The Permanent Portfolio, Investing, Finance and Random Thoughts.
Posts by craigr
Social Media and Post Rating Blog Updates
1 month ago
by craigr
in Miscellaneous
To welcome in 2012, I have decided to join 2008. I added in social media buttons on the top of the site and Facebook like buttons at the bottom of each post. You can also see related articles and vote on what you think about posts as well.
I now have a Facebook fan page for the blog. I also have a Twitter account where you can follow my deep insights shared to the world 140 characters at a time. Finally, I run a YouTube channel that has absolutely nothing to do with investing, but a lot to do with hiking, outdoor skills and equipment reviews.
Let me know if you see any problems with the site updates and Happy New Year once again!
Permanent Portfolio 2011 Results
1 month ago
by craigr
in Permanent Portfolio
In 2011 the Permanent Portfolio returned +11.36% (or 11.03% for the Treasury Money Market version) for the year according to Morningstar’s data. An outstanding result considering everything that went on this year. Let’s review…
Here is the breakdown of the popular asset classes:
S&P 500 +1.18%
Total Stock Market Index +0.93%
EAFE International Index -14.0%
Emerging Market Index -18.83%
Commodities Index -2.58%
Real Estate Investment Trust Index +10.15%
Treasury Inflation Protected (TIPS) Bonds +13.24%
Corporate Bonds +9.37%
International Bonds +5.72%
Total Bond Market +7.66%
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) +0.93%
25% iShares 1-3 Year Short Term Treasury Bond ETF (Ticker: SHY) +1.39%
25% iShares 20+ Year Long Term Treasury Bond ETF (Ticker: TLT) +33.56%
25% Gold Price appreciation for the year +9.57%
2011 End of Year Result w/Short Term Bonds for Cash: +11.36%
If you used the more conventional Treasury Money Market Fund instead of the Short Term Bonds for the Cash allocation you did the following:
25% Vanguard Total Stock Market ETF (Ticker: VTI) +0.93%
25% iShares Treasury Money Market ETF (Ticker: SHV) +0.06%
25% iShares 20+ Year Long Term Treasury Bond ETF (Ticker: TLT) +33.56%
25% Gold Price appreciation for the year +9.57%
2011 End of Year Result w/Treasury Money Market for Cash: +11.03%
Stocks
Stocks finally stopped their recovery from the 2009 lows but not without a lot of up and down nausea. The beginning of the year was starting to look pretty good and stocks continued their 2010 climbs. But as news of the European crisis spread the markets began to react in a very volatile way. The gains quickly turned into losses up to -10% and the daily volatility went through the roof. Portfolios that held a lot of stocks saw daily swings in value of several percent during the summer. In the end, the US markets just couldn’t get their feet under them and ended the year mostly flat at +0.93%.
2011 Vanguard Total Stock Market ETF Performance
Currency Risk Bites International Stock Holders
The total international stock index lost -14% and the emerging markets stock index lost almost -19% this year. This was much worse than the +0.93% of the US markets. These results are a mix of problems, but the crisis in the Euro allowed the US dollar to go up in value a lot in international markets and this compounded the losses to the markets overseas. One of the risks of owning a lot of stocks outside of the country where you live is currency risk and unfortunately in 2011 it was just one of those years where it really hurt. This chart shows the US Dollar index for the year. Currency markets are just as unpredictable as the general stock market and the declining dollar turned around into a powerful rally towards the end:
2011 US Dollar Index
Bonds
Well this was a shocker to many. The Treasury long term bond, which many had predicted would be demolished in 2011, came out swinging and posted a monster +33% gain! This, despite the fact that many prognosticators predicting that interest rates couldn’t go any lower. Well guess what? They’re lower. The 30 year bond currently is yielding under 3%. I hope those following the Permanent Portfolio ignored the market gurus in 2011 and held onto their bonds.
In the winter, interest rates creeped upwards and it looked like the gurus may have finally gotten something right. But as the markets in the US and Europe deteriorated the Treasury long term bond showed how powerful it can be. In the summer it shot up 30% in value in two months, and pretty much stayed there until December. This really boosted portfolio performance and dampened all the volatility in the stock allocation. Thank you Treasury long term bonds for another surprising year!
2011 Long Term Treasury ETF Performance
Cash
Cash does what cash does best, stay stable. When the markets were really moving around it was nice to have a part of the portfolio that we could rely on for living expenses and emergency savings to be there if we needed it. In this case the short term bonds or Treasury money market ETFs both posted gains. The short term bonds posted +1.39% and the Treasury money market %0.06. Since cash is used as a stabilizer for recessions in the portfolio we never really expect big gains or losses from it. So by this measure it performed as expected. Here is a chart of the short term bonds and Treasury money market ETFs. Keep in mind the scale is only in a couple percent so the seemingly volatile moves were actually not very significant.
2011 Short Term Bond and Treasury Money Market ETF Performance
The bottom line is the Treasury Money Market equivalent ETF from iShares with the symbol SHV. The upper line is the slightly longer term short term Treasury bond ETF with the symbol SHY. I list them together so you can see the difference in volatility. The traditional Permanent Portfolio uses 25% in cash in the Treasury Money Market asset. My own modification I will put my short term reserves in the Treasury Money Market (about a year’s worth of living expenses) and the remainder in the slightly more volatile short term ETF to get a little extra return for a little more interest rate risk. Having the year buffer allows an investor to ride out the ups and downs in the short term treasury bond portion.
There is nothing wrong with putting it all in the Treasury money market and being done with it. But if you have a lot of cash in the 25% allocation and wouldn’t need to touch it for a year or more, then it may be worth considering the short term Treasury bonds for a little more yield.
Treasuries Still Safest Way to Hold Cash
With the European banks in crisis this year, and not knowing how US bank’s assets are interlinked with them, it was a good feeling holding cash in a nice safe Treasury money market or Treasury bond fund. Because the Permanent Portfolio holds its cash in very safe US Treasuries, investors don’t need to worry about the surprises that may await other riskier cash holdings. Chasing yield can lead to sleepless nights.
Gold
Well gold was interesting this year. It hit an all time high price over $1900 an ounce in the summer when it looked like the Euro might go away, but corrected downward towards the end when things calmed down (for now). Yet, it still posted a gain over +9.5% for the year if you bought it in January and just held on. If you hit a rebalancing band in August at the high and rebalanced out then you made a nice profit and could use the proceeds to buy lagging assets like stocks. This protects your profits and allows you to buy assets when they are on sale. Buying assets on sale is a long-term winning strategy.
Even though gold came down from its highs this summer, the long term bonds in the portfolio buffered the decline nicely. So even if you didn’t rebalance out at the highs, fret not. You still posted solid returns from the portfolio this year.
Gold is Not a Standard Commodity
Note also that gold posted a gain when the overall commodities index posted nearly a -3% loss for the year. Gold is a special commodity because it is also a monetary metal. The problems in the Euro, and uncertainty with US markets, meant investors were very happy to hold gold and not so thrilled with other commodities. Gold is not just another commodity. Gold has a special place in the markets as a form of money. This is why the Permanent Portfolio holds gold and not a basket of commodities as a hard asset.
2011 Gold ETF Performance
Conclusions
2011 was an interesting year for sure. I was really thinking the Euro would finally blow up, but they managed to make it limp along another year (I hate predictions, but in 2001 when the Euro rolled out I thought that it wouldn’t last 20 years so we have another 10 years to go to see if I’m right). However the Permanent Portfolio was able to pull out solid gains from the most unlikely of assets this year: Long Term Bonds.
Here’s how the entire thing looked with all the assets for 2011. Blue line are bonds, purple is gold, green line is short term bonds, red line are stocks.
Permanent Portfolio All Four Assets 2011
Watching those ups and downs cancel each other out and produce a year end profit with no guess work brings a smile to my face. Such a simple portfolio idea can provide such strong diversification. It’s just amazing watching it work.
I continue to advocate that those looking to start the portfolio simply buy all the assets at one time and not worry about things any more. Earlier this year people were worrying about long term bonds. My advice is always to just buy them and own the entire Permanent Portfolio package. If they did this they were well rewarded and the portfolio performed. If they didn’t do this then the portfolio did not do as well. I hope readers follow this advice and not get into the market timing game. The Permanent Portfolio continues to show respectable performance in good, bad and sideways markets and does not require market timing of any kind to work. A loss in one asset is often offset by the gains in another over time.
Keep your portfolio rebalanced, own all the assets all the time, ignore the market noise and enjoy your life. Investing should be simple and stress free and the Permanent Portfolio is one way to achieve those goals.
I hope you have a wonderful year. I really appreciate all the readers of this blog and forum for all your ideas, input, insights and comments. Have a great 2012!
A Viking Camp
1 month ago
by craigr
in Miscellaneous
On a trip to Norway this summer I came across a really cool group re-enacting the Viking lifestyle in the Fjords of Norway. Here are some of the photos of it.
The Misleading Stocks for the Long Run Chart
1 month ago
by craigr
in Permanent Portfolio
I see this chart posted from Jermy Siegel’s book Stocks for the Long Run from time to time to defend why owning lots of stocks is the way to go and why owning gold is some kind of chump move.
Well I think this chart is misleading for several reasons. Gold is useful in a diversified portfolio along with stocks and bonds. It should not be 100% of a portfolio just as stocks shouldn’t be nor bonds.
First let’s explain a few things about this gold line you see here. We must understand that for the first 130 or so years of the founding of the United States gold and the dollar were the same thing (aka. the Gold Standard). With that, let’s look at this chart with this gold standard in mind:
1) From 1802-1913 the value of the dollar was strongly linked to gold and there was slight deflation over this time. There was essentially no inflation except for the period around the Civil War when Lincoln printed a lot of money to pay for things. That’s the blip you see in the early 1860s. Gold went “up” simply because the dollar was going “down.”
2) In 1933 FDR broke the gold standard. He raised the price from $20.67 an ounce to $35 an ounce to deliberately try to cause inflation. This was done after prohibiting Americans from owning gold. That’s the rise in gold price you see in that year and also when the dollar started to rapidly decline in value. A gold convertible currency prior to that keeps paper currency honest because if people think the government is printing too much money they could turn in their paper dollars for gold specie and drain the Treasury. After 1933 that was no longer possible. This was a stupid idea that achieved nothing but allow the inflation genie out of the bottle and send the dollar on a downward trajectory from that day forward.
3) In 1971, after nearly four decades of artificially low gold prices due to government price controls, Nixon broke the last of the gold standard for foreign holders of dollars. Dollars could now be converted to gold by nobody. You see the gold price spike the first couple years as it adjusted for the prior price controls. After that, I believe it was simply responding to the very high inflation. The dollar also this year begins a very big decline. By the end of the 1970s the dollar bought about only 50% of what it did in the early 1970s. By today it’s lost something around 80% of its purchasing power.
4) Gold is not volatile. It’s a piece of metal. It is only volatile against the currencies it is priced in which are the real culprits. Price spikes in gold are more of a reflection in the value of the dollar than anything. Gold is a form of money and people buy it when they think the dollar is going to have problems keeping its value.
Now back to the chart in general. This chart is misleading for several reasons:
1) The data going back to 1802 is suspect to me. Nobody could have invested that way if they wanted to even if the data is accurate (which is another debate). This chart is what stock bugs use to justify why you only need to own stocks. It’s as bad as when a gold bug shows you a chart of gold vs. the dollar and insists you only need to own gold. No, you need to own a variety of assets like the Permanent Portfolio. Concentrating your bets in any one asset is a bad idea.
2) Nobody lives for 200 years. An investor’s timeline is like 30-40 years before they need the money. Stocks have had extended periods of bad performance in the past and this makes total returns very time dependent on the individual level.
3) Gold doesn’t have interest and dividends. This is a statement of the obvious. But it has much different risks than stocks and bonds and that means it is still useful in a portfolio. The same economic factors that are horrible for stocks and bonds can be quite good for gold and vice versa. That simply means you own gold as part of a diversified portfolio and not 100%.
4) This chart also shows that over 200 years gold has had a remarkably good record of stability in terms of preserving purchasing power. This is quite remarkable when you consider the history of the US, the wars, the booms, the busts, etc. that have happened. How many companies from 1802 are still around today?
5) Gold in a diversified portfolio can increase returns, decrease volatility, decrease risk, and provide protection under serious currency problems. All good things in my book.
This chart doesn’t make the case that gold shouldn’t be owned to me. It basically makes the case that owning a lot of different assets with different risk profiles is a really good idea. Stocks can be very powerful when the economy favors them, but when it doesn’t they can languish with big losses or zero real returns for protracted periods. A portfolio with stocks, bonds, cash and gold however can weather just about anything the economy is throwing at it. Diversification is your friend.
Diversify Where You Put Your Money
2 months ago
by craigr
in Permanent Portfolio
MF Global lays out the perfect case for Rule #10 in the 16 Golden Rules of Financial Safety:
Are customer accounts at brokerage firms safe?
Until the collapse of MF Global, that’s a question I thought I’d never have to ask.
Brokerage firms are required by law to maintain segregated accounts holding all client assets, including stocks, bonds, mutual funds, money market funds and cash. The law was passed after the 1929 crash, in the depths of the Depression, to make sure that customer assets were there at all times, ready to be disbursed even if everyone asked for their money at once.
This obligation to protect customer assets “is considered sacrosanct,” Robert Cook, director of the division of trading and markets at the Securities and Exchange Commission, told me this week. “It’s considered a sacred obligation.”
Lehman Brothers may have engaged in many foolhardy practices, but even in the firm’s last days, when officials were desperate for cash, no one dared touch customer assets, which remained safely segregated despite the firm’s collapse.
And then came the revelation that an estimated $1.2 billion in customer assets had vanished at MF Global, the large brokerage and futures trading firm headed by Jon S. Corzine, the former Goldman Sachs executive and Democratic politician, that collapsed in late October after a catastrophic bet on European sovereign debt.
How could such a thing happen? I had always assumed it was impossible and that strict internal controls existed at all brokerage firms so that firm officials couldn’t tap segregated customer funds even if they were willing to break the law. Thanks to MF Global, it’s now apparent that isn’t necessarily true. “If people are determined to misuse customer funds, they will misuse them,” said Ananda Radhakrishnan, the director of the division of clearing and risk at the Commodities Futures Trading Commission. – A Risk Once Unthinkable by James B. Stewart – New York Times December 9, 2011
(Emphasis added)
Rule #10 States:
Rule #10: Don’t depend on any one investment, institution, or person for your safety.
Every investment has its time in the sun — and its moment of shame. Precious metals ruled the roost in the 1970s while stocks and bonds were in disgrace. But then gold and silver became the losers of the 1980s and 1990s, while stocks and bonds multiplied their value. No one investment is good for all times. Even Treasury bills can lose real value during times of inflation.
And you can’t rely on any single institution to protect your wealth for you. Old-line banks have failed and pension funds have folded. The company you think will keep your wealth safe might not be there when you’re ready to withdraw your life savings.
We live in an uncertain world, and surprises are the norm. You shouldn’t risk the chance that a single surprise will wipe out a large part of your holdings.
(Emphasis added)
I always recommend keeping your savings at more than one institution and not using the same fund company for all your investment money (for instance not using all Vanguard funds or all iShares or all Fidelity, etc.). It’s best to split up the assets in case something very bad were to happen with your brokerage or the company running the funds.
I know it’s more convenient to keep everything at one broker or fund provider because of unified statements, etc, but it’s really not a good idea for diversification. You’ll even notice on this blog when I recommend using ETFs, I tend to not provide tickers from all the same company (like iShares). Rather I think it a better idea to use some Vanguard, iShares, SPDRs and of course physical gold storage somewhere secure. MF Global is the poster-child why this kind of thinking is a good idea.
H/T to Ad Orientem for his link on the forum reminding me to make a comment about this latest financial industry debacle.
