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Permanent Portfolio
Posts about Harry Browne’s Permanent Portfolio Concept
William Bernstein is Wild About Harry
Aug 29th
Investment author William Bernstein from Efficient Frontier recently wrote an article about the Permanent Portfolio:
He states:
In many respects, this allocation is a thing of beauty. Not only does it provide some protection against all but the most dire of scenarios, but its correlation grid is one rarely seen in finance: four non-derivative assets populated entirely by near-zeros…
- William Bernstein – Efficient Frontier “Wild About Harry”
He continues:
And therein lies the real problem with the TPP (ed: Theoretical Permanent Portfolio): because of its huge tracking error relative to more conventional portfolios, it attracts assets and adherents during crises, then sheds them in better times. There’s nothing wrong with Harry’s portfolio – nothing at all – but there’s everything wrong with his followers, who seem, on average, to chase performance the way dogs chase cars.
…
Sadly, this [buying assets before they have gone up in price] is the opposite of what the legions of new TPP adherents and PRPFX owners have been doing recently – effectively increasing their allocations to red-hot long Treasuries and gold. Consider: over the long sweep of financial history, the annual real return of long bonds and gold have been 2% and 0%, respectively; over the decade ending 2009, they were 5% and 11%.
- William Bernstein – Efficient Frontier “Wild About Harry”
His point about people not sticking to an investment plan is well taken, but hardly unique to the Permanent Portfolio. As for whether gold or LT bonds are a good buy now: I learned a long time ago that whenever I think I know what the markets are going to do I’m usually surprised later.
I read articles back in 2007 saying how expensive gold was when it was $600 an ounce and would crash any day now (it’s over $1200 now). I read articles over a decade ago about avoiding LT bonds because of the inevitable rise in interest rates (30 year bonds yielded 5.9% in 2000 – today they are 3.5% giving big profits to long bond holders over this time). In fact, I’ve read investment books going back over 20 years saying the exact same thing about the inevitable destruction of the long bond (30 year bonds in 1990 yielded 8.6% BTW).
The above is to say nothing of the copious amounts of doom and gloom stock predictions in 2009 that proved to be horribly incorrect as the market recovered so sharply it could give you whiplash. All of these predictions have been dead wrong and highly unprofitable if followed.
As it were, Harry Browne actually got this type of question about avoiding this or that asset over the years and I made this audio clip of him answering it:
http://crawlingroad.com/blog/wp-content/uploads/2010/01/HarryBrowne-WhichAssetWillDoBest.mp3
This clip was made in 2004 but could have been recorded last week (Browne even mentions about the Dow being 10,000 back then and it’s there again right now in fact – It’s de ja vu all over again). These debates about what to buy and sell are raging constantly in the market and will do so forever. Investors just need to ignore all of them.
The point is not to be a cheerleader for some particular asset because eventually every investment has a bad spell. It’s simply that we can’t predict the future and the reason we own different assets in the portfolio is to provide protection against the unknown.
Diversifying asset classes, as Harry Browne knew well, can benefit a portfolio. The secret is deploying them before those diversifying assets shoot the lights out.
- William Bernstein – Efficient Frontier “Wild About Harry”
I disagree. Investors can’t possibly position their portfolio in a way to take advantage of an asset before it goes up in price. It just doesn’t happen that way.
What’s the real secret? Simple:
Just own everything at once because we have no way of knowing what is going to do best going forward.
It was investors who owned assets like gold and long bonds all the time, regardless of what was being predicted, that were able to reap these rewards the past few years. They may continue to do well, or maybe not. Maybe stocks will finally come out of their funk and go gangbusters again as they did in the 1980s and 1990s. Nobody knows.
We just don’t know when the markets will move one way or another. Investors therefore must diversify, and must stay diversified, all the time regardless of what their opinion is about the future. We simply cannot know what asset is going to do best ahead of time and allocate accordingly.
The correct strategy then is to hold fast to your asset allocation. If something has gone up enough in price to trigger a rebalancing band, then sell it down and use the profits to buy the laggards. But never time the buying or selling of an asset in the portfolio because of how you feel about it. That’s a sure way to run into big problems. The Permanent Portfolio is designed to hold volatile assets together in the form of 25% each stocks, bonds, cash and gold. If you take out any one piece you lose the protection of the portfolio.
Performance chasers will always performance chase and will always show poor results for their efforts. The Permanent Portfolio is not designed to be a hot rod so the performance chasers will eventually be disappointed. What the portfolio provides however is moderate growth with wide diversification and low volatility even in very bad markets. At the same time the strategy has shown reasonable real after-inflation returns for the level of risk involved with no market timing nor close monitoring required. For people looking for those attributes, the strategy may make you wild about Harry, too.
European Permanent Portfolio Update
Jul 22nd
Marc DeMesel runs his blog over in Europe and has built a European version of the Permanent Portfolio using Eurozone stocks, German Bonds, Cash and Gold. He too presents a mid-year report from the European perspective showing a 8.7% YTD return and goes over how the portfolio performed historically. Keep in mind that the Euro this year has taken a thrashing which is why the gold price appreciation in Euros is higher than that in the US.
His site is in Dutch and this is the English translation link:
Crisis? Not with a Permanent Portfolio
Marc talks about an important issue of buying things you may not think are worth owning and selling assets that are your favorites when they go up too much in value:
A crystal ball is not required, but an iron discipline in order to buy certain assets that you do not believe in and occasionally by balancing assets to sell what you believe in.
Discipline is right. It takes discipline to sell off something that has gone up so much in price and you think can only go higher to buy today’s current dog that the news media says will only go lower. Likewise, there can also be an asset you’ll be holding in the portfolio that others will ridicule as foolish. It takes a lot of discipline to ignore this noise but the reward will be an ever growing pot of money.
Permanent Portfolio Mid-Year 2010
Jun 29th
I generally advise not looking at portfolio returns too often, but it’s about halfway through the year so we’ll take a peek because some people have wanted to know.
The standard Permanent Portfolio allocation is 25% split into stocks, bonds, cash and gold. So far Morningstar shows:
25% Stocks – Vanguard Total Stock Market (Ticker: VTI): -5.35%
25% Bonds – iShares Treasury Long Term 20+ year Bond Fund (Ticker: TLT): +14.37%
25% Cash – iShares Very Short Term Treasury Bond Fund (Ticker: SHV) [Equivalent to a Treasury Money Market Fund]: +0.04%
25% Gold – SPDR Gold Trust (Ticker: GLD): +13.0%
Total Return YTD: +5.4% (Total Returns including all interest and dividends according to Morningstar)
If you are using my modification which substitutes the Treasury Money Market cash for a 1-3 year Short Term Treasury Fund (Ticker: SHY) you are up YTD: +5.9%
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For comparison I track a 60% Total Stock Market and 40% Total Bond Market portfolio as well:
60% Vanguard Total Stock Market (Ticker: VTI): -5.35%
40% Vanguard Total Bond Market (Ticker: BND): +5.10%
Total Return YTD: -1.5% (Total Returns including all interest and dividends according to Morningstar
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Interesting year so far. Gold and LT bonds are showing some serious muscle at the same time – A very unusual thing. However the markets have been very volatile for the stocks yet the portfolio has been protecting and growing the value regardless.
Keep an eye on your asset allocation and be sure you are rebalancing if you need to do so.
Permanent Portfolio Forum – 100 Registered Users
Jun 22nd
In two months the forum has reached 100 registered users and almost 1000 posts! Thanks to everyone for contributing and bringing your perspectives to the discussion.
Permanent Portfolio Discussion Forum
Overseas Accounts?
Jun 13th
One of Harry Browne’s pieces of advice was to hold some assets overseas. However, options for US Citizens in this regard are very limited and/or impossible in today’s world (segregated gold storage in your own name in a foreign bank).
Some have wondered why holding an account overseas has become much more difficult the past few years for American citizens. Two words: Red Tape. This article goes into the latest reason:
The U.S. government – under a new law incorporated in the Hiring Incentives to Restore Employment Act signed by President Barack Obama on 18 March 2010 – is demanding that international financial institutions reveal which of their clients are U.S. citizens with accounts of more than $50,000. Foreign banks are, in effect, being asked to act as the international enforcement arms of the Internal Revenue Service. Those banks that don’t comply will be subject to a 30% withholding tax on all payments made to them in the U.S. Many banks and wealth managers have decided it is far easier to politely show their U.S. clients the door.
The basic message here is that you can be fully compliant with all tax laws but the banks will still not want you as a customer. In essence, the US Govt. is putting up capital controls without doing it overtly. They are doing it with red tape and it is deliberate.
These regulations have nothing to do with “tax evasion” and have everything to do with controlling where US citizens hold their money. A wall is being built very quietly and you have to wonder how it will be used.
This topic is being tracked on the forum. Stop by if you want to discuss it:
An Unknown Economic Climate?
May 31st
Someone wanted to know: Are we sure there are no more than four economic investing climates that can affect the Permanent Portfolio?
What the question refers to is the core idea in the Permanent Portfolio that we have to only contend with four states in the economy:
1) Prosperity
2) Inflation
3) Deflation
4) Recession
This is a critical concept in the portfolio and why it works so well in protecting and growing money against an unknown future. Because there are only four economic climates, we need to own just four assets to deal with each:
Stocks are for Prosperity
Gold is for Inflation
Long Term Bonds are for Deflation
Cash is for Recession
So are we really sure that’s all that exists? Is there a fifth case that could blindside the portfolio?
This is an excellent question.
Aside from Harry Browne and Terry Coxon who created the strategy, a lot of other people have put many brain cycles into this. My own review of history agrees with what Browne and Coxon postulated. I’ve only ever seen four economic cycles.
A review of US market history and other market history you can find various events on the timeline and see how the markets reacted. Before we went off the gold standard there were periods of inflation and deflation in the US - During the Civil War (inflation) and Reconstruction (deflation) for instance.
In other economies we can see similar cases of how the stock market, bonds and the money supply expanded and contracted. Recently I had a person in Greece write and they are facing huge problems that could very likely impact their savings due to bad inflation if they leave the Euro. In that country people are responding by buying gold if they are able. So even in that unpredictable situation inflation is the likely predicted outcome and people are responding to it by buying gold just as the Permanent Portfolio idea would suggest.
In 2008 we had a currency crisis in Iceland that caused bad inflation and gold was again the asset to hold for Icelanders.
Yet in that same year 2008 we had a deflationary event kick off in the US and LT bonds were the asset to have. But in 2009 the markets righted themselves and the stock market recovered sharply as deflation threats seemed to fade so stocks responded well.
Are you dizzy yet?
These were different countries with different results but the economic climates were each respectively accounted for with the portfolio.
But here’s the thing: These events were not predicted by the portfolio at all. Yet they all fell into the four economic climates model perfectly fine and the portfolio weathered the storms.
Could another economic climate exist? What history we have across multiple countries shows that some pretty serious events have occurred and the four economic climate model has pretty much accommodated them all as far as I can tell. So from my view I think the four economic climates are all we need to worry about.
Mark Hulbert on the Permanent Portfolio
May 18th
Well known investment newsletter expert Mark Hulbert has written a nice article on the Permanent Portfolio concept:
Would you be interested in an all-weather portfolio that, despite hardly ever changing its composition, performs creditably in almost all market environments?
Why that does sound good doesn’t it? Click below to find out more:
Permanent Portfolio Allocation
Permanent Portfolio Historical Returns
Enjoy the article and also be sure to check out the new Permanent Portfolio discussion forum: