EDIT: Contains corrected final 2010 numbers from Morningstar. Rounded to nearest tenth.

Another year wrapped up and the Permanent Portfolio returned +14.5% to the faithful. Let’s look at the popular asset classes first:

S&P 500 +14.4%

Total Stock Market Index +17.4%

EAFE International Index +7.6%

Emerging Market Index +15.9%

Commodities Index +11.9%

Real Estate Investment Trust Index +29.2%

Treasury Inflation Protected (TIPS) Bonds +6.2%

Corporate Bonds +9.2%

International Bonds +0.1%

Total Bond Market +6.5%

Now we’ll list the components of the Permanent Portfolio Allocation if you chose to build it only with Exchange Traded Funds (ETFs):

25% Vanguard Total Stock Market ETF (Ticker: VTI) +17.4%

25% iShares 1-3 Year Short Term Treasury Bond ETF (Ticker: SHY) +2.3%

25% iShares 20+ Year Long Term Treasury Bond ETF (Ticker: TLT) +9.2%

25% Gold Price appreciation for the year +29.2%

2010 End of Year Result: +14.5%

Stocks

In early 2010 I heard many reports of the “double dip” recession that was imminent. Well I guess by double dip recession they really meant up almost 18% for the year.

But these returns didn’t happen without some nerve wracking moments. Through the first half of 2010 stocks were actually in the negative territory as the market fell. But investors that ignored the market gurus and remained invested according to their asset allocation pulled in solid profits by Q4 2010.

Vanguard Total Stock Market Returns 2010 - stockcharts.com

Bonds

Long Term Bonds had a bad year in 2009 as the stock market recovered and the panic subsided. Despite the -22% drop that year, this year bonds posted around 9.2% gains. In fact, earlier in the year they were up over 20% as the stock market dropped into negative territory. But, as things settled down, the bond interest rates went back up and the prices fell. Still, a 9.2% return is better than the 0% people are getting staying in cash on the sidelines as many experts advised them to do.

Long Term Treasury Market Returns 2010 - stockcharts.com

Cash

Well cash is a stability part of the portfolio and it pretty much was…stable. Shocking, I know. If you use my modification to the Permanent Portfolio (using short term Treasuries mixed with a Treasury money market) you posted better returns than straight cash though. The chart exaggerates the actual price movements for the cash. The actual swing if you look at the chart was pretty small fluctuating between 0 and +2.5%. If you use the more “pure” Permanent Portfolio form of cash (in very short term Treasury money market like ETF Ticker Symbol SHV) then the swing was in the 0 to 0.1% range through the year.

Short Term Treasury Market Returns 2010 - stockcharts.com

Gold

The asset that people love to hate gave another year of love to those that hold it. Up around 29%, gold turned in a strong performance and hit new non-inflation adjusted highs of over $1400 USD an ounce (the inflation adjusted high of the early 1980s is over $2200 an ounce). Frankly, I was surprised that it would have done so well with all the talk of deflation in the air. But again, for those that ignored the market prognosticators, gold turned in a banner year. How high can it go? I have no idea, but it’s interesting to watch. The problems with the Euro over the summer and the falling of the US dollar gave this asset a real tailwind towards the latter half of the year.

Gold is getting a lot of attention and that’s never a good thing. Be sure to keep this asset rebalanced if you haven’t done so already.

Gold Market Returns 2010 - stockcharts.com

Conclusions

If 2010 showed anything, it’s that we should hold all the assets all the time in our portfolio and not try to time the market. Stocks did great, then did poorly, then did great. LT bonds did great and then fell down. Gold had a great start, fumbled some, and then laid down the law on the other assets. Cash is just cash and provided a stable home for our portfolio as always.

But all the assets were up, what’s going on?

With the Permanent Portfolio it is often the case that you’ll have some assets doing well and at least one in the tank. So why are they all up this year? Well the markets are not a light switch, it’s more like a rudder on a giant ship. The assets are going to move as the markets think and there is not going to be some pre-defined moment in time when something must go up and another must go down.

But even though the assets are all up, it’s still clear that the diversification is moving them around. The LT bonds were up over 20% earlier this year and then fell sharply as the markets recovered. So there have in fact been pretty big swings in the assets individually. And going forward we’re going to see these kinds of swings in all the assets because that’s what they always do. In 2010 they were all profitable and I’m not going to complain, but in 2011 one or more could be negative. However the overall long term trend of the Permanent Portfolio is upwards so I don’t concern myself too much with worrying about these things. Also, as always, don’t look at the assets in isolation. Only total portfolio matters!

Here’s how the whole portfolio looked in aggregate (stocks in red, LT bonds in blue, ST bonds in green and gold in purple):

Stocks, Bonds, Cash and Gold 2010 - stockcharts.com

It really pays to ignore the market noise and hold all the assets all the time. I don’t know what will happen in 2011, but I do think that diversification is the only way to deal with it. The Permanent Portfolio turned in another good year even though there was a ton of uncertainty going into it. An investor that just bought into the portfolio in January and left it alone is now 16% richer. These profits happened without any market predictions or gurus. And it happened in a much safer way than concentrating bets on one investment vehicle and hoping for the best.

Stay rebalanced, keep diversified (in stocks, bonds, cash and gold), keep costs low and ignore market noise. It’s amazing how such a simple approach can work so well.

Have a great 2011!