Relative Newbie... Not happy with 1 year performance

[Pointedstick]

If an orthodox 4 x 25% PP has a losing year, it's hard to imagine a portfolio that would do better without being a lot riskier. It's possible that PRPFX could outperform a PP in any given year, but I could say that about any ETF or mutual fund, so at that point you're not really talking about a PP anymore. I think the OP's issue was that he thought he was getting PP-like performance when there's no guarantee that's true. We all know the PP can have a down year, but I think it's easier to stomach your investment choices falling because of unfavorable market conditions rather than because you hadn't invested in what you thought you had.

Testing your suggestion, going 90% PRPFX and 10% EDV would indeed juice the returns a bit. A backtest shows a small gain in the OP's timeframe:




... But it still gets destroyed by a real PP, and with a tad less volatility too:

[Ad Orientem]

PRPFX is a good fund. That's not something I say lightly since I have a strong prejudice against actively managed mutual funds. But its asset allocation is based on an early incarnation of Harry Browne's PP and it is definitely weighted towards an inflationary scenario. Thus it tends to perform more poorly in a deflationary/depression environment like what we saw in 2008 and are experiencing right now. If and when the Fed starts cranking up the printing press again PRPFX will likely do better than a straight 4x25 PP.

One way to fix the imbalance as suggested by Medium Tex is simply to add a little EDV to your PRPFX. Say a 90/10 ratio should really help counterbalance the heavy weighting towards inflation.

[craigr]

So, I'm starting to consider cutting my losses, bailing on the principles of the PP.  But before I go, wanted to invite any comments, words of encouragement or enlightenment.

First I will say that no investing system will guarantee you will never have losses. Even putting all your money in cash right now guarantees a -3% loss due to inflation. But if a -5.5% loss is really bothering you, you may want to consider significantly increasing your cash allocation to the portfolio so it is even less volatile.

The fund's main benefit is that it is convenient. It has some warts, but it mostly has done what it set out to do in the early 1980s and that is provide a relatively smooth moderate growth with limited drawdown in bad markets. I personally think DIY works better because it holds a more balanced allocation, but the fund is very convenient for people that simply do not want to do that. The new PERM ETF may be a better option, but it is so new I'm a little cautious about recommending it (especially for taxable investors). However if your funds are in a tax-free account that may be a good option for you.

But again I would say that no system is going to be 100% certain. The benefit of the Permanent Portfolio allocation is, IMO, it doesn't make you concentrate your bets. So even if something were to go very wrong in any one asset, the impact on the entire portfolio is muted somewhat. I know people that lost over 30% of their life savings in 2008 for instance and that kind of loss in the Permanent Portfolio is very unlikely (but I would never say *impossible*, just unlikely). The reason it is unlikely is that the major assets are split 25% each so even a 50% loss in any one of them would be only about at -12.5% loss overall. That is not great, but it's a long way away from the kinds of losses I've seen in other strategies.

Finally, I would say that one year is not long enough for investing. In fact both Browne and Chandler talked about this in their shows as well. The problem is that the world does not run on a calendar year so you have this artificial deadline wrapped around the world of investing and sometimes the markets just aren't going to cooperate in that time period. But over time I have found the portfolio will continue to weather the ups and downs and post gains. It just may take more than 12 months at a time to do it.

[dragoncar]

Even putting all your money in cash right now guarantees a -3% loss due to inflation.

I expect more from you, craigr.  In what world is inflation guaranteed?  Don't we hold 25% cash in case of deflation?

[Pointedstick]

I expect more from you, craigr.  In what world is inflation guaranteed?   Don't we hold 25% cash in case of deflation?

Inflation is virtually guaranteed by living under a debt-based monetary system in which new money is constantly being created by the banking system and a low level of inflation is beneficial to the heavily-indebted populace. Notice how even now, with substantial deflationary pressures, we're not actually experiencing any deflation. Just a lower level of inflation than normal.

[craigr]

Even putting all your money in cash right now guarantees a -3% loss due to inflation.

I expect more from you, craigr.  In what world is inflation guaranteed?   Don't we hold 25% cash in case of deflation?

Yes, but the main point is the loss was -3% over the same time if all in cash. Just because we can't see the decline in value doesn't mean it's not there!

As someone else pointed out the returns can vary quite a bit even by just the time you happened to buy in. One month it may be peaches and cream and the next month (or even next week) and it could be a much different outcome at least short term. But again over time as interest, dividends and capital appreciation add up the result is likely going to be a positive return.

[Pointedstick]

Apologies if this has been answered elsewhere [I searched the boards, but came up empty]:

1. If EDV is held in a taxable account, are you taxed annually on imputed income [which then increases your cost basis] like the American Century Zero-coupon funds [e.g., BTTRX] are? Is EDV any more tax efficient in a taxable account than TLT, all other things being equal?

2. If GTU is taxed as a trust [K-1], even though the tax rate is better, aren't you taxed each year rather than only upon selling like you would be with IAU or GLD? Am I missing something here?

Thanks for any clarification.

1. I don't hold EDV for the tax efficiency, but rather because of the larger percentage of the fund assets that are actually long-term bonds. I also like the greater volatility and the slightly lower ER.

2. I'm still a n00b at this as well, but I believe GTU is taxed as a PFIC (IRC Form 8621) which taxes yearly distributions, but not unrealized gains.

[notsheigetz]

Sounds like you are right about where I was 2 years ago. I started out with PRPFX and wasn't happy with the performance either. After spending time in this forum I decided to go all in with setting up my own PP. It was a lot easier than I thought it would be and I've been very pleased with the results.

Hey everyone,

I've been educating myself for the past several years, bought PRPFX about 10 months ago (early Aug 2011), and I'm down about 5.5%.  Doesn't please me, of course. 

I would have thought the fund would hold it's own in a climate like the past year; that indeed, it's diversification would be well-suited, and while I might not be up, I wouldn't be down either.  But it's been more volatile then expected, and doing pretty poorly regardless of the up's and downs of the larger markets.

So, I'm starting to consider cutting my losses, bailing on the principles of the PP.  But before I go, wanted to invite any comments, words of encouragement or enlightenment.

Appreciate it -

[Pointedstick]

FYI, in the months since I posted in this thread, I've accumulated about 12K in PERM that I consider as a sort of high-risk, extra-volatile, supercharged savings account. Knowing all the risks going in, I'm very happy with its performance so far. On most days, it very closely tracks the performance of my orthodox 4x25 PP.

[Ad Orientem]

FYI, in the months since I posted in this thread, I've accumulated about 12K in PERM that I consider as a sort of high-risk, extra-volatile, supercharged savings account. Knowing all the risks going in, I'm very happy with its performance so far. On most days, it very closely tracks the performance of my orthodox 4x25 PP.

I find that quite interesting since I haven't been tracking PERM. I hope it works out as advertised and becomes a cheaper alternative to PRPFX.

[Pointedstick]

PS, aren't you even a little worried that, considering the thin trading volume, if for some reason everyone wanted to cash out the price would drop like a rocket? Or even if someone needed to liquidate $100,000 worth for an emergency, that the excess volume would push the price way lower than NAV?

Yes, but I don't let it keep me up at night. This is VP-ish money in that I can afford to lose it and don't need it right away. I'd be able to wait until the NAV recovered.

[jediclampet]

FYI, in the months since I posted in this thread, I've accumulated about 12K in PERM that I consider as a sort of high-risk, extra-volatile, supercharged savings account. Knowing all the risks going in, I'm very happy with its performance so far. On most days, it very closely tracks the performance of my orthodox 4x25 PP.

PS, aren't you even a little worried that, considering the thin trading volume, if for some reason everyone wanted to cash out the price would drop like a rocket? Or even if someone needed to liquidate $100,000 worth for an emergency, that the excess volume would push the price way lower than NAV?

Forgive my ignorance... but is that why sometimes PERM does not always seem to follow the HBPP on a day-to-day basis but does follow pretty closely over somewhat longer time frames (like a few days to a week)?

And although PERM’s expense ratio (0.49%) is about 3 times higher than a 4 ETF HBPP (e.g., VTI, IAU, SHY and TLT), does not having to rebalance PERM compensate for the ER?  In a taxable account you’d be paying 28% on IAU’s capital gains when you rebalance.  Would a reasonable strategy be to put as much IAU (and TLT?) in your Roth IRA as possible and offset that with the appropriate amount of VTI (and maybe some SHY above emergency cash in a checking/savings account) and any remaining PP in a taxable account would go into PERM?

Seems to me that, for a taxable account, the most attractive thing about PERM and PRPFX as opposed to a 4 ETF HBPP is that all long-term capital gains in PERM and PRPFX are taxed at 15%. Couldn't make a big difference if gold takes off?

[Pointedstick]

You can easily get the capital gains tax on gold down by using GTU instead of IAU, and I do this in my DIY taxable PP. I am under no illusions about the safety of a single-fund PP in the event of a bank panic, brokerage seizure, monetary crisis or even a severe recession. I mostly use PERM for the convenience factor of being able to buy a single fund commission-free at eTrade where I already had an account, and it's used for medium term savings because I can tolerate fluctuations and it does better than the piddly 0.8% interest on my savings account. My long-term investments are in three DIY PPs, two of which are tax-sheltered in a 401k and two Roth IRAs.

[jediclampet]

You can easily get the capital gains tax on gold down by using GTU instead of IAU, and I do this in my DIY taxable PP.

So you have to fill out an 8621 form every year to allow you to pay 15% tax on GTUs long-term capital gains?  This form is not currently supported by TurboTax so I'd have to file my taxes the old fashioned way or pay an accountant to do my taxes, right?  

[Pointedstick]

I haven't actually had the opportunity to do it yet so maybe others can chime in, but I hear TaxAct lets you file that form. It's a lot cheaper than TurboTax, too.

[craigr]

Seems to me that, for a taxable account, the most attractive thing about PERM and PRPFX as opposed to a 4 ETF HBPP is that all long-term capital gains in PERM and PRPFX are taxed at 15%. Couldn't make a big difference if gold takes off?

PERM does not have nearly long enough track record yet to determine how tax efficient it will be. PRPFX has that over it that they run the fund for tax efficiency. The PERM prospectus indicates they will rebalance once a year. That could drop a big tax bill in shareholder's laps if not done correctly by the fund. They also are relying on ETFs underneath to do things correctly and not make a lot of taxes that will pass through to shareholders. There are a lot of moving parts involved in PERM that the managers do not control.

I would recommend that PERM be relegated to tax-deferred funds until it gets some time to establish how it is going to be run.

[Pointedstick]

I share your concerns, craigr. However, I sort of did this to be a guinea pig as well as to try to use it as a supercharged savings account. I'll be sure to report back what happens at the end of the year. I knew I wanted to use one an all-in-one fund with a certain amount of money simply for convenience, but PRPFX is just too expensive and different from the straight-up HBPP for me to stomach.

[craigr]

I share your concerns, craigr. However I sort of did this to be a guinea pig as well as to try to use it as a supercharged savings account. I'll be sure to report back what happens at the end of the year. I knew I wanted to use one an all-i-one fund for a certain amount of money simply for convenience, but PRPFX is just too expensive and different from the straight-up HBPP for me to stomach.

Definitely post how it works. I'm hoping the managers handle things well and make this a useful option to investors.