The Permanent Portfolio, Investing, Finance and Random Thoughts.
Archive for July, 2009
Permanent Portfolio Questions from the Early Retirement Forum
2 years ago
Over at the Early Retirement Forums, a thread was started on the Permanent Portfolio. I posted a long response to several questions at the time and thought I’d reproduce the reply here as it answers questions I also receive at this site and at the Diehards investing forum.
Common questions are:
How do I backtest gold prices before 1970?
I’m worried about inflation and don’t want to rebalance out of my gold which has done well. Why is this a bad idea?
This portfolio looks like it’s for Doomsday scenarios only. Why should I use it?
What’s the story on the Permanent Portfolio Fund (PRPFX)?
What’s the story on Harry Browne’s simplification of the portfolio idea later?
Why is the Permanent Portfolio allocation different from other asset allocation approaches?
The US is going to default on their debt so I want to own other currencies instead. Is this a good idea?
The portfolio idea is getting a lot of attention. Is that a sign it’s going to blow up soon?
I answer these questions below:
Permanent Portfolio – UK Style
2 years ago
An article in the Motley Fool UK edition looks at the Permanent Portfolio from the British perspective. Instead of US Treasuries the author used UK Gilts (UK Treasury Bonds) and found that the portfolio worked just as well for UK residents as it does for US citizens:
So, for the period from 1972 to 2008 the Permanent Portfolio method delivered the same compound annual growth rate (CAGR) as the equity portfolio but with none of the eye-watering falls. This assumes of course that you rebalanced your portfolio to 25% in each asset at the end of each year.
In fact, this method only experienced two minor down years in 1994 and 2001. In times of major crises, such as the early ’70s and the last two years, gold has proved to be far more effective than fixed interest at boosting returns and maintaining wealth.
I get questions from time to time about implementing the portfolio ideas for non-US residents. But I readily admit my exposure to overseas investing options are limited. However, Browne’s advice generally was to use asset classes based on where you live. Meaning cash in your local currency, bonds from your own government and stocks focused on your home country. Gold is country neutral and should be stored securely (preferably outside of where you live for geographic diversification – although this is not always possible). This author’s research seems to suggest Browne’s advice works as advised at least for UK residents.
What’s most interesting is seeing how his chart of returns for the UK compares to those of a US investor. Notice how the returns fluctuate in relation to the activity of the British economy as it moves separately from that of the US economy (UK stocks may be doing quite well, but US doing poorly. Bonds may be doing great in the US, but poorly in the UK. Etc.). Also notice how the portfolio has typically been able to exceed inflation and provide real returns through some really rough patches for the British Pound.
This is the main reason why non-US residents want to concentrate more on where they live. Their local economy could be booming while the US is in a bust or vice versa. If you live overseas and invest too heavily in US bonds, US Stocks, US Dollars, etc. you could find that the movement of the portfolio is not matching the conditions you are experiencing locally.
Just some food for thought for all of those out there wondering whether the portfolio ideas may apply to non-US investors.
