T put forth the following asset allocation as a variation on the original; precious metals 25%, Swiss assets (a mix of stock and currency) 10%, worldwide real estate and real assets (one category per T) 20%, aggressive growth stocks 15% and US treasuries and government bonds of varying maturities 30%. T names names in terms of funds selected so you should click through if you are curious.
There are some things that are of course unique and interesting and some things I would do differently. I should back up for just a moment. Not that T implies that you can buy a dozen funds and never do anything again but rebalance but to be clear I would view any permanent portfolio as something to watch closely, study diligently and change occasionally. For example I do not have as much faith in Switzerland as T does. Obviously the country is known for many positive fundamental attributes, its debt to GDP is around 36% which is pretty good these days, but the banking system is larger than the GDP and the SNB had been trying for months to make the franc more competitive before it finally started to turn down last November. Of course the downturn could not be for anything the SNB has done but just part of a broader market theme.
All of that notwithstanding let's say T is correct about Swiss assets for the next ten years. Well ten years is a long time and it would be reasonable to look down the road and conclude that things may not always be that good for the country. I might prefer Norway in the role that T chose Switzerland. Norway could continue to be "right" until 2020, for example, but if at that point something changes with oil production such that the income deteriorates dramatically the country would then become far less compelling. As great as I think Norway is as an investment destination it should be obvious that anything bad with oil will threaten Norway.
As part of the precious metals allocation T includes a recently listed platinum mining stock ETF. The chart compares the spot price of the metal in red with Anglo Platinum (AGPPY) which is the largest holding in the fund (the fund is too new for a comparison to mean anything). Clearly the stock has been a good hold but it is not clear to me that it is a proxy for the metal. Hopefully stating the obvious; at times the metal will be better to hold and at other times a stock, or fund, will be better. I am not sure where Browne stood on the idea of using a mining stock as a proxy for a precious metal so if anyone knows please leave a comment.The 20% in aggressive stocks makes sense but I might try to go narrower than the funds that T suggested (he's not actually suggesting anything but for economy of words). I think of the equity allocation in a permanent portfolio being closer to what Taleb advocates, closer but not exactly. So I might want to consider certain higher beta themes like a particular emerging market country or alternative energy; things of that sort but not going berserk with options contracts.
The last thing I will say about the idea from T is that I am no fan of REITs, I have given up on them as diversifiers but I should note that T has forgotten more about real estate than I will ever know. I continue to hold a candle for the idea that some of these funky farm stocks I've mentioned before can offer some diversification benefit but I don't own any of them.
However realistic it is to build a permanent portfolio today with ETFs, it is far more realistic today than it was a year ago. Obviously ETFs can be one tool of several that a do-it-yourselfer could select to build something like this for themselves. Great talking points T, thank you.
14 comments:
There is URE - Pro share Real Estate
Jeff from Milan, Italy
I have posted this before on this blog. Harry Browne's Permanent Portfolio consistsof 4 equal weighted asset classes (equity, gold, long term treasuries and cash). This portfolio backtest extremely well and more importantly has provided equity like returns with much lower volatility and drawdown. The critical part of the strategy is to rebalance in 15/35 bands.
The following blog is an excellent source on the PP: http://crawlingroad.com/blog/
Yeah, Roger just forgot the reference to the mutual fund.
For a good ETF portfolio based on the PP, try the following:
25%- Gold (GLD)
25%- Long Term Treasuries (TLT)
25%- Cash- I use (SHY) for short term treasuries
25%- Equity. Some use VT for all world stock and PP purists use VTI and perhaps a small allocation to VEU.
The important thing to remember is tha the actual stock holding is not that important as it ismore critical to have the four asset classes equal weighted and used in the format above.
SDrone- the mututal fund does not mimic HB's PP as it is more weighted to inflation so one will run the risk of underperforming during deflationary environments. However you should know this as you have frequented the bogleheads website which also discusses HB's strategy.
Roger, I'm a money manager and use the Permanent Portfolio as my preferred investment vehicle for all clients besides retirees who need the income to live on. Did my own research on it to verify Harry's stats. Here's a couple major points, since 1974:
1)33 out of 36 years had positive returns;
2)Worst loss was 7.1% in 2008
3)Other losses were -3.6% in 1981 and -.5% in 1994.
4)1974-2009 average return 9%;
5)1974-2009 Std Deviation 8% v 19% for S&P 500
6)2000-2009 Avg return of 7%;
7)2000-2009 Std Deviation of 6.7% v 21.1 for S&P 500
I absolutely do not get why people try to tamper with the PP and put other asset classes in there. Why mess with something that works this well?
thanks for the stats purewater.
any concern on your part about the obvious boost the idea got from long term bonds in the time you cited that is not reasonably repeatable?
the 30 year yielded 7.8% in march 1977 which is as far back as yahoo goes. the original premise was created with a much higher long term bond yield in mind.
Yes, I'm always concerned this is going to quit working! However, when I look at the data, over broad periods of time, the winning investments always add more value to the portfolio than the losing investments take away. I think it's reasonable to cut the bond duration a bit in this climate. You'll still get the gains and losses when yields move but they won't be so dramatic...having said that if we get a long period of deflation (which is entirely possible), then the long bonds will do great and you'll miss out on some gains, of course.
Also, if bonds yields rise, the cash portion of the portfolio will do quite well, at least relative to today.
One of the things I like about the PP, is since the 70s we've been thru recessions, inflation, stagflation, near-depression and prosperity and it consistently produced stable returns. Like you say all the time, it's not about beating the S&P 500 every year, it's getting clients to retirement with enough money. Moreover, the low std deviation reduces the odds of making an error in judgment that can really cost you.
any concern on your part about the obvious boost the idea got from long term bonds in the time you cited that is not reasonably repeatable?
The 30 year yielded 7.8% in march 1977 which is as far back as yahoo goes. the original premise was created with a much higher long term bond yield in mind.
The classic Permanent Portfolio (25% in each of stocks, gold, long dated treasuries, cash), rebalanced yearly between 2000 and 2008 inclusive produced compound average gains of
Japan 3.1% versus -0.1% inflation
UK 6.1% versus 2.7% inflation
US 7.2% versus 2.9% inflation
and has worked relatively well in providing low year on year draw-downs with modest real rewards over periods of both rising and declining 10 year note yield periods since 1970's
I'd suggest perhaps considering holding a bit more international exposure and maybe split both the stock and cash 25% parts into 5 x foreign investments/cash. Periodically rebalance back to 5% weightings.
If/when a domestic crisis occurs in isolation then government debt yields soar and the currency collapses, stocks/bonds/treasury prices can decline 90% or more (e.g. Iceland recently, Argentina in 2002). Gold in domestic currency terms can rise four-fold or more to counter the losses, but in import terms you're still way down overall (much better off than domestic stock/bond investors though). Holding foreign currency based investments will help further reduce the real losses. If the foreign holdings are diversified widely then the risk associated with a foreign held investment encountering its own crisis is only 5% of the total fund value.
A Canadian based Permanent Portfolio produced 6.84% compound since 2000 to 2008
http://tinyurl.com/2vg48et
I've no idea how the the "Scenario Analysis" data is formed in that link, but if anywhere near correct it shows a -22% decline over the 1929 to 1932 period when stocks declined -89%
Again, folks, everyone is comparing this to Browne's original permanent portfolio idea. That's not what the article is about. It's about re-creating Cuggino's mutual fund called the Permanent Portfolio using ETFs.
So, it's NOT using ETFs to invest in short bonds, long bonds, gold, and equities equally. It's using ETFs to invest in:
20% gold
5% silver
10% Swiss franc assets
15% real estate and natural resource stocks
15% aggressive growth stocks
35% T bills, bonds, etc.
per the mutual find as shown here.
Might as well throw in my Swiss Franc's worth on this:
As many readers know, Seeking Alpha does not like to promote mutual funds. My effort was to entice investors with a yen for this setup to explore a Permanent Portfolio using ETFs. The model was the current catagories and appromimate allocation to same of the Permanent Portfolio Fund.
I have been a fan of the late Harry Browne for many years, and had a fulfilling e-mail correspondance with him in the early 2000s regarding some of his investing and Libertarian ideas. We disagreed on some important points, but he was always was the perfect gentleman. We both were appreciative of Opera, which was his artistic passion.
I appreciate Roger's taking my blog post and running with it. As stated in my article, the allocations are not a mandate from me (or anyone else). I hope between my post and Roger's enhancements (he's the expert), readers will investigate this approach.
I highly recommend the current Permanent Portfolio Fund to long term investors if you don't want to do it yourself.
T
You know, it's interesting enough that I may add it to the list of ETF portfolios I track. I'm not sure how much history it'll have, but it'll be fun to look at.
I set up the proposed ETF permanent portfolio and the problem I have is that many of the ETFs trade in exceedingly low volumes. Accordingly, unless the portfolio is going to be relatively small, getting in and out of some of the positions may be a problem.
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