Is the PP a Libertarian Investment Philosophy?

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jalanlong
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Is the PP a Libertarian Investment Philosophy?

Post by jalanlong » Thu Jul 29, 2021 6:16 pm

Since the PP was started by Harry Browne, I feel like a lot of people on other investment sites try to pigeonhole it as a crackpot Libertarian investment philosophy. Having such a large percentage of the portfolio in Gold probably doesn't help that image.

However, is it really that Libertarian? No true Libertarian would put 50% of their portfolio in government debt would they?

https://mises.org/library/dont-buy-government-bonds

I think we have established on this forum that people of all political persuasions can buy into the PP. If it is not political, then what characteristics would make up a PP proponent? And if it is not the PP, what is a more true Libertarian investment philosophy? Equal weights of stock, gold and bitcoin?
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Maddy
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Re: Is the PP a Libertarian Investment Philosophy?

Post by Maddy » Thu Jul 29, 2021 8:26 pm

jalanlong wrote:
Thu Jul 29, 2021 6:16 pm
[T]hen what characteristics would make up a PP proponent?
The top characteristic, I'd say, is our proclivity for independent thinking. I say that because of what I observed when the PP forum was a mere thread on the Boglehead site. The more I read of that thread, the stodgier and more rigid the Bogleheads appeared to me. (And the more contempt they expressed for our out-of-the-box thinking).
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Re: Is the PP a Libertarian Investment Philosophy?

Post by sophie » Fri Jul 30, 2021 8:38 am

Well said vincent!

It's not just about the gold. It's how those three volatile asset classes were chosen to be as uncorrelated with each other as it's possible to get. All other asset classes are either strongly correlated with one of them (e.g. the different stock classes), or correlate with a mix of them (e.g. corporate bonds, TIPS). That's why there's no need to invest in corporate bonds or TIPS - you already have the bases covered with the PP's assets.

It's such a beautiful scheme. And yes it's not for the sheeple, you have to be an out of the box thinker to go for something like this. But, there's more to it: the PP also incorporates elements designed to protect you from government meddling, and that's where the libertarian philosophy comes in. You have to first believe that government meddling is almost never a good thing.
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Re: Is the PP a Libertarian Investment Philosophy?

Post by I Shrugged » Fri Jul 30, 2021 11:49 am

I agree that the gold is attractive to libertarians. And repellent to progressives/ world improvers.
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Re: Is the PP a Libertarian Investment Philosophy?

Post by Kbg » Fri Jul 30, 2021 9:43 pm

Maddy wrote:
Thu Jul 29, 2021 8:26 pm
The top characteristic, I'd say, is our proclivity for independent thinking. I say that because of what I observed when the PP forum was a mere thread on the Boglehead site.
Surely you jest Maddy.

I read both boards frequently and this place is just as true religion as Bogleheads and generally as much or more hostile to those not practicing the correct religion here.

The Other Discussions part of the board completely demolishes any credibility to a statement of a "proclivity for independent thinking."

Different thinking is not independent thinking. Independent thinking is letting your opinions be shaped by and changed according to new information to include doing 180s on previously held opinions.

An objective data based view of the PP is that it has less volatility than a stock only or a stock and bonds portfolio and the cost of a smoother ride is worse performance over longer term periods. This trade off is as close as you can get to physics in the investing world. It does very well during periods of serious stock market duress and gives it all back and more when that is not the case.

Risk vs. return is a preference we all have to dial our personal meters to. As such, the PP is a great portfolio for those who want the meter a little more to the left and as one nears retirement and has to worry about sequence risk it's a really good option unless you are thinking of passing along legacy wealth. Not to mention it is a relatively simple asset allocation to manage with a good theoretical foundation if you're into correlations and other financial characteristics.

A frequently stated thing you will see when involved in investing is don't let your politics drive your asset allocation or trading decisions. This is outstanding advice.

At the end of the day the PP shouldn't be a religion, a political statement or anything like that. It's an asset allocation model, it behaves differently than other asset allocation models because it holds different assets. That's it.
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Re: Is the PP a Libertarian Investment Philosophy?

Post by Kriegsspiel » Sat Jul 31, 2021 9:07 am

Kbg wrote:
Fri Jul 30, 2021 9:43 pm
An objective data based view of the PP is that it has less volatility than a stock only or a stock and bonds portfolio and the cost of a smoother ride is worse performance over longer term periods. This trade off is as close as you can get to physics in the investing world. It does very well during periods of serious stock market duress and gives it all back and more when that is not the case.

Risk vs. return is a preference we all have to dial our personal meters to. As such, the PP is a great portfolio for those who want the meter a little more to the left and as one nears retirement and has to worry about sequence risk it's a really good option unless you are thinking of passing along legacy wealth. Not to mention it is a relatively simple asset allocation to manage with a good theoretical foundation if you're into correlations and other financial characteristics.
That's right, the PP just putters along. My personal philosophy is to have x years of spending invested in the PP, and I give myself leeway to do what I want with the rest. I don't expect massive returns in the PP, I just want a better version of "cash." I don't think it's libertarian, I think it's worry-free agnosticism, which is how I live my own life so it's a good fit.
You there, Ephialtes. May you live forever.
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Re: Is the PP a Libertarian Investment Philosophy?

Post by sophie » Mon Aug 02, 2021 10:44 am

Yes well put Kbg! The PP is about protecting your nest egg, not striking it rich.

One thing we'd all discussed is using the PP for "core" retirement savings, i.e. enough to live on, and any savings beyond that can be 100% stocks. If the stocks lose value or go flat for a decade like they have in the past, you'll be frustrated but at least you'll collect the dividends and won't be forced to sell. And of course you'll have the potential upside of outsized gains, with the ability to buy individual stocks in taxable to play the capital loss tax game.

My mother's savings are heavily into individual stocks, and she's done quite well plus has a lot of losses built up so that she could probably sell the whole lot and not pay a penny in taxes. I'm a bit jealous! The index fund approach has its good points, but it sucks when it comes to tax liability.
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Re: Is the PP a Libertarian Investment Philosophy?

Post by glennds » Mon Aug 02, 2021 11:03 am

sophie wrote:
Mon Aug 02, 2021 10:44 am


My mother's savings are heavily into individual stocks, and she's done quite well plus has a lot of losses built up so that she could probably sell the whole lot and not pay a penny in taxes. I'm a bit jealous! The index fund approach has its good points, but it sucks when it comes to tax liability.
Please help me understand this. If her losses are equal enough to her gains such that she would not pay a penny in taxes when selling the whole lot, then why do you say she's done quite well?
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Re: Is the PP a Libertarian Investment Philosophy?

Post by SomeDude » Mon Aug 02, 2021 12:07 pm

glennds wrote:
Mon Aug 02, 2021 11:03 am
sophie wrote:
Mon Aug 02, 2021 10:44 am


My mother's savings are heavily into individual stocks, and she's done quite well plus has a lot of losses built up so that she could probably sell the whole lot and not pay a penny in taxes. I'm a bit jealous! The index fund approach has its good points, but it sucks when it comes to tax liability.
Please help me understand this. If her losses are equal enough to her gains such that she would not pay a penny in taxes when selling the whole lot, then why do you say she's done quite well?
I think she is referring to the whole lot of losers. This is the tax advantage of individual stocks over the index.
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Re: Is the PP a Libertarian Investment Philosophy?

Post by SomeDude » Mon Aug 02, 2021 12:58 pm

If you perfectly recreated the S&P with the 500 stocks in the exact same proportion on Jan 1, by Dec 1 you'd have virtually the identical return as the index. Excluding transaction you'd be ahead because of 0% management fees.

You could then sell all the losers and have a big capital loss to offset taxes now and for years most likely.

You would have to diverge from the index and would be selling weak stocks instead of buying them, but maybe you could buy them all back in a month so no wash sale.....
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Re: Is the PP a Libertarian Investment Philosophy?

Post by sophie » Tue Aug 03, 2021 2:12 pm

SomeDude wrote:
Mon Aug 02, 2021 12:07 pm
glennds wrote:
Mon Aug 02, 2021 11:03 am
sophie wrote:
Mon Aug 02, 2021 10:44 am


My mother's savings are heavily into individual stocks, and she's done quite well plus has a lot of losses built up so that she could probably sell the whole lot and not pay a penny in taxes. I'm a bit jealous! The index fund approach has its good points, but it sucks when it comes to tax liability.
Please help me understand this. If her losses are equal enough to her gains such that she would not pay a penny in taxes when selling the whole lot, then why do you say she's done quite well?
I think she is referring to the whole lot of losers. This is the tax advantage of individual stocks over the index.
Yes, exactly.

Let's say you buy an index, and it goes up 10%. You need to sell some to generate income. You'll pay capital gains on the 10%, and there's nothing you can do to avoid it.

Now let's say that instead of an index, you bought a basket of stocks (let's say 10 of them). Now let's say that a couple of them went up a lot (> 20%), some of them went up by 10%, and about half were losers with a couple being big losers. You now have the option to choose what to sell in order to end up balancing the realized gains with losses, so your tax bill is zero. Plus you can offset $3000 in ordinary income every year.

Depending on your state + fed cap gains and ordinary income tax rate, the amount of tax you manage to avoid this way could be large enough that even if you underperform the index with your basket of stocks over time, you still come out ahead.

It's a slight wrinkle on the usual philosophy that an index fund is always the best choice to maximize long term gains. That it is, and for sure it's the best option for a tax-advantaged account. But in taxable investing, this stuff becomes important. I wish I'd realized that a long time ago.
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Re: Is the PP a Libertarian Investment Philosophy?

Post by SomeDude » Tue Aug 03, 2021 2:27 pm

vincent_c wrote:
Tue Aug 03, 2021 2:18 pm
sophie wrote:
Tue Aug 03, 2021 2:12 pm
But in taxable investing, this stuff becomes important. I wish I'd realized that a long time ago.
No it doesn't actually do anything except to defer capital gains which is only useful if you believe you will be taxed lower in future years. Not a great way to plan. Over a general retirement investment timeframe, how many randomly selected S&P500 stocks had negative returns?
No advantage to tax deferral eh?

Most people are taxed lower in retirement than in their prime earning years.
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Re: Is the PP a Libertarian Investment Philosophy?

Post by Xan » Tue Aug 03, 2021 2:40 pm

As Sophie pointed out, you can take up to $3,000 of losses each year to offset income. That's unquestionably a win.
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Re: Is the PP a Libertarian Investment Philosophy?

Post by glennds » Tue Aug 03, 2021 11:19 pm

Of course, the other distinction in the apples/oranges comparison, is the difference between active and passive investing. Yes index funds have a management fee. Yes, index funds bundle losses and gains together such that the investor does not have the ability to selectively harvest one and not the other.
However, index funds are passive set and forget investments, which for many can be a performance advantage that outweighs the benefits of selectively harvesting losses.
There's also an issue of the time involved in self managing.
If you are an investor who is comfortable making stock selections, trusts their own buy/sell decisions, and has the time to do so, it is definitely an option.
But I would be wary of trading performance for tax efficiency.
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Re: Is the PP a Libertarian Investment Philosophy?

Post by D1984 » Wed Aug 04, 2021 6:24 am

vincent_c wrote:
Tue Aug 03, 2021 10:55 pm
SomeDude wrote:
Tue Aug 03, 2021 2:27 pm
vincent_c wrote:
Tue Aug 03, 2021 2:18 pm
sophie wrote:
Tue Aug 03, 2021 2:12 pm
But in taxable investing, this stuff becomes important. I wish I'd realized that a long time ago.
No it doesn't actually do anything except to defer capital gains which is only useful if you believe you will be taxed lower in future years. Not a great way to plan. Over a general retirement investment timeframe, how many randomly selected S&P500 stocks had negative returns?
No advantage to tax deferral eh?

Most people are taxed lower in retirement than in their prime earning years.
Well I specifically mentioned that it is only useful in this situation. But I personally think it is a better plan to try to increase income even after retirement. There are also ways to lower taxable income prior to retirement so I guess it is ymmv.
There's actually a complex interplay between CAGR (compound annual return on an investment), the length of the time period invested that the investment is allowed to compound for, and the tax rate; suffice it to say, for high enough rates of CAGR and long enough time periods it can sometimes make sense to defer even if the tax rate paid on a deferred basis when you finally do sell with massive gains--thus pushing you into a high bracket because you realized it all in one year rather than it being spread out over several decades--is a higher (or much higher) rate than you would've paid if you'd realized gains each year and paid taxes on them at a lower rate.

You probably remember that example of the power of compounding where you were asked "would you rather have a penny that doubled every day or a million dollars" where the penny that doubled was worth far more in the end. Some finance teachers (or finance textbooks) take it further by showing what a say, 15% capital gains tax on each doubling (which is not all that high in terms of absolute tax rate) would do in terms of reducing the final amount versus paying no tax at all (it takes it from $5,368,709.12 down to $559,731.98; that is almost a tenfold reduction despite the tax difference being only 15 percent). In this scenario you would be better off deferring and then paying taxes at, say, even an 89% rate (letting it compound by doubling each day untaxed and then paying 89 percent of your gains in tax at the end of 30 days) rather than paying a seemingly much more measly 15% rate on your gains at the end of each day (end of each doubling period).

The above is obviously an absurd example (if you can find me any actual real-life investment that can compound at 100% per day I'm not going to much care about what the tax rate I pay is) but it does serve to illustrate the point. This point even holds with much more reasonable assumptions; assuming a yearly CAGR of 7.50% and a 30 year deferral period you are still (slightly) better off at a 30% tax rate deferred (pay tax only in year 30 when you realize the gain) vs realizing the gains every year and only paying 15% on them each time you realize said gains (i.e. once per year) because in the former scenario you don't have the tax nipping away each year at money that would've compounded further each year had you not had to pay it in tax.

The longer the deferral period and the higher the CAGR the more it makes sense to defer and the larger the difference between the deferred vs non-deferred tax rate grows that allows you still come out ahead.

Note: None of the above has to do with paying tax on the principal now vs later (the whole "Roth IRA vs regular IRA" discussion AKA "pay tax on the seed corn or on the harvest" ); the above is just about when and whether it makes sense to defer taxes on earnings/gains even if it means paying a higher rate later.
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Re: Is the PP a Libertarian Investment Philosophy?

Post by Kbg » Wed Aug 04, 2021 9:02 am

glennds wrote:
Tue Aug 03, 2021 11:19 pm
But I would be wary of trading performance for tax efficiency.
+1000
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