Why do you use the PP?

[buddtholomew]

Help me rationalize.

I selected the PP to avoid 30-40% losses in the equity portion of the portfolio. In exchange for this protection, I am now sitting on 30-40% losses in the gold portion of my portfolio. Really disappointed in the PP. I should have listened to my gut in 2011, but Craigr with his rudder speech and MediumTex with his over-confidence persuaded me to remain invested. I lost money while equities reached new highs and am now losing as they decline.

I've said it before and I will say it again...the PP goes ONLY as GOLD goes.

If that were true, it'd be down significantly since 2011. But in fact you'd have a gain even if you invested on the day of gold's peak that year. Stocks and bonds clearly play roles, just not as influential ones as they do in a 50/50 type portfolio.

Stocks will eventually correct, probably brutally, just like they always do over time. And if the PP holds on to most of its value, it may actually pull even with or ahead of a stock-heavy portfolio in the short-term providing a great opportunity for you to get out and never look back.

The only difference between a BH portfolio and the PP is the inclusion of gold. Ergo, portfolio under or over-performance is attributed to the whims of gold.

[Xan]

thanks ..
i will nominate you for word police .

I don't think I'm being pedantic.  You said that if you're not 100% comfortable with an investment, or you have doubts, then you shouldn't be in it.

My point was that there will always be doubts.  You have to put your money somewhere, and you will never be 100% certain that you're doing it correctly.  Just because you have doubts doesn't mean you should abandon your strategy.

[mathjak107]

i would agree  , with a but.

the ability to stick with the strategy will greatly depend on  how much doubt you have .

[LC475]

Help me rationalize.

I've said it before and I will say it again...the PP goes ONLY as GOLD goes.

Well, I mean, I don't think that's true, as the charts of gold and of the PP look quite different.  But I don't know that that will help you as you requested.

Here's something that may help: it seems to you that gold is the biggest factor in the PP (despite being only 25%) because since 2011, it has been the biggest factor in the tracking error between the PP and stocks.  It just so happens that in that time period, 2011-present, there was only one crash in the PP assets and gold was the thing that happened to crash.  But you know, you have to know, that gold is not actually any kind of dominant majority factor in the PP, because mathematically it is only 25%.  You have to tell yourself this and remind yourself of this, because it is true.  Gold only seems like it is such a disproportionate element to you, personally, because it has had such horrible performance over your personal time frame.  And also perhaps because it is the element in the PP that you like the least.  Now I may have you all wrong, and if so don't take offense, but if I'm right maybe this will be helpful.  You seem like you are coming from a conventional investing background.  For whatever reason, stocks are orthodox, bonds are orthodox, and even cash is somewhat orthodox, but gold is unorthodox.  Contrarian.  Kooky.  Unacceptable.  Unclean.  Off-limits.  And so you probably bought into gold against your better judgment and without really fully believing in it, but you gritted your teeth, closed your eyes, turned your head, and pushed the button, because the PP as a total package seemed to offer what you want.

And lo and behold, gold crashed.  The very asset you were least comfortable with in the first place.  Bad luck!  If stocks had crashed, you would be loving the PP right now (b/c that's the very reason you got into the PP in the first place, to protect against that).  If bonds had crashed: also OK.  But, unfortunately gold crashed.  So, I'm sorry, like I say, that's bad luck.  Best I can tell you is just keep the big picture in mind.  Give it five or ten years and something else will crash, not gold this time, and you'll probably feel a lot better.  If you make it that long.

I hope that helps.

[buddtholomew]

Help me rationalize.

I've said it before and I will say it again...the PP goes ONLY as GOLD goes.

Well, I mean, I don't think that's true, as the charts of gold and of the PP look quite different.  But I don't know that that will help you as you requested.

Here's something that may help: it seems to you that gold is the biggest factor in the PP (despite being only 25%) because since 2011, it has been the biggest factor in the tracking error between the PP and stocks.  It just so happens that in that time period, 2011-present, there was only one crash in the PP assets and gold was the thing that happened to crash.  But you know, you have to know, that gold is not actually any kind of dominant majority factor in the PP, because mathematically it is only 25%.  You have to tell yourself this and remind yourself of this, because it is true.  Gold only seems like it is such a disproportionate element to you, personally, because it has had such horrible performance over your personal time frame.  And also perhaps because it is the element in the PP that you like the least.  Now I may have you all wrong, and if so don't take offense, but if I'm right maybe this will be helpful.  You seem like you are coming from a conventional investing background.  For whatever reason, stocks are orthodox, bonds are orthodox, and even cash is somewhat orthodox, but gold is unorthodox.  Contrarian.  Kooky.  Unacceptable.  Unclean.  Off-limits.  And so you probably bought into gold against your better judgment and without really fully believing in it, but you gritted your teeth, closed your eyes, turned your head, and pushed the button, because the PP as a total package seemed to offer what you want.

And lo and behold, gold crashed.  The very asset you were least comfortable with in the first place.  Bad luck!  If stocks had crashed, you would be loving the PP right now (b/c that's the very reason you got into the PP in the first place, to protect against that).  If bonds had crashed: also OK.  But, unfortunately gold crashed.  So, I'm sorry, like I say, that's bad luck.  Best I can tell you is just keep the big picture in mind.  Give it five or ten years and something else will crash, not gold this time, and you'll probably feel a lot better.  If you make it that long.

I hope that helps.

100% correct and excellent synopsis of my experience with the PP.

Gold comprises 10% of overall portfolio - 70% in taxable (PP @ 23%) and 30% in retirement assets.

Perhaps I would feel more comfortable if the losses were more evenly distributed across accounts. A loss in taxable (money I cannot afford to lose) is a lot more painful as the goal of early retirement remains illusive.

[buddtholomew]

The only difference between a BH portfolio and the PP is the inclusion of gold. Ergo, portfolio under or over-performance is attributed to the whims of gold.

That's an interesting statement.  I look at it a bit differently.  I think the very unique things about the PP are:
1. 25% gold
2. Fixed income consisting of only treasuries (I think this is the most important thing I've learned from the PP)
3. Relatively long maturity of fixed income, about 10-15 years.

While #1 is the most striking difference between the PP and BH, the longer maturity, treasury-only fixed income portion is maybe just as important.  I've stated before (maybe too many times) that I prefer the bullet approach to FI, because of simplicity and the benefit of "riding the yield curve" one gets from hanging out on the usually steeper portion of the curve.  But whether bullet or barbell, the the long duration treasury-only bonds really tend to do a nice job of balancing the equity volatility.  It's pretty cool to watch.  Corporate bonds don't work as well in balancing volatility.  Then the gold: gold is mostly uncorrelated with both stocks and bonds, and moves about in a seemingly random walk.

I am comfortable with the LTT/Cash barbell approach as I can hold additional cash to reduce duration. I match the duration of the Total Bond Market Index but with treasury only exposure. Aside from credit exposure, there isn't really much between these two approaches. That aside, the only other difference between the portfolios is the amount allocated to equities. It is 100% in the BH portfolio and split 25% equities, 25% gold in the PP.

[Dieter]

there are many portfolios that are BH (no one allocation as per PP.)

Way I see BH:

25% - 100% Stocks (50 - 70% for majority?)
      0% to 55% Intl (20% - 40% avg?)
      0 - 100% tilted (Small, Value, REIT, emerging mkt,...)
      Fixed allocation vs glide path
Bonds
      Mostly total market
      0 - 50% corp vs treasury
      Munis in taxable
      Duration 0 - ~6 years
      0 - ? International
Some concede 5% to maybe even 10% Gold / commodities ok
Emergency fund outside of portfolio

Although I consider the baseline to be the three fund portfolio:
  Total U.S.
  Total Intl.
  Total bond (US)

42/18/40 as a baseline?

Biggest differences:
  Gold, Intl stocks, bond duration, typical stock allocation
  Bond type lesser diff, as baseline BH is 50-60%+ Treasuries
  Plus no Stock tilting in PP (unless consider gold a tilt....)

[goodasgold]

Biggest differences:
  Gold, Intl stocks, bond duration, typical stock allocation
  Bond type lesser diff, as baseline BH is 50-60%+ Treasuries
  Plus no Stock tilting in PP (unless consider gold a tilt....)

Bogleheads (of which I was one, very profitably) need to get used to riding the roller coaster. I grew tired of it, especially as retirement approached, when I would no longer have a salary coming in to pay for my tickets on the roller coaster. As the years went by, I felt the chills more than the thrills.

I like the fact that the PP is much less volatile, although the prominence given to gold by the PP terrifies and annoys almost all BHers; holding large amounts of cash is also puzzling to them.

A big difference between the two philosophies is the steady asset allocation recommended by the PP, in contrast to the "age in bonds" philosophy of Bogleheads.

Also, a lot of Bogleheads recommend holding TIPs or TIP funds as part of the bond component, to blunt the impact of inflation. I was enlightened, after reading Craig R and MT's book, to learn how ineffectual TIPs really are in protecting us from the ravages of inflation. Gold is the way to go in this department, although I concede that the yellow stuff is not always reliable in countering inflation. But it is still the least problematic solution to this ravenous menace, I think.

Besides, I like the splendid independence of those often-despised gold coins, lazing around in their insured safety deposit box, just waiting to dust themselves off and rush to our rescue in times of need.

And I am somewhat troubled by Craig and MT's vague recommendations as to the percentage of our $ to be held in a VP. Bogleheads are much more strict in this respect, often recommending that no more that 5-10% be invested outside the bonds of BH holy matrimony.

But that said, as a "sheet anchor to windward" after conversion to the PP, I still hold roughly 1/3 of my portfolio the Boglehead way. Both philosophies are fine, in my opinion.

[LC475]

That aside, the only other difference between the portfolios is the amount allocated to equities. It is 100% in the BH portfolio and split 25% equities, 25% gold in the PP.

What do you mean?  Are you counting gold as a kind of equity?

I see gold as more of an alternative type of cash.  US dollars are cash for the short term, gold is cash for the long term.  Thus you have a portfolio that's 50% cash and 50% income-generating, and the income-generating is further split 50-50 between the two main ways to structure income-generating assets: debt and ownership.  At least, that's one way to look at it.

[iwealth]

Perhaps I would feel more comfortable if the losses were more evenly distributed across accounts. A loss in taxable (money I cannot afford to lose) is a lot more painful as the goal of early retirement remains illusive.

If one thing the last few years has proven it's that investing in the PP is not immune to poor start date timing. All of those recently posted fancy charts help visualize the somewhat dark reality that was buried under the rug until someone actually dug into the monthly start date data.

Depending on the month you started, historically it took up to 17 years before the PP returned 3% real CAGR. Too bad for those people that started in the first half of 1987! Those that started 5 years earlier saw > 6.5% real CAGR over their first 17 years. That's a seriously wide spread.

If you know exactly how many years are left before you want to retire, all of the necessary data is available to determine the historical success rate you'd have with the PP.

[buddtholomew]

That aside, the only other difference between the portfolios is the amount allocated to equities. It is 100% in the BH portfolio and split 25% equities, 25% gold in the PP.

What do you mean?  Are you counting gold as a kind of equity?

I see gold as more of an alternative type of cash.  US dollars are cash for the short term, gold is cash for the long term.  Thus you have a portfolio that's 50% cash and 50% income-generating, and the income-generating is further split 50-50 between the two main ways to structure income-generating assets: debt and ownership.  At least, that's one way to look at it.

Total Bond Market Index has a duration of 5.6 years. The fund holds a variety of bonds including corporates and treasuries. LT treasuries in combination with cash can replicate 5.6 years in duration and eliminate default risk. To me, these are similar enough approaches to consider the two options a wash over time (barbell vs. bullet strategy).

Now each portfolio has 50% remaining to allocate. BH will allocate the entire amount to equities and the PP splits 25% in Gold and 25% in equities. That is the major distinction between the two portfolios. BH investors may choose to hold REITs, INT or SC, but it is still considered equities.

Hope this clarifies.

[internationalcanuck]

I want to use the PP because I am living as an expat overseas.  My plan is to buy a house/relocate to Australia.  I have my retirement money in mostly equities since it is being invested for 30+ years, and can ride out the volatility. 
Because when I decide to move to Australia, I don't know what the economy will be like either here or in Australia, I want an investment plan that gives me a fair amount of certainty. I like the 25% cash as an emergency reserve if all hell breaks loose and I lost my job.  I at least would not be touching the other investments that are likely appreciate at some point in the future.

[mathjak107]

That aside, the only other difference between the portfolios is the amount allocated to equities. It is 100% in the BH portfolio and split 25% equities, 25% gold in the PP.

What do you mean?  Are you counting gold as a kind of equity?

I see gold as more of an alternative type of cash.  US dollars are cash for the short term, gold is cash for the long term.  Thus you have a portfolio that's 50% cash and 50% income-generating, and the income-generating is further split 50-50 between the two main ways to structure income-generating assets: debt and ownership.  At least, that's one way to look at it.

Total Bond Market Index has a duration of 5.6 years. The fund holds a variety of bonds including corporates and treasuries. LT treasuries in combination with cash can replicate 5.6 years in duration and eliminate default risk. To me, these are similar enough approaches to consider the two options a wash over time (barbell vs. bullet strategy).

Now each portfolio has 50% remaining to allocate. BH will allocate the entire amount to equities and the PP splits 25% in Gold and 25% in equities. That is the major distinction between the two portfolios. BH investors may choose to hold REITs, INT or SC, but it is still considered equities.

Hope this clarifies.

the intent of cash in the pp is to be neutral . it isn't there to pretend it is part of the bond fund to make it appear less volatile or to be part of stocks to make their beta appear lower or any other asset.

each asset is what it is without being combined with anything else to disguise it.

if stocks fell then the cash works with the portfolio as a whole .  if it is stocks and bonds then it mitigates both . but trying to pretend if you combine cash and long term bonds  like they exclusively are one and the same asset class  and  you really have an equal to an intermediate bond fund is not correct .

all that counts at the end of the day is that balance you have from the pp and not how you try to disguise the assets from what they are .

for all purposes long term treasury's are exactly what they are , stocks and gold are what they are and cash stands ready to do its part for the portfolio as a whole .

[Pointedstick]

you really can' look at cash in that manner  in my opinion .  your treasury position in long term treasury's will fully act as such the way it functions in the pp.  the cash is acting at the same time with other asset classes  taking part of its weight away from acting on the long term bonds  exclusively .

if bonds fell 15% and gold fell 15% with stocks flat the cash has not cut the duration in bonds to 5.6 years . the cash gets spread out over the effects of all assets .

That sounds like mental masturbation to me; your money doesn't care about such distinctions. History shows that overall effect to your bottom line is indeed more or less the same for barbell and bullet strategies with the same duration.

Blue portfolio 100% 5-9 year treasuries; red portfolio 50% 30-year treasuries + 50% 2-year treasuries:

[img width=600]http://i.imgur.com/WsQSqxR.png[/img]

[mathjak107]

re-read what i wrote , i didn't word it exactly  they way i wanted it to mean.

correct as you said everything works together , cash is not part of the bond allocation and works with all parts equally .

[LC475]

Hope this clarifies.

Yes, that does clarify.

You are lumping the cash with the bonds and saying all together it's a bunch of 5 or 6 year duration bonds, and that's 50%.

It's a perfectly valid and correct way of looking at it.

However, I do not think it is the ideal way to be looking at it and thinking about it, for you, most of the time.  Thinking about it my way is going to help you feel better about holding the HBPP, if holding it and feeling better about it is your goal.

You have split the pie in half vertically: left half bonds, right half gold and stocks.  I would say split the pie in half horizontally instead: bottom half cash, top half income production.  The cash is your foundation, your bedrock of safety.  There's two kinds of cash in the bottom half: US Dollars and gold.  They are both great for different reasons.  They provide you with safety, stability, and peace of mind.  You might say "Aack! No!  Gold provides me anything but stability!"  But actually, it really does.  It's an old goldbug saw, but it's true: The cost of a good man's suit in 1800 was about an ounce of gold, the cost today is about an ounce of gold, the cost in 1600 was about an ounce of gold, and even back in Roman times the cost of a good toga and sash was, again, about an ounce.  Gold has been a reliable way to store wealth for over 2000 years.  That's a good track record, I don't care how much you hate the stuff.  You just can't argue with that track record.  Gold is the best long-term cash available.  Gold is not going anywhere.  Gold will ride out the storms.  Gold is money, and the US dollar is money (both in very different ways!) and, as Harry Browne once wrote: that's what you need right now. (Money, that is).

You are a conservative investor.  Cash is a conservative investment.  And gold is an uber-conservative cash.

[Pointedstick]

Mandatory devil's advocacy: the USD price of a good men's suit was $250 in 2000 and $1800 in 2011?

[Mark Leavy]

Mandatory devil's advocacy: the USD price of a good men's suit was $250 in 2000 and $1800 in 2011?

Maybe not an exact correlation, but...

Here's the 15 year chart for Merino wool :

[img width=800]http://i62.tinypic.com/2lncrxl.png[/img]

[Pointedstick]

Whoa, that is spooky.

[lordmetroid]

Not spooky but an effect of the end of the 15 year commodity super cycle of which Jim Rogers usually speaks of.
Capital has been invested in order to secure commodities. Now this has been achieved and the next phas in the economic cycle can begin.

[portart]

I have used PP for ten years. This is the first time I some level of fear with the potential bottom dropping out of gold. I like Pointedstick's idea of a second more aggressive portfolio (same as a pp if you rolled into one with less gold and treasuries changing the percentages so it's how you want to look at it.) Of course trying to time when to sell some gold and move it around is tricky with it close to losing support and having another waterfall drop begin.  It's hard to change your philosphy...

[Pointedstick]

If there was ever a good time to underweight gold, it was 2 or 3 years ago, not right now. As icky as this drop is, I'm not selling because that would be buying high and selling low. Same reason I'm not loading up on more stocks. I'm just letting the PP do its thing. If the stock market flames out and gold surges, that will be the time to transition into a portfolio with more stocks and less gold if that's what you want.

[buddtholomew]

If there was ever a good time to underweight gold, it was 2 or 3 years ago, not right now. As icky as this drop is, I'm not selling because that would be buying high and selling low. Same reason I'm not loading up on more stocks. I'm just letting the PP do its thing. If the stock market flames out and gold surges, that will be the time to transition into a portfolio with more stocks and less gold if that's what you want.

Trapped in the PP...it's funny how ridiculed I was when I saw this playing out. Stuck in gold until it eventually restores my losses which are now approaching 25%

[Pointedstick]

If there was ever a good time to underweight gold, it was 2 or 3 years ago, not right now. As icky as this drop is, I'm not selling because that would be buying high and selling low. Same reason I'm not loading up on more stocks. I'm just letting the PP do its thing. If the stock market flames out and gold surges, that will be the time to transition into a portfolio with more stocks and less gold if that's what you want.

Trapped in the PP...it's funny how ridiculed I was when I saw this playing out. Stuck in gold until it eventually restores my losses which are now approaching 25%

The thing is… this is just how the PP is. Something is always gonna be a stinker. It stinks the worst when the stinker is the thing you hate most, and when it starts to stink when you're just starting out.

[buddtholomew]

If there was ever a good time to underweight gold, it was 2 or 3 years ago, not right now. As icky as this drop is, I'm not selling because that would be buying high and selling low. Same reason I'm not loading up on more stocks. I'm just letting the PP do its thing. If the stock market flames out and gold surges, that will be the time to transition into a portfolio with more stocks and less gold if that's what you want.

Trapped in the PP...it's funny how ridiculed I was when I saw this playing out. Stuck in gold until it eventually restores my losses which are now approaching 25%

The thing is… this is just how the PP is. Something is always gonna be a stinker. It stinks the worst when the stinker is the thing you hate most, and when it starts to stink when you're just starting out.

So true...