PP-Inspired Portfolios
Posted: 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.
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.