permanent portfolio questions

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Frosti85
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permanent portfolio questions

Post by Frosti85 »

- is it still a valid strategy with the growing national debt and quantitative easing going on ?

- home country bias.
As I see it, it would make more sense to actually invest a lot of my assets outside of my home country. there could be 2 possible scenarios:

a) my country is fucked. I will become a refugee, and still have lot of assets
b) rest of the world is fucked. I lose my investments, but still live quite good in my country

these are exaggerations and very simplified of course, but you get the idea.

also if I have all my assets in the economy I work in, I could lose my job & most of my assets at the same time.
It just seems like unnecessary risk concentration in my opinion.

Also in the PP book they suggest as an EU citizen I should buy german / my country governemnt bonds.
But would it not make sense to internationally diversify and have US & EU bonds ? (and also for the cash component)

- are there other "risk hedging" approaches like the PP that I should also consider (being agnostic towards the future and hedging black swan events) ?

vexed87
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Re: permanent portfolio questions

Post by vexed87 »

Most of these questions are addressed in Craig Rowland's book. Have you read that? If not, start there.

Will the PP earn you massive short term returns compared with other 'riskier' strategies? Short answer is No, it all depends on your market timing. Will you be able to preserve your wealth in the face of market crashes and general tough economic times for the long haul, I'd say its better suited than most other strategies. Tyler9000's portfoliocharts.com is a great resource for comparing strategies, but the past is the past. Who know's what's around the corner. Whether the PP is for you depends on your priorities. I prefer a portfolio not subject to extremes of volatility, I prefer that over short term higher returns for higher likelihood that my money is there when I need it the most.

If you lose your job, you may either be victim to back luck/timing or you got wiped out by during a global or national recession/depression, in which case the PP is a solid bet, as you will have protected against these eventualities by holding the designated assets, you'll always have 'cash' on hand to tide you over.

As for diversifying with international assets, this is a bad idea if you are attempting to implement the PP by the book. You break the warranty so to speak because in theory as one asset class falters, another should be performing well within your national economy. By diversifying internationally, you run the risk of being out of a well performing asset (locally) when your other assets are crashing. Therefore you'll get burned when you rebalance you assets during market turmoil. Say for instance you are holding a proportion of US bonds and DE bonds, instead of 100% DE bonds. While more intertwined than ever, globally markets are still mostly impacted by their national economic outlook. The German stock market may well be crashing, while DE bonds are rallying, at the same time the US bond market could crashing due to domestic economic or political problems. Even if you chose to diversify and hold a mix of international bonds, or any other asset, you open yourself up to the risk that you lose the full effect of the rebounding asset class, dampening the overall value of your portfolio.

As for being motivated to invest overseas by the fear of becoming a refugee or suffering government confiscation of assets etc, there's an equivalent argument stating that your hard earned wealth could be lost overseas if disaster or hostile government were to manifest there. The book by Rowland does go into this in detail with each asset class, and explains why it's a bad idea so I won't repeat it here, save to say, there's also other risk and significant costs associated with holding assets overseas.

You might by tempted to hold total world stock/bond index funds so your assets are spread across many countries, but consider where is the fund managed, and what power does your government has over these funds. If they are managed abroad, what cost or tax implications are there in implementing this, would those costs eat your returns? As for overseas assets being compatible with the PP, the short answer is no (arguably gold is the exception as it's not a domestic asset in the same sense as stocks, bonds and cash). That's not to say you might prefer to split your wealth into distinct portfolios, part PP and part some other strategy for instance. The PP is great for preserving wealth you really don't want to lose, say your nest egg, then everything else over that amount could go toward some other 'riskier' strategy.
Last edited by vexed87 on Thu May 18, 2017 7:37 am, edited 1 time in total.

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jennypenny
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Re: permanent portfolio questions

Post by jennypenny »

KevinW added a section to the wiki that might be helpful ... https://wiki.earlyretirementextreme.com ... ide_the_US .

ThisDinosaur
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Re: permanent portfolio questions

Post by ThisDinosaur »

I wouldn't want to argue too hard against international diversification. I'm not sure international stock index funds were available when Harry Browne died, or else he may very well have included them.(Somebody correct me on this if I'm wrong.) I know Rowland favors holding some of your gold overseas. Makes sense to do the same with stocks given they are somewhat uncorrelated with domestic stocks. You could do a Golden Butterfly type allocation (see portfoliocharts.com) with your two stock allocations being Total Domestic, and Total International minus domestic. Or you could do an 8-way allocation: four by-the-book PP, and the other four Total International stock, international sovereign/long bond, a collection of different currencies, and either gold (held in an overseas location or different ETF) or some other inflation hedge (commodities, reits, precious metals, other hard asset). If you diversify between all 8 you may "break the warranty," but we diversify because there are no guarantees in investing. There *will* be some point in the future when those assets will outperform all of the classic 4 in the PP.

vexed87
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Re: permanent portfolio questions

Post by vexed87 »

International diversification (in this context, basket of international funds/stocks/bonds/whatever) is the anathema of the PP allocation stratergy, precisely because it screws with the rebalancing of the asset classes in complex ways as I tried to allude to above. Diversification is not to be confused with off shore holdings, gold being the obvious example as noted by TD. Keeping your eggs all in one basket is to be avoided, and is a common theme in Rowland's book. I never read Browne's original text, but assume he had the same stance. However, the extent and the means by which you spread out your assets depends very much on the size of your portfolio.

It would be more practical and financially viable to spread out a £500,000 portfolio across multiple brokerage accounts, funds, and countries compared with a £10,000 portfolio. You might decide to stop holding bullion in anyone country once you reach a certain threshold, though that would be a very personal decision, there's no real truism to share here.

If you really want to diversify internationally, you could spilt your wealth between nations, e.g. 50% operating as a distinct PP in your country of residence, then the other 50% with respective allocations of PP assets relevant to that foreign market, but for the same reasons as above, you increase risk, transaction fees and taxes with this complexity. The strategy will only become financially feasible as your wealth grows and begins to cover these additional costs. Definitely not something to consider too early on in your accumulation of wealth, unless of course you perceive domestic risk to be high and you are not worried about fees eating your returns or worse, your principal.
Last edited by vexed87 on Fri May 19, 2017 6:42 am, edited 2 times in total.

Frosti85
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Re: permanent portfolio questions

Post by Frosti85 »

@vec: I have read the book, I agree with most of it. Still dont agree with the home country bias.

if the PP works in US, and works in EU.

now if I have a 50% US and 50% EU PP, it should work as well (because I'm running 2 permanent portfolios at the same time now)
but I would get additional benefit because a black swan event that kills an entire economy would only wipe out half my assets (in theory... in reality an event that wipes out an entire economy would probably be bad for the other parts of the world as well)

But I agree with you, the potential benefits of this are probably destroyed by the additional hassles of management, transaction costs, taxes and so on

also agree with you that for small portfolio sizes it doesn't make a lot of sense to be extremly diversified

vexed87
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Re: permanent portfolio questions

Post by vexed87 »

@Frosti, yes suggesting operating two distinct PPs was what I suggested above! :D

vexed87
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Re: permanent portfolio questions

Post by vexed87 »

@Frosti, as for the home country bias, I think it's purely a matter of efficiency and simplicity. If you have ever seriously entertained holding oversea's investments, you'll realise what a nightmare the tax arrangements, FX fees/risk and red tape can be. It's not a great leap to see how the costs eat into your return to the extent that your investment stops growing, particularly as your add each additional country to your collection of distinct PPs.

As for macro scale black swan events wiping out the PP, I can see where you are going with this logic, but you might want to start questioning your reasoning behind wanting to operate it within two financially linked, militarily allied and interdependent free market economies. If two is not enough, then is three or four economies, or more? How practical is that? Now we haven't defined the black swan event (because we can't predict it!) but say for instance there was something significant enough to wipe out the German economy, say WWIII comes to Europe. You're not going to be particularly worried about your wealth, but being alive! Also, not sure there are many portfolio strategies that can withstand these kind of wealth destruction events, but at least with the PP, you've got your bullion, you can cash that out anywhere, and bet your bottom dollar that if a free-market system is still functioning in a WWIII scenario, it's value (if not manipulated to hell) will be stable, if not sky-rocketing.

Frosti85
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Re: permanent portfolio questions

Post by Frosti85 »

@vec: agree with you, it's just too complicated for our ERE portfolios

vexed87
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Re: permanent portfolio questions

Post by vexed87 »

Sorry for a third post, I overlooked your first and most interesting question:
"is it still a valid strategy with the growing national debt and quantitative easing going on ?"
This is one of my concerns also, but I don't feel confident that I can give an accurate insight, what follows is only speculation based on my own mental modelling.

I suspect the answer to your question depends mostly how your particular nation deals with its debt. If the answer to the debt problem is austerity and no more debt, and the economy keeps on growing, outlook is good. If the answer is inflate the debt away, the gold allocation addresses that. If the answer is gold confiscation, large scale government bond defaults/debt jubilee, or high taxes on dividends, or any other means of achieving the same ends, then no the PP wont work well as a long term wealth preservation strategy. In these scenario's you are no longer operating in a functioning free-market economy and it's going to be very hard to preserve wealth. In those scenarios, you'd be better putting you money in some other productive assets which are not as highly taxed, however because you carry 4 distinct asset classes, its very unlikely you'll loose all of your wealth in one fell swoop.

I honestly don't know how prolonged QE will effect the PP, my simplistic mental model dictates that QE indirectly props up the high valuations in the stock market. It does so by increasing money supply, thus keeping money circulating within acceptable parameters. How this impacts the PP depends where that money flows to. Usually this money is invested in various assets, usually those with the highest returns. Central banks will keep at QE during tough economic times, at least until it stops working as intended. If asset prices start to collapse and QE is no longer effective, that's when capital will take flight to safe haven assets. Better hope you are holding on to those and they are not manipulated also.

The PP is a strategy for a functioning market economy. If you are concerned about the above eventualities and the death of the market economy, you'll probably want to invest in a a doomsday preppers manual and accumulate other forms of capital, see my other post here on my line of thinking here.

Tyler9000
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Re: permanent portfolio questions

Post by Tyler9000 »

Frosti85 wrote:
Thu May 18, 2017 3:57 am
- is it still a valid strategy with the growing national debt and quantitative easing going on ?
Absolutely. IMHO, the PP is better positioned to do well in this environment than the vast majority of other options.

Frosti85 wrote:
Thu May 18, 2017 3:57 am
As I see it, it would make more sense to actually invest a lot of my assets outside of my home country.
A big reason that the PP is intended to be primarily held in your own country is because of the one thing that is impossible to diversify -- the inflation that you personally experience. Real returns are all that really matter, and if your investments aren't tied to your local inflation then they may not perform the way you need. Stocks, bonds, and cash all respond to the inflation of your local country in one way or another, so it's important to maintain local exposure.

Another reason that the traditional PP doesn't include international diversification is that hedging against local economic swoons is what gold is for. Gold is a rare truly universal uncorrelated asset that knows no borders, and it is arguably a better hedge against local trouble than any foreign country. Stock markets around the world are more correlated these days than most people want to believe. But if gold ownership is ever outlawed again for some reason, I'll probably take a second look at international stocks to fill that role.

Now if you live in a small economy, I think it's reasonable to also look at adding international stock diversification to the mix in addition to your own country. The percentage is up to you. Since I believe you're from Austria, I might recommend looking at a German or Europe index just to keep things in the same neighborhood. It's also perfectly reasonable to invest in whatever countries you choose as part of a variable portfolio outside of your core PP.

Michael_00005
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Re: permanent portfolio questions

Post by Michael_00005 »

Frosti85 wrote:
Thu May 18, 2017 3:57 am
- are there other "risk hedging" approaches
Everyone will eventually die. How do we hedge our life, when worldly assets will become worthless as we transition to the next?

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