Peeking, and the Permanent Portfolio

[craigr]

There is a lot of wisdom in this quote Gumby transcribed from one of Harry Browne's shows:

HARRY BROWNE: Bob — out in cyberspace asks — what combination of events were in effect when the Permanent Portfolio produced a loss? Well, over the last 35 years, the Permanent Portfolio has had only four losing years. And it has averaged a [annual] gain of 9% for all of the 35 years. Now, the worst year that it had was in 1981, when it lost 6%. And the reason it lost 6% was because that year everything went down. Gold went down, stocks went down, bonds went down, commodities, currencies — everything went down. But, of course, that's a situation that cannot sustain itself. It's a recessionary situation. And the following year, 1982, everything went up, and really sprang up. Gold had big gains, stocks had a big gain. Bonds even moved up a bit. And the result was that the portfolio gained something like 22%. I don't have the figures in front of me, but it was over 20%. And that was as unusual as the 6% loss was the year before. So, given the two years, there was a net gain — quite a big net gain — bigger than we should expect in an average year for the Permanent Portfolio. But that's the only time that I know when you really had an inundation of losses in all of the investments. And otherwise, we always have at least one winning investment that's strong enough to pull the portfolio upward. And so, I hope that answers the question.

JOHN CHANDLER: It does, Harry. I would like to add one thing and that is that the world doesn't really work according to the calendar. The calendar is there for I think maybe the benefit of accountants.

HARRY BROWNE: And to remember our birthdays.

JOHN CHANDLER: Well, something of that nature. A lot, a lot of harm has been done because of the calendar. And one of the harms is trying to make everything fit neatly into a 12 month, or four week, or seven day pattern. The idea of the Permanent Portfolio is is that it invests in asset classes, which respond differently in different economic conditions. The economic conditions that makes one thing goes down, is the same condition that makes another asset go up. But, here is the key and that is that it does not happen overnight. It does take time for these economic forces to take hold. And I rememember back in the seventies, early eighties when we were doing research on the Permanent Portfolio, we found periods as long as 18 months where the portfolio could lose money. But, now that was about the longest we found. Now bear in mind that this is not a promise. It's not a guarantee without — saying that with only 18 months it can work. I can simply say, during the periods when it was being tested. The prices... doing tests on the Permanent Portfolio and what would happen in the different situations over long, long, long periods of time — about 18 months is the maximum we found where the portfolio could lose money before the economic forces took hold and balanced the portfolio out.

HARRY BROWNE: Yes, if you were to invest on day one, you did run the risk that maybe you would not show a gain for 18 months. But, as you say that's a unique situation. An unusual situation. But, it was a possibility, and it must be recognized. But, in any event, we know that the portfolio does right itself, and it doesn't take very long. That's the value of the stability. You look at the chart of the stock market, and you see these rollercoaster swings. But, you don't see that in a chart of the Permanent Portfolio, and you can see that at my website. You can get to a chart of the Permanent Portfolio and you just see the slow steady growth. Stability is very important, because if it's not stable, you'r going to be tempted to abandon the whole approach, and probably at the worst time.

I agree with John Chandler on this. The 12 month cycle is just for accountants to know how to keep the books. Otherwise for an investor it doesn't mean much. The markets are not a light switch and the movements can take time to sort themselves out. Watching daily, weekly or even monthly swings can really play havoc on the nerves. Same with looking at assets in isolation. There is a lot to control emotionally when managing your own portfolio.

[Lone Wolf]

Good work, 6 Iron.  One day at a time, brother! 

I agree with John Chandler on this. The 12 month cycle is just for accountants to know how to keep the books. Otherwise for an investor it doesn't mean much. The markets are not a light switch and the movements can take time to sort themselves out. Watching daily, weekly or even monthly swings can really play havoc on the nerves. Same with looking at assets in isolation. There is a lot to control emotionally when managing your own portfolio.

Craig, I was curious how often you check up on your overall portfolio.  I've been trying to get into a monthly groove of checking the PP (basically just doing it at the same time of the month that I make sure my paycheck went to the right place and that nobody's funneling money out of my accounts!)  Maybe I should be scaling that back to more of a "seasonal" check.

[craigr]

Good work, 6 Iron.  One day at a time, brother!   :)

I agree with John Chandler on this. The 12 month cycle is just for accountants to know how to keep the books. Otherwise for an investor it doesn't mean much. The markets are not a light switch and the movements can take time to sort themselves out. Watching daily, weekly or even monthly swings can really play havoc on the nerves. Same with looking at assets in isolation. There is a lot to control emotionally when managing your own portfolio.

Craig, I was curious how often you check up on your overall portfolio.  I've been trying to get into a monthly groove of checking the PP (basically just doing it at the same time of the month that I make sure my paycheck went to the right place and that nobody's funneling money out of my accounts!)  Maybe I should be scaling that back to more of a "seasonal" check.

I will log into the online accounts every now and then just to make sure there is nothing fraudulent going on. But I don't check performance. Overall I'd say I check actual portfolio performance no often than monthly. Sometimes even quarterly. I've even gone six months without checking performance. If I wasn't running the blog/forum I'd probably check less often.

I pay very little (if any) attention to financial news any more. It just isn't interesting and doesn't provide me with any information I can use to better my position. It just causes stress over a bunch of stuff I have no control over. The only thing I find helps me as an investor is to stay very well diversified, not time the market, hold costs low, and keep things rebalanced when needed. Those are the basic items that make a profitable investing strategy. Checking the portfolio frequently and following the financial news I have found to be very counterproductive.

[cowboyhat]

I find checking and pondering my investments is a way to expend nervous intellectual energy that perhaps ten years ago I employed to further my professional development.

Harry Browne noted in his rules that most of what most people make comes from their professional lives, and so I wonder (and I say this with humility as an obsessive portfolio checker myself) if this extra intellectual and emotional energy would be better directed a developing a professional plan B.

If you are an established accountant maybe take a welding class, or if you are a welder learn how to do the books. Backing up your professional life is probably worth more to you on a risk adjusted basis than tweaking an extra 1% portfolio performance. The new intellectual challenge will keep you occupied and probably help you forget about your portfolio.

[Lone Wolf]

If you are an established accountant maybe take a welding class, or if you are a welder learn how to do the books. Backing up your professional life is probably worth more to you on a risk adjusted basis than tweaking an extra 1% portfolio performance. The new intellectual challenge will keep you occupied and probably help you forget about your portfolio.

I think that this is stellar advice.

I really enjoy geeking out about this stuff but I am personally under no illusion that I'd be able to do much to improve on the HBPP formula.  Apart from tax planning (which is something that I think is worth aiming some intellectual firepower at), the best way for me to improve my HBPP is to contribute more and more and more money to it.

[MediumTex]

I just ran across this thread for the first time and I think it is great advice.

I have two side businesses I run just for fun in addition to my professional occupation and I have found it to be a good investment of my time and energy.

I really wish I could take all of the time I have spent sitting in front of a computer monitor like a vegetable watching asset values move (with absolutely no ability to change the course of any asset's price) and invested it in marketing my other businesses and improving my skills.

You only have so much time on this earth.  Don't let the internet and abstractions like market action suck up too much of it.

Think of a person who invested in the stock market one day and completely forgot about it for 20 years and then think about a person who invested in the stock market and watched the ticker every single day for 20 years.  Who would have the happier life (regardless of the investment returns)?

[6 Iron]

After reading some powerful angst on the PP=RBD thread, I am reminded of this commitment I made over 3 years ago. For the last year, I have decreased my frequency of portfolio checking to every other month, and next year I am going to quarterly. I cannot begin to tell you how much easier a down year is to take by doing this.

[buddtholomew]

After reading some powerful angst on the PP=RBD thread, I am reminded of this commitment I made over 3 years ago. For the last year, I have decreased my frequency of portfolio checking to every other month, and next year I am going to quarterly. I cannot begin to tell you how much easier a down year is to take by doing this.

What emotions did you experience after updating the NAV and seeing a negative return?

[6 Iron]

After reading some powerful angst on the PP=RBD thread, I am reminded of this commitment I made over 3 years ago. For the last year, I have decreased my frequency of portfolio checking to every other month, and next year I am going to quarterly. I cannot begin to tell you how much easier a down year is to take by doing this.

What emotions did you experience after updating the NAV and seeing a negative return?

Honestly, a cold detached acceptance now. I have recorded changes in my permanent and variable portfolio monthly or bimonthly for the past 4 years, but stopped the frequent peeks 3 years ago. Sometimes it is down a little. More often it has been up a little. But getting off the emotional roller coaster of watching the individual assets move on a daily basis, comparing my returns to other portfolios, or Bitcoins, or Apple was crucial for my happiness.

[buddtholomew]

I commend you on identifying the problem and working to correct the negative behavior. I turn 40 early next year and would like to achieve the same success that you have realized over the last few years. Perhaps a New Year's resolution is in order 

[6 Iron]

Perhaps a New Year's resolution is in order 

www.youtube.com/watch?v=BQ4yd2W50No

[dragoncar]

It's impossible for me not to look.  It's just not gonna happen.  I make pretty regular purchases.

[ZedThou]

Honestly, a cold detached acceptance now.

Couldn't have described it better, and I keep tabs multiple times a day! We're all different, I suppose. There have been quite a few days this year where I was down five figures, but I have achieved emotional detachment.

[6 Iron]

It's impossible for me not to look.  It's just not gonna happen.  I make pretty regular purchases.

When I started, I did this, buying the lagging asset with monthly contributions and dividends. I now just put everything in cash/cash equivalents, and make asset purchases no more than a 1-2 times a year. I was using the frequent purchases as a justification for my frequent peeks; it was not improving my portfolio performance, just increasing gastric acid secretion.

[dualstow]

It's a great idea to not look more than once a month, quarter or year, but as I asked in another thread, how will I know it's time to rebalance?
I get some emails triggered by major stock market movements, but I don't know how to set this up for the other assets.
Could someone please wake me when gold drops below 1200?

[6 Iron]

The timing of rebalancing is imprecise at best, and the trends that caused the need for rebalancing can always continue, making it impossible to know when is the best time to rebalance. So we use rebalancing bands, but these are guidelines for our own risk tolerance, not crystal balls. In my portfolio, asset valuation changes have been gradual enough that I have never checked and been shocked at how out of balance an asset was. My sense is that if something drastic happened (gold plummets to $500/oz, or the market loses 50% in one day, or LT bond yields go up to 8%), I would hear about it on the news and be able to react accordingly.

I check my balance sheet infrequently, but I still read the newspaper. It is not like I have been unaware of the current bull market in equities.

[annieB]

Can't believe how far gold can fall and not hit my 15% rebalance.
Now at 19.08%,VTI at 32.35%.

At my age,I check my numbers every Friday afternoon..

[dragoncar]

It's a great idea to not look more than once a month, quarter or year, but as I asked in another thread, how will I know it's time to rebalance?
I get some emails triggered by major stock market movements, but I don't know how to set this up for the other assets.
Could someone please wake me when gold drops below 1200?

You can make a tracking spreadsheet like this one and hide the cells with scary info:

https://docs.google.com/spreadsheet/pub ... utput=html

edit: use google docs and the function =googlefinance("symbol","price") to grab real time prices

[Tyler]

I enjoy applying my nervous intellectual energy that Cowboyhat describes to spending less rather than investing. It's another side of financial optimization that I have far more control over.