The Permanent Portfolio, Investing, Finance and Random Thoughts.
Which Asset Will Do Best?
Fail-Safe Investing
I get asked from time to time about what asset class in the Permanent Portfolio is going to do best. Usually this is in the context of someone wanting to start investing in the Permanent Portfolio but they don’t want to buy the stocks or the bonds or the cash or the gold because they feel one or all of them are too expensive.
Well, here is a snippet from Harry Browne’s investment radio show on October, 24th, 2004 where he answers the same question from a listener about not wanting to buy Asset X because it’s too expensive (in this case stocks and bonds). Harry Browne lays out his experience on the matter in this five minute long clip:
Harry Browne – Which Asset Will Do Best
It’s now 2010 and this show was recorded in 2004. Let’s see what happened if the caller just took their money and dumped it into the 4×25 Permanent Portfolio split instead of trying to guess what the market would do:
2004-2009 annualized return of each individual asset class (rounded to nearest tenth from Simba’s Spreadsheet*):
Stocks: 2.5%
Bonds: 5.8%
Cash: 2.5%
Gold: 17.5%
Annualized return for 4 x 25 split portfolio: +7.5-7.8% (depending on bond index used)
We know gold did well after the fact but don’t know how it will do going forward. Back in 2004 it was a rare bird who was telling people to buy gold and many analysts still liked stocks as they were recovering from the 2000-2002 crash. Indeed, from 2004-2007 stocks were up about 10% a year. In fact, investors who thought stocks were a bad bet in 2004 were probably feeling pretty left out by 2007 after seeing them go up so much in price. They likely were tempted to move their money into stocks at that point – just in time to catch the downswing. Then, we have 2008 where bonds went up over 30% in a single year due to the market panic and handily beat stocks over this 2004-2009 time period as well. On top of all this, consider that the nearly 8% annualized return also included the horrible 2008 performance for stocks and poor 2009 performance for the bonds. If we go year by year in fact, returns for these assets will be all over the map from double digit boom years to double digit down years. Yet, there was still a reasonable profit made.
This illustrates why investors should always keep a balanced and diversified portfolio and not try to guess what the markets are going to do. In this case, the listener above would have pulled down about 8% a year doing pretty much nothing but holding a diversified portfolio and they would have rode through the 2008 crash without any damage. This would have been a far safer portfolio than making a concentrated investment in a single asset like gold or stocks regardless of how the actual bet turned out over the past – A bet that could blow up just as easily going forward.
Harry Browne’s archived shows contain lots of wisdom and knowledge like the above that have proven to be solid and dependable. I advise those looking to implement the Permanent Portfolio strategy to take the time to listen to Harry Browne’s radio shows as well as buying his book Fail-Safe Investing. I don’t make any money from this and it’s less than 10 bucks. This is an outstanding way to educate yourself on the approach and see if it is something that will work for you. Even better, his shows are timeless and you’ll probably hear people calling or writing in with many of the same questions you have. It’s entertaining and educational to listen to what people were saying and worrying about six years ago and how little it’s changed. Moreover, it helps reinforce the idea that the future is not predictable and investors should use strategies like the Permanent Portfolio that embraces this uncertainty so they can grow their money safely.
* I use historical data to disprove investment concepts as history cannot show you what returns will be going forward. I’d advise anyone using backtested data to not fall into the trap of building optimized portfolios that worked in the past. The past does not repeat and highly optimized and data-mined assets that outperformed before may not do so in the future.
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Hi Joel,
Just playing around with things on the site with the new look.
As for multiple accounts. I know that Browne liked to spread the money around. To some degree this can make sense, but you can also go overboard and cause problems as well especially for heirs trying to work through your estate or a loved one who has to manage the finances if you should become incapable. I think having your stocks, bonds, cash at a brokerage/bank and gold somewhere else is a reasonable compromise for most people.
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#3 written by Vic 2 years ago
Hi Craig -
First of all, thanks for the work you do over here. This blog was essentially my introduction to the Permanent Portfolio approach and am grateful to you for providing such a lucid explanation of its tenets.
However, I have a question for you regarding its applicability to all markets and not just the US. The reason I am asking this question, is that the US has held a central role in international business and politics for the last century. I have seen the performance of the portfolio from 1974, since Nixon took us off the gold standard. This correlates to the period of US dominance in the world.
I would be interested in finding out how this approach would perform if the US was not the dominant player. I think it would be a worthwhile exercise to plot the performance of this portfolio assuming that, say, you are Japanese or Chinese or any other emerging market citizen.
The reason for my question is to hedge the risk that the US may be in a terminal decline. This would result in higher borrowing costs for the US (higher treasury rates), a lower dollar ( cash is not performing well), impaired earnings for US companies(stock is not doing well) . Gold is in a separate class of its own. It hedges currency risk and not inflation. Essentially, I am trying to imagine a scenario in which all assets held by the portfolio go down or do not give you acceptable returns.
Hopefully, this is clearer than mud. -
Some people have looked at the portfolio as it would have been in places like the UK and Iceland and found it provided solid protection as well (Google will find the pages for you – or search this site). Someone on the very long Diehards Permanent Portfolio thread posted data on Japan and the portfolio did OK compared to other strategies.
The main issue really is that each market future is going to be different than the past. We have no idea how things will work out, but I feel comfortable with the diversification in a US based portfolio right now. I’ve traveled to about 20 different countries at this point in my life and I’ll only say that discounting the US and thinking places like Brazil are going to overtake it is pure fantasy. Investors who think that should hop on a plane and visit these places themselves and make up their own mind once they see how they really work.
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#5 written by Vic 2 years ago
Thanks for the response, Craig. I found a blog entry by someone who is running the european version of your site and he has posted an analysis of the permanent portfolio returns in Iceland. Here is the main takeaway from his post.
So what is the total picture? Here the results for the 4 assets of the permanent portfolio in Iceland:
* 25% Long Term Government bonds = 0% = 25 x 1 = 25
* 25% Short-term government bonds = 12% = 25 x 1.12 = 28
* 25% Stocks = -88% = 25 x 0.12 = 3
* 25% Gold = 259% = 25 x 3.59 = 90
* Total = 25 + 28 + 3 + 90 = 146 = 46%So the 100 krona at the start of 2008 became 146 krona, a yield of 46% for the permanent portfolio. However what is a krona still worth? The Icelandic central bank claims that inflation has risen from 5% to 18% in 2008. So if you take their figures that 146 crowns needs to be deducted by 18% as that is what a krona dropped in value for the year. This means you only have 120 kroner purchasing power. Still quite well as according to these figures your purchasing power went up by 20%.
However, if you take the figures of the European central bank inflation of the krona against the euro was 69%. So the 100 krona in early 2008 could still get you 1.1 euro. But those 145 krona you had at the end of 2008 could only get you 0.5 euro. In other terms, even with 46% yield, you still lost 55% purchasing power in the Eurozone even though you had a permanent portfolio.
Since the euro dropped 10% in value versus the dollar in 2008 it’s even worse in dollar land. You lost 76% purchasing power in America and versus all trading partners that want to get payed in US dollars. Because obviously trading partners want dollars or euros all imports skyrocketed in price by a modest 200%.
A fridge, food, cars, gasoline, computers, clothes, and almost any other item in the stores just tripled in price as most of them are imports. So, even with a permanent portfolio you lost serious purchasing power versus imports. However, with the permanent portfolio you did win purchasing power versus local goods, services and real estate as these prices did not go up but stayed flat or went down.
http://europeanpermanentportfolio.blogspot.com/2009/08/permanent-portfolio-in-iceland.html
Vic -
Looks like the PP is the way to invest but it also depends on when you started investing. Icelanders stock market grew 700% in the preceding 10 years. If an investor had gotten in during the beginning of this trend or the middle, he would have reduced his stock exposure and bought more gov bonds and gold and come out ahead in the long run. However if he started towards the end of this trend, he would have lost a substantial amount of his purchasing power in terms of imports.
However, I now have increased amount of confidence in this method having seen it put through the worst possible scenario. Thanks gain, Craig.
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Vic,
Yep, that’s the link. There is also another UK analysis around that showed good results.
The thing is there are no guarantees in investing. You just have to stay widely diversified and hold enough of each key asset to grow and/or protect the portfolio as needed. The PP is a way to strike a balance between growing a portfolio and taking on too much risk and facing a crushing loss.
Iceland is an extreme example, but extremes can show certain things you would never see when life is going swimmingly. The key point in his analysis is that yes even the PP can take a loss under the right events, but compared to conventional stock/bond portfolios it came out way on top.
This gets back to a point I made in another post that holding only stocks and bonds has exposure to extreme events. I think all portfolios should hold allocations to hard assets like gold in combination with stocks and bonds at all times.
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WHOA!!!! I love the new look!!!!! One of my New Years Resolutions was to consolidate all my accounts….I now have all my accounts with Charles Schwab (expect for my GoldMoney account). So I pretty much have a checking, savings, 2 brokerage accounts (Permanent & Variable Portfolio) and lastly a 2% cash back credit card with them.
I consolidated all my accounts with Schwab since doing so would make it easier to manage my finances. I can now buy 30-year Treasury Bonds, the S&P 500 Index (SWPPX), and a Short-Term Treasury Bond Fund (FSGVX) without any fees and most importantly, all in one place.
I know Harry Browne wasn’t a fan of such a move but I find it much more convenient consolidating my accounts. Should I reconsider this move?
Also, I moved all my accounts to Schwab since they didn’t not receive any bailouts and in fact rejected them. I guess I’m trying to stick to the bankers and credit card companies who profited from this mess….lol. “Too big to fail”……lets stop supporting them and see if they’re really “too big to fail”…..lol.