Should I Stay with 80% Stock/20% Bond Allocation or Switch to the Permanent Portfolio

N

nico08

Recycles dryer sheets
Joined
Feb 6, 2010
Messages
429
Hello there:

I currently have the following asset allocation:

Stock
Large Cap 48%
Mid/Small Cap 16%
International 16%
Specialty 0%

Bond
Investment Grade 15%
High Yield 0%
International Bond 5%

Cash
Short Term 0%

I am considering switching to a Permanent Portfolio Asset Allocation. The allocation would be the following:

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)

I would like to be able to retire in 4 to 9 years. I am currently 41 years old. About 59% of my asset allocation is in 401k or ROTH investments. About 41% is in after tax investments.

My overall net worth has increased since I started preparing for early retirement, I became more aggressive with this early retirement plan in the beginning of 2005. However, I think my savings rate has increased my net worth more so than my actual return on investments.

What do you think about the Permanent Portfolio asset allocation? What do you think I should consider before I make the switch to this type of asset allocation? Thank you for your advice!
 
You'll doubtless get a great deal of good advice on this forum. My two cents: your current allocation is very aggressive (and risky) for someone with your stated plans. You could easily lose half or more of your savings in a heartbeat.

The forum linked to below is probably the single best resource on the Permanent Portfolio. Regardless of what you decide to do, I recommend reading and heeding Harry Browne's 16 Golden Rules of Financial Safety, which are right at the beginning of this forum's posts:

Permanent Portfolio Discussion Forum - Index

I personally am sold on the PP but there plenty of other viable options to consider and the PP is most definitely not for everyone. You could go with something as simple as Vanguard's Wellington fund or a plain vanilla self-managed equivalent (e.g. 65% 5 year Treasuries, 35% VTI) and probably sleep a whole lot better. Check out Larry Swedroe's "no fat tails" portfolios, sophisticated slice-and-dice (Bob Clyatt's "RIP" portfolio and the sample DFA portfolios on Assetbuilder.com) and see what you feel comfortable with.

Good luck!
 
At age 41 I like the 80/20 more than what your are considering moving to. 25% cash and 25% gold is way too much for someone your age. I would probably look at something along the lines of 40% US large cap, 10% small/mid cap, 10% international stock, 20% US bonds, 5% international bonds, 5% Reits, 5% commodities/gold, 5% cash.

That being said asset allocation is a very personal thing....only you can decide just how much risk you are comfortable undertaking.
 
Any answers you get are going to be biased by the person's risk tolerance and particular circumstances. I personally think you have too much in equities given your plan to retire comparatively soon, but you are young so there's an argument for risk too. I use a "couch potato" index fund approach, so I like the the simple approach of the PP, but I don't like the AA. Too much in long term treasuries, I go with a bond index so the average duration is shorter, not enough in international stocks and too much in cash and gold

I'm a couple of years from ER and I plan to have an initial 4% WR going down to less than 2% when SS starts so I don't need much risk, here's my target AA

Cash 10%
International stock index 15%
US stock index 20%
Wellesley 20%
Bond index 35%

maybe throw in some real estate or commodities it you want a bit more diversification.
 
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I think the PP is outside what I would recommend as a conventional portfolio. I have no problem with your current portfolio AA, but I'm 100% equities. As long as you are flexible on your retirement date, the large equities allocation shouldn't be a problem. It may just delay retirement if you hit a 50% dip before you retire.
 
You should probably learn to be better at market timing.

And you should learn that no one can predict the future.

I suppose those that do not like the PP would not recommend it and those that like it would recommend it. But how does that help you make up your mind?
 
I enjoy reading about different pre-defined portfolios and investment ideas, such as the PP or others.

However, I do think that if one has made a big effort to self-educate (by reading the books on the Bogleheads' list, for example), then there is no reason that a portfolio that you design for your specific situation would be any worse than a portfolio with a catchy name. I'd recommend doing more reading and self-educating at this point, as we all do from time to time. No matter how much you know (and for all I know that may be quite a bit), there is always more to learn.

Being 4-9 years from ER, you are probably thinking of reducing your equity exposure gradually over the next few years, and if I was in your situation that would be front and center in my thoughts right now.
 
RockyMtn said:
At age 41 I like the 80/20 more than what your are considering moving to. 25% cash and 25% gold is way too much for someone your age. I would probably look at something along the lines of 40% US large cap, 10% small/mid cap, 10% international stock, 20% US bonds, 5% international bonds, 5% Reits, 5% commodities/gold, 5% cash.

That being said asset allocation is a very personal thing....only you can decide just how much risk you are comfortable undertaking.
Click to expand...

I agreed


I think the fundamental question when looking at any portfolio is simple. If it behaves like I predict will it enable me to reach my goal?

In the case of 80/20 portfolio over the last 30 years stocks have returned 10.8% and bonds a bit over 11%. Of course the decade the returns have divergent significantly. This has been the only 30 year period when bonds outperformed stocks the last 150 year, so logically the next 30 years the situation will reverse. I'd argue that even in the next decade stock should out perform bonds. (Of course I been predicting bonds will drop in value for the last 2+ years and have been dead wrong.:blush:)

In the case of the PP, we have two new assets classes to consider. The good news is that we can with great confidence predict that over the next decade the returns of cash/money markets will exceed the current levels of .01%, On the other hand will having 25% of your assets essentially earning nothing enable you to hit your retirement goal?. This obviously depends on your spending needs and savings discipline. The finally asset class Gold, I'll be the first to admit I have no clue as to its direction over any time period. I will say that historically the price of gold has rise pretty much at rate of inflation, although in the intermediate term it is pretty volatile.


My thoughts on the permanent portfolio, are very similar to Bernsteins. If you are already retired with more than sufficient assets and worried about being able to maintain retirement than it is reasonable choice. If on the other hand you are saving for retirement the PP will require to work longer (on average) to retire than your aggressive portfolio.
 
I think 80/20 is fine for a 41-year-old planning to retire in 20 years. For someone retiring in less than 10 years, especially one that won't have a pension or health insurance lined up already, it seems too risky for me. YMMV, of course.
 
I believe your savings rate is a more important factor than your asset allocation in terms of building wealth...and you even alluded to this...so keep saving for now.

As to asset allocation, we all have different risk tolerances. IMO both of your options are a bit aggressive. With the first, too much equity positions. WIth the second, I'd never own 25% in gold, especially with it being at the highs it's at now.

Good luck!
 
midnighter777 said:
What do you think about the Permanent Portfolio asset allocation? What do you think I should consider before I make the switch to this type of asset allocation? Thank you for your advice!
Click to expand...
I think you need to read more about asset allocation and figure out why the PP seems so attractive to you. You don't seem to be aware of its rocky long-term history nor the advantages of your current AA.

A good place to start learning about AA is Bernstein's "Four Pillars" book. Another good place is the Boglehead's Wiki. You might decide that an equivalent amount of safety (the lure of the PP) could be achieved by annuitizing a portion of your portfolio and leaving the rest in a stock/bond AA. Others have been pretty happy with Vanguard balanced funds like Wellesley.
 
Hi Nords;

I do not think that the Permanent Portfolio has had a rocky long term history. The stability of the Permanent Portfolio is one of the reasons that I am attracted to it. It has historically produced a reasonable rate of return and has a low standard deviation.
 
midnighter777 said:
The stability of the Permanent Portfolio is one of the reasons that I am attracted to it. It has historically produced a reasonable rate of return and has a low standard deviation.
Click to expand...
Probably holding gold would have been better than the gold stock mutual fund I used for an IRA back in the mid 70s, but that IRA has done really, really poorly. After all these years, it's only doubled in value, while the IRA my wife started about the same time, which used a small cap mutual fund, is worth 30 times her investment. No PP for me.
 
The PP's historical returns have been anything but rocky - about the same as straight S&P 500 Index from 1972-2008 but with a quarter of the volatility. That's not the reason to hold the PP though. The inventor of the PP's most famous quote is:

“The best kept secret in the investing world: Almost nothing turns out as expected.”

Designing porfolios based on backtested asset class returns leads you down the Modern Portolio Theory slice-and-dice path. Then, when all your "non-correlated" assets suddenlly correlate in a market panic or other Black Swan event (as in '08) you face huge losses. The PP is based on having assets that respond to specific economic conditions, as this post makes clear:

Crawling Road » The Permanent Portfolio Allocation

Bob Clyatt, on an earlier discussion of the PP on this board, called the PP a "bunker" portfolio, and I think that's fair. But it's a bunker that has done far better than any porfolio I know of when the s#$t hits the fan - and that is the decisive difference between it and, say, Wellesley or other plain vanilla conservative allocations.
 
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kevink said:
Tried to poset this but couldn't put 2 URLs in one post:

What may be the longest Bogleheads thread of all time is devoted to kicking the tires of the PP to the tune of 72 pages/3556 posts:

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

so if you're a glutton for info overload and want to truly look at this allocation from any angle, there you go!
Click to expand...

You seem to be a proponent of PP. How much of your portfolio is allocated to PP?
 
midnighter777 said:
Hi Nords;
I do not think that the Permanent Portfolio has had a rocky long term history. The stability of the Permanent Portfolio is one of the reasons that I am attracted to it. It has historically produced a reasonable rate of return and has a low standard deviation.
Click to expand...
So do a bunch of other portfolios.

My point isn't intended to attract a vigorous defense of a niche portfolio. My point is that you need to research the subject of asset allocation to find a portfolio that suits your style & tolerance. When you can debate Bernstein as vigorously as you can rally 'round the PP, then you're ready to choose a portfolio that you'll be able to stick with despite more market volatility.

Otherwise you're just standing in the world's largest candy store with a fistful of dollars saying "Gee, guys, I dunno, what looks good to you?" and hoping that it tastes OK without making you puke later.
 
Nords' advice is very wise. To answer your question, Spanky: 100%. I also think Finance Dave's advice about savings is very important, and it echoes the first two of Harry Browne's 16 Rules of Financial Safety:

16 Golden Rules of Financial Safety

As Nords and others have said there are many allocations that could work for you, but I think that while the PP allocation is probably only for a few those 16 Rules are worthwhile reading for all of us.
 
midnighter777 said:
Hello there:

I currently have the following asset allocation:

Stock
Large Cap 48%
Mid/Small Cap 16%
International 16%
Specialty 0%

Bond
Investment Grade 15%
High Yield 0%
International Bond 5%

Cash
Short Term 0%

I am considering switching to a Permanent Portfolio Asset Allocation. The allocation would be the following:

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)

I would like to be able to retire in 4 to 9 years. I am currently 41 years old. About 59% of my asset allocation is in 401k or ROTH investments. About 41% is in after tax investments.

My overall net worth has increased since I started preparing for early retirement, I became more aggressive with this early retirement plan in the beginning of 2005. However, I think my savings rate has increased my net worth more so than my actual return on investments.

What do you think about the Permanent Portfolio asset allocation? What do you think I should consider before I make the switch to this type of asset allocation? Thank you for your advice!
Click to expand...

Hello - I'm new to the forum (as of today) and am finding a range of topics here of interest.

I have a lot in common with the OP ~ same age (+1 yr) and similar AA (90/10). Portfolio growth was due to aggressive savings more than investment returns for the period of the past 2 decades. Even my retirement/after tax investment ratios are similar (50/50). Retired 3 years ago with hubby who is 100% equities.

We have strong stomachs after the market (& our investments) fell almost 50% only 1 month after quitting our jobs. Things have recovered well and we're on-track with our budget. We have a low annual spend and live simply on a boat - that is until maintenance time (or get struck by lightning as just happened in Sept...).

It's interesting to hear the various input to these AAs and different risk tolerance, etc. Best wishes to the OP in meeting your goals.
 
Reach said:
We have a low annual spend and live simply on a boat - that is until maintenance time (or get struck by lightning as just happened in Sept...).
Click to expand...
That sounds like fun, except maybe the lightning part.
 
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