Why do you use the PP?

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Why do you use the PP?

Post by Pointedstick » Mon Jul 13, 2015 3:43 pm

This came up in another thread and I think it might be interesting to hear the reasons why people choose the PP and stick with it.

I'll start. I didn't have any really bad market experiences; I started investing in 2009. But I didn't really know what I was doing and could never come to a good conclusion as to which asset classes I should invest in. Why not small-cap value stocks? Why not REITs? Foreign stocks? High-yield bonds? Commodities? They all seemed like reasonable choices that had their turns in the sun. But there was no rhyme or reason that anyone could explain to me.

The PP appeals to me because it has a theory behind it. It gives you a reasonable "why" that makes sense to me as well as a "what," and this "why" makes sense to me. For nearly all other portfolios, the "why" seems to be, "because that's what did well historically," which is not a terrible answer, but does nothing to address the uncertainty of the future; they are all basically saying,  "past performance does not guarantee future returns, but you'll probably get good returns anyway." Lots of other countries have experienced very very bad market returns but this point is hand-waved away because the USA is not those other countries, but nothing lasts forever...

In order to ditch the PP, I would need to be convinced that the PP's theory is wrong and that another portfolio has a superior and more correct theory behind it.
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Re: Why do you use the PP?

Post by mathjak107 » Mon Jul 13, 2015 4:48 pm

the pp always appealed to me because it was a simple strategy and  not that volatile .    i just can't do it myself because i  do not like not maximizing my pucker factor potential , i prefer to go right up to the line of what i am comfortable with .  but that does not mean it isn't right for you guys or those who have more money than they want or need .

especially if you are going to make your retirement nest egg from other sources , why not go with it . ,
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Re: Why do you use the PP?

Post by barrett » Mon Jul 13, 2015 5:15 pm

I like the PP because it's not based on hoping or even believing that stocks will continue to do well. That seems to be the primary foundation behind most allocations. If stocks continue to pump out gains, great. A PP investor will reap some of those gains (and with a thriving stock market, much of the time the actual allocation to stocks will be above 25%).

Most likely I'll be retiring within five years or so and the cash component is a beautiful attribute during the withdrawal phase that I didn't fully appreciate before. Ditto for sequence of returns. Fewer down years makes a big difference if you are not lucky enough to have your retirement coincide with boom times.
Pointedstick wrote: In order to ditch the PP, I would need to be convinced that the PP's theory is wrong and that another portfolio has a superior and more correct theory behind it.
Agree with that though I am tempted to fiddle with percentages. But I think that is because I am a relative newcomer to this way of investing. And, back to my point above, it's built into the PP that much of the time one is more heavily invested in assets that are hot.

Though I am not there 100% yet, the idea of being future agnostic towards financial markets really appeals to me. Again, it's not a portfolio based on hope... except that we hope it thrives in a low interest rate environment!
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Re: Why do you use the PP?

Post by Pointedstick » Mon Jul 13, 2015 5:21 pm

I am also tempted to fiddle with the percentages to adjust for the likelihood that certain conditions are more likely than others (e.g. prosperity is more common than catastrophe). But I haven't actually done it, and I like that I can sort of "virtually" do so by simply buying more of a particular asset in my VP.
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Re: Why do you use the PP?

Post by mathjak107 » Mon Jul 13, 2015 5:35 pm

barrett wrote: I like the PP because it's not based on hoping or even believing that stocks will continue to do well. That seems to be the primary foundation behind most allocations. If stocks continue to pump out gains, great. A PP investor will reap some of those gains (and with a thriving stock market, much of the time the actual allocation to stocks will be above 25%).

Most likely I'll be retiring within five years or so and the cash component is a beautiful attribute during the withdrawal phase that I didn't fully appreciate before. Ditto for sequence of returns. Fewer down years makes a big difference if you are not lucky enough to have your retirement coincide with boom times.
Pointedstick wrote: In order to ditch the PP, I would need to be convinced that the PP's theory is wrong and that another portfolio has a superior and more correct theory behind it.
Agree with that though I am tempted to fiddle with percentages. But I think that is because I am a relative newcomer to this way of investing. And, back to my point above, it's built into the PP that much of the time one is more heavily invested in assets that are hot.

Though I am not there 100% yet, the idea of being future agnostic towards financial markets really appeals to me. Again, it's not a portfolio based on hope... except that we hope it thrives in a low interest rate environment!
well you are still betting on hope , because  you hope rates do not rise  and you hope gold  responds or else you have a portfolio that would be dead in the water as it would be hard even in a good market to have decent gains.

no portfolio is without "hope"  the pp has  its needs too.

the only thing it does is trade off potential upside risk for more downside protection but to do well it still hopes for certain conditions to be trends .
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Re: Why do you use the PP?

Post by escafandro » Mon Jul 13, 2015 6:15 pm

wealth preservation, inverse dollar correlation
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Re: Why do you use the PP?

Post by barrett » Mon Jul 13, 2015 6:17 pm

mathjak107 wrote:
barrett wrote: I like the PP because it's not based on hoping or even believing that stocks will continue to do well. That seems to be the primary foundation behind most allocations. If stocks continue to pump out gains, great. A PP investor will reap some of those gains (and with a thriving stock market, much of the time the actual allocation to stocks will be above 25%).

Most likely I'll be retiring within five years or so and the cash component is a beautiful attribute during the withdrawal phase that I didn't fully appreciate before. Ditto for sequence of returns. Fewer down years makes a big difference if you are not lucky enough to have your retirement coincide with boom times.
Pointedstick wrote: In order to ditch the PP, I would need to be convinced that the PP's theory is wrong and that another portfolio has a superior and more correct theory behind it.
Agree with that though I am tempted to fiddle with percentages. But I think that is because I am a relative newcomer to this way of investing. And, back to my point above, it's built into the PP that much of the time one is more heavily invested in assets that are hot.

Though I am not there 100% yet, the idea of being future agnostic towards financial markets really appeals to me. Again, it's not a portfolio based on hope... except that we hope it thrives in a low interest rate environment!
well you are still betting on hope , because  you hope rates do not rise  and you hope gold  responds or else you have a portfolio that would be dead in the water as it would be hard even in a good market to have decent gains.

no portfolio is without "hope"  the pp has  its needs too.

the only thing it does is trade off potential upside risk for more downside protection but to do well it still hopes for certain conditions to be trends .
The thing is that I think the PP will be fine if/when rates rise, whether they do so quickly or slowly. Yeah, bonds will take a hit. Our bet on bonds is risky in isolation but it only represents 1/4 of the portfolio. Again, to PS's point, this portfolio is based on theory. One or more of the assets should do well when rates rise. Whether that actually pans out, well, we will see eventually... unless of course we become Japan.

I think the Japanification of much of the world's economy is actually more likely than continued prosperity (but I am not hoping for that).
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Re: Why do you use the PP?

Post by barrett » Mon Jul 13, 2015 6:27 pm

I have mathjak on the ropes! Almost ten minutes have passed since my last post. I can smell victory! :)
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Re: Why do you use the PP?

Post by barrett » Mon Jul 13, 2015 6:39 pm

Pointedstick wrote: I am also tempted to fiddle with the percentages to adjust for the likelihood that certain conditions are more likely than others (e.g. prosperity is more common than catastrophe). But I haven't actually done it, and I like that I can sort of "virtually" do so by simply buying more of a particular asset in my VP.
PS, Help me understand something. From my point of view, if you buy into PP theory being sound, why even have a VP? Or, put another way, do you really have a PP if your overall allocations are quite different from 4X25? Isn't it then just a portfolio that keeps a bit more cash, gold and LTTs than most people would bother with?
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Re: Why do you use the PP?

Post by Cortopassi » Mon Jul 13, 2015 6:59 pm

I have the PP because in the past I tended to be all in on one asset class or another, and did reasonably well -- until I didn't and ran for the exits.

I like the non-correlated diversification.

And it was supposed to do two major things:

1) Cut my trading way down, to near zero.  Check.  It has.  Stress level is non-existent related to trading, getting in out, stops, etc.  There just isn't any.
2) Make me less emotional about my holdings and the obsession of checking it all the time.  Half check.  I still check too much and am still too emotionally tied to gold, but that is improving.
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Re: Why do you use the PP?

Post by mathjak107 » Mon Jul 13, 2015 7:04 pm

barrett wrote: I have mathjak on the ropes! Almost ten minutes have passed since my last post. I can smell victory! :)
you already know my feeling . the pp will not be a pleasant place to be if rates continue to rise  as that leveraged bond position will always be behind the curve by a lot no matter how much you rebalance for years after rates stop rising.    that can easily over power the rest unless a strong trend develops and even then it can be painful.

you are playing with fire but time will tell.  personally I think the bond position carry's to much weight at these levels along with to much dead money in gold .

can we make this prediction a sticky ?
Last edited by mathjak107 on Mon Jul 13, 2015 7:12 pm, edited 1 time in total.
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Re: Why do you use the PP?

Post by Pointedstick » Mon Jul 13, 2015 7:07 pm

barrett wrote:
Pointedstick wrote: I am also tempted to fiddle with the percentages to adjust for the likelihood that certain conditions are more likely than others (e.g. prosperity is more common than catastrophe). But I haven't actually done it, and I like that I can sort of "virtually" do so by simply buying more of a particular asset in my VP.
PS, Help me understand something. From my point of view, if you buy into PP theory being sound, why even have a VP? Or, put another way, do you really have a PP if your overall allocations are quite different from 4X25? Isn't it then just a portfolio that keeps a bit more cash, gold and LTTs than most people would bother with?
Well, having a VP doesn't mean you don't have a PP. It just means 100% of your net worth isn't in the PP.

As for why I do this, it's sort of ideological and sort of practical. Ideologically, I do want more stocks and shorter-term bonds, and practically, my wife and my Roth IRAs are in accounts that can't do a commission-free PP, so we just run then as 50/50 BH portfolios instead. Good enough. If I tabulate the totals across all my accounts, here's the result as of today:

Stocks: 33%
Long bonds: 22%
Total bond market: 5%
Gold: 17%
Cash: 25%

Feels good to me.
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Re: Why do you use the PP?

Post by mathjak107 » Mon Jul 13, 2015 7:10 pm

your best bet is to do exactly what pointed stick did if you run a variable.

no matter how you try to disguise your re-weighting things with a vp and calling it a separate portfolio your money has no memory as to  which gang it belongs too.

it is like buying a target fund then buying all kinds of other investments  un-doing what the target fund is trying to do .

if you have a vp look at it all together or you are fooling yourself but not your money .

as a true pp'er you have to live with the thought any moment can be the moment you have been waiting for , ( otherwise why hold so much gold  when conditions are so far off for it ?) and to be weighted the wrong way can undo years of waiting for this moment .

so you should look at your total portfolio as just that instead of a part time pp'er with a side bet . . .
Last edited by mathjak107 on Mon Jul 13, 2015 7:22 pm, edited 1 time in total.
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Re: Why do you use the PP?

Post by ozzy » Mon Jul 13, 2015 7:51 pm

I also use the PP because I believe in the theory behind it.  After studying the PP for a couple years I realized its the only truly diversified portfolio.  A 50/50 Boglehead portfolio just doesnt cover all the bases.

Of course I have fiddled with the percentages and made mine more juicy, but I’m comfortable with it.

I sleep at lot better at night.  The piece of mind it provides me has value.  I no longer feel the need to buy and sell funds, or listen to the latest financial advice from the "experts".  Just one simple lazy passive allocation.  I think its a solid portfolio. I love it.
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Re: Why do you use the PP?

Post by goodasgold » Mon Jul 13, 2015 7:53 pm

mathjak107 wrote:


you already know my feeling . the pp will not be a pleasant place to be if rates continue to rise  as that leveraged bond position will always be behind the curve by a lot no matter how much you rebalance for years after rates stop rising.
Yes, mathjak, long bonds *will* be hurt when rates go up. But folks have been predicting this rise for years, so far without much success. And even when bond rates finally do rise sharply, you seem to forget that they will also eventually go down again, reaping big gains for bonds.

In summary, short-term thinking is the curse of most investors, few of whom can ever perform multiple miracles by predicting changes in rates, not to mention fluctuations in other asset classes.

This is why I am a PP investor.
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Re: Why do you use the PP?

Post by dualstow » Mon Jul 13, 2015 8:00 pm

I use the pp so that I can continue to hold stocks without worrying about an exit strategy, an exit being either getting out at the top or saving myself from financial ruin. Both impossible.

I hold a vp (I have read mathjak's comments) and looking at pp+vp, I am about 50% in stocks which is where I want to be.

I can see myself abandoning gold in the future (just before it triples), but I like holding cash and thinking of it as part of my investment package instead of wasted capital, and I love thinking of my 30-YR bonds as insurance.

In short, the pp makes me feel good about my investments. I would never trust myself to put together an ideal portfolio but I really do trust the wisdom of Harry Browne.
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Re: Why do you use the PP?

Post by iwealth » Mon Jul 13, 2015 8:15 pm

mathjak107 wrote: no matter how you try to disguise your re-weighting things with a vp and calling it a separate portfolio your money has no memory as to  which gang it belongs too.

it is like buying a target fund then buying all kinds of other investments  un-doing what the target fund is trying to do .

if you have a vp look at it all together or you are fooling yourself but not your money .
Well put, I agree with this. Not that there's anything wrong with modifying a portfolio to suit one's needs, but when you put 50% of your money in the PP and 50% in a 60/40, your risk and reward profile is that of a 42.5% stocks, 20% total bond, 12.5% long bond, 12.5% gold, 12.5% cash portfolio. I hope people think of allocations this way, but you can never be sure.
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Re: Why do you use the PP?

Post by barrett » Mon Jul 13, 2015 8:22 pm

Pointedstick wrote: If I tabulate the totals across all my accounts, here's the result as of today:

Stocks: 33%
Long bonds: 22%
Total bond market: 5%
Gold: 17%
Cash: 25%

Feels good to me.
Ah, got it. Very PP-ish.

Little side excursion here. I have a bunch of EE and I Bonds and can never figure out how to really categorize them when figuring out what my overall asset allocation really is. They provide some deflation protection but are clearly not long bonds. They are not really cash either because there are gains and taxes to deal with. Anyone else have this "problem"?
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Re: Why do you use the PP?

Post by Dieter » Tue Jul 14, 2015 12:46 am

barrett wrote: Little side excursion here. I have a bunch of EE and I Bonds and can never figure out how to really categorize them when figuring out what my overall asset allocation really is. They provide some deflation protection but are clearly not long bonds. They are not really cash either because there are gains and taxes to deal with. Anyone else have this "problem"?
I think of them as cash - no principle movement. Impacted by inflation, but don't loose NAV when interest rate rise. (And the correlary - no bounce when interest rates drop or money flows to safety.)
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Re: Why do you use the PP?

Post by rickb » Tue Jul 14, 2015 1:29 am

Pointedstick wrote: Well, having a VP doesn't mean you don't have a PP. It just means 100% of your net worth isn't in the PP.

As for why I do this, it's sort of ideological and sort of practical. Ideologically, I do want more stocks and shorter-term bonds, and practically, my wife and my Roth IRAs are in accounts that can't do a commission-free PP, so we just run then as 50/50 BH portfolios instead. Good enough. If I tabulate the totals across all my accounts, here's the result as of today:

Stocks: 33%
Long bonds: 22%
Total bond market: 5%
Gold: 17%
Cash: 25%

Feels good to me.
So - you're not rebalancing your overall percentages to anything in particular, but rather maintaining separate "PP" and "VP" accounts?  This sounds to me very much like Browne's PP rules (never rebalance OUT of your PP, but do whatever you want with your VP including transferring money into your PP).

For the folks who maintain a "VP" to adjust the percentages of your overall portfolio - if this requires selling a "PP" asset (gold seems to be the most hated asset at this point), will you do this?  I.e. do you rebalance to a target allocation across your entire portfolio, or do you maintain separate VP and PP accounts and keep the PP account rebalanced at 25/25/25/25.  More specifically, will you move money from your "PP" to your "VP" to rebalance your overall portfolio?

If so, you're not actually maintaining a PP and separate VP in Browne's sense, but rather changing the allocations of your PP.  If this is what you need to do to sleep at night, go for it - but mathjak is right that if this what you're doing you're not maintaining a PP and a separate VP.  Browne's VP is a separate account.  Managed under any rules you want.  BUT - you never ever transfer money from your 25/25/25/25 PP to your VP.  If this is not a restriction you accept, you don't have a PP and VP - you have a modified PP.
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Re: Why do you use the PP?

Post by mathjak107 » Tue Jul 14, 2015 2:05 am

goodasgold wrote:
mathjak107 wrote:


you already know my feeling . the pp will not be a pleasant place to be if rates continue to rise  as that leveraged bond position will always be behind the curve by a lot no matter how much you rebalance for years after rates stop rising.
Yes, mathjak, long bonds *will* be hurt when rates go up. But folks have been predicting this rise for years, so far without much success. And even when bond rates finally do rise sharply, you seem to forget that they will also eventually go down again, reaping big gains for bonds.

In summary, short-term thinking is the curse of most investors, few of whom can ever perform multiple miracles by predicting changes in rates, not to mention fluctuations in other asset classes.

This is why I am a PP investor.

i would say the  downward  spiral the long bond and its funds has seen for more than  6 months now  isn't exactly predicting rates will rise with no success . 

it is already happening as the long bond' s yield  went up a full point from its low which is a big hit for funds like TLT .

rebalancing from a portfolio being up overall from  gains is a good thing . rebalancing because of losses is never a good thing .

my opinion as you know is if you want to be in bonds this late in the game keep maturities short  as the hand writting is already on the wall and happening .

trying to be a contrarian now will be  taking a  big risk trying to catch a falling knife since  gold has been going no where but down , cash is producing little , bond values have been falling  and equities seem to be the only thing producing some positive gains and struggling at that  .  in effect you are risking a bet on some calamity happening to give you positive returns .  other wise the weight on bonds and gold will pull you down as it has been doing in what seems to have become the new normal. .


what are the returns on the 4 part pp since bnds flipped in january ?  i don't track the pp except for the time frame i bought a few weeks ago before changing my mind so i don't know but i doubt they are positive with TLT down 7% including interest ,  gld is down over 2%
vti is up 3.50%

on the other hand more conventional  models like the fidelity insight models which are typical of any mix with those allocations  , since the turn in bonds  are up .

the conservative income and capital preservation model with 26% equity and shorter maturity bonds are up 1.90%  , the growth and income model is up 3.60% and the  growth model up almost 6% .

if i wanted to run the pp at this stage i would do 50% in the pp so you know at least 1/2 your assets are going to be low volatility, ( they have not proved to be safer over the long term , only less volatile with lower returns to match  )    and the other half in a growth and income model where you are not betting so heavy on interest rates and gold .

the combo of the two should give you a much better balance and far less risk tied  to interest rates and gold.


in times of such uncertainty for gold and heavy bets on bonds  and not knowing if finally after decades the pp is meeting it's waterloo it isn't a bad idea to try to use a variable pp just in case times have changed and like everything in life eventually what worked  doesn't.

just keep the total mix of the two in a range you can sleep at night.

perhaps if you are a fidelity user 2/3's in the fidelity insight income and preservation model and 1/3 in the growth and income model may be a good balance to look in to if you are not happy with the pp or nervous about the pp going forward.  . .

because  folks pay for that subscription i can't disclose what funds the models hold but you can catch a free older issue from their web site for some older models that were used .

i think as of this month my subscription is up  and i likely will not renew since i decided to go with my own model for retiremt which starts in 10 more working days .  YIPEEEEEE!
Last edited by mathjak107 on Tue Jul 14, 2015 4:42 am, edited 1 time in total.
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Re: Why do you use the PP?

Post by bedraggled » Tue Jul 14, 2015 5:01 am

As Goodasgold mentioned, rates could drop after climbing.  This morning's CBS News radio business report mentioned crude oil is down to the $51 neighborhood and Iran wants to bring more supply to the world market.  Another deflation indicator.  Can oil drop below $20?  Traders have pushed oil that low in recent history- without a deflationary scenario. Now, with deflation?

That velocity of money post may just indicate deflation may be upon us.  The dollar index, DXY, is at around 96, after climbing from 79 last August.  Maybe the Euro will help!  Ha ha!

So, we might conclude that the bond cycle has, or is ready to, reverse but these are not ordinary times.  I proposed a deflation portfolio last October of 40% LTTs and 30% cash.  Got a few chuckles with that.  So, what to do?  Maybe nothing but despair and hold 25/25/25/25 as TLT surges to new highs.  We saw "The King and I" on stage a couple of weeks ago.  This whole bond scenario: "It is a puzzlement."

Doing nothing seems to have worked for my family in the last 19 years since we moved back to Manhattan.  Next month my wife and I will convene our annual "G-2" meeting and probably agree to do nothing for another year.

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Re: Why do you use the PP?

Post by mathjak107 » Tue Jul 14, 2015 5:09 am

of course rates could drop  , but if the party ends at midnight we are likely at 10 or 11 pm.

that is a risky bet .  if you said to me you were going 50% equity's and 50% long term bonds  i would not think it was as risky of a bet.

so in my opinion if there ever was a time to have a variable portfolio i think now is the time.

I say that because we have bedfellows that never happened before. things like low interest rates and high stock valuations .  we have gold and long term bonds following each other down.

it used to be if markets fell 15% at the historical norm interest rates made you whole again in two years ready to move on .

lots of very different situations going on and I would hedge the fact gold and bonds are moving together more than they move opposite now.

a variable portfolio can do that ..

just google  lazy portfolio's and many models will come up.
Last edited by mathjak107 on Tue Jul 14, 2015 6:17 am, edited 1 time in total.
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Re: Why do you use the PP?

Post by barrett » Tue Jul 14, 2015 6:22 am

Serious question for you, mathjak...

With all your doom and gloom about gold and bonds, doesn't it concern you at least a little that stocks are only up 2% this year? Even that slightly positive figure is only because the last two trading days have been good to stocks. Otherwise they are flat for 2015. Shouldn't that asset really be rocking right now? Cash will at least keep you even in the short run. Isn't putting 50% of your assets in an asset that is struggling to keep its head above water pretty darn risky? If fundamentals are so bad all around, why not go all to cash for a while?
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Re: Why do you use the PP?

Post by mathjak107 » Tue Jul 14, 2015 6:31 am

you hit the nail on the head . equity's are only up 2%.

so with little oomph behind them and everything else not only at a loss but typically running longer cycles than equities I would want to give my equity's a fighting chance without crushing them under two very damaging potential assets today namely long term bonds and gold .

historically stocks have always cycled around faster even when they dip so if I had to hitch my wagon to a horse that  would be my choice .

that has always been the best gainer long term and had near zero loses over 20 or more years unless self inflicted. . even 15 years has been loss free.

thinking this time is different has always lost money for investors over the long haul.

so with that in mind I think a variable portfolio with at least some of the money will be a good hedge against those long term bonds and gold if they continue to turn nastier.
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sometimes winning is by not losing or losing as much and mitigating what seems to be causing the losses is always a good idea.

trends always have plenty of time to make changes  and as you all know by now I firmly believe no portfolio  is forever and they need to be nudged like steering a big ship to keep it on course.
Last edited by mathjak107 on Tue Jul 14, 2015 6:52 am, edited 1 time in total.
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