I have two questions about the Permanent Portfolio—not the PRPFX fund but the 4x25% allocation to stocks, LT bonds, cash and gold. I haven't finished reading the
lengthy discussion of the Permanent Portfolio at Bogleheads. Maybe the answers to these two questions are in there, but I'm guessing I will hear back on E-R before I finish reading the 60+ pages at Bogleheads.
- I think I understand how the portfolio would operate in the accumulation phase—you put 25% of your portfolio into each of the asset classes and rebalance annually or whenever you drift too far from an even split of all four. But how do you use it after retirement? I would suppose you sell whatever asset went up that year, skim what you need for living expenses off the top, and then use the remainder to buy whatever asset(s) are below 25% of the remaining total. If nothing went up, make a withdrawal from the cash for living expenses, and maybe wait to rebalance until one of the assets does go up. Is that correct? I also wonder what would be the effect of using dividend-paying stocks, instead of the growth-oriented ones specified for the original PP (either during the withdrawal phase only, or for the entire time of holding the PP).
- As I understand it the Permanent Portfolio has four asset classes because there are four basic economic states: inflation, deflation, prosperity and recession, and the PP works because each of the four asset classes tends to do very well in one of the four states. To me, these four states seem to arrange themselves along two axes, inflation/deflation and expansion/contraction, which makes me wonder if there is a third axis and if so, what is it? Does the economic "universe" have two-dimensions or three? If there is a third axis, what are the asset classes corresponding to the two directions?
Very good questions, and please understand I am not a PP expert. I am intensely studying the subject, and have looked at it years ago (didn’t have the need for it then; thought I was too smart to need it. My how arrogance can take a back seat as one matures!)
Here are my thoughts. First, I am not sure about a third axis. However, I do maintain some reservations about the concept. The Boglehead poster “Clive”, a Brit, has some excellent comments on the research he has done on the PP based on Japanese results. The PP had long stretches when it didn’t do very well at all, such that your capital would have been impacted fairly severely. This is what concerns me a bit. If we hit a spot where gold, stocks and bonds fell, and this continued for awhile, one’s portfolio would be severely affected.
So, I have decided to maintain a couple portfolios—the PP for roughly half and what Harry Browne, the creator of PP, called a Variable Portfolio (VP)—which can be anything you want it to be. I will put income instruments, some individual equities (my PP will be straight up ETF’s), and whatever strikes my fancy. This gives me some variability of results and hopefully improves them.
The other comment you had, about value vs. growth stocks, somewhat is contrary to the PP idea. The original idea is to use only four broad ETF’s to capture the four areas. Yes, some folks slice and dice, and I will do that too (picking up some emerging markets and maybe using Wellesley for part of my $, among others). However, the key is to pretty well set and forget the PP, really only moving around at rebalancing time. BTW, you can rebalance annually or when the 15%/35% bands are reached. Not sure what I will do here, but probably use the bands to capture extreme moves like Tbonds in the fall of 2008.
As to how to draw income, I plan on taking mine from the cash portion when needed, and then rebalance according to my 15%/35% plan.
So, my holdings will look something like this:
25% SHY (for cash—increases yield with very little negative consequences)
25% government bonds, including EDV, TLT and others
21% VTI to capture broad US markets
4% DEM to pick up some EM exposure
25% GLD, maybe SGOL and GTU and maybe some physical gold
Hope this was helpful. And yes, I am struggling through the entire Bogleheads post!
Jim
You're starting to sound like a compensated spokesperson for Vanguard Funds!!! 
