Permanent Portfolio Historical Returns
Let’s get to the meat of any investment strategy: How well does it actually work?
In a prior post we talked about the Permanent Portfolio allocation which is:
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)
This allocation will provide protection when the economy shifts through the cycles of prosperity, inflation, deflation and recession.
Now, some may be thinking that this allocation sounds very different than what they’ve seen elsewhere. For instance, the idea of owning gold is scoffed at by some investment advisors because it has no dividends or interest. Long Term Bonds? Many will tell you that they’re too risky due to rising interest rates. How about Cash? Isn’t holding a bunch of cash missing out on the hot stock market action? And, only 25% in stocks? Well everyone knows that stocks always beat every other investment so surely you want more than 25%, right? Right!?
Not exactly.
The reality is the investment markets are uncertain and unpredictable. What may look good in a theoretical backtest may blow up horribly as economic conditions change. Even worse, portfolio strategies that should work well based history often don’t work in actual application as people abandon them due to volatility and long periods of underperformance. Finally, every reputable study on the subject has shown that relying on your gut instinct, hunches, investment gurus and hot tips to run a portfolio is a road to disaster for performance and safety.
The Permanent Portfolio strategy works because it has very wide and true diversification. You have exposure to assets that can grow your money safely at all times without having to predict the future. You also have protection in the diversification against losing large amounts of money which can cause you to abandon the strategy in bad markets.
A Couple Small Changes
I did make two small changes to the original Permanent Portfolio as investment vehicles have changed in type and availability over the years. Harry Browne recommended using the Treasury Money Market Fund for cash. I personally like using Short Term Treasuries in combination with a Treasury Money Market Fund which provides nearly identical risks but slightly better returns on your cash. Also, instead of using the S&P 500 Index, I’ve chosen to use the Total Stock Market Index(also called the Russell 3000, or Wilshire 5000 index). The Total Stock Market Index provides wider stock diversification (holds 3-7000 stocks) with slightly better results than the S&P 500 (which holds 500 stocks). The slightly better result is because the Total Stock Market also holds small and medium sized company stocks which can sometimes outperform the large company stocks of the S&P 500 alone. The Total Stock Market also has expected higher tax efficiency due to how the index is constructed and managed.
You can use my changes or not. It doesn’t matter much. If you stick to the S&P 500 and Treasury Money Market Fund as originally recommended the results are within about 0.50% (one half percent) annually (favoring short-term bonds and total stock market) through the years.
Historical Returns
Let’s look at the score card and see how the Permanent Portfolio Allocation has done the past 36 years from 1972-2008 (1972 is the furthest we have data for Gold which was taken off the fixed exchange rate in 1971).
The assumption in this table is we rebalance each year to get back to our 25% allocation split among all four asset classes. In the table below I’ve highlighted in Red the asset that did the worst in a particular year and Green for the asset that did the best. Note that “worst” does not mean the asset was necessarily negative, just that it was the lowest performer for that particular year. In the average column I highlighted in Orange any year with a loss for the portfolio.
Key:
- TSM – Total Stock Market Index
- ST Bonds – Treasury 1-2 year Short Term Bonds
- LT Bonds – Treasury 20+ year Long Term Bonds
- Gold – Gold Bullion
| Year | TSM | ST Bonds | LT Bonds | Gold | Returns |
| 1972 | 16.9 | 3.9 | 5.7 | 48.9 | 18.8 |
| 1973 | -18.1 | 6.1 | -1.1 | 75.6 | 15.6 |
| 1974 | -27.2 | 9.1 | 4.4 | 70.5 | 14.2 |
| 1975 | 38.7 | 7.9 | 9.2 | -22.7 | 8.3 |
| 1976 | 26.7 | 8.9 | 16.8 | -3.8 | 12.2 |
| 1977 | -4.2 | 3.7 | -0.7 | 23.5 | 5.6 |
| 1978 | 7.5 | 5.5 | -1.2 | 36.7 | 12.1 |
| 1979 | 23.0 | 10.4 | -1.2 | 136.3 | 42.1 |
| 1980 | 32.7 | 14.1 | -4.0 | 10.8 | 13.4 |
| 1981 | -3.7 | 18.9 | 1.9 | -32.8 | -3.9 |
| 1982 | 20.8 | 19.5 | 40.4 | 12.5 | 23.3 |
| 1983 | 22.0 | 8.6 | 0.7 | -14.3 | 4.2 |
| 1984 | 4.5 | 12.8 | 15.5 | -20.2 | 3.2 |
| 1985 | 32.2 | 13.2 | 31.0 | 6.9 | 20.8 |
| 1986 | 16.1 | 11.9 | 24.5 | 22.9 | 18.8 |
| 1987 | 1.7 | 6.0 | -2.9 | 20.2 | 6.2 |
| 1988 | 18.0 | 5.9 | 9.2 | -15.7 | 4.3 |
| 1989 | 28.9 | 8.7 | 17.9 | -1.7 | 13.5 |
| 1990 | -6.0 | 8.9 | 5.8 | -2.2 | 1.6 |
| 1991 | 34.7 | 10.7 | 17.4 | -10.4 | 13.1 |
| 1992 | 9.8 | 6.8 | 7.4 | -6.2 | 4.4 |
| 1993 | 10.6 | 6.4 | 16.8 | 17.7 | 12.9 |
| 1994 | -0.2 | -0.6 | -7.0 | -2.2 | -2.5 |
| 1995 | 35.8 | 12.1 | 30.1 | -5.9 | 18.0 |
| 1996 | 21.0 | 4.4 | -1.3 | -4.6 | 4.9 |
| 1997 | 31.0 | 6.4 | 13.9 | -21.5 | 7.5 |
| 1998 | 23.3 | 7.4 | 13.1 | -0.3 | 10.8 |
| 1999 | 23.8 | 1.9 | -8.7 | -0.2 | 4.2 |
| 2000 | -10.6 | 8.8 | 19.7 | -5.3 | 3.2 |
| 2001 | -11.0 | 7.8 | 4.3 | 2.4 | 0.9 |
| 2002 | -21.0 | 8.0 | 16.7 | 24.4 | 7.0 |
| 2003 | 31.4 | 2.4 | 2.7 | 19.6 | 14.0 |
| 2004 | 12.5 | 1.0 | 7.1 | 5.6 | 6.6 |
| 2005 | 6.0 | 1.8 | 6.6 | 18.1 | 8.1 |
| 2006 | 15.5 | 3.8 | 1.7 | 23.0 | 11.0 |
| 2007 | 5.5 | 5.9 | 9.2 | 30.9 | 12.9 |
| 2008 | -36.7 | 6.2 | 33.4 | 4.9 | 1.9 |
| CAGR | 9.3 | 7.5 | 9.0 | 8.4 | 9.7 |
Data pulled from the Simba Spreadsheet on the Diehards Forum. Gold returns pulled from: http://www.finfacts.ie/Private/curency/goldmarketprice.htm. NOTE: Gold prices were largely fixed before 1971 and tied to the dollar. So the prices of gold did not move according to market fluctuations much before 1971. 2008 values pulled directly from market indicators. LT Treasuries for 2008 reflects owning 25-30 year treasuries directly and not the market index 20 year benchmark (which the portfolio is not designed to use).
Results
The Compound Annual Growth Rate (CAGR) is 9.7% for the entire period.
The worse loss for the portfolio in any one year was 1981 which had you down only about 4%. The market problems through the decades were barely registered in the final return each year. This means the portfolio was able to provide these solid and stable returns with very low volatility and risk.
You’re probably wondering how this portfolio compares to other strategies. The Permanent Portfolio was able to rack up the following returns against these competitors if you invested $10,000 back in 1972:
| 1972-2008 | CAGR | Growth of 10K |
| Permanent Portfolio | 9.7% | $317,220 |
| 100% Total Stock Market | 9.2% | $266,885 |
| 100% Total Bond Market | 7.7% | $155,907 |
| 50% Total Stock Market/ 50% Total Bond Market | 8.9% | $234,371 |
Now, some might be thinking: “Hey, gold was price controlled before 1971 so it’s not fair using 1972 as the start because the price of gold shot up. It made it look better than it really was!” (OK, maybe you weren’t thinking that, but I was because it’s true and we need to consider its impact). We’ll start a couple years out in 1974 then, enough time that the gold market would have settled out:
| 1974-2008 | CAGR | Growth of 10K |
| Permanent Portfolio | 9.3% | $230,853 |
| 100% Total Stock Market | 9.9% | $278,757 |
| 100% Total Bond Market | 7.8% | $142,649 |
| 50% Total Stock Market/ 50% Total Bond Market | 9.3% | $227,281 |
The Permanent Portfolio allocation is always competitive with the 100% stock allocation and the 50/50 bond allocation. Anything within +-0.50% of each other is essentially market noise that can easily flip back and forth each year.
The most important part is the Permanent Portfolio never had wild gut wrenching swings in value. In 1973-1974 stocks lost 50% in value. In 1987, stocks dropped 25% in one day. During the 2000-2002 Internet bubble crash, stocks dove about 40% over two years and the NASDAQ dove 80%! In 2008 stocks were down about 40% for the year.
Yet given all the above the Permanent Portfolio was able to produce positive returns during these very bad markets. Most recently in 2008 we had the worst single year market crash since 1931 and the portfolio still squeezed out a 2% profit for the year. The Permanent Portfolio allowed you to avoid all those disasters but gave you performance on par with the far riskier 100% stock allocation.
Even better, the Permanent Portfolio was able to provide real after-inflation returns during some times when the stocks and bonds couldn’t (such as the decade of the 1970’s). This means that even though inflation may have been killing your stocks and bond returns (by giving you negative real growth even though they went up in value), the Permanent Portfolio was able to go above and beyond by several percentage points to give real results that weren’t being eroded by a falling dollar.
Take a look at the returns table above and notice how you’ll always have one asset class doing very well and one doing flat or badly. Isn’t that counter-intuitive that you should be able to profit from that type of movement? Nope. It’s diversification in action. The way the Permanent Portfolio uses its assets to diversify according to economic conditions is what makes it work so well.
We’ll talk more about this in the future.
- Ben Stein Helps Retirees Transition Back into the Workforce | Crawling Road
- Time to rebalance? | Crawling Road
- Periodic Table of Investment Returns | Crawling Road
- The Permanent Portfolio Asset Allocation: Fail-Safe Investing by Harry Browne | Income Trust | Personal Finance | Real Estate SEO
- The Permanent Portfolio Asset Allocation: Fail-Safe Investing by Harry Browne » My Money Blog
- Permanent Portfolio Excel Spreadsheet Data | Crawling Road
- Permanent Portfolio – UK Style | Crawling Road
- Interesting analysis of CD ladders vs investing in the stock market – Retirement – City-Data Forum
- I don’t know | Crawling Road
- Connaissez vous le « permanent portfollio » de Harry Browne ? | Weinstein Forcast Invest
- A flawed design? | Crawling Road
- Why these assets? | Crawling Road
- Why I Own Gold | Crawling Road
- Complicated costs. Simple saves. | Crawling Road
- Person to Person Deadbeat Lending | Crawling Road
about 1 year ago
Craig,
Excellent analysis of the permanent portfolio. Harry would be proud. I’ve enjoyed reading your articles here and your posts at Bogleheads.
Keep up the good work.
about 1 year ago
What do you think of these ideas for boosting the potential return?
1) Replace “cash” with TIPS or a 50/50 mix of TIPS and short term treasuries.
2) Replace Total Stock Market with a small cap index fund.
about 1 year ago
@Max
I’d stick with ST Bonds because they have a known track record for keeping up (more or less) with bad inflation as happened in the 1970’s. TIPS have not been tested under a truly bad inflation scenario as they have only been around 10 years in the US and there has been no high inflation in that time.
As for Total Stock Market (TSM) vs. small caps. I’m a TSM guy. Small caps have had good performance and then really long stretches of underperformance compared to large cap stocks. TSM makes sure I get benefits no matter which side is doing well.
about 1 year ago
“TIPS have not been tested under a truly bad inflation scenario as they have only been around 10 years in the US and there has been no high inflation in that time.”
That’s true, but I would expect gold to do extremely well under any scenario so bad that TIPS fail.
One more question…foreign equity, any role for it? I guess it’s more correlated with gold because of currency effects. Is that why it’s excluded, or some other reason?
about 1 year ago
@Max
Re: TIPS
My main concern about TIPS is whether there are some risks that we can’t see right now that could impact the role of the cash portion in the balance. While they will probably be as OK, I’m not willing to make the switch personally. The cash is to buffer recessions and help out in deflations. It’s never going to provide a lot of returns whether you use ST bonds or TIPS. IMO. For taxable investors, TIPS are just not tax-friendly enough to warrant my holding them either.
Some people have suggested using TIPS as a replacement for gold. This is definitely NOT recommended. TIPS will never move as hard or fast against high inflation as gold will.
Re: Foreign Equity
You can hold some foreign equity, but don’t go crazy. In my 25% allocation about 5% of the 20% was in the EAFE Index. This actually hurt my performance this year because international stocks did worse than the domestic US market. You got a double whammy as the EAFE index plunged and the US dollar recovered hurting the returns.
about 1 year ago
Interesting numbers.
My first reaction was that they seemed too good to be true. Not everybody has an investment horizon long enough to include two gold bull markets, so I quickly ran your numbers for the period 1980-2000.
Amazingly, even then the numbers were very respectable. Good work!
about 1 year ago
My math skills are as bad as my English though, so you’d better double check it.
about 1 year ago
@Pres
Hi Pres,
Your numbers are probably right. I’m going to do a decade by decade breakdown in the near future and highlight some market happenings and how the portfolio responded to each. It should be interesting.
about 1 year ago
The numbers speak for themself. Thanks.
about 1 year ago
I compared table results of your permanent portfolio to the open ended mutual fund PRPFX. Totals from 1983 -2007 (25 years) – your permanant portfolio 209.6 total return and PRPFX 174.17 total return. I have noticed depending on what time periods you use PRPFX and the 4×25 portfolio are generally pretty close in returns.
about 1 year ago
Great work. I am very interested in the PP. I have just read Harry Browne’s Fail Safe Investing book. I then re-read the book for any info I mught have missed. Keep up the great work.
about 1 year ago
Azjimbo,
Besides reading his book Fail-Safe Investing, you should also consider listening to his archived radio podcasts that I have posted here. They contain a tremendous amount of detailed information on many investing topics not specifically covered in his book.
about 1 year ago
What is your source for the annual returns for gold?
about 1 year ago
Hi Greg,
I grabbed my prices from this site:
http://www.finfacts.ie/Private/curency/goldmarketprice.htm
Then I kept it up to date in my own spreadsheet. I use the same spreadsheet to work out annual gains/losses.
Keep in mind that gold in the US was price controlled more or less until 1971. Data before 1971 is going to show “zero” or so real growth which is correct. The dollar and gold were linked so therefore they didn’t move against each other.
This leads into another subject about gold which I’ll put in the FAQ. But the basic idea is gold is not going to provide real returns over time. It will simply match inflation. However, if used in a portfolio with regular rebalancing the price swings are an effective way to show “growth” by banking the gains and buying back into it again when people have moved into some new assets as the economy shifts. Hope that helps.
about 1 year ago
I understand using 1972 as a start date for returns because that was the ended of the fixed gold/cash exchange rate. Has anyone looked at data from further back with the following allocation?
50% Cash
25% Stocks
25% Long Term Treasuries
This would be a roughly equivalent portfolio. I have no idea where to find the appropriate data.
Cross-posted at: http://www.bogleheads.org/forum/viewtopic.php?p=405250#405250
about 1 year ago
Ryan,
I had discussions with John Chandler who was Harry Browne’s publisher about a lot of this. 1972 is the date I generally use because most of our data that is easily accessible starts around then and yes that’s when the gold standard was broken internationally. However John Chandler discussed about in the late 70’s when Browne, Coxon, himself, and others started working on this idea how they went back decades and even paid to have computer analysis of the data done for them (which in the late 70’s was probably quite expensive and extraordinary for someone to do). Not only this, but they looked at economic history that drove asset classes as well.
There is data that goes back to 1926 or so, but the gold prices were fixed and it’s hard to say exactly how things would have worked out in the strategy. Unfortunately investing is not an exact science and political and economic climates can have large effects on the outcomes. This is what makes backtesting of strategies so dangerous. It’s easy to come up with a high-performing asset allocation in hindsight. But we really don’t know what would have happened at the time if those asset classes were available for investors.
The advantage of the PP strategy is it’s simple, widely diversified based on sound economic principles, battle-tested through good and very bad markets, and has a track record of providing reasonable growth while protecting capital. It’s not going to be the hottest performer over any one period. But over time I think it stands a good chance of being a reasonable way to invest and grow one’s money.
about 1 year ago
apology for my ignorance but i have a few questions to help me get started
1) specifically, how do i invest in each of the 4 categories ? hopefully there are online brokerages that offers all 4 types and the flexibility to move assets between them.
2) timing for each of these categories.
thanks,
dbmd
about 1 year ago
Is there a way to work this portfolio into a taxable account? I could see the distributions from the LT Bonds and ST Treasuries would kill you tax wise. Also, paying 28% taxes on your gold gains (during rebalancing) isn’t so great either. I wonder if I would be better off with just using the retail mutual fund PRPFX. It does involve manager risk and higher expenses but offers a very tax efficient version of HBs 4×25 portfolio. What do you think? Thanks.
about 1 year ago
DBMD,
“1) specifically, how do i invest in each of the 4 categories ? hopefully there are online brokerages that offers all 4 types and the flexibility to move assets between them.”
You may want to download the fail-safe investing e-book which explains this in detail. Also check out the FAQ section on this site where I have two FAQs up on stocks and bonds. I will have other FAQs done in the near future.
“2) timing for each of these categories.”
I can’t predict the future so can’t offer you any advice on timing. The markets are very choppy now so I understand your concern. At any time you’re going to have one asset doing well and one doing poorly. It’s just how the portfolio works.
about 1 year ago
Todd,
“Is there a way to work this portfolio into a taxable account? I could see the distributions from the LT Bonds and ST Treasuries would kill you tax wise. Also, paying 28% taxes on your gold gains (during rebalancing) isn’t so great either. I wonder if I would be better off with just using the retail mutual fund PRPFX. It does involve manager risk and higher expenses but offers a very tax efficient version of HBs 4×25 portfolio. What do you think? Thanks.”
Taxable investing is tough for any portfolio. Yes the LT bonds are taxed, but at least they aren’t taxable by the state where you live. As for gold, the 28% is also higher than I’d like, but because it is relatively infrequently balanced and doesn’t produce capital gains or interest it is not as bad as one may think.
The PRPFX fund is very tax efficient though and has the highest rating from Morningstar for tax efficiency in a conservative allocation fund if I recall. So that is a possibility as well if you can accept the manager risk.
Taxes are always a drag on performance, but sometimes you have to absorb the pain to solve a larger problem. For instance many people cite tax-free munis as the way for taxable investors to hold bonds. But there are market risks that wipe out this tax advantage (see my Bond FAQ). In 2008 for instance Muni bonds did relatively poorly compared to treasuries. Any tax advantage that existed for munis was utterly destroyed by the large spike in LT bond prices which saved the portfolio during that year.
about 12 months ago
Thanks for your extremely intelligent and interesting blog and especially for your valuable comments on the permanent portfolio.
May i ask the following
I have constructed a quasi permanent portfolio myself which is comprised of
40% Stocks held in IWRD-iShares world index
15% Gold bullion
5% managed futures
15% cash
15% Bonds
10% Property-simply my home.
My question concerns the best way to achieve international diversification in Bonds and Cash/Currency. I have no confidence in the long term prospects for the dollar, euro or sterling-i hold swiss and euro bonds and cash- the euro because i live in the euro zone but may well be moving to either dubai or far east as the economies here become more moribund with statism, as will Obamas USA. Is there a way to achieve global diversification in bonds and currencies-wish i had been in Yen!-in the same manner as with stocks through iShares IWRD and ACWI?
about 12 months ago
Craig,
You made a calculation error in calculating the average yearly result from the permanent portfolio. This is 9,8% instead of 10%, not a big difference, but I may turn out to be bigger when using longer periods. You don’t want to calculate the average the same way as you calculate the average of the different assets. Instead you want to divide the end amount by starting amount, and deduct from that total percentage gain the average yearly results.
Thanks for your great explanations about the permanent portfolio.
about 11 months ago
To obtain these returns is the portfolio ever rebalanced? If so, how often?
about 11 months ago
By chance do you think that owning a basket of precious metals would be better than just owning gold bullion?
about 11 months ago
James,
Just own gold. Gold is a monetary metal and responds to inflation the strongest vs. silver, platinum, etc.
about 11 months ago
Mad Max,
This assumes an annual rebalance. You can also use balancing bands of 15% on the low side (and buy back to 25%) or 35% on the high side ( and sell down to 25%). The rebalancing bands could work out so you don’t touch the portfolio for more than a year at a time which could significantly reduce tax and transaction costs.
about 11 months ago
HI CRAIG
CAN ONE SIMPLY INVEST IN THE FOUR CATEGORIES AT ONE TIME, WITHOUT DOLLAR COST AVERAGING IN? WOULD THIS BE FOOLISH? AM IMPATIENT, LAZY AND WANT TO HAVE IT DONE! WEARY OF WORRYING ABOUT IT. THANKS
about 11 months ago
Lisa,
Harry Browne actually advised people to just get it over with because you can’t predict the future. Other investors like to dollar cost average in. The risk you run in dollar cost averaging is letting emotions get in the way and turning it into a market timing maneuver. If you have the patience and emotional fortitude to dollar cost average religiously it may be OK, otherwise if you think you just want to get it over with Harry Browne would certainly be on your side with that decision.
When I set my portfolio up years back I just took the plunge and did it all at once. Although I was quite nervous about doing so for all the reasons investors always have (Asset X is too high! Asset Y is too low!, etc.), I found that many months later I was much more relaxed. No matter what was going on in the news I just simply didn’t care too much because the portfolio allocation seemed to be doing what it was designed to do.
With the markets so volatile today I understand the desire of people to move in slowly. I certainly wouldn’t fault them for thinking this way but would just say again that they shouldn’t turn it into a market timing maneuver. Since the future is unpredictable it could very well be that not diversifying could be just as bad as going in all at once.
about 11 months ago
Hi Craig
Thanks for the great blog. One more question? I have six ira’s of different types (between my husband and myself) with two different brokerages and find the gold portion a bit baffling. I understand the advantages of holding bullion and I do hold a little outside of ira’s, but not nearly enough to make up 25% of all assets. Can’t take out portions of each ira to roll into one gold ira either ( logistics nightmare). GLD would make it WAY easier. Is the etf really that bad an idea?
about 11 months ago
Lisa,
If that’s all you can do then it’s better than not holding any hard assets in the portfolio. I’d work to hold some outside the IRA as best you can as well.
about 9 months ago
I you were to set up this portfolio using low cost index funds, what funds would work?
about 9 months ago
Dan,
You need four asset classes:
1) A broad based stock market fund.
2) A Treasury Money Market Fund
3) Long Term Treasury Bonds
4) Gold
The website has descriptions of a couple of these asset classes under the FAQ section. If you wanted to implement it just with ETFs (and there are reasons not to do this entirely), then you could do:
25% Stocks – IShares Russell 3000 ETF (IWV) or Vanguard Total Stock Market ETF (VTI)
25% Long Term Treasury Bonds – iShares 20+ Treasury Bond ETF (TLT)
25% Treasury Bills (Treasury MMF equivalent) – iShares short Treasury bill fund (SHV) or SPDR short treasury bill fund (BIL)
25% Gold – iShares Gold ETF (IAU) or SPDR Gold ETF (GLD) or ZGLD (From Bank of Zurich)
It’s better to own the bonds directly to save on fees and eliminate more layers of people. The gold is also best held in segregate storage but this has some logistical problems for people.
about 9 months ago
These returns don’t include any broker fees or purchase fees. right?
about 9 months ago
Thanks for the great article, but I have one question:
Do these historical returns include interest/dividends? If not, then what would the returns look like if dividends were included? (I suspect they’d be much better
thanks again
about 9 months ago
two more questions.
how often does this portfolio re-balance itself? Once a year?
AND,
given the balance between inflationary allocations (gold and stocks), and deflationary allocations (short-term and long-term treasuries), how does this portfolio stack up if one uses alternative investments, or a basket (for example, instead of simply placing 25% in Gold, what about dividing up that 25% allocation among Silver (SLV), food commodities (DBA), and oil (USO))? Does this added diversification improve or hurt expected returns.
This is my first exposure to the Permanent Portfolio Theory, so I’m pretty excited about it. Thanks!
about 9 months ago
Dan,
The returns (like most historical returns you see) do not include fees. Generally you will want to subtract about 0.10% a year for a stock index fund. Index mutual funds generally have no fees for deposits or withdrawals (unless you are doing excessive transactions or holding them for too short a period – in other words trading them).
Bonds can be held directly and incur no annual fees. Although there is a small commission to buy or sell, it is negligible compared to face value of the bond and the fact that you are only buying and selling each bond once every 10 years or so.
Treasury MMF are also in the 0.10% range if you stick to a company like Vanguard. Or will be in that range if you use a T-Bill ETF like iShares Ticker SHV or SPDR Ticker BIL.
Gold will have a commission for buying and selling usually about 2% each way. Plus there may be a nominal fee to store it at a bank if you decide to use a safe deposit box, etc. The fees for this type of service are sometimes even included free with some bank checking accounts as part of the package. If you use an ETF the expense ratio is about 0.40% a year. Segregated storage in a bank can be about 1% which is quite steep, but there is some convenience factors built in and banks offering this service will sometimes not charge commissions on bullion trades.
Now if you use ETFS for everything then yes you’ll pay commissions on all transactions. But if you are doing bulk purchases and limiting your trades you can contain your costs. A discount broker may charge $9.95 for an ETF trade up to a very large amount so as a percentage of the transaction you can keep the costs very low.
Overall I estimate portfolio maintenance fees to be in the 0.25-0.50% range each year. Probably closer to the lower end of that range. But you can be more conservative and take off 0.50% a year from the CAGR. This is still a reasonable expense for an investment portfolio.
The biggest benefit is the portfolio does not have heavy turnover. So once you set it up it generally requires very little tinkering to keep it in balance which saves on commissions and taxes.
about 9 months ago
Mikem,
The returns are total returns which means interest and dividends are included.
Rebalancing is when an asset is 15% of your portfolio or less or 35% and above. When something hits 35% of the portfolio you sell it down to 25%. When something is 15% or less of your portfolio you buy it back up to 25%. You can look at the portfolio once a year or so to determine these percentages. If they are within the bands then you need not do anything to adjust it. If these bands are too wide for you, then you can make it 20%/30% but just be aware of the additional costs you may be incurring on the transactions.
Re: Dividing up the gold allocation.
This question came up to Harry Browne many times. In fact one of his radio shows addresses it:
http://www.crawlingroad.com/finance/harrybrowne/radio/04-10-24.mp3
The short answer is: No, don’t do this. Commodities move differently and for different reasons than gold. Silver is more of an industrial metal and not a monetary metal so it too moves differently than gold. Gold has attributes of a commodity so it can move for the same reason commodities do. But gold also has attributes of money so it can move for reasons that commodities don’t. Gold reacts very powerfully to threats to the dollar. You saw this in 2008 where commodity funds lost 50% or more of their value, but gold went up about 5% for the year. So you want to hold gold for the permanent portfolio. Anything else is considered a speculation.
about 9 months ago
Thanks Craig!
Mikem
about 8 months ago
Browne used Swiss franc bills or bonds as well as US bills and bonds. PRPFX does this as well. Did Browne change his allocation later on? I read him in the easrly 1970’s and a bit later.
about 8 months ago
Swiss francs were taken out of the portfolio by the time Browne wrote his 1987 book “Why the Best Laid Investment Plans Go Wrong”. The gold in the portfolio took over the function of inflation protection that the Swiss Franc once shared. Also, in 2000 the Swiss completely broke from the gold standard so even he Swiss are on a full fiat currency standard now and open to the same risks of inflation that everyone else is with over-printing of money (although the Swiss may be much less tolerant of this behavior).
about 8 months ago
Well, Like all the others.. It’s all in how you want to Look at it..
You note that The Total Bond Fund only did $142k and change? But you don’t show a Tot.Bond Fund, just ST and LT..
I show just owning LT Bonds be worth over $243k = 143% by 36yrs = almost 4% apy
but you failed to Compare to other Bonds such as Muni’s, Global And EMD’s..
TGBAX has been the Little Secret among pro’s for their own $..
And Keeping 25% in Cash? I don’t think so..do you really think a person with $1 Million is going to want to let $250k sit in a MMkt account? Or ST bond? S/B/at the Least In a Muni..
And All this Boggleheads and Indexing is a Cult.. that Indexing DOESN’T Work Nearly was well as other methods..! Example > btwn 99-08′ a 50/50 Index port has a $11,000 Tot Value vs a 50/50 group of 4 Bal. Funds is worth over $21,000! ( FPACX,OAKBX, PRPFX & PRWCX ) And the Indexer’s/Boggleheads and Jack Boggle are Still Licking their Wounds.. after last yr.. and for the past 10 yrs and are quick to Blame everyone else..
Sorry, But For Active Worlking People? Own nothing But Balanced Funds and Let those Pro’s Fight Wall Street and after Retiring? 50% In Bal. Funds and put the Rest in Bonds Like Bill Larkin at Cabot Mgt. Does for their Clients..( In 08′ BF’s Lost ave -14%, but the other 50% in Bonds Made over 17% = +1.5%)
If you must play Indexes? Only Play the VWINX At Vanguard.. (50%) and keep the other 50% in LT Bonds, Global and EMD’s.. and Keep 10% in COH in ST Bond Funds.. to buy on the Dips/Corrections or Crashes, like last yr was VFITX or VSGBX and this Yr it’s been in FFRHX and VFSTX.
And Do you really Beleive in using Past Performance? Guess what? BoggleHeads Don’t..Nor does Boggle , it’s only 25% of the Equation.. Bunch of hypocrites that Use Past Performance to Push their Theroies , but then will say things like past Performance Won’t Necessarily Reflect Future Performance…
You Get What you Pay For.. With all the New Investing Tools from ETF’s to Leveraging, the Amature Hasn’t got a Fair Chance anymore, If you don’t have a Min. of $500k, then go the Cheap Route mentoned above, but For Most Investors, we do , thus Hire a Good Pro/Firm and you will do just fine..You can either pay Funds the ave of 1% apy or pay a Firm to do better than you the same .. It’s Upto you..
You can keep your Large Cap or TSM-Equities on a Direct Basis… The Markets Have gotten so sophisticated, only Fellow Pro’s can Play that game and Shirley not any Amatures.. Either Own Managed Bal. Funds or Hire a Decent Pro.. or Firm..
Of course, Wall Street doesn’t want everyone to use AMBF’s ( Active MgeBalFunds) since they would have to try to Con Fellow Pro’s and that’s not a good thing.. Most make their $ off Amature Investors..not the pro’s…
Also Your Port. shows a 10% apy? But the LT Bond shows a 9.6% apy?
Seems to me.. the LT Bond Is the better way to go for Both Safety and To be able to sleep at nite….?
As for GOLD? Since 1996? thru 03′? It did Terrible..My Balanced Funds did the same and Added Bonds Did Better..
Own Gold Coins? Yeah Right… Where you going to Keep them? Pay $100/yr in a Bank SDBox?
about 8 months ago
Limoman,
My replies are inline:
”I show just owning LT Bonds be worth over $243k = 143% by 36yrs = almost 4% apy but you failed to Compare to other Bonds such as Muni’s, Global And EMD’s..”
The Permanent Portfolio idea does not advocate holding any type of bond but US Treasuries. This avoids credit and default risk present in Munis, global bonds and Emerging Market Debt. As 2008 showed, when the markets are really hurting people want US Treasury Bonds. Not bonds from California, not bonds from France nor bonds from Brazil. US investors especially don´t want to buy foreign bonds because it introduces significant currency risk. The fall of the dollar the past several years is the largest driver behind foreign bond performance. If this trend reverses it could severely hurt US investors holding foreign bonds.
”And Keeping 25% in Cash? I don’t think so..do you really think a person with $1 Million is going to want to let $250k sit in a MMkt account? Or ST bond? S/B/at the Least In a Muni..”
I actually know very wealthy people who keep a good amount of funds in cash. When you obtain a large amount of wealth the name of the game is not losing it, not trying to grow it taking huge risks. So cash is used much more often for high net worth people than you may think. It also allows them to invest that money at more attractive stock market prices when severe downturns happen.
And again as 2008 has shown, when the markets go crazy having cash on hand is an excellent diversifier. People with cash and LT bonds last year did very well. They were able to use that money this year to buy stocks at prices not seen in 10 years. Cash can add tremendous return to a portfolio for such a ”low return” asset when used correctly.
”And All this Boggleheads and Indexing is a Cult.. that Indexing DOESN’T Work Nearly was well as other methods..!”
This has been shown to be false in so many studies that I don´t have time to list them all here. The important thing to understand is that the index IS the market. Somewhere around 90% of all trades each day happen between professionals. One professional decided it was a good idea to sell a security and another professional, using the same information, decided it was a good idea to buy that security. The fact that two equally educated and informed traders can reach conclusions that are 180 degrees apart tells you that the information they are acting on is random noise.
”Bal. Funds is worth over $21,000!”
Actively managed balanced funds have not only higher expenses, but significant manager risk. Meaning that the manager can decide to do something very risky with the fund´s money that could pay off big, or be a huge disaster. Over the past few decades index funds have handily beat more than 80% of all actively managed funds at least (it is probably well over 90% but I don´t have my figures here now). This is being generous because it doesn´t include the actively managed funds that were closed down and simply vanished through the years.
Lastly, there are thousands of actively managed funds out there. You simply can´t predict which ones are going to do the best going forward. Actively managed funds last year got creamed in the markets. Their managers weren´t able to add any real value to investors in avoiding the damage.
”Sorry, But For Active Worlking People? Own nothing But Balanced Funds and Let those Pro’s Fight Wall Street ”
See above. The pros on Wall St. are trading against each other and reaching opposite conclusions. They offer zero value to an investor trying to beat the market. They are the market.
”And Do you really Beleive in using Past Performance? Guess what? BoggleHeads Don’t..Nor does Boggle , it’s only 25% of the Equation.. Bunch of hypocrites that Use Past Performance to Push their Theroies , but then will say things like past Performance Won’t Necessarily Reflect Future Performance…”
I can only use past performance to disprove and idea, not prove it. But since nobody can tell me what is going to happen in the future, it´s all we´ve got.
The past performance of the Permanent Portfolio has shown that it has survived very bad inflation, good markets, sideways markets and now deflation. The worst loss it had was very low compared to the alternatives. It also provided moderate growth with low volatility. All of this was achieved without having to time the markets or hire some managers to trade your account for high fees. It may not be perfect, but it´s a heck of a lot better idea than most investing advice you run across that is chasing the latest hot peformer or hot manager.
”Hire a Good Pro/Firm and you will do just fine..You can either pay Funds the ave of 1% apy or pay a Firm to do better than you the same .. It’s Upto you..”
Pros on Wall St. have no better chance at beating an index than an individual. For this lower performance you are going to pay very high fees. Wall St. pros offer no value to an individual and should be avoided at all costs.The performance data on active managers is abysmal. Bogle was right about indexing and will continue to be right about it. Indexers reap the research and expenses Wall St. analysts provide by just owning what everyone else owns and not worrying about it any more.
”Also Your Port. shows a 10% apy? But the LT Bond shows a 9.6% apy?
Seems to me.. the LT Bond Is the better way to go for Both Safety and To be able to sleep at nite….?”
LT Bonds did very poorly during the high inflation of the 1970s. If that inflation returns again you need an asset like Gold to offset the losses.
”As for GOLD? Since 1996? thru 03?? It did Terrible..My Balanced Funds did the same and Added Bonds Did Better..”
Well I hear this all the time as a reason not to own gold, and one I used to believe myself. But the data stands on its own that Gold can under certain conditions be a life saver in a portfolio. For instance, since the early 2000’s Gold has done perfectly fine and carried the portfolio for nearly the past 10 years. Gold may very well do poorly again in the future just as it has in the past. For now though I´m happy to harvest the gains and use that money to buy more stocks and bonds. And when gold does poorly in a balanced portfolio other assets can carry the weight. No asset works well all the time. Just ask stock investors the past 10 years.
The portfolio being described here holds a balanced allocation between stocks, bonds, cash and gold and holds them all the time. It does not try to time the market or select hot assets. It also doesn´t rely on expensive and ineffective money managers. It may not be the portfolio for you, but it has a couple decades of empircal data behind it at this point and has worked just fine.
I don´t advise anyone to touch actively managed funds. Overall they have a very poor track record compared to indexing, and even worse when compared to the Permanent Portfolio allocation. I wouldn´t put a dime in them personally.
about 7 months ago
Hello Craig,
Thank you for your hard work. It’s very valuable to me.
I can’t find the LT data. Where do you pull your LT data from?
The Simba Spreadsheet on the Diehards Forum where to refer seems to only publish:
Tamasset Spreadsheet 1972-1986
Vanguards Long Term Treasury(VUSTX) 1987-2008
However, the Vanguard VUSTX has only +22.52% for 2008 and not +33.4% like mentioned here.
I could find another fund, the Barclays 20+ Year Treasury Bond Fund, but even here the returns for 2008 are only +28%.
Seeing forward to your reply
about 7 months ago
Well, Hope this Helps ….
Before Retiring, The Company I was with had some of the Top Investment People & Firms in the Business as Clients and Advisors… an After yrs of Serving them, we developed good relations, had a List of clients to recommend to other clientsfor vaous needs and got alot of good advice and guidence in return for doing that and One of the most consistant suggestions when the Market gets ” Questionable was to Move Into Treasuries..and when things Look Good? Move into Corporate Bonds..” ( We didn’t have Leveraged/Inverse Funds for the rest of us to buy back then)
I CK 4 SOURCES EVERY 4TH QTR for the Following Yr for my ST $ ( I keep 3 yrs of Cash to pay my est. bills in retirement)
General Consenseous for going into 2008 was the same as for 2007:
VSGBX
VFITX
VUSTX
To Levergage Treasuries was Pro Funds// 125% , $5k Min thru Broker and $15k direct. Min. Cost ( for 08′ it was it’s Gov’t Plus of GVPIX and I got 27% out of it. b4 selling it)
For going into 2009 it was VFSTX, FFRHX and to Short Treasuries.. Using Pro Funds ( RRPIX = 36% YTD )
If you find some good sources to follow that are good on doing this for Short Term $, you can also do the same for your LT..if you “read btwn the lines”…
I moved over 50% of my $ out of my Equities and Other Bonds into VFITX and VUSTX and another 20% into the Pro Funds-US Govt. Plus GVPIX..
Got the Heads up on “Go Treas. for Bear Mkts.” for yrs from my Limo Clients and I ‘ve Been doing things like this Since 99′ and did about the same ( Going into Treasuries) for the Previous Bear as well.. ( 00-02′).. It worked Great then , so I figured why not this time around?
For 09′ it was Gen. Con. to go 75% for the 1st 6mos in FFRHX, 25% In VWEHX and then move it into VFSTX and.or your usual Bond Funds you have in your Port,,, Keep in mind, Institutions Run the Show and they aer about 6 mos ahead of the curve.. Thus Own the funds for the 1st 6 mos to get most of the run up and then bail..take your $ off the table and your profits and go back to your traditional funds .. Don’t get greedy.. is the most common mistake..
We gave this heads up manytimes in 99-01′ and again in 07′ thu 1st qtr of 08′ in the M* Boards and to go Corp. for 03′/04′ and again for this yr .
2 of the 4 Also Recommended Going EMD’s for Bull Markets or for the LT. B&H many yrs ago and still advocate 7.5-11% allocation in them..FNMIX, PREMX and TEGIX are most noted.. and their Yields are just Great as well.
Hope this helps
about 7 months ago
Marc,
The LT historical data is sourced from Simba’s spreadsheet from the Diehards site which used the Ibbotson data for 20 year bonds I believe. You can also see another independently generated spreadsheet here:
http://crawlingroad.com/blog/2009/05/26/permanent-portfolio-excel-spreadsheet-data/
The Vanguard LT Treasury bond fund has a much shorter duration/maturity than the long term bonds advocated by Browne for the Permanent Portfolio. While Browne advocated holding LT Treasuries with 25-30 years maturity and selling them when they reach 20 years, the Vanguard LT Bond fund has an average maturity of only around 17 years and duration around 11 years. A 20-30 year bond (or bond fund like TLT that uses bonds 20+ years) will have a duration somewhere around 15 years. This means that that for every point in interest +-1% the Vanguard bond fund will move +-11% but an individual bond (or the TLT bond fund) will move +-15% (duration is roughly how much the fund moves for each percentage move in market interest rates).
In the case last year if you owned bonds in the 25-30 year range you had returns greater than 30%. If you owned the Vanguard LT bond your duration is even shorter than the TLT fund and you only were up 22%.
Which gets back to the issue of the best kind of bonds to own for the portfolio strategy. They are in order:
1) 25-30 year LT Treasury Bonds owned directly by you at either a broker or Treasury Direct purchased at auction or secondary market.
2) The iShares TLT fund
3) The Vanguard LT Treasury fund
The Vanguard fund is a distant second though to the first two choices.
about 6 months ago
Hi Craig. Thanks for all your hard work on this.
I was wondering, did Harry have any insights on Roth vs. Traditional retirement accounts? My employer offers both Roth and Traditional contributions, and I’m a bit confused as to which one to select. I also live in a high tax state (California), so I don’t know if that would make a difference.
Thanks.
about 6 months ago
Roth vs. Traditional retirement accounts
Re: If Don’t need the IRA Deduction and want to Pay taxes as you Go, Load up the Roth instead.. Many are converting $ out of their IRA’s to Roths and paying More Taxes now vs Paying as they went yrs ago..
And I know very few who take the IRA and invest the Tax Savings as well, they spend it.. and I think that is Exactly what The Gov’t figured most would do when they created that IRA garbage.. A bait and Switch deal also.. “You’ll be paying Less taxes when your Retire” BS… You load up your IRA with BONDS right? But what happens when you have to start taking the $ out of those Bonds? You get Hit big time!
They also know top end Investors will have more $ when they retire and the Smae or higher Incomes and thus be paying the same or higher taxes with Less Deductions…( Mortge, etc)….
I know I and my friends are now..
about 6 months ago
Turns out my retirement account will only allow me to invest in mutial funds, not ETFs or stocks. Any advice on what mutial funds may fit the criteria?
about 6 months ago
well, Not sure this kind of Port will continue to do very well into the next Decade, but it has done me right the past one..
75% in: Global ( TGBAX), EMD ( FNMIX) , GOLD ( USAGX ) , VIPSX ( TIPS), GNMA ( TGLMX ) and VBMFX and the new PUDGX
25% in ST Bonds on a yr-yr basis.. 07′ was VSGBX & VBISX, 08′ Was ST. Treas. and this yr it’s been in FFRHX.
And taking Hints from also owing PRPFX & HSTRX.
of course, I only need less then 3% from my Savings funding my Retirement..Which was the Plan to have before retiring at age 55.
While working and after going thru all that Indexing and performance chasing business, it was nothing but Letting the Pro’s take care of things:
VWELX and VWINX = a 50/50 ave mix.
it forced me to Save More and Live on Less..
Which turned out for the best for me and the family..
and gave up having “Illusions of Grandeur” of frocing the Market to make up for my short Commings to allow me to spend more and save less routine.. It didn’t work for me, nor my friends..
Just put 25% + out of your income btwn Into your Home and a Retirement Port and you’d be fine.. Just Downsize the Old Homestead and Put the Tax free $ left over from it into your Retirement Savings and you’ll be Just Dandy..
And only Let the Wife have 1 Credit card with a $200 spending limit per Charge and convience the Kids you’re always broke and can’t afford to pay for their College, that’s their job.. They’ll do better in HS to get Scholorships..
about 6 months ago
If you can access Vanguard then you can get a close representation of the portfolio. The LT bonds are not as good as buying directly, but if it’s all you’ve got for bond funds then it’s much better than what most other companies offer.
Stocks: Vanguard Total Stock Market Ticker: VTSMX
Bonds: Vanguard US Treasury LT Bonds: VUSTX
Cash: Vanguard Treasury Money Market Fund
Gold: Hold outside of the retirement fund if you are able. There are no really good mutual fund options that I’m aware of for this portion.
If you wanted some small amount of international stock exposure you could consider adding a little Vanguard FTSE All Word Ex-US (VFWIX) or Vanguard Total International.
Finally, you could just buy the commercially run Permanent Portfolio Fund (PRPFX) which follows a version of the portfolio outlined on this site that has similar returns, but a higher expense ratio than using Vanguard.