A better Permanent Portfolio?

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Browser
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A better Permanent Portfolio?

Post by Browser » Mon Sep 28, 2015 10:22 am

[restarted thread. Check posting dates before replying - admin alex]

The problem with the classic Permanent Portfolio is that it has too little in stocks and too much in intermediate duration bonds. This results in a portfolio with very low volatility, but also mediocre returns. Gold has low or negative correlation to both stocks and bonds and represents a good diversifier during periods in which both stocks and bonds have poor returns, as happened in the inflationary period of the 1970s.

I compared the returns of investing $10,000 in the classic PP (25% stocks, 50% intermediate treasuries, 25% gold) to a portfolio with 50% stocks, 25% long treasuries, and 25% gold for the period 1972-2014.

Portfolio #1 is the classic PP with 25% stocks, 50% intermediate treasuries, 25% gold.
Portfolio #2 is the "modified" PP with 50% stocks, 25% long treasuries, 25% gold.

Code: Select all

#	Initial Balance	Final Balance CAGR StdDev Best Year	Worst Year Max. Drawdown Sharpe Ratio
1	$10,000	$445,485 	9.23% 	7.85%	39.02%	-4.63%	-4.63% 	0.56
2	$10,000	$713,478 	10.43% 	10.17%	42.43%	-11.65%	-11.65% 	0.55
Sharpe ratios are the same (.56 and .55). The annualized return of the modified PP was 1.2% higher than for the classic PP, while volatility was also somewhat higher. The worst annual drawdown of the modified portfolio (2008) was -11.65% vs. -4.65% for the classic PP.

For my money, the modified PP with a higher stock allocation and a smaller bond allocation to long duration treasuries is superior. It provides higher long term returns with pretty low volatility, with the same risk-adjusted returns.
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Rodc
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Re: A better Permanent Portfolio?

Post by Rodc » Mon Sep 28, 2015 10:25 am

I thought PP used long bonds and cash.

https://en.wikipedia.org/wiki/Fail-Safe_Investing

Similar but not the same as 50% intermediate.
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Re: A better Permanent Portfolio?

Post by FuzzyButtons » Mon Sep 28, 2015 10:45 am

Yes, if you replace the 25% cash allocation of the Permanent Portfolio with stocks instead, you will get higher returns with more volatility. Though you might instead divide evenly at 33/33/33 between all three classes. After all, the idea is that these are uncorrelated assets that move in ways that balance each other and respond to different economic climates. By giving stocks double the weight of the other two, you're breaking that balance. You're essentially gambling that "prosperity" will be the dominant climate throughout your investing period. I hope you're right - that sounds good to me. :D

The cash portion of the PP is a drag on returns, but that's kindof the point. The PP is all about capital preservation with reduced volatility and moderate growth. So that reduction in the overall gains/losses is a feature, not a bug.

I adopted a loose PP strategy last November, and was confronted with the same concern about missing out on gains by putting so much in cash. But I eventually made my peace with it. One thing I do is consider my emergency fund to be part of the cash allocation. So the actual "invested" cash is slightly smaller. I'm also using a short duration treasury bond fund for the "cash".

Before last November, I was 100% stocks since 1994. I sleep much better now. YMMV :)

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Re: A better Permanent Portfolio?

Post by boomdeyada » Mon Sep 28, 2015 10:53 am

FuzzyButtons wrote: The cash portion of the PP is a drag on returns, but that's kindof the point. The PP is all about capital preservation with reduced volatility and moderate growth. So that reduction in the overall gains/losses is a feature, not a bug.
While cash plays an important role in providing liquidity, you should consider that cash most likely will result in negative returns. I would not call negative returns 'capital preservation' but rather 'capital destruction'.

I fully agree with everything else you've said for example, and I hold cash myself. But I consider cash (and bonds, in fact) to be a price I pay in order to get liquidity.

I'd also add that my interpretation of the permanent portfolio isn't to hold equally non-correlated assets, but rather to hedge against against all possible financial environments, namely "prosperity, inflation, recession or deflation". It sounds nice but I think deflation is very unlikely in times of modern economics.
Last edited by boomdeyada on Mon Sep 28, 2015 11:03 am, edited 1 time in total.

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Re: A better Permanent Portfolio?

Post by Call_Me_Op » Mon Sep 28, 2015 10:56 am

I don't think you can just change the PP based upon back-testing and claim that the result is "better." The PP is based upon the premise that the economy is always dominated by one of four economic states, and the PP holds at least one investment that will do very well in each of the four states. If you eliminate cash, it ain't a PP as originally conceived by Harry Browne.
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Re: A better Permanent Portfolio?

Post by Rx 4 investing » Mon Sep 28, 2015 11:00 am

FWIW...

The folks at Crawlingroad.com maintain a website dedicated to Harry Browne's memory and the Permanent Portfolio. They use...

For bonds: Treasury 20+ year long term bonds

For cash: Treasury 1-2 year notes

Here's the link to their historical returns with these two buckets...

http://www.crawlingroad.com/blog/2008/1 ... l-returns/
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Re: A better Permanent Portfolio?

Post by small_index » Mon Sep 28, 2015 9:46 pm

Browser wrote:

Code: Select all

#	Initial Balance	Final Balance CAGR StdDev Best Year	Worst Year Max. Drawdown Sharpe Ratio
1	$10,000	$445,485 	9.23% 	7.85%	39.02%	-4.63%	-4.63% 	0.56
2	$10,000	$713,478 	10.43% 	10.17%	42.43%	-11.65%	-11.65% 	0.55
Looks like the best year column mistakenly copies the worst year column.

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galeno
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Re: A better Permanent Portfolio?

Post by galeno » Mon Sep 28, 2015 9:57 pm

The PP is 25% stocks + 25% long USA T-bonds + 25% gold + 25% cash. The cash and the gold are total drags. A far better port would be 50% stocks + 50% long USA T-bonds.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.13%. Term = 34 yr. FI Duration = 6.2 yr. Portfolio survival probability = 95%.

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Re: A better Permanent Portfolio?

Post by koekebakker » Mon Sep 28, 2015 11:40 pm

galeno wrote:The PP is 25% stocks + 25% long USA T-bonds + 25% gold + 25% cash. The cash and the gold are total drags. A far better port would be 50% stocks + 50% long USA T-bonds.
Better in what way, and for what purposes?

Lump 25% cash and 25% LT bonds together and you have 50% intermediate treasuries. Add 25% stocks and you have a very basic conservative Boglehead portfolio. The only thing that makes the PP 'un-Boglehead' is the large allocation to gold. So far that hasn't hurt the portfolio.

Also don't forget to include your emergency fund. So a 50/50 stock bond portfolio usually looks more like a 40 stocks/40 bonds/20 cash, which is a already a bit closer to the PP.

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Re: A better Permanent Portfolio?

Post by 2Birds1Stone » Tue Sep 29, 2015 6:47 am

Posting to follow. My personal AA is

50% Equities (35% domestic/15% international)
20% Precious Metals
20% Cash
10% Bonds

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Re: A better Permanent Portfolio?

Post by azanon » Tue Sep 29, 2015 6:56 am

2Birds1Stone wrote:Posting to follow. My personal AA is

50% Equities (35% domestic/15% international)
20% Precious Metals
20% Cash
10% Bonds
If you don't mind my asking, what do you use for your Precious Metals investment allocation?

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Re: A better Permanent Portfolio?

Post by 2Birds1Stone » Tue Sep 29, 2015 7:34 am

azanon wrote:
2Birds1Stone wrote:Posting to follow. My personal AA is

50% Equities (35% domestic/15% international)
20% Precious Metals
20% Cash
10% Bonds
If you don't mind my asking, what do you use for your Precious Metals investment allocation?
Physical Ag/Au bullion.

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galeno
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Re: A better Permanent Portfolio?

Post by galeno » Tue Sep 29, 2015 7:58 am

Most Bogleheads do not think of gold or other commodities as investments. The long term returns for gold and other commodities = USD inflation - portfolio costs.

Gold and commodities are speculative.

25% cash is just too much. We hold 5% which is 1.25 years of living expenses. I can see someone holding a maximum of 10%. More than 10% cash is just too much portfolio drag.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.13%. Term = 34 yr. FI Duration = 6.2 yr. Portfolio survival probability = 95%.

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Re: A better Permanent Portfolio?

Post by nisiprius » Tue Sep 29, 2015 8:04 am

Call_Me_Op wrote:I don't think you can just change the PP based upon back-testing and claim that the result is "better." The PP is based upon the premise that the economy is always dominated by one of four economic states, and the PP holds at least one investment that will do very well in each of the four states. If you eliminate cash, it ain't a PP as originally conceived by Harry Browne.
It's important to remember that "The" Harry Browne Permanent Portfolio evolved over time and was revised several times. "The" Permanent Portfolio that followers cite today is already the result of choosing the best backtested results.
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Re: A better Permanent Portfolio?

Post by Call_Me_Op » Tue Sep 29, 2015 9:23 am

nisiprius wrote:
Call_Me_Op wrote:I don't think you can just change the PP based upon back-testing and claim that the result is "better." The PP is based upon the premise that the economy is always dominated by one of four economic states, and the PP holds at least one investment that will do very well in each of the four states. If you eliminate cash, it ain't a PP as originally conceived by Harry Browne.
It's important to remember that "The" Harry Browne Permanent Portfolio evolved over time and was revised several times. "The" Permanent Portfolio that followers cite today is already the result of choosing the best backtested results.
Indeed there has been some tweaking of the PP, but IMO what distinguishes it (the original PP) from other portfolios is that it has a certain elegance (beauty?) that derives from its being based upon an economic model, as well as its symmetric use of 4 uncorrelated asset classes. There are all sorts of portfolios that do better on back-testing, but none has as elegant a theoretical basis.
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Re: A better Permanent Portfolio?

Post by 2Birds1Stone » Tue Sep 29, 2015 10:09 am

galeno wrote:
25% cash is just too much. We hold 5% which is 1.25 years of living expenses. I can see someone holding a maximum of 10%. More than 10% cash is just too much portfolio drag.

I suppose that depends on the individual, for me 20% cash represents 1 year of living expenses. I can see someone with a 7 figure portfolio might want to hold much less.

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Re: A better Permanent Portfolio?

Post by azanon » Tue Sep 29, 2015 10:18 am

galeno wrote:Most Bogleheads do not think of gold or other commodities as investments. The long term returns for gold and other commodities = USD inflation - portfolio costs.
... as one who does use commodities in my portfolio, I don't think of that position as an investment per se either, in the sense that investments are "for profit", for the very reason you mentioned above. I think of a position in commodities (and other real assets) as serving the purpose of reducing volatility/increasing overall portfolio diversity. I'm also just as concerned about a return of my money, as I am a return on my money.

Stocks and bonds are great asset classes, and everyone should have them. But there are other asset classes besides these that are at least worth consideration, and not just for return purposes.

* edit - there's also the potential for a "faux" return on commodities when you rebalance. Said another way, its entirely possible for a commodities wrapper to have 0% return independent of itself, yet boost portfolio return by its inclusion via rebalancing the portfolio.

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Re: A better Permanent Portfolio?

Post by Clive » Tue Sep 29, 2015 10:30 am

Since 1975 when it became legal again to hold gold in the US, comparing total gains yearly rebalanced of a third each in Short Term Treasury, Long dated treasury (blue line) and gold with that of 100% Total Bond (red line)

Image

https://www.portfoliovisualizer.com/bac ... rmBond1=33

The visual indications are that a 25/75 stock/'bond' would have had more stable bond value utilising Total Bond than if 'bonds' were held using a equal split of long dated/short dated/gold.

Indeed when you compare those two choices https://www.portfoliovisualizer.com/bac ... rmBond1=25 the indications are that the Total Bond based portfolio provided better risk adjusted and actual reward.

Larry's Portfolio (30/70 more-volatile-stocks/bonds) https://www.portfoliovisualizer.com/bac ... rmBond1=25 is perhaps 'A better Permanent Portfolio'

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Re: A better Permanent Portfolio?

Post by azanon » Tue Sep 29, 2015 10:41 am

There are a lot of things that would lose to Total Bond looking at the past 30 years. If the required assumption here is that the future will look exactly like the past, then yeah this is an easy choice - drop the commodities including gold and just go total bond. Heck, I'm not even sure the S&P 500 would fair much better. Can you add it on that graph?

I'm more apt to also take into consideration interest rates 30 years ago vs. today as well.

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Re: A better Permanent Portfolio?

Post by Dutch » Tue Sep 29, 2015 10:49 am

I guess we better call it the semi-permanent portfolio

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Re: A better Permanent Portfolio?

Post by Clive » Tue Sep 29, 2015 11:46 am

azanon wrote:There are a lot of things that would lose to Total Bond looking at the past 30 years. If the required assumption here is that the future will look exactly like the past, then yeah this is an easy choice - drop the commodities including gold and just go total bond. Heck, I'm not even sure the S&P 500 would fair much better. Can you add it on that graph?

I'm more apt to also take into consideration interest rates 30 years ago vs. today as well.
Here you go https://www.portfoliovisualizer.com/bac ... rmBond1=33

If you consider gold as a left bell of a barbell - a form of long (un)dated zero coupon inflation bond and long dated treasury as a right bell of a barbell, combined with short term treasury being middle/fulcrum, then broadly that wont differ that much to just a all short term treasury bullet. https://www.portfoliovisualizer.com/bac ... rmBond1=33

Much of the Permanent Portfolio's historic is circumstantial and with real world doubts (such as PP historic data dating back to 1972 when it was technically illegal to hold investment grade gold in the US, or including the gains after gold was compulsory purchased in 1933/34 before the price fix was ramped up 70% or whatever). Similarly for bonds often the net real rewards are ignored. During times of economic stress/high inflation and bond yields taxes likely also will rise. In the UK in the late 1970's for instance higher rate income tax hit 83% levels and a additional unearned income tax of 15% was also applied, pushing tax rates to 98%. Stocks in the past were a lot more expensive to trade. Pre internet days and market makers could make a killing on postal orders and there were few/no tax exempt accounts at the time when most needed.

Its perhaps more appropriate to focus on what assets can be held the more cost/tax efficiently as taxes and costs can make a significant difference to overall rewards. If all are equally cheap/expensive to hold and are taxed the same then a total bond diversifies risk compared to holding one risk exposure alone. In the UK our gold Sovereign's being legal tender are capital gains tax exempt. Spreads however are wide, typically ranging from 5% to 10% (for larger/smaller trade amounts respectively). Some of that might however be recouped by trading/tax-harvesting taxable and tax exempt.

For many the simplicity and low cost/tax efficient total bond fund would suffice equally as well as the likes of a gold/STT/LTT ... whatever type 'bond' asset allocation.

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Re: A better Permanent Portfolio?

Post by linenfort » Tue Sep 29, 2015 11:58 am

nisiprius wrote:It's important to remember that "The" Harry Browne Permanent Portfolio evolved over time and was revised several times. "The" Permanent Portfolio that followers cite today is already the result of choosing the best backtested results.
I think the first part is true- the HBPP was modified once or twice by Harry Browne. However, I don't think your second assertion is. For example, I don't think Harry got rid of silver because of backtesting, but simply because he thought gold would do the job and that silver was extraneous.

And, as others have already noted, the OP got it wrong from the beginning. The PP has never had any intermediate term bonds whatsoever. What say you, Browser?
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Re: A better Permanent Portfolio?

Post by Browser » Tue Sep 29, 2015 12:12 pm

linenfort wrote:
nisiprius wrote:It's important to remember that "The" Harry Browne Permanent Portfolio evolved over time and was revised several times. "The" Permanent Portfolio that followers cite today is already the result of choosing the best backtested results.
I think the first part is true- the HBPP was modified once or twice by Harry Browne. However, I don't think your second assertion is. For example, I don't think Harry got rid of silver because of backtesting, but simply because he thought gold would do the job and that silver was extraneous.

And, as others have already noted, the OP got it wrong from the beginning. The PP has never had any intermediate term bonds whatsoever. What say you, Browser?
I say that 50% intermediate is about as close to 25% T-Bills + 25% Long Treasuries as you can get in government work. So that's what I use just to save time. Actually, the 10-year Treasury would be a bit closer. The notion that you should hold both T-Bills and Long Treasuries is just silly, but it stems form Browne's All-Weather economic model which is a nice simplification of reality.
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Re: A better Permanent Portfolio?

Post by VA_Gent » Tue Sep 29, 2015 12:34 pm

As far as questionable history. Start at 1975 when it was legal again to own gold .
Looks pretty good to me.

Years 40.77
CAGR 7.95%
Starting Capital 10,000
Ending Capital 226,231
Total Return 2162.31%
Max Drawdown 21.50% (1980-01-21 - 1980-03-27)
DD > 10% Count 5
Annualized Std. Dev 6.34%
Sharpe Ratio 0.43

The above stats were using 50% 5yr treasury.
Try it yourself: http://www.peaktotrough.com/hbpp.cgi
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Re: A better Permanent Portfolio?

Post by azanon » Tue Sep 29, 2015 1:29 pm

Clive, I was just more simply expressing that if one is going to cherry pick the unusual performance of a bond index over the past 30 years, that particular 30 year period, a perfomance that was so great and so unusual that a year or two ago, it even beat stocks, then you're really applying a very outlier situation to prove a point. And with interest rates where they are today, it would take a great degree of imagination to think bonds can come anywhere close to repeating that same feat again.

On the other hand, i would not be surprised at all to see an inflation surge in another 5-15 years. Precious metals could do well in that situation.

Oh, and I asked you to update the graph. I'd be dishonest were I to suggest I'm so interested, that I'm going to learn how to use that tool myself. :mrgreen:

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Re: A better Permanent Portfolio?

Post by linenfort » Tue Sep 29, 2015 4:45 pm

Browser wrote:
linenfort wrote:The PP has never had any intermediate term bonds whatsoever. What say you, Browser?
I say that 50% intermediate is about as close to 25% T-Bills + 25% Long Treasuries as you can get in government work. So that's what I use just to save time. Actually, the 10-year Treasury would be a bit closer. The notion that you should hold both T-Bills and Long Treasuries is just silly, but it stems form Browne's All-Weather economic model which is a nice simplification of reality.
I agree that intermediate is the best approximation for those who cannot buy the classic formula (T-Bills and 30-year bonds), but I found it a little puzzling that what you call "the classic PP" has no long bonds, while the modified one does. Not to nitpick: I know why you did it that way now, but:
1 - You didn't list the true ingredients of the classic HBPP in the OP and
2 - Cash (in the form of t-bills or very short treasuries) plays an important role that intermediate just doesn't: you can sell it anytime to rebalance without worrying about interest rates. Meanwhile, long bonds provide that extra volatility that, while certainly not consistently inversely related to stock swings, helps the whole package work).
Just saying.
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Re: A better Permanent Portfolio?

Post by Clearly_Irrational » Tue Sep 29, 2015 4:51 pm

In my opinion the real weakness of the PP is the static gold allocation. Gold is insurance like in nature and thus has a fairly high carrying cost. Holding it even when times are good is a significant drag on performance. Personally, I think the answer is to hold gold only when times are not prosperous, as a proxy for that I use real interest rates. When real rates are negative then the risk/reward trade off of gold tends to be pretty good. When real rates are positive the risk/reward trade off of gold tends to be fairly poor.

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Re: A better Permanent Portfolio?

Post by linenfort » Tue Sep 29, 2015 5:06 pm

Clearly_Irrational wrote:In my opinion the real weakness of the PP is the static gold allocation.
...
Personally, I think the answer is to hold gold only when times are not prosperous...
Sure, it's definitely the most controversial of the assets, and a dealbreaker for many would-be pp adherents.
For those who got in, say in 1998, things look a lot better than for those who got in around late 2011.
Still, as with the Boglehead approach, trying to figure out when times are prosperous and when they are prosperous no longer, well that would be market timing. This is clearly irrational. ;-)
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Re: A better Permanent Portfolio?

Post by Browser » Tue Sep 29, 2015 5:19 pm

linenfort wrote:
Browser wrote:
linenfort wrote:The PP has never had any intermediate term bonds whatsoever. What say you, Browser?
I say that 50% intermediate is about as close to 25% T-Bills + 25% Long Treasuries as you can get in government work. So that's what I use just to save time. Actually, the 10-year Treasury would be a bit closer. The notion that you should hold both T-Bills and Long Treasuries is just silly, but it stems form Browne's All-Weather economic model which is a nice simplification of reality.
I agree that intermediate is the best approximation for those who cannot buy the classic formula (T-Bills and 30-year bonds), but I found it a little puzzling that what you call "the classic PP" has no long bonds, while the modified one does. Not to nitpick: I know why you did it that way now, but:
1 - You didn't list the true ingredients of the classic HBPP in the OP and
2 - Cash (in the form of t-bills or very short treasuries) plays an important role that intermediate just doesn't: you can sell it anytime to rebalance without worrying about interest rates. Meanwhile, long bonds provide that extra volatility that, while certainly not consistently inversely related to stock swings, helps the whole package work).
Just saying.
Splitting hairs, I think. But I do think a better way to describe what I did is that I traded the 25% cash allocation for an additional 25% allocation to stocks, leaving 25% in long treasuries and 25% in gold. I'm not advocating that I'd hold such a portfolio because I still think that 25% in gold is a bit heavy. However, I agree with Larry S. that if you are holding long duration bonds in your portfolio it's probably a good idea to balance the interest rate risk with an "inflation" asset such as gold or commodities. We saw in the 1970s that high inflation killed both stocks and bonds, but gold helped to offset the exposure to that kind of risk. If you truly want to have a "permanent" asset allocation, seems to me you need to cover that possibility and take the consequent hit on long term returns delivered by the lousy long term returns of gold/commodities. But a 25% allocation is probably over-insurance. However, if you're committed to that allocation, a higher allocation to stocks than 25% seems advisable because gold/commodities are such a drag on long term returns. An important risk of the HB Permanent Portfolio is "tracking error risk." No-one but a true PP fanatic could bear to hold that allocation during the long periods in which the returns are getting trounced by a more traditional allocation such as 60/40. You really need to hold an allocation that has more allocated to stocks, even if that results in somewhat higher volatility, or you'll end up ditching it at some point.
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Re: A better Permanent Portfolio?

Post by Clearly_Irrational » Tue Sep 29, 2015 5:27 pm

linenfort wrote:Still, as with the Boglehead approach, trying to figure out when times are prosperous and when they are prosperous no longer, well that would be market timing. This is clearly irrational. ;-)
So obviously if you were trying to identify tops and bottoms in the gold market that would definitely be market timing in the traditional sense. I do think there is some room for identifying when the odds are more or less in your favor and adjusting allocations based on that, but that's definitely not a standard boglehead approach, of course neither is holding gold in the first place.

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Re: A better Permanent Portfolio?

Post by Desert » Tue Sep 29, 2015 5:27 pm

Browser, another option is to go with the 50% equity, 25% LTT and 25% gold as you suggested, but split the equity equally among TSM, SVC and EM. It's a bit of a Larry/HBPP hybrid.

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Re: A better Permanent Portfolio?

Post by linenfort » Tue Sep 29, 2015 8:40 pm

Browser wrote: If you truly want to have a "permanent" asset allocation, seems to me you need to cover that possibility and take the consequent hit on long term returns delivered by the lousy long term returns of gold/commodities. But a 25% allocation is probably over-insurance. .
...
No-one but a true PP fanatic could bear to hold that allocation during the long periods in which the returns are getting trounced by a more traditional allocation such as 60/40. You really need to hold an allocation that has more allocated to stocks, even if that results in somewhat higher volatility, or you'll end up ditching it at some point.
One conventional way around it is to simply hold a variable portfolio (vp) in addition to the pp. The vp can be filled with stocks, or whatever one prefers, and then it becomes easier to hold things like gold in a pure pp because they are a smaller % of one's total allocation.
bogleheads, don't knock state lotteries. They helped defund the mafia.

drummerboy
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Re: A better Permanent Portfolio?

Post by drummerboy » Sun Jan 21, 2018 9:08 pm

[restarted thread from 2015. Check posting dates before replying - admin alex]

In backtesting, the permanent portfolio looks quite attractive. It "feels" strange (so much gold and cash).

BUT, it tests out well. If I use a PP+ a Variable portion....

40% Stocks (25 US, 15 Ex-US)
20% Cash/Short Term
20% Gold
20% Long Term Treasury

It can yield quite nice results. Better than a 60/40 Three Fund with less volatility.
Portfolio Visualizer - Comparison

My concern with EVERY backtest (even for Three Fund portfolio's)..... What do future interest rates hold in the Long Term space?
Of course, Long Term Treasuries just had a GREAT year in 2017 (8.6% growth), even though everyone was concerned about rising interest rates.

I'm would think that Long Term Treasuries would suffer for the next few years. But, that's the beauty of the PP. As Long Term Treasuries get beat up, you will have the opportunity to buy at a discount during rebalancing. Total return of Cash may actually outperform LT over the short term. Same with gold, again, the beauty of the portfolio is just to rebalance and let the low correlation assets do their magic.

Theoretical
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Re: A better Permanent Portfolio?

Post by Theoretical » Sun Jan 21, 2018 9:47 pm

koekebakker wrote:
Mon Sep 28, 2015 11:40 pm
galeno wrote:The PP is 25% stocks + 25% long USA T-bonds + 25% gold + 25% cash. The cash and the gold are total drags. A far better port would be 50% stocks + 50% long USA T-bonds.
Better in what way, and for what purposes?

Lump 25% cash and 25% LT bonds together and you have 50% intermediate treasuries. Add 25% stocks and you have a very basic conservative Boglehead portfolio. The only thing that makes the PP 'un-Boglehead' is the large allocation to gold. So far that hasn't hurt the portfolio.

Also don't forget to include your emergency fund. So a 50/50 stock bond portfolio usually looks more like a 40 stocks/40 bonds/20 cash, which is a already a bit closer to the PP.

25 cash (tbills/money markets NOT the mattress) and 25 long treasuries /= to 50% intermediate at all.

For one Tyler9000 and the Simba spreadsheet going all the way back to the 1870s show that one of the best inflation protection assets historically available has been interest bearing cash. Nowadays TIPS are better still but the only exception in over a century of data was the interest rate controls imposed after WWII where cash did not keep up with inflation more or less.

Similarly, long treasury rates are ultra-sensitive to decreasing interest rates to jump start the economy. They suffer miserably in inflationary circumstances but their piece of the yield curve doesn't necessarily move in tune with that of the intermediate treasury.

Intermediate and long treasury bonds are highly correlated but neither is correlated much at all to ultra low duration money markets, high yield savings and t-bills. Even short term treasury notes aren't that heavily correlated to the cash rates.

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willthrill81
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Re: A better Permanent Portfolio?

Post by willthrill81 » Mon Jan 22, 2018 11:37 am

drummerboy wrote:
Sun Jan 21, 2018 9:08 pm
[restarted thread from 2015. Check posting dates before replying - admin alex]

In backtesting, the permanent portfolio looks quite attractive. It "feels" strange (so much gold and cash).

BUT, it tests out well. If I use a PP+ a Variable portion....

40% Stocks (25 US, 15 Ex-US)
20% Cash/Short Term
20% Gold
20% Long Term Treasury

It can yield quite nice results. Better than a 60/40 Three Fund with less volatility.
Portfolio Visualizer - Comparison

My concern with EVERY backtest (even for Three Fund portfolio's)..... What do future interest rates hold in the Long Term space?
Of course, Long Term Treasuries just had a GREAT year in 2017 (8.6% growth), even though everyone was concerned about rising interest rates.

I'm would think that Long Term Treasuries would suffer for the next few years. But, that's the beauty of the PP. As Long Term Treasuries get beat up, you will have the opportunity to buy at a discount during rebalancing. Total return of Cash may actually outperform LT over the short term. Same with gold, again, the beauty of the portfolio is just to rebalance and let the low correlation assets do their magic.
Take a look at the performance of the PP since 1970; there have been periods of increasing interest rates during this time (not a straight march downwards as many seem to assume), yet it's performance has been remarkably steady. Portfolio Charts has some excellent graphs and tables for this and other portfolios.

For instance, using data since 1970, the SWR for a 3-fund portfolio (40% TSM/20% int'l/40% TBM) has been around 4.7% for 30 year periods, whereas it's been about 5.3% for the PP, an increase in spending of 13%.

Even more impressive is the Golden Butterfly, which had a SWR of 6.2% for 30 year periods since 1970.

Some say that these are mere 'hindsight portfolios' that will not perform similarly going forward, which is certainly very possible. However, when you examine how consistent these portfolios' performance has been in recent years, I think that view might be a bit too dismissive and overly pessimistic. But time will tell.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Alexa9
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Re: A better Permanent Portfolio?

Post by Alexa9 » Mon Jan 22, 2018 11:47 am

Cash is trash. So are gold and long term bonds IMHO.
Three fund with a small value tilt is about as fancy as I get.

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Re: A better Permanent Portfolio?

Post by technovelist » Mon Jan 22, 2018 3:17 pm

Alexa9 wrote:
Mon Jan 22, 2018 11:47 am
Cash is trash. So are gold and long term bonds IMHO.
Three fund with a small value tilt is about as fancy as I get.
How did you do in 2008?
In theory, theory and practice are identical. In practice, they often differ.

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Alexa9
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Re: A better Permanent Portfolio?

Post by Alexa9 » Mon Jan 22, 2018 3:21 pm

technovelist wrote:
Mon Jan 22, 2018 3:17 pm
Alexa9 wrote:
Mon Jan 22, 2018 11:47 am
Cash is trash. So are gold and long term bonds IMHO.
Three fund with a small value tilt is about as fancy as I get.
How did you do in 2008?
A minor blip. Intermediate bonds (Total Bond Market) provide a good cushion.

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1nv35t
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Re: A better Permanent Portfolio?

Post by 1nv35t » Mon Jan 22, 2018 5:19 pm

drummerboy wrote:
Sun Jan 21, 2018 9:08 pm
...
Extending your link to include 30 SCV/70 10-Year-T
If you want gold like protection, then foreign currencies can provide that just as well, UK SCV for instance provides both SCV and gold like (via FX) elements combined into one.
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Re: A better Permanent Portfolio?

Post by technovelist » Tue Jan 23, 2018 1:17 am

1nv35t wrote:
Mon Jan 22, 2018 5:19 pm
drummerboy wrote:
Sun Jan 21, 2018 9:08 pm
...
Extending your link to include 30 SCV/70 10-Year-T
If you want gold like protection, then foreign currencies can provide that just as well, UK SCV for instance provides both SCV and gold like (via FX) elements combined into one.
Image
No paper money has anything like the length of track record that gold has.

Neither does anything else, including stocks and bonds.

Does that mean that in any given case you can't get good results from a different asset? Of course not. But if you are looking for protection against pretty much any negative circumstance where the USD isn't doing well, gold is likely to be the best bet.
In theory, theory and practice are identical. In practice, they often differ.

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