trout007 Posted November 4, 2013 Posted November 4, 2013 I think a great place for new investors to start is with former libertarian presidential candidate Harry browne's book Failsafe Investing. I will provide a summary but you can get the pdf online somewhere I'm sure. Basically you put your money in the following categories in 25% each. S&P 500 fund with dividends reinvested, 30 year treasury bonds, gold bullion coins, money market fund. The idea is to diversify. Each will do well during certain economic conditions and help prvent wild fluctuations like you get if you are all in stocks. Every few months check the portfolio and if any category goes above 35% or below 15% rebalance. This helps you buy low and sell high. During the 2008 crash gold and bonds did well so I had money to buy more S&P 500 when it was in the tank. Recently stocks have performed well and gold has gone down so I've been selling stocks and buying gold. The beat thing is the peace if mind knowing even if stocks drop by 40% you are OK.
Emanuel Posted November 4, 2013 Posted November 4, 2013 I have been preparing for the dollar-less world by buying silver bullion. Once I reach a quantity I feel comfortable with, I'll probably invest in foreign stocks through Peter Schiff's EuroPac bank. They have a lot of insight into the Federal Reserve's actions and their results in the world economy. To me, there's no doubt the value of Silver will skyrocket once the Fed and banks can't manipulate the markets any more. When they lose control, it's going to be a good day to be in gold and silver.
Alan C. Posted November 4, 2013 Posted November 4, 2013 I wouldn't sink money into treasury bonds. They're junk.
trout007 Posted November 4, 2013 Author Posted November 4, 2013 I wouldn't sink money into treasury bonds. They're junk.They respond well when the fed drops rates or during a crisis as people flee stocks.
ThomasDoubts Posted November 4, 2013 Posted November 4, 2013 Hey Trout, how's it going? I thought I'd share a couple of my thoughts for consideration. IMO US stocks and bonds are significantly overvalued. Diversification is important, but I believe the big story will be a global failure of fiat currencies. That being the case, I'd be looking for ways to diversify my medium of exchange. I'd rather have 1/2 precious metals and 1/2 bitcoin than have 50% made up of government bonds and US stocks. This isn't to say you can't make money doing so, but I would advise against it. It's like the turkey; every day the farmer feeds him and every day the turkey becomes more confident he'll continue to be fed. On the day he is most confident the farmer is bringing his breakfast, the farmer comes and chops his head off. Such is my attitude regarding QE fed stock markets, and QE suppressed bond yields. Money Market yields make it such that you'd be just slightly worse off (or perhaps better) with your cash in a safe in your basement. The whole point of inflating is you're forced to invest in order to maintain purchasing power. I'd argue that's much more easily done by storing value outside of the fiat currency. The notion of failsafe investing kinda bothers me if I'm honest. If it's failsafe, why not go max out a dozen credit cards to finance it. You can't diversify against systemic risks in the system, and fiat economies have never been more vulnerable. For me, I want to be in defensible hard assets, or sound money, which make up only 25% of your strategy. I can't prove my strategy is better, but if I had significant money to invest, that's what I'd be doing with it. I'm always curious when someone gives investment advice. I'm only vaguely familiar with Harry Browne, but does he invest all of his money in the manner prescribed? Often times I find people write books or sell investment advice that isn't reflected in their personal investments.
ribuck Posted November 4, 2013 Posted November 4, 2013 It's important to understand a few limitations of Harry Browne's method. In the long run, the expected return equals the average of the return of each asset class. Let's assume that (in the long run, and after adjusting for inflation) stocks return 5% per year, bonds return 3%, the money market returns 2% and gold returns 0% (in the long run, gold holds its value but is not a productive asset). The overall return will be the average of these, i.e. 2.5% per year. Harry Browne's method is always going to underperform an investment that's solely in stocks, even though Harry's method will probably have less volatility. It's a common misconception that Harry Browne's "rebalancing" will effectively harvest volatility (in other words, it would produce a profit when prices are volatile even if the overall average return is zero). Unfortunately that's not the case, because the mechanism is symmetrical in both directions. For example, if stocks fall and gold rises, we rebalance the portfolio by selling some gold at a high price and buying stocks at a low price. But when the trend is in the other direction, we will buy gold and sell stocks at the same price points! So we don't harvest volatility. Over the past hundred years, stocks in my country have risen by 5.2% per year (in addition to the rise due to inflation). By keeping an investment portfolio entirely in stocks, one should be able to get a long-term return of 4% per year even after allowing for all the costs of buying, selling and holding stocks. I'm only vaguely familiar with Harry Browne, but does he invest all of his money is the manner prescribed? Often times I find people write books or sell investment advice that isn't reflected in their personal investments. Harry Browne is dead now, but he did follow his own advice. He posted his returns since 1970. After he died, his wife maintained a page showing theoretical returns from the permanent portfolio, but she seems to have lost interest after 2003. Here are his wife's figures: http://harrybrowne.org/PermanentPortfolioResults.htm
ThomasDoubts Posted November 4, 2013 Posted November 4, 2013 Did some quick math on that. Between 1970-2003 he would have had an average annual return of just about 2%, adjusted for inflation, and assuming you think government inflation statistics are valid (I used CPI). Of course that would be revised lower with data for the next decade, and what I believe to be more accurate measures of inflation. There is an assumption, and a dangerous one I believe, that stocks and bonds are just about universally inversely related. I think it's quite intuitive that the end of QE will cause a great deal of turmoil in the bond markets, and I don't believe that will strengthen stock markets which continue to make all time highs. Rather I anticipate crises in the bond markets dragging down the stock markets too. Money Markets could very well freeze up, as they did in '09. I suppose the point I'm trying to make is that an investor ought to make an early play on long term seismic shifts, which are foreseeable. A prudent investor doesn't rely on historical trends; rather he manages risk. For a long term investor, I think it would be unwise to diversify across a stock/bond market that isn't self sustaining 5 years removed from the financial crisis. I quite agree with the importance of diversification, but I don't invest in dog shit simply because I don't have any exposure to the dog shit market. Government bonds are, in my view, akin to junk bonds, but QE has suppressed yields and inflated prices. Demand is artificial in some respects as many bond funds/pension funds are required by law to own US bonds. Either you believe QE will last forever, and government can decree it's creditworthiness to the market, or market forces will eventually intervene. In that respect, I'd rather be a year early than a day late. If I'm going to have a high risk tolerance, which I do as a young person, I would much rather incur high levels of risk with the opportunity of massive returns in bitcoin that be exposed to government bonds or a good deal of the stock market. If I'm nearing retirement, with a low risk tolerance, I'd probably prefer to sit out from the markets all together for a few years. I'd much prefer my purchasing power be stored in precious metals or hard assets than in pieces of paper.
trout007 Posted November 4, 2013 Author Posted November 4, 2013 Did some quick math on that. Between 1970-2003 he would have had an average annual return of just about 2%, adjusted for inflation, and assuming you think government inflation statistics are valid (I used CPI). Of course that would be revised lower with data for the next decade, and what I believe to be more accurate measures of inflation. There is an assumption, and a dangerous one I believe, that stocks and bonds are just about universally inversely related. I think it's quite intuitive that the end of QE will cause a great deal of turmoil in the bond markets, and I don't believe that will strengthen stock markets which continue to make all time highs. Rather I anticipate crises in the bond markets dragging down the stock markets too. Money Markets could very well freeze up, as they did in '09. I suppose the point I'm trying to make is that an investor ought to make an early play on long term seismic shifts, which are foreseeable. A prudent investor doesn't rely on historical trends; rather he manages risk. For a long term investor, I think it would be unwise to diversify across a stock/bond market that isn't self sustaining 5 years removed from the financial crisis. I quite agree with the importance of diversification, but I don't invest in dog shit simply because I don't have any exposure to the dog shit market. Government bonds are, in my view, akin to junk bonds, but QE has suppressed yields and inflated prices. Demand is artificial in some respects as many bond funds/pension funds are required by law to own US bonds. Either you believe QE will last forever, and government can decree it's creditworthiness to the market, or market forces will eventually intervene. In that respect, I'd rather be a year early than a day late. If I'm going to have a high risk tolerance, which I do as a young person, I would much rather incur high levels of risk with the opportunity of massive returns in bitcoin that be exposed to government bonds or a good deal of the stock market. If I'm nearing retirement, with a low risk tolerance, I'd probably prefer to sit out from the markets all together for a few years. I'd much prefer my purchasing power be stored in precious metals or hard assets than in pieces of paper. What did you get since 2003? That is when I started and I've averaged over 10% since then using this method not adjusted for inflation. It's important to understand a few limitations of Harry Browne's method. In the long run, the expected return equals the average of the return of each asset class. Let's assume that (in the long run, and after adjusting for inflation) stocks return 5% per year, bonds return 3%, the money market returns 2% and gold returns 0% (in the long run, gold holds its value but is not a productive asset). The overall return will be the average of these, i.e. 2.5% per year. Harry Browne's method is always going to underperform an investment that's solely in stocks, even though Harry's method will probably have less volatility. It's a common misconception that Harry Browne's "rebalancing" will effectively harvest volatility (in other words, it would produce a profit when prices are volatile even if the overall average return is zero). Unfortunately that's not the case, because the mechanism is symmetrical in both directions. For example, if stocks fall and gold rises, we rebalance the portfolio by selling some gold at a high price and buying stocks at a low price. But when the trend is in the other direction, we will buy gold and sell stocks at the same price points! So we don't harvest volatility. I don't think that is correct. Let's look an example. Assume for this argument that we have two investments that vary inversely and linearly. I know that's not reality but it's good for a simple example. You start with $20k with $10k in each of two investments as follows 100 shares of A at $100 = $10,000 100 shares of B at $100 = $10,000 Let's say A drops by 20% and B rises by 20% 100 shares of A at $80 = $8,000 100 shares of B at $120 = $12,000 You rebalance by selling $2000 worth of B at $120 = 16.6 shares and buy $2000 of A at $80 = 25 shares. 125 shares of A at $80 = $10,000 83,3 shares of B at $120 = $10,000 Let's say the prices go back to where they were. 125 shares of A at $100 = $12,500 83.3 shares of B at $100 = $8,330 Your total is now $20,830 vs $20,000 if you didn't rebalance.
ThomasDoubts Posted November 4, 2013 Posted November 4, 2013 I understand the principal. What I'm saying is, I doubt the sufficiency of diversification. In the future I suspect stocks and 30yr government bonds will move together (down), rather than inversely, as is the historical trend. Money Markets are frequently net negative investments when you account for inflation. Of the 4 asset classes you mentioned, I consider the next big move for 3 of them to be down. I think the strategy is a fair rule of thumb for allocating across asset classes in a free market but consider: 30 yr bonds are not priced in a free market; rather they're priced artificially through QE & the Fed. Stocks continue to make all time highs, yet this is not reflected by meaningful metrics of the underlying economy. Money markets are particularly succeptible to liquidity problems when markets correct abrubtly. You are advocating investing in asset classes that are artificially being upheld. I don't believe that will continue in perpetuity. I don't doubt that you've used the strategy with good results; I doubt that it will continue to produce good results. Who the hell knows what a 30 year bond is worth without a free market to price it? I would not buy something if I couldn't determine it's value, and the only thing I know about government bonds is that they're overvalued. I would not buy something overvalued simply for diversification's sake. The broad story effecting the entire market is QE, Zero interest rate policy. In my view, the inevitable correction to this market interference will be negative for stock, bonds, and money markets. There is no fail safe investment, else everyone would be making it, and it would discontinue being failsafe as prices were bid up.
Alan C. Posted November 5, 2013 Posted November 5, 2013 They [treasury bonds] respond well when the fed drops rates or during a crisis as people flee stocks. How is a person better off if price inflation exceeds the interest rate of the bond?
Lowe D Posted November 5, 2013 Posted November 5, 2013 @ Alan If that always happened, you'd have a great point. But it doesn't. Real rates have been positive for over a year, which is why gold has declined since then. @ Falsarius The permanent portfolio is not based on measured correlations between the asset classes. Correlations change. It's based on the theory that at least one of the classes will outperform the others enough to give a positive return, no matter what the economy is doing. So far it's done that. The only serious disadvantage to it, is its large tracking error against stocks. It's a common misconception that Harry Browne's "rebalancing" will effectively harvest volatility (in other words, it would produce a profit when prices are volatile even if the overall average return is zero). Unfortunately that's not the case, because the mechanism is symmetrical in both directions. For example, if stocks fall and gold rises, we rebalance the portfolio by selling some gold at a high price and buying stocks at a low price. But when the trend is in the other direction, we will buy gold and sell stocks at the same price points! So we don't harvest volatility. I don't understand your reasoning. Rebalancing is based on the weight of an asset in the portfolio, not on the asset's price. I don't see how the price points would be the same. Will you explain this to me?
trout007 Posted November 5, 2013 Author Posted November 5, 2013 How is a person better off if price inflation exceeds the interest rate of the bond?I'll give you my example. I had treasuries that were yielding 6+% prior to the 2008 crash. As the fed dropped rates the price of those bond rose. So not only was I making interest income but the price appreciated as well.
ThomasDoubts Posted November 5, 2013 Posted November 5, 2013 The permanent portfolio is not based on measured correlations between the asset classes. Correlations change. It's based on the theory that at least one of the classes will outperform the others enough to give a positive return, no matter what the economy is doing. So far it's done that. The only serious disadvantage to it, is its large tracking error against stocks. Yes, I think I understand that. I presume the inclusion of government bonds and the S&P500 is based on a historical trend of their inverse relationship, which has since been proved to not be as strong a correlation as previously thought, and several times refuted for extended periods. Money Markets are presumably included because they're traditionally so stable that you often lose money when accounting for inflation. Gold is the inflation hedge. What I'm suggesting is that the theory is a theory, not a fail safe strategy. If that were the case, the argument is falsified by the several years(4) of negative nominal returns in the data ribuck provided. From '70-'03, 14 of the 33 years produced negative returns adjusting with government reported average annual inflation numbers. This isn't precise, but illustrates the point. The market environment is extraordinary, and ought to be treated as such. Central banks around the world are flooding markets with cash. This was not a concern 10, 15, or 30 years ago. The effects of that cannot be fully known, nor can we know future political policies/responses to the effects. We can only make educated guesses. My educated guesses incline me to think US government bond performance will be poor, stock performance will be poor, money markets will likely underperform inflation, and gold could do quite well. Nothing inclines me to think government bonds will do well; in fact they couldn't, yields are already incredibly low, historically. Why would I invest in those bonds for the sake of diversity, if mathematically, they have very little room to increase in value (unless we decide negative interest rates are a good idea). This a huge problem. Everyone wants to be invested, so as to not lose purchasing power to inflation. Chasing yield in government bonds is like stabbing a buzzing beehive with a butcher's knife because your wife bought cheerios, and you like honeynut cheerios. The value just isn't there, in proportion to the risk. I'll find my 3% return elsewhere, thank you very much. I don't mean to be stubborn about this, but the title of the thread is "Failsafe Investing". There is no such thing in perpetuity. Maybe I'm just being a bit of a stickler, I foolishly just realized that Failsafe Investing is the title of the recommended book, not Trout's title. It just rubs me the wrong way when someone sells investment advice and presents it as a golden ticket, free of risk (not directed at you Trout). If I were to advocate Browne's strategy, I would feel pretty awful if someone used it to invest their life savings and lost 40%. I feel obligated to provide a contrarian viewpoint to at least illuminate, what I see as, huge downside risks to enacting such a strategy for the foreseeable future. Hopefully my arguments are of merit. I'd love to hear a defense of investing in government bonds with prices near the highs, thus yields just off the lows, and IMO risks much greater than reflected due to market intervention. I don't believe this imbalance can be maintained. http://research.stlouisfed.org/fredgraph.png?g=o3K
trout007 Posted November 5, 2013 Author Posted November 5, 2013 Failsafe doesn't mean guarenteed. It means when something fails it does so in a safe way. The idea here is to not allow one or two events wipe you out. Failsafe doesn't mean guarenteed. It means when something fails it does so in a safe way. The idea here is to not allow one or two events wipe you out.
PatrickC Posted November 5, 2013 Posted November 5, 2013 The Harry Browne method has worked out well for most people who've followed his methods. Although they will almost all say that it generally just keeps their principle safe from the ravages of inflation. Personally, I've never seen much success from the stock market. It's always seemed like it's been rigged in favour of those in the know, depite laws against insider trading.My biggest success has been investing in small businesses. It's always been the most profitable for me. But I haven't done this in quite a while since 2008, except with a friend. Bitcoin has been very profitable for me, since I bought mine at around $31. That said it's way to erratic I feel to start buying large quantities. Although I may end up eating my hat on that one perhaps, if the most bullish predictions of $1,000 bitcoins are ever reached. I am seriously considering the Harry Browne method, because just holding onto the value of my savings is hard enough these days, let alone making a profit. I think generally speaking it's the worst time I've ever known for investment opportunities. Pretty much everything is like playing poker for sensible investors and blackjack for those that enjoy more risk.
ribuck Posted November 5, 2013 Posted November 5, 2013 The Harry Browne method has worked out well for most people who've followed his methods. Although they will almost all say that it generally just keeps their principle safe from the ravages of inflation. Yes I think that's a fair analysis. The Harry Browne method forces you to maintain diversification, and diversification lowers risk. Three of the four asset categories are productive ones, so in the long term the Harry Browne method is almost guaranteed to make some money. If it doesn't, it's because those assets are somehow no longer productive, and if that happens the world's problems will be so serious that your investment portfolio will be the least of your concerns. But this doesn't change the fact that, in the long run, investing in higher-performing asset classes (i.e. stocks) will produce a higher average return (with the downside of higher volatility). Personally, I've never seen much success from the stock market. It's always seemed like it's been rigged in favour of those in the know, depite laws against insider trading. For sure, the little guy can never beat the insiders. But the little guy can always invest through low-cost tracker funds. If you drip-feed your investments into these funds (instead of trying to time the market), there hasn't been any period longer than ten years where you wouldn't have been in profit, and over the long run (50 years) there is no asset class that would have done better. For the historical statistics (all inflation-adjusted), see the following PDF report: Credit Suisse Investment Banking: historical investment returns To Lowe D: I was wrong about the rebalancing. Sorry about that. To trout007: Thanks for your worked rebalancing example, with which I agree. There is indeed hysteresis in the buying and selling prices, instead of price symmetry on the way up and down. The rebalancing can cause other problems though. Suppose your investment A keeps rising in value, and investment B keeps dropping in value. At each rebalancing, you sell your high-performing investment to buy more of your junk asset. Suppose someone developed a technique for economically extracting the gold that is present in all seawater. The gold price would continue to drop towards zero, yet Harry Browne portfolios would keep selling their good assets so that they could buy more and more of this depreciating gold.
Existing Alternatives Posted November 5, 2013 Posted November 5, 2013 The intent of the Permanent Portfolio was not to provide the investor with superior return, but rather to develop a simple framework that allows to mitigate main risks inherent in investing, such as inflation, deflation, and outright financial system collapse. Each of the asset types used in constructing the portfolio serve to counteract any one of those risks. But the main focus is simplicity – you buy those four assets and you are done, just keep on rebalancing every year or so. The fact that portfolio has been outperforming most indices is spurious and should be treated as nothing more than icing. Harry also made a provision for “speculation allowance” – setting some money aside to invest in individual stocks, hot tips, etc. Although, in my view, the most important message in his Fail Safe approach was “investing in yourself.” First and most, you should always increase your earning potential through training and education. Those will survive any financial calamity. Highly recommended read!
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