Investing in the PP - Why Do I Feel Like My Head is in the Sand?

General Discussion on the Permanent Portfolio Strategy

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Gumby
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Re: Investing in the PP - Why Do I Feel Like My Head is in the Sand?

Post by Gumby » Tue Sep 17, 2013 1:19 pm

frommi wrote:Currently there is too much money on the sidelines waiting to get into the market on dips.
All it takes is a good dose of uncertainty, or some kind of crisis, to squash that theory.
Nothing I say should be construed as advice or expertise. I am only sharing opinions which may or may not be applicable in any given case.
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Re: Investing in the PP - Why Do I Feel Like My Head is in the Sand?

Post by Gumby » Tue Sep 17, 2013 1:35 pm

MangoMan wrote:Gumby, am I understanding correctly that the 25% stock portion of your PP is not in index funds? And if not, what would be a reasonable alternative in your opinion?
I, personally, use a Total Stock Market index fund.

I don't think the article is suggesting that you avoid index funds.

I think the problem comes from comparing your returns — wherever they are from — with the returns of a benchmark index. And believing that you are somehow failing if you don’t beat the benchmark.

If you save enough, and your investments simply keep up with inflation, you are doing great in my opinion.

Inflation is the real benchmark — not some volatile index fund that is generally a component of a portfolio. Anyway, in general, the Permanent Portfolio tends to be negatively correlated with the US dollar (against a basket of other currencies).

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So, when the Dollar gets weaker, the Permanent Portfolio goes up. When the dollar gets stronger, the Permanent Portfolio goes down. It ends up being that we typically just keep pace or beat inflation after taxes and fees, etc. That's usually all the Permanent Portfolio does — whether it's going up or down. It's not intended to do much more than that.

Actually, if you could create an ETF or fund that was the inverse of the DXY Dollar Index, it would perform very similar to the Permanent Portfolio!
Last edited by Gumby on Tue Sep 17, 2013 2:49 pm, edited 1 time in total.
Nothing I say should be construed as advice or expertise. I am only sharing opinions which may or may not be applicable in any given case.
christina
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Re: Investing in the PP - Why Do I Feel Like My Head is in the Sand?

Post by christina » Tue Sep 17, 2013 2:02 pm

Gumby wrote: So, when the Dollar gets weaker, the Permanent Portfolio goes up. When the dollar gets stronger, the Permanent Portfolio goes down.
So, when the dollar gets stronger --- maybe that's the signal to get out of the PP and into something else (not sure what)?
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Re: Investing in the PP - Why Do I Feel Like My Head is in the Sand?

Post by rickb » Tue Sep 17, 2013 2:12 pm

christina wrote: Really, I want an ultra-safe method of making 6% a year. Is there another way to achieve this?

3% a year is not enough so I can't just buy bonds.
It sounds like you're thinking about returns in nominal, not real, terms.  Is 6% enough if inflation is running at 10%?  Probably not.  I'd suggest you re-think your goals in real terms, i.e. figure out what you want to live on in today's (Canadian) dollars and set a target based on that amount (probably something like 25x the annual spend). If this is what you've already done and is where the 6% is coming from, you actually need 6% real return, not just 6% nominal.  There is definitely no ultra-safe way to achieve a 6% real return.

The PP has historically returned about 4.5% (real return), see http://www.stableinvesting.com/2011/04/ ... hmark.html (this is a blog run by our very own melveyr).  It is much less volatile than a stock-heavy portfolio but it's definitely not the same as a 4.5% inflation adjusted bank account.  It hasn't happened, but 10% down in a year is not out of the question.  On the other hand over any 3-5 year period the PP will almost certainly be up (although no guarantees), at something pretty close to 4.5% real return per year.

As far as alternatives, I think most of us here are of the opinion that the PP does as well as nearly anything and better than most.
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Re: Investing in the PP - Why Do I Feel Like My Head is in the Sand?

Post by Gumby » Tue Sep 17, 2013 2:35 pm

christina wrote:
Gumby wrote: So, when the Dollar gets weaker, the Permanent Portfolio goes up. When the dollar gets stronger, the Permanent Portfolio goes down.
So, when the dollar gets stronger --- maybe that's the signal to get out of the PP and into something else (not sure what)?
I don't think it makes a difference over the short term. If the dollar gets stronger and your PP goes down, it's not all that much different than the dollar getting weaker and the PP going up. In general, your purchasing power doesn't change that much either way and you're just getting distracted (and paying taxes) by nominal changes. All that matters is that you beat inflation over the long term. Few people ever do better than that.
Last edited by Gumby on Tue Sep 17, 2013 2:50 pm, edited 1 time in total.
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Re: Investing in the PP - Why Do I Feel Like My Head is in the Sand?

Post by christina » Tue Sep 17, 2013 3:03 pm

No, i meant 6% per year, not over inflation.
I'm not quite sure how to arrive at a savings target based on a moving compound interest target of 4.5% over inflation.

To get to my target, I need my savings to compound at 5-6% per year.
How I arrived at my target was to take my salary and multiply it by 15, because that's what advisors recommend (although they actually recommend saving less...I think they are assuming we get an old-age pension from the Government, which I am not banking on). Assuming in retirement I skim off 6% per year, and halve that (to account for inflation over 35 years) then I'm at a figure I can swallow.

Is there a better way to find a target?
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Re: Investing in the PP - Why Do I Feel Like My Head is in the Sand?

Post by rickb » Tue Sep 17, 2013 9:07 pm

christina wrote: No, i meant 6% per year, not over inflation.
I'm not quite sure how to arrive at a savings target based on a moving compound interest target of 4.5% over inflation.

To get to my target, I need my savings to compound at 5-6% per year.
How I arrived at my target was to take my salary and multiply it by 15, because that's what advisors recommend (although they actually recommend saving less...I think they are assuming we get an old-age pension from the Government, which I am not banking on). Assuming in retirement I skim off 6% per year, and halve that (to account for inflation over 35 years) then I'm at a figure I can swallow.

Is there a better way to find a target?
I wouldn't necessarily say it's better, but another way is to estimate how much you'll want to spend per year in today's dollars, and multiply that by 25.  That's your target (in today's dollars), assuming a 4% withdrawal rate (which is fairly conservative, at least for a portfolio invested in the PP, see this thread, also 1, 2).  Now, crank up your favorite spreadsheet and play with the FV function.  For example, OpenOffice says if you start with $100,000 (in today's dollars), add $10,000 (in today's dollars) per year, and manage to make 4.5% (real) per year, then after 20 years you'll have a little less than $555,000 in today's dollars ( =FV(4.5%;20;-1000;-100000;0) ).    You can vary the interest rate, the number of years, and the yearly addition until you find something that looks reasonable (this assumes a constant yearly addition, in today's dollars). 

Standard disclaimer applies (I may or may not be a dog, but I am definitely not a financial panther).
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Re: Investing in the PP - Why Do I Feel Like My Head is in the Sand?

Post by glennds » Wed Sep 18, 2013 11:24 am

Gumby wrote:
MangoMan wrote:Gumby, am I understanding correctly that the 25% stock portion of your PP is not in index funds? And if not, what would be a reasonable alternative in your opinion?


If you save enough, and your investments simply keep up with inflation, you are doing great in my opinion.

Inflation is the real benchmark — not some volatile index fund that is generally a component of a portfolio. Anyway, in general, the Permanent Portfolio tends to be negatively correlated with the US dollar (against a basket of other currencies).

That's an interesting comment - that inflation is the real benchmark. And it sounds consistent with the way Harry Browne talks in his book i.e. don't look to your investments as a means of creating wealth, rather seek out a strategy (like his) that uses the markets as a means of preserving your "real" wealth.

So my question to you - how do you define your inflation benchmark? Do you believe the government's CPI and PPI reports of inflation?
Thanks
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Re: Investing in the PP - Why Do I Feel Like My Head is in the Sand?

Post by Mdraf » Wed Sep 18, 2013 11:29 am

glennds wrote:
Gumby wrote:
MangoMan wrote:Gumby, am I understanding correctly that the 25% stock portion of your PP is not in index funds? And if not, what would be a reasonable alternative in your opinion?


If you save enough, and your investments simply keep up with inflation, you are doing great in my opinion.

Inflation is the real benchmark — not some volatile index fund that is generally a component of a portfolio. Anyway, in general, the Permanent Portfolio tends to be negatively correlated with the US dollar (against a basket of other currencies).

That's an interesting comment - that inflation is the real benchmark. And it sounds consistent with the way Harry Browne talks in his book i.e. don't look to your investments as a means of creating wealth, rather seek out a strategy (like his) that uses the markets as a means of preserving your "real" wealth.

So my question to you - how do you define your inflation benchmark? Do you believe the government's CPI and PPI reports of inflation?
Thanks
And that's exactly the problem. Last July we had  an informal poll asking members here what they think the real inflation rate to be. The results are all over the place:

http://gyroscopicinvesting.com/forum/pe ... /#msg72664
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Re: Investing in the PP - Why Do I Feel Like My Head is in the Sand?

Post by Rien » Wed Sep 18, 2013 11:43 am

christina wrote:All I need is about 6% gain per year to achieve my retirement goals.
Have you listened to the first two radio broadcasts by HB?
He states very strongly that PP is not the way to riches, but a way to maintain one's riches.
I found those first two broadcast enormously helpful in understand his motives for implementing the PP as it is.

If you "need" 6% a year, guaranteed, then I would humbly offer my opinion that you are in trouble. I use the word trouble, but please substitute with your choice of stronger terminology.

I am of the opinion that no absolute value exists. This means two things: a) you cannot "store" your wealth and expect the purchasing power to remain constant. And b) you can achieve a positive return in a growing population by investing in permanently scarce resources.

IMO (b) is the best way to increase your wealth through investing. All other investments are temporary at best.
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Re: Investing in the PP - Why Do I Feel Like My Head is in the Sand?

Post by Thomas Hoog » Thu Sep 19, 2013 7:20 am

An idea, though not an advise. (who needs a phone).

"Telefonica SA, through its entity Telefonica Europe BV two perpetual bonds issued: the first perpetual bond has a fixed coupon of 6.5% during the first five years, ending on until September 18, 2018."
Life is uncertain and then we die
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