolios, and I did not mean to dismiss it lightly. I do need to read through all the various threads to better educate myself on it. Still my instincts are that this portfolio ties your performance to the fortunes of 4 asset classes which always makes me feel something is riskier. (I'm afraid the desire to diversify is deep in my DNA) I agree that the data for the past 35 years say that it is not riskier, but I can't help be feel going forward into uncharted territory that it is or could be. (US credit worthiness decline, US losing ground to other economies, that sort of thing)

And as to whether a slice-and-dice portfolio can come back from a 20% loss -- in 6 of the 20 years between 1989 and 2008, the Rational Investing Portfolio posted 15%+ gains. In one year (2003) it was 28%. When that happened, a part of me knew that it could also go down by a big number, too, and that we just hadn't seen it yet. Still the data do show that a 20% loss (Rational Investment Portfolios approximate loss in 2008) can certainly be worked out over time even in a widely diversified portfolio.
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Old 06-24-2009, 09:30 PM   #32
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Hello,

Interesting discussion. First of all I own ESRBob's book (and have for many years) and think it's a great guide to early retirement and everyone should own a copy. I just run a different portfolio strategy, but I think we both are trying to reach for the same goals.

I just want to add several things:

1) Gold prior to 1971 was price controlled at $35 an ounce back to 1933 and prior to 1933 was at about $20 an ounce back to the founding of the country. After 1933 Americans could basically not own gold bullion (except for a trivial amount). They couldn't even own it overseas. It wasn't legal to own again until 1974. So backtesting prior to this is just about impossible because the figures relating to the dollar are all way off with respect to the gold price (the dollar should have been going down in price years before but didn't due to the controlled price of gold). You can look at gold prices starting around 1974 or so to get an idea how it does under bad inflation. That would be three years after the dollar was allowed to float so there was plenty of time for the markets to adjust to the new dollar/gold situation (in fact there was a price decline in gold starting in 1975 of -22% so that could be a good starting point for the portfolio and it still did Ok with a 9% CAGR and low volatility to end of 2008)

2) Gold is an asset that can go a very long time doing *nothing* and then have a fierce run up in price if you look at the history. If you own it with the portfolio you need to be mechanical and unemotional about selling it when it reaches your rebalancing bands and buy it when everyone thinks it is not worth owning. You need to capture the gains when your rebalancing says you should and not get all worked up over what the news is blaring on about. You then need to buy it when it gets below your rebalancing bands no matter how hot the stock market is doing. In 1999/2000 gold was around $250 an ounce but everyone wanted stocks. We all know how that turned out. Sooner or later the markets are going to have a problem and the gold could be the only asset you have that protects you as it has in the past. The opposite applies, too. When everyone is worried about inflation and you are nervous about rebalancing out of gold you are looking for potential problems because the price could drop suddenly.

But this advice applies to any asset class you own. If you aren't rebalancing, you aren't controlling your risk and you undermine your diversification. Rebalancing is critical to any diversified investment strategy.

3) The portfolio is not strictly for doomsday scenarios. It is designed to grow wealth at a moderate rate and provide wide enough diversification to limit bad losses. If the stock markets are turning in double-digit years you are probably going to see moderate growth in the portfolio. Then again, when the markets are doing poorly you still tend to see moderate growth in the portfolio. By moderate I mean it has historically turned in 3-5% real after inflation returns going back to the early 1970s where I have the data. It has done this over rolling 10 year periods as well which is something that other approaches have not always done (especially during the 1970s and the 2000s so far).

So you need to understand that when the markets are doing REALLY well you're not going to have much to brag about at the cocktail party. You'll just have pretty boring returns by comparison. But then again I happen to like boring when it comes to my life savings. However the portfolio so far has turned in consistent real returns and that's all I can expect from any investment strategy.

4) The PRPFX fund was started n 1981 by Harry Browne's partners Terry Coxon and John Chandler. It actually uses the original portfolio in Browne and Coxon's book "Inflation proofing your investments" written during that time. In that book they presented several portfolio strategies for dealing with the future markets depending on what you thought would happen (more inflation, less inflation, deflation, neutral). In that book Browne and Coxon generally advocated the "neutral" portfolio which didn't try to guess the future. That portfolio held stocks, bonds, gold, swiss franc, real estate, silver, etc. (the original slice and dice portfolio?? ) It has remained largely unchanged since. Aside from an expense ratio that may be too high for some, it has managed to fulfill the original intent of moderate returns with low risk of loss. It's also simple and tax efficient for people who don't want to run their own portfolio.

5) Browne simplified the portfolio later in 1987 in his book "Why the best laid investment plans go wrong". That book advocated the use of the four basic asset classes in balance. Stocks. Bonds. Gold. Cash. The stock funds advocated then were not index funds as index funds were not commonly available to investors during that time (Bogle was still waging his battle for market share). However this book contains a blistering critique of various investment strategies like market timing, chart reading, prognosticating, etc. It also contains more in-depth reasoning behind why he chose the assets for the portfolio. If you can navigate around the advice that is outdated (mainly the use of warrants and actively managed funds of the time), then this information is great to read. This book can be found for a couple bucks online at used book vendors. Well worth the price. IMO. Browne didn't start advocating stock index funds for the portfolio until his last investment book Fail-Safe Investing. Only stock index funds should be used for the stock portion of the portfolio today. IMO.

6) I think diversification should come from seeing how the assets you own correlate to the economy, not each other. The reason asset class correlations change (especially at the exact moment you don't want them to) is because they don't move based on what each of them is doing. They move based on what the economy is doing underneath them. This is a fundamental difference between Browne's approach to investing and others.

7) US Credit risk. Certainly this becomes more and more likely each year. Keep in mind people have been predicting this for at least 40 years now. Not saying it won't happen, but just keep in mind that as bad as the US Dollar is right now, other countries and regions are just as bad or even worse (British Pound for instance is horrible and the Euro is going down the same route with their central bank spending. Remember Iceland last year? People thought their currency was safe at one time.). Be careful that you don't jump from the frying pan into the fire. If the dollar were to melt down, the gold allocation would likely go through the roof so the damage to the portfolio may not be as bad as we may think. The amount of gold in the world is tremendously smaller than dollars in circulation. If everyone wanted out of the dollar at once the price of gold and other commodities would soar.

8) Re: The portfolio is getting too much attention. Yeah it is. This could be the year it blows up. Nobody can predict the future, but the four assets it owns are so different from each other that we'd have to be in some type of remarkably bad market meltdown for all four of them to go down significantly at once. Even then, no portfolio is going to be doing well in that situation most likely. However, I can see one asset losing half the value (has in the past). I can see two possibly taking a big loss. Three of the assets going down by a lot is not likely to continue for too long due to the way the economy works (it did happen though in 1981 for the 4-6% loss but had a huge gain the next year). All four assets going down substantially at once? Not very likely IMO. That would mean stocks, bonds, cash and gold all taking huge losses at once. I don't know what would cause that, but I hope none of us are around to witness it because it will be quite bad.

Overall what has typically happened is one asset is usually doing quite poorly and another is doing well enough to offset and pull in gains for the portfolio. At any one time you should expect one asset to be lagging and one to be doing well. It's just how the portfolio was designed to work. And since we can't predict the future, you just need to own all the assets and not worry about timing them. In early 2008 most people thought inflation was going to come on strong when gas was over $4 a gallon. Yet by the end of 2008 it was Long Term Bonds that saved the portfolio when deflation reared its head unexpectedly. So you never know what is going to happen in the markets.

I don't really have much more to add. I realize not many people are going to adopt the strategy and certainly there are many investment ideas to draw from for each person's portfolio. However Browne presents some compelling arguments for his approach and even if not adopted entirely, he may have some strategies that could work in an existing portfolio to offer some more diversification benefits that you may have never considered.
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