The Awesome Portfolio

General Discussion on the Permanent Portfolio Strategy

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pmward
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Re: The Awesome Portfolio

Post by pmward » Sat Dec 05, 2020 11:57 am

vincent_c wrote:
Thu Dec 03, 2020 11:42 pm

I’m curious.

How do you guys determine how much to allocate to the VP? I know it’s for money you are willing to lose but can you give me an idea in ratio terms relative to the PP how big a VP should be capped at?
Yeah that's a tough question to answer. While I agree that using age (100-age in PP) is too generic of a proxy, the general theme behind it is solid. If you were to do a standard stock and bond portfolio, what percentage in bonds would be right for you? That percentage in PP. The rest in whatever you feel most confident in. This can be a buy and hold allocation, or it could be some form of an active strategy. Either way, strategy diversification does help in the same way asset diversification helps.

These things are really individual though. It all really depends on individual need and goals. Need is something often overlooked. Someone with great need by definition needs to take more risk to hit their goals. Someone with moderate need really only needs a moderate portfolio (this could be 100% PP coast mode basically). However, an interesting switch happens at the top end of the spectrum. Where your need becomes low, and you're basically in (or on track for) "won the game" territory, the penalty to increasing risk goes down (especially so for younger people like me that can always choose to work longer if worse comes to worse).

I personally reached this point in the last year or so, where I surpassed my planned "won the game" track by a significant margin. Financially, I'm doing much better than I originally anticipated both in my career and in my investment performance, and I had to adjust my model accordingly. I reached a point where it became silly to not increase risk, because even with more risk and a historical string of bad luck, I would still hit my game plan goal early or on time of my original projections. So basically, I crossed into "why not?" territory. As such the amount that I keep in a conservative "diversified portfolio" has dropped from 60% of my portfolio at the start of the year down to 30% of my portfolio.

Now in the last year I've also adjusted the "VP" strategy to a quant strategy that I levered up just to the point of just less than a 30% max historical drawdown (you can see my recent VP section thread for more info). I chose 30% because a 40% future drawdown in that 70% of my portfolio is about the point that I would start to really get queasy, and I always assume the max drawdown of any strategy (PP included) lies in the future not the past. So in my case, since I'm not doing a buy and hold strategy in my VP, I didn't just look at need and goals, I also looked at what I was doing in my VP and how the two portfolios play together.

If I were looking at a VP strategy like buy and hold that would have a much higher assumed max drawdown, then I would have wanted to err on the side of less VP than more. So maybe that would have been going from 60PP/40VP to something more conservative like 50/50 vs my current 30/70. But when I backtest the whole of both PP an VP for my current setup, 30/70 is about the sweet spot of where I want to be risk wise. Hopefully me writing out my thought process in how I arrived at my breakdown might help you in your own process.
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mathjak107
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Re: The Awesome Portfolio

Post by mathjak107 » Sat Dec 05, 2020 1:55 pm

vincent_c wrote:
Fri Dec 04, 2020 11:37 am
Well just to clarify it's not that I don't have a gambling itch, but more like my gambling itch needs to also follow a strategy.

So first I identify an edge (the regular PP) and then I apply a conservative leverage using a % of the kelly criterion.

Personally I have a paid off home with a HELOC attached which I use for emergency funding instead of using the cash portion of the PP because if you can convince yourself that the size of your portfolio is the total exposure and not only your equity then you don't really need cash, you just need sufficient liquidity to survive drawdowns.

The trick is to eliminate the risk of ruin through portfolio insurance and hedging but the total returns are higher because you can optimize your leverage and remove the drag caused by the cash portion.
Many helocs were closed down in 2008 since banks had no money to loan , just when people needed the money most ..a heloc really is no emergency fund.

When the real emergency hits you can find yourself with no heloc
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Re: The Awesome Portfolio

Post by vnatale » Sat Dec 05, 2020 2:48 pm

mathjak107 wrote:
Sat Dec 05, 2020 1:55 pm
vincent_c wrote:
Fri Dec 04, 2020 11:37 am
Well just to clarify it's not that I don't have a gambling itch, but more like my gambling itch needs to also follow a strategy.

So first I identify an edge (the regular PP) and then I apply a conservative leverage using a % of the kelly criterion.

Personally I have a paid off home with a HELOC attached which I use for emergency funding instead of using the cash portion of the PP because if you can convince yourself that the size of your portfolio is the total exposure and not only your equity then you don't really need cash, you just need sufficient liquidity to survive drawdowns.

The trick is to eliminate the risk of ruin through portfolio insurance and hedging but the total returns are higher because you can optimize your leverage and remove the drag caused by the cash portion.
Many helocs were closed down in 2008 since banks had no money to loan , just when people needed the money most ..a heloc really is no emergency fund.

When the real emergency hits you can find yourself with no heloc
I had not known that until reading what you wrote.

A cousin to..."banks will not loan money to you when you need it....only when you don't need it"?

Vinny
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
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Re: The Awesome Portfolio

Post by vnatale » Sat Dec 05, 2020 4:38 pm

vincent_c wrote:
Sat Dec 05, 2020 4:02 pm
I think this is why when things are bad individuals and companies draw down their helocs and put it in a savings account just to be safe
Except that during a financial crisis like 2008 or earlier this year...things can just happen too suddenly to make adequate preparation...

Vinny
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
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mathjak107
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Re: The Awesome Portfolio

Post by mathjak107 » Sat Dec 05, 2020 4:42 pm

vnatale wrote:
Sat Dec 05, 2020 4:38 pm
vincent_c wrote:
Sat Dec 05, 2020 4:02 pm
I think this is why when things are bad individuals and companies draw down their helocs and put it in a savings account just to be safe
Except that during a financial crisis like 2008 or earlier this year...things can just happen too suddenly to make adequate preparation...

Vinny
Exactly , it is like thinking when markets don’t look good I will sell out before the damage .

As a note , in 2008 we sold two of our co-ops in manhattan...when closing time came both buyers banks had no money to loan ....it took six long months before banks came across with funding
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Re: The Awesome Portfolio

Post by mathjak107 » Sat Dec 05, 2020 5:31 pm

vincent_c wrote:
Sat Dec 05, 2020 4:02 pm
I think this is why when things are bad individuals and companies draw down their helocs and put it in a savings account just to be safe
So when one is at the point they need their emergency money they should pay a load of interest too on money stockpiled and not even needed yet ?

doesn’t sound like a good emergency plan to me
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Re: The Awesome Portfolio

Post by mathjak107 » Sat Dec 05, 2020 6:23 pm

Personally having been through 2008 I don’t want to depend on loans for my emergency money ..today you Need the same criteria to get a heloc as a mortgage .

One can find themselves at a point with no income to qualify just when they need the money
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