Why don't people use the Permanent Portfolio?

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Why don't people use the Permanent Portfolio?

Postby boggler » Tue May 07, 2013 6:35 pm

I'm wondering whether the Permanent Portfolio would be more appropriate than an 80/20 stock/bond allocation. Incredibly, it seems to have done just as well as even a 100% stock portfolio over the past 30 years or so, despite the fact that it only holds 25% stocks... and yet it has done so with significantly less volatility. Why don't more people use it? Why don't you use it, personally?

See here for an example:
http://crawlingroad.com/blog/2008/12/22 ... l-returns/
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Re: Why don't people use the Permanent Portfolio?

Postby ignatz » Tue May 07, 2013 6:53 pm

Many do use it, but not too many that frequent this forum.

I'd guess it's seen as gimmicky or antithetical to Bogleheadism or a flash in the pan, etc.

I owned PRPFX for 6 or so years ending about a year ago. Some will tell you they don't like PRPFX due to the ER if nothing else and that it could be replicated for much less by buying individual ETFs.

It's out-performance pretty much coincides with gold's performance. It can be boring and it can also be tough to hold when gold is going sideways or down while the SP is going up at 10 or 15 percent per year. You might find it tries your patience during those times.

It under-performed most conservative allocation funds through most of the 1980s and 1990s and really caught fire only in the last 10 or 15 years.

There's a forum out there devoted to it that you can find with Google.
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Re: Why don't people use the Permanent Portfolio?

Postby steve r » Tue May 07, 2013 7:08 pm

Boggler

Many on this site have discussed PP.

Read this thread - it will take a few days (72 pages nearly 4,000 post!)

http://www.bogleheads.org/forum/viewtopic.php?t=15434&postdays=0&postorder=asc&start=0

A lot of people are skeptical about gold. Some (not me) question the performance as gold gained a lot when it was not legal to own.

I question my ability to hold an asset class that under performs for nearly two decades before springing back to life.

I see you are searching for a plan. Whatever you decide, you need the realize that staying the course is extremely important.
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Re: Why don't people use the Permanent Portfolio?

Postby boggler » Tue May 07, 2013 7:15 pm

steve r wrote:I see you are searching for a plan. Whatever you decide, you need the realize that staying the course is extremely important.


Yup. That's why I'm asking so many questions. :)

So basically, the consensus is that gold is questionable as an asset class since it has no intrinsic value and could very well fail to go anywhere over the next bunch of decades? In other words, you might liken it to "tulip mania"?
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Re: Why don't people use the Permanent Portfolio?

Postby nisiprius » Tue May 07, 2013 7:17 pm

boggler wrote:Incredibly, it seems to have done just as well as even a 100% stock portfolio over the past 30 years or so, despite the fact that it only holds 25% stocks... and yet it has done so with significantly less volatility. Why don't more people use it? Why don't you use it, personally?
I don't use it personally because gold is just not my thing. I don't trust it. Gold advocacy comes with ideological and political baggage that don't happen to align with, let's say, my own baggage. I don't understand why gold should be expected to earn any return, or why I deserve to be rewarded for holding it. And it is not a stable store of value; it just isn't, it hasn't been, regardless of whether it ought be according to someone's economic theories.

I don't see why the Permanent Portfolio mutual fund shouldn't be taken a fair illustration of the historical real-world results actually obtained by professionals implementing the strategy.

Blue: Permanent Portfolio fund (PRPFX); orange, Vanguard Prime Money Market fund; green, Wellesley; yellow, 500 index.

Image

I don't know the explanation of the differences between their results and craigr's numbers.

I think PRPFX is a gold story, plain and simple It would have taken an awful lot of patience to stick to PRPFX during the 22-year-long period when it was underperforming a money market fund. And regardless of what craigr's paper table shows, the real-world fund did not outperform Vanguard 500 Index, nor did it outperform Wellesley Income Fund.

Permanent Portfolio fund: $73,885.96
Wellesley: $208,672.15
Vanguard 500 Index: $227,362.57
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Re: Why don't people use the Permanent Portfolio?

Postby steve r » Tue May 07, 2013 7:21 pm

I don't think that (per Boggler last post). I think gold has real value as a currency of last resort. Most don't. I think the PP is wonderful in its simplicity and diversification.

That said, things may not play out as I expect for a very very very long time. When things go poorly, I will bail (and gold will spike.)

I stay as diversified as I can without gold and am comfortable with this mix and can stay the course. I struggle to stay the course when I own assets that under perform for 20 months - I cannot imagine 20 years. I would second guess myself constantly.

one last thing ... Craig R - who you cited - occasionally posts on this site (and on the link I provided).
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Re: Why don't people use the Permanent Portfolio?

Postby Quasimodo » Tue May 07, 2013 7:31 pm

nisiprius wrote:
boggler wrote:Incredibly, it seems to have done just as well as even a 100% stock portfolio over the past 30 years or so, despite the fact that it only holds 25% stocks... and yet it has done so with significantly less volatility. Why don't more people use it? Why don't you use it, personally?
I don't use it personally because gold is just not my thing. I don't trust it. Gold advocacy comes with ideological and political baggage that don't happen to align with, let's say, my own baggage. I don't understand why gold should be expected to earn any return, or why I deserve to be rewarded for holding it. And it is not a stable store of value; it just isn't, it hasn't been, regardless of whether it ought be according to someone's economic theories.

I don't see why the Permanent Portfolio mutual fund shouldn't be taken a fair illustration of the historical real-world results actually obtained by professionals implementing the strategy.

Blue: Permanent Portfolio fund (PRPFX); orange, Vanguard Prime Money Market fund; green, Wellesley; yellow, 500 index.

Image

I don't know the explanation of the differences between their results and craigr's numbers.

I think PRPFX is a gold story, plain and simple It would have taken an awful lot of patience to stick to PRPFX during the 22-year-long period when it was underperforming a money market fund. And regardless of what craigr's paper table shows, the real-world fund did not outperform Vanguard 500 Index, nor did it outperform Wellesley Income Fund.

Permanent Portfolio fund: $73,885.96
Wellesley: $208,672.15
Vanguard 500 Index: $227,362.57


Hi Nisiprius;

Craig R will no doubt offer a better explanation, but my take on it is that the Permanent Portfolio mutual fund PRPFX is modeled after an early version of the portfolio that is slanted toward protection in an inflationary environment. It includes Swiss franc assets and is light on the long term treasury bond portion of the later version of the portfolio, which is equal parts cash in the form of T bills, gold, stocks and long term T bonds.

During the 1980s and 1990s PRPFX performance was poor compared with the 4 x 25% version of the portfolio detailed on Craig's website.

John
Last edited by Quasimodo on Tue May 07, 2013 7:35 pm, edited 2 times in total.
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Re: Why don't people use the Permanent Portfolio?

Postby 3CT_Paddler » Tue May 07, 2013 7:32 pm

There is a strong correlation between the performance of precious metals relative to other assets and interest in PP.
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Re: Why don't people use the Permanent Portfolio?

Postby SpaceCommander » Tue May 07, 2013 7:34 pm

Of course, nobody has a crystal ball, but the fundamentals for 75% of that portfolio look really bad: Gold has had its nice runup over the last 10 years. Reversion to the mean: gold probably won't duplicate its stellar performance of late. With interest rates artificially pushed to near zero the effect on bonds is terrible. As Buffett mentioned recently, "there's some guy buying 75 billion a month" and that's artificially depressing interest rates. With rates near zero, t-bills are returning nothing. After inflation, you're taking a loss there. But the outlook for long bonds is atrocious. When interest rates move up (and they inevitably will at some point), long bonds will get absolutely creamed. So where's the return on your Permanent Portfolio going forward? I like equities, gold has seen it's day, t-bills are a losing bet after inflation, and long bonds are a ticking timebomb. But, that's just my opinion, I could be wrong... :wink:
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Re: Why don't people use the Permanent Portfolio?

Postby steve r » Tue May 07, 2013 7:38 pm

3CT_Paddler wrote:There is a strong correlation between the performance of precious metals relative to other assets and interest in PP.


Well stated ... gold goes up and interest grow ... correlation coefficient is high indeed.
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Re: Why don't people use the Permanent Portfolio?

Postby Jebediah » Tue May 07, 2013 7:41 pm

ignatz wrote:
I'd guess it's seen as gimmicky or antithetical to Bogleheadism or a flash in the pan, etc.



It is none of those things. It is old, low-cost, and based on solid theory.

The real beauty of it is the mixture of 3 asset classes that respond differently in different economic climates and do not correlate. Stock risk, term risk, and commodities mix very efficiently. Which instruments (gold or CCF, etc), and in what proportions is left to taste and can be argued about forever, but the fundamental efficiency of this 3-part mix is very impressive.
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Re: Why don't people use the Permanent Portfolio?

Postby boggler » Tue May 07, 2013 7:43 pm

Would it be accurate to say that since the portfolio has lower volatility, we are taking a hit in return? And the fact that the performance has matched 100% stock is somewhat of a fluke?
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Re: Why don't people use the Permanent Portfolio?

Postby Clive » Tue May 07, 2013 7:46 pm

but my take on it is that the Permanent Portfolio mutual fund PRPFX is modeled after an early version of the portfolio that is slanted toward protection in an inflationary environment

What Investors Should Fear in the Permanent Portfolio

Another important statistical feature of the PP is that it negatively correlates with interest rates, unlike a 60/40 portfolio
...
Falling interest rates will correspond to better returns for PRPFX, and increasing interest rates will correspond to worse performance for PRPFX. Conversely, the 60/40 portfolio will deliver higher returns in a rising rate environment, and vice versa.
...
There are, however, some potential problems with the PP. First, we have just seen a
period when both long-term bonds and gold have substantially outperformed. Browne
envisioned a world in which long-term bonds outperform in a deflationary period and gold
outperforms in an inflationary period. What are we to make of the fact that gold has
substantially outperformed in recent years in a deflationary environment? The trailing fiveyear
annualized return of GLD is almost 20% per year. The long rallies in both
government bonds and gold are a reflection of investors’ fear of equity risk. We should not
expect gold and bonds to move counter to one another in coming years. In other words,
the PP has enjoyed an extended period that has been perfectly aligned for its
outperformance, but that there is no reason to believe that we should expect this
performance to continue.
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Re: Why don't people use the Permanent Portfolio?

Postby boggler » Tue May 07, 2013 7:49 pm

Jebediah wrote:
ignatz wrote:
I'd guess it's seen as gimmicky or antithetical to Bogleheadism or a flash in the pan, etc.



It is none of those things. It is old, low-cost, and based on solid theory.

The real beauty of it is the mixture of 3 asset classes that respond differently in different economic climates and do not correlate. Stock risk, term risk, and commodities mix very efficiently. Which instruments (gold or CCF, etc), and in what proportions is left to taste and can be argued about forever, but the fundamental efficiency of this 3-part mix is very impressive.



It sounds like the counterargument I'm hearing is that commodities (ex. gold) aren't a true investment. What do you make of this?
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Re: Why don't people use the Permanent Portfolio?

Postby steve r » Tue May 07, 2013 7:51 pm

boggler wrote: It sounds like the counterargument I'm hearing is that commodities (ex. gold) aren't a true investment. What do you make of this?


Opinions vary... this is for you to decide ... if you stomached the low return of commodities in the 1980s and 1990s it paid you back big time the last 13 years.
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Re: Why don't people use the Permanent Portfolio?

Postby LFKB » Tue May 07, 2013 7:56 pm

OP, FWIW I was new to the board about 6 months ago and was deciding on an AA. I came across the PP and thought it was a winning strategy. After doing more research, I decided against it and went with a typical stock/bond strategy. I have owned some gold since 2008 outside of my Vanguard account but it is a small percentage of my overall portfolio. I think you will come to the conclusion after reading more about it.
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Re: Why don't people use the Permanent Portfolio?

Postby Clive » Tue May 07, 2013 8:04 pm

boggler wrote:Would it be accurate to say that since the portfolio has lower volatility, we are taking a hit in return? And the fact that the performance has matched 100% stock is somewhat of a fluke?

Over the 1972 to 2012 that many measure the PP performance over, annualised gains :

Stocks 9.8%
Gold 8.9%
20 Year T 8.4%
5 Year T 7.8%
Inflation 4.4%

Broadly the interest rates trend was downwards from high 1980's levels to recent low levels, a rising tide so-to-speak which uplifted gains generally. In a flat or rising interest rate trend era, the general similarity of gains wouldn't hold.
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Re: Why don't people use the Permanent Portfolio?

Postby boggler » Tue May 07, 2013 8:08 pm

LFKB wrote:OP, FWIW I was new to the board about 6 months ago and was deciding on an AA. I came across the PP and thought it was a winning strategy. After doing more research, I decided against it and went with a typical stock/bond strategy. I have owned some gold since 2008 outside of my Vanguard account but it is a small percentage of my overall portfolio. I think you will come to the conclusion after reading more about it.


LFKB,
Why did you decide against it?
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Re: Why don't people use the Permanent Portfolio?

Postby zaboomafoozarg » Tue May 07, 2013 8:15 pm

Because I don't want to put half my money in gold and cash.
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Re: Why don't people use the Permanent Portfolio?

Postby 3CT_Paddler » Tue May 07, 2013 8:17 pm

Clive wrote:
boggler wrote:Would it be accurate to say that since the portfolio has lower volatility, we are taking a hit in return? And the fact that the performance has matched 100% stock is somewhat of a fluke?

Over the 1972 to 2012 that many measure the PP performance over, annualised gains :

Stocks 9.8%
Gold 8.9%
20 Year T 8.4%
5 Year T 7.8%
Inflation 4.4%

Broadly the interest rates trend was downwards from high 1980's levels to recent low levels, a rising tide so-to-speak which uplifted gains generally. In a flat or rising interest rate trend era, the general similarity of gains wouldn't hold.


Roll that timeline back 5 or 6 years and its a different story for gold.
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Re: Why don't people use the Permanent Portfolio?

Postby Harold » Tue May 07, 2013 8:39 pm

Because I’m an investor not a speculator.

There’s a fundamental difference between exchanging your money for defined income (bonds), anticipated earnings/dividend streams (stocks), or future rents (real estate) – and exchanging your money for nothing but metal (gold). Pure investing is buying cash flows, not just buying something and hoping it increases in value.

Nothing inherently wrong with speculating. It can be very lucrative -- it’s just not for me.
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Re: Why don't people use the Permanent Portfolio?

Postby Calm Man » Tue May 07, 2013 8:46 pm

I am now researching the ETF and reading about it on seeking alpha for the umpteenth time. I have long considered this for my IRA as a set and forget. I won't be touching it for 10 years when RMDs begin and the IRA is about 10% of my assets. It would be very easy to do but I don't do anything like this too quickly.
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Re: Why don't people use the Permanent Portfolio?

Postby Jebediah » Tue May 07, 2013 8:55 pm

boggler wrote:
Jebediah wrote:
ignatz wrote:
I'd guess it's seen as gimmicky or antithetical to Bogleheadism or a flash in the pan, etc.



It is none of those things. It is old, low-cost, and based on solid theory.

The real beauty of it is the mixture of 3 asset classes that respond differently in different economic climates and do not correlate. Stock risk, term risk, and commodities mix very efficiently. Which instruments (gold or CCF, etc), and in what proportions is left to taste and can be argued about forever, but the fundamental efficiency of this 3-part mix is very impressive.



It sounds like the counterargument I'm hearing is that commodities (ex. gold) aren't a true investment. What do you make of this?


I'm not making anything of it. I'm just saying that the three assets are uncorrelated and thus mix very well
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Re: Why don't people use the Permanent Portfolio?

Postby nisiprius » Tue May 07, 2013 8:57 pm

Quasimodo wrote:Hi Nisiprius;

Craig R will no doubt offer a better explanation, but my take on it is that the Permanent Portfolio mutual fund PRPFX is modeled after an early version of the portfolio that is slanted toward protection in an inflationary environment. It includes Swiss franc assets and is light on the long term treasury bond portion of the later version of the portfolio, which is equal parts cash in the form of T bills, gold, stocks and long term T bonds.

During the 1980s and 1990s PRPFX performance was poor compared with the 4 x 25% version of the portfolio detailed on Craig's website.

John
Wouldn't that qualify as 20/20 hindsight? If the Permanent Portfolio has evolved, one wants to know how real people performed in the real world by constantly following the best recommendations of Permanent Portfolio advocates as they were known at the time. If there were several different versions, it's not appropriate to present only one of them after the fact and say "the" Permanent Portfolio had thus-and-such results; in real life you didn't know which version to use.

If "during the 1980s and 1990s PRPFX performance was poor compared with the 4 x 25% version of the portfolio" one must ask why the fund managers didn't know that and weren't using that 4 x 25% version. They couldn't travel forward in time and buy a copy of craigr's book.
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Re: Why don't people use the Permanent Portfolio?

Postby Clive » Tue May 07, 2013 8:58 pm

Roll that timeline back 5 or 6 years and its a different story for gold.

1972 - 2007 8.1%

I know what you mean though. 1982 - 2000 gold declined -5.5% annualised real (after inflation) - quite a heavy load to carry :)

Pure investing is buying cash flows, not just buying something and hoping it increases in value

+1

Buying and locking gold away for safe keeping is a bit like buying some land and doing nothing with it.

Rent it out or grow/sell some crops and it provides an income on top of perhaps the land value broadly rising with inflation over time - subject to the whim of the potential market/buyers.

Exchange some USD for Australian Dollars and stuff them in a mattress and you gain/lose the USD/AUD currency fluctuations. Buy some Australian stocks with those notes and you benefit/lose by the stock +/- currency movements.

Buy an oil company stock - perhaps XOM, and you have bought into their current known oil reserves +/- stock price motions. Buy oil and the Dow separately and your money isn't working as hard as having bought a combination of both (XOM).

If you were looking to hold perhaps 100 gold coins, and traded those, perhaps buying at $99, selling at $101; Averaging 100 coins being held, but turning over 200% each year to yield a 4% cash-flow then fine. But just to buy some foreign currency, or a barrel of oil, or gold coins and sit/sleep on them :oops:
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Re: Why don't people use the Permanent Portfolio?

Postby patrick » Tue May 07, 2013 9:40 pm

I'm wondering whether the Permanent Portfolio would be more appropriate than an 80/20 stock/bond allocation. Incredibly, it seems to have done just as well as even a 100% stock portfolio over the past 30 years or so, despite the fact that it only holds 25% stocks... and yet it has done so with significantly less volatility. Why don't more people use it? Why don't you use it, personally?


I can't speak for anyone else but here are my main reasons for not using it:

1) The performance record you mentioned covers a very short time compared to the performance records I see for other assets. For instance, US stock data goes back at least to the 1870s, global stock and bond data to 1900, and the value premium back to the 1920s.
2) The performance record you mentioned just happens to cover a period of time when just every non-stock asset did much better than its long-term average, which would clearly bias the results in favor of portfolios with less in stocks (such as the permanent portfolio).
3) Of the 4 assets in the permanent portfolio, 2 of them (cash and long bond bonds) risk losing a lot if there is high inflation, and the other 2 (stocks and gold) have a high risk of losing a lot for no clear reason at all.
4) Of the 4 assets in the permanent portfolio, only 1 of them (stocks) has shown a high long term historical return.
5) I don't believe that the economy will always be within a small number of possible states to which asset returns will respond predictably, and therefore I don't accept the claims that the permanent portfolio interacts with the states of the economy in a way that will reliably counter the problems listed above.
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Re: Why don't people use the Permanent Portfolio?

Postby Quasimodo » Tue May 07, 2013 10:24 pm

nisiprius wrote:
Quasimodo wrote:Hi Nisiprius;

Craig R will no doubt offer a better explanation, but my take on it is that the Permanent Portfolio mutual fund PRPFX is modeled after an early version of the portfolio that is slanted toward protection in an inflationary environment. It includes Swiss franc assets and is light on the long term treasury bond portion of the later version of the portfolio, which is equal parts cash in the form of T bills, gold, stocks and long term T bonds.

During the 1980s and 1990s PRPFX performance was poor compared with the 4 x 25% version of the portfolio detailed on Craig's website.

John
Wouldn't that qualify as 20/20 hindsight? If the Permanent Portfolio has evolved, one wants to know how real people performed in the real world by constantly following the best recommendations of Permanent Portfolio advocates as they were known at the time. If there were several different versions, it's not appropriate to present only one of them after the fact and say "the" Permanent Portfolio had thus-and-such results; in real life you didn't know which version to use.

If "during the 1980s and 1990s PRPFX performance was poor compared with the 4 x 25% version of the portfolio" one must ask why the fund managers didn't know that and weren't using that 4 x 25% version. They couldn't travel forward in time and buy a copy of craigr's book.


My recollection of Harry Browne's writings is that he did initially suggest several Permanent Portfolio variations, slanted toward different economic scenarios; inflation, deflation and a neutral version. When the PRPFX fund was started in the early 1980s, the asset allocation chosen was for protection against inflation, because that was a major concern for most investors at the time. I don't know why mutual funds based on other versions of the portfolio weren't created. I'd guess that the general idea seemed radical even then, and one version was all that got implemented in fund form. But even before Harry Browne changed the Permanent Portfolio recommendation to only the 4 x 25% version, I believe he had suggested that allocation as one possibility; it just didn't get used to create a mutual fund.

John
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Re: Why don't people use the Permanent Portfolio?

Postby avalpert » Tue May 07, 2013 10:32 pm

Quasimodo wrote:
nisiprius wrote:
Quasimodo wrote:Hi Nisiprius;

Craig R will no doubt offer a better explanation, but my take on it is that the Permanent Portfolio mutual fund PRPFX is modeled after an early version of the portfolio that is slanted toward protection in an inflationary environment. It includes Swiss franc assets and is light on the long term treasury bond portion of the later version of the portfolio, which is equal parts cash in the form of T bills, gold, stocks and long term T bonds.

During the 1980s and 1990s PRPFX performance was poor compared with the 4 x 25% version of the portfolio detailed on Craig's website.

John
Wouldn't that qualify as 20/20 hindsight? If the Permanent Portfolio has evolved, one wants to know how real people performed in the real world by constantly following the best recommendations of Permanent Portfolio advocates as they were known at the time. If there were several different versions, it's not appropriate to present only one of them after the fact and say "the" Permanent Portfolio had thus-and-such results; in real life you didn't know which version to use.

If "during the 1980s and 1990s PRPFX performance was poor compared with the 4 x 25% version of the portfolio" one must ask why the fund managers didn't know that and weren't using that 4 x 25% version. They couldn't travel forward in time and buy a copy of craigr's book.


My recollection of Harry Browne's writings is that he did initially suggest several Permanent Portfolio variations, slanted toward different economic scenarios; inflation, deflation and a neutral version. When the PRPFX fund was started in the early 1980s, the asset allocation chosen was for protection against inflation, because that was a major concern for most investors at the time. I don't know why mutual funds based on other versions of the portfolio weren't created. I'd guess that the general idea seemed radical even then, and one version was all that got implemented in fund form. But even before Harry Browne changed the Permanent Portfolio recommendation to only the 4 x 25% version, I believe he had suggested that allocation as one possibility; it just didn't get used to create a mutual fund.

John


Doesn't that beautifully illustrate nisiprius' point? You had to guess on which one was going to be the best performer, the one that was chosen based on the concerns of the day turned out not to be it - why would anyone think if they were standing at that point in time they would have been the one with enough foresight to choose a different incarnation?
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Re: Why don't people use the Permanent Portfolio?

Postby Quasimodo » Tue May 07, 2013 10:38 pm

"Doesn't that beautifully illustrate nisiprius' point? You had to guess on which one was going to be the best performer, the one that was chosen based on the concerns of the day turned out not to be it - why would anyone think if they were standing at that point in time they would have been the one with enough foresight to choose a different incarnation?"

I wasn't disagreeing with Nisiprius, and I believe you're right.

John
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Re: Why don't people use the Permanent Portfolio?

Postby Noobvestor » Tue May 07, 2013 11:26 pm

I'm in the (perhaps rare?) camp that would consider it seriously, but does not actually employ it personally. Here are a few of my reasons, FWIW:

1) I want more return out of my portfolio than I would expect 25% in stocks to provide. I would thus *reconsider* it if I were looking for stability over growth (e.g. if I had 10 million+ dollars and was really concerned mainly with preservation). Of course, even then I'd have to ponder the headache of storing millions in physical gold (assuming the purist approach).

2) I need greater tax efficiency from my portfolio - with a lot of investments in taxable space, I can't afford to be rebalancing out of things like gold that are taxed as collectibles. I would thus *reconsider* it if I had more tax-advantaged space (and fully understood the ins and outs of buying/selling gold in IRAs, which I haven't bothered to research).

As you might infer, I think the Permanent Portfolio is a strong candidate for someone in the right taxation conditions and/or with a focus on capital preservation over growth. I do, however, think it is extremely dangerous to assume it has high growth prospects going forward relative to a stock/bond portfolio, and would be a bad idea to use it thinking that it would return something like a 60/40 should.

By the way, I still haven't read CraigR's book, but have been meaning to: can anyone shed light on when the 4x25 became the 'accepted' or 'promoted' version? That would be interesting to know definitively.
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Re: Why don't people use the Permanent Portfolio?

Postby Browser » Wed May 08, 2013 12:12 pm

You couldn't have invested in the PP even if you'd wanted to until 1975, when it was made legal again for U.S. citizens to own gold, thereby missing annual returns of 49%, 71%, and 72% for gold in 1972-74 (the PP bugs are fond of quoting returns from 1972). When you remove those returns, the PP doesn't look all that great even including the last 10 gold runup years. Additionally, gold was difficult to acquire and own until 2005 when the gold ETF became available. People completely ignore the liquidity risk and the high costs that were involved in storing significant holdings of gold until recently. And you didn't get compensated for either for over two decades from 1981-2002. Now that it is easy and inexpensive to own gold via ETFs, I have a small gold allocation for diversification purposes and prefer it to commodity CCFs (they're too opaque and managed for my taste, and haven't done as well as gold for diversifying stock and bond risk). I've owned gold since 2002 in the form of gold stocks and done well with those holdings while the skeptics reigned supreme (it was pretty obvious to me that it was a good time to own gold then), as well as with ETFs more recently. But I would never put 25% of my wealth into gold, as the PP folks advise. Especially not now that the litter of gold cats is well clear of the bag. There's just not sufficient evidence that it will work in the real world going forward, or that it even worked very well in the real world looking backward. It's a mistake to attribute recent good luck to investing acumen.
If we have data, let’s look at data. If all we have are opinions, let’s go with mine. – Jim Barksdale
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Re: Why don't people use the Permanent Portfolio?

Postby InvestorNewb » Wed May 08, 2013 12:19 pm

If I had millions of dollars I would probably use the permanent portfolio. It seems like a good way to preserve what you have, get moderate gains, and not take on too much risk.
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Re: Why don't people use the Permanent Portfolio?

Postby grap0013 » Wed May 08, 2013 12:20 pm

SpaceCommander wrote:Of course, nobody has a crystal ball, but the fundamentals for 75% of that portfolio look really bad: Gold has had its nice runup over the last 10 years. Reversion to the mean: gold probably won't duplicate its stellar performance of late. With interest rates artificially pushed to near zero the effect on bonds is terrible. As Buffett mentioned recently, "there's some guy buying 75 billion a month" and that's artificially depressing interest rates. With rates near zero, t-bills are returning nothing. After inflation, you're taking a loss there. But the outlook for long bonds is atrocious. When interest rates move up (and they inevitably will at some point), long bonds will get absolutely creamed. So where's the return on your Permanent Portfolio going forward? I like equities, gold has seen it's day, t-bills are a losing bet after inflation, and long bonds are a ticking timebomb. But, that's just my opinion, I could be wrong... :wink:


+1

75% of that mix will likely have negative real returns for the foreseeable future. Brutal. I do not care what it has done in the past.
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Re: Why don't people use the Permanent Portfolio?

Postby ofcmetz » Wed May 08, 2013 12:29 pm

I don't use it because I'm not interested in owning gold as an investment. I'm not convinced that the permanent portfolio is a wiser way to invest than my current allocation.
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Re: Why don't people use the Permanent Portfolio?

Postby wesleymouch » Wed May 08, 2013 12:32 pm

Browser wrote:You couldn't have invested in the PP even if you'd wanted to until 1975, when it was made legal again for U.S. citizens to own gold, thereby missing annual returns of 49%, 71%, and 72% for gold in 1972-74 (the PP bugs are fond of quoting returns from 1972). When you remove those returns, the PP doesn't look all that great even including the last 10 gold runup years. Additionally, gold was difficult to acquire and own until 2005 when the gold ETF became available. People completely ignore the liquidity risk and the high costs that were involved in storing significant holdings of gold until recently. And you didn't get compensated for either for over two decades from 1981-2002. Now that it is easy and inexpensive to own gold via ETFs, I have a small gold allocation for diversification purposes and prefer it to commodity CCFs (they're too opaque and managed for my taste, and haven't done as well as gold for diversifying stock and bond risk). I've owned gold since 2002 in the form of gold stocks and done well with those holdings while the skeptics reigned supreme (it was pretty obvious to me that it was a good time to own gold then), as well as with ETFs more recently. But I would never put 25% of my wealth into gold, as the PP folks advise. Especially not now that the litter of gold cats is well clear of the bag. There's just not sufficient evidence that it will work in the real world going forward, or that it even worked very well in the real world looking backward. It's a mistake to attribute recent good luck to investing acumen.


Actually if you had used the other precious metal available to you at the time, i.e. silver and or gold mining stocks you would have made even more money. This is what Harry Browne outlined in his first bestseller "You Can Profit From the Coming Devaluation" which made him both rich and famous. THe PP is not a way to get wealthy, it is a way to remain wealthy.
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Re: Why don't people use the Permanent Portfolio?

Postby wesleymouch » Wed May 08, 2013 12:34 pm

grap0013 wrote:
SpaceCommander wrote:Of course, nobody has a crystal ball, but the fundamentals for 75% of that portfolio look really bad: Gold has had its nice runup over the last 10 years. Reversion to the mean: gold probably won't duplicate its stellar performance of late. With interest rates artificially pushed to near zero the effect on bonds is terrible. As Buffett mentioned recently, "there's some guy buying 75 billion a month" and that's artificially depressing interest rates. With rates near zero, t-bills are returning nothing. After inflation, you're taking a loss there. But the outlook for long bonds is atrocious. When interest rates move up (and they inevitably will at some point), long bonds will get absolutely creamed. So where's the return on your Permanent Portfolio going forward? I like equities, gold has seen it's day, t-bills are a losing bet after inflation, and long bonds are a ticking timebomb. But, that's just my opinion, I could be wrong... :wink:


+1

75% of that mix will likely have negative real returns for the foreseeable future. Brutal. I do not care what it has done in the past.


If there is a replay on the 1970's then the PP will far outperform conventional portfolios in real terms. Most portfolios do not do very well in hedging currency devaluation risk/inflation risk.
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Re: Why don't people use the Permanent Portfolio?

Postby wesleymouch » Wed May 08, 2013 12:38 pm

The fact is that during the last two Fed induced dislocations of this century (1929 and the 1970's) gold and/or gold proxies (silver, mining shares are the one thing that did perform well and hedged the bad outcomes of the time. It appears to anyone that is not dead that we are now in the throes of another Fed induced dislocation. So far gold has done quite well. Will it in the future is not known but it does appear to be an asset that does hedge tail risk. That is why Central Banks, who do have the power to destroy a currency own it in spades (and are buying more as we speak).
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Re: Why don't people use the Permanent Portfolio?

Postby Browser » Wed May 08, 2013 12:39 pm

Also, the PP is a pretty interest-rate sensitive portfolio. It's returns have a historical correlation around -.30 with changes in the 10-yr treasury yield. Not a particularly good way to hedge a rise in interest rates. Gold is often touted as a good inflation hedge, but that's not really true except perhaps for very large unexpected inflation spikes. And there is NOT a perfect correlation between interest rates and inflation anyway. It's certainly possible that interest rates can rise significantly without inflation shocks, which would eat away at PP returns. It is not the a fail-safe all-weather portfolio solution that is advertised.
If we have data, let’s look at data. If all we have are opinions, let’s go with mine. – Jim Barksdale
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Re: Why don't people use the Permanent Portfolio?

Postby Call_Me_Op » Wed May 08, 2013 12:44 pm

boggler wrote:I'm wondering whether the Permanent Portfolio would be more appropriate than an 80/20 stock/bond allocation. Incredibly, it seems to have done just as well as even a 100% stock portfolio over the past 30 years or so, despite the fact that it only holds 25% stocks... and yet it has done so with significantly less volatility. Why don't more people use it? Why don't you use it, personally?

See here for an example:
http://crawlingroad.com/blog/2008/12/22 ... l-returns/


The good performance of PP over the period is due in part to an explosion in gold price in the 1970's (due to decoupling from the dollar - a one-time event) and to a 30 year bond bull market. The reason more people do not follow this approach is they are wary about holding so much in gold, long-term treasuries, and cash.

I think that there is much to learn from the PP concept, but I am not implementing it.
Best regards, -Op

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Re: Why don't people use the Permanent Portfolio?

Postby nisiprius » Wed May 08, 2013 12:48 pm

wesleymouch wrote:
Browser wrote:You couldn't have invested in the PP even if you'd wanted to until 1975...
Actually if you had used the other precious metal available to you at the time, i.e. silver and or gold mining stocks you would have made even more money....
What, then, is the reason why the managers of the Permanent Portfolio mutual fund didn't do this, and didn't "make even more money" than the backtested results of the 4 x 25% Permanent Portfolio?
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Re: Why don't people use the Permanent Portfolio?

Postby tadamsmar » Wed May 08, 2013 12:50 pm

I don't see that owning gold is antithetical to Bogleheadism.

Here some efficient frontiers including gold:

http://www.merkinvestments.com/download ... nefits.pdf

The one based on the most data includes only 20 years and that's probably not long enough. And the set of assets is too simplified. But this does seem to motivate the idea that some allocation to gold could be justified.

However, switching your AA to include gold now could be antithetical to Bogleheadism since it could be viewed as performance chasing.

And the PP is not based on the efficient frontier (as far as I know), but ad hoc allocations can be OK anyway.
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Re: Why don't people use the Permanent Portfolio?

Postby wesleymouch » Wed May 08, 2013 1:02 pm

nisiprius wrote:
wesleymouch wrote:
Browser wrote:You couldn't have invested in the PP even if you'd wanted to until 1975...
Actually if you had used the other precious metal available to you at the time, i.e. silver and or gold mining stocks you would have made even more money....
What, then, is the reason why the managers of the Permanent Portfolio mutual fund didn't do this, and didn't "make even more money" than the backtested results of the 4 x 25% Permanent Portfolio?


You are confusing the Permanent Portfolio Fund which is actively managed to some degree with the original Permanent Portfolio as designed by Harry Browne. C Rowland has the best expose of this. The Permanent Portfolio Mutual Fund outlines well the pitfalls of active management. The original PP is boglehead in that there is no performance chasing, no prediction of outcomes, only passive allocations and predefined rebalancing. It has worked well during the time periods gold could be held by US citizens. During the other periods when other gold like items could have been substituted in place of gold it worked well also. Sadly gold is like abortion: it stirs emotions on both sides. There is no reason for rabid hatred of it. Those of us who use the PP or a variant are pleased with it and have no need to convert others. Tolerance for other points of view should be welcome and if we have a replay on the 1970's the rich PP disciples may buy tyou a beer
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Re: Why don't people use the Permanent Portfolio?

Postby wesleymouch » Wed May 08, 2013 1:27 pm

As a side note the great W Bernstein acknowledges the use of precious metals (stocks) in his Madonna portfolio. Plus L Swedroe recommends commodities in small doses. I think the point is that if you use gold that you use it as part of a passive allocation and not performance chase. That is exactly what the original Permanent Portfolio advocates. The time to buy insurance is before the hurricane hits
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Re: Why don't people use the Permanent Portfolio?

Postby grap0013 » Wed May 08, 2013 1:39 pm

wesleymouch wrote:
grap0013 wrote:
SpaceCommander wrote:Of course, nobody has a crystal ball, but the fundamentals for 75% of that portfolio look really bad: Gold has had its nice runup over the last 10 years. Reversion to the mean: gold probably won't duplicate its stellar performance of late. With interest rates artificially pushed to near zero the effect on bonds is terrible. As Buffett mentioned recently, "there's some guy buying 75 billion a month" and that's artificially depressing interest rates. With rates near zero, t-bills are returning nothing. After inflation, you're taking a loss there. But the outlook for long bonds is atrocious. When interest rates move up (and they inevitably will at some point), long bonds will get absolutely creamed. So where's the return on your Permanent Portfolio going forward? I like equities, gold has seen it's day, t-bills are a losing bet after inflation, and long bonds are a ticking timebomb. But, that's just my opinion, I could be wrong... :wink:


+1

75% of that mix will likely have negative real returns for the foreseeable future. Brutal. I do not care what it has done in the past.


If there is a replay on the 1970's then the PP will far outperform conventional portfolios in real terms. Most portfolios do not do very well in hedging currency devaluation risk/inflation risk.


Depends what you define as conventional. If there is a replay of the 70s my current portfolio will do much better than the PP even on a risk adjusted basis.
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Re: Why don't people use the Permanent Portfolio?

Postby wesleymouch » Wed May 08, 2013 1:57 pm

grap0013 wrote:
wesleymouch wrote:
grap0013 wrote:
SpaceCommander wrote:Of course, nobody has a crystal ball, but the fundamentals for 75% of that portfolio look really bad: Gold has had its nice runup over the last 10 years. Reversion to the mean: gold probably won't duplicate its stellar performance of late. With interest rates artificially pushed to near zero the effect on bonds is terrible. As Buffett mentioned recently, "there's some guy buying 75 billion a month" and that's artificially depressing interest rates. With rates near zero, t-bills are returning nothing. After inflation, you're taking a loss there. But the outlook for long bonds is atrocious. When interest rates move up (and they inevitably will at some point), long bonds will get absolutely creamed. So where's the return on your Permanent Portfolio going forward? I like equities, gold has seen it's day, t-bills are a losing bet after inflation, and long bonds are a ticking timebomb. But, that's just my opinion, I could be wrong... :wink:


+1

75% of that mix will likely have negative real returns for the foreseeable future. Brutal. I do not care what it has done in the past.


If there is a replay on the 1970's then the PP will far outperform conventional portfolios in real terms. Most portfolios do not do very well in hedging currency devaluation risk/inflation risk.


Depends what you define as conventional. If there is a replay of the 70s my current portfolio will do much better than the PP even on a risk adjusted basis.


Returns 1970 to 1980
Portfolio A: 75% small cap/ 25% 5 yr treasury 4.8% annual real return. Worst streak -42.8%
Permanent Portfolio 5.2% annual real return, worst streak -3.3%
Witness the genius of Harry Browne
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Re: Why don't people use the Permanent Portfolio?

Postby Call_Me_Op » Wed May 08, 2013 2:06 pm

Why are you comparing gold's best decade ever with one of small-cap's worst? Look what happened during the next decade.
Best regards, -Op

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Re: Why don't people use the Permanent Portfolio?

Postby LH » Wed May 08, 2013 2:17 pm

The Permanent Portfolio has 4 Asset classes.

25 gold
25 cash

25 stocks
25 long bonds

The first two assets, 50 percent, expectantly on their own, provide zero real return.
The remaining 50 percent, is a traditional Boglehead portfolio (really one could throw the cash in their as well, but its pretty high cash/short bonds).

A portfolio achieves its return via:
1)return of asset classes (which are then put through 2 and 3, to achieve portfolio return over time)
2)correlation effect of asset classes in relation to each other
3)re-balancing the asset classes

In short, I do not invest in permanent portfolio because in ISOLATION, 50 percent has zero return expectation.

That is a lot. Now, to negative that, one has to have beneficial correlation at the proper times amongst the classes.

This, over the past 30 years or so, has happened.

That does not mean it will happen going forward.

The permanent portfolio is correlation dependent for return, much more so than a traditional boglehead portfolio, one with medium bonds and stocks, both of which have expected return in isolation.

If the correlation does not show up amongst the 4 in good way, then one is left with 50 percent of portfolio with return, and maybe gold falls through the floor for 20 years during ones retirement too, and maybe the other assets do not pick it up, and then the cash, is well cash (not tips), and maybe that has a negative real return too.......

Maybe.

Its not hard for me to envision that.

To me, it just seems iffy, I like return, MPT and correlation effect is nice, its real, but if the correlation does not show up, you are left with assets in isolation, 50 percent of which expectantly produce nothing.

LH

PS

As an aside, and not central to the above is this as well: If the gold standard people are right (which I do not think they are), and fiat money is doomed medium term, then one looks to 1933, and gold confiscation type issues, because the only way this country would ever go off fiat money, imo, is a 1933 level disaster, then they will, like 1933, need YOUR gold, if they want to go back on the gold standard, like a small minority of people think they will have to eventually do.
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Re: Why don't people use the Permanent Portfolio?

Postby sschullo » Wed May 08, 2013 2:19 pm

wesleymouch wrote:
nisiprius wrote:
wesleymouch wrote:
Browser wrote:The Permanent Portfolio Mutual Fund outlines well the pitfalls of active management. The original PP is boglehead in that there is no performance chasing, no prediction of outcomes, only passive allocations and predefined rebalancing.


Agree with the above quote, but it's not just gold that I abhor, it's the exposure to long-term maturity treasuries, 25% in MM is way too much allocation and zero exposure to international markets. Its a great portfolio if financial Armageddon is around the corner.
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Re: Why don't people use the Permanent Portfolio?

Postby Clive » Wed May 08, 2013 2:22 pm

wesleymouch wrote:The fact is that during the last two Fed induced dislocations of this century (1929 and the 1970's) gold and/or gold proxies (silver, mining shares are the one thing that did perform well and hedged the bad outcomes of the time. It appears to anyone that is not dead that we are now in the throes of another Fed induced dislocation. So far gold has done quite well. Will it in the future is not known but it does appear to be an asset that does hedge tail risk. That is why Central Banks, who do have the power to destroy a currency own it in spades (and are buying more as we speak).

To pay for World War 1 there were three basic ways to raise the money: (1) raising taxes, (2) borrowing from the public, and (3) printing money. In the Civil War the government had had simply printed the famous greenbacks. In World War I it was possible to "print money" in a more roundabout way. The government could sell a bond to the newly created Federal Reserve. The Federal Reserve would pay for it by creating a deposit account for the government, which the government could then draw upon to pay its expenses. If the government first sold the bond to the general public, the process of money creation would be even more roundabout. In the end the result would be much the same as if the government had simply printed greenbacks: the government would be paying for the war with newly created money.

Short-term borrowing was undertaken as a stopgap. To reduce the pressure on the Treasury and the danger of a surge in short-term rates, however, it was necessary to issue long-term bonds, so the Treasury created the famous Liberty Bonds. The first issue was a thirty-year bond bearing a 3.5% coupon callable after fifteen years. There were three subsequent issues of Liberty Bonds, and one of shorter-term Victory Bonds after the Armistice. In all, the sale of these bonds raised over $20 billion dollars for the war effort.

Silver Prices
1916 0.76
1917 0.90
1918 1.02
1919 1.34
1920 0.66
1921 0.66

Inflation (1916-1921)
12.5
19.7
17.9
17
-1.6
-11

10 year bond yields remained relatively
level at around 4% across 1916 - 1921

One year interest rates (1916-1921)
3.64
4.25
5.98
5.56
7.3
7.44

Stock Total gains (1916-1921)
8.57
-17.45
16.78
19.24
-13.70
9.14

In real terms, 25% in each of stocks, silver, long bonds, one year bills (1917-1920)

-17.4
-7.9
-1.96
-11.7

A somewhat similar trend occurred over the 1938-1948 period, again when treasury yields were being artificially suppressed and inflation spiked. More recently one half of that characteristic is already evident - suppressed yields. Should inflation spike for whatever reason !!!

Pre Nixon (1969) money and gold were convertible (pegged). PP'ers will suggest that in more recent decades the de-pegging makes things different - but they're speculating that in periods such as when treasury yields are being suppressed and inflation spikes into double digits that gold will compensate. There's little evidence however to suggest that gold and inflation are correlated.
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Re: Why don't people use the Permanent Portfolio?

Postby TO39 » Wed May 08, 2013 2:32 pm

Clive posted

Stock Total gains (1916-1921)
8.57
-17.45
16.78
19.24
-13.70
9.14

In real terms, 25% in each of stocks, silver, long bonds, one year bills (1917-1920)

-17.4
-7.9
-1.96
-11.7

I think it was misleading to post PP gains in real and stock in nominal if that is what this was
Last edited by TO39 on Wed May 08, 2013 2:40 pm, edited 1 time in total.
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