Harry Browne’s Permanent Portfolio

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stemikger
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Harry Browne’s Permanent Portfolio

Post by stemikger » Sun Oct 14, 2012 5:50 am

I recently read a sample on my tablet of The Permanent Portfolio: Harry Browne’s Long-Term Investing Strategy: Although I only read a small amount, it did seem very intriguing and unlike anything I have read before. I have seen his name referenced on these boards before but never took the time to read because like many of the topics discussed on these boards some are for idiot savants or math wizards so I thought this might be one of those theories.

Is this a strategy that Bogleheads respect and think can be valid?
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Re: Harry Browne’s Permanent Portfolio

Post by Call_Me_Op » Sun Oct 14, 2012 7:07 am

As noted, this has been discussed at some length here. I would have to say that in general, Bogleheads reject the idea of holding large allocations in gold, cash and long-term bonds. Of course, one should look at how the individual components of a portfolio play together as a whole.

The classical Boglehead approach involves stocks and short-intermediate bonds, mainly in the form of low-cost funds. The reason for this is that both stocks and bonds have an "internal rate of return" (earnings and dividends for stocks, coupons for bonds), and intermediate bonds capture most of the return of long bonds with substantially reduced risk. My own view (at this point in time) is that I am intrigued by the PP, but hesitant to commit to it because of the large allocations to gold and long bonds.

By the way, you could view the cash and bonds of the PP as a barbell, in which case it is roughly equivalent to a 50% allocation to intermediate-term bonds. Thus, it is really the gold portion of PP with which many Bogleheads will take issue.

Hope that helps.
Last edited by Call_Me_Op on Sun Oct 14, 2012 7:21 am, edited 2 times in total.
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Re: Harry Browne’s Permanent Portfolio

Post by craigr » Sun Oct 14, 2012 7:09 am

stemikger wrote:I recently read a sample on my tablet of The Permanent Portfolio: Harry Browne’s Long-Term Investing Strategy: Although I only read a small amount, it did seem very intriguing and unlike anything I have read before. I have seen his name referenced on these boards before but never took the time to read because like many of the topics discussed on these boards some are for idiot savants or math wizards so I thought this might be one of those theories.
Thanks for checking out the book. Full-disclosure: I'm one of the authors.

In simple terms about the portfolio, pro and con:

Pros

1) Historically (1972-2011[2012]) it has a compound annual growth (CAGR) of around 9.5%. Past performance does not guarantee future results disclaimer applies as it does with any investment.
2) Historically it has returned 3-6% real returns over rolling 10 year periods through this entire date range. In simple terms, whether it was bad inflation, good prosperity, deflation, etc. you were beating inflation by 3-6%. This is a really good thing for savers and especially for those in withdrawal phase.
3) Worst loss it ever had was about -5% in 1981. In the last big crash of 2008 the portfolio was down somewhere around -1-2% vs. the nearly -40% of the market.
4) It can be easily setup and managed by an investor.

Cons

1) It holds stocks, bonds, cash and gold. At least one of those assets is probably going to be in the doghouse at any moment and/or out of favor with the market sentiment. You need to learn to just ignore it and hold the asset anyway.
2) It may lag the stock market during good years which could make you envious of people bragging about their huge gains.
3) It is guaranteed to hold an asset that someone, somewhere will think is a bad idea. Stock people hate gold. Gold people hate bonds. Bond people hate stocks. Everyone hates the cash.
Is this a strategy that Bogleheads respect and think can be valid?
I believe so in many respects. Specifically:

- It's completely passive and does not time the market.
- It's dirt cheap to implement.
- It's simple and widely diversified.
- It will likely wipe the floor with investment professionals and actively managed funds just like most passive strategies will.

Where it may not be considered Bogleheadish:

- It holds gold instead of inflation protected bonds (TIPS).
- It does not attempt to adjust the stock allocation based on age.
- It holds long term bonds.
- It holds a block of cash.

I would suggest you read more about it before making a decision so you understand the principles of why those assets and design decisions were reached. There is nearly 30 years of empirical evidence at this point supporting the approach (the original strategy was roughed out in the late 1970s and simplified in the mid-1980s). Great pains were taken in the book to explain the pros/cons of each asset and what asset classes to avoid and why. There is almost no technical jargon used in the book so everyone can understand the approach.

The book details portfolio implementations that are as simple as as single mutual fund running the strategy, using four simple ETFs to run the strategy yourself, up to a widely diversified approach that incorporates geographic diversification for geopolitical and environmental disaster protection.

If you have any questions, please feel free to post them and I'll answer as best I can.
Last edited by craigr on Sun Oct 14, 2012 7:22 am, edited 1 time in total.
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Re: Harry Browne’s Permanent Portfolio

Post by Call_Me_Op » Sun Oct 14, 2012 7:18 am

Craig,

Congratulations on the book, by the way. I've not read it yet, but based upon the reviews it appears to be a smashing success.
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Re: Harry Browne’s Permanent Portfolio

Post by beardsworth » Sun Oct 14, 2012 7:27 am

I don't do the permanent portfolio, and have no plans to, but I think Craig's post above, of its pros vs. cons and Bogleheadish characteristics vs. non-Bogleheadish, is a superb summary.

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Re: Harry Browne’s Permanent Portfolio

Post by Barry Barnitz » Sun Oct 14, 2012 8:13 am

Hi:

For those of you who have not yet read Craigr's and Medium Tex's book, I would recommend that you give it a try. Although those who are not fan's of the PP will find plenty to fuss over, the book is judicious, thorough, and an interesting read. The Total Stock Market enthusiasts on this site--Taylor's "gems" would tumble out diamonds over this--- will find the chapter on stock market indexing : Indexing is a Marathon, to be a fresh wonderful analogy.

While Craigr and Medium Tex have not had the time to produce a wiki for the PP forum, one of the forum's posters has produced a wiki page on the strategy on an outside wiki (Disclosure: I have joined to make some small edits on this page) : Permanent Portfolio - Early Retirement Extreme Wiki

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Re: Harry Browne’s Permanent Portfolio

Post by deci02 » Sun Oct 14, 2012 10:04 am


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Re: Harry Browne’s Permanent Portfolio

Post by Browser » Sun Oct 14, 2012 10:17 am

The Permanent Portfolio concept represents a somewhat subtle shift of viewpoint from the standard Boglehead viewpoint, which is based on the idea that one should invest in assets that have an "intrinsic" rate of return, such as stocks and bonds, and largely avoid assets without an intrinsic return, such as gold or even commodities. The intrinsic return of stocks is provided by dividends and earnings, while the intrinsic return of bonds is provided by interest payments. Things like variability in equity investor sentiment and interest rates are pesky nuisances that one must patiently endure along the path to the eventual Promised Land of greater riches that will be provided by "intrinsic returns."

In contrast, the PP is based on the idea that one's portfolio selections should instead be based on the consideration of "return drivers." Return drivers are the underlying factors that account for asset gains and losses. For example, the return drivers for equities are company earnings (profits) and investor sentiment (enthusiasm for buying and owing stocks). The principal return driver for bonds is changes in interest rates. The principal driver for Gold or commodities is currency debasement and the resulting decline in real purchasing power, which can be represented by 'inflation."

The return driver perspective advocates diversifying across asset types that display a range of different return drivers; the idea being this is an "all weather" strategy that has a higher likelihood of faring best over a variety of different secular regimes or scenarios. The standard stock/bond portfolio did not do well during the high-inflationary decade of the 1970s because the return drivers for this portfolio were all upside-down: corporate profits were down, equity sentiment was down, and interest rates rose dramatically. But if you owned Gold or Commodities, the driver for these asset types was right-side up and your portfolio did quite well in fact.

IMO, the return driver viewpoint is more of a forward-looking approach than is the standard buy-and-hold only stocks and bonds approach, which is actually backward looking, and relies heavily on the fundamental premise that the past history of long term success of this portfolio for U.S. investors will persist indefinitely into the future. I'm not sure that the PP is the only way, or even the most successful way, to implement the return driver perspective. For example, is a static 25% allocation to stocks, long bonds, gold, and cash optimal? Or should the allocations be somewhat more dynamic? Holding that much gold for the two decade period from 1981-2000 was a real bummer. Could one have done a better job of comprehending the change in regime from high inflation to declining inflation and made a rational decision to reduce gold holdings in favor of both equities and bonds? Holding stocks since 2000 has been a ride on Hell's roller coaster. Could one have done a better job of comprehending the fact that the unprecedented, giddy height of investor enthusiasm for stocks at the end of the 1990s probably fore-ordained the miserable returns that were to follow and consequently reduced equity holdings even below the rather modest 25% that is advocated in the PP?

What are the key return drivers right now, and how are they likely to play out? I have my thoughts about this and they don't particularly favor significant allocations to either stocks or long-dated bonds. But an agnostic "see no evil, hear no evil, speak no evil" perspective like the PP probably makes pretty good sense for most of us who are completely bamfoozled by what's going on in the world these days and how it will eventually play out.
Last edited by Browser on Sun Oct 14, 2012 11:01 am, edited 1 time in total.
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Re: Harry Browne’s Permanent Portfolio

Post by Bill Bernstein » Sun Oct 14, 2012 10:48 am

I've also written an Amazon.com review of Craig's book, something I almost never do:

http://www.amazon.com/The-Permanent-Por ... ig+rowland

Bottom line: Craig and Tex's book is well written, deeply researched, and very Bogleheadish (in the sense that both the authors and Harry are/were agnostic to a fault about their ability to forecast market direction, macroeconomic events, and believe/believed in writing an asset allocation in stone and staying the course.)

I'm never going to to do the Harry Portfolio, let alone go to Zurich or Sydney and plunk gold in a vault, but learning about that process was a fascinating journey through technique and history.

Bill

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Re: Harry Browne’s Permanent Portfolio

Post by hazlitt777 » Sun Oct 14, 2012 11:37 am

I"m currently reading Craig Rowland and J.M. Lawson's book. I hope we can use this thread or start another where we can all comment on specifics at some point.
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Re: Harry Browne’s Permanent Portfolio

Post by LadyGeek » Sun Oct 14, 2012 11:45 am

We also have the author's biographies in the wiki: Craig Rowland, J. M. Lawson

For completeness, wbern is William Bernstein.

If you want to comment on the Permanent Portfolio, go here: Harry Browne Permanent Portfolio Discussion (Cont'd) - it's currently at 10 pages, continued from the first 72 page thread (Updated Modification of Harry Browne Permanent Portfolio).
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Re: Harry Browne’s Permanent Portfolio

Post by craigr » Sun Oct 14, 2012 11:54 am

Thanks for the kind words, everyone. We're happy the book is being well received.
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"Permanent Portfolio" will become a gem.

Post by Taylor Larimore » Sun Oct 14, 2012 12:49 pm

craigr wrote:Thanks for the kind words, everyone. We're happy the book is being well received.
Graig:

I am half way through your book and I'm already convinced that it meets the high qualifications for our Investment Gems.

Look for many of your book's valuable excerpts soon.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: "Permanent Portfolio" will become a gem.

Post by craigr » Sun Oct 14, 2012 1:18 pm

Taylor Larimore wrote:I am half way through your book and I'm already convinced that it meets the high qualifications for our Investment Gems.
Being part of the Investment Gems is one of the highest honors for an investing book! Thanks for your countless contributions here over the years which I know have been a huge influence on many investors (myself included).
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Re: Harry Browne’s Permanent Portfolio

Post by MediumTex » Mon Oct 15, 2012 2:30 pm

Thanks to everyone who has paid us the compliment of buying and reading the book.

I'm happy to hear that people are finding it to be a good resource for understanding and implementing the Permanent Portfolio strategy.
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Re: Harry Browne’s Permanent Portfolio

Post by clacy » Mon Oct 15, 2012 4:10 pm

With all due respect to the authors, who I do respect, I would highly recommend that the first Permanent Portfolio book you look into is "Fail-Safe Investing" by Harry Browne himself. It's a quick read, and very informative on why Harry chose the PP. It is the cornerstone for the portfolio.

Then if you like what you hear, you should definitely look into Craig's book.

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Re: Harry Browne’s Permanent Portfolio

Post by MediumTex » Mon Oct 15, 2012 4:57 pm

clacy wrote:With all due respect to the authors, who I do respect, I would highly recommend that the first Permanent Portfolio book you look into is "Fail-Safe Investing" by Harry Browne himself. It's a quick read, and very informative on why Harry chose the PP. It is the cornerstone for the portfolio.

Then if you like what you hear, you should definitely look into Craig's book.
Harry Browne wrote two books that specifically cover the Permanent Portfolio strategy, Fail Safe Investing and Why the Best-Laid Investment Plans Usually Go Wrong. The former is a high level overview of the strategy and the latter is a deeper analysis of the strategy.

Our book falls somewhere between Browne's two works in terms of detail, while providing an updated set of implementation options to reflect the dramatic changes in the investing world since Browne was writing on the subject (especially with respect to fund options and foreign gold ownership).

A true enthusiast should probably read all three books, but one of our objectives in our book was to provide a synthesis of everything Browne had written on the Permanent Portfolio topic, update the implementation options, and address many questions, concerns, and objections that Browne did not address in his writings.

I think that one of our hopes with the book was also to renew interest in Harry Browne as a true innovator in the areas of investment philosophy and portfolio design.

As we worked through the project and saw how much potential there was for analysis and explanation, I was really surprised that there hadn't been dozens of books written about the strategy. For whatever reason, though, the Permanent Portfolio is just that rare thing in life that works as promised (i.e., provides consistent inflation-adjusted returns) and yet seems to hide in plain sight as people often find reasons to believe that it simply couldn't work, no matter how strongly its historical performance and sound theoretical foundation would suggest otherwise.

-J.M. Lawson
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Re: Harry Browne’s Permanent Portfolio

Post by athrone » Mon Oct 15, 2012 5:13 pm

Permanent Portfolio:
25% Stocks, 50% Intermediate Bonds, 25% Gold

Typical Boglehead:
25-75% Stocks, 25-75% Bonds

The only difference here is people who adopt the PP philosophy:

1. Don't change their allocation over time / with age

2. Choose 2/3 bonds and 1/3 gold rather than go "All-in" with bonds

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Re: Harry Browne’s Permanent Portfolio

Post by MediumTex » Mon Oct 15, 2012 5:30 pm

athrone wrote:Permanent Portfolio:
25% Stocks, 50% Intermediate Bonds, 25% Gold

Typical Boglehead:
25-75% Stocks, 25-75% Bonds

The only difference here is people who adopt the PP philosophy:

1. Don't change their allocation over time / with age

2. Choose 2/3 bonds and 1/3 gold rather than go "All-in" with bonds
I assume you meant 1/2 bonds and 1/4 gold in 2., above.

***

I'm always surprised at how small differences in perspective can ignite large differences of opinion.

The good news is that virtually all investors who follow a Boglehead or Permanent Portfolio strategy are probably all going to do okay.

From my perspective, comparing a Boglehead portfolio to a Permanent Portfolio is sort of like comparing a Baptist church to a Methodist church. Both are setting you up to reach approximately the same destination.
"Early in life I noticed that no event is ever correctly reported in a newspaper." | -George Orwell

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Re: Harry Browne’s Permanent Portfolio

Post by athrone » Tue Oct 16, 2012 10:36 am

MediumTex wrote:Permanent Portfolio:
I assume you meant 1/2 bonds and 1/4 gold in 2., above.

I'm always surprised at how small differences in perspective can ignite large differences of opinion.

From my perspective, comparing a Boglehead portfolio to a Permanent Portfolio is sort of like comparing a Baptist church to a Methodist church. Both are setting you up to reach approximately the same destination.
I was referring to the currency (bond) portion only. If Bogleheads had a $1M portfolio, $250-750,000 would be 100% in bonds. Whereas the PP would hold $750,000 split 2/3 bonds and 1/3 gold.

I do disagree that the difference between Baptist and Methodist is the same as the difference between someone owning 0% Hard Assets vs. someone holding 25%. I think the last decade has proven this out.

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Re: Harry Browne’s Permanent Portfolio

Post by MediumTex » Tue Oct 16, 2012 11:11 am

athrone wrote: I do disagree that the difference between Baptist and Methodist is the same as the difference between someone owning 0% Hard Assets vs. someone holding 25%. I think the last decade has proven this out.
The point I was making was simply that a traditional Boglehead portfolio can coexist with a Permanent Portfolio and nothing too terrible is likely to happen to investors in either strategy.
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Re: Harry Browne’s Permanent Portfolio

Post by athrone » Tue Oct 16, 2012 11:31 am

MediumTex wrote:nothing too terrible is likely to happen to investors in either strategy.
I agree that as long as nothing terrible happens, nothing terrible is likely to happen to those not holding a properly diversified portfolio. :wink:

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GEMS from the "Permanent Portfolio"

Post by Taylor Larimore » Wed Oct 17, 2012 7:43 am

Bogleheads:

I have posted many of the best ideas from The Permanent Portfolio here:

THE PERMANENT PORTFOLIO by Craig Rowland and J.M. Lawson

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Harry Browne’s Permanent Portfolio

Post by Call_Me_Op » Wed Oct 17, 2012 9:08 am

Based upon back-testing, a 30/70 portfolio of stocks/5 year treasuries compares favorably with the Permanent Portfolio (return. SD, and draw-down), and appears to be intrinsically less risky in the sense that 70% of the portfolio is very safe. Perhaps the experts can comment upon this option versus the PP.
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Re: Harry Browne’s Permanent Portfolio

Post by surfer1 » Wed Oct 17, 2012 9:32 am

athrone wrote:Permanent Portfolio:
25% Stocks, 50% Intermediate Bonds, 25% Gold

Typical Boglehead:
25-75% Stocks, 25-75% Bonds
My problem with the PP is Gold - it doesn't earn dividends.

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Re: Harry Browne’s Permanent Portfolio

Post by MediumTex » Wed Oct 17, 2012 9:37 am

Call_Me_Op wrote:Based upon back-testing, a 30/70 portfolio of stocks/5 year treasuries compares favorably with the Permanent Portfolio (return. SD, and draw-down), and appears to be intrinsically less risky in the sense that 70% of the portfolio is very safe. Perhaps the experts can comment upon this option versus the PP.
The safety of bonds is a relative thing. If given enough time, most governments will eventually default on bond commitments. You just hope that you aren't part of the population of bond holders when that happens.

With the PP, you can hold your bond allocation for the safety it provides in periods of deflation and certain types of prosperity without having to worry about what would happen to you if government bonds suddenly experienced an "unexpected credit event."

As with all PP matters, that is simply an explanation of my perception of the difference between the PP and another strategy.
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Re: Harry Browne’s Permanent Portfolio

Post by MediumTex » Wed Oct 17, 2012 9:38 am

surfer1 wrote:
athrone wrote:Permanent Portfolio:
25% Stocks, 50% Intermediate Bonds, 25% Gold

Typical Boglehead:
25-75% Stocks, 25-75% Bonds
My problem with the PP is Gold - it doesn't earn dividends.
Do you have the same problem with cash? :happy
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Re: Harry Browne’s Permanent Portfolio

Post by craigr » Wed Oct 17, 2012 11:30 am

MediumTex wrote:With the PP, you can hold your bond allocation for the safety it provides in periods of deflation and certain types of prosperity without having to worry about what would happen to you if government bonds suddenly experienced an "unexpected credit event."
This is obviously my view as well. The portfolio has a lot of exposure to government bonds. We don't anticipate any problems and it sure is nice having that income stream coming in. However, history suggests it's a really good idea to hedge your bets against something going wrong and gold is able to do that. It's true that gold could sit and do nothing for years (or even lose money from where it is right now). But I sleep better knowing that at least a portion of my life savings is in this historically powerful asset that has a knack for surviving all sorts of monetary emergencies.
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Re: GEMS from the "Permanent Portfolio"

Post by craigr » Wed Oct 17, 2012 11:37 am

Taylor Larimore wrote:Bogleheads:

I have posted many of the best ideas from The Permanent Portfolio here:

THE PERMANENT PORTFOLIO by Craig Rowland and J.M. Lawson

Best wishes.
Taylor
Thank you Taylor. It's an honor to be in your list.
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Re: Harry Browne’s Permanent Portfolio

Post by Call_Me_Op » Wed Oct 17, 2012 11:41 am

Medium Tex and Craigr,

Thanks for the replies. That's certainly a valid concern (unexpected credit crisis) and probably a better reason to hold gold than its impact on portfolio returns. If the gold can legally be kept out of the reach of one's government, that greatly reinforces your argument.
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Re: Harry Browne’s Permanent Portfolio

Post by craigr » Wed Oct 17, 2012 11:55 am

Call_Me_Op wrote:Medium Tex and Craigr,

Thanks for the replies. That's certainly a valid concern (unexpected credit crisis) and probably a better reason to hold gold than its impact on portfolio returns. If the gold can legally be kept out of the reach of one's government, that greatly reinforces your argument.
The thing is though gold has been useful for diversification even without serious credit crisis in the U.S. as well. The 1970s and 2000s gold was a powerful asset to have when stocks were having a particularly tough time.
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Re: Harry Browne’s Permanent Portfolio

Post by Call_Me_Op » Wed Oct 17, 2012 12:32 pm

True, but given that gold underperformed in the 1980's and 1990's, 5 year treasuries overall provided about as good a hedge against poor stock performance overall. Of course, this is based upon back-testing and we have had a 30 year bull market in bonds. The nice thing about PP is that it is based upon economic theory - at least Harry Browne's understanding of economics, which is better than that of the vast majority of people.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: Harry Browne’s Permanent Portfolio

Post by rmelvey » Wed Oct 17, 2012 1:19 pm

Owning gold is a terrible idea. In the 1980s and 1990s it lost money.
Owning 30 year treasuries is a terrible idea. In the 1970s it lost money.
Owning stocks is a terrible idea. In the 1970s they performed poorly and in the 2000s they lost money.

This way of looking at the PP is ridiculous. It is like criticizing a cookie recipe because spoonfuls of flour don't taste good.

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Re: Harry Browne’s Permanent Portfolio

Post by craigr » Wed Oct 17, 2012 1:23 pm

rmelvey wrote:It is like criticizing a cookie recipe because spoonfuls of flour don't taste good.
I'm stealing that line! :D
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Re: Harry Browne’s Permanent Portfolio

Post by Call_Me_Op » Wed Oct 17, 2012 1:55 pm

rmelvey wrote:Owning gold is a terrible idea. In the 1980s and 1990s it lost money.
Owning 30 year treasuries is a terrible idea. In the 1970s it lost money.
Owning stocks is a terrible idea. In the 1970s they performed poorly and in the 2000s they lost money.

This way of looking at the PP is ridiculous. It is like criticizing a cookie recipe because spoonfuls of flour don't taste good.
But if the cookies come out fine without flour, or better yet if the flour makes them prone to crumbling, maybe the criticism has some merit. This is really about comparing the PP with something like a 30/70 stock/intermediate treasury mix. Aside from the remote possibility of a credit crisis in the US, the are arguable advantages to the 30/70, and over 40 years it has performed comparably.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: Harry Browne’s Permanent Portfolio

Post by rmelvey » Wed Oct 17, 2012 2:19 pm

Call_Me_Op wrote:
rmelvey wrote:Owning gold is a terrible idea. In the 1980s and 1990s it lost money.
Owning 30 year treasuries is a terrible idea. In the 1970s it lost money.
Owning stocks is a terrible idea. In the 1970s they performed poorly and in the 2000s they lost money.

This way of looking at the PP is ridiculous. It is like criticizing a cookie recipe because spoonfuls of flour don't taste good.
But if the cookies come out fine without flour, or better yet if the flour makes them prone to crumbling, maybe the criticism has some merit. This is really about comparing the PP with something like a 30/70 stock/intermediate treasury mix. Aside from the remote possibility of a credit crisis in the US, the are arguable advantages to the 30/70, and over 40 years it has performed comparably.
I have a slightly modified version of Simba's spreadsheet that has inflation adjustments as well as logarithmically scaled graphs.

Image
Image

Historically, the PP has had more consistent real returns than the portfolio you cited. Which makes sense. The portfolio you cited holds no assets that directly benefit from inflation. It's not a bad portfolio, but I wouldn't consider it to have the robust diversification of the PP.

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Re: Harry Browne’s Permanent Portfolio

Post by Browser » Wed Oct 17, 2012 2:27 pm

rmelvey - Nice charts. Did you modify Simba's spreadsheet to produce this? The chart shows nicely what can happen when both stocks and bonds go down the chute together - which happened in the 1970s. We've been living in a world lately where stocks and treasury bonds have been negatively correlated and might forget that regime is likely to change when the USD takes a hit - inflation being one of the possible consequences. Nice to have something that might help preserve purchasing power when that happens.
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Re: Harry Browne’s Permanent Portfolio

Post by rmelvey » Wed Oct 17, 2012 2:35 pm

Browser wrote:rmelvey - Nice charts. Did you modify Simba's spreadsheet to produce this? The chart shows nicely what can happen when both stocks and bonds go down the chute together - which happened in the 1970s. We've been living in a world lately where stocks and treasury bonds have been negatively correlated and might forget that regime is likely to change when the USD takes a hit - inflation being one of the possible consequences. Nice to have something that might help preserve purchasing power when that happens.
Yes the spreadsheet uses all of the return data from Simba, but adjusted using the CPI. The only other real difference is logarithmically scaled graphs as well as the geometric mean graphed as a line for each portfolio.

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Re: Harry Browne’s Permanent Portfolio

Post by MediumTex » Wed Oct 17, 2012 3:20 pm

A picture really can be better than a thousand words.

Image
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Re: Harry Browne’s Permanent Portfolio

Post by Call_Me_Op » Wed Oct 17, 2012 3:26 pm

Nice - thanks for the chart. I do wonder how much of the 1970's gold performance was due to its deregulation (perhaps you could comment). But the consistency of the real return of the PP is rather astonishing.

You may detect that my "kicking the tires" of the PP is really part of the process by which I am evaluating whether I should do it. I have your book on order and have read "Fail-Safe Investing" as well as listened to all of Harry's radio shows. The appeal of the PP (to me) would be greatly enhanced if I could protect the 25% gold portion from threat of confiscation (frivolous lawsuits, etc).
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Re: Harry Browne’s Permanent Portfolio

Post by rmelvey » Wed Oct 17, 2012 3:31 pm

MediumTex wrote:A picture really can be better than a thousand words.
Yeah, I don't see how anyone can claim "recency bias" when you look at the chart.

Can you see the gold bubble bursting in the early 80s? Nope.
Can you see the epic bear market in Treasuries in the 70s? Nope.
Can you see the stock market going down the crapper twice in the 2000s? Nope.

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Re: Harry Browne’s Permanent Portfolio

Post by MediumTex » Wed Oct 17, 2012 3:42 pm

Call_Me_Op wrote:Nice - thanks for the chart. I do wonder how much of the 1970's gold performance was due to its deregulation (perhaps you could comment). But the consistency of the real return of the PP is rather astonishing.

You may detect that my "kicking the tires" of the PP is really part of the process by which I am evaluating whether I should do it. I have your book on order and have read "Fail-Safe Investing" as well as listened to all of Harry's radio shows. The appeal of the PP (to me) would be greatly enhanced if I could protect the 25% gold portion from threat of confiscation (frivolous lawsuits, etc).
Just so there is no confusion, that chart is rmelvey's.

rmelvey has a small blog that covers PP issues that is really top quality. You might check it out if you are interested in the PP.

http://www.stableinvesting.com/

rmelvey's posts over at gyroscopicinvesting are always very good as well.
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Re: Harry Browne’s Permanent Portfolio

Post by bogleblitz » Wed Oct 17, 2012 5:22 pm

Can someone post the 4 mutual funds or etfs to implement this? I'm not sure which mutual fund/etf is for cash and gold.

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Re: Harry Browne’s Permanent Portfolio

Post by MediumTex » Wed Oct 17, 2012 5:28 pm

bogleblitz wrote:Can someone post the 4 mutual funds or etfs to implement this? I'm not sure which mutual fund/etf is for cash and gold.
A good way to model past PP performance (or set up a new portfolio) is to start with VTI for stocks, TLT for bonds, GLD for gold and SHV for t-bills (cash).

There are lots of fund choices for each asset class, but these are just four that I picked that are popular.
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Re: Harry Browne’s Permanent Portfolio

Post by schwarm » Wed Oct 17, 2012 6:44 pm

deci02 wrote:Bill Bernstein's take.

http://www.efficientfrontier.com/ef/0adhoc/harry.htm

He also wrote the most popular review of the book on Amazon.com

http://www.amazon.com/The-Permanent-Por ... 1118288254

edit - doh! Bernstein already posted this ITT.
Last edited by schwarm on Thu Oct 18, 2012 12:06 pm, edited 2 times in total.

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Re: Harry Browne’s Permanent Portfolio

Post by stemikger » Thu Oct 18, 2012 12:20 am

craigr wrote:
stemikger wrote:I recently read a sample on my tablet of The Permanent Portfolio: Harry Browne’s Long-Term Investing Strategy: Although I only read a small amount, it did seem very intriguing and unlike anything I have read before. I have seen his name referenced on these boards before but never took the time to read because like many of the topics discussed on these boards some are for idiot savants or math wizards so I thought this might be one of those theories.
Thanks for checking out the book. Full-disclosure: I'm one of the authors.

In simple terms about the portfolio, pro and con:

Pros

1) Historically (1972-2011[2012]) it has a compound annual growth (CAGR) of around 9.5%. Past performance does not guarantee future results disclaimer applies as it does with any investment.
2) Historically it has returned 3-6% real returns over rolling 10 year periods through this entire date range. In simple terms, whether it was bad inflation, good prosperity, deflation, etc. you were beating inflation by 3-6%. This is a really good thing for savers and especially for those in withdrawal phase.
3) Worst loss it ever had was about -5% in 1981. In the last big crash of 2008 the portfolio was down somewhere around -1-2% vs. the nearly -40% of the market.
4) It can be easily setup and managed by an investor.

Cons

1) It holds stocks, bonds, cash and gold. At least one of those assets is probably going to be in the doghouse at any moment and/or out of favor with the market sentiment. You need to learn to just ignore it and hold the asset anyway.
2) It may lag the stock market during good years which could make you envious of people bragging about their huge gains.
3) It is guaranteed to hold an asset that someone, somewhere will think is a bad idea. Stock people hate gold. Gold people hate bonds. Bond people hate stocks. Everyone hates the cash.
Is this a strategy that Bogleheads respect and think can be valid?
I believe so in many respects. Specifically:

- It's completely passive and does not time the market.
- It's dirt cheap to implement.
- It's simple and widely diversified.
- It will likely wipe the floor with investment professionals and actively managed funds just like most passive strategies will.

Where it may not be considered Bogleheadish:

- It holds gold instead of inflation protected bonds (TIPS).
- It does not attempt to adjust the stock allocation based on age.
- It holds long term bonds.
- It holds a block of cash.

I would suggest you read more about it before making a decision so you understand the principles of why those assets and design decisions were reached. There is nearly 30 years of empirical evidence at this point supporting the approach (the original strategy was roughed out in the late 1970s and simplified in the mid-1980s). Great pains were taken in the book to explain the pros/cons of each asset and what asset classes to avoid and why. There is almost no technical jargon used in the book so everyone can understand the approach.

The book details portfolio implementations that are as simple as as single mutual fund running the strategy, using four simple ETFs to run the strategy yourself, up to a widely diversified approach that incorporates geographic diversification for geopolitical and environmental disaster protection.

If you have any questions, please feel free to post them and I'll answer as best I can.
Wow!! You never know who your going to meet here. Very cool and thanks! You actually answered all my questions that I was about to ask. I am definitely going to buy your book, I'm not sure if I want the actual copy or I will download it on my Kindle Fire. I was always told how Gold was a bad investment, so if I did decide to do this, it would be a mind shift.

Does the asset allocation stay the same your entire life? That is a selling point becasue that is what I love about Scott Burn's Couch Potato Portfolio which I am currently doing an even more simple version of that. I basically just hold the Vanguard Balanced Index Fund Admiral Shares.

Thanks again for weighing in!!

Steve G.
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Re: Harry Browne’s Permanent Portfolio

Post by Clive » Thu Oct 18, 2012 1:48 am

Classic Permanent Portfolio minus 2 year Treasury (using a modified version of Simba's spreadsheet to generate that comparison)

Image

Generally stocks and gold move counter-direction and cancel each other out to some extent.

Long dated treasury and short dated treasury barbell is generally comparable to intermediate treasury's.

So the overall general characteristic is for PP = intermediate Treasury, but with extra volatility thrown in as stocks and gold don't always cancel each other out consistently.

1972 to early 2000's, generally flat overall, but as gold has made strong gains during the noughties the PP has pulled ahead of 2 year T. Should gold mean revert as it did after the 1980's up-spike, then :oops: for anyone who bought in near the peak of that up-run.

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Re: Harry Browne’s Permanent Portfolio

Post by craigr » Thu Oct 18, 2012 2:25 am

stemikger wrote:I was always told how Gold was a bad investment, so if I did decide to do this, it would be a mind shift.
Here's the deal because a lot of people get wrapped up in this and it's a common criticism.

Gold is a tool. That's it. Sometimes it's a useful tool and sometimes it's not. It just depends on what is going on in the markets. When you combine it with stocks and bonds it tends to dampen volatility and help returns when the stocks and bonds are not doing as well. If you want to own gold, you need to have a plan for it and unfortunately a lot of people don't because they are chasing returns. The Permanent Portfolio is one way to handle gold in a portfolio safely. It was designed from the beginning to use it as part of the diversification and it is balanced against other assets so if there is a bad gold market the losses will be dampened.

When people get into trouble with gold is they read all this stuff in the press or listen to what their neighbors are doing (who only brag about the gains but never the losses of their investing) and want to jump in. They often jump in not knowing anything about the asset, what it can and can't do, nor the potential problems (and benefits) of what it does in a portfolio. Our book went to great lengths to explain the pros and cons of each asset, including gold, because an informed investor can then make an intelligent decision.

So is gold a "bad investment"? There are two ways to answer that:

1) Yes it is a bad investment if you don't have a plan, don't know why you are buying it, and don't know anything about diversification.
2) It's a great investment if used properly and you understand how it works in a portfolio that also holds stocks and bonds to weather all markets.

So if you fall into category (1), then definitely please do not buy gold!

If you fall into category (2) about wanting to see if gold can be a good fit for how you invest because you want to understand the risks/benefits, then gold could be a good option to add to your portfolio.

With that said, I absolutely believe that all stock and bond portfolios should hold at least 10% in gold whether you follow the Permanent Portfolio or not. Historical review of the markets indicates this is a really good idea for a lot of reasons that are related to monetary policy and can't be discussed here. Gold is an insurance asset. It is not a growth asset like stocks and bonds. But it also has much different risks/rewards than stocks and bonds which is why it can be a good diversifier.

As my co-author would say: "I don't buy fire insurance because I'm expecting my home to burn down. I buy fire insurance because homes burn down all the time and I want to be protected in case it happens."
Does the asset allocation stay the same your entire life?
Yes it stays the same. I do not believe in changing asset allocation based on age (which is quite different than other Boglehead advocates).

I will simply say that if you think the future is unpredictable, then it is unpredictable for all assets and that also includes things like stocks. So a strategy that weighs stocks heavily when younger assumes that the market will be the best place for that money so it concentrates your bets. However, if that plan does not happen (and it hasn't in the past for extended periods both here and abroad), then you end up concentrating your earnings in a place where it would have grown faster somewhere else. Since we don't know where that somewhere else will be, I want to be neutrally balanced so I can take advantage of the growth no matter where it originates.

Secondly to the above, I believe that you first make your money from your career. Investments compounding returns is great, but the snowball takes time to build. What I find is that many investors get involved in portfolios that are much too volatile and will bail out during market turmoil. Often they will sell and lock in losses at near market bottoms in many cases. Or they may get so rattled they stay out of the markets for years waiting for a recovery and the recovery passes them by.

So I agree with Harry Browne that you should invest, but also you need to protect that money because you can't go back and re-earn it. That means avoiding large losses to allow you to deal with emotions of investing is just as important (if not *more* important) than trying to chase the absolute best returns constantly. That's because an investor that can stick with a low-volatility moderate growth plan is very likely to outperform one chasing after hot returns that are very volatile. And when investors can stick to a plan without panicking that means they will always be in the market ready to capture gains whenever they are handed out. And if you invest for any period of time, you quickly learn that the gains can happen at any moment and are unpredictable. So being out of the markets because of emotional distress is almost always a bad idea for total returns.

Finally, by splitting your assets more evenly you are creating firewalls for your life savings (http://crawlingroad.com/blog/2011/08/18 ... firewalls/). Meaning that if one of your assets burns to the ground, you want it to be contained. When you limit the size of each asset (as we do with 25% in each), you effectively limit negative outcomes if something very bad were to happen in the stocks, bonds, cash or gold markets.

Again, this is not what other Bogleheads recommend. It is kind of particular to the Permanent Portfolio in many ways. I just wanted to lay out my perspective.
IMPORTANT NOTE: My old website crawlingroad{dot}com is no longer available or run by me. | | Please refer to archive.is or archive.org for old links in my post.

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Re: Harry Browne’s Permanent Portfolio

Post by stemikger » Thu Oct 18, 2012 4:39 am

craigr wrote:
stemikger wrote:I was always told how Gold was a bad investment, so if I did decide to do this, it would be a mind shift.
Here's the deal because a lot of people get wrapped up in this and it's a common criticism.

Gold is a tool. That's it. Sometimes it's a useful tool and sometimes it's not. It just depends on what is going on in the markets. When you combine it with stocks and bonds it tends to dampen volatility and help returns when the stocks and bonds are not doing as well. If you want to own gold, you need to have a plan for it and unfortunately a lot of people don't because they are chasing returns. The Permanent Portfolio is one way to handle gold in a portfolio safely. It was designed from the beginning to use it as part of the diversification and it is balanced against other assets so if there is a bad gold market the losses will be dampened.

When people get into trouble with gold is they read all this stuff in the press or listen to what their neighbors are doing (who only brag about the gains but never the losses of their investing) and want to jump in. They often jump in not knowing anything about the asset, what it can and can't do, nor the potential problems (and benefits) of what it does in a portfolio. Our book went to great lengths to explain the pros and cons of each asset, including gold, because an informed investor can then make an intelligent decision.

So is gold a "bad investment"? There are two ways to answer that:

1) Yes it is a bad investment if you don't have a plan, don't know why you are buying it, and don't know anything about diversification.
2) It's a great investment if used properly and you understand how it works in a portfolio that also holds stocks and bonds to weather all markets.

So if you fall into category (1), then definitely please do not buy gold!

If you fall into category (2) about wanting to see if gold can be a good fit for how you invest because you want to understand the risks/benefits, then gold could be a good option to add to your portfolio.

With that said, I absolutely believe that all stock and bond portfolios should hold at least 10% in gold whether you follow the Permanent Portfolio or not. Historical review of the markets indicates this is a really good idea for a lot of reasons that are related to monetary policy and can't be discussed here. Gold is an insurance asset. It is not a growth asset like stocks and bonds. But it also has much different risks/rewards than stocks and bonds which is why it can be a good diversifier.

As my co-author would say: "I don't buy fire insurance because I'm expecting my home to burn down. I buy fire insurance because homes burn down all the time and I want to be protected in case it happens."
Does the asset allocation stay the same your entire life?
Yes it stays the same. I do not believe in changing asset allocation based on age (which is quite different than other Boglehead advocates).

I will simply say that if you think the future is unpredictable, then it is unpredictable for all assets and that also includes things like stocks. So a strategy that weighs stocks heavily when younger assumes that the market will be the best place for that money so it concentrates your bets. However, if that plan does not happen (and it hasn't in the past for extended periods both here and abroad), then you end up concentrating your earnings in a place where it would have grown faster somewhere else. Since we don't know where that somewhere else will be, I want to be neutrally balanced so I can take advantage of the growth no matter where it originates.

Secondly to the above, I believe that you first make your money from your career. Investments compounding returns is great, but the snowball takes time to build. What I find is that many investors get involved in portfolios that are much too volatile and will bail out during market turmoil. Often they will sell and lock in losses at near market bottoms in many cases. Or they may get so rattled they stay out of the markets for years waiting for a recovery and the recovery passes them by.

So I agree with Harry Browne that you should invest, but also you need to protect that money because you can't go back and re-earn it. That means avoiding large losses to allow you to deal with emotions of investing is just as important (if not *more* important) than trying to chase the absolute best returns constantly. That's because an investor that can stick with a low-volatility moderate growth plan is very likely to outperform one chasing after hot returns that are very volatile. And when investors can stick to a plan without panicking that means they will always be in the market ready to capture gains whenever they are handed out. And if you invest for any period of time, you quickly learn that the gains can happen at any moment and are unpredictable. So being out of the markets because of emotional distress is almost always a bad idea for total returns.

Finally, by splitting your assets more evenly you are creating firewalls for your life savings (http://crawlingroad.com/blog/2011/08/18 ... firewalls/). Meaning that if one of your assets burns to the ground, you want it to be contained. When you limit the size of each asset (as we do with 25% in each), you effectively limit negative outcomes if something very bad were to happen in the stocks, bonds, cash or gold markets.

Again, this is not what other Bogleheads recommend. It is kind of particular to the Permanent Portfolio in many ways. I just wanted to lay out my perspective.
Craigr, thanks so much!! I have to read this book, I'm definitely going to pick-it up this weekend. If I do the PP, I would have to do it outside of my 401K because we do not have a Gold option.

I appreciate the fact that you explained it so easily.
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!

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