Permanent Portfolio Results 2008 – A Disaster Averted
UPDATED: This posting now lists (mostly) finalized 2008 total returns information (interest and dividends included) from the listed stock indices. The final numbers won’t change much.
“The best kept secret in the investing world: Almost nothing turns out as expected.”
– Harry Browne
Investors won’t be forgetting 2008 any time soon. Yet as bad as it was, the Permanent Portfolio survived intact with a profit for the year of about two percent.
The year included oil and other commodities going to record highs. Real estate prices fell at a rate not seen since the Great Depression. Century old banks that were leveraged to their eyeballs blew up and vanished. Iceland, a first-world country, went broke. Bernard Madoff, one of the founders of NASDAQ, admitted his hedge fund was a $50 Billion Ponzi Scheme. The Treasury Secretary and Fed Chairman openly talked about The End of The World As We Know It if we don’t “do something”. That “something” of course meant big bailouts for banks, irresponsible home buyers and automakers (and maybe more — to be continued).
By the time 2008 was over, the markets were down by one of the largest single year amounts since 1931.
Performance Results
The results were brutal for investors in many commonly used asset classes. The numbers below include interest and dividend total returns from Morningstar:
S&P 500 -37.22%
Total Stock Market Index -36.67%
EAFE International Index -41.04%
Emerging Market Index -48.89%
Commodities Index -31.73%
Real Estate Investment Trust Index -41.01%
High Yield Bonds -17.98%
Emerging Market Bonds -10.29%
Treasury Inflation Protected (TIPS) Bonds -2.85%
Corporate Bonds +2.02
International Bonds +2.41%
Total Bond Market +5.13%
As the markets roiled the Permanent Portfolio bobbed and weaved and avoided a knockout. Here’s the breakdown of the results using commonly available ETFs and physical gold price to make up the Permanent Portfolio Allocation:
25% Vanguard Total Stock Market ETF (Ticker: VTI) -36.68%
25% iShares 1-3 Year Short Term Treasury Bond ETF (Ticker: SHY) +6.19%
25% iShares 20+ Year Long Term Treasury Bond ETF (Ticker: TLT) +33.46%
25% Gold Price appreciation for the year +4.92%
2008 End of Year Result: +1.97%
NOTE: If you used the standard Permanent Portfolio “Cash” allocation of Treasury Money Market instead of Short Term Treasury Bonds that asset is up +2.71% for the year bringing to total portfolio result to +1.10%
The best managed mutual funds (and Ivy League Endowments) in the world are down 25, 30, 40, or more than 50% in 2008. The fact that the Permanent Portfolio allocation allowed you avoid big losses in such a bad market is great and gives you a good leg up if the markets recover next year.
Ups and Downs of 2008 Produce an Unlikely Winner
This year started off in inflation and ended in deflation. The first half saw the price of gold up 20-30% higher than it is today reaching an all time high of over $1000 an ounce (not adjusted for inflation). But by October things started to change. Gold was below where it started for the year and the stock market, which had been slowly sliding, began to really plunge. By the end of the month the damage was tremendous for investors.
Also this year credit risk showed up in unpredictable ways. Investors who owned speculative bonds and other supposedly “safe” assets that promised higher than market returns learned first-hand that there is no free lunch in investing .
The winning asset this year was a surprise to just about everyone: Treasury Long Term Bonds. This stodgy asset racked up gains around 30% in a little over a month and wiped out almost all the losses in our stock holdings. This is a remarkable feat considering just months earlier all available inflation indicators were climbing at a brisk pace which is bad news for bonds. Who says bonds are boring?
I can’t think of one prominent investing talking head or market prognosticator who was forecasting Long Term bonds were going to be the winner in 2008. Can you?
A Theory Proven
When the Permanent Portfolio was designed, the creators based it on responding to economic cycles of prosperity, inflation, recession and deflation. Up to this point, the portfolio has endured good prosperity, bad inflation and bad recessions and has grown safely and securely. The only economic cycle it had never been through was deflation which hadn’t been a serious threat since the 1930’s Great Depression.
Well I’m happy to report that 2008 has shown the deflation protection works. While we don’t know what 2009 may bring, we now know that the portfolio weathered all economic threats it was designed to handle so far.
The Permanent Portfolio is now a veteran of all of these scenarios and came out with solid returns and excellent downside protection in turbulent markets. The portfolio helped to preserve its capital which is now available to rebalance back into stocks to take advantage of any gains that may show up going forward.
Time to Rebalance?
One last thing: Have you rebalanced yet to harvest your gains and buy your losers? You should really think about doing that if you need to.
Gratitude
Thank you Harry Browne, Terry Coxon and John Chandler for all the work and research you did into this investment strategy over the years. A special thanks to John Chandler who still hosts Money Talk and is keeping Harry Browne’s message of the balanced Permanent Portfolio alive (get his podcast here). You’ve allowed many people to invest safely and sleep well at night.
Let’s hope that 2009 is kinder to investors than 2008. Happy New Year!
Buy the book and learn to make your own Permanent Portfolio. It’s the best ten bucks you’ll ever spend:
Fail-Safe Investing
about 1 year ago
Craig,
Excellent post. Was interested to see how the PP faired since Jan 1. I changed “horses” in July, so I was fortunate to get at least partial benefit from the PP. Best wishes for continued success in ‘09. Cheers!
about 1 year ago
Hi Wonk,
Glad to hear things are working out for you. 2009 should be interesting and there’s always the possibility of a bad result for the Permanent Portfolio that we can’t foresee. However it really worked this year as designed. Let’s hope the markets cooperate better in 2009.
about 1 year ago
Craig, I am a young worker who has become very interested in learning about the permanent portfolio over the past month. I have been searching out many answers to satisfy my questions on how I would construct it. If I were to do a portfolio based on ETF’s, what would be the preference for IRA accounts? Gold, bonds, then stocks? Thanks.
about 1 year ago
Jason,
I am working on a series of FAQs that cover the stocks, bonds, cash and gold allocations. If you come back in the next few weeks you should start seeing them.
In the interim you want to put in your IRA the funds that generate the most taxable income. So first you want to put in your bonds and cash as they make a lot of taxable interest you want to shelter. If you have room left over you want to put in the stocks which will generate taxable dividends and capital gains.
Finally, if you still have room left you can put in the gold holdings. Gold is less of a problem because it doesn’t generate interest or dividends. You do have to pay a collectible tax though when you sell it but this is not so frequent unless there is a huge price swing in gold. Ideally the gold should be held outside the IRA in physical form somewhere safe. Some IRA custodians can handle storage of gold coins for you, but this may still not be the best option. There is too much to post in this comment, but in summary you want to put into your IRA the assets in this order: Bonds, Cash, Stocks and then gold. Shelter the interest and dividend income if you can.
about 1 year ago
I believe cash should have IRA priority over bonds, unless the extra income would push you into a higher tax bracket. The reason is all of the return from cash is income, while the return from bonds includes capital gains (or losses) which you prefer to take in taxable.
about 1 year ago
Hi Max,
Good points. The one thing I’d add is that you may want to make sure you have some cash outside the IRA for emergency needs so you can access at least part of it without having to pay large penalties if you have to.
about 1 year ago
Personally I don’t consider cash (i.e. money market fund) to have a special emergency status because I can get money from stocks and bonds just as easily. I realize this goes against the conventional wisdom, but I’ve never understood why there’s anything wrong with selling stocks and bonds if you need to!
about 1 year ago
This looks like a good, long term way to invest. What would a person do who has a 401(k), but doesn’t have the ability to invest in these four buckets?
about 1 year ago
Ray,
It just depends on what your 401(k) does offer. I know that many plans offer bad choices for their participants. You’ll just have to see what they offer and try to build it as best as you can according to the allocation strategy. So find the cheapest and broadest stock fund your plan allows. Find the longest term bond fund you can that preferably only holds Treasury bonds. For cash you’ll want to find a high quality short-term money market or bond fund (again with only treasury bonds). For gold you can have an IRA custodian hold gold coins, or you can hold them outside of your retirement plan yourself as they only generate taxable gains when sold as opposed to bond and stock funds which generate interest and dividends all year that you want sheltered.
You may also consider rolling your 401(k) into an IRA if you can. Use the 401(k) to grab matching funds from your employer if possible. You can then use the IRA to buy ETFs, Vanguard or Fidelity index funds to build the stock and bond portion.
about 1 year ago
Craig,
Thanks. We have a stable value fund that has earned ~5% per year over the past 10 years so I’ll probably use that for 75% of my money and use an S&P 500 index fund for the remainder. The problem is I have to keep my money in my 401k since I am an active employee. Don’t have a choice about gold, though.
about 8 months ago
Found what I have been looking for, for several years. Kiplingers first turned me on to
Permanent Portfolio last year, and it did fabulous as you all know. 3 losses in 26 years
is good enough for me. Johnny White, Mobile, Ala
about 6 months ago
Craig,
I had a long post being lost because of a wrong CAPTCHA-code. It’s quite late already so I’ll summarise. I’m in europe and found that euro bonds and indices don’t perform as well as US’s. So i’d like to find, especially, US treasury bond etf’s (both long and short) denoted in euro. Do you know if they exist and do you know there name or isin?
Thanks very much
JDB
about 5 months ago
I am not familiar with european bond funds. Sorry.