Geoff Considine had a very lengthy post up at Seeking Alpha called Stress Testing Your Portfolio which drew some interesting comments. Geoff has been submitting content to Seeking Alpha as long as I have, maybe longer. His articles have tremendous depth and he gets very high praise, notably from Phil DeMuth.
I tend to view just about everything related to portfolio construction and market navigation differently than my perception of how Geoff views things. As a result I must confess only skimming the above article (it's gotta be more than 2000 words).
The article starts off talking about the merits of Monte Carlo Simulations (and the like) and then those merits get jumped on in the comments. I have never been a fan of simulations. A theme that should be apparent to long time readers is that I do not like to rely on things that should work. There are just too many potential variables between theory and reality.
Ultimately when you are 78 or any other age you have whatever amount of money you have, you have either generally benefited from or been hurt by whatever decisions you have made, you have had some combo of good and bad luck and your situation is what it is. Probabilities that some model spit out 30 years earlier mean nothing today.
Who doesn't know what does people in? Some combination of poor spending habits, poor investments decisions and bad luck is the culprit to many a failed financial plan. Emotions like hubris and panic are often involved in the first two and bad financial luck can be partially offset by accumulating a bigger emergency fund.
Is there anyone who doesn't know they should spend as little as possible, not panic sell, exercise (don't drink soda!) and work longer than they might have originally wanted to? Again there are a lot of variables between the theory of people knowing these things and reality of people heeding these things. The difference is that spending, not panicking, exercising and working are within your control (working being a possible exception) whereas this financial crisis occurring when you are 35 versus 65 is not within your control.
One particularly critical commenter of the Considine piece spoke out about the (obvious) need to be out of the stock market occasionally. Clearly I would agree with this line of thinking. My goal with this has been the same all along and I believe quite simple. When the market seems to be at greater risk of going down a lot (when it breaches its 200 DMA) I am hoping to go down less. That is it, just go down less.
In thinking of the entire stock market cycle, after the typical bull bear phase the market will be some percent higher then the end of the last full stock market cycle. If you simply go along for the ride on the way up (capturing most of the effect) and go down less on the retracement you will either have better returns over the entire cycle or simply smooth out the ride for yourself or both.
Perhaps I am making sound easier than it is but long time readers have had a front row seat to this here during the current cycle and again this behavior is within your control whereas the great market meltdown of 2040 will not be (we seem to go 30-40 years between great market meltdowns).
The bigger macro is the attempt to avoid being in situations where you increase the likelihood of trouble. Again not all of this is in your control; a combo of needing a new roof, a new car and serious dental work all at the same time can happen to anyone at anytime but does anyone have to buy a new 42 foot Power Cruiser and three jet skis to go with when they turn 62?
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15 comments:
Checking once again with The Hulbert Financial Digest, this time the newsletters instead of the book, I looked for the last review of Harry
Brown’s permanent portfolio, which ceased publication in 1997.
This time Hulbert has got nearly ten years of data. The permanent portfolio came in at 6.8% with the Wilshire 5000 at 16.1%, the Lehman
at 8.2% all annualized. The permanent portfolio had 43% of the market risk.
I also came across a blog entry by Mark Skousen called “The Permanent Portfolio Fund: Long Live Harry Browne’s “Fail-Safe” Investment Strategy” Skousen refers to Browne’s helping to create the Permanent Portfolio Fund (PRPFX) in 1982. He includes a long term chart of the
fund, which to my surprise has many years of 1% returns.
A link to the page can be found here:
http://tinyurl.com/malroa
And a quote from Skousen, “The fund’s long-term performance is poor compared to stocks, or even junk bonds. Its average return of 6.38% is only one percentage point higher than safe T-bills! During the roaring 1990s, the Permanent Portfolio Fund seemed “permanently” in a funk, rising only 1% a year while stocks were exploding at a 20%-30% annual rate.
I suspect that Harry Browne’s Permanent Portfolio gives too much weight to hard assets, and not enough in stocks and bonds. I like the idea of a permanent portfolio, but you should adjust it to your own comfort level”.
I feel compelled to respectfully point out that not everyone views retirement the way Roger does when he says "Is there anyone who doesn't know they should spend as little as possible, not panic sell, exercise (don't drink soda!) and work longer than they might have originally wanted to?"
As someone who quit a very typical lower level corporate job at age 52 to self retire I would like to state that for me and a lot of people I know we want to spend as MUCH as possible consistent with reasonable projections that our assets will last our lifetime (ie...the 4% per annum spending projection); and I REFUSED to work longer than I originally wanted to despite facing two terrible Bear markets since 1999. I just adapted and adjusted AND I'm still happily retired....
Just another point of view.
Oh, great. I'll be 92 for the next meltdown with no time to recover :)
Just to stir things up a little more on Sunday morning, I'll argue that just capturing most of the upside won't meet most folk's investment goals because their portfolios have gotten whacked so badly. This is not the time to get conservative and adopt a PP. It's time to take on risk with a Temporary Portfolio.
How about this (make one up):
25% Emerging markets
25% Financials
25% Japanese Yen
25% Junk bonds
To be clear, I wouldn't do that for lots of reasons, but the point is I don't think we spend enough time thinking about outperformance on the way up. Maybe now's the right time to pay more attention to the likes of Jim Rogers and the concept of concentrated portfolios where one thing doesn't just balance the other out.
Roger,
You have indicated that you do not like broad based indices like the EFA which has high exposure to Japan and questioned why one would want exposure to this country.
Question for you: Do you believe that the markets have priced all known public knowledge and that it is quite challenging to forecast the future? If so, why would you now want to invest in a broad based fund? If not, how can you forecast the unknown and make a determination to avoid a country like Japan, amongst others?
Anon 6:20
If you carry that Mark Skousen chart forward to the present date you get something like this
Which shows PP up around 90% versus 60% for the Dow.
Anon 7:56 Just to stir things up a little more on Sunday morning, I'll argue that just capturing most of the upside won't meet most folk's investment goals because their portfolios have gotten whacked so badly. This is not the time to get conservative and adopt a PP. It's time to take on risk with a Temporary Portfolio.
Ahh! What Roger and the PP advocate is not getting whacked so badly in the first place. Doubling up (or rather doubling-down :) your risk after one loss runs the risk of two 40% downs in a row. A nigh on impossible position to recover from.
Comparing The Permanent Portfolio's returns to stock index returns seems hardly the point, unless it was an all or nothing proposition which it shouldn't be.
On the other hand it has provided exposure to investments otherwise not found in stock funds, especially coins & bullion.
According to Morningstar PP's 10-year total return is 8.96% ranking it 6th in the "Balanced Fund" category and first withing the "Conservative Allocation". (also first for 5 years and second for 3)
AGain, we need to differentiate here between the "permanent portfolio" idea from Harry Browne and the permanent portfolio mutual fund. They are 2 different things. 99% of our discussion here is about the IDEA, and not the mutual fund
Yes, I have to agree with Stephen Drone, the actual Harry Browne,
permanent portfolio, as tracked by Hubert, was amazingly steady.
The chart, which is printed on a old Hulbert newsletter and can’t
be referenced here, is as flat as a ruler. The permanent portfolio fund
had years of bad performance, before doing very well, recently.
I suspect the stock market will catch up, eventually, but who knows,
I could be wrong?
Anyway, the two portfolios are very different.
time out from a painting project to catch up on the comments.
anon 6:20, I thought this would be the first post in a while with no Perm portfolio discussion Doh!
Retired in P kind of a counter factual reply to your comment would be but you'd be financially better off had you had a part time job. On a more srious note my experience has been to observe that far more people spend beyond their means than within their means. Sad but anecdotaly (and probably intuitively) true.
Anon 7:56 a Temporary Portfolio? you need to get that term patented and then market it. Seriously.
Anon, 7:57 I will answer you in tomorrows post.
Clive, you took the words....TY
Larry, I know you've been working at the quickie Mart with Apu and have not been around the the Harry Browne concept and the mutual fund managed by Cuggino are two different things.
One more thing somehwere someone said not switch to a perm portfolio now, I just said this the other day, I agree completely and it cannot be said enough, big changes AFTER the market drops 40% is a bad idea for the timing.
Great post by Hussman tonight, enjoy all.
http://hussmanfunds.com/wmc/wmc090615.htm
thanks for checking that this week's hussman is up
In case this horse hasn't been beaten enough...
Any money manager who attempts to mimic the PP for his clients will necessarily underperform it by the cost of his management fee. I'll bet PRPFX underperforms the benchmark by at least its expense ratio if not more. The only way for an active manager to match the PP, which in theory has no costs, is to take excessive risk to compensate for the manager's fee. At that point, the investment strategy is no longer the PP and is subject to tracking error. Wouldn't you agree with this assessment Roger?
You guys who regularly post here are smart enough to assemble a portfolio with low cost funds. My question is, when the silver bullet portfolio is finally hammered out, will anyone here actually recognize it? As Mr. Bogle likes to say, "The enemy of a good plan, is the search for a perfect plan."
Given his strong background in finance and accounting as well as skilled investment management Hussman is a superb source for valuation and market analysis and I read him religiously but I don't think much of his "economy at equilibrium" screeds; e.g., balancing the books is a snapshot involving accounting identities and it does not follow that it is also a real-world economic behavior.
I've already commented on what I see as problems with a bookkeeping approach to macroeconomics in the Krugman v. Ferguson thread last week so I'll continue to let someone else do the talking: Here's a realistic view at http://tinyurl.com/mb6zj6 of what will probably happen if stimulus is abandoned too early (ht Naked Capitalism) and, of course, there is always the premier macroeconomist himself, most recently at http://tinyurl.com/lxmvlj
From the Naked Capitalism post:
"Going forward, in all likelihood, we are going to see a move toward fiscal prudence and policy normalization. Stimulus will be seen as irresponsible. This is already the view amongst many politicians in the U.K., the U.S., and Germany ...So, when the U.S. and global economy relapse into depression because we did not stay the course, you will know why."
I only disagree with the very last phrase: The elites who have been chronically wrong about the economy (and a lot of other things) have shown a consistent willingness to not only deny their errors but to blame them on others and, even more troubling, corporate media outlets have shown a consistent willingness to report their convictions in this regard as at least equivalent, if not superior, to the verdict of those who got things right. YMMD
PS: The notion that the perfect can be the enemy of the good goes back a lot further than Bogle.
Roger --
Although I find your blog insightful, thought-provoking, and always entertaining, I did see this the other day:
http://buttersafe.com/2007/08/21/the-regrets-we-have/
Made me think of you, but in a sad way.
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