Thanks for the link to the UK article. I love the inflation measures back to 1970 which I can use for cloning a backtest spreadsheet in GBP. Now if I can find the inflation indexed Gilt returns from 1982 forward for a little TIPS research.

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.”

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/

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.

But if you’ve followed Browne’s teachings to the letter, in the worst case you can flee your home country and build a new future with the gold you’ve stashed in a Swiss bank.

I agree with you. If you live in a country where there is no respect for private property, a propensity to ignore the rule of law, or with governments that have a habit of taking things that aren’t theirs, then the strategy probably won’t work.