The Permanent Portfolio

grey_gym_sock

Pork&Beans wrote: »

I think I will stick to it .I recently read the ascent of money,interesting book.....until relatively recently in the history of finance the world has pretty much revolved around the gold standard.I believe it may one day return to this as the global debt bubble cannot continue forever.

that's really not a good reason for adopting the PP.

i've haven't read that book, but from a glance at its wikipedia page, it sounds like it is a bit cursory about anything before the medicis. to get a longer view, i'd recommend david graeber's "debt: the first 5000 years". he identifies alternating periods of bullion-based money and credit-based money. the earliest money (c. 3000 BC) was credit-based. there have been 2 periods of bullion-based money: the first from 800 BC - 600 AD; the second from 1450-1971 (i.e. up to the collapse of the gold standard). it is simply wrong to say that money has always revolved around gold.

you could argue that the long view provides some support for the idea that bullion-based money might make a comeback. but not for the idea that it needs to happen any time soon, specifically: in our lifetimes. purely credit-based money can be used for very long periods.

debt is a distinct (though related) issue. there are various debt bubbles. at some time, they'll burst, i.e. some debts won't be paid (and will have to be written down). but it doesn't follow that we'll go back to bullion-based money at that point.

if you change your mind about bullion-based money making a comeback soon, would you abandon the PP? if you would, then you probably shouldn't adopt it in the first place. that's what i mean by saying it's a bad reason for adopting the PP.

That being said.......as boring as the PP is I get my kicks out of investing in highly speculative oil companies and previously mentioned my pension is 100% equities.The PP for me is my safe haven or fall back fund it it all goes Pete Tong!

there's nothing wrong with dialling down the risk for a part of your capital. that's usually done by reducing the equities, increasing bonds and cash. the PP is one way to do it, but there are more conventional ways, which most investors will find it easier to stick with. such as buying a multi-asset fund with a relatively low proportion of equities. the PP will probably do the job, if you can stick with it, but all that gold would make me very nervous.

did i miss it, or are you sticking with FTSE 100 + FTSE 250 as your equities part of the PP? i agree with the other posters who think that's a bad way to do it.

what are you using for the other 3 components?

grey_gym_sock

kidmugsy wrote: »

That's because Harry Browne wrote before I-L bonds were available.

good point. but what would he have done (or would it make sense to do, following a similar approach) if they had been available? i'm not at all sure.

should the conventional long-term bonds be replaced with index-linked long-term bonds? the long-term bonds are supposed to make gains in an economic slump. do I-L bonds do that as well, or better, than conventional ones?

alternatively, should the gold be replaced with I-L bonds? as an asset that will more accurately keep pace with high inflation, measured against a broad index of inflation, instead of a single commodity?

Pork&Beans

grey_gym_sock wrote: »

that's really not a good reason for adopting the PP.

i've haven't read that book, but from a glance at its wikipedia page, it sounds like it is a bit cursory about anything before the medicis. to get a longer view, i'd recommend david graeber's "debt: the first 5000 years". he identifies alternating periods of bullion-based money and credit-based money. the earliest money (c. 3000 BC) was credit-based. there have been 2 periods of bullion-based money: the first from 800 BC - 600 AD; the second from 1450-1971 (i.e. up to the collapse of the gold standard). it is simply wrong to say that money has always revolved around gold.

you could argue that the long view provides some support for the idea that bullion-based money might make a comeback. but not for the idea that it needs to happen any time soon, specifically: in our lifetimes. purely credit-based money can be used for very long periods.

debt is a distinct (though related) issue. there are various debt bubbles. at some time, they'll burst, i.e. some debts won't be paid (and will have to be written down). but it doesn't follow that we'll go back to bullion-based money at that point.

if you change your mind about bullion-based money making a comeback soon, would you abandon the PP? if you would, then you probably shouldn't adopt it in the first place. that's what i mean by saying it's a bad reason for adopting the PP.

there's nothing wrong with dialling down the risk for a part of your capital. that's usually done by reducing the equities, increasing bonds and cash. the PP is one way to do it, but there are more conventional ways, which most investors will find it easier to stick with. such as buying a multi-asset fund with a relatively low proportion of equities. the PP will probably do the job, if you can stick with it, but all that gold would make me very nervous.

did i miss it, or are you sticking with FTSE 100 + FTSE 250 as your equities part of the PP? i agree with the other posters who think that's a bad way to do it.

what are you using for the other 3 components?

Yes I am.I want the whole portfolio to be UK based.I am well aware of the global diversification argument and can see how it works however i'm just going to stick to my water pistols on it.Ideally id like to find an AIM index to incorporate into it however there isn't one available nor is there likely to be .The thing is and this is probably a fundamental question........can anyone predict the future? I live and work in the UK.What the Wombles in Parliament do effects us all directly one way or another.There was someone a few posts back advocating owning foreign forestry, land etc. I've worked in places like Africa where overnight a regime change can happen,land seized etc.I think sometimes it can be possible to diversify or as they say diworsify too much.

Again...I will take lower growth from the UK as a safety net.The SIPP is all out global equities,that can do what it wants and enjoy all the diversification,crashes and charges.....I cant touch that money anyway until i've more or less forgotten my name and where I live.

Other components are

Vanguard long duration Gilt index
Cash ISA
Gold various forms

If someone can come up with a better allocation to the UK market (only UK mind) then i'd be most grateful!

:beer:

Audaxer

Pork&Beans wrote: »

Again...I will take lower growth from the UK as a safety net.The SIPP is all out global equities,that can do what it wants and enjoy all the diversification,crashes and charges.....I cant touch that money anyway until i've more or less forgotten my name and where I live.

The fact that you are sticking to the UK market for your non-SIPP investments doesn't necessarily mean they are any safer in that your UK-based portfolio could suffer as much from equity crashes as your global portfolio in your SIPP. Just pointing that out, but if you are happier sticking with the UK for that portfolio, that's fine.

kidmugsy

grey_gym_sock wrote: »

Should the conventional long-term bonds be replaced with index-linked long-term bonds? The long-term bonds are supposed to make gains in an economic slump. Do I-L bonds do that as well, or better, than conventional ones?

I don't know; I do know that index-linked gilts currently pay a negative real rate of return. We can get a rate of return on cash at above CPI inflation at the moment: not on much cash, and mostly for only a year at a time, but with a good deal more flexibility than ILGs offer. Combined with our index-linked savings certificates - which protect us from inflation for up to five years at a time - this removes any argument for ILGs for us. Our long term protection from CPI inflation is in our pensions.

I also know that negative inflation - such as might occur in a mighty deflation - drags down the return on ILGs whereas ILSCs and our pensions would go up in real terms if inflation turned negative. So would cash.

grey_gym_sock wrote: »

alternatively, should the gold be replaced with I-L bonds? as an asset that will more accurately keep pace with high inflation, measured against a broad index of inflation, instead of a single commodity?

If part of the point of gold is to free the investor from many of the risks of dodgy government finance then I don't see how it can make sense to hold 25% fixed interest gilts plus 25% index-linked gilts. Neither is a gamble I'd take at the moment, never mind both. Our State Pensions and ILSCs are quite enough of a gamble on HMG.

Maybe I'm being blind; maybe we should take a punt on fixed interest gilts: the last time we did it went awfully well. But the long decline in interest rates that made everyone an investment genius has presumably finished.

We realised that once we had retired it's the defensive characteristics of investments that matter most to us. I'm not convinced that the classical argument for the defensive characteristics of fixed interest gilts is sound now: maybe QE, near-zero bank rate, and stupendous government debt changed all that. (Stupendous, that is to say, by the standards of times when war can't be blamed for the debts. And stupendously worrying particularly in the USA.)

Anyway, suppose we made a big gain on fixed interest gilts. For all I know the IHT laws at the time of my widow's death would swipe 40% of the gain anyway. That emphasises that we are interested mainly in risk mitigation rather than in taking risks in search of high returns.

What I like about Harry Browne is that he invites you to think about what sorts of broad economic events can occur and how you can defend yourself from each, and gain from each. He positively insists you diversify. Both of these points seem very prudent to me: how each investor interprets them is up to him. For example, someone with DC pensions rather than DB pensions is almost certain to take decisions different from ours.

The decline in DB pensions seems to me to imply a radical change. It's a terrible pity that annuity rates are so dismal - are people with little financial experience really going to have to manage their pension investments into their years of intellectual decline? I shiver for them.

bowlhead99

Pork&Beans wrote: »

If someone can come up with a better allocation to the UK market (only UK mind) then i'd be most grateful!

As you mentioned, there isn't really a cheap aim tracker. And if there was it might not be too attractive; because a marketcap weighted tracker would be focusing the money into the 'biggest' small companies, which sounds a bit obtuse, and within AIM there is quite a lot in the way of crappy small companies with reduced standards of governance and transparency compared to bigger main market firms, together with liquidity, high dealing spread etc.

Yhe latter points make for an expensive and ineffective index fund, while the former ones mean that if you don't make some sort of effort to separate the wheat from the chaff, the returns of the hidden gems get outweighed by the terrible companies; AIM indexes haven't really been stellar in recent memory.

I would advocate getting a managed fund for UK smallcap. And then when you look at the allocation of your large cap, (which is via the ftse100 with a huge skew to certain industries), I would look at managed for that as well. There may be fewer underlying holdings used in an actively managed fund than there are in the FTSE350, but it would still be diversified and wouldn't be forced to focus on buying whatever is most expensive or most 'big and slow' to the dilution of other industry types.

So although a pure 'index based' allocation might work ok for US or to some extent global, if your portfolio is UK centric or UK exclusive I would tend to not go with an index (or even two or three). Instead a managed smallcap with a managed large/midcap could work fine, as could a managed mid/small cap fund with a managed mid/large or large one.

AlanP_2

How are people calculating a value for their DB pensions?

I have two on the horizon. One I value at 30x annual pension as it is CPI inflation linked, the second I value at 20x annual pension as it has no guaranteed inflation linking (apart from minimal statutory GMP part) and a track record of no increases over last 11 years for those already drawing from the scheme.

A more evidence based approach could be constructed using Annuity rates I guess but I can't think of anything else.

Kidmugsy and Ray have both set out the percentage of their "wealth" that is attributable to DB pensions, and they are very similar. But, if the underlying calculations are different the results would be very different.

Malthusian

bowlhead99 wrote: »

As you mentioned, there isn't really a cheap aim tracker.

There isn't a cheap one but there is at least one expensive one (TIME : AIM). But given the annual charge is 0.8% + VAT I can't help thinking you may as well go with a discretionary managed portfolio of AIM shares for the extra assurance that you are not investing blindly into complete junk.

A while ago I read that the AIM market index as a whole had an annualised percentage return of minus 1.6% since 1995.

Pork&Beans

Aye the AIM is hard going for dodgy dealings,as you say probably better to hold a portfolio of picked stocks!I'm not so keen on the managed funds,a lot of these managers tend to lose their shine after a while.Anyway lets see.........need enough dosh in my retirement to buy a Harley.....havn't thought further than this!

bowlhead99

Pork&Beans wrote: »

.Anyway lets see.........need enough dosh in my retirement to buy a Harley.....havn't thought further than this!

You can get most Harleys for £20k which is only a year's ISA allowance. If your projected wealth is also good enough to know that you can easily afford that, great. But if that's going to be a lot in the context of your total long term living or retirement pot, you might need to grow that pot, to meet the objectives you have (of being able, e.g., to find £20k for a bike) in which case putting three quarters of your non-pension investment into things that aren't equities is probably too conservative. The old "shortfall risk" issue, of not taking enough investment risk to get you where you need to be...