Harry Browne’s Permanent Portfolio

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MediumTex
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Re: Harry Browne’s Permanent Portfolio

Post by MediumTex »

stemikger wrote:Craigr, thanks so much!! I have to read this book, I'm definitely going to pick-it up this weekend. If I do the PP, I would have to do it outside of my 401K because we do not have a Gold option.

I appreciate the fact that you explained it so easily.
In the book we go into 401(k) implementation options, and there are a couple of wrinkles of which you may not be aware that might be helpful to you in implementing the PP with 401(k) balances making up a significant part of your savings.

401(k) plan work is what I do during the day to pay the bills, so this is an area I have spent a lot of time thinking about in the context of the PP and we tried to address it as fully as possible in the book. If you decide to read the book, keep an eye out for the "401(k)asino."
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Re: Harry Browne’s Permanent Portfolio

Post by FinanceFun »

MediumTex wrote:
stemikger wrote:Craigr, thanks so much!! I have to read this book, I'm definitely going to pick-it up this weekend. If I do the PP, I would have to do it outside of my 401K because we do not have a Gold option.

I appreciate the fact that you explained it so easily.
In the book we go into 401(k) implementation options, and there are a couple of wrinkles of which you may not be aware that might be helpful to you in implementing the PP with 401(k) balances making up a significant part of your savings.

401(k) plan work is what I do during the day to pay the bills, so this is an area I have spent a lot of time thinking about in the context of the PP and we tried to address it as fully as possible in the book. If you decide to read the book, keep an eye out for the "401(k)asino."
Curious. Would you consider Stable Value funds as an acceptable replacement for cash in the PP? Secondly, would you consider REIT as a replacement for a portion of the gold allocation?
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Re: Harry Browne’s Permanent Portfolio

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FinanceFun wrote:
MediumTex wrote:
stemikger wrote:Craigr, thanks so much!! I have to read this book, I'm definitely going to pick-it up this weekend. If I do the PP, I would have to do it outside of my 401K because we do not have a Gold option.

I appreciate the fact that you explained it so easily.
In the book we go into 401(k) implementation options, and there are a couple of wrinkles of which you may not be aware that might be helpful to you in implementing the PP with 401(k) balances making up a significant part of your savings.

401(k) plan work is what I do during the day to pay the bills, so this is an area I have spent a lot of time thinking about in the context of the PP and we tried to address it as fully as possible in the book. If you decide to read the book, keep an eye out for the "401(k)asino."
Curious. Would you consider Stable Value funds as an acceptable replacement for cash in the PP?
While a stable value fund in a 401(k) obviously involves counterparty risk that is not present with t-bills, the structure of stable value funds is designed to avoid principal loss due to interest rate fluctuations, while providing regular interest payments. Thus, I think that a stable value fund can be an acceptable substitute for t-bills if it's the only option you have for a cash-like instrument in a 401(k) plan account, so long as the counterparty risk is understood and the investor is comfortable with that additional risk.
Secondly, would you consider REIT as a replacement for a portion of the gold allocation?
No. Not at all. That would be like asking if a ham sandwich is an acceptable substitute for a hammer.
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Re: Harry Browne’s Permanent Portfolio

Post by Call_Me_Op »

How do the experts (Craig and MT) feel about global diversification of the equity portion of PP?
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Re: Harry Browne’s Permanent Portfolio

Post by Browser »

One small elaboration of the drawdown information about the PP. It's true that on a year-over-year basis, the worst nominal drawdown was about -5% in 1981. Far as I know, that's based on looking at Simba's spreadsheet, which uses the annual returns for Vanguard funds and spot Gold. But to gauge your risk tolerance it's important to consider the maximum peak to trough drawdown. I'm only able to do that for the PP since Nov, 2004 which was when the GLD ETF was introduced. For the 8 years between Nov, 2004 - Oct, 2012 the maximum peak-to-trough drawdown for the PP was approximately -15%, occurring during 2008. The portfolio recovered in the last few weeks of 2008 due to a massive spike in long term Treasuries. By comparison, in 2008, you would have experienced a similar maximum drawdown of -18% with a portfolio of 50% stocks, 50% 5-Yr Treasuries.
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Re: Harry Browne’s Permanent Portfolio

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Call_Me_Op wrote:How do the experts (Craig and MT) feel about global diversification of the equity portion of PP?
I think that a 15% allocation to international equities within the 25% allocation to stocks is about right.

Thus, with a $100,000 portfolio, with a $25,000 allocation to stocks, you might have $21,250 in an S&P 500 index fund and $3,750 in an international equity index fund.

With this approach I would just rebalance the equity portion to 85%/15% any time the overall portfolio is rebalanced.

I don't think it matters that much whether you take this approach, but it does provide an added layer of protection in the event that your home country stock market enters into an especially punishing bear market, as Japan's stock market has seen in for the last 22 years.
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Re: Harry Browne’s Permanent Portfolio

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Browser wrote:One small elaboration of the drawdown information about the PP. It's true that on a year-over-year basis, the worst nominal drawdown was about -5% in 1981. Far as I know, that's based on looking at Simba's spreadsheet, which uses the annual returns for Vanguard funds and spot Gold. But to gauge your risk tolerance it's important to consider the maximum peak to trough drawdown. I'm only able to do that for the PP since Nov, 2004 which was when the GLD ETF was introduced. For the 8 years between Nov, 2004 - Oct, 2012 the maximum peak-to-trough drawdown for the PP was approximately -15%, occurring during 2008. The portfolio recovered in the last few weeks of 2008 due to a massive spike in long term Treasuries. By comparison, in 2008, you would have experienced a similar maximum drawdown of -18% with a portfolio of 50% stocks, 50% 5-Yr Treasuries.
I think that the best way for this sort of thing not to bother you too much is to not look in on the portfolio too often.

Once you get comfortable with the portfolio, I have found that it is easy to resist peeking at it too often.

I was never able to do this when I was using more volatile strategies.
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Re: Harry Browne’s Permanent Portfolio

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MediumTex wrote:I think that the best way for this sort of thing not to bother you too much is to not look in on the portfolio too often.
That's been my solution to the problem as well.

It's really important if you look at assets in isolation as well. It's almost guaranteed that one of the Permanent Portfolio assets is going to have a bad (or even really bad) year from time to time. If you only look at that one asset, and not what the rest of the portfolio is doing, you can make a really bad decision. Swapping around in and out of assets is very bad for the bottom line and increases your risk of a large loss.
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Re: Harry Browne’s Permanent Portfolio

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I've been playing around with Simba's spreadsheet. Based on comparing the PP, I'm not sure the historical data persuasively show that you need Gold at all to get the same returns. Over the four decades from 1972-2011 if you held the Swedroe-type portfolio (with 25% in Small Cap Value and 75% in 5-Year Treasurys), you had a compound annual return of 9.5% (9.2% PP) and an annualized volatility of 7.5% (7.8% PP). If you held 20% SCV, 5% Gold, and 75% 5-Yr Treasury, your compound annual return was about the same as the PP but with volatility of only 6.4%. The charts of cumulative real returns are all equally smooth-looking. Your returns were better with the PP in the first decade of this period, and in the most recent decade - which were both characterized by very strong gold returns; but you did equally better with the 25/75 allocation in the middle two decades of this 40-year period, which were characterized by good stock and bond returns.
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Re: Harry Browne’s Permanent Portfolio

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Browser wrote:I've been playing around with Simba's spreadsheet. Based on comparing the PP, I'm not sure the historical data persuasively show that you need Gold at all to get the same returns. Over the four decades from 1972-2011 if you held the Swedroe-type portfolio (with 25% in Small Cap Value and 75% in 5-Year Treasurys), you had a compound annual return of 9.5% (9.2% PP) and an annualized volatility of 7.5% (7.8% PP). If you held 20% SCV, 5% Gold, and 75% 5-Yr Treasury, your compound annual return was about the same as the PP but with volatility of only 6.4%. The charts of cumulative real returns are all equally smooth-looking. Your returns were better with the PP in the first decade of this period, and in the most recent decade - which were both characterized by very strong gold returns; but you did equally better with the 25/75 allocation in the middle two decades of this 40-year period, which were characterized by good stock and bond returns.
Please understand that backtesting can only disprove ideas, it can't prove them going forward. We can all use a spreadsheet to find what did best, etc. But that's only one tool I suggest should be used. There also needs to be some research done outside of US markets, research into economics, and also an understanding of financial history to factor in to the decision.

Investing is not a science. I wish it were because then we could just run everything through a formula and be done with it. But the problem of investing is that the future dictates everything and the future is not knowable. We can assign judgement to certain things that are likely (e.g. the stock market will continue to grow), but we can't be sure that any particular thing is going to actually happen on our timetable.

So there is this mix of considerations. We want to try to get the probability of maximum growth, but we always need to be looking over out for events that could take us for surprise.

That brings us to gold. A very controversial asset. I don't deny that I'd rather be able to invest in a world where I felt gold was not needed in a widely diversified portfolio. I'd rather have the money invested in a more productive asset. However, the world I have includes all sorts of risks to currencies that I know could affect the stock/bond markets. So to hedge those risks I need to own gold because that's what humanity has decided is a monetary metal and can retain wealth through a variety of very bad historical events.

Looking back over the last 40 years is OK and tells you what portfolios may have had problems at one time or another. But it doesn't tell us what will happen the next 40 years. The U.S. today is much different than it was 40 years ago, and 40 years ago before that. Going forward another 40 years? Who can really say what is going to happen? I can't and I'd say that anyone that thinks they can is just fooling themselves. So again, I just own everything and don't get wound up about it. Believe me, if I knew for instance that gold was not going to be needed over the next 40 years of investing I probably wouldn't want to own it either. But I simply don't know that and financial history is filled with events showing that owning some gold in a diversified portfolio is a good idea.
Last edited by craigr on Thu Oct 18, 2012 1:09 pm, edited 2 times in total.
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Re: Harry Browne’s Permanent Portfolio

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Browser wrote:I've been playing around with Simba's spreadsheet. Based on comparing the PP, I'm not sure the historical data persuasively show that you need Gold at all to get the same returns. Over the four decades from 1972-2011 if you held the Swedroe-type portfolio (with 25% in Small Cap Value and 75% in 5-Year Treasurys), you had a compound annual return of 9.5% (9.2% PP) and an annualized volatility of 7.5% (7.8% PP). If you held 20% SCV, 5% Gold, and 75% 5-Yr Treasury, your compound annual return was about the same as the PP but with volatility of only 6.4%. The charts of cumulative real returns are all equally smooth-looking. Your returns were better with the PP in the first decade of this period, and in the most recent decade - which were both characterized by very strong gold returns; but you did equally better with the 25/75 allocation in the middle two decades of this 40-year period, which were characterized by good stock and bond returns.
A person who simply sticks with the PP will see some strategies outperform it over some periods, but the PP's theoretical framework provides you with solid exposure to (and protection against) the full range of possible future economic conditions that we might face. I don't know of any other strategy that can make the same claim.

Without gold in the portfolio, you have virtually no protection against a whole range of natural and man-made disasters, many of which from a historical perspective happen all of the time. I think that it is only prudent to respect these lessons that history offers to anyone who is willing to listen.
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Re: Harry Browne’s Permanent Portfolio

Post by Browser »

I wanted to compare the PP to a"Swedroe-type" portfolio because IMO this allocation has a clear rationale behind it and is not simply based ex-post on data-mining. Which of these two rationales makes more sense? I guess that's up to each investor to decide. Historical data doesn't decide for you, since both have done about equally well over time. You can expect one to outperform the other about equally often and for both to produce similar returns over longer periods of time encompassing different secular economic regimes.

Both of these portfolio allocations have the characteristic of reducing left tail risk (downside risk) at the expense of also reducing right tail, or upside, gains. The appropriateness of this investing objective will depend on the investor's need, willingness, and capacity to assume investment risk.

The "Swedroe-type" portfolio also incorporates a small allocation to commodities (about 5%). He believes that should come out of the allocation to equities. You could substitute gold for commodities because they perform similarly and are correlated. As I found, 20% SCV, 5% gold, 75% Treasurys reduced portfolio volatility somewhat while still producing about the same returns. The Sharpe ratio is higher than the PP (.66 vs. .57) and - as you would expect from that - the graph of cumulative returns is even smoother than that for the PP.
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Re: Harry Browne’s Permanent Portfolio

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Browser wrote:I've been playing around with Simba's spreadsheet. Based on comparing the PP, I'm not sure the historical data persuasively show that you need Gold at all to get the same returns.
Gold isn't for returns, it's for insurance. Try comparing the Sharpe and Sortino ratios for the two portfolios and you'll see the difference. Personally I see gold as a "cash" substitute. During periods of positive real returns I'd prefer to hold cash since I'll get a small positive IRR, during periods of negative real returns I'd rather hold gold since zero is better than a negative number.

Gold returns basically have four components: Industrial demand + Inflation protection + devaluation adjustment + Fear premium

The industrial demand component is pretty small but it is fairly steadily rising over the decades.
The inflation protection only works over very long time frames, more than one decade at least, but it does tend to work.
The devaluation adjustment takes place when gold stays the same, but the currency you're measuring it in drops with respect to a global basket of currencies which makes it look like gold went up.
The fear premium is the part I like since it makes gold the best exactly when I need it most, it also happens to be the largest component.

Insurance isn't free, so obviously there are some downsides to holding gold, you'll have to decide how important it is for your portfolio.

Current real return according to the Fed is -1.84% (Federal funds rate - trailing 1 year CPI-U) So they're pretty much flat out telling you that they're going to go through your pockets for loose change.
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Re: Harry Browne’s Permanent Portfolio

Post by Call_Me_Op »

Clearly_Irrational wrote: Personally I see gold as a "cash" substitute. During periods of positive real returns I'd prefer to hold cash since I'll get a small positive IRR, during periods of negative real returns I'd rather hold gold since zero is better than a negative number.
Gold a cash substitute? I think not. Are you willing to wait 50 years for your zero percent? Because it might take that long.
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Re: Harry Browne’s Permanent Portfolio

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Call_Me_Op wrote:
Clearly_Irrational wrote: Personally I see gold as a "cash" substitute. During periods of positive real returns I'd prefer to hold cash since I'll get a small positive IRR, during periods of negative real returns I'd rather hold gold since zero is better than a negative number.
Gold a cash substitute? I think not. Are you willing to wait 50 years for your zero percent? Because it might take that long.
In the last 40 years gold has provided a CAGR of 8.90%, while t-bills have provided a CAGR of 5.36%.

I don't know if that sheds any light on the differences between the two assets or not.

During the periods of positive real interest rates in the 1980s and 1990s, t-bills did provide very nice returns that were MUCH better than the returns that gold was providing during that period. During periods of negative real interest rates as we saw in the 1970s and 2001-forward, however, gold has demonstrated that it will provide returns that are far superior to t-bills.
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Re: Harry Browne’s Permanent Portfolio

Post by Clearly_Irrational »

Call_Me_Op wrote:
Clearly_Irrational wrote: Personally I see gold as a "cash" substitute. During periods of positive real returns I'd prefer to hold cash since I'll get a small positive IRR, during periods of negative real returns I'd rather hold gold since zero is better than a negative number.
Gold a cash substitute? I think not. Are you willing to wait 50 years for your zero percent? Because it might take that long.
It has zero intrinsic return, that doesn't mean it's price in dollars doesn't fluctuate for a variety of reasons. During periods of negative real return I expect the economy to be doing badly and the price of gold in dollars to actually rise. As part of a portfolio this makes perfect sense, if you're using "cash" as a bank account substitute it does not since the volatility is much higher.
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Re: Harry Browne’s Permanent Portfolio

Post by bogleblitz »

for the cash 25% portion, can I just put that in my bank savings account?

In 401k cash portion, Can I just buy the money market fund?
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Re: Harry Browne’s Permanent Portfolio

Post by MediumTex »

bogleblitz wrote:for the cash 25% portion, can I just put that in my bank savings account?

In 401k cash portion, Can I just buy the money market fund?
These options are fine, so long as you understand the additional risk these approaches involve compared to treasuries.

People sometimes scoff at the suggestion that there is a difference in risk between t-bills, money market funds and savings accounts. There is a difference, though. Some people found this out the hard way in 2008.
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Re: Harry Browne’s Permanent Portfolio

Post by Call_Me_Op »

MediumTex wrote:
bogleblitz wrote:for the cash 25% portion, can I just put that in my bank savings account?

In 401k cash portion, Can I just buy the money market fund?
These options are fine, so long as you understand the additional risk these approaches involve compared to treasuries.

People sometimes scoff at the suggestion that there is a difference in risk between t-bills, money market funds and savings accounts. There is a difference, though. Some people found this out the hard way in 2008.
People with savings accounts were fine in 2008. For those in money-market funds that don't invest 100% in treasuries, there was some anxiety (maybe a lot) but very few people lost money, and those that did lost about 3 cents on the dollar.

Also, people holding treasuries had a bit of a scare last year during the debt ceiling debate.

Bottom line: Nothing is completely safe, so spread your money around.
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Re: Harry Browne’s Permanent Portfolio

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Call_Me_Op wrote:People with savings accounts were fine in 2008. For those in money-market funds that don't invest 100% in treasuries, there was some anxiety (maybe a lot) but very few people lost money, and those that did lost about 3 cents on the dollar.
I remember when it was happening. There was very serious risk of many of those funds locking up. I wish I had been a fly on the wall at some of those manager meetings when it was all occurring. I suspect as an investor in those funds that were having problems it was a very trying time. These funds locked up investor assets for years as the litigation worked its way through the courts. I'm trying to imagine what someone in Schwab YieldPlus would be feeling when the fund dropped 40% almost overnight. This was sold as a safe conservative fund to hold cash!
Also, people holding treasuries had a bit of a scare last year during the debt ceiling debate.
Just noise, really. If T-Bills aren't being paid, then everything in the U.S. financial system is in dire trouble. The safest way to hold U.S. dollars is in Treasury bills. They are at the very top of the pyramid in terms of creditors that will be paid. As we point out in the book, T-Bill holders will be paid before things like FDIC insurance would even be discussed. It's just how the system works.

If someone wants more yield, they should setup a variable portfolio and do their gambling there. But don't speculate with the cash. Keep it very safe because in an emergency you really want it liquid and available. You don't want it being subjected to whatever is affecting the markets.
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Re: Harry Browne’s Permanent Portfolio

Post by Call_Me_Op »

Craig (and/or MT),

I don't know whether this is covered in your book, but what do you think about the CEF GTU for holding gold (in a taxable account)?
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Re: Harry Browne’s Permanent Portfolio

Post by MediumTex »

Call_Me_Op wrote:Craig (and/or MT),

I don't know whether this is covered in your book, but what do you think about the CEF GTU for holding gold (in a taxable account)?
As long as you understand the way its premium (or discount) to NAV will expand and contract over time, I think it is a great option.

The trick is to buy it when the premium to NAV is low. If you do that, the probability of future regret goes down a lot.
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Re: Harry Browne’s Permanent Portfolio

Post by Clive »

craigr wrote:Please understand that backtesting can only disprove ideas, it can't prove them going forward. We can all use a spreadsheet to find what did best, etc. But that's only one tool I suggest should be used. There also needs to be some research done outside of US markets, research into economics, and also an understanding of financial history to factor in to the decision.
So let's go back 100 years to 1912 and assume that an investor sees how the Permanent Portfolio has performed in recent years, ponders for a few more years before finally going all-in with their life savings at the end of 1915 as they retire, with a view to withdraw a 4% yearly pension amount (being midway between the 3% and 5% real (after inflation) reward that the Permanent Portfolio is suggested as providing).

Four years later, their Permanent Portfolio has lost -30% in value in real (after inflation) terms, on top of which they've also been drawing a 4% initial and likely rising income and perhaps are down close to (or in excess of) -50%.

Image

That Permanent Portfolio however was based on the assumption that gold changed 0% each year in real terms i.e. the yearly PP figures were calculated as the average of the real gain (loss) of stock, long dated treasury, 1 year interest rate and 0% (courtesy of Robert Shiller's data). If gold didn't keep up with inflation, then the Permanent Portfolio figure would have been even worse. If gold remained unchanged in nominal terms, the capital value loss would have been -42% (on top of which 4% income might also have been withdrawn).

Whilst gold was tied to cash (visa-versa), we can gleam a feel for how gold might have performed if it were free-floating at that time by looking at FX. Gold is global and we can deduce the price of gold in each currency - given the price of gold in one currency and the foreign exchange (currency) change between your currency and their currency and you can deduce the price of gold in your own currency. Looking at how the US $ moved relative to other currencies at that time the indications are that there was little movement, which implies there would have been little movement in the price of gold in US $ terms at that time. If anything therefore, the latter -42% Permanent Portfolio decline is the more likely outcome over that period, and if the investor had been withdrawing a 4% initial income and increasingly larger percentages year on year for living expenses that four year drawdown could easily have reached -60% or more :oops:
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Re: Harry Browne’s Permanent Portfolio

Post by hpowders »

What is the point of having 25% in cash? Why not just hold 1/3 each in gold, long term treasuries and stocks and simply rebalance each asset once a year back to 1/3? I bet the returns will be better too! :happy
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Re: Harry Browne’s Permanent Portfolio

Post by rmelvey »

Clive,

If gold ever become tied to our currency again I would rethink everything and would likely not hold a PP, but something different.

The permanent portfolio is based off of economic regimes, and it is primarily meant to exploit the cycles in a capitalist, credit based, free floating exchange, fiat with no default risk, CB manipulated interest rate economy.

Prior to 1972 we were living in a different regime. Citing how the PP would have fared then is like giving a poor review for a banana because it functioned poorly as a crowbar.

Hpowders,

You are essentially on the path to a "leveraged" PP. The returns look great unless interest rates increase. In 1981 cash was up +15% as Volcker aggressively tightened monetary policy. Every other asset was down that year. Without cash you will feel like a raging alcoholic with a vicious hangover if the fed starts pulling the punch bowl away. Harry Browne said that cash protected you against a "tight money" recession, referring to tight monetary policy.
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Re: Harry Browne’s Permanent Portfolio

Post by Call_Me_Op »

MediumTex wrote:
Call_Me_Op wrote:Craig (and/or MT),

I don't know whether this is covered in your book, but what do you think about the CEF GTU for holding gold (in a taxable account)?
As long as you understand the way its premium (or discount) to NAV will expand and contract over time, I think it is a great option.

The trick is to buy it when the premium to NAV is low. If you do that, the probability of future regret goes down a lot.
Thanks MT. I am aware of the premium/discount to NAV issue.

Does holding gold in GTU achieve any of the geographical diversification of the type advocated by Browne?
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: Harry Browne’s Permanent Portfolio

Post by hpowders »

rmelvey wrote:Clive,

If gold ever become tied to our currency again I would rethink everything and would likely not hold a PP, but something different.

The permanent portfolio is based off of economic regimes, and it is primarily meant to exploit the cycles in a capitalist, credit based, free floating exchange, fiat with no default risk, CB manipulated interest rate economy.

Prior to 1972 we were living in a different regime. Citing how the PP would have fared then is like giving a poor review for a banana because it functioned poorly as a crowbar.

Hpowders,

You are essentially on the path to a "leveraged" PP. The returns look great unless interest rates increase. In 1981 cash was up +15% as Volcker aggressively tightened monetary policy. Every other asset was down that year. Without cash you will feel like a raging alcoholic with a vicious hangover if the fed starts pulling the punch bowl away. Harry Browne said that cash protected you against a "tight money" recession, referring to tight monetary policy.
Okay. Thanks! :happy
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Re: Harry Browne’s Permanent Portfolio

Post by Clive »

rmelvey wrote:The permanent portfolio is based off of economic regimes, and it is primarily meant to exploit the cycles in a capitalist, credit based, free floating exchange, fiat with no default risk, CB manipulated interest rate economy.
So "Permanent" within a specific set of parameters outside of which backtesting is declared null and void.

What then of four sets of grandparents, all aged 70, who each retired at the end of 1979 (i.e. within the 'acceptable' backtest period) with the exact same amount saved for their retirement years. One invested in short term treasury's; another opted for 60-40 total stock market, total bond; the third (perhaps foolishly) opted for 100% stocks; and the last opted for a Permanent Portfolio.

Five years later, aged 75 at the end of 1984, assuming each of the grandparents had lived purely off state/private pensions and not dipped into their savings, each of the grandparents handed 40% of their savings/pension pot to their grandchildren, except for the Permanent Portfolio invested grandparents who opted to give nothing. Yet after that, all three of the generous grandparents had similar amounts or more in their pension pot than the Permanent Portfolio grandparents.

Yes - I know, selective timing, and there would have been other periods when the opposite might have occurred. But things in common to that of today and the 1910-1920 years and the 1980-85 period was that in the 1910-20 years yields were being suppressed below inflation - much as they are of present; and in 1980 gold had just made very strong gains over the prior decade - much the same as present (gold weighed heavily in the 1980 to 1984 years, losing -15.5% annualised real).
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Re: Harry Browne’s Permanent Portfolio

Post by rmelvey »

Clive,

If you want my honest opinion the name "Permanent Portfolio" is corny and makes the portfolio seem like an overly simplified gimmick. Nothing is permanent. The PP is not a religion for me. It is a hypothesis that has yet to be disproven. If it is ever disproven (poor risk adjusted returns relative to my goals), then I will do some deep reflection and come up with a new "neutral" portfolio.

Also, as we discussed in a previous thread it all depends what your denominator is. My denominator is very roughly the CPI because I wish to increase my purchasing power over time. I don't care if the PP loses money with a stock denominator, gold denominator, cash denominator, or LTT denominator; my denominator will always be the CPI. If it is beating the CPI by 3-6% over rolling 10 year periods than I am happy.
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Re: Harry Browne’s Permanent Portfolio

Post by MediumTex »

Call_Me_Op wrote:
MediumTex wrote:
Call_Me_Op wrote:Craig (and/or MT),

I don't know whether this is covered in your book, but what do you think about the CEF GTU for holding gold (in a taxable account)?
As long as you understand the way its premium (or discount) to NAV will expand and contract over time, I think it is a great option.

The trick is to buy it when the premium to NAV is low. If you do that, the probability of future regret goes down a lot.
Thanks MT. I am aware of the premium/discount to NAV issue.

Does holding gold in GTU achieve any of the geographical diversification of the type advocated by Browne?
In my opinion, yes.
"Early in life I noticed that no event is ever correctly reported in a newspaper." | -George Orwell
meckaneck
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Re: Harry Browne’s Permanent Portfolio

Post by meckaneck »

I posted this at crawling road too


Butler & Philbrick are putting out some of the best research on a consistent basis that I have seen anywhere.  They have reservations about it's future returns.

Part 1
http://gestaltu.blogspot.ca/2012/08/per ... art-1.html

Part 2
http://gestaltu.blogspot.ca/2012/08/per ... rt-ii.html

Japan PP
http://gestaltu.blogspot.com/2012/09/th ... anese.html
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Re: Harry Browne’s Permanent Portfolio

Post by meckaneck »

The authors suggest a tactical overlay
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Re: Harry Browne’s Permanent Portfolio

Post by Clearly_Irrational »

meckaneck wrote:The authors suggest a tactical overlay
I like the permanent portfolio since to me it seems like an extension or corollary of MPT based on fundamental rather than purely mathematical relationships. I'm not particularly impressed with any of the authors' "tweaks" to the setup as they seem to lack the rigor and conceptual foundation that makes the original so compelling. I'm not opposed to "enhancements" in general but feel that they should generally be based on underlying fundamentals like the rest of the setup.
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Re: Harry Browne’s Permanent Portfolio

Post by MediumTex »

Clearly_Irrational wrote:
meckaneck wrote:The authors suggest a tactical overlay
I like the permanent portfolio since to me it seems like an extension or corollary of MPT based on fundamental rather than purely mathematical relationships. I'm not particularly impressed with any of the authors' "tweaks" to the setup as they seem to lack the rigor and conceptual foundation that makes the original so compelling. I'm not opposed to "enhancements" in general but feel that they should generally be based on underlying fundamentals like the rest of the setup.
When it comes to the PP and financial professionals, there is typically a bit of bravado in their tweaks.

I just take it all with a grain of salt. These guys tell their clients a new story about every quarter anyway, so if this quarter's PP tweaks don't work out the way they're supposed to, they can just come up with some more tweaks next quarter.
"Early in life I noticed that no event is ever correctly reported in a newspaper." | -George Orwell
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Re: Harry Browne’s Permanent Portfolio

Post by mickens16 »

MediumTex wrote:
Call_Me_Op wrote:Craig (and/or MT),

I don't know whether this is covered in your book, but what do you think about the CEF GTU for holding gold (in a taxable account)?
As long as you understand the way its premium (or discount) to NAV will expand and contract over time, I think it is a great option.

The trick is to buy it when the premium to NAV is low. If you do that, the probability of future regret goes down a lot.
I tried to buy GTU through Vanguard and they indicated a $50 fee for a non-usa fund. Is this normal?
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Re: Harry Browne’s Permanent Portfolio

Post by MediumTex »

mickens16 wrote:
MediumTex wrote:
Call_Me_Op wrote:Craig (and/or MT),

I don't know whether this is covered in your book, but what do you think about the CEF GTU for holding gold (in a taxable account)?
As long as you understand the way its premium (or discount) to NAV will expand and contract over time, I think it is a great option.

The trick is to buy it when the premium to NAV is low. If you do that, the probability of future regret goes down a lot.
I tried to buy GTU through Vanguard and they indicated a $50 fee for a non-usa fund. Is this normal?
Hmm. I don't know. I've never tried to buy it through Vanguard before. I haven't ever had to pay anything extra when I have purchased it through another broker.
"Early in life I noticed that no event is ever correctly reported in a newspaper." | -George Orwell
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Re: Harry Browne’s Permanent Portfolio

Post by Call_Me_Op »

No extra fee with Fidelity. :happy
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Re: Harry Browne’s Permanent Portfolio

Post by Reubin »

I've purchased GTU through Vanguard in the past and never noticed any fees.
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Re: Harry Browne’s Permanent Portfolio

Post by Clive »

Call_Me_Op wrote:Based upon back-testing, a 30/70 portfolio of stocks/5 year treasuries compares favorably with the Permanent Portfolio (return. SD, and draw-down), and appears to be intrinsically less risky in the sense that 70% of the portfolio is very safe.
This is a Boglehead 25/75 Total International Stocks/Total Bond comparison to the Permanent Portfolio (courtesy of Simba's spreadsheet/data)

Image

One stop UK versions of Boglehead portfolios

80-20 http://www.morningstar.co.uk/uk/funds/s ... F00000MLUR
60-40 http://www.morningstar.co.uk/uk/funds/s ... F00000MLUP
20-80 http://www.morningstar.co.uk/uk/funds/s ... F00000MLUL

Expense Ratio comparisons
Boglehead (Vanguard) 0.3%
PERM 0.5%
PRPFX 0.8%

The 4x25 (stocks, LTT, T-Bill, Gold) Permanent Portfolio might be considered as a gold tilt (additional gold exposure above and beyond Total Market exposure), so would be expected to relatively lead when gold was rising (1970's, 2000's), and lag when gold was in decline (1980's, 1990's). During the early years of the 1980's gold was declining at -15% annualised (i.e. 1980 to 1984 inclusive). At other times gold might be putting on 16%+ annualised (i.e. 2007 to 2011 inclusive).

If you're considering a tilted portfolio, perhaps its best not to do so when the tilt asset has had a very strong prior decade. Often however that's when investors are more attracted to such tilting - only to later sell out of such tilt after subsequent relatively poor performance.

5 year Treasury's instead of total bond ? - Personally I quite like that myself. Again that's tilting away from total bond though. A 5 year treasury ladder when each rung is held to maturity has no capital risk and rolls relatively quickly to track yields up (or down). When holding each rung to maturity, interim capital value fluctuations can in effect be ignored as they're just paper value changes. When so, the gain each year for such a 5 year ladder is the average of the current and past four years 5 year Treasury yields. UK since 1980, a 5 year Gilt (treasury) ladder yielded a 3.7% annualised real (after inflation) return - not bad for something that is nigh on totally risk free. Much of that however would have been a consequence of generally transitioning from relatively high yields in the 1980's, down to more recent low/average yields. Going forward ??? I wouldn't expect such historic high real gains to persist, excepting perhaps if yields again spiked heavily upwards and maturing bonds were rolled into those higher yields (I'd be inclined to extend the ladder out to perhaps 10+ years under such conditions i.e. roll maturing gilts into 10 year gilts).

Total bonds versus specific bonds is ??? For example whilst corporate bonds might yield 2% more than gilts, the corporate bond default rate might average 2% and in effect negate the benefit of higher yields (approximation for corporate bonds is yield - default rate (%)). A problem with defaults is that they tend to cluster, so whilst there may be no defaults for 9 years, you might encounter 20% defaults in the tenth year and endure a sizeable capital loss in that year as a result (silly example perhaps, but conveys the gist).
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Re: Harry Browne’s Permanent Portfolio

Post by pinebarrens1 »

I'm all for looking at the portfolio as a whole, not the individual components.....but could even the diehard PP'ers stick with it 1988 thru 2000?

say you adopt the Permanent Portfolio at the beginning of 1988. Your 25% allocation to gold is down for the year so you rebalance into it. Then 1989 Gold is down again for the year. Negative once again in 1990. Down again in 1991. Down again in 92! Then from 96 to 2002 it's down another 4 out of 5 years. I don't think I could stay the course thru that kind of scenario.
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Re: Harry Browne’s Permanent Portfolio

Post by hpowders »

4 ETF do it yourself PP, expense ratio 0.15%.
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Re: Harry Browne’s Permanent Portfolio

Post by Call_Me_Op »

There are alternatives to the classical PP with which I feel more comfortable. One example is 30/10/60 Diversified Stock/Gold/5 Year Treas. Call this portfolio X. Here is how portfolio X has stacked-up against the classical PP from 1972 through 2011.

Permanent Portfolio - CAGR 9.20% Sharpe 0.52

Portfolio X - CAGR 10.10% Sharpe 0.74

Portfolio X is not just developed based upon back-testing. It is tied to the economy in the same way as PP, but uses a more broadly diversified stock portfolio, de-emphasizes gold, and reduces the treasury duration.
Last edited by Call_Me_Op on Mon Oct 22, 2012 9:07 am, edited 2 times in total.
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Re: Harry Browne’s Permanent Portfolio

Post by Clive »

hpowders wrote:4 ETF do it yourself PP, expense ratio 0.15%.
UK DIY 32-68 stock/bond incorporating 20% foreign exposure has an expense ratio of 0.13% :happy (i.e. 40% allocation to Vanguard 80-20 lifestyle, 60% 5 year gilt ladder (holding each rung to maturity)).
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Re: Harry Browne’s Permanent Portfolio

Post by wshang »

Call_Me_Op wrote:30/10/60 Diversified Stock/Gold/5 Year Treas. Call this portfolio X. Here is how portfolio X has stacked-up against the classical PP from 1972 through 2011.

Permanent Portfolio - CAGR 9.20% Sharpe 0.52

Portfolio X - CAGR 10.10% Sharpe 0.74
Looks interesting. May I suggest starting a new thread, and if you can, 'show your work'. (Year by year win/loss perecentage, chart versus 60/40 and PP - if that isn't asking too much.)
The cure shouldn't be worse than the disease.
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Re: Harry Browne’s Permanent Portfolio

Post by Clive »

Image
above is log scaled, below is linear
Image
Yearly gains (image is too tall for posting here) http://tinyurl.com/9vkajbh
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Re: Harry Browne’s Permanent Portfolio

Post by Clearly_Irrational »

pinebarrens1 wrote:I'm all for looking at the portfolio as a whole, not the individual components.....but could even the diehard PP'ers stick with it 1988 thru 2000?

say you adopt the Permanent Portfolio at the beginning of 1988. Your 25% allocation to gold is down for the year so you rebalance into it. Then 1989 Gold is down again for the year. Negative once again in 1990. Down again in 1991. Down again in 92! Then from 96 to 2002 it's down another 4 out of 5 years. I don't think I could stay the course thru that kind of scenario.
That was a concern for me as well which is why I've adopted a real interest rate rule. Positive real interest rates - Hold Cash since you get an intrinsic return, Negative real interest rates - Hold gold since zero is better than a negative number.
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Re: Harry Browne’s Permanent Portfolio

Post by Call_Me_Op »

Clive wrote:Image
above is log scaled, below is linear
Image
Yearly gains (image is too tall for posting here) http://tinyurl.com/9vkajbh
Clive,

You used 2 year treasuries while I proposed 5 year. Performance is even better with the 5 year.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: Harry Browne’s Permanent Portfolio

Post by Clive »

Call_Me_Op wrote:You used 2 year treasuries while I proposed 5 year. Performance is even better with the 5 year.
I used 2 year T as the 2 year T fund is more like a 5 year T ladder, whilst 5 year T fund is more like a 10 year T ladder.
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Re: Harry Browne’s Permanent Portfolio

Post by Call_Me_Op »

Thanks Clive. Should the truth be known, this is the portfolio I am implementing outside of my retirement account. I am very short-maturity on the treasuries right now and allow the use of some CD's and US Savings Bonds for the 60% bond portion. I am grappling with allowing a small portion in municipals. So really, I plan to slowly grow into what I consider a good asset allocation. As Browne said, "nobody ever went broke by playing it safe."
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: Harry Browne’s Permanent Portfolio

Post by Clive »

Clearly_Irrational wrote:
pinebarrens1 wrote:I'm all for looking at the portfolio as a whole, not the individual components.....but could even the diehard PP'ers stick with it 1988 thru 2000?

say you adopt the Permanent Portfolio at the beginning of 1988. Your 25% allocation to gold is down for the year so you rebalance into it. Then 1989 Gold is down again for the year. Negative once again in 1990. Down again in 1991. Down again in 92! Then from 96 to 2002 it's down another 4 out of 5 years. I don't think I could stay the course thru that kind of scenario.
That was a concern for me as well which is why I've adopted a real interest rate rule. Positive real interest rates - Hold Cash since you get an intrinsic return, Negative real interest rates - Hold gold since zero is better than a negative number.
Do you hold Total International Stocks (foreign currencies/earnings) to compensate?

In Iceland 2008, an Icelandic all cash investor (short term treasury's) would have done as equally as well (bad) as a Permanent Portfolio investor that year - provided they were holding 22% US $ (maybe an indicator that 20% to 25% foreign is generally appropriate).

If real yields were positive and you were fully in domestic - a sudden shock event ($ crisis) could be painful.
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