Permanent Portfolio vs. Slice & Dice

[kevink]

Maybe I've missed the thread, but I'm curious as to why there hasn't been more discussion of the "Permanent Portfolio" advocated starting in the 70's by Harry Browne, especially since it appears to be among the few backtested portfolios to have not only generated 10% average annual return since 1970 but also the only one to have generated positive numbers in 2008:

Mad Money Machine Podcast and Blog

I guess I spent too much time reading modern portfolio theory and missed this guy's extensive body of work. Shame on me. Meanwhile there is a very lengthy thread over on Diehards about this very topic that I found well worth wading through:

Bogleheads :: View topic - Updated Modification of Harry Browne Permanent Portfolio

In a nutshell, isn't it interesting that the most intricate slice-and-dice portfolios engineered by the best minds Harvard et al have produced have lost at least 20% of their value in the meltdown while the absurdly simple PP has never lost more than 4% (and that was in '81)? As an ER looking for a steady ~8% return with few or no negative years I went the slice-and-dice route a la Bob Clyatt's intricate RIP portfolio, but now wonder if I wouldn't have been better served by this absurdly simple allocation. Anyone else?

 

[ziggy29]

I'd be careful not to use the last dozen years or so as evidence that the preceding 100+ years of generally strong returns on equities is dead.

Having said that, I am intrigued by the PP and I've started considering putting a fairly defensive portion of my portfolio in it. I'm at the age where preserving what I have is becoming at least as important as growing what I have, and it looks like it is built in a way that allows something to perform well at all times while having a general bias toward going higher.

I don't see the PP as a "core" holding or the bulk of the portfolio of most investors. But the more I study it, the more I like it as a hedge against several types of serious economic problems. And I don't see it continuing to beat the more heavily equity-laden portfolios moving forward into the longer term.

 

[dex]

Is this Bob's RIP portfolio?

US Large Value Tilt 12.0%
US Small Value Tilt 8.5%
Int'l Small 10.0%
Emerging Mkt 6.5%
Int'l Large 5.0%
US Government Bonds 4.0%
ST Corp /Money Mkt 4.0%
Med Term Int'l Bonds 12.0%
Med Term US Bonds 10.0%
GNMA Bonds 5.0%
High Yield Bonds 3.5%
Oil and Gas 3.5%
Market Neutral Hedge Fund 2.0%
Commodities 4.0%
Commercial Real Estate 5.0%
Private Equity/ Venture Capital 5.0%
100.0%
+++++
If so, it would have been easier (and you would probably get the same return )to consolidate them and invest in corresponding index funds.

 

[dex]

I don't see the PP as a "core" holding or the bulk of the portfolio of most investors. But the more I study it, the more I like it as a hedge against several types of serious economic problems. And I don't see it continuing to beat the more heavily equity-laden portfolios moving forward into the longer term.

The Permanent Portfolio Fund

Today’s Investment U Crib Sheet The idea behind the Permanent Portfolio Fund is a variation of “efficient market” indexing, only in Harry’s case, he originally recommended an equal 25% position in four areas (reset every year):

• Precious metals which do well during inflationary times
• Growth stocks which do well in good times
• Government bonds that do well during recession
• T-bills that do well during a depression

 

[kevink]

Hi Dex,

Two clarifications:

1. Yes that looks pretty much like Bob's RIP portfolio. As he explains quite clearly in the book though, you pretty much have to have access to the DFA funds to fully execute the portfolio. You can approximate a lot of it with index funds and ETF's, but especially in international and emerging market small cap and value areas won't hit it all exactly. How important that is anymore with "uncorrelated" asset classes tanking in unison and the value of tilts arguably gone I can't say.

2. The Permanent Portfolio should NOT be confused with a mutual fund sold as the Permanent Portfolio Fund, which is what you supplied the link to. The latter substantially deviates from Harry Browne's formula and has a high ER to boot. For more info on the real thing this is the best source I have found (to be read either before or after wading through the very lengthy discussion on Diehards I already gave the link to):

Permanent Portfolio Historical Returns | Crawling Road

Kevin

 

[dex]

Hi Dex,

Two clarifications:

1. Yes that looks pretty much like Bob's RIP portfolio.

2. The Permanent Portfolio should NOT be confused with a mutual fund sold as the Permanent Portfolio Fund, which is what you supplied the link to. The latter substantially deviates from Harry Browne's formula and has a high ER to boot. For more info on the real thing this is the best source I have found (to be read either before or after wading through the very lengthy discussion on Diehards I already gave the link to):

Permanent Portfolio Historical Returns | Crawling Road

Kevin

Thanks
1. The RIP portfolio doesn't interest me.

2. The Permanet Portfolio is more in line with what many on this board gravitate towards - simple and fewer investments.

My thoughts based upon my perspective and doing the allocation now.

25% – Stocks (in a broad based stock index fund like the S&P 500) +++ expand to include non USA investments

25% – Gold Bullion +++ expand to include non USA currencies

These are the tough investments
25% – Long Term Treasury Bonds +++ expand to include world bond funds?
25% – Cash (in a Treasury Money Market Fund) +++ Change from 25% to 5 years of expense budget (net of income and dividends/interest) and re allocate percentages to other areas above

Basically, I think growth opportunities will be greater outside the USA in the future.

 

[Dennis]

Permanent Portfolio Historical Returns | Crawling Road

Is there not a couple of Bal Funds that do the same thing?
Or Just Hire your Advisor to do it for you an pay the ave of 1% in a fee
and you'd still make about 9%, right?

Although his 2008-LT Treas wasn't 33%, about 22% I think (I sold mine in Nov of 08'. )
anyone go thru each investment, look them up and compare #'s? To confirm his.

Ditto Dex , Keeping that Much in just MMkt ( several Hundred k) isn't my idea of making my $ work for me.. and prefer to Go into Global Bond Funds and EMD's..My FNMIX has done a great job for over 10 yrs and counting..and so has PREMX.
But, who knows..

 

[craigr]

Hello,

KevinK let me know about this thread. I run the blog mentioned above and just wanted to add a few things.

It's a gamble stepping out for early retirement and there are risks that need to be managed as best you can. I found that the Permanent Portfolio allocation helped me because of the following:

1) It never had a rolling 10 year period of negative real returns going back to the early 1970s. It usually ranged in the 3-5% real return range through a variety of good and bad economic conditions.

2) It never has sustained a serious loss through a variety of very bad markets. The worst year was 1981 where it lost around 4-6%.

3) It is simple to implement.

4) It is based on a different idea than other approaches. A usual stock/bond allocation is basing diversification on correlation between asset classes. The Permanent Portfolio looks only at how the assets correlate to the economy. Whether we have prosperity, inflation, recession or deflation you own an asset that can deal with it effectively and allow you to ride the wave or ride out the storm.

5) Because it uses assets tied to the economy, it tends to provide very strong diversification against problems that nobody could imagine. This is because no matter what is happening in the markets it will affect the economy in the four basic ways discussed above. In 2008 for instance you didn't need to be a prognosticator and react to the banking crisis. The crisis simply manifested itself as a deflationary effect and because you own LT Treasury bonds already you were protected. You didn't need to short the financial markets, move to cash, etc. beforehand (which is impossible to know ahead of time).

6) Harry Browne had a very healthy respect for the unpredictability in the markets. He never took anything for granted and knew life was uncertain. Instead of trying to assume that history would repeat, he instead embraced the uncertainty of life and designed a portfolio strategy that worked with uncertainty instead of trying to fight it. He was preaching protection against "Black Swans" before the phrase was even coined.

7) The portfolio embraces Harry Browne's 16 Golden Rules of Financial Safety. This sounds a bit gimmicky, but it actually contains very sound advice that, if followed religiously, I believe can keep most investors out of serious trouble with their life savings.

8) I used to follow a more traditional approach and was quite skeptical of his ideas. But once I researched them, looked at financial history, and listened to his investment radio shows, I came to fully believe that his approach is a very workable solution for investors. It can not only grow your money, but protect it in uncertain times because you may not be able to earn it back again.

9) It's conservative so you sleep better at night. Yet, it can achieve returns of far riskier approaches.

Historically the portfolio has around a 8-10% CAGR with very low volatility. Is it going to be as hot of a performer as a equity heavy allocation when the markets are good? Nope. But at the same time it doesn't carry nearly the risk and for many people is quite likely "good enough" to meet most of their needs.

Now we all know (hopefully!) that backtesting has severe limitations. For instance, it cannot predict the future. But it is useful though for disproving theories. So although I can't say that the Permanent Portfolio will do as well going forward, I can at least look at the data and say that it managed to hold its own during some strenuous and good times and still come out OK. In fact, it just about matches the CAGR of a 100% Total Stock Market portfolio going back to the early 1970s with about 1/4th the volatility. Not too bad for something that looks so simple that it couldn't possibly work.

I believe there is a balance between trying to get the hottest returns and not losing a large part of your money in a bad bear market. There are no right portfolios for every person, but I think that Harry Browne had some really good ideas. Even if you aren't thinking of implementing a portfolio exactly as prescribed, I do think he has ideas and concepts in the Permanent Portfolio that could apply to any other asset allocation to make it a lot safer and still allow you to reach your goals of living off of your savings.

 

[ESRBob]

Have been intrigued by Kevin's post and the Permanent Portfolio enough to do some digging. It is certainly an intriguing option, but most of its appeal may be a matter of timing: we've just come off a meltdown year (2008) so we're drawn to anything that survived that perfect storm year with a positive return. Permanent Portfolio did.

Question is, going forward, are we going to be as excited about a deeply contrarian investing approach? (and make no mistake, Permanent Portfolio is deeply contrarian: 25% stocks, 25% Gold, 25% Cash, 25% long govt bonds.) My sense is that if you're really in a slice/dice/stay-the-course mode, you will in fact stay the course especially after a year like 2008. That is not the time to abandon ship and move to a gold/fixed-income with an equity kicker portfolio, appealing as it would have been to be in it during 2008.

Agreed, the alleged non-correlation of assets in broadly diversified portfolios seemed to fail last year as everything went down in synch. It was gut-wrenching. But having weathered it, paid the price, is now the time to switch to something like Permanent Portfolio?

I continue to seek as much diversification as I can get in credible asset classes. International, illiquid, hedge fund, commodity, global fixed income -- all these areas look poised for good long term returns with built-in diversification of returns and risk. This is how I hope to weather the next 'black swan' and earn decent returns in the meantime.

If we could completely run from risk, we would: buy long term TIPS and be done with it. But most of us long-term retirees cannot afford to live on those returns. So we are pushed into the world of risk, like it or not. I still trust the long term data, and the long term wisdom of being in low-fee, low-turnover, broadly diversified tax-efficient investments-- through thick and thin.

 

[ziggy29]

Have been intrigued by Kevin's post and the Permanent Portfolio enough to do some digging. It is certainly an intriguing option, but most of its appeal may be a matter of timing: we've just come off a meltdown year (2008) so we're drawn to anything that survived that perfect storm year with a positive return. Permanent Portfolio did.

Question is, going forward, are we going to be as excited about a deeply contrarian investing approach? (and make no mistake, Permanent Portfolio is deeply contrarian: 25% stocks, 25% Gold, 25% Cash, 25% long govt bonds.) My sense is that if you're really in a slice/dice/stay-the-course mode, you will in fact stay the course especially after a year like 2008. That is not the time to abandon ship and move to a gold/fixed-income with an equity kicker portfolio, appealing as it would have been to be in it during 2008.

On one hand I don't disagree, but on the other hand, it's not like the PP has often lost money or lagged inflation. More often than not it didn't. It may not be right for everyone but I think it's a bit of a disservice to dismiss it as a "contrarian" investment. It's often done quite well even when the market was rising and inflation was low.

I think truly long term investors with a strong stomach can ditch some of the bonds and the gold and the cash for higher probable long-term returns. But the track record isn't exactly one of an investment that only performs when everyone thinks the end is near.

 

[mathjak107]

i use TLT GLD MONEY MARKET AND VTI

last year i was actually up 1 % as bonds tlt were up 28% and gld gold was ap a few points overshadowing the drop in equities.... i have been using my own version of perm portfolio with some of my portfolio for 20 years now.... never great in an up market but makes it all back in the drops or by not dropping.... its all about capital preservation and not appreciation

 

[clifp]

I'll admit I haven't studied the permanent portfolio very much. I know I have seen it discussed a 1/2 dozen times in retirement forums and was always very skeptical.

I think this an example of a stopped clock being right twice a day or in the case of the PP maybe twice in lifetime. 2008 was a horrible year for all asset class except for gold and US Government bonds. Already in 2009 we are seeing a decline in treasuries and basically flat gold price.

I think it is an open question of US government bonds will still have the flight to safety component in future financial crisis that they had in this one. Or to put an other way how would the PP have performed if was Japanese, Russian, British, or German Government bonds?

Second from a retiree's prospectus there are practical problems to using this portfolio. There a storage costs associated with Gold bullion wish aren't reflected in the performance data, and rather large transaction cost.

If my $1 million consisted of 250K each of gold bars, VTI, and two Vanguard government bond funds. Last year I guess I ecked out a 2% gain. Great beats the heck of my last years performance.

I need 40K for living expense, someone want to explain precisely how it get the 40K out of the portfolio. Last I looked and Bank of America won't take 2.2 Oz of gold as payment for my mortgage.

 

[ziggy29]

I need 40K for living expense, someone want to explain precisely how it get the 40K out of the portfolio. Last I looked and Bank of America won't take 2.2 Oz of gold as payment for my mortgage.

When Harry Browne designed the PP, he never intended it to be all of an investor's portfolio. Presumably someone would hold this in addition to other appropriate investments; i.e. a 35-year-old could hold it along with a more traditional 75/25 porfolio, and a 60-year-old could hold it with a 40/60 portfolio, pulling the income needs from the 60% in bonds or cash.

The thing that worries me most about the PP is that I hear enough people talking about it now that it may stop working. Plus using an ETF like GLD could serve as a proxy for storing all the physical metals, though that loses some of its "doomsday appeal" for some.

 

[Maurice]

Has anyone back tested it prior to 1970? It would be interesting to see how well is did from 1900 on.


It would also be interesting to see how it did in a few other countries. In a devaluation three of the four could take a secular shift south.

 

[unclemick]

Yeh - I got sucked into a version(mine) of PP with an admixture of slice and dice - AAII membership, pastry and guest speakers at New Orleans chapter meetings and so on. Taxable outside 401k(Index 500) before I Bogled up as it were.

Memory says ( ancient records went in Katrina):

1. Wellesley
2. Vanguard Trustee's Co-mingled International
3. Gold, Silver and Platninum coins
4. Timberland
5. rental RE
6.Vanguard Intermediate Treasuries
7.Short Term corporate.
8. a Putnam closed end Foriegn bond fund.
No rebalancing - various amounts in the 70's/80's.
1966- 1982 stocks went not the most popular kids on the block.

In the end - simple Index 500/GIC's(insurance co's) in 401k funded maybe 80-90% of ER.

Great pastries at the AAII meetings though.

heh heh heh - I think my PP portfolio died of overthinking, overwatching and later boredom. .

 

[unclemick]

Ahah! - it's coming back to me now - 1989 - I got born again (outside 401k) in taxable starting my file cabinet of DRIP plans which went to peak at about 50-52 Norwegian widow type dividend stocks in two file cabinets.

Keeping it simple is great - but managing those pesky hormones is tough.

heh heh heh -

 

[Spanky]

The thing that worries me most about the PP is that I hear enough people talking about it now that it may stop working.

Don't worry - someone (or financial genius) will come up with something new and innovative that will knock your socks off.

 

[mathjak107]

Has anyone back tested it prior to 1970? It would be interesting to see how well is did from 1900 on.


It would also be interesting to see how it did in a few other countries. In a devaluation three of the four could take a secular shift south.

you cant really as gold was price fixed at 35 bucks an ounce for the longest time

 

[mathjak107]

I'll admit I haven't studied the permanent portfolio very much. I know I have seen it discussed a 1/2 dozen times in retirement forums and was always very skeptical.

I think this an example of a stopped clock being right twice a day or in the case of the PP maybe twice in lifetime. 2008 was a horrible year for all asset class except for gold and US Government bonds. Already in 2009 we are seeing a decline in treasuries and basically flat gold price.

I think it is an open question of US government bonds will still have the flight to safety component in future financial crisis that they had in this one. Or to put an other way how would the PP have performed if was Japanese, Russian, British, or German Government bonds?

Second from a retiree's prospectus there are practical problems to using this portfolio. There a storage costs associated with Gold bullion wish aren't reflected in the performance data, and rather large transaction cost.

If my $1 million consisted of 250K each of gold bars, VTI, and two Vanguard government bond funds. Last year I guess I ecked out a 2% gain. Great beats the heck of my last years performance.

I need 40K for living expense, someone want to explain precisely how it get the 40K out of the portfolio. Last I looked and Bank of America won't take 2.2 Oz of gold as payment for my mortgage.

2 or 3 slightly negative years in almost 40 years isnt a case of a clock being right 2x a day

 

[Maurice]

you cant really as gold was price fixed at 35 bucks an ounce for the longest time

You can still test it. And gold did move somewhat, it was ~20 at the turn of the last century, went up to the 30s in the depression, crept up to the 40s after the war, went back down to 35 for 20 years before taking off in the 70s.

 

[mathjak107]

but when the lid was taken off it soared to 900 bucks or so with the world events....its a little to hard to back test in my opinion...only think i care about is what its done since i started it in the late 80's

 

[kevink]

Thanks for all the comments.

Answers to most of the questions asked about the PP can be found through a patient reading of the massive thread on Bogleheads I provided the link to in my first post.

An easier place to start is the site maintained by Craig R, whose post on page one of this thread is the best introduction to Harry Browne's work I've seen. There is a ton of information including great answers to FAQ's at:

About the Blog | Crawling Road

ESR Bob you're one of the smartest guys around and I appreciate your work greatly, but I don't know whether I share your optimism about sophisticated slice-and-dice portfolios such as those you advocate roaring back from their 24% plus losses last year. Maybe yes, maybe no. It seems like your asset enthusiasm lies outside the U.S. and outside of stocks, and there I tend to agree with you, but that kinda amounts to market timing.

As we saw last year (and in 1998-99, after 9/11, etc., etc.) during panics all the "non-correlated" asset classes become correlated. Unlike with the PP, you don't own enough of a truly non-correlated asset to rescue the portfolio; with PP, you do. I am dubious about the value of back-testing, but if you want to go by that the PP has a better return than the RIP portfolio with only a bit more than half the SD. I'd call that proven, not merely contrarian. On the evidence, for a retiree looking to live on ~4% with as little volatility as possible and enough growth of principal to preserve the porfolio the PP looks like a much better solution than the RIP or any other slice-and-dice portfolio out there. Clearly the PP is not suitable for everyone, but I wouldn't call a 10% CAGR a pure "capital preservation" strategy or a "bunker."

As for implementation costs, one possible hurdle is gold, whose price gains are taxed at 28% as a collectible (but unlike stocks or bonds gold, doesn't throw off taxable interest or dividends). The obvious choice is to do it with funds: GLD and/or IAU, though a Browne purist would insist on owning actual gold. The three other asset classes are easy as can be: TLT or individual long bonds from Treasury Direct for the long bonds; Vanguard TSM Admiral shares or the equivalent from others (Schwab's Total Stock Market fund currently matches the Vanguard funds .08 ER); a good money market fund (e.g. Schwab Bank's, currently paying 1.35%) plus maybe some IBonds for the cash. Total ER for the portfolio should be .28% or less. The total portfolio is certainly not ultra tax efficient, but not a nightmare by any means.

Quoting from Craig R's excellent post above, I think this is the crucial distinction that is hard to get one's mind around between the thinking underlying the PP and portfolios based on the work of Bernstein, Fama & French et al:

A usual stock/bond allocation is basing diversification on correlation between asset classes. The Permanent Portfolio looks only at how the assets correlate to the economy. Whether we have prosperity, inflation, recession or deflation you own an asset that can deal with it effectively and allow you to ride the wave or ride out the storm.

When you look at the historical return chart you truly do see this in action.

The discussion on the Bogleheads thread answers the speculative question about the PP in other currencies or economies, as well as touching on the research Harry Browne and his colleagues did into performance of various asset classes prior to 1970. It is worth taking the chunk of time to read that thread start to finish if the PP is of real interest to you.

After that, as I keep learning from Craig R, there's no substitute for reading Browne's books and listening to his radio shows.

I realize I'm coming off sounding like a convert to the PP and I'm not. I'm not at all eager to jettison the carefully crafted diversified portfolio I have, but I sure am eager to avoid another year of 20+% losses.

Kevin

 

[DoubleDown]

Thanks for all the comments.

Answers to most of the questions asked about the PP can be found through a patient reading of the massive thread on Bogleheads I provided the link to in my first post.

An easier place to start is the site maintained by Craig R, whose post on page one of this thread is the best introduction to Harry Browne's work I've seen. There is a ton of information including great answers to FAQ's at:

About the Blog | Crawling Road

ESR Bob you're one of the smartest guys around and I appreciate your work greatly, but I don't know whether I share your optimism about sophisticated slice-and-dice portfolios such as those you advocate roaring back from their 24% plus losses last year. Maybe yes, maybe no. It seems like your asset enthusiasm lies outside the U.S. and outside of stocks, and there I tend to agree with you, but that kinda amounts to market timing.

As we saw last year (and in 1998-99, after 9/11, etc., etc.) during panics all the "non-correlated" asset classes become correlated. Unlike with the PP, you don't own enough of a truly non-correlated asset to rescue the portfolio; with PP, you do. I am dubious about the value of back-testing, but if you want to go by that the PP has a better return than the RIP portfolio with only a bit more than half the SD. I'd call that proven, not merely contrarian. On the evidence, for a retiree looking to live on ~4% with as little volatility as possible and enough growth of principal to preserve the porfolio the PP looks like a much better solution than the RIP or any other slice-and-dice portfolio out there. Clearly the PP is not suitable for everyone, but I wouldn't call a 10% CAGR a pure "capital preservation" strategy or a "bunker."

As for implementation costs, one possible hurdle is gold, whose price gains are taxed at 28% as a collectible (but unlike stocks or bonds gold, doesn't throw off taxable interest or dividends). The obvious choice is to do it with funds: GLD and/or IAU, though a Browne purist would insist on owning actual gold. The three other asset classes are easy as can be: TLT or individual long bonds from Treasury Direct for the long bonds; Vanguard TSM Admiral shares or the equivalent from others (Schwab's Total Stock Market fund currently matches the Vanguard funds .08 ER); a good money market fund (e.g. Schwab Bank's, currently paying 1.35%) plus maybe some IBonds for the cash. Total ER for the portfolio should be .28% or less. The total portfolio is certainly not ultra tax efficient, but not a nightmare by any means.

Quoting from Craig R's excellent post above, I think this is the crucial distinction that is hard to get one's mind around between the thinking underlying the PP and portfolios based on the work of Bernstein, Fama & French et al:

A usual stock/bond allocation is basing diversification on correlation between asset classes. The Permanent Portfolio looks only at how the assets correlate to the economy. Whether we have prosperity, inflation, recession or deflation you own an asset that can deal with it effectively and allow you to ride the wave or ride out the storm.

When you look at the historical return chart you truly do see this in action.

The discussion on the Bogleheads thread answers the speculative question about the PP in other currencies or economies, as well as touching on the research Harry Browne and his colleagues did into performance of various asset classes prior to 1970. It is worth taking the chunk of time to read that thread start to finish if the PP is of real interest to you.

After that, as I keep learning from Craig R, there's no substitute for reading Browne's books and listening to his radio shows.

I realize I'm coming off sounding like a convert to the PP and I'm not. I'm not at all eager to jettison the carefully crafted diversified portfolio I have, but I sure am eager to avoid another year of 20+% losses.

Kevin

If you are investing in a taxable account why not just go with PRPFX and be done with it? Yes, I know all of the arguments here - manager risk, high expenses, etc. But, it is very tax effecient. Then once a year take 4% of your account value (not this fooshishness of 4% of your initial account value plus 3% per year for inflation). Thoughts??

 

[ziggy29]

If you are investing in a taxable account why not just go with PRPFX and be done with it? Yes, I know all of the arguments here - manager risk, high expenses, etc.

I think an even bigger objection with some is that PRPFX isn't using the Harry Browne 4x25 allocations, but have tinkered with it (adding Swiss francs and silver, making it more heavy on stocks, et cetera).

 

[kevink]

Yes as explained earlier PRPFX deviates so much from the actual Permanent Portfolio that they really ought not to be using the name.