I think there is an error when calculating the CAGR, he divides by 39 years, it should be 37 years.

In the other CAGR results he takes the right amount of years but not the right numbers to start from e.g 2000-2008 he divides correctly by 9 years but starts at number 2000, I think he should start at number 1999.

Anyway, excellent spreadsheet, thanks a lot!

It is true this past decade has seen negative returns, it was not stagflationary though. Inflation was under control and GDP growth was actually good (except for the past three quarters). The way the government is printing money could usher in a repeat of the ’70’s which was high inflation, stagnant economic growth which is good for gold. Or, as Craig has pointed out to me, we could have stagnant growth with possible deflation ala Japan. In this scenario, LT bonds would excel. The problem is we can all make a case for either of these scenarios, or others, but won’t actually know what happened until after the fact.

I’m a big proponent of this strategy; I just had to get my head around the long-term treasuries instead of munis because of the tax efficiency for people in the highest tax bracket. I am now a believer in treasuries instead of munis.

Ray

Good points, thanks. You may already agree that we are in a period of stagflation as the S&P returned (1.59%) from 2000-2008. The bust started in 2000, followed by a boom in 2003-2007, then a kaboom in 2008. My unstated point is that we are experiencing significant volitility that I suspect will continue.

I came across this site while investigating the Permanent Portfolio fund (PRPFX). I am sitting on a lot of cash (about 25% of my investment portfolio) earning next to nothing and am researching my investment options. Being about 3 years away from retirement, I want to protect what I have but also make a reasonable return. And the historical returns for PRPFX looked good.

I have about 25% in large-cap mutual funds and stocks, 10% in mid-caps, 5% in emerging markets, 10% in international, 25% in bonds and about 25% in cash. I seem well diversified but want to do something with the cash.

Any suggestions?

You wrote going forward we will see an economic climate more like 2000-2008 rather than post 1972. We very well may, but there are many who fear we are on the verge of another 1970’s era stagflationary environment. Who knows what will happen? By 2020, we’ll know who was right and who was wrong. The benefit of the PP is either way, an investor likely will make money without getting blown out of the water because they bet on the incorrect forecast.

Ray

Thanks for your e-mail and your post here. Yes you are correct that annual rebalancing is assumed which is how most of these backtests commonly seen are done. The actual way to implement the portfolio though is to use rebalancing bands. If one asset is 15% or less you buy it back up to 25%. If one asset is 35% or more you sell it down to 25% and use the proceeds to buy your losers.

If you follow this approach you will need to look at the portfolio once a year but may not make any adjustments at all on some assets for several years.

Transaction costs are a part of any portfolio strategy. The Permanent Portfolio has a couple advantages though because it is simple and holds assets that tend to have low transaction costs and expenses. The stock index fund is typically below 0.20% expense ratio a year and mutual funds do not charge commissions for buying or selling into the fund. Discount brokers do charge though if you are using ETFs which may make the case to not use ETFs for the stocks if you are going to be doing many small transactions such as depositing your savings each month into the portfolio.

Bonds can be purchased either from Treasury Direct or through a broker and once bought carry no annual expense ratios. Since the bonds should be 30 year bonds and sold when they reach 20 years of maturity or so you can go many years with virtually no transaction costs on that part of the portfolio.

Cash should be held in a treasury money market fund. A good fund in this category should also have expense ratios less than 0.20% a year.

Finally, gold does have commissions on sales in some cases and also storage fees. However this is an asset that usually doesn’t require much rebalancing unless inflation is really heating up and causing the price to escalate quickly. It also generates no interest or dividends that can be taxed. You only pay on the gains when you are ready to sell, not when the fund company decides to give you gains at the end of the year.

To help with taxes, the portfolio should be held as best you can to keep the high interest cash and bonds in your tax-deferred savings first. Then, if you have room, put in the stock index to shield the dividends. Finally, you can put the gold in the shelter, although this is not recommended because it has no interest or dividends to shield, but also because the physical control of the asset outside of your retirement policy is probably a good idea.

As a largely taxable investor myself, I am acutely aware of the costs of fees, transactions and taxes on a portfolio. I try to do as few transactions as possible and so far have needed to only do them periodically when one asset has greatly appreciated. There are some trade-offs that need to be made in any investment strategy against lower taxes vs. having the diversification you need to protect your assets.

100% tax-free munis for instance would certainly have a lower tax bill, but they are not a very well diversified portfolio with significant risks. So it is the case that you need to use other assets that do cost more, but give you the protection when you need them. 2008 for instance was not a good year for munis, but was a fantastic year for taxable Treasuries.

All investment strategies will have costs associated with them. But due to the individual circumstances of each investor, it is almost impossible to factor them entirely into a spreadsheet. There are too many variables as to where they are keeping their funds, how much the expense ratios are, if they are able to tax loss harvest, etc. It’s very important to control costs in a portfolio. Anything an investor can do to reduce their annual expense ratios and number of transactions they make each year will save them a large amount of money over the years.

Costs like this are associated with any investment strategy and need to be carefully considered. Thanks for your comments and bringing up this important point.

The annual balances in the Excel file assume the four components of the portfolio are rebalanced annually. If you are going to re-balance, then you need to include the costs of re-balancing within the portfolio. These costs will noticeably reduce portfolio performance over time. Taxes paid on interest and dividends further reduce portfolio performance.

Lastly, I believe the returns from the period 2000-2008 are more representative of future returns than 1972-2008. The market of today is dissimilar to 2000 and nothing like it was in 1972.

These are a few of the factors that will prevent investors from achieving the returns described.

Don’t thank me. Thank Scott Sutton. He did all the work!

Re: SPDR Gold.

It’s better to use something with more physical control of the asset if you can. ETFs are OK if you have no better alternatives. Segregated storage in a bank is best along with some coins in your physical control stored safely (like a safe deposit box or where you feel is appropriate).