No video this week.A reader asked for my take on a version of a Permanent Portfolio posted on a site called Crawling Road (great name) that I presume was first put forth by Harry Browne.
25% - Stocks (in a broad based stock index fund like the S&P 500)
25% - Long Term Treasury Bonds
25% - Gold Bullion
25% - Cash (in a Treasury Money Market Fund)
The post also includes performance numbers. Going back to 1972 the average annual return for the mix 10.0% versus 11.1% for the US stock market. Maybe I missed any info about volatility stats but I would have to imagine it was much less volatile than the stock market.
The first thing I wonder about is the gold allocation. I'm a big fan of gold and own a little but the volatility makes 25% way more than I would ever own. I wondered whether the skew that goes with including the 1970s, the best yet for gold so far, in the period studied gave a long term result that could not be repeated. So in going from 1980 forward I get an annual average of 8.42% compared to 12.36% for stocks. The problem with that is that while I may have removed a period for gold that may not be repeatable I may have isolated a period for equities that may not be repeatable. It makes no sense to go back past 1971 to study gold.
It seems to me that the idea as spelled out is one fund (or product) for each of the four making it a combination permanent and lazy portfolio. Couldn't the concept be applied as an asset allocation model where a diversified equity and bond portfolio are constructed and instead of just gold couldn't some sort of diversified commodity mix be assembled?
First let me say I can't envision getting anywhere close to 25% in commodities let alone just gold. That is something I have mentioned many times in the past. Commodities might have a low correlation to equities most of the time (but not always) but they can be volatile so I'm not on board with that kind of allocation. If you think you want 25% in commodities and are starting from a low or no weight now I would suggest you move slowly or wait for the sentiment to shift what's wrong with commodities which is the exact opposite of the sentiment now.
One reason why the above portfolio concept exists is to capture a zigzag effect. One thing may go down a lot at some point but the hope is that the others will balance out the decline. If proponents of the above concede me that point and if any of them are interested in the asset allocation part of this but are willing to do more than a lazy portfolio then couldn't the equities go up to 40%, gold down to 10% and 25% each still in a cash proxy and long term debt?
I believe the desired zigzag effect can be captured in a properly diversified equity portfolio, I've been writing about just that for almost five years and other folks write about this too so the how to is easily available (take a little bit of process from many places to create your own process).
Within the portion that is allocated to long term treasury bonds can there be no recognition that at times rates are low and at other times high? In that context couldn't you shorten or lengthen the average maturity accordingly? I would also ask about foreign bonds. The allocation, which I pasted from the original post, just says treasury bonds but I think it just means domestic.
I am not going to be using the above in any way shape or form but that does not mean it is not useful to deconstruct to try to learn from. One reason I don't do something like this (there are several reasons) is that I tend to believe that investing, by necessity, is an evolving discipline and complete reliance on past truisms seems like a huge gamble. The camp that believes more foreign investing must be done (I am in this camp) has a point but strict adherence the above ignores that. Yes you could sub an all-world fund in for the equity exposure but then you are immediately admitting some sort of obsolescence with the idea and where there is one there could be more than one.
These types of studies can either cause you to reassess what you are doing or build more confidence in what you are doing, either is productive.
I was saddened to hear of the passing of Randy Smith yesterday. He was an NBA ironman back in his day.
15 comments:
Hi Roger,
In response to its 200DMA article, Naked Hedge responded to some comments over at TBP that I thought you would find interesting...
"Your definitely right on the ability of todays govt. to manipulate the market… it is a different ballgame in those terms. And when you’ve got mega banks/brokers on the same page with the govt. in the single mission of raising capital you have a freight train you need to jump on or get out of the way.
Even though I have bearish thoughts in the back of my mind…. having long positions has been a guilty pleasure in that I know no matter what .. I can wake up in the morning and those guys are going to work and twist this market whatever way they want to get their stock prices up to sell shares and raise capital."
"I know you don’t find these charts useful constantnormal, but the 200 day MA is and has been a significant turning point either way it decides to go… and in order to manage risk thoroughly its important to stay informed of where we are. thanks for the comments nonetheless."
http://www.ritholtz.com/blog/2009/06/200-day-moving-average/#comments
maturity is not the same as duration.
Roger,
I'm interested in your comments on gold. You say you would not have 25% allocation in gold due to its volitility. Is it the gold or the dollar that is volitile? Gold has been money for 5000 years. The US consitution states that only gold and silver can be legal tender. The authors of the constitution wrote this because they knew how dangerous paper money is. I'm a novice investor but it seems to me that gold would be safer than dollars or treasuries, especially in this period of the US economy. Any thoughts?
Hi Roger
By a strange coincidence I've been looking at the Permanent Portfolio myself recently.
Here's a link to my observations and conclusions
http://tinyurl.com/qobe98
I saw that chart on Barry's site, people should click over if they haven't already.
maturity not the same as duration? yes I know and would want to shorten both when yields are very low.
my brain can't work in the gold is money realm. are you US based? I buy things with US dollars. Whatever is going on in the world, at the end of the day I need dollars to buy things. I have never purchased any good or service with gold or silver and I don't know anyone who ever has. Further I can't think of a time where volatiltiy of the dollar impaired my ability to buy groceries, pay utility bills or get a check up at the doctor. Last year gold fell 20% at one point. If you had all your cash in gold and then had to pay for something when it was down a lot you'd have had a big problem. Even if gold is on its way to $2000 by 2011 what if it gets there via $500 and when it is at $500 you need to replace your roof and all the electrical in your home at the same time?
Thanks for the info Clive, readers should click over to that as well.
D-Day - A lot people died on this day to secure your freedom from righ wing fascist bastards.
Next time you meet one of those right wing fascists that have sprung up in our own country such as Rush Limaugh, Dick Cheney, Fox News Employeed, GW Bush, Condi Rice, ... you owe it to your country to dump them in a river.
As Obama said in his speach today -
the world's people have many differences but they were united on D-Day to fight evil and they have been united in their hatred against American right wing fascists as well like GW Bush and Dick Cheney and neocon republicans.
Define fascism smart guy?
Hatred of communism
Hatred of liberals
Hatred of "itellectuals"
Hatred of homesexuals
Hatred of unions
Belief in Corporatism
Belief in Military might
Belief in Military pre-emption
Obsessive Nationlism and Patriotism
Belief in "US" vs. "Them"
Belief in "We are better then them"
Radical religious ideologies (taking a religion and warping it into a nationalistic & militant construct)
Belief Social Darwinism
Use of Media Propganda and Scare Tactics to indoctrinate population to fascist beliefs
....
Holly Crap - The Republican Party are FASCISTS.
Excpet for Ron Paul - only conservative
gold is a funny thing. You can't eat it, drink it or make anything useful out of it. However, gold can be taken to any corner of the earth, in almost every society and it will be considered valuable. In our lifetimes we have never had use gold for daily trasactions, especially now with "electronic" money/transactions. The dollar is strong and easy to use. In fact, if you did use gold in daily trasactions you would be in violation of legal tender laws and could be put in jail. However, this is a savings/investment site and I'm looking for a good place to store and/or create value. Gold may have dipped 20% last year but its one of the few things in my portfolio thats up right now. Furthermore, if you read between the lines in the news you'll see that Obama is in Saudi Arabia, Geithner is in China, and Bernanke tesified on capitol hill...all three of them are trying to ensure the creditors of the U.S. that their debts are safe. I don't believe them. I'll save in gold.
Sorry I made a typo....all three of them are trying to ensure the creditors of the US that their INVESTMENTS are safe...not debts
Roger: R.I.P. Randy Smith, soccer and basketball legend at Buffalo State, Division 3 school, drafted in 7th or 8th round by now defunct but beloved Buffalo Braves, going on to more than hold his own with the big boys in the NBA - a real "ironman."--Jim L.
Roger,
It so happens back in 2006 I parked some of my son's college money in the Permanent Portfolio fund (PRPFX), although most was in a money market. I wasn't very optimistic about the market at the time; one was in school and the other started 2008. It seemed the most conservative fund I could locate--the returns wouldn't be spectacular but I figured the losses wouldn't be bad either.
I would have been better off with the money market, but right now I'm up about 2%.
Considering the alternative scenarios if I'd put that money in almost anything else, the Permanent Portoflio approach has its advantages.
I admit for longer term money, I took more risks but was helped by non-US holdings, cash/Treasuries (I got increasingly concerned in 2007), and blind luck, so I got wacked for about 1/2 of the loss of the S&P and consider myself very lucky.
I agree with the concern about the percentage of gold; I would increase the percentage of industrial materials, metals, and commodities to form the 25% devoted to gold, personally. And I'd wait for the inevitable retest on these. I like Energy but only longterm, not at these values. Just a thought.
Roger, who cares about volatlity? Shouldn't your focus be on valuations? If XYZ asset class is cheap on a historical basis and your forward looking valuations look good as well buy it right?
you're telling me what I should focus on?
ok, replace "your focus" with "ones focus" I am just trying to better understand why everyone is so concerned about volatility. If an asset class is "cheap" then wouldn't you welcome to high volatility that you are expecting to the upside?
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