The Permanent Portfolio, Investing, Finance and Random Thoughts.
Permanent Portfolio – UK Style
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.
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#3 written by Pres 2 years ago
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#4 written by Clive 2 years ago
IBGL.L and/or IGLT.L are a couple of ETF’s that UK investors might use for the Long Dated UK bond component
http://uk.finance.yahoo.com/q/bc?s=IBGL.L&t=2y&l=on&z=m&q=l&c=IGLT.L,TLT
One approach from a UK investors perspective might be to combine IBGL, IGLT and TLT in equal parts, rebalanced yearly which might throw off a bit more rebalance benefit capture.
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#5 written by Clive 2 years ago
Consider that stocks might average inflation + 6%, Bonds might average inflation + 2% and both cash and gold pace inflation. With 25% of funds in each, the overall average is inflation + 2%.
The 4% average difference between the Pernament Portfolio and Stocks might result in stocks being 48% ahead after 10 years. If then however stocks decline 30% (a typical Bear) whilst PP stays level (as it did in 2008), then the two near realign (1.48 x 0.7 = 1.036)
This excludes the benefits of rebalancing Permanent Portfolio periodically. Typically that rebalance benefit amounts to around 0.5% of the total fund value each year on average when using the conventional 15/35 rebalance trigger levels. That 0.5% of total fund value is equivalent to both gold and cash achieving a inflation + 1% type investment benefit, which uplifts the whole to inflation + 2.5% p.a. average.
Reducing the PP vs Stocks difference to 3.5% p.a. means that after ten years stocks are 41% relatively ahead, which if then stocks encounter a -30% decline whilst PP remains level results in PP being ahead of stocks.
Whilst the concept is simple, the difficulty is sticking with PP over the period of time when stocks pull ahead. Having a $10,000 investment doubled to $20,000 over ten years under PP whilst all-stock investors have seen $10,000 rise to $30,000 is trying. The feel-good psychological factor however kicks in when stock investors then see their $30,000 decline down to $20,000 whilst PP investors remain level at $20,000. From the stock investors perspective they’ve lost a third of their prior paper value $ amount.
In its conventional form PP will likely serve you well over the longer term. For the more adventurous it is possible to better tune PP’s rebalance method and/or uplift cash returns to improve overall investment benefits potentially to better longer term levels than that of all-stock based investments. FWIW I’ve outlined my own such PP tweaks at http://www.jfholdings.pwp.blueyonder.co.uk/
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#6 written by stratton 2 years ago
On countries with rule of law issues:
Mustafa, Khalid and Nishat, Mohammad,Do Asset Returns Hedge Against Inflation in Pakistan(August 25, 2008). 21st Australasian Finance and Banking Conference 2008 Paper. Available at SSRN: http://ssrn.com/abstract=1259576
“This paper attempts to explore an empirical relationship between asset returns and inflation in Pakistan. Using simple Foreign currency, gold, real estate, saving deposits, silver, stock prices, treasury bills, and government securities are considered as asset. To establish the relationship between asset return and inflation the study uses the annual data from 1972 to 2006 using OLS techniques. The empirical results indicate that most of the asset returns are hedged expected inflation. None of the asset returns are hedging unexpected inflation and total inflation. However, the treasury bills and government securities are significant to total and unexpected inflation, but the coefficients are less than one. The stock prices and gold prices neither hedge to total inflation nor expected and unexpected inflation. The reason is that the individuals are used gold for precautionary purpose not for hedging against inflation. For stock prices the reasons may be the people are not interested to invest in risky assets. A matter of fact is that a significant relationship exists between un-expected inflation and assets in various cases but slope coefficients are less than one and therefore are not hedges against inflation. The Pakistani investors are interested in risk free investment and not risky investment.”
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#7 written by stratton 2 years ago
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#8 written by stratton 2 years ago
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I would expect the Permanent Portfolio to be as successful in the U.K. as it was in the U.S.. Both are politically stabile, have open financial markets and strong central banks. And I would expect that countries such as Switzerland, Germany, France and Australia to have similar results.
But I do not think that the Permanent Portfolio to be successful in countries like Russia, Columbia or China. Assuming these countries allow their citizens to make the required investments, their political systems are too volitile.
Perhaps other commentators will perform the analysis and prove me wrong.