New Here - I want to make sure I got the basics!

[Sir_Bondalot]

Hi All,

Just joined after sneaking around here for awhile. I figured it's about time.

I've always been a boglehead, and still am in many regards, but I've also read portions of Harry Browne's fine book several years ago in college, and have slowly come around to the perm portfolio side of things.

Anyway, two questions:

1. Given my age of mid-20's, would the permanent portfolio's focus on capital preservation grow my assets during my accumulation years too slowly? In other words, should I take on more risk (say a standard vanilla 80/20 portfolio), given the amount of time I have until retirement. I may be thinking about this all wrong. But just curious if people my age typically use a permanent portfolio, or if this is more to reduce drawdowns once you get older?

2. Here's how I would implement my portfolio. Tell me if I'm doing anything wrong

25% Cash: Online CD's paying 2.25%, Savings accounts
25% LT Bonds: Buying longest term treasury bonds I can find in secondary market via vanguard acct Roth IRA brokerage
25% Equities: 401k and vanguard Roth IRA Mid cap funds and REIT Index (I like midcaps, maybe bad idea to slice and dice). My reasoning here is to go ahead and take more risk in the equities side of things.
25% Gold: Physical and an ETF in vanguard Roth IRA brokerage (GLD, IAU, etc.)

[Kriegsspiel]

Hi All,
1. Given my age of mid-20's, would the permanent portfolio's focus on capital preservation grow my assets during my accumulation years too slowly? In other words, should I take on more risk (say a standard vanilla 80/20 portfolio), given the amount of time I have until retirement. I may be thinking about this all wrong. But just curious if people my age typically use a permanent portfolio, or if this is more to reduce drawdowns once you get older?

I started using the PP in my mid-20s too. You could take some risk on the VP side of things, if you want. Or you could invest "with your gut" in the VP;
get into EM or utility stocks or something, whatever you think is smart. Looking back at my records, I had about a 75% PP, 25% VP split starting out, and I increased the VP by about 10% each year until I had about an even split, but I had a really high saving rate.

If I were starting over right now, I'd be building up the PP side of things. Anything outside the PP would go towards real estate (if it was a good value in my area) or a really conservative portfolio (like 80% cash/20% VT) for now. If you have a low savings rate, you have less to worry about since you'll be dollar cost averaging over a longer time, but if your savings rate is really high, you probably don't want to dump a ton of money into stocks right now unless you also plan on working for a long time, IMO.

Keep the PP mechanical, let it sit there earning a steady low return; that's the money you don't want to risk. Use what's left to buy real estate, start a business, buy risky investments, day trade, etc. I will say though, just because you're young, you don't have to take big risks! Buy less shit, don't take out a bunch of debt, and save more. Retirement can come sooner than you think.

2. Here's how I would implement my portfolio. Tell me if I'm doing anything wrong

25% Cash: Online CD's paying 2.25%, Savings accounts

CDs are ok for some cash, but I wouldn't keep all of it there just in case something crazy happens with that particular bank or the economy in general. Buy some 1 year Treasuries and some I-bonds too.

25% Equities: 401k and vanguard Roth IRA Mid cap funds and REIT Index (I like midcaps, maybe bad idea to slice and dice). My reasoning here is to go ahead and take more risk in the equities side of things.

Save the slice-and-dice for the VP, just use an SP500 or TSM fund in the PP.

[sophie]

Welcome!!

There's nothing wrong with your implementation, but I agree with Kriegspiel about diversifying your cash holding. Set up a treasury bill autoroll program with an online brokerage or Treasury Direct. Or, some forum members like the short term Treasury ETFs SHV (T bill equivalent) or SHY (3 year).

A caution about I Bonds for someone your age: when the bonds mature at 30 years, tax will be due on *all* the interest collected over 30 years whether you cash the bond or not. In 30 years you'll be in your mid 50s, when you may be at your peak earning level and in a correspondingly high income tax bracket. I suggest you consider the option of paying the taxes annually instead of at the end, if you do decide to use them. I believe once you go this route, it applies to all of your bonds including ones bought in future - not sure about that though.

[Tyler]

1. Given my age of mid-20's, would the permanent portfolio's focus on capital preservation grow my assets during my accumulation years too slowly? In other words, should I take on more risk (say a standard vanilla 80/20 portfolio), given the amount of time I have until retirement. I may be thinking about this all wrong. But just curious if people my age typically use a permanent portfolio, or if this is more to reduce drawdowns once you get older?

Typical Bogleheads-style asset allocation philosophy generally boils down to the idea of maximizing tolerable risk in order to get the most return out of your investments, which is why they talk so much about risk tolerance and the overall percentage of stocks in your portfolio. The PP appeals to me personally because I have a different perspective. First, the most important investing goal to me is not to maximize risk or even potential account balances, but to meet my important life goals with minimum uncertainty. And second, I've learned from my own research that the percentage of stocks in a portfolio is a terrible proxy for performance. Not all stocks and bonds are created equal, and efficient asset allocation is a lot more interesting than the old "age in bonds" rule of thumb. So rather than focus on maximizing tolerable risk by loading up on stocks, I personally think young investors would be much better served by maximizing their savings rate and investing in a stable portfolio they'll be comfortable sticking with in both good times and bad. The key to wealth is not to gamble in the markets but to invest in your own career and save like crazy.

That said, I do have a bit of small caps in my VP to tilt my PP a little more towards prosperity. I've found that it boosts returns a bit without sacrificing the famous stability that makes the PP so appealing. You might search the forum for "Golden Butterfly" if you want to know more about that, but it's just my own modification and is not part of standard PP advice.

2. Here's how I would implement my portfolio. Tell me if I'm doing anything wrong

25% Cash: Online CD's paying 2.25%, Savings accounts
25% LT Bonds: Buying longest term treasury bonds I can find in secondary market via vanguard acct Roth IRA brokerage
25% Equities: 401k and vanguard Roth IRA Mid cap funds and REIT Index (I like midcaps, maybe bad idea to slice and dice). My reasoning here is to go ahead and take more risk in the equities side of things.
25% Gold: Physical and an ETF in vanguard Roth IRA brokerage (GLD, IAU, etc.)

I'd recommend diversifying the cash with some true treasury funds like SHY. Cash in the PP is less about yield and more about protection, and Online CDs may have more counter-party risk than you probably realize.

For stocks, the normal PP allocation is a TSM fund like VTI. I also like midcaps and am not opposed to including a dedicated fund in your stocks, although perhaps you can consider them part of your VP. Despite their formal classification as stocks, REITs are really a different animal with just as much in common with real assets like gold and commodities. I would treat those completely separately from your stock allocation.

[buddtholomew]

Excellent responses so far.
You're young and may have 70 more years to invest.
My personal opinion is to take more risk on the equity side but continue to hold all 4 PP assets.
50/20/20/10 is a reasonable allocation or thereabouts.

[sophie]

Yes, stocks are great...until they aren't. Which I think our new PP investor has already figured out.

If your goal is aligned with that of the PP - that your wealth comes from your career and the role of investments is to protect and enhance it (see Harry Browne's rules in addition to Tyler's post above) - then you don't want to overdo it on stocks. There's a ton of recency bias going on. People forget that for a period of over 10 years (1999 - 2009/10), the S&P 500 returned practically zero. Of course it depends on which 10 year period, but it would have been no fun to retire or lose your job in that time frame. Ditto for the 1970s. Which means in the past 50 years, there's been two decades (~40% of the time) where traditional stock/bond portfolios did poorly.

The Golden Butterfly is nice because it's a safe way to pump up returns a bit, with a slightly larger stock allocation and still sufficient quantities of the defensive assets. Just realize it would probably only have done so 60% of the time in the past 50 years (ignoring the Great Gold Debates about the early 1970s). And, I'm surprised at the number of people advising a greater overall allocation to stocks, via PP tweaking, separate portfolio or what have you. I guess that's a reasonable thought given someone starting out in their 20s.

[eufo]

1. Given my age of mid-20's, would the permanent portfolio's focus on capital preservation grow my assets during my accumulation years too slowly? In other words, should I take on more risk (say a standard vanilla 80/20 portfolio), given the amount of time I have until retirement. I may be thinking about this all wrong. But just curious if people my age typically use a permanent portfolio, or if this is more to reduce drawdowns once you get older?

Kudos for starting in your 20's. I wish I had!

I think the PP will be harder to follow for a younger person because of the way it's constantly hedged. When the market is rallying hard and your friends and colleagues are crushing your returns just by simply investing in SPY, you may get the dreaded FOMO and dump out at the exact wrong moment. I think you'll probably want something a bit more aggressive, while keeping risk at bay.

Tyler's site is an excellent place to get information regarding a multitude of asset allocations and how they've performed over the last 47 years roughly. His Golden Butterfly allocation deserves some interest. I use a modified version of it and have been very pleased with the results.

Not only should you look at the assets as they have performed, but then dig a little deeper into the actual instruments you'll be able to access to see if they will be able to mirror the results. Tyler lists different options, but you'll do yourself a favor to investigate a little on your own as well.

[Kriegsspiel]

I think the PP will be harder to follow for a younger person because of the way it's constantly hedged. When the market is rallying hard and your friends and colleagues are crushing your returns just by simply investing in SPY, you may get the dreaded FOMO and dump out at the exact wrong moment. I think you'll probably want something a bit more aggressive, while keeping risk at bay.

Not many of our peers talk about their stock holdings at the cocktail parties like you used to hear about. But they might be beating the PP by just paying down their student loans.

[eufo]

Not many of our peers talk about their stock holdings at the cocktail parties like you used to hear about. But they might be beating the PP by just paying down their student loans.

You do have a point. I only have a few friends that talk to me about holdings. I'm honestly shocked by how many middle class folks aren't invested at all. They're too in debt, even the ones with decent salaries. No one I know is currently invested beyond a retirement account. And the one I knew only bought like $5,000 of AAPL after getting a bonus at work, telling me it's Apple so it has to always go up. As I do, I played devil's advocate and, even though I love Apple, told him that the price can always go down, but it's probably a great long-term hold. He bought in at about $125/share and sold at around $95/share because he needed the money for something else. Now he feels kinda burned and probably won't ever buy stock again, especially since it's around $160/share now. This guy makes a lot more income than I do, but he sure knows how to spend it all... and then some.

Does anyone think investing is going to be a rich man only game?

[jhogue]

Welcome to the forum. In answer to your questions:

1. I think it is more important to save than it is to invest. Why? Because you can control your rate of savings. You cannot control your investment rate of return. Congratulations on getting a head start over your peers.

2. While I agree with what others have said about your choice of equities, I think it is more important that your chosen portfolio has broad diversification among four assets. It has taken me most of my financial lifetime to realize that diversification is one of the few free lunches in the world of investment.

[ochotona]

I think for someone in their 20s, the standard PP is too cautious "on average". However, these are not average times. Stocks are over-valued, some say in a bubble.

https://www.hussmanfunds.com/weeklyMarketComment.html

If you were to go grab a big slice of stocks, and then experience a 50% loss, I think that would be very demoralizing. I don't understand why advisors think young people should seek emotional torment more than their elders. I think the PP is a fine place to start, then you may have to wait 0-3 years-ish for a possible big move downward in stocks. People like Hussman think 50%-60% down, like the prior two bear markets. And not only him. If you get that opportunity, and you'll know it when it happens, everyone will be talking about the "death of equities", all of your friends and family will tell you to even sell your 25% PP equity stake, then you could try up to a 40% PP and 60% VP configuration, where the VP is substantially all equities and REITS. That would bring you to 70% equities, 10% gold, 10% cash, 10% bonds. A big equity slice for sure, but hopefully starting from a low Shiller PE Ratio, or CAPE value. No one who bought stocks in 2009-2010 regrets it. They have been fantastic. To find another opportunity like that over the coming years would be a family-changing event.

http://www.multpl.com/shiller-pe/

I also advise my daughter, aged 20, to be very cautious now, she's maybe 50% equities, 50% bonds in the AOM ETF, but she has significant cash on the side, and she gets to inherit my gold someday, so she has kind-of a provisional or virtual PP, without intentionally using that design.

If we get a CAPE in the 10-15 range, I am going to advise she go heavy equities. If below CAPE 10, then 100% equities in her ETFs, then hold on tight as the comes out of the gate. Rinse and repeat a few times over her lifetime.

[ochotona]

ochotona,

I love your new avatar!
But I would hesitate to take any advice from John Hussman who has misread the market with his seemingly intelligent analytics for so long, he is worse than the proverbial stopped clock.

At least he admits he was wrong, and analyzes why. His call for -50% to -60% drop in the SP500 is not unprecedented, it happened twice this century already, and the century is still young, and the Central Banks keep stimulating.

[Sir_Bondalot]

Wow, such fantastic advice here. Thank you all for replying. I'm trying to get my father started on the PP as he is a few years from retirement.

I never gave my VP much thought, but I would like to keep my REIT's so I will make that apart of my VP. Only have several thousand in there, and I guess I have a lot of thinking to do to determine how much to allocate to my VP vs my PP. It will take some soul searching for sure.