Why don't people use the Permanent Portfolio?

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

Postby wesleymouch » Wed May 08, 2013 1:34 pm

During the early twentieth century (1900 to 1933) the dollar was backed by gold and bills could be redeemed for specie. There would have been no need to hold gold since the dollar istelf was backed by gold.
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Re: Why don't people use the Permanent Portfolio?

Postby avalpert » Wed May 08, 2013 1:42 pm

wesleymouch wrote: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


Yes, he was an exceptional marketer
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Re: Why don't people use the Permanent Portfolio?

Postby Clive » Wed May 08, 2013 1:53 pm

Clive wrote:
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.

...

Some PP'ers suggest that combining 10% EDV with 90% PRPFX to be more like a 4x25 PP. But all that is doing is taking an asset (PRPFX) that is already light on inflation hedging and making it even less of an inflation hedge.

The above link infers that combining a 60-40 with PRPFX might be more appropriate. 42.5% stocks, 12.5% gold, rest in treasury bonds. If you utilise small cap value in lieu of TSM you might hold less SCV for similar risk/reward, perhaps 66% SCV instead of 100% TSM. Which reduces that 42.5% stock allocation down to 28% SCV.

28% SCV, 12.5% gold, rest in treasury bonds is broadly similar to Larry Swedroe's Fat Tail Minimisation (30% spicier stocks (SCV, EM etc.), 70% TIPS), but that holds some gold instead of TIPS.

With modest rounding, I'd suggest 15% in each of SCV, Oil/Energy stocks and gold, combined with 55% TIPS would be a reasonable alternative choice. Since Nov 2004 comparing that to PRPFX :

Image

In earlier years however, when PRPFX faltered and lagged other common asset allocations, the above choice tracked those others more closely. Similar gains to the Coffee House (diverse 60-40) with lower volatility.

You might hold that perhaps as 15% XOM (or a more diverse range of oil/energy stocks), 15% physical gold, 15% VBR and the rest in directly held treasury's. As VBR has a 0.1 expense ratio and once bought the others have no/minimal ongoing costs, the total portfolio yearly costs might amount to 15% x 0.1% = 0.015%, which is a lot better than handing over 0.7% yearly fees to the PRPFX fund managers.
Last edited by Clive on Wed May 08, 2013 2:00 pm, edited 1 time in total.
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Re: Why don't people use the Permanent Portfolio?

Postby Clive » Wed May 08, 2013 1:58 pm

TO39 wrote: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

No it wasn't intended that way. My intent was to highlight how the PP lost in real terms over that period of time, the stock and other nominal values (that you didn't quote) were just shown for completeness to show how those PP yearly real losses were derived.
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Re: Why don't people use the Permanent Portfolio?

Postby Noobvestor » Wed May 08, 2013 2:01 pm

Question for anyone who is saying some variant of "I don't invest in asset classes with 0% expected return": Do you invest in bonds? Do you believe they have a real expected return (my napkin math suggests that most don't)? If the best predictor of future rates is current rates, the answer should be 'no', correct? I personally do not use the PP and do hold bonds, but do not use the criteria of 'expected real return' to strictly determine what I should or shouldn't invest in. So if your criticism is no/negative expected return, and that's part of your IPS, I am curious how you reconcile this with holding bonds.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
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Re: Why don't people use the Permanent Portfolio?

Postby TO39 » Wed May 08, 2013 2:09 pm

Clive wrote:
TO39 wrote: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

No it wasn't intended that way. My intent was to highlight how the PP lost in real terms over that period of time, the stock and other nominal values (that you didn't quote) were just shown for completeness to show how those PP yearly real losses were derived.



I think it would have been more instructive to post the PP in real terms over those years next to stocks, and bonds, and stocks and bonds, in real terms over those years.
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Re: Why don't people use the Permanent Portfolio?

Postby technovelist » Wed May 08, 2013 2:16 pm

I can answer why the PRPFX managers haven't followed the 4x25 allocation: almost no one would pay their expense ratio to do it, since it is much cheaper to do it yourself and doesn't take much work or attention once you have it set up. So they are trying to market their "expertise", which as we know isn't likely to be profitable to anyone but them.
In theory, theory and practice are identical. In practice, they often differ.
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Re: Why don't people use the Permanent Portfolio?

Postby Clive » Wed May 08, 2013 2:20 pm

TO39 wrote:
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 would have been more instructive to post the PP in real terms over those years next to stocks, and bonds, and stocks and bonds, in real terms over those years.

They all did poorly. Cash and bond yields were suppressed whilst inflation raged, stocks crashed in real terms. The point however was that even the thread/topic PP asset allocation performed poorly as well in real terms. i.e. the reliance upon gold to serve as an inflation hedge is questionable.
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Re: Why don't people use the Permanent Portfolio?

Postby TO39 » Wed May 08, 2013 2:26 pm

Clive wrote:
TO39 wrote:
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 would have been more instructive to post the PP in real terms over those years next to stocks, and bonds, and stocks and bonds, in real terms over those years.

They all did poorly. Cash and bond yields were suppressed whilst inflation raged, stocks crashed in real terms. The point however was that even the thread/topic PP asset allocation performed poorly as well in real terms. i.e. the reliance upon gold to serve as an inflation hedge is questionable.



Did it perform poorly in real terms relative to the others in real terms? mostly stocks and LT bonds, cash might have done better but I'm not sure in real terms

I think that is what the supporters of the PP are suggesting
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Re: Why don't people use the Permanent Portfolio?

Postby technovelist » Wed May 08, 2013 2:36 pm

It was not possible to have a HBPP prior to 1972, when the gold price was fixed in dollars, so any comparisons that involve that time period are impossible.

And no, silver is not the same as gold, so substituting silver does not help.
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Re: Why don't people use the Permanent Portfolio?

Postby Clive » Wed May 08, 2013 2:39 pm

Did it perform poorly in real terms relative to the others in real terms?

I get your point, but losing less than others in bad times, gaining less than other during good times, shouldn't be looked at in isolation. Overall lower volatility with less rewards across full cycles is a factor.

Looking to reduce yearly volatility at the expense of longer term gains, whilst providing a more emotionally comfortable ride, might not meet investment objectives. If you ride volatility through and meet your objective the interim holding period volatility fades into a distant memory.

If you can meet the investment objective whilst also reducing volatility along the way then so much the better.

For instance comparing that 15% SCV, 15% XOM, 15% gold, 55% treasuries allocation I outlined earlier to the Coffee House (60-40) since 1972

Image

Comparing the same with PRPFX (since 1983 PRPFX inception)

Image
(note the Coffee House references in the textual boxes in that second image should have read PRPFX (I forgot to edit the titles to reflect being PRPFX data before uploading the image)).
Last edited by Clive on Wed May 08, 2013 2:43 pm, edited 2 times in total.
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Re: Why don't people use the Permanent Portfolio?

Postby TO39 » Wed May 08, 2013 2:41 pm

to technovelist,

not impossible, just a comparison


I like apples because compared to an orange, they have more crunch


see how easy that was
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Re: Why don't people use the Permanent Portfolio?

Postby TO39 » Wed May 08, 2013 2:45 pm

Clive said

Looking to reduce yearly volatility at the expense of longer term gains, whilst providing a more emotionally comfortable ride, might not meet investment objectives.

I think that was the stated objective of the PP. muted returns 3% to 4 % real with less deviation
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Re: Why don't people use the Permanent Portfolio?

Postby Clive » Wed May 08, 2013 3:11 pm

TO39 wrote:
Clive wrote:Looking to reduce yearly volatility at the expense of longer term gains, whilst providing a more emotionally comfortable ride, might not meet investment objectives.

I think that was the stated objective of the PP. muted returns 3% to 4 % real with less deviation

Which distils down to what I suggested earlier. You can hold multiple factors individually, such as some foreign currency stuffed in a mattress, and some foreign stocks. Or you can combine factors via a single asset exposure, for instance exchanging some currency and buying stocks in that country with that currency for currency + stock risk/reward exposure factors. The PP isolates assets/factors, whilst other assets might provide multi risk/reward factor exposure. 50% in foreign currency, 50% in stocks has half the risk/reward factor exposure as having 100% FX'd and bought stocks with that foreign currency.

The PP is inefficient, with less reward expectancy, comparable volatility with higher rewards can be provided via more efficient means. The PP is a bit like buying some land and doing nothing with that land other than hoping its price appreciates over time. Spending in the grocery store to buy things that the land might have produced. :oops:
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Re: Why don't people use the Permanent Portfolio?

Postby Noobvestor » Wed May 08, 2013 3:23 pm

Clive wrote:
TO39 wrote:
Clive wrote:Looking to reduce yearly volatility at the expense of longer term gains, whilst providing a more emotionally comfortable ride, might not meet investment objectives.

I think that was the stated objective of the PP. muted returns 3% to 4 % real with less deviation

Which distils down to what I suggested earlier. You can hold multiple factors individually, such as some foreign currency stuffed in a mattress, and some foreign stocks. Or you can combine factors via a single asset exposure, for instance exchanging some currency and buying stocks in that country with that currency for currency + stock risk/reward exposure factors. The PP isolates assets/factors, whilst other assets might provide multi risk/reward factor exposure. 50% in foreign currency, 50% in stocks has half the risk/reward factor exposure as having 100% FX'd and bought stocks with that foreign currency.

The PP is inefficient, with less reward expectancy, comparable volatility with higher rewards can be provided via more efficient means. The PP is a bit like buying some land and doing nothing with that land other than hoping its price appreciates over time. Spending in the grocery store to buy things that the land might have produced. :oops:


In a way, this is why I'm surprised more people don't hold hybrid portfolios (though I realize it 'breaks' part of the theory behind the 4x25 PP).

Instead of: 25% US stocks, 25% long-term treasuries, 25% cash and 25% gold

Why not: 20% US stocks (50/50 large/small+value), 20% ex-US stocks (50/50 Dev/EM), 20% long-term-treasuries, 20% cash, 20% gold

Or: 25% US, 25% ex-US, 30% long treasuries, 10% cash, 10% gold

In that way, you could get some diversification benefits out of the cash/gold/long bonds, without sacrificing quite so much diversification and growth potential on the stock side.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
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Re: Why don't people use the Permanent Portfolio?

Postby Clearly_Irrational » Wed May 08, 2013 6:34 pm

I don't use the PP however some of it's design concepts have made their way into my portfolio. My mix can properly described as Markowitz with a dash of Fama/French in a PP framework with some macro adjustment rules.

30% Small Cap Value
20% Emerging Market
30% Long US Treasuries
20% Gold (Rotated with "cash" based on real interest rates)

Some AA adjustment and timing allowed in extreme PE10 scenarios.
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Re: Why don't people use the Permanent Portfolio?

Postby hazlitt777 » Wed May 08, 2013 9:28 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/


I basically use it.

I think many will be tempted to drop it when a typical 60/40 stock bond portfolio outperforms, and maybe run back into it when it outperforms the 60/40 portfolio. You have to be philosophical about it, or you will lose your nerve no matter how you invest.
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Re: Why don't people use the Permanent Portfolio?

Postby tadamsmar » Thu May 09, 2013 7:01 am

Two things wrong with the PP:

1. It assumes a universal constant lifetime risk level. It fixes the cash at 25%. In Modern Portfolio Theory, you invest in the risk-free asset to determine your risk level, it's not a permanent fixed percentage for life, or the same percentage for all.

2. Gold has zero long term real return. I am not sure it's plausible that you'd get a sufficient payoff in terms of diversification from an asset with zero real return.
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Re: Why don't people use the Permanent Portfolio?

Postby larryswedroe » Thu May 09, 2013 7:21 am

haven't read the thread but here is simple answers
First, there is no sense really to holding both ST (cash) and LT, just own say 5 year Treasuries
Second, no sense to only a US portfolio, so at very least globally diversify. And the PP has no tilt, no exposure to any equity factors except beta.
Third, how many people can make their goal with the following expected returns going forward
Stocks real expected return say 4%, bonds say 0 and gold 0. That means expected real return of the PP is about 1%.
Now how many think they can hit their goal with such a portfolio?
Still think it makes sense?
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Re: Why don't people use the Permanent Portfolio?

Postby Browser » Thu May 09, 2013 10:19 am

larryswedroe wrote:haven't read the thread but here is simple answers
First, there is no sense really to holding both ST (cash) and LT, just own say 5 year Treasuries
Second, no sense to only a US portfolio, so at very least globally diversify. And the PP has no tilt, no exposure to any equity factors except beta.
Third, how many people can make their goal with the following expected returns going forward
Stocks real expected return say 4%, bonds say 0 and gold 0. That means expected real return of the PP is about 1%.
Now how many think they can hit their goal with such a portfolio?
Still think it makes sense?
Larry

Larry hit all the major points. No point to holding a treasury barbell -- 50% 5-year Treasuries has performed exactly the same as 25% in long and 25% in t-bills or ST. It's the average duration that counts here. A U.S. centric port makes no sense from a diversification perspective either. Finally, it is a beta-risk portfolio that relies entirely on the low or negative correlations between stocks, treasuries, and gold for it's risk-adjusted return. If you look at the historical returns of the PP, it's all about the gold. When gold has been on a tear it has had attractive returns (1972-1980, 2002-2012). When gold has swooned, the returns have been miserable, comparable to money market returns (1981 - 2001). What is your gold bet for the next 10 years?
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 rmelvey » Thu May 09, 2013 10:34 am

Browser wrote:When gold has been on a tear it has had attractive returns (1972-1980, 2002-2012). When gold has swooned, the returns have been miserable, comparable to money market returns (1981 - 2001). What is your gold bet for the next 10 years?


Well, if an investor is comparing their returns to inflation, than the PP had some of its best real returns in the 1980s.
Image

Comparing the whole portfolio (a blend of stocks, bonds, gold, or cash) to one of the asset classes the comprise it over a short period doesn't make sense to me. I simply care about what a portfolio does versus inflation because that is my goal.

Larry's point about the superiority of the bullet over the barbell is not a nail in the coffin case. He may prefer the bullet, but it is not an unambiguously correct solution. A barbell protects you from unexpected inversions in the yield curve, the bullet does not. They are just different strategies. One of them is not clearly "better" than the other. Also, having the barbell allows you to isolate the LTT in your tax advantaged account and hold the cash in taxable. This provides numerous tax advantages and it gives you liquidity.

Also, I didn't realize that not tilting towards a small cross section of the stock market was that big of an offense. Besides, the PP is about having very broad buckets that helps ensure you will catch sentiment as it sloshes around the financial system. Holding a Total Market index for stocks makes the most sense in this context.

Finally, the PP is dollar centric because its investors spend in dollars. If I could buy a currency hedged international stock fund as well as a hedged international treasury fund (one that only contained government debt where the CB and Treasury were fully cooperative so no Euro debt), than I would do so. Unfortunately, those products are not yet available to retail investors :(
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Re: Why don't people use the Permanent Portfolio?

Postby Clearly_Irrational » Thu May 09, 2013 11:49 am

larryswedroe wrote:First, there is no sense really to holding both ST (cash) and LT, just own say 5 year Treasuries


I agree that is mostly true, however there are times when it's not true and then it makes a big difference. (yield curve inversion) Also by having a barbell you can make better use of your tax free space.

larryswedroe wrote:Second, no sense to only a US portfolio, so at very least globally diversify.


I agree, though that would be easy to fix without really changing the setup much.

larryswedroe wrote:And the PP has no tilt, no exposure to any equity factors except beta.


I'm not sure that's a mandatory feature, after all the three fund portfolio doesn't have that either, still it's fairly simple to fix.

larryswedroe wrote:Third, how many people can make their goal with the following expected returns going forward
Stocks real expected return say 4%, bonds say 0 and gold 0. That means expected real return of the PP is about 1%.
Now how many think they can hit their goal with such a portfolio?
Still think it makes sense?
Larry


I could quibble with some of those numbers but lets say they're spot on, that means the standard 60/40 three fund portfolio would have an expected real return of 2.4% which is also pretty terrible.

Using more realistic numbers the comparison probably looks more like this:

PP
----
Stocks 5.5%
LTT 1.8%
Cash 0.3%
Gold 4.6% (This number is very volatile and will generally be either much more positive or much more negative for long stretches but it incorporates all backwards looking data 1972-2012)

Expected return = 3.05%

60/40 Three Fund
----------
US & Foreign Stocks 5.5%
Bonds 1.3%

Expected return 3.82%

So yeah, you're giving up some performance for extra insurance with the PP and you'll have large tracking error but if you have a long holding period it should be reasonable.

Personally I think gold is too expensive as buy and hold insurance so I let the Fed tell me when to hang onto it via real interest rates but of course that's a form of timing.
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Re: Why don't people use the Permanent Portfolio?

Postby Clive » Thu May 09, 2013 11:58 am

Did the yield curve invert in 2008?

2008 Stocks -37%, LTT +22%. Apparently a nice inverse correlation where the 25% allocation to LTT gains helped offset the 25% allocation to stock losses.

But combine 50-50 LTT 22% gain with T-Bills 2% gain over 2008 = 12% average. 5 year T in 2008 yielded a 13% gain.

Longer term, comparing barbell and bullets yields very similar results. So the choice is perhaps just down to whichever is the more tax/cost efficient to hold. Whilst currently US taxation might favour the barbell, UK taxation currently favours the bullet.
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Re: Why don't people use the Permanent Portfolio?

Postby TO39 » Thu May 09, 2013 12:13 pm

larryswedroe wrote:Third, how many people can make their goal with the following expected returns going forward
Stocks real expected return say 4%, bonds say 0 and gold 0. That means expected real return of the PP is about 1%.
Now how many think they can hit their goal with such a portfolio?
Still think it makes sense?
Larry



In Larry's example the PP returns 1%. My calculations have a 50/50 stock/ bond portfolio returning 2 % using Larrys figures.

However if stocks gain 16 % and gold drops 15% in six monthes , a rebalencing trigger is hit. If you rebalance and in the next six monthes stocks and bond revert to the mean, Stocks will lose 12% and gold will gain 17%. By my calculations (still using Larry's figures) this will raise the PP gain to 1.5%. still behind the 50/50 but no where near Larrys figures.

The 50/50 portfolio would not have hit rebalencing trigger and would have returned 2%

I think it is likely that in the next 12 monthes Larrys projected gains will be close to what happens. I also think it likely the PP has a rebalencing event and has larger gains than he is proposing.

If you are discussing the PP, I think you should consider rebalencing.

edit to add: I think someone in this post said there was no benefit to the bar bell approach to treasuries.

That is showing no understanding of the rebalencing effect.
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Re: Why don't people use the Permanent Portfolio?

Postby rmelvey » Thu May 09, 2013 12:14 pm

Clive wrote:Did the yield curve invert in 2008?

2008 Stocks -37%, LTT +22%. Apparently a nice inverse correlation where the 25% allocation to LTT gains helped offset the 25% allocation to stock losses.

But combine 50-50 LTT 22% gain with T-Bills 2% gain over 2008 = 12% average. 5 year T in 2008 yielded a 13% gain.

Longer term, comparing barbell and bullets yields very similar results. So the choice is perhaps just down to whichever is the more tax/cost efficient to hold. Whilst currently US taxation might favour the barbell, UK taxation currently favours the bullet.


Yes I think that the PP throws many people off because the weighted duration of the FI portion is not that extreme when examined critically. Currently, the duration of the PP's fixed income (cash + LTT) is around 9. That's basically the same as 10 year Treasury. So the PP could be almost replicated by doing

50% 10 year Treasury
25% Stocks
25% Gold

Looks slightly less controversial right? The only real bugaboo now is the gold. Chart a stock/bond portfolio in real terms and see it's Achilles heel.
Image

What's the story of the 1970s? A supply shock driven inflation. Energy prices skyrocketed and interest rates were below the rate of inflation. Gold is energy intensive and CB reserve currency. It's not that hard to understand why it would do well during that type of an environment. How would adding gold affect this portfolio?
Image

It is very clear to see that adding gold reduced the speculative aspect of the portfolio. A stock/bond portfolio contains the implicit speculation that interest rates will compensate you for inflationary risks, however that is not historically true all of the time. Gold only begins to make sense if you think about a portfolio in real terms, and understand that gold does not protect you from inflation in isolation but hedges you against the inflationary risks that bonds sometimes do not compensate you for. After all, the CB controls interest rates. Under this arrangement there is no law saying that interest rates must rise with inflation, interest rates do whatever the Fed wants them to do, its a non-exchangeable fiat currency. Gold is simply a way of profiting when they hold this rate below what makes investors comfortable.
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Re: Why don't people use the Permanent Portfolio?

Postby TO39 » Thu May 09, 2013 12:26 pm

[quote="rmelvey"][



Yes I think that the PP throws many people off because the weighted duration of the FI portion is not that extreme when examined critically. Currently, the duration of the PP's fixed income (cash + LTT) is around 9. That's basically the same as 10 year Treasury. So the PP could be almost replicated by doing

50% 10 year Treasury
25% gold
25% stocks

This post shows no understanding of the rebalencing effect, and thus no understanding of the permanent portfolio.


edited because i originally quoted too many people and only wanted to quote one
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Re: Why don't people use the Permanent Portfolio?

Postby rmelvey » Thu May 09, 2013 12:40 pm

TO39 wrote:
rmelvey wrote:[



Yes I think that the PP throws many people off because the weighted duration of the FI portion is not that extreme when examined critically. Currently, the duration of the PP's fixed income (cash + LTT) is around 9. That's basically the same as 10 year Treasury. So the PP could be almost replicated by doing

50% 10 year Treasury
25% gold
25% stocks

This post shows no understanding of the rebalencing effect, and thus no understanding of the permanent portfolio.


edited because i originally quoted too many people and only wanted to quote one


Uhh okay... I think I actually understand the PP pretty well I have been using it for years. The post was merely highlighting that the barbell is WAY less controversial than it appears at first glance. The charts I posted had annual rebalancing, so rebalancing was definitely included in the tests. The portfolio I posted also had a 0.9675 correlation with the PP with slightly higher returns. Are you blinded by the fixed income component as well? The exact weightings of the PP aren't magic, neither is the choice of a barbell over a bullet. The differences are nearly imperceptible. Try googling bullet vs. barbell to see how largely meaningless the choice is. The PP can be understand from many different angles. Subbing the 10 year in for the barbell was merely an attempt to see how the portfolio works from a different perspective. 8-)
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Re: Why don't people use the Permanent Portfolio?

Postby Jebediah » Thu May 09, 2013 1:27 pm

Harry/Larry compromise:

15% SCV
15% EM
5% CCF
5% Gold
10% Long Treas
50% 5 Yr Treas

And the Simba says (1985-present):

CAGR = 10.82
SD = 8.16
Sharpe = 0.87
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Re: Why don't people use the Permanent Portfolio?

Postby SSSS » Thu May 09, 2013 1:44 pm

nisiprius wrote:Gold advocacy comes with ideological and political baggage


I only see this as a concern if you believe that humanity will have less ideological and political baggage in the future.
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Re: Why don't people use the Permanent Portfolio?

Postby rmelvey » Thu May 09, 2013 1:51 pm

SSSS wrote:
nisiprius wrote:Gold advocacy comes with ideological and political baggage


I only see this as a concern if you believe that humanity will have less ideological and political baggage in the future.


It doesn't have to though. Personally, I can't imagine voting R (or libertarian), but I hold gold. My portfolio is about pursuing strong risk adjusted returns, not political expression. Besides, the 30 year Treasury exposure acts a decent repellent for the more... enthusiastic... libertarians.
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Re: Why don't people use the Permanent Portfolio?

Postby TO39 » Thu May 09, 2013 2:27 pm

rmelvey wrote:
TO39 wrote:
rmelvey wrote:[



Yes I think that the PP throws many people off because the weighted duration of the FI portion is not that extreme when examined critically. Currently, the duration of the PP's fixed income (cash + LTT) is around 9. That's basically the same as 10 year Treasury. So the PP could be almost replicated by doing

50% 10 year Treasury
25% gold
25% stocks

This post shows no understanding of the rebalencing effect, and thus no understanding of the permanent portfolio.


edited because i originally quoted too many people and only wanted to quote one


Uhh okay... I think I actually understand the PP pretty well I have been using it for years. The post was merely highlighting that the barbell is WAY less controversial than it appears at first glance. The charts I posted had annual rebalancing, so rebalancing was definitely included in the tests. The portfolio I posted also had a 0.9675 correlation with the PP with slightly higher returns. Are you blinded by the fixed income component as well? The exact weightings of the PP aren't magic, neither is the choice of a barbell over a bullet. The differences are nearly imperceptible. Try googling bullet vs. barbell to see how largely meaningless the choice is. The PP can be understand from many different angles. Subbing the 10 year in for the barbell was merely an attempt to see how the portfolio works from a different perspective. 8-)



Why do you think I am blinded by the fixed in come component? I am seeing something you are not, a period where barbell rebalencing outperforms bullet.

You have a chart where I see no period of low inflation and rising interest rates. What would the rebalencing effect be in this environment and others not in your time period?

Perhaps you are the one not seeing something.

If you mentioned rebalencing in your earlier post I missed it. I think it is wrong to discuss PP and not to mention, as many have done.

edited to add

I followed your suggestion to google bullet vs barbell. What I found seems to me to support me, although it doesn't speciffically mention rebalencing, it does say the returns vary in different environ ments

quote


Originally Posted by Gollum
Could someone please explain why is this statement true? Thanks.

For two bond portfolios with equal market value and equla duration, if short term interest rates increase and long term interest rates decrease, the value of the bullet bond portfolio would increase less than the value of the barbell portfolio.

short term interest rates increase and long term interest rates decrease (or vice versa) means non-parallel yield curve shift.

Such shift is called "twisted". The reason that the barbell portfolio value increases more than that of the bullet is because 1) more capital gain from the long term maturity bonds 2) higher reinvestment income from the short term maturity bonds. In this scenario, you actually benefit from the non-parallel shift if you use the barbell strategy to immunize a single liability.

However, the opposite is true if short term interest rates decrease and long term interest rates increase, which is bad if you use the barbell strategy to immunize a single liability.

This demonstrates that the volatility of portfolio return for barbell strategy wrt non-parallel yield curve shift.
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Re: Why don't people use the Permanent Portfolio?

Postby rmelvey » Thu May 09, 2013 3:06 pm

TO39,

I agree that the barbell protects you from unexpected inversions in the yield curve. I use the barbell instead of the bullet for this reason, but I am not sure why you are so adamant that it makes a difference worth claiming that I don't "understand the PP." The portfolio I posted has a 0.9675 correlation with the PP including multiple episodes of yield curve inversion, so I am not sure why you are so upset about it. Besides I never even recommend the bullet over the barbell! I was just trying to help people that hadn't internalized that the weighted duration of the PP is not high compared to more traditional bond heavy portfolios.

As far as not mentioning every single aspect that drives the PP in every single post that I make, isn't that kind of a ridiculous standard? I made website about the PP so that I didn't have to do that.
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Re: Why don't people use the Permanent Portfolio?

Postby Clive » Thu May 09, 2013 3:09 pm

Jebediah wrote:Harry/Larry compromise:

15% SCV
15% EM
5% CCF
5% Gold
10% Long Treas
50% 5 Yr Treas

And the Simba says (1985-present):

CAGR = 10.82
SD = 8.16
Sharpe = 0.87

Jebediah, these are the yearly gains for XOM 1972-2012 respectively, try dropping those figures into Simba's spreadsheet
Code: Select all
23.53
11.90
-25.53
48.57
26.92
-4.55
9.52
20.29
57.83
-15.27
8.11
37.50
30.30
31.16
35.11
13.65
21.25
19.62
8.76
23.28
5.23
8.01
0.84
39.48
25.33
28.45
22.43
12.59
10.24
-7.62
-8.88
20.67
28.04
11.79
39.08
24.28
-13.10
-12.61
10.14
18.67
4.70

and then have a look at :
Image

That tracked the Coffee House portfolio (diverse 60-40 type asset allocation) much more closely than did the PP and as such was less likely to have tracking error regret (capitulation) - as I posted earlier

Image

XOM has oil/gas/pipelines etc i.e. commodity like, whilst also being stock like. Somewhat similar to exchanging $ into a foreign currency and buying stocks in that country/currency, you get FX + stock risk/reward exposure wrapped up into one. But instead of FX + stock factors, XOM provides stock + commodity factors wrapped up into one (XOM have something like 25-30 Billion barrels of known oil reserves).

Count the 15% XOM allocation as being both 15% commodity and 15% stocks, and when the 15% commodity is combined with 15% gold = 30% total commodity like exposure. Combine the 15% XOM stock exposure with 15% SCV = 30% stock exposure. Which is close to being a Talmud type asset allocation of a third business (stocks), a third land (hard assets/commodities) and a third reserves (cash/bills/notes).

Instead of XOM, you might opt for something like IYE (energy fund) so as to be more diversified/less single stock risk. IYE's historical data however is limited

Image

Or rather than paying nearly 0.5% yearly expenses, perhaps form your own energy fund. For example from a UK investors perspective :

Image

CVX = Chevron
XOM = Exxon Mobile
KMP = Energy partner (distribution)
BP = (I suspect after recent years everyone knows who BP is)
RDSA = Shell
NG = UK National Grid (energy distribution)
PHGP = £ Gold ETF
MIDD = FT250 (somewhat small cap value like)
INXG = index linked (inflation) treasury (gilt) bond ETF
Last edited by Clive on Thu May 09, 2013 4:44 pm, edited 1 time in total.
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Re: Why don't people use the Permanent Portfolio?

Postby Clive » Thu May 09, 2013 3:41 pm

The yield curve is dynamic

Image

Shorter dated yields (closest to the front/left in the above image) are more volatile than longer dated.

Generally buying near the peak of the steepest part of the yield curve is the best value, because if things remain the same then that has the fastest price appreciation element. Moving existing holdings to that value point will tend to capture greater rewards. Broadly the average peak of the steepest part of the yield curve is at around 10 years out.
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Re: Why don't people use the Permanent Portfolio?

Postby TO39 » Thu May 09, 2013 3:47 pm

rmelvey wrote:TO39,

I agree that the barbell protects you from unexpected inversions in the yield curve. I use the barbell instead of the bullet for this reason, but I am not sure why you are so adamant that it makes a difference worth claiming that I don't "understand the PP." The portfolio I posted has a 0.9675 correlation with the PP including multiple episodes of yield curve inversion, so I am not sure why you are so upset about it. Besides I never even recommend the bullet over the barbell! I was just trying to help people that hadn't internalized that the weighted duration of the PP is not high compared to more traditional bond heavy portfolios.

As far as not mentioning every single aspect that drives the PP in every single post that I make, isn't that kind of a ridiculous standard? I made website about the PP so that I didn't have to do that.



First off I am not upset and secondly I never claimed you didn't understand the PP. I said that one post showed no understanding of the rebalancing effect and thus no understanding of the PP. I still think it doesn't. Your post followed several making claims about the PP and ignoring the rebalancing effect, also showing no understanding.

I also think the bullet will not perform as well as the barbell, but that was not the message I was getting from your post, because in the time frame of your charts it performed well, and you seemed to suggest it would always
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Re: Why don't people use the Permanent Portfolio?

Postby TO39 » Thu May 09, 2013 4:00 pm

[quote="Clive"][

Instead of XOM, you might opt for something like IYE (energy fund) so as to be more diversified/less single stock risk. IYE's historical data however is limited

Image

Or rather than paying nearly 0.5% yearly expenses, perhaps
unquote

Perhaps VDE, ER .14 but less history than IYE
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Re: Why don't people use the Permanent Portfolio?

Postby Clive » Thu May 09, 2013 4:37 pm

Perhaps VDE, ER .14

Thanks for the pointer.

Re: Bullets/barbells

From http://www.treasury.gov/resource-center ... data=yield

The US Treasury Yield curve for May 5th 2013 indicates

7 year 1.2%
10 year 1.81%

Buy a 10 year 1.81% coupon yield for par $100 (assuming one were available) and hold for 3 years until 7 years remaining, and assuming no change in the yield curve, the market will price that 7 year to 1.2% yield - and would be paying $104.08 for that treasury.

1.81% yearly income from bond interest plus a 4.08% capital gain over 3 years (1.34% annualised)
for combined 1.81 + 1.34 = 3.15% yearly benefit

Compared to
1 year yield of 0.02%
20 year yield of 2.6%

Whilst the 20 year would also have dropped to being a 17 year after 3 years and be valued more expensively (again assuming no changes in the yield curve), the yield difference is much smaller and hence the capital gain amount would be relatively small. In effect a barbell would be earning a little over the average of 0.02 and 2.6 - perhaps around 1.5%, whilst buying a 10 year, selling at 7 years remaining to roll into another 10 year yields a 3.15% yearly benefit.

Whilst a barbell might gain more under other circumstances, there will be an equal and opposite side where it loses more - overall neutral. Buying a bullet tuned to the best value at the time, and rolling - buys value, and whilst that will also have good and bad times, overall its positive as you've in effect bought the best value at the time (relatively cheapest).

That however is all based on no friction. After costs/spreads etc. the costs might outweigh the benefits. Overall perhaps there's little difference - such that the best choice is the most tax efficient choice.
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Re: Why don't people use the Permanent Portfolio?

Postby TO39 » Thu May 09, 2013 6:15 pm

Clive wrote:Did the yield curve invert in 2008?

2008 Stocks -37%, LTT +22%. Apparently a nice inverse correlation where the 25% allocation to LTT gains helped offset the 25% allocation to stock losses.

But combine 50-50 LTT 22% gain with T-Bills 2% gain over 2008 = 12% average. 5 year T in 2008 yielded a 13% gain.

Longer term, comparing barbell and bullets yields very similar results. So the choice is perhaps just down to whichever is the more tax/cost efficient to hold. Whilst currently US taxation might favour the barbell, UK taxation currently favours the bullet.



I see where there is little difference in the above example, but there was no rebalancing that I could see. What is the difference between:
25% LTT 25% STT 25% gold 25% stocks and 50% ITT 25% gold and 25% stocks over a ten year period rebalanced when ever any component increased or decreased by 15 % : ie gold went to 21.25% or 28.75% of the port folio. and would it stay the same for different ten year periods?

When you said longer term there was little difference, did that include % based rebalancing?
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Re: Why don't people use the Permanent Portfolio?

Postby Clive » Thu May 09, 2013 6:25 pm

TO39 wrote:Perhaps VDE, ER .14

According to http://www.hmrc.gov.uk/collective/rep-funds.xls VDE was UK reporting registered from September 2010, which means that capital gains are taxed as capital gains rather than income from a UK investors perspective. So you might utilise yearly capital gains tax exemption to tax harvest capital gains, rather than having to hold inside an ISA (tax exempt) - leaving more tax exempt space available for bonds.

The 1.8% dividend yield would have 15% US withholding tax applied, so in combination = 0.41% cost assuming the dividend remains the same - and that tax might potentially be offset against other assets, perhaps in effect reducing the cost back down to 0.14%.

Seems to hold similar assets/allocations as iShares IYE and hence similar tracking

Image

VBR (Small Cap Value) has similar characteristics (UK reporting registered etc.), so conceptually a UK based investor might hold

15% VBR (small cap value)
15% VDE (energy)
15% PHGP.L (gold)
55% INXG.L (inflations bonds)

and VDE would be providing FX (GBP/USD) + Oil/Gas commodity + Stock risk/reward factors.

30% USD exposure via VBR and VDE could be a useful GBP hedge, as well as possibly adding value as broadly the GBP has relatively declined compared to USD over the longer term.
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Re: Why don't people use the Permanent Portfolio?

Postby Clive » Thu May 09, 2013 6:54 pm

TO39 wrote:What is the difference between:
25% LTT 25% STT 25% gold 25% stocks and 50% ITT 25% gold and 25% stocks over a ten year period rebalanced when ever any component increased or decreased by 15 % : ie gold went to 21.25% or 28.75% of the portfolio. and would it stay the same for different ten year periods?

When you said longer term there was little difference, did that include % based rebalancing?

Its been a few years since I last looked, but I believe there was little difference when compared using yearly rebalancing or 40% band rebalancing (15% or less, 35% or more weightings, reset back to 25% weightings) when using either 25% STT/25% LTT barbell or 50% bullet. Historically most of the rebalance action occurred between stocks and gold (band rebalanced being triggered by either stocks or gold, and most of the rebalance money being a movement between stocks and gold) - something like

Image

with much smaller amounts being moved from/to LTT's, too little to make much difference to the total portfolio.

The relative benefit/loss from historic rebalance actions would likely differ over different time periods. When you rebalance if the prior trend continues it would have been better to have delayed rebalancing; If the prior trend reverses then having rebalanced was the better choice. There's 50-50 chance of either case. Over individual cases however you might hit more cases of having been right that wrong, but equally in other cases you might have been more wrong than right. Coin flips.

Strip out just the rebalance amount elements and such trading isn't assured to be profitable. If for instance you held non of the assets but then stocks rose, gold declined and moved $10,000 from stocks to gold in the virtual portfolio and you went $10,000 long gold, $10,000 short stocks at that time .... etc. adjusting for each rebalance action, then its all very hit and miss as to whether you'd profit or not from such trading.
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Re: Why don't people use the Permanent Portfolio?

Postby Jebediah » Thu May 09, 2013 9:36 pm

Clive

I appreciate the XOM idea, it's clever, but not so sure about a) taking on that much idiosyncratic risk, b)mixing equity/commodity exposure in one stock and muddying up the allocation vs knowing exactly how much I've got of each. Separating ccf, gold, stock seems cleaner. Though I guess you could argue beta/size/value are all muddled together in one fund but I'm not sure how to fix that.
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Re: Why don't people use the Permanent Portfolio?

Postby TO39 » Thu May 09, 2013 10:07 pm

Clive, thanks for the answer, I will study it
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Re: Why don't people use the Permanent Portfolio?

Postby Clive » Sat May 11, 2013 6:48 am

Jebediah wrote:Clive

I appreciate the XOM idea, it's clever, but not so sure about a) taking on that much idiosyncratic risk, b)mixing equity/commodity exposure in one stock and muddying up the allocation vs knowing exactly how much I've got of each. Separating ccf, gold, stock seems cleaner. Though I guess you could argue beta/size/value are all muddled together in one fund but I'm not sure how to fix that.

There are few things we can reliably predict. Costs and taxes however are two that we can reasonably predict and control.

For example as a UK investor, dividends from US stocks will have a 15% withholding tax applied and as such I might prefer to hold a asset allocation that has relatively low or no dividends. And/or I might prefer to be lighter or heavier on USD exposure at times.

Assuming for instance I wanted to be light USD and US dividend income, I might opt for 5% ERX (3x energy ETF), 7.5% LBUL.L (2x gold bullion ETF), 5% TNA (3x stock ETF), which relative to the total portfolio value that would have a 0.1685% combined expense ratio (acceptably low), and pays a low dividend.

Image
[values are total gains (accumulation)]

For simplicity I'm assuming here that the 82.5% remainder of funds would be retained in the UK in a UK TIPS like alternative i.e. just 17.5% total USD exposure via the three ETF's.

Or if I wanted to be more USD heavy (GBP light), I might hold stocks or 1x ETF's (I wouldn't however be inclined to weight 10% into XOM alone for instance, but would instead diversify across multiple stocks, perhaps bearing no more than 2% risk (weighting) per individual stock).

Muddling up multiple risk/reward factors isn't a bad thing. i.e. movements between 15% in three 3x ETF's and 45% in three 1x ETF's might still achieve similar overall results whilst adding in an additional USD/GBP currency play on top of the existing position/asset allocation gains, which is a more productive approach than that of just a FX play alone. Each $ is working harder and potentially yielding a better overall reward, and/or perhaps compensating for other assets such as gold that might be under worked (similar to owning some land that is left idle rather than being farmed/rented).

My personal general preference is towards the 5% in three 3x choices (leveraged ETF's) as that can have acceptably low costs (expense ratio relative to total portfolio), low dividends (withholding taxes), some additional GBP risk hedge, and is a somewhat 15-85 type asset allocation (Zvi Bodie/Nassim Taleb), whilst also being somewhat PP, FTM and Talmud like - but historically having tracked Coffee House rewards reasonably closely (less likely to capitulate due to 60-40 tracking error). Holding the 3x's within ISA (tax exempt) space also better utilises that (limited) space. And if some pending GBP crisis became apparent and I wanted to exit fully out of GBP into USD then a handful of trades could accomplish that, whilst still continuing to hold the target asset allocation.
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Re: Why don't people use the Permanent Portfolio?

Postby nedsaid » Sat May 11, 2013 12:25 pm

I have been in the camp of investing in asset classes that have real return over time. Cash has a small real return (it is negative real return now) and gold has zeor percent real return over long time periods. So 50% of the portfolio is dead money.

The long term bonds are pretty volatile and I own bonds for income and to reduce volatility. Of course I like stocks a whole lot.

This portfolio has worked well historically. Cash and long term bonds are your deflation hedges. Stocks and gold protect against inflation. Cash offsets the volatility of the long term bonds. Over long periods of time, gold is a good store of value.

So I am not telling people not to do this, but this portfolio runs against the grain of my investment philosophies and what I am interested in owning. Pretty much, I am a believer in owning the means of production. Stocks and REITS help to do this. I want to own businesses and keep them for a long time.
A fool and his money are good for business.
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Re: Why don't people use the Permanent Portfolio?

Postby Jebediah » Sat May 11, 2013 2:10 pm

Clive
I too like 3x ETFs for concentrated risk, in theory. In practice it's a no go due to high ERs and slippage, they don't keep up with the index long-term. I don't know where you're getting those low ERs. M* shows 0.99 for ERX, for example.
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Re: Why don't people use the Permanent Portfolio?

Postby Quasimodo » Sat May 11, 2013 3:42 pm

Responding to the original poster:

Some reasons why I like the Permanent Portfolio:

The plan recognizes uncertainty in financial markets, and doesn't try to predict outcomes.

The plan has uncorrelated assets that can do well during times of prosperity, inflation, deflation and recession.

Every alternative stock and bond asset allocation I have seen has a history of higher volatility, which would discourage me from staying the course.

Except for some good luck during the 1970s, I personally have a poor history of investment planning and implementation. This plan offers a clear way to allocate funds for positive returns in a way I am likely to be able to live with.

Some methods for implementing this plan:

1) Buy low cost Vanguard ETFs for the stock and bond portions, and Central Gold Trust (symbol GTU) for the gold portion. (Purists would hold at least some physical gold instead of a fund)

2) Buy the Permanent Portfolio mutual fund (symbol PRPFX) which includes the various elements of the portfolio and rebalances them periodically for you.

3) Buy the Permanent Portfolio ETF (symbol PERM) which follows the neutral 4 x 25% allocation more closely than the mutual fund PRPFX.

Some drawbacks to plans 2) and 3):

PRPFX is slanted toward protection from inflation, and invests in growth stocks and natural resource stocks instead of a broad stock index. It also includes Swiss franc assets and does not hold 25% in long term treasury bonds. Although the fund did well during the early 2000s, its performance was very mediocre during the 1980s and 1990s. A suggestion I have seen to offset these drawbacks is to allocate 90% to PRPFX and 10% to an ETF that invests in long term US Treasury bonds.

Although so far it seems to track the 4 x 25% allocation better than the mutual fund PRPFX,
PERM was introduced early in 2012 and doesn't yet have much of a track record.

Expense ratios for PRPFX and PERM are higher than for plan 1).

1) above is my personal implementation, and my comments are not represented as an authoritative review.

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

Postby craigr » Sat May 11, 2013 4:29 pm

A few things I would probably point out:

1) The Permanent Portfolio has a much different objective than a lot of stock heavy portfolios. The Permanent Portfolio is designed to grow and protect your life savings at moderate rates, it is not designed to swing for the fences. Harry Browne (and myself), believe first and foremost that your career builds your wealth and your investing can accelerate that growth given time. However, investors make a huge error when they think they are going to grow their savings exclusively through chasing after high returns. Since you can't go back and re-earn money you lose when taking on extreme investing risk, investors are probably best served by being more conservative so they are not forced to make bad decisions due to market volatility (like sell all their stocks at a market bottom). The Permanent Portfolio is designed to not only grow your money, but reduce volatility so investors are likely to stick to their plan no matter what is going on.

2) In addition to the above, investors do not know when they are actually going to need their money. It's common to think we'll save money for 40 years and then retire in peace. But what may very well happen is life gets in they way. You can't save as much, or you have health problems come up that need to covered, or family issues get in the way, or you have to leave the workforce early for a variety of reasons, etc. So you really don't know when you may need your life savings. If that moment when you need your savings is the same exact moment when the stock market is having a rough time (or protracted rough time), you could be really stuck. This is where a low-volatilty Permanent Portfolio really shines. At any time you have a good handle on how much money you are likely to have if you need it because volatility is controlled.

3) The purpose for the barbell is it gives you a big slug of cash that you can use to buffer market volatility and draw on if you lose a job, have an emergency, etc. The blending with the long-term bonds means you can also harvest that volatility during rebalancing without watching your entire fixed income allocation bouncing up and down. Cash is a tremendously underrated asset class.

4) People hate gold. I get it. Really, there are no arguments about the asset I haven't heard 1,000 times at least. But surprises happen all the time in this world. And surprises happen quickly enough that you can't react. And when you decide to react, it is usually too late. So you can get gold run-ups like in the 2000s that nobody really thought would happen when stocks languished. However, you can get big spikes in prices due to world events. Or you could have major currency problems that happen suddenly. History is replete with these examples. The purpose for gold in a portfolio is to handle surprises, but also counteracts a lot of risks that affect stocks and bonds negatively.

5) I think looking exclusively at U.S. markets and assuming the next 10,20,50,100 years of market history will be like the last is a tremendous strategic error. Stock and bond portfolios should hold some gold as insurance against uncertainty even if the investor doesn't want to use the Permanent Portfolio. What that insurance is worth to an investor (and how much) is their own choice. I will simply suggest that for the same reason people don't like gold because it's not a stock or bond is a good reason why it can diversify against stock and bond risk. Not every part of your portfolio needs to be income producing. Sometimes you just need a part that you know will always be there no matter what is going on in the world. If someone wants to say that this has some political/ideological baggage that's fine. But I think it's more fair to say that it's just a nod to history and I'm not passing judgement on it. I just accept that gold is valuable and it's just how the world works.

6) I think Harry Browne hit on a very important theory by trying to diversify assets based on economic drivers. The model could be tweaked I suppose, but every time I've done it myself I came back to the 25% split because it works and is simple. I think ultimately the core ideas will be proven correct, even if there are some variations that perhaps could work a little better (in hindsight). Fundamentally, the markets move based on the economy and the economy reflects its health with prevailing interest rates and sentiments around deflation, inflation, recession and prosperity. It's a pretty good model to build a diversified portfolio even if an investor decides that the core Permanent Portfolio idea is not for them.

7) Finally, the portfolio is built around the idea that the world is uncertain and this means you need to diversify to protect yourself. A balanced portfolio is not betting on any particular outcome. Because of this, you can lose some upside if a particular future unfolds (e.g. Stocks go gangbusters but you're not 100% stocks). However you are protected if a particular future doesn't arrive on your timeline or pans out in unexpected ways (isn't this always what happens?). The Permanent Portfolio tries not to make any assumptions. The core assets are each picked for very specific reasons to eliminate risks where it's not needed (like credit risk), but react very strongly to particular events that favor that asset. The diversification resulting from this is very strong.

There is a target painted on the Permanent Portfolio because in the core form it advocates a fixed allocation that has remained more or less constant since Harry Browne's 1987 book Why the Best Laid Investment Plans Usually Go Wrong (25% split allocation with only major change is using index funds for the stocks which he advised towards the end of his career). While this makes the portfolio simple, it also gives a non-moving target and there is always something that can be found that will perform better in hindsight.

The Permanent Portfolio has got a lot of really good thinking behind it and 30 years of empirical data with real money on the line. It's not perfect (what is?), but if you want a moderate return portfolio with built-in fail-safes that make taking large losses less likely, it's something to consider. I certainly think there are a ton of good ideas built into the strategy that an investor can use, even if they choose not to adopt the full strategy. Certainly, the views on market risk and diversification will likely be an eye opener. The ideas of diversification based on economic drivers is also a key insight. It's a very unique and approachable strategy (even if unconventional). It also has a track record that shows it performed as designed with moderate growth outpacing inflation with low risk across changing economic environments.
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Re: Why don't people use the Permanent Portfolio?

Postby Clive » Sat May 11, 2013 6:55 pm

Jebediah wrote:Clive
I too like 3x ETFs for concentrated risk, in theory. In practice it's a no go due to high ERs and slippage, they don't keep up with the index long-term. I don't know where you're getting those low ERs. M* shows 0.99 for ERX, for example.

You only need to hold a third of ERX as you would hold in IYE, so the relative comparable ER is 0.99 / 3 = 0.33. Instead of 15% IYE you hold 5% ERX.

Generally 33.3% ERX, 66.7% TIPS will compare to 100% IYE and track each other reasonably closely for up to a year or so (generally). But after a year the weightings might have drifted to perhaps 20% ERX/80% TIP or maybe 50% ERX/50% TIPS, and as such the tracking will start to drift more. Resetting back to 33/67 once each year rectifies that.

In this multi year example, you'll see quite close tracking in the earlier part, but more drift in later years because no rebalancing occurred.

Image

i.e. after the big drop in 2008/9, the SSO 2x SPY weighting would have dropped to a relatively low level and as such the subsequent volatility was lower than it would have been if it had been rebalanced back to target weightings.
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Re: Why don't people use the Permanent Portfolio?

Postby Jebediah » Sat May 11, 2013 8:18 pm

Craigr: thank you for that excellent post. Especially item #5.
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Re: Why don't people use the Permanent Portfolio?

Postby RyeWhiskey » Sat May 11, 2013 11:22 pm

Craigr's post is excellent but I just want to emphasize a portion of it which is often overlooked (hence the repeated HBPP vs. Boglehead threads).
The Permanent Portfolio has a much different objective than a lot of stock heavy portfolios.


This is the real point. The Permanent Portfolio is, according to Browne's own words, 'for money that you cannot afford to lose.' It is not built to return the kind of numbers that Boglehead portfolios are because it is built to suffer minor losses in years when most conventional stock/bond portfolios take bigger hits. It is built to be conservative because, as Craigr elaborated well, it is assumed that the folks involved will be making the majority of their money through their careers (I think this is somewhere in the beginning of Harry Browne's book, maybe even the first chapter).

So the debate isn't really accurate as the premises are totally different. I, being a 27 year old with no real income (artist), use a very stock-heavy Boglehead portfolio. My parents, being retired with a steady monthly income, use the Permanent Portfolio. I explained both Boglehead wisdom and the HBPP to them and they chose it because it made them feel better about their financial future.

All these HBPP vs. Boglehead arguments miss the point, or so it appears to me. We should be happy that both Bogleheads and HBPP use low-cost, diversified, investment strategies and tune out the noise. This is what really matters in the long run.
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