The Permanent Portfolio, Investing, Finance and Random Thoughts.
Permanent Portfolio Results 2009 – A Thrilling Ride
Well another year is gone and it was a kick in the pants for the markets. Let’s cut to the chase:
Performance Results
2009 was a great year for stocks. The numbers below include interest and dividend total returns from Morningstar and are rounded to the nearest tenth as of 12/31/2009 (values may change a little as distributions, etc. are counted but the point is still valid):
S&P 500 +26.3%
Total Stock Market Index +28.9%
EAFE International Index +26.9%
Emerging Market Index +68.8%
Commodities Index +16.2%
Real Estate Investment Trust Index +25.5
Treasury Inflation Protected (TIPS) Bonds +10.8%
Corporate Bonds 8.6%
International Bonds 6.7%
Total Bond Market 3.3%
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) +28.9%
25% iShares 1-3 Year Short Term Treasury Bond ETF (Ticker: SHY) +0.25%
25% iShares 20+ Year Long Term Treasury Bond ETF (Ticker: TLT) -21.8%
25% Gold Price appreciation for the year +24%
2008 End of Year Result: +7.8%
In Like A Lion – Stocks
January 2009 came in with the 2008 bear market still raging. By March 2009 the US Total Stock Market index sank -27% since the beginning of the year and almost -56% since the bear market started way back in October 2007. A brutal bear market by any measure and by March many people were thinking it was just going to keep going down:
Total Stock Market January to March 2009
(Chart courtesy of www.stockcharts.com)
Then, a surprise. By March of 2009 the market went on a tear upwards. A powerful recovery happened that took the losses from earlier this year away and ended up almost +29% for 2009. From the March 9th, 2009 low to December 31, 2009 the Total Stock Market went up almost +71% in value!
Total Stock Market 2009
(Chart courtesy of www.stockcharts.com)
As of now, stocks are about the same place they were at the end of September 2008. They are still about -25% below their October 2007 highs and need to go up another 33% to get back to that point. Maybe 2010 will deliver?
Total Stock Market High October 2007 to December 2009
(Chart courtesy of www.stockcharts.com)
Mr. Popularity 2008 Finds Out He Was Just Being Used for His Money – Bonds
What about our US Treasury long term bonds? They were so faithful to us in 2008 and were the only asset to really turn in a stellar performance and prevent losses to the portfolio. Well, the market panic that sent everyone into Treasuries at the end of 2008 quickly faded by January and they began to sink. I mentioned this possibility last year and urged readers to make sure they rebalanced out of bonds if needed and I hope this advice served you well.
As it were, long term bonds went down in price as interest rates recovered (bonds move opposite to interest rates, remember). Long term bonds turned in a disappointing year of around -21%. If investors bought Treasuries in January they hit the peak and took maximum losses. If you bought any time after the January price spike you took perhaps -12% at worse or nearly flat for the year at best.
iShares Treasury Long Term Bonds 20+ Years
(Chart courtesy of www.stockcharts.com)
This is what it looked like if you had just bought Treasuries one month later:
TLT From February 2009 to End of Year 2009
(Chart courtesy of www.stockcharts.com)
Is this an argument for Dollar Cost Averaging into assets? In this extreme, perhaps. But I think most of the time Dollar Cost Averaging doesn’t help too much.
One more chart on this because I thought it was interesting to support buy and hold and not jumping in and out of assets based on how hot they are in the news. If you’d have bought Treasuries in early 2008 and held on you’d be up a few percent even with the price correction early in 2009. The spike in 2008 would have been a great time to rebalance though and offset the stock losses by locking in your bond gains and using that money to rebalance into stocks which had dove in price. But even if you didn’t do this, Treasury bonds are up over 50% going back to the early 2000s just by doing nothing at all.
Long Term Treasuries from 2008 to 2009
A Boring Asset Does Something Interesting – Cash
This was an interesting year for Cash because the portfolio holds it in a Treasury Money Market Fund. Most Treasury Money Market funds ended up paying interest at effectively 0% for 2009 as panicky investors tried to avoid any type of credit risk in other funds. Large companies like Vanguard in fact closed down their Treasury Money Market funds to new investors to prevent having the fund going into a situation where yields could fall to 0% or below. In the 1930s, Treasury Bills did in fact go negative yield at one time as investors were willing to pay someone hold their money safely as banks were far too risky during the Great Depression.
Ultimately our tracking index for Treasury Bills is the iShares Short Treasury ETF (Ticker: SHV) and it shows us up +0.16%. Those that went with my modified Permanent Portfolio cash holding of a US Treasury Short Term Bond fund (Ticker: SHY) that has slightly longer duration instead of a Treasury Money Market Fund were up around 0.25% or perhaps a little better. Still nothing to write home about. Here is the chart for the SHY ETF:
Short Term Treasuries 2009
(Chart courtesy of www.stockcharts.com)
A Shocking Performance – Gold
Finally we have gold. This asset received a troubling amount of attention this year (I get very nervous when people are talking too much about any one asset in a positive “it can’t be stopped!” kind of way). This year gold set new price highs, but not in real terms compared to the 1981 peak. In 2009 gold went to $1200 an ounce and has been comfortably settled above $1000 an ounce for the latter part of the year. In real terms, the gold price in 1981 still has it beat as inflation adjusted the price then was over $2000 an ounce. In 2009, gold was up almost as much as Stocks for a +24% gain. In fact it was up over 35% for a brief time which was far higher than stocks. I didn’t expect this type of performance from gold at all this year:
Gold Prices for 2009
(Chart courtesy of www.stockcharts.com)
Will we see gold hit $2000 in 2010 or will it fall to $300? I have no idea. It seems the markets are not settled by the Federal Reserve printing of money to bail out everything that moves. I think it’s called “Quantitative Easing” which is simply translated as: “We’re buying a bunch of stuff nobody wants with money that we don’t have.”
The Fed has in fact been easing their quantitative selves into the markets behind the scenes buying Treasuries and other assets to keep the prices at some magical point that they think the world wants. How long this game will go on nobody knows, but it will be interesting to watch it all unwind. And by “interesting” I mean you better stay diversified because nobody knows how this thing is going to play out.
Comments and Comparisons
2009 was an incredibly volatile year in the markets. In March it was still looking very bad with Stocks going on a nasty slide along with bonds. It’s easy now to look back on 2009 with those big stock gains and pat yourself on the back. But, there wasn’t much patting going on during the Winter and Spring months compounding the 2008 stock losses.
In terms of best performance it would be obvious that someone who dumped their money into all Emerging Markets cleaned house. A nearly +70% return sure would have been nice! Not likely, but nice.
A stock focused portfolio such as one split between 60% Total Stock Market and 40% Total Bond Market turned in a splendid +21% return. Overall, anything with higher stock weightings did very well this year. Is it enough to offset the losses incurred in 2008? It just depends how much the portfolio lost last year according to this handy chart:
The last decade of the US Stock market is one of the worst on record. Pundits are calling it “The Lost Decade.” I guess it’s what sells magazines. But the reality is we’ve had “Lost Decades” in the stock market before. The 1970s for instance saw zero real returns in stocks due to inflation. That’s why this idea that holding stocks only is such a bad idea. The key is you need to be diversified and you need to rebalance to control risk. There are protracted periods where any asset can do poorly and that includes stocks. This is not to say stocks won’t have a great 10 years going forward, just that the future is unpredictable so it pays to diversify.
Sticking to the Plan Works
The past couple years in the markets have shown the value of having a diversified portfolio and sticking to your plan. I think it also showed the value of limiting volatility so investors don’t panic sell at the wrong time.
In terms of performance, some can say “Hey, the Permanent Portfolio returned only around 8% this year when stocks were up over 20%!” And I would simply say: “Yes it did. And in terms of its average returns in the 8-10% range it did just as expected and has never delivered serious losses the way stock heavy portfolios have.”
The portfolio strategy is designed not to have these wild up and down swings. So while you probably won’t be getting these huge double digit gains, you also are less likely to get huge double digit losses. The portfolio has tended to drift along in a moderate return zone with no big drama. I think drama should only be happening in the theaters, not with one’s life savings.
This is what the four asset classes looked like in total (Gold – Magenta, Stocks – Red, Cash – Green, LT Bonds – Blue) for the year:
Permanent Portfolio Total Year 2009
(Chart courtesy of www.stockcharts.com)
Investors have to look at portfolios in total and not at assets in isolation. In most years you’re going to have one or more assets that are lagging. One of them may be a real stinker in fact. But the winners can offset the losers so the portfolio will still grow. This is diversification in action.
It’s a Marathon, Not a Sprint (or insert your favorite cliche here)
By limiting volatility the Permanent Portfolio allowed investors to (hopefully) stick to the plan through these past couple years. Last year this would have meant selling down their bonds and buying stocks at a nice discount for 2009 which I advised:
By not rebalancing [bonds], you may miss out on large gains in your other assets by having too much of your money tied up in your current winners. Imagine missing out on a 20%, 30% or higher gain next year in stocks if the markets recover and things work out.
YES, I know that sounds impossible right now. But it’s happened before and YES it usually does it after a bad market crash.
Gains like I just mentioned happened after the early 1970’s recession (1975 +37%, 1976 +24%), after the recession in the early 1980’s (1982 +21%, 1983 +22%), after the early 1990’s recession (1991 +31%), after the early 2000’s Internet bust (2003 +29%) and they even happened during the 1930’s Great Depression (1933 +54%, 1935 +47%, 1936 +34%, 1938 +31%).
Now we have a situation like this that has happened in our stocks and gold. Many may find that these two assets could be near or above their rebalancing bands for the portfolio (either 30%-35% as you see fit). If this is the case, then I urge you to rebalance (taxable investors should try to maximize long term vs. short term gains if possible). That means sell your winners down to 25% and buy your losers back up to 25%.
Yes, I know that some are talking about inflation and how Long Term Bonds will get killed. Yes, I know that some are expecting stocks to go up +50% this year. Yes, I know that some see $2000 gold on the horizon. Yes, I know that some don’t like holding onto cash. Yet, some of these people are going to be right, and some of them of them are going to be wrong. I wish we knew which was going to be which, but we don’t. I encourage readers therefore to keep a balanced approach and be happy with their stable returns vs. swinging for the fences and risk striking out. Those +20-30% returns you hear people getting come with a tremendous amount of risk as 2008 demonstrated. Many people are probably still in the hole with their previous losses.
To use a cliche: “It’s a marathon, not a sprint.” That certainly is important for investors to remember. Those boring stable returns for the Permanent Portfolio will really add up over the years. And, the lower volatility helps investors keep their cool when markets are misbehaving. So rebalance that portfolio if you need to do it and ignore the market pundits. I use this portfolio allocation myself and it helps me sleep like a baby. I hope that it does the same for you and wish you all the best in 2010.
Happy New Year!
Related posts:
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Hi Joel,
Predicting the market is a tremendously bad idea. Some people I met were in cash most of the year and missed a big part of the recovery. You just need to stay diversified and try if you can to not look at your portfolio too much nor follow any financial news. These two things would help most people out tremendously in controlling their emotions. IMO.
I don’t have any predictions for 2009. I felt stocks last year were the best buy based on history of market recoveries. This year I’m not so sure and need to think about it a bit. Even then, I won’t act on these guesses. They are just for my own entertainment.
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#3 written by Mari 2 years ago
Thanks for the quick 2009 results! I recently found out about this portfolio through
early retirees Kevin and Erin Knox (http://www.retireearlylifestyle.com/kevin-erin-knox-interview.htm).
Do you ever experiement with tweaking the portfolio (other than with the US Treasury ST Bond fund)?
Looking forward to 2010! -
Tried lots of tweaking. Some of them worked for certain periods and then fell apart for others. Some tweaks made things worse. Some looked like they made improvements but introduced a lot more risk.
The people who worked on it before me thought of a lot of these things and just decided that none of it was reliable enough to rely upon.
In my former life I did a lot of Internet Security work so I was paid to break things. Therefore I’m less interested in seeing rosy returns of past asset allocations and more interested in seeing how the ideas hold up when you introduce unpredictable and extreme events. This is what security auditors do and we broke a lot of stuff that people never thought could happen.
I want to see how portfolios hold up under the *worst* conditions, not the best. Finding a period of time when something turned in 15%+ returns a year is easy. I want to see what happens when things don’t go according to plan. A protracted bear market for stocks. Bad inflation. Deflation. Etc. Nothing is discounted just because it hasn’t happened in a long time or has never happened in the US before.
Every asset in an allocation is going to have a bad time eventually. It’s inevitable. So let’s look at the thing and see what the worse cases scenarios are and what they do to the total portfolio. Chances are you may find that the worst isn’t so bad compared to others and this allows you to get a better view into the strategy and have at least some type of expectation about these risks if they do show up.
So when I look at the Permanent Portfolio I went through this same process and while there are some criticisms that could be levied at it (some don’t like how much gold it owns for instance or the long term bonds). I think overall the portfolio has a lot of failsafe and conservative attributes to keep problems from becoming catastrophes (and the gold and LT bonds were an integral part in preventing these problems some of the time).
So this is a long way of saying that in the end I found my tweaking just introduced new vulnerabilities and I decided to leave well enough alone.
Of course, nobody needs to do 100% in the portfolio. They could allocate 50% of their savings to it and 50% to overweighting stocks for instance. If their gamble pays off it will be great for them, but if it blows up at least they have 50% in this stable core that they can rely on to be there in some capacity.
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#6 written by Mike Turner 2 years ago
Thanks for the year end update Craig! Why is it everyone wants to tweak? me included
How about a zero coupon bond – say a target of 2015 symbol BTFTX to replace TLT. It seems less volatile and has a small dividend. Or do you feel we need that volatility in TLT to balance out the other components?
“I think overall the portfolio has a lot of failsafe and conservative attributes to keep problems from becoming catastrophes (and the gold and LT bonds were an integral part in preventing these problems some of the time).”
Happy New Year
Mike -
#7 written by Jim 2 years ago
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Mike,
There are some issues with zeros and imputed income if you are a taxable investor. They also don’t move quite the same as just nominal treasuries. BTFTX also has a high expense ratio of 0.57% vs. TLT 0.15%. So I’d just stick with TLT if you want to use a fund or just own the bonds directly to remove one more layer of manager risk and expense.
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#9 written by Tom 2 years ago
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Tom,
This question comes up a lot. There are pros and cons and because we don’t know what’s going to happen in the future and there is no “correct” answer except in hindsight.
If for instance you lump summed into the portfolio in 2007 you did great because the timing worked in your favor and you avoided huge losses and made good gains other assets. If you lump summed into the portfolio in January 2009 you did just OK as your LT bonds were at a high price and quickly lost value. You still came out OK with a gain, but not as big of one as if you bought in slowly.
So moving in gradually may or may not work out to your advantage. Overall, I think the longer people wait to diversify the more risk they are taking or the more they are losing in real returns in a lower performing asset. So I’m usually a lump sum kind of person. The other problem is investors may think they’ll move in gradually, but they’ll really be using it as a market timing maneuver and may find they don’t own enough of an asset that they thought was “too expensive” and it just keeps going up in value.
My advice usually is to lump sum in and just get it over with but I know many people don’t want to do this. My secondary advice therefore is if you want to gradually move into the portfolio you make sure you do it on a fixed schedule with fixed amounts and do it religiously and not turn it into a market timing game. Some people right now don’t like the price of gold or LT bonds. Ok that’s fine. Then park that money you’d put into them into a really safe treasury money market fund and each month move in a fixed amount into both without fail and without trying to guess what the markets will do. Set a target to have these allocations full up by 12 months for now or whatever. But the thing is to make sure you are robotic about it.
Also as I posted earlier, you don’t have to put 100% of your money into the portfolio if that makes you nervous. You could say that 25-50% of your money will be in the strategy and the remainder in whatever approach you are doing now. That way even if your timing is really horrible and something truly awful happens in the portfolio you aren’t exposed all at once. Then as you get more comfortable with things you can move over the rest in some fixed blocks.
But the important thing for me is to not market time the portfolio.
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#12 written by brianh 2 years ago
Craig,
Thank you for maintaining this very informative blog. I just found your blog (and this approach) last week. I’m considering building a “plan B” portfolio using this approach. I’m in my late 30′s so I’m in the accumulation phase of things.
How concerned should I be if 100% of new investments (including cash / bonds) are in taxable accounts? I do have assets in tax advantaged accounts for “plan A”, but I’m not sure I want to touch those. Also, our ability to make deductible IRA contributions in the future might be limited since our AGI will probably be too high. I might be able to use HSA contributions (up to $6,150 in 2010) for part of the cash/bonds piece, but I’m not sure if that would be a good idea.
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craigr, loved this post, thanks for the analysis.
I’ve taken a look at the most recent three year performance for a number of lazy portfolios. Harry Browne Permanent Portfolio (and the related mutual fund PRPFX) score the best. Take a look at http://madmoneymachine.com/2010/01/04/lazy-portfolio-results-for-3-2-and-1-years/
I have also plotted a few of the popular lazy portfolios on a return vs. risk chart for those three years. Have a look: http://madmoneymachine.com/2010/01/04/risk-vs-return-chart-2007-2009/
Thanks, Paul
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Brianh,
If you can, try to put the bonds into your tax shelter first before putting in things like stocks or gold. Bonds and cash are by far the worst tax offenders and can benefit the most from tax deferral. So perhaps sell down your stocks in the IRA and replace them with bonds through your custodian could be an option. If you run out of room after to hold the stocks, then you can own them in taxable if you use a very low cost low turnover broad index fund. The tax impacts in that case are not severe as they are with bonds. Gold can also be stored outside of the tax-deferred as it generates no interest/dividends and only capital gains when sold. So it’s also not as bad as the bonds/cash holdings.
Finally, you should keep some cash outside the tax-deferred for emergency needs so you don’t have to sell down assets or incur penalties if you needed money quickly.
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Hi Paul,
Thanks for the links. I think the PRPFX fund did well because it’s way more biased towards inflation than Browne’s 4×25 split is. PRPFX holds a lot of gold, silver and Swiss Franc bonds which did very well last year vs. the dollar. If we get a lot of inflation that fund will do pretty well. If we don’t then these assets will probably lag the 4×25 split. So it all just depends on what happens going forward.
Thanks for the charts The past three years have been “interesting” to say the least. I think over time that the permanent portfolio allocation has a reasonable risk/return profile as Grayfox explored on the Diehards forum. Looking at simpler measures, the portfolio has had a lot less volatility for sure.
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#16 written by Greg 2 years ago
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#17 written by JDB 2 years ago
Hello Craig,
Thank you for sharing the results for 2009 of the PP.
One question comes to mind. You talk about a PP with cash or a PP with short term treasuries instead of cash. My question is, which one do you prefer yourself and why? Or in other words, in which PP did you put your own hard earned money?
Thanks for your reply,
greetings
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Hi JDB,
I use Treasury Money Market fund for money that I may need in a year or less. For money that I probably wouldn’t need for a year or more I use the ST Treasuries. There is more duration in ST Treasuries and if interest rates go up you could have to wait a year or so for the NAV of the fund to recover. With cash in a Treasury MMF this slight volatility is not a big concern and I can wait out the ST Treasury bond fluctuations while it recovers with the Treasury MMF cash.
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Greg,
I don’t know if I have a good answer for you. I’m assuming you mean which is a better choice considering the Roth you won’t pay taxes on withdrawal and the standard IRA you will. If that is the case, who knows? Tax laws are always changing and these things are not predictable.
Frankly I don’t see any possibility that the government is going to let Roth users withdraw their money tax-free in the long-run. They’ll come up with some way to get to that money eventually. But this could be a while away. However, it’s just too much money sitting around being unmolested for them to resist. I’m a cynic in these types of matters.
Just my opinion on this so take it for what it’s worth.
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#20 written by JDB 2 years ago
Craig,
So you divide about 50/50 between both. Some state that, with today’s low intrest rates choosing ST bonds for cash is a bad choice, because if intrest rates go up steadily in the years to come, ST bonds will always lag behind and result in a loss on the cash position.
It is said, that for this reason Harry Brown advised always cash for the cash part, since it should never be negative and it would always anticipate immediately on rises in intrest rates. Last year, anyway in europe, the lag behind was good, since ST bonds were way better than cash (still higher intrest rates), but in the opposite case, the lag will turn out bad.
How do you feel about this? What is your anticipation regarding risc vs. revenue. Should Harry be followed with cash only or is it acceptable to choose st bonds. can you assess the risks? Could cash in st-bonds go -5% or -10% at a time pushing the PP down hard?
Regards,
JDB
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JDB,
I divide so that near-term one year or less cash on hand is in the Treasury MMF and whatever you have left after that can then (optionally) go into ST Treasuries. But again this is optional if you want to take slightly more risk for a likely better return over the long run.
In the 1970s interest rates went through the roof, yet ST Treasury notes (2 years or so) basically broke even with inflation whereas Treasury bills (shorter than one year or so) lost to inflation by about -1% a year. Now the spread isn’t huge, but just goes to show that the markets are very efficient at pricing in interest rate risk and in the case of the 1970s the market priced ST bonds effectively beating out the safer “cash” in the shorter issues. Nothing is certain, but it’s at least one data point to consider.
The biggest risk in inflation is to LT bonds. In the 1970s they did comparatively worse coming in about -5-6% below inflation each year on average for the entire decade. However if this should happen again, the gold stands a good chance of going up enough to offset these losses and still turn a profit.
I can’t comment on what Browne would say one way or another. I have spoken with his former business partner and publisher though about these tweaks. His only caution is the same one I mention and that is you are taking on some interest rate risk in the cash. I don’t personally feel it’s enough to worry about, but if it is to you then by all means just stick to the cash in Treasury Money Market fund as it is a safe bet.
By far the biggest thing to take away from Browne on the issue of fixed income/bonds/cash is to stay the heck away from credit risk and only buy Treasuries. (For US-Based investors – otherwise bonds from your own country) If you ignored everything Browne has to say on the subject of bonds/cash/fixed income except for this one piece of advice it would be worth it to you. The potential extra return you get on riskier corporate, junk, munis, mortgage and foreign bonds does not offset the other risks compared to Treasuries. IMO. 2008 was a prime example of what happens when you take on credit and call risks with bonds and you need them to perform. Everything in the market tanked except for Treasuries. The last thing investors want are their bonds behaving like their stocks in a bad market. Treasuries can help make the chances of that happening a lot less.
Also let’s just assume that your ST bonds fell by -10%. They’re no more than 25% or so of the portfolio so that would be a net loss to the portfolio of only -2.5% which is chicken scratch in a market that is making ST bonds go down -10% in a year. In that market LT bonds will be doing a lot worse and chances are inflation is raging really out of control. Stocks may also be doing quite poorly. At that point the only asset worth owning is going to be gold because everything else is going be in the tank due to the inflation.
But again I mention the ST Treasury/Cash split as an option and something I do. I never want people to do anything they don’t understand or feel comfortable doing. Remember Rule #16 of Harry Browne’s 16 Golden Rules of Financial Safety:
Rule #16: Whenever you’re in doubt about a course of action, it is always better to err on the side of safety.
Also, there’s nothing wrong with just doing the cash in the Treasury MMF for the time being and if you feel like it later just move some over into ST bonds or not.
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#22 written by JDB 2 years ago
Craig,
I’ve already chosen for st bonds, but started doubting about it. I’m in europe and the problem of the european PP is that it’s return’s are much lower the last decade than the american version. The reason? Mainly bonds, european treasury funds consists of treasury bonds of all european country, which are not all rated as high as the uS’s, thus european PP lags back mainly in bonds. However over 2009 there’s was a result of about +13,4% which is very good.
My reasobn for the choice is thus revenue, since the bonds inside are refreshed quite regularly it made sense to me to choose st-bonds over cash, in 2009 my st bonds wtill were around +4%, where cash was around +0,5%. Big difference.
However your answer strengthened my faith to stick with st bonds. Also, far from everything is invested. Also a savingsaccount can help for the cash you need.
KInd regards
JDB
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#23 written by gm 2 years ago
I’m new to the Permanent Portfolio method. I would appreciate some comments by the experts on this scenario:
1. Strategy will be used in a retirement account (401k), and retirement is 30+ years away;
2. Current funds are only $10,000 but will add about $500 to $1000 per month from here on out (call it forced dollar cost averaging because the lump sum is not yet there);
3. Concerned that the transaction fee for constant monthly purchases of ETFs would be too high, and mutual funds may be better in this situation (no load, no transaction fee)(?)
4. Besides the professionally run PRPFX, is there a way to put this strategy together with mutual funds (and if so, which ones mirror each 25% allocation)?Thank you for any comments you have.
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Gm,
Transaction fees will add up for the size and frequency of your contributions. You should consider using mutual funds for the stocks and Treasury Money Market Fund. For the bonds what you can do is pool the money up over several months that you store in your cash allocation and then go buy them in larger blocks to lower costs or use the TLT ETF. If that is too much to do, then the Vanguard Long Term Treasury Bond fund is an alternative for a pure mutual fund to keep transaction costs down but it’s not as good as owning directly or with TLT. Gold can be purchased physically and stored securely or again you may want to consider the ETF and doing purchases only a few times a year once you save up enough money from your cash allocation.
Mutual funds would be something like:
Stocks – Mutual fund VTSMX or ETFs VTI, IWV
Bonds – TLT or VUSTX if you just have to use an open ended mutual fund. Best though to buy the bonds directly from the Treasury or on the secondary market and just set them in your account until their maturity is less than 20 years.
Cash – SHV, SHY, or Vanguard Treasury Money Market (VMPXX) or Vanguard Short Term Treasury (VFISX)
Gold – Physical gold stored securely or if not possible logistically, then one of the gold ETFs. But don’t use Gold mining stocks as a substitute. -
#25 written by Jim 2 years ago
craigr,
Just a thought. With all the ridiculous spending going on by goverment there has been much talk about a possible downgrade to our own treasuries. Since the PP has nearly 50% of its portfolio in treasuries does this in any way alarm you? I can not see how we can keep spending money we do not have and keep printing money. I believe gold has done so well not because of it being a hedge on inflation but because of the devaluation of the dollar. Would enjoy hearing your views. Thanks. -
Jim,
I agree the spending is alarming, but a country like Japan has a much larger debt to GDP ratio than anyone else and the Yen is still a strong currency.
http://en.wikipedia.org/wiki/List_of_countries_by_public_debt
Ultimately we just don’t know how this will play out. The death of the dollar has been predicted now for decades. It could happen tomorrow, or it could happen in 50 years. So the best plan is to diversify so in case these scenarios do play out you’re protected, but if they don’t you’re still protected.
Gold is going to react to the perceived or anticipated inflation in the dollar. Right now the markets are anticipating the dollar is going to lose purchasing power. In 2008 they were wrong and the dollar recovered strongly in the last quarter unexpectedly. In 2009 the dollar continued to fall again but it is still above the lows in early 2008 as you can see in this chart:
http://quotes.ino.com/chart/?s=NYBOT_DX&v=dmax
So is 50% in Treasuries too much? Honestly the Cash/ST Bonds are going to tread water under high inflation as their interest rates will adjust quickly and the short duration will not cause big losses to those that hold those assets. The biggest worry is LT bonds which would be severely punished under high inflation. At that point we just have to hope that the gold markets reacts strongly enough to offset those losses. It has in the past and I expect it will in the future. The gold market is MUCH smaller than the total number of dollars in the world. If people wanted to dump dollars quickly due to high inflation the price of gold would go orbital and losses in LT bonds will not be a problem in my opinion.
But then again you have this wealth destruction in the real estate market still happening in the US and that could be very good for the dollar and it could gain strength. LT bonds could go up quickly in price and gold could suffer in the long run if this continues.
In the final analysis we just don’t know what is going to happen. Clearly 25% of the portfolio in LT bonds are extremely exposed to inflation. But the other 25% in gold is highly allergic to inflation. We just have to trust that the markets are going to figure out what direction things will go as it always does. When this occurs the LT bonds or the gold will take care of the portfolio.
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#27 written by Jim 2 years ago
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Happy New Year Craig!!!!
2009 has only solidified my belief in the Permanent Portfolio. Who would’ve thought stocks would run up 60% from its year low……we certainly living in a uncertain world…..lol. Any predictions on which asset class will lead the pack in 2010?