PP-Inspired Portfolios

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Kevin K.
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PP-Inspired Portfolios

Post by Kevin K. » Wed May 12, 2021 6:05 pm

While many who post on these forum are dyed-in-the-wool PP adherents (and I totally respect that choice) there are also (from what I can tell) a fair number of GB fans and many others who implement some but not all of the PP assets and/or percentages.

I thought it'd be interesting to discuss real-world portfolios that seek to apply key principles (e.g. real asset diversification based on their likely response economic conditions; seeking to avoid sharp and/or sustained drawdowns) learned from Mr. Browne without slavishly adhering to the traditional 4 x 25%.

The GB is probably the most obvious and elegant example, but off hand I also think of Desert's most recent portfolio (10% each TSM,SCV,EM,GLD, 60% ITT's) and the 80% Wellesley 20% Gold approach discussed in a thread I started in the Variable Portfolio discussions last year.

Clearly there are lots of other possibilities. Here are a few obvious questions that come to mind, at least for me, when looking at the traditional PP assets:

1. Stocks: Browne changed his mind about the best choice here but current gospel is TSM. Of course there's nothing "total" about Total Stock Market since it's massively skewed towards the FAANG stocks and mega-corps in general with very little in small or value stocks and of course no international. The GB's stock allocation is not just larger (40 vs. 25%) but far more diversified and "agnostic" about growth vs, value- i.e. far more of a set-it-and-forget-it approach than TSM, IMHO. I can also see good arguments for adding Total International (e.g. VXUS), especially if gold is reduced below 20-25% (see below).

2. Gold: Its value as SHTF insurance and as a truly uncorrelated asset that helps greatly with sequence-of-returns risk is clear. But how much is enough for those purposes? ERN's research showed 15% to be optimal, 10% to be meaningful and anything less to be not worth the bother. Desert's research showed 10% to be enough but he's got 20% super-volatile equities.

3. Cash: Not a whole lot to say. It's still essential and I love the way the PP and GB explicitly include it unlike clunky Bogleheads "bucket" portfolios. But what percentage and in what form(s)? Subbing STT's for Treasury MM has long been sanctioned here but at this point the only safe cash offering a real return are pain-in-the-ass iBonds. The GB's 20% allocation seems like the upper limit to me but much depends on the sheer size of your portfolio, as what it comes down to is having enough dry powder to be able to live for, say, 3-10 years (if retired) without having to sell the other assets when they've tanked.

4. Bonds: I'm among those who don't think Browne would've owned 30 year Treasuries at anything close to today's rates. But if you disagree, what % is enough? Treat them like nitroglycerin and figure 10-15% is plenty for a deflation play without betting the farm and seeing LTT's lose so much due to interest rate spikes and inflation that they tank the whole portfolio? Keep invoking convexity until it turns into perplexity? Split the difference and switch all of the LTT's and some of the cash to ITT's since they've historically equalled the short:long barbell's return but with much less volatility? Or go another direction altogether like Jonathan Clements does: all of the bond and cash allocation split between VTIP and a short-term Treasury fund with massively diversified global cap weighted equities for the rest.

Again I'm just interested in spurring discussion of things folks are doing or thinking about doing and to get away from the comments on bailing on one asset (LTT's most recently, for obvious reasons but it was SCV in the GB this time last year) and to look at things afresh in our brave new world of boundless money printing, crypto frenzy and limitless debt.
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Hal
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Re: PP-Inspired Portfolios

Post by Hal » Wed May 12, 2021 7:10 pm

Kevin K. wrote:
Wed May 12, 2021 6:05 pm
While many who post on these forum are dyed-in-the-wool PP adherents (and I totally respect that choice) there are also (from what I can tell) a fair number of GB fans and many others who implement some but not all of the PP assets and/or percentages.

I thought it'd be interesting to discuss real-world portfolios that seek to apply key principles (e.g. real asset diversification based on their likely response economic conditions; seeking to avoid sharp and/or sustained drawdowns) learned from Mr. Browne without slavishly adhering to the traditional 4 x 25%.
<snip>
Again I'm just interested in spurring discussion of things folks are doing or thinking about doing and to get away from the comments on bailing on one asset (LTT's most recently, for obvious reasons but it was SCV in the GB this time last year) and to look at things afresh in our brave new world of boundless money printing, crypto frenzy and limitless debt.
Good topic Kevin and one I have been pondering on for some time.
From the perspective of an Australian investor, and assuming you are NOT in the drawdown phase, I would suggest....

Shares: As broad a developed market as possible. eg MSCI World
Why? Australia is only 2% of the worlds economy. Also the limited availability of other than whole world ETF's here, especially in retirement funds.

Bonds: Total developed world bond market ETF. Intermediate duration
Why? As per reason for shares

Shares/Bonds ratio 50/50
Why? Following Benjamins Grahams reasoning. Read the Defensive Investor section in The Intelligent Investor for full details

Gold: 33% of total portfolio
Why? Back testing gives around 28% (from memory) for least volatility. Close enough to 33%

Cash: 0%
Why? The AUD is not the reserve currency and gold will not go up dramatically to cover losses in case of high inflation. Listen to Harry Browne archives for the full explanation.

So it's a 3x33% allocation. Limited choices make for easy decisions O0
Aussie GoldSmithPP - 25% PMGOLD, 75% VDCO
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Kriegsspiel
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Re: PP-Inspired Portfolios

Post by Kriegsspiel » Wed May 12, 2021 7:14 pm

The idea I like the most is shortening the duration of the Treasuries. Stable (better for loss-aversion), better tax treatment (assumption), simpler.
You there, Ephialtes. May you live forever.
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mathjak107
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Re: PP-Inspired Portfolios

Post by mathjak107 » Thu May 13, 2021 3:27 am

Wellesley and some gold , is a nice mix.

While I don’t use Wellesley my final model is close in allocation
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Hal
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Re: PP-Inspired Portfolios

Post by Hal » Thu May 13, 2021 4:10 am

mathjak107 wrote:
Thu May 13, 2021 3:27 am
Wellesley and some gold , is a nice mix.

While I don’t use Wellesley my final model is close in allocation
Hi Mathjak,

What percentage gold allocation would you use for the Wellesley approach?
Would it be 35% as BelangP suggests...
Aussie GoldSmithPP - 25% PMGOLD, 75% VDCO
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mathjak107
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Re: PP-Inspired Portfolios

Post by mathjak107 » Thu May 13, 2021 4:13 am

At this stage 10-15% , no more than that for me and more likely I will hold at 10%

Gold is hurt to much by potential rising rates …I don’t want another pp fiasco where rising rates hurts 75% of my portfolio and with the odds of rates going up I want to keep rate sensitivity low .

If things change I will adjust but for now to much rate sensitivity is not good .

The Models I use have the 25% equity income model up 3.48% ytd after yesterday , then I season to taste with the 100% equity model which is up 8.64% .

Unfortunately I missed most of those gains and was down in the pp getting my butt kicked which offered no additional safety at all .

It was way more volatile and riskier to boot because of its big bet on rates not going up much . I don’t think Harry ever envisioned a world with long term bonds at under 2.50% and cash at zero and stocks at high valuations. Lower rates were always associated with low valuations of stocks not record highs .



Yesterday I show the pp which I no longe own down 1.31% …..the model I went back to was down about half that at .70%
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Hal
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Re: PP-Inspired Portfolios

Post by Hal » Thu May 13, 2021 6:21 am

Thanks Mathjak,

I could live with that allocation.
And you have summer coming as well, I'm envious ;)
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Aussie GoldSmithPP - 25% PMGOLD, 75% VDCO
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mathjak107
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Re: PP-Inspired Portfolios

Post by mathjak107 » Thu May 13, 2021 7:10 am

I like being In control so I don’t use Wellesley…but Wellesley has always been a fine conservative fund
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Re: PP-Inspired Portfolios

Post by jhogue » Thu May 13, 2021 8:14 am

Kriegsspiel wrote:
Wed May 12, 2021 7:14 pm
The idea I like the most is shortening the duration of the Treasuries. Stable (better for loss-aversion), better tax treatment (assumption), simpler.
Practical steps to lower LTT volatility and raise total yield.

1. Stop buying TLT.
ETF’s have counterparty risk, fluctuating net asset value, and annual expense.

2. Shorten portfolio maturity.
Buy 20 year Treasury Zero bonds. Less volatile than a 30 year T-bond.
Current yield to maturity of 2.44% p.a. Ideally held in IRA.

3. Lock in higher yield.
Buy EE bonds up to $10,000 annually. They are a zero coupon Treasury maturing in 20 years. Current yield to maturity of 3.54% p.a..
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: PP-Inspired Portfolios

Post by Kevin K. » Thu May 13, 2021 9:33 am

Regarding the Wellesley/Gold combo: historically (and admittedly it's a brief one since GLD debuted in 2004) the performance of this allocation and the GB have been extremely close:

https://www.portfoliovisualizer.com/bac ... tion6_2=20

However.....Wellesley is narrowly-concentrated and actively managed and you'd have to have strong faith to put all your eggs into high-dividend U.S. stocks and longish-duration corporate bonds, while trusting the Wellington Management team not to succumb to style drift (not that such faith hasn't been earned over 50 years of stellar performance). AND you can also only buy Admiral shares (VWIAX) of the fund at Vanguard; otherwise you pay an extra .06% in ER (.16 vs .22). And you'd better have room for most or all of your Wellesley in tax-deferred accounts since it is very tax-inefficient. Personally I'd just swap out LTT's for ITT's in the GB and call it a day.
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Re: PP-Inspired Portfolios

Post by Tyler » Thu May 13, 2021 10:38 am

Kevin K. wrote:
Thu May 13, 2021 9:33 am
Regarding the Wellesley/Gold combo: historically (and admittedly it's a brief one since GLD debuted in 2004)...
I've got your back.

https://gyroscopicinvesting.com/forum/v ... 33#p169763
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Re: PP-Inspired Portfolios

Post by Kevin K. » Thu May 13, 2021 11:01 am

Thanks Tyler! Yes I have that link to those charts you so kindly did for us saved. So helpful!
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Re: PP-Inspired Portfolios

Post by mathjak107 » Thu May 13, 2021 11:35 am

Kevin K. wrote:
Thu May 13, 2021 9:33 am
Regarding the Wellesley/Gold combo: historically (and admittedly it's a brief one since GLD debuted in 2004) the performance of this allocation and the GB have been extremely close:

https://www.portfoliovisualizer.com/bac ... tion6_2=20

However.....Wellesley is narrowly-concentrated and actively managed and you'd have to have strong faith to put all your eggs into high-dividend U.S. stocks and longish-duration corporate bonds, while trusting the Wellington Management team not to succumb to style drift (not that such faith hasn't been earned over 50 years of stellar performance). AND you can also only buy Admiral shares (VWIAX) of the fund at Vanguard; otherwise you pay an extra .06% in ER (.16 vs .22). And you'd better have room for most or all of your Wellesley in tax-deferred accounts since it is very tax-inefficient. Personally I'd just swap out LTT's for ITT's in the GB and call it a day.

which is why i dont use wellesly . but wellesly is one of the most popular retirement portfolios for those who want a conservative fund
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Re: PP-Inspired Portfolios

Post by I Shrugged » Thu May 13, 2021 5:04 pm

Wellesley is not as tax efficient as a two fund mix using an index fund for the stocks. I’ve deferred a ton of taxes over the past 12-15 years since I switched all our taxable stock allocation into vanguard index funds.

We do use Wellesley in an IRA. Love it there.
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Re: PP-Inspired Portfolios

Post by mathjak107 » Thu May 13, 2021 5:25 pm

Unless one is passing these funds to heirs tax efficiency is really non existent..

You can pay me now or pay me an unknown amount down the road , but pay you will .

I deferred lots of taxes too over the yearsl.I deferred them from 15% right to 23.80% after the max capital gain rate was raised
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