Are you always taking a bath on at least one asset?

[burley]

I recently rolled over an old employee-sponsored 401k into an individual IRA. I allocated it to a Golden Butterfly (GB) portfolio. Now I'm getting cold feet about the gold portion. Given the record highs lately, it *feels* like it has nowhere to go but down. I've read Fail-Safe investing and I know you shouldn't try to time markets and all, but damn it feels like gold is an bubble lately. On the other hand long term bonds are a better buy than they've been in years, so do I just suck it and assume I'm getting a decent deal on some assets and a bad deal on others?

When using the Permanent Portfolio or GB, do you just have to accept that fact that one asset is totally going to crap the bed in the short term?

I guess more generally, how do folks here psychology insulate themselves from the tracking error inherent in these types of portfolios?

[welderwannabe]

Yup, thats pretty much the design.

Gold has done well lately, but it also went sideways for a few recent years while other assets were appreciating from the inflation. Comparing gold to other assets right now and their appreciation, i dont feel its over valued.

[Hal]

I guess more generally, how do folks here psychology insulate themselves from the tracking error inherent in these types of portfolios?

Interestingly enough, I find it easier with just two items (Gold & VDCO).

All the rebalancing between Bonds & Shares is not seen, and my mindset is that Gold is my capital and VDCO is my investment. If I need some more Aussie Dollars (Pacific Peso's ) then I just sell whatever has increased the most from the target 1:3 ratio. So looking at the attached chart, I see Gold as the reference and the price of VDCO has gone down.

PS: For fun, look up the 1976-Present Aussie M0 money supply on Trading Economics. Make sure you are sitting down first!

<snip>
ETF overview
The ETF targets a 70% allocation to income asset classes and a 30% allocation to growth asset classes.
<snip>

[burley]

Yup, thats pretty much the design.

Gold has done well lately, but it also went sideways for a few recent years while other assets were appreciating from the inflation. Comparing gold to other assets right now and their appreciation, i dont feel its over valued.

@welderwannabe - Gold is the asset in the PP/GB that I have by far the least understanding of and confidence in. What makes you feel like it's not overvalued? One of the things that always makes me scratch my head with gold is that I have no idea how to interpret the current valuation at any given time.

[yankees60]

Yup, thats pretty much the design.

Gold has done well lately, but it also went sideways for a few recent years while other assets were appreciating from the inflation. Comparing gold to other assets right now and their appreciation, i dont feel its over valued.

@welderwannabe - Gold is the asset in the PP/GB that I have by far the least understanding of and confidence in. What makes you feel like it's not overvalued? One of the things that always makes me scratch my head with gold is that I have no idea how to interpret the current valuation at any given time.

You and everyone else!

[coasting]

I allocated it to a Golden Butterfly (GB) portfolio. Now I'm getting cold feet about the gold portion. Given the record highs lately, it *feels* like it has nowhere to go but down.

I felt that way buying long term treasurys near highs. It seemed they had nowhere to go but down. Sure enough they did. But I let fund distributions automatically reinvest each month and slowly the bond portion is down less over time. I would say the overall portfolio has still worked as expected. And consider, if "real" rates (nominal - inflation) should go down, gold may continue to do well in that scenario as there is less opportunity cost to hold gold vs. cash. Also, if you haven't done so already, go read Tyler's articles on gold over at Portfolio charts. Gold is like salt in a recipe - doesn't make sense all by itself but helps make the whole package work. This is one of my all time favorites: https://portfoliocharts.com/2021/12/16/ ... ortfolios/

When using the Permanent Portfolio or GB, do you just have to accept that fact that one asset is totally going to crap the bed in the short term?

Yes, I just remind myself of that expression "If you don't have at least one asset doing poorly at any given time, you're not properly diversified!"

I guess more generally, how do folks here psychology insulate themselves from the tracking error inherent in these types of portfolios?

Tracking error against what? Something like a traditional 60/40? At this stage I'm more concerned with return of my money than return on my money. So I aim for no big swings up or down for the overall portfolio, though the individual components may swing considerably. And I accept that the long term total return may be less than other conventional allocations - that is the cost for peace of mind regarding (as HB phrased it) the money that is precious to you. Money you deem not precious can be placed in the Variable Portfolio and make your bets there. Time has seen me moving further towards the PP now at 80%+ of the total while VP has drifted below 20%.

[flyingpylon]

The historical results that probably convinced you to go with the GB were generated with individual assets that were overvalued or undervalued at any given time. If you want the benefits of a “lazy portfolio” and you accept that you can’t predict the future, you need to treat it like a black box as much as you can and stop second-guessing and overthinking.

[burley]

The historical results that probably convinced you to go with the GB were generated with individual assets that were overvalued or undervalued at any given time. If you want the benefits of a “lazy portfolio” and you accept that you can’t predict the future, you need to treat it like a black box as much as you can and stop second-guessing and overthinking.

Good point. It's one of those things that I'd file under, "simple, but not easy". The biggest appeal of the PP and GB approaches to me is that they embrace the fact that we can't predict the future. I embrace and appreciate this fact intellectually, it's just a matter of training my emotions to do likewise .

[welderwannabe]

@welderwannabe - Gold is the asset in the PP/GB that I have by far the least understanding of and confidence in. What makes you feel like it's not overvalued? One of the things that always makes me scratch my head with gold is that I have no idea how to interpret the current valuation at any given time.

There is a lot of push/pull with Gold, and seemingly unrelated forces can cause it to act differently than one would expect, as many people consider it as solely an inflation hedge. It is far more complex that that.

Gold was artificially depressed for a couple of years because even though the US was seeing crazy inflation, the USD was stronger than many other currencies. That kept the value of gold down as expressed in US dollars. If you charted Gold against other currencys at the time you'd see it performing better.

Gold also gets headwinds from rising rates, because gold doesn't have a yield, money is pulled out of gold into Treasurys when they are paying 5%.

Lastly, lots of central bank buying of gold going on right now, which is helping to pull the price up. The US kicking russia out of SWIFT and freezing their dollar reserves sent shockwaves around the more undeveloped world. Very bully maneuver that was short sighted and took a lot of confidence out of the dollar, so other countries are removing the US Treasury debt from their central banks as an asset, and replacing with gold slowly.


So, IMHO, we have had a ton of inflation in the last few years, our US Debt has been downgraded, and we have a non deminimis risk of entering into a debt spiral that is only recoverable by massive money printing. I don't believe all of this is priced into gold, as its been held back by the USD being strong relative to other currencys, and the attractiveness of Treasury yield. In addition, a lot of gold $$$ has been pulled into bitcoin speculation. Once interest rates drop and we realize we are entering into a recession, with having already high levels of annual deficit that is historically unusual for an economic expansion, gold will rally. A lot. I also don't think bitcoin will end up being the safe haven some hope it will be as people will realize it can be shut down by governments with the snap of a finger. Confiscating physical gold is a lot harder to do.

Those of us that have stayed true to LTT's and gold will be rewarded, although if you believe the US is headed for a debt crisis like I do, you may want to unload the LTT's once rates crash and double down on gold...I'm not sure we want to be holding long term nominal debt much longer under our current political climant.

/end rant

[burley]

@welderwannabe - Gold is the asset in the PP/GB that I have by far the least understanding of and confidence in. What makes you feel like it's not overvalued? One of the things that always makes me scratch my head with gold is that I have no idea how to interpret the current valuation at any given time.

There is a lot of push/pull with Gold, and seemingly unrelated forces can cause it to act differently than one would expect, as many people consider it as solely an inflation hedge. It is far more complex that that.

Gold was artificially depressed for a couple of years because even though the US was seeing crazy inflation, the USD was stronger than many other currencies. That kept the value of gold down as expressed in US dollars. If you charted Gold against other currencys at the time you'd see it performing better.

Gold also gets headwinds from rising rates, because gold doesn't have a yield, money is pulled out of gold into Treasurys when they are paying 5%.

Lastly, lots of central bank buying of gold going on right now, which is helping to pull the price up. The US kicking russia out of SWIFT and freezing their dollar reserves sent shockwaves around the more undeveloped world. Very bully maneuver that was short sighted and took a lot of confidence out of the dollar, so other countries are removing the US Treasury debt from their central banks as an asset, and replacing with gold slowly.


So, IMHO, we have had a ton of inflation in the last few years, our US Debt has been downgraded, and we have a non deminimis risk of entering into a debt spiral that is only recoverable by massive money printing. I don't believe all of this is priced into gold, as its been held back by the USD being strong relative to other currencys, and the attractiveness of Treasury yield. In addition, a lot of gold $$$ has been pulled into bitcoin speculation. Once interest rates drop and we realize we are entering into a recession, with having already high levels of annual deficit that is historically unusual for an economic expansion, gold will rally. A lot. I also don't think bitcoin will end up being the safe haven some hope it will be as people will realize it can be shut down by governments with the snap of a finger. Confiscating physical gold is a lot harder to do.

Those of us that have stayed true to LTT's and gold will be rewarded, although if you believe the US is headed for a debt crisis like I do, you may want to unload the LTT's once rates crash and double down on gold...I'm not sure we want to be holding long term nominal debt much longer under our current political climant.

/end rant

Thanks for the detailed explanation, I really appreciate it.

[Smith1776]

Some excellent discussion here folks.

I'll chime in and add another perspective. Since the original HBPP thread on the Knuckleheads forum, people have occasionally brought up the issue of gold being rebalanced into oblivion during a currency crisis or hyperinflation.

I've been cognizant of this as well, and as such I've put gold and Bitcoin in its own separate "Bunker Portfolio", so that they are not subject to normal rebalancing policies.

I think both gold and Bitсoin are assets that should be kept in reserve with a wait-and-see policy regarding their deployment. In other words, during a true currency crisis, one should wait until the economic and political situation stabilizes before deploying these hard assets. This is in contrast to those who might otherwise blindly and mechanically rebalancing their gold and Bitcoin into a bottomless pit.

[burley]

Some excellent discussion here folks.

I'll chime in and add another perspective. Since the original HBPP thread on the Knuckleheads forum, people have occasionally brought up the issue of gold being rebalanced into oblivion during a currency crisis or hyperinflation.

I've been cognizant of this as well, and as such I've put gold and Bitcoin in its own separate "Bunker Portfolio", so that they are not subject to normal rebalancing policies.

I think both gold and Bitсoin are assets that should be kept in reserve with a wait-and-see policy regarding their deployment. In other words, during a true currency crisis, one should wait until the economic and political situation stabilizes before deploying these hard assets. This is in contrast to those who might otherwise blindly and mechanically rebalancing their gold and Bitcoin into a bottomless pit.

I've wondered about the potential for re-balancing into oblivion. I remember reading somewhere, "A stock down 90% is a stock that was down 80% and got cut in half".

[I Shrugged]

Burley: But you don’t feel that stocks are in a bubble? I’m always seeing bubbles everywhere.

Smith: I agree. Once a person has some critical mass of gold, just set it aside and run a stocks/bonds/cash investment plan.

[burley]

Burley: But you don’t feel that stocks are in a bubble? I’m always seeing bubbles everywhere.

Smith: I agree. Once a person has some critical mass of gold, just set it aside and run a stocks/bonds/cash investment plan.

I Shrugged: I 100% feel like stocks are in a bubble. But if I go too heavy into gold, then I'm wrong and alone. If I go too heavy into stocks, I'm wrong but in good company. I know this is completely irrational, but that doesn't stop it from getting to me at times; humans are not completely rational creatures. That's one of the reasons I joined this forum - to learn from folks who have the moral courage to buck the conventional wisdom in this domain. I thoroughly believe that the typical investor, particularly ones of the boglehead variety, drastically underestimates:

1. Their overall risk of ruin
2. Their own risk tolerance when facing massive loses and where the bottom is unknown
3. How much "timing", e.g. the unexpected loss of a job, forced early retirement, health problems, etc. can cause you to deviate from "the market"

That being said, it's nevertheless very hard to mentally justify something like the HBPP or the GB when the whole world, including finance professionals, look at anyone who's not 80% allocated to stocks or anyone who has the audacity to hold gold, like they have three heads. It makes you doubt yourself.

[Hal]

I think both gold and Bitсoin are assets that should be kept in reserve with a wait-and-see policy regarding their deployment. In other words, during a true currency crisis, one should wait until the economic and political situation stabilizes before deploying these hard assets. This is in contrast to those who might otherwise blindly and mechanically rebalancing their gold and Bitcoin into a bottomless pit.

[Smith1776]

Burley: But you don’t feel that stocks are in a bubble? I’m always seeing bubbles everywhere.

Smith: I agree. Once a person has some critical mass of gold, just set it aside and run a stocks/bonds/cash investment plan.

I Shrugged: I 100% feel like stocks are in a bubble. But if I go too heavy into gold, then I'm wrong and alone. If I go too heavy into stocks, I'm wrong but in good company. I know this is completely irrational, but that doesn't stop it from getting to me at times; humans are not completely rational creatures. That's one of the reasons I joined this forum - to learn from folks who have the moral courage to buck the conventional wisdom in this domain. I thoroughly believe that the typical investor, particularly ones of the boglehead variety, drastically underestimates:

1. Their overall risk of ruin
2. Their own risk tolerance when facing massive loses and where the bottom is unknown
3. How much "timing", e.g. the unexpected loss of a job, forced early retirement, health problems, etc. can cause you to deviate from "the market"

That being said, it's nevertheless very hard to mentally justify something like the HBPP or the GB when the whole world, including finance professionals, look at anyone who's not 80% allocated to stocks or anyone who has the audacity to hold gold, like they have three heads. It makes you doubt yourself.

Tex once said that interest in the PP is a built-in pinhead filter. I think you have demonstrated as such.

You have demonstrated a level of macroeconomic insight that few possess.

Ray Dalio puts it another way: most people simply take the recent past and simply extrapolate that into the future with some minor modifications. However, sometimes the future ends up being very different. Bogleheads typically don't see that. You now do.

I hear you that it's definitely hard to go against the grain sometimes, but going with the crowd scarcely ever produced exceptional results in life.

[Hal]

<snip>
I thoroughly believe that the typical investor, particularly ones of the boglehead variety, drastically underestimates:

1. Their overall risk of ruin
2. Their own risk tolerance when facing massive loses and where the bottom is unknown
3. How much "timing", e.g. the unexpected loss of a job, forced early retirement, health problems, etc. can cause you to deviate from "the market"

That being said, it's nevertheless very hard to mentally justify something like the HBPP or the GB when the whole world, including finance professionals, look at anyone who's not 80% allocated to stocks or anyone who has the audacity to hold gold, like they have three heads. It makes you doubt yourself.

To add to Smith's answer, I think you will find this interview from a few years back useful....

[seajay]

I guess more generally, how do folks here psychology insulate themselves from the tracking error inherent in these types of portfolios?

Interestingly enough, I find it easier with just two items (Gold & VDCO).

All the rebalancing between Bonds & Shares is not seen, and my mindset is that Gold is my capital and VDCO is my investment. If I need some more Aussie Dollars (Pacific Peso's ) then I just sell whatever has increased the most from the target 1:3 ratio. So looking at the attached chart, I see Gold as the reference and the price of VDCO has gone down.

PS: For fun, look up the 1976-Present Aussie M0 money supply on Trading Economics. Make sure you are sitting down first!

<snip>
ETF overview
The ETF targets a 70% allocation to income asset classes and a 30% allocation to growth asset classes.
<snip>

We have a crystal ball (variant of Robert LIchello's AIM)

that is suggesting recent levels direct more towards 33/67 to 40/60 stock/cash (where gold is a core part of 'cash'). Continuation of rising stocks may drive that into PP territory. It made pretty reliable predictions for the 1929 and late 1960's highs and again for the 1999 highs. As did it reasonably call the 2010 lows.

Leveled to Ben Graham's advice, no more/less than 25/75, with gold a core element, but with historic caveats (money was gold pre 1933, gold was prohibited in the US 1933 - 1975).

A factor with looking toppy is that it can become even more toppy tomorrow. Wouldn't put it past the market to continue to drive stock prices even higher yet.

[ppnewbie]

My 2 cents

One reason a portfolio of uncorrelated(ish) volatile assets work is that rebalancing forces you to sell high and buy low. Unfortunately this goes against a lot of our powerful behavioral biases. It feels like you are selling a winner and then trying to catch a falling knife.

One thing to know is that you pay a price for insuring your portfolio in returns. I use a golden butterfly because I am in a glide path to retirement and want to protect my wealth and outpace inflation by a bit.

But for my kids, I have put them in 100 percent stocks (VTI) with dividends reinvested. If I had a 30 to 40 year time horizon I would do all stocks. It’s easy and even during a 30 year downturn (15 years slowly down / 15 years slowly back up) I think you would make around a 7 percent return of dividends are reinvested.

Portfoliocharts.com attempts to answer all these questions.

[ppnewbie]

Also on the topic of gold. I like to think of it as a value gauge for the dollar. iE it takes 2640 dollars to exchange for ounce of gold. In 1971 it took 35 dollars. Gold is not going up, the dollar is going down. Just my humble opinion but I could be off.

[yankees60]

My 2 cents

One reason a portfolio of uncorrelated(ish) volatile assets work is that rebalancing forces you to sell high and buy low. Unfortunately this goes against a lot of our powerful behavioral biases. It feels like you are selling a winner and then trying to catch a falling knife.

One thing to know is that you pay a price for insuring your portfolio in returns. I use a golden butterfly because I am in a glide path to retirement and want to protect my wealth and outpace inflation by a bit.

But for my kids, I have put them in 100 percent stocks (VTI) with dividends reinvested. If I had a 30 to 40 year time horizon I would do all stocks. It’s easy and even during a 30 year downturn (15 years slowly down / 15 years slowly back up) I think you would make around a 7 percent return of dividends are reinvested.

Portfoliocharts.com attempts to answer all these questions.

" I think you would make around a 7 percent return"

Nominal or Real?

[yankees60]

Also on the topic of gold. I like to think of it as a value gauge for the dollar. iE it takes 2640 dollars to exchange for ounce of gold. In 1971 it took 35 dollars. Gold is not going up, the dollar is going down. Just my humble opinion but I could be off.

But 1971 was an engineered or restricted value?

Wouldn't 1979 or 1980 be a better measure?

Gold was $855 in January 1980. Now 45 years ago. That would be $3,274 in today's $$$$.

Today is $2,655?

Could that not be used to say that gold has gone down while the dollar has gone up?

[mathjak107]

the price of gold back when it hit 850 was a misprice . it was a price that should never have been .

no different then we had etfs that got disjointed in the flash crash of 2010 , according to the Securities and Exchange Commission. For a few horrific seconds, shares of the iShares Russell 1000 Growth Index ETF (IWF) traded for a penny. Vanguard Total Stock Market ETF (VTI) sold for 13 cents.

so every so often assets go to prices that should never be , and that doesn’t make that point in time a benchmark forever

[yankees60]

the price of gold back when it hit 850 was a misprice . it was a price that should never have been .

no different then we had etfs that got disjointed in the flash crash of 2010 , according to the Securities and Exchange Commission. For a few horrific seconds, shares of the iShares Russell 1000 Growth Index ETF (IWF) traded for a penny. Vanguard Total Stock Market ETF (VTI) sold for 13 cents.

so every so often assets go to prices that should never be , and that doesn’t make that point in time a benchmark forever

Looks like gold started at $227 in 1979 and ended at $524. That was its peak price.

For 1980 ... Started at $559. Ended at $590. Peak was $843 on January 21, 1980. The price seemed to fit in with that had happened in the days before and after.

Seems like there were significant daily fluctuations in the daily prices of gold in 1980?


https://sdbullion.com/gold-prices-1980

[ppnewbie]

At some point gold was $21 per ounce. Then I think too many dollars were printed and they repegged at $35 an ounce. Somewhere in there gold was probably really worth $35 an ounce at least for a brief moment.

Meaning the supply of dollars was 35x the amount of gold backing it. But I don’t really have any data to back that up. I do not believe Fort Knox has been audited.