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.

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.

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

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:

Toxic Citizens?

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:

Overseas Accounts

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.

Well known investment newsletter expert Mark Hulbert has written a nice article on the Permanent Portfolio concept:

An Antidote to Volatility

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:

Permanent Portfolio Discussion Forum

Thanks everyone for checking out the new forum. We have almost 200 messages in just two days. Come on over and join the discussion:

Permanent Portfolio Discussion Forum

We have some really knowledgeable posters and great questions. Thanks for participating if you have already.