The best portfolios when the going gets rough

[CULater]

Interesting analysis by Portfolio Charts of the portfolios that have held up best over each stressful period since the 1970s. The top four in every instance were:

- Harry Browne Permanent Portfolio
- The Golden Butterfly
- Dalio's All Weather
- Larry Swedroe's Minimize Fat Tails

What they all have in common is an allocation to equities of 40% or less. All but the Larry portfolio had a significant allocation to long term treasuries, and the Larry portfolio had a 70% allocation to intermediate treasuries. All but the Larry portfolio had an allocation to gold and/or commodities. Each of these is a version of a "risk parity" portfolio allocation. Here were the author's takeaways:

Really think about cutting back on stocks to something less than 50%. Some people may laugh and tell you that’s way too conservative, but those same people will likely be freaking out and complaining about their losses when the next stock market correction inevitably comes. Stocks are just one asset in the grand scheme of things, not the entire “market”. Betting most of your money on economic prosperity is exactly how most portfolios get killed in a recession.

For bonds, your choice depends on your preferred portfolio approach. If you’re taking risks on niche stock classes like Swedroe, stick to larger quantities of shorter maturities with your bonds. But if you’re looking to balance your portfolio based on economic conditions like Browne, give long term treasuries a try as the added volatility helps these portfolios react to economic conditions.

Three of the four portfolios find gold to be an effective ingredient to mitigate downside risk. It seems very counter-intuitive that a shiny metal with no yield can maintain or even increase portfolio returns while reducing volatility, but play around with the calculators and you’ll see it doesn’t take much to have a noticeable positive effect. And as we’ve seen, it’s not simply an artifact of a one-time gold correction. Gold adds valuable diversification in a well-balanced portfolio and has historically responded strongly when it’s needed most.

https://portfoliocharts.com/2019/08/20/ ... vestments/

[Silk McCue]

Thanks for the interesting read.

Cheers

[Taylor Larimore]

Bogleheads:

Fidelity Magellan fund manager, Peter Lynch, once said: “Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves.”

What they all have in common is an allocation to equities of 40% or less.

It is the opinion of most authorities that investors should own a portfolio with more than 40% stocks (equities) if they want to meet their long-term financial goals.

Best wishes.
Taylor

Jack Bogle's Words of Wisdom: "Asset allocation is critically important; but cost is critically important, too -- All other factors pale into insignificance."

[jsprag]

Now all we need is someone to tell us in advance when times are going to get rough.

[Silk McCue]

Now all we need is someone to tell us in advance when times are going to get rough.

Sooner than some think and later than others expect.

Cheers

[delamer]

I don’t want a portfolio that holds up “best over each stressful period.”

I want a portfolio that gives the best long-run return for the level of risk that I want to take.

[Random Walker]

Bogleheads:

Fidelity Magellan fund manager, Peter Lynch, once said: “Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves.”

What they all have in common is an allocation to equities of 40% or less.

It is the opinion of most authorities that investors should own a portfolio with more than 40% stocks (equities) if they want to meet their long-term financial goals.

Best wishes.
Taylor

I have thought a lot about the above Peter Lynch quote the last couple of years. I took risk off the table starting 2-3 years ago and I’ve only seen equities rise But can’t confuse strategy with outcome. And this brings up the above 40% number. A blanket statement that >=40% equities is necessary to meet goals without knowledge of the individual circumstances is almost meaningless. It depends on how much is saved, how much is intended to be spent, and how long the investor intends to live. And it gets way more individualized than that if we add in each individual’s unique relative importance of sleeping well.

Dave

[Fallible]

It's always good to know the sources of these blogs, especially financial blogs. Here's the author of this one:

https://portfoliocharts.com/about/

[abuss368]

No one will know in advance. No crystal ball will provide the answer either. Focus on developing an asset allocation based on timeframe, goals, and tolerance for risk. Tune out the market noise and stay the course.

An investor will be better over the long term for it.

[Sandtrap]

It's always good to know the sources of these blogs, especially financial blogs. Here's the author of this one:

https://portfoliocharts.com/about/

Good one.
Author is a Mechanical Engineer.
Always know the source. . . .

On the other hand, William Bernstein was also a neurologist, although his financial studies are formidable indeed.
j

[steveyg50]

Interesting thing is that according to Bogleheads own data, Taylor's 40/60 3 fund portfolio has done very nearly as well (CAGR) as 80/20 over last 20 year period. Despite having 1/2 the equity.

https://finpage.blog/2019/01/03/three-f ... 18-update/

In fact over last 20 years 20/80 is only 0.7% behind the 80/20 despite having 1/4 the equity.

Now of course the last 20 years has 2 big drawdowns, but who would bet we won't have a big one in next few years?

I have a strong suspicion that the 40/60 may be looking nearly as good as 80/20 in 10 years time as we look back on the last 30 year performance.

I'm not sure if those figures for various AA in the link are rebalanced every year? Presume so.

With the 40/60 you also have a lot more bonds to sell and buy equity in any big dips, if willing to temporarily move to higher equity AA.

Maybe Long Term more equity is better performing, but I'm 50, I have a 30 year window.

[triggerfish10]

Focus on developing an asset allocation based on timeframe, goals, and tolerance for risk. Tune out the market noise and stay the course.

An investor will be better over the long term for it.

Exactly right. Don't just do something, stand there!

[ResearchMed]

I don’t want a portfolio that holds up “best over each stressful period.”

I want a portfolio that gives the best long-run return for the level of risk that I want to take.

This!

Unless, of course, I could find out with certainty when each "stressful period" begins and ends. In that case, sure, I would love to know the "best strategy" just for this type of interval.
But that's the same for ANY "type of interval"...

RM

[Random Walker]

Interesting thing is that according to Bogleheads own data, Taylor's 40/60 3 fund portfolio has done very nearly as well (CAGR) as 80/20 over last 20 year period. Despite having 1/2 the equity.

https://finpage.blog/2019/01/03/three-f ... 18-update/

In fact over last 20 years 20/80 is only 0.7% behind the 80/20 despite having 1/4 the equity.

Now of course the last 20 years has 2 big drawdowns, but who would bet we won't have a big one in next few years?

I have a strong suspicion that the 40/60 may be looking nearly as good as 80/20 in 10 years time as we look back on the last 30 year performance.

I'm not sure if those figures for various AA in the link are rebalanced every year? Presume so.

With the 40/60 you also have a lot more bonds to sell and buy equity in any big dips, if willing to temporarily move to higher equity AA.

Maybe Long Term more equity is better performing, but I'm 50, I have a 30 year window.

I have Monte Carlo Simulations from my advisor. For me a surprising finding is the lack of sensitivity of the results to changes in asset allocation. I think this is especially true when one gets clear on needs versus wants.

Dave

[nisiprius]

Now all we need is someone to tell us in advance when times are going to get rough.

Hear, hear!

As a side note, Jeremy Siegel devotes an entire chapter of Stocks for the Long Run to the question of what would happen if you were out of the market during every recession and in the market the rest of the time. The interesting thing is that you can't even do that, because the NBER will not declare the starting date of a recession until the recession is over. Which makes sense. "The recession has begun" is in fact a prediction, and a fairly iffy one at that. Nevertheless, Siegel found that if you could get out of the market during every recession, there was some improvement but it was surprisingly small--"a mere half a percentage point."

[Fallible]

It's always good to know the sources of these blogs, especially financial blogs. Here's the author of this one:

https://portfoliocharts.com/about/

Good one.
Author is a Mechanical Engineer.
Always know the source. . . .

On the other hand, William Bernstein was also a neurologist, although his financial studies are formidable indeed.
j

Right about Bill Bernstein, plus he is also an excellent writer. A uniquely talented individual.

My main concern about the author of the blog we're discussing here is not his vocation, but that he chooses to remain anonymous. This means that we'll just have to trust, or not, that a stranger is what he says and that his sources, motivations, and ideas are what he says they are.

[Tyler9000]

It's always good to know the sources of these blogs, especially financial blogs. Here's the author of this one:

https://portfoliocharts.com/about/

Good one.
Author is a Mechanical Engineer.
Always know the source. . . .

On the other hand, William Bernstein was also a neurologist, although his financial studies are formidable indeed.
j

Right about Bill Bernstein, plus he is also an excellent writer. A uniquely talented individual.

My main concern about the author of the blog we're discussing here is not his vocation, but that he chooses to remain anonymous. This means that we'll just have to trust, or not, that a stranger is what he says and that his sources, motivations, and ideas are what he says they are.

Well I'm not that anonymous. In addition to writing Portfolio Charts I'm also a regular poster here.

I like to think of good data as the great equalizer between salesmen with fancy credentials and the smart people who contribute to conversations like this one. So don't judge Portfolio Charts (or any other financial source) by how you feel about the author. Read the methodology, study the data, and come to your own conclusions. And if you ever have any questions, I'm always happy to help.

We're in this together.

[Fallible]

It's always good to know the sources of these blogs, especially financial blogs. Here's the author of this one:

https://portfoliocharts.com/about/

Good one.
Author is a Mechanical Engineer.
Always know the source. . . .

On the other hand, William Bernstein was also a neurologist, although his financial studies are formidable indeed.
j

Right about Bill Bernstein, plus he is also an excellent writer. A uniquely talented individual.

My main concern about the author of the blog we're discussing here is not his vocation, but that he chooses to remain anonymous. This means that we'll just have to trust, or not, that a stranger is what he says and that his sources, motivations, and ideas are what he says they are.

Well I'm not that anonymous. In addition to writing Portfolio Charts I'm also a regular poster here.

I like to think of good data as the great equalizer between salesmen with fancy credentials and the smart people who contribute to conversations like this one. So don't judge Portfolio Charts (or any other financial source) by how you feel about the author. Read the methodology, study the data, and come to your own conclusions. And if you ever have any questions, I'm always happy to help. ...

I can't judge you as an author because you've chosen to remain anonymous. The only question I would have is why remain anonymous, but that is your decision to make.

[Tyler9000]

I can't judge you as an author because you've chosen to remain anonymous. The only question I would have is why remain anonymous, but that is your decision to make.

Fundamentally I want the site to be about the portfolio data and not about me. I don't care about being famous and prefer to maintain my privacy, but the methodologies and data sources are well-documented and completely transparent. So even if you disagree with my interpretation of certain data, feel free to study it for yourself and come to your own conclusions. Offering a neutral source for independently testing portfolio ideas rather than simply trusting the word of various authors is one of my high-level goals, and that applies to my own commentary as well.

[CULater]

Perhaps I should have used the title "The best portfolios for the rough times, and not bad for the good times too." If we look at performance since 1978, the good old 60/40 portfolio grew at 10.1% per year, while the Golden Butterfly (40% stocks) grew at 10.0% per year, the Larry portfolio (30% stocks) grew at 9.7% per year, and the Dalio All Weather (30% stocks) grew at 9.5% per year. I could have retired quite nicely on any of these, thank you very much, but the journey was a lot less harrowing -- with the worst portfolio drawdowns being 16.6% for the Golden Butterfly, 11.7% for the Larry and 13% for the All Weather; compared to 28% for the 60/40. I think it's a myth that one needs a stock allocation more than 40% to reach Happy Retirement. What one needs is to put away as much as possible into a retirement portfolio that you can live with over the long run -- and for many that's easier to do without most of the risk tied up in stocks. More than one road to Dublin!

[HawkeyePierce]

I fail to understand why we need to know Tyler9000's true identity in order to judge his work as an author. Seems to me that those are unrelated. Either his work stands on its own or it doesn't, anything else is just a fallacious appeal to authority.

[Sandtrap]

It's always good to know the sources of these blogs, especially financial blogs. Here's the author of this one:

https://portfoliocharts.com/about/

Good one.
Author is a Mechanical Engineer.
Always know the source. . . .

On the other hand, William Bernstein was also a neurologist, although his financial studies are formidable indeed.
j

Right about Bill Bernstein, plus he is also an excellent writer. A uniquely talented individual.

My main concern about the author of the blog we're discussing here is not his vocation, but that he chooses to remain anonymous. This means that we'll just have to trust, or not, that a stranger is what he says and that his sources, motivations, and ideas are what he says they are.

True.
How much can any "stranger" be trusted?
Hmmmmmm.
j

[willthrill81]

I fail to understand why we need to know Tyler9000's true identity in order to judge his work as an author. Seems to me that those are unrelated. Either his work stands on its own or it doesn't, anything else is just a fallacious appeal to authority.

Sadly, appeals to authority, especially Bogle, are very common around here.

[willthrill81]

Interesting analysis by Portfolio Charts of the portfolios that have held up best over each stressful period since the 1970s. The top four in every instance were:

- Harry Browne Permanent Portfolio
- The Golden Butterfly
- Dalio's All Weather
- Larry Swedroe's Minimize Fat Tails

What they all have in common is an allocation to equities of 40% or less. All but the Larry portfolio had a significant allocation to long term treasuries, and the Larry portfolio had a 70% allocation to intermediate treasuries. All but the Larry portfolio had an allocation to gold and/or commodities.

Regardless of whatever financial theory says in regards to how gold should perform, the reality is that a 10-20% allocation to gold has been an excellent diversifying asset for a long time, especially when it comes to the decumulation phase. And FWIW, since the year 2000, almost 20 years, gold has had higher returns than stocks or bonds, despite being in a drawdown for the last eight years.

[sandramjet]

My main concern about the author of the blog we're discussing here is not his vocation, but that he chooses to remain anonymous. This means that we'll just have to trust, or not, that a stranger is what he says and that his sources, motivations, and ideas are what he says they are.

I don't understand this. It sounds like you are trying to make a judgement of the person, not his work. His ideas, the data, his writings are all there to be inspected and examined by you or anyone else if you want to judge that. He has posted frequently here, engaged with people to discuss his data, and so on. Why does his name matter? Would you not read a book because an author chose an assumed name?

[Fallible]

I fail to understand why we need to know Tyler9000's true identity in order to judge his work as an author. Seems to me that those are unrelated. Either his work stands on its own or it doesn't, anything else is just a fallacious appeal to authority.

An author and his or her work are one and the same, with the work being the expression of the author, who chooses the subject, which and how much data to use, how to use it, what to emphasize, how best to express it, etc.

Also, it is very important for readers to know the sources of the web blogs they read in order to best judge the material. We’ve had many examples of this on the forum where blogs have been posted bashing passive investing. Those who checked the source often discovered an active manager.

[willthrill81]

I fail to understand why we need to know Tyler9000's true identity in order to judge his work as an author. Seems to me that those are unrelated. Either his work stands on its own or it doesn't, anything else is just a fallacious appeal to authority.

An author and his or her work are one and the same, with the work being the expression of the author, who chooses the subject, which and how much data to use, how to use it, what to emphasize, how best to express it, etc.

There's a good reason why the 'gold standard' (no pun intended) in the realm of academic research is the double-blind review process whereby neither authors nor reviewers are aware of the others' identity.

I'll be the first to stay that people's experiences can easily lead to biases that are reflected in their writing, but their experiences alone don't make their work inherently good or bad.

[WoodSpinner]

Well I'm not that anonymous. In addition to writing Portfolio Charts I'm also a regular poster here.

I like to think of good data as the great equalizer between salesmen with fancy credentials and the smart people who contribute to conversations like this one. So don't judge Portfolio Charts (or any other financial source) by how you feel about the author. Read the methodology, study the data, and come to your own conclusions. And if you ever have any questions, I'm always happy to help.

We're in this together.

Tyler, a big thanks for your hard work and contribution. Frankly, I owe you more than a beer! It’s a great tool and I have only just scratched the surface of the insights it can provide.



WoodSpinner

[Fallible]

It is always wisefor readers in general to know the source of something that could influence their behavior. In this case, it's a financial blog that could influence how they invest their money.

And judging from Tyler's previous reply to me and to his being a Boglehead , I think he would agree. Whether he chooses to remain anonymous, as I said before, is up to him.

[heyyou]

Whatever is best for the worst of times, will not be good for better times. Investors have to lose more in the worst times, to benefit more in the good times. We don't get to have it both ways.

[willthrill81]

From Tyler's post:

The real risk-reducing move is to diversify away from stocks altogether.

Despite being a 'stock proponent', I wholeheartedly agree.

Contrary to your academic instinct that usually equates risk and return with very little tangible understanding of the uncertainty involved, portfolios that avoid recessions and don’t need to recover from major drawdowns also consistently provide desirable long-term compound returns.

Again, I completely agree.

[rich126]

It really depends on what back testing you believe and what fits your style and your beliefs for the future. And yeah all of the numbers come from back testing. As you get closer to retirement generally you are willing to give up a bit on the upside for a smoother ride.

Also once you retire or are near it, a person with 25x savings should be pretty happy with a 3% real return since your money will likely last 40+ years. Enough for most.

My concern with bond heavy portfolios at this time are the very low interest rates we currently have. Although I believe they are likely to continue for a while, I’m not sure what 10 years of 2% or less interest on bonds will do to the real return of bond heavy portfolios. Also right now everything possible seems to be done to help companies prop up profits but interest rates and taxes can only go down so far. I think investing in the next decade will be very interesting and potentially more risky. Hopefully I’m wrong but I think it is dangerous to be holding 70+% of only US stocks over the next couple decades.

[stuper1]

Perhaps I should have used the title "The best portfolios for the rough times, and not bad for the good times too." If we look at performance since 1978, the good old 60/40 portfolio grew at 10.1% per year, while the Golden Butterfly (40% stocks) grew at 10.0% per year, the Larry portfolio (30% stocks) grew at 9.7% per year, and the Dalio All Weather (30% stocks) grew at 9.5% per year. I could have retired quite nicely on any of these, thank you very much, but the journey was a lot less harrowing -- with the worst portfolio drawdowns being 16.6% for the Golden Butterfly, 11.7% for the Larry and 13% for the All Weather; compared to 28% for the 60/40. I think it's a myth that one needs a stock allocation more than 40% to reach Happy Retirement. What one needs is to put away as much as possible into a retirement portfolio that you can live with over the long run -- and for many that's easier to do without most of the risk tied up in stocks. More than one road to Dublin!

Very good points. Also consider that a person may plan to retire at a certain age, but something unexpected could happen to cause you to retire earlier, say losing your job and not being able to find another one due to age discrimination, or getting a serious illness and having to quit. Consider a hypothetical person say age 55 who lost his job during the Great Recession and couldn't find another one. If he was using a stock heavy portfolio because he didn't plan to retire for 15 more years, then he may be in a world of hurt when he has to retire with a lot less money in his portfolio than he expected. He would have been much better off with one of the portfolios listed above that has almost the same long-term return but much small drawdowns along the way.

FYI, I'm also going to choose to remain anonymous, but my personal portfolio is the Golden Butterfly.

Also, Tyler9000 isn't selling anything on his website, which helps me have a lot of trust in the data and interpretations that he presents. In no way does he advocate for active investing over passive investing. I guess the only possible bias I can think of is if he is a gold dealer on the side, in addition to being a mechanical engineer, because he isn't shy about pointing out that a reasonable chunk of gold in a portfolio can help with diversification. But if that were the case, I would expect his website to point to his gold dealing website, which it doesn't, nor does it point to any other websites.

[Rowan Oak]

I fail to understand why we need to know Tyler9000's true identity in order to judge his work as an author. Seems to me that those are unrelated. Either his work stands on its own or it doesn't, anything else is just a fallacious appeal to authority.

Sadly, appeals to authority, especially Bogle, are very common around here.

Bogleheads.org
Investing Advice Inspired by Jack Bogle

[willthrill81]

I fail to understand why we need to know Tyler9000's true identity in order to judge his work as an author. Seems to me that those are unrelated. Either his work stands on its own or it doesn't, anything else is just a fallacious appeal to authority.

Sadly, appeals to authority, especially Bogle, are very common around here.

Bogleheads.org
Investing Advice Inspired by Jack Bogle

Inspired by. Jack didn't have a monopoly on truth in finance.

It's important to note that this (appeal to authority) fallacy should not be used to dismiss the claims of experts, or scientific consensus. Appeals to authority are not valid arguments, but nor is it reasonable to disregard the claims of experts who have a demonstrated depth of knowledge unless one has a similar level of understanding and/or access to empirical evidence. However, it is entirely possible that the opinion of a person or institution of authority is wrong; therefore the authority that such a person or institution holds does not have any intrinsic bearing upon whether their claims are true or not.

https://yourlogicalfallacyis.com/appeal-to-authority

[Random Musings]

I'm surprised no one has included the "when the going gets tough" Bluto portfolio.

50 % Whiskey
45 % Beer
3 % German Stocks
2 % Hog Futures (still hoping for Bacon futures or some ETF to be available in the future)

Bactesting, you'll find that this portfolio really doesn't Flounder.

RM

[willthrill81]

I'm surprised no one has included the "when the going gets tough" Bluto portfolio.

50 % Whiskey
45 % Beer
3 % German Stocks
2 % Hog Futures (still hoping for Bacon futures or some ETF to be available in the future)

Bactesting, you'll find that this portfolio really doesn't Flounder.

RM

Or the HFTH portfolio (i.e. 'head for the hills'):
50% Beans
35% Bullets
15% Band-Aids

[Forester]

If I was a lazy billionaire

25% stocks
25% REITs
25% bonds
25% gold

[Dandy]

I agree that retirees that have reached or exceeded their "number" should consider equity allocations around 40%. There is a point about less need for growth and it's higher risk and more need for asset preservation.

I also think that while a decent intermediate bond fund like Total bond (which isn't "total") is a reasonable choice for fixed income. But when you have nearly 60% of your assets allocated to fixed income you might want to consider a bit more fixed income diversity. I suggest some inflation protected assets, some FDIC products (CD ladder, Money Market, etc), Shorter duration bond fund, etc.

Some would stress about complexity. That is only a significant issue if you are worried about sub account rebalancing. To me I focus on the overall portfolio allocation. It matters little if on the fixed income side if you have a bit more in short term bonds than CDs. Also, on the taxable side if muni's make sense they should also be considered.

[dogagility]

Bogleheads:
Fidelity Magellan fund manager, Peter Lynch, once said: “Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves.”

Thank you, Taylor, for that succinct and spot on response.

[Dandy]

Did Peter offer any proof of that sweeping statement? He had great success but that doesn't make his statement golden.

[Always passive]

It's always good to know the sources of these blogs, especially financial blogs. Here's the author of this one:

https://portfoliocharts.com/about/

Good one.
Author is a Mechanical Engineer.
Always know the source. . . .

On the other hand, William Bernstein was also a neurologist, although his financial studies are formidable indeed.
j

In my view, absolutely irrelevant. I have a masters in engineering and a PhD in economics, but I am sure this mechanical engineer, which based on his website, spends endless hours thinking about the subject, knows much more than me on the area of investing

[nisiprius]

I'm risk-averse by nature, I'm retired, and I'm conservatively allocated, so I'm not going to argue for a high stock allocation. But my decisions how much risk to take have been based on knowing myself. I believed and still believe I opted for less risk with less return. I think expecting to get less risk for free is the investing equivalent of perpetual motion.

Whenever I think about the possible virtues of non-traditional portfolios, I just compare the lifetime histories of two funds that have existed out in the open, following two philosophies, investing real money, continuously disclosing their real results: the Permanent Portfolio mutual fund, PRPFX, and the Wellesley Income Fund, VWINX. If Harry Browne, who personally advised the fund, had developed the 25x4 revision of the Permanent Portfolio in 1981, it might have followed that version and gotten the backtested results of that version, but it didn't. I have no doubt that both the Permanent Portfolio fund and Wellesley have made mistakes along the way. But they are reasonable long-term evidence of the general behavior of the strategies, as implemented in real life by professional managers.

Finally, lest we feel that we have gained too much through any Wellesley "secret sauce," I'm also including the Morningstar category average.

Blue, the Permanent Portfolio mutual fund, PRPFX.
Orange, the Morningstar category average.
Green, the Vanguard Wellesley income fund, VWINX.

Source



Now, for whatever reason, let's "forgive" PRPFX for the first few years and start with 1985. This is cherry-picking in PRPFX's favor. I don't know a good reason to do this, but maybe if I'd been paying close attention to the fund in the early years, I would. Anyway, when we do this, we find that it still did not more than roughly tie the Morningstar category average, and it still far underperformed Wellesley.



So, if it underperformed a randomly chosen conventional fund with a similar stock allocation, did it make up for this with far better behavior when during the global financial crisis of 2008-2009?



It did about the same as the Morningstar category average--a little worse in 2008, a little better in 2009--and much worse than Wellesley. It didn't do much better.

In PortfolioVisualizer,

Portfolio 1 (blue)
PRPFX Permanent Portfolio Permanent I 100.00%

Portfolio 2 (red; a passively managed portfolio with a stock allocation similar to PRPFX and VWINX)
VTSAX Vanguard Total Stock Mkt Idx Adm 35.00%
VBTLX Vanguard Total Bond Market Index Adm 65.00%

Portfolio 3 (yellow)
VWINX Vanguard Wellesley Income Inv 100.00%

Source



So, did the Permanent Portfolio mutual fund provide superior downside protection to traditional portfolios during the global financial crisis? No, it did not--they were all about the same and PRPFX had the deepest drawdown of the three.

In other words, you cannot make the case that the Permanent Portfolio was "better for the rough times, and not bad for the good times too," unless you assume that you personally would have done better than the managers of the Permanent Portfolio fund and that you could, in the 1980s, have anticipated the changes Browne would develop in the composition of the Permanent Portfolio.

A sane person could certainly opt for the Permanent Portfolio, but the evidence from actual public results of real investments is that its performance was no better than picking traditional conservative stocks-and-bonds fund at random; that its behavior during tough times was no better, either; that you had to wait an awfully long time to get back to average.

[Sandtrap]

It's always good to know the sources of these blogs, especially financial blogs. Here's the author of this one:

https://portfoliocharts.com/about/

Good one.
Author is a Mechanical Engineer.
Always know the source. . . .

On the other hand, William Bernstein was also a neurologist, although his financial studies are formidable indeed.
j

In my view, absolutely irrelevant. I have a masters in engineering and a PhD in economics, but I am sure this mechanical engineer, which based on his website, spends endless hours thinking about the subject, knows much more than me on the area of investing

Very true.

It can be interesting to know the various backgrounds of high level professionals such as yourself to understand, appreciate, and better value context.

Good points.
j

[Nowizard]

Ad hominem approaches can appeal to those who focus on positive traits correlating, in this case formal training for areas in which one expounds. Such approaches can also reflect that a lack of openness to alternative approaches leads to inflexibility which can be as damaging as accepting general tenants as absolutes with complex issues such as investing. For new investors, it may be wise to read and begin by following generally accepted and recommended approaches. For more seasoned investors, new data can be evaluated for additions to ones knowledge.

Tim

[HEDGEFUNDIE]

I'm risk-averse by nature, I'm retired, and I'm conservatively allocated, so I'm not going to argue for a high stock allocation. But my decisions how much risk to take have been based on knowing myself. I believed and still believe I opted for less risk with less return. I think expecting to get less risk for free is the investing equivalent of perpetual motion.

Whenever I think about the possible virtues of non-traditional portfolios, I just compare the lifetime histories of two funds that have existed out in the open, following two philosophies, investing real money, continuously disclosing their real results: the Permanent Portfolio mutual fund, PRPFX, and the Wellesley Income Fund, VWINX. If Harry Browne, who personally advised the fund, had developed the 25x4 revision of the Permanent Portfolio in 1981, it might have followed that version and gotten the backtested results of that version, but it didn't. I have no doubt that both the Permanent Portfolio fund and Wellesley have made mistakes along the way. But they are reasonable long-term evidence of the general behavior of the strategies, as implemented in real life by professional managers.

Finally, lest we feel that we have gained too much through any Wellesley "secret sauce," I'm also including the Morningstar category average.

Blue, the Permanent Portfolio mutual fund, PRPFX.
Orange, the Morningstar category average.
Green, the Vanguard Wellesley income fund, VWINX.

Source



Now, for whatever reason, let's "forgive" PRPFX for the first few years and start with 1985. This is cherry-picking in PRPFX's favor. I don't know a good reason to do this, but maybe if I'd been paying close attention to the fund in the early years, I would. Anyway, when we do this, we find that it still did not more than roughly tie the Morningstar category average, and it still far underperformed Wellesley.



So, if it underperformed a randomly chosen conventional fund with a similar stock allocation, did it make up for this with far better behavior when during the global financial crisis of 2008-2009?



It did about the same as the Morningstar category average--a little worse in 2008, a little better in 2009--and much worse than Wellesley. It didn't do much better.

In PortfolioVisualizer,

Portfolio 1 (blue)
PRPFX Permanent Portfolio Permanent I 100.00%

Portfolio 2 (red; a passively managed portfolio with a stock allocation similar to PRPFX and VWINX)
VTSAX Vanguard Total Stock Mkt Idx Adm 35.00%
VBTLX Vanguard Total Bond Market Index Adm 65.00%

Portfolio 3 (yellow)
VWINX Vanguard Wellesley Income Inv 100.00%

Source



So, did the Permanent Portfolio mutual fund provide superior downside protection to traditional portfolios during the global financial crisis? No, it did not--they were all about the same and PRPFX had the deepest drawdown of the three.

In other words, you cannot make the case that the Permanent Portfolio was "better for the rough times, and not bad for the good times too," unless you assume that you personally would have done better than the managers of the Permanent Portfolio fund and that you could, in the 1980s, have anticipated the changes Browne would develop in the composition of the Permanent Portfolio.

A sane person could certainly opt for the Permanent Portfolio, but the evidence from actual public results of real investments is that its performance was no better than picking traditional conservative stocks-and-bonds fund at random; that its behavior during tough times was no better, either; that you had to wait an awfully long time to get back to average.

Your backtest does not include the true “tough times” that the PP was built for, the high inflation times of the late 70s early 80s. If the fund existed back then, it would have far outperformed the other portfolios.

Don’t get me wrong, I don’t believe we will ever see those days again. Which is why I have said before that the PP is actually too conservative to hold reasonably- its investors are basically anticipating financial apocalypse and are paying a steep “insurance” cost for it.

[Rowan Oak]

I fail to understand why we need to know Tyler9000's true identity in order to judge his work as an author. Seems to me that those are unrelated. Either his work stands on its own or it doesn't, anything else is just a fallacious appeal to authority.

Sadly, appeals to authority, especially Bogle, are very common around here.

Bogleheads.org
Investing Advice Inspired by Jack Bogle

Inspired by. Jack didn't have a monopoly on truth in finance.

It's important to note that this (appeal to authority) fallacy should not be used to dismiss the claims of experts, or scientific consensus. Appeals to authority are not valid arguments, but nor is it reasonable to disregard the claims of experts who have a demonstrated depth of knowledge unless one has a similar level of understanding and/or access to empirical evidence. However, it is entirely possible that the opinion of a person or institution of authority is wrong; therefore the authority that such a person or institution holds does not have any intrinsic bearing upon whether their claims are true or not.

https://yourlogicalfallacyis.com/appeal-to-authority

Did he need a monopoly?

[willthrill81]

I fail to understand why we need to know Tyler9000's true identity in order to judge his work as an author. Seems to me that those are unrelated. Either his work stands on its own or it doesn't, anything else is just a fallacious appeal to authority.

Sadly, appeals to authority, especially Bogle, are very common around here.

Bogleheads.org
Investing Advice Inspired by Jack Bogle

Inspired by. Jack didn't have a monopoly on truth in finance.

It's important to note that this (appeal to authority) fallacy should not be used to dismiss the claims of experts, or scientific consensus. Appeals to authority are not valid arguments, but nor is it reasonable to disregard the claims of experts who have a demonstrated depth of knowledge unless one has a similar level of understanding and/or access to empirical evidence. However, it is entirely possible that the opinion of a person or institution of authority is wrong; therefore the authority that such a person or institution holds does not have any intrinsic bearing upon whether their claims are true or not.

https://yourlogicalfallacyis.com/appeal-to-authority

Did he need a monopoly?

For every word that came out of his mouth to be absolute truth, pretty much yes.

[Rowan Oak]

Sadly, appeals to authority, especially Bogle, are very common around here.

Bogleheads.org
Investing Advice Inspired by Jack Bogle

Inspired by. Jack didn't have a monopoly on truth in finance.

It's important to note that this (appeal to authority) fallacy should not be used to dismiss the claims of experts, or scientific consensus. Appeals to authority are not valid arguments, but nor is it reasonable to disregard the claims of experts who have a demonstrated depth of knowledge unless one has a similar level of understanding and/or access to empirical evidence. However, it is entirely possible that the opinion of a person or institution of authority is wrong; therefore the authority that such a person or institution holds does not have any intrinsic bearing upon whether their claims are true or not.

https://yourlogicalfallacyis.com/appeal-to-authority

Did he need a monopoly?

For every word that came out of his mouth to be absolute truth, pretty much yes.

Well, then it's a good thing that all it requires to be inspired by Jack Bogle is common sense.

[willthrill81]

Inspired by. Jack didn't have a monopoly on truth in finance.

It's important to note that this (appeal to authority) fallacy should not be used to dismiss the claims of experts, or scientific consensus. Appeals to authority are not valid arguments, but nor is it reasonable to disregard the claims of experts who have a demonstrated depth of knowledge unless one has a similar level of understanding and/or access to empirical evidence. However, it is entirely possible that the opinion of a person or institution of authority is wrong; therefore the authority that such a person or institution holds does not have any intrinsic bearing upon whether their claims are true or not.

https://yourlogicalfallacyis.com/appeal-to-authority

Did he need a monopoly?

For every word that came out of his mouth to be absolute truth, pretty much yes.

Well, then it's a good thing that all it requires to be inspired by Jack Bogle is common sense.

That's more or less what I said to begin with. If an argument is logical, then it shouldn't matter who provided it, Bogle or otherwise.