The Permanent Portfolio, Investing, Finance and Random Thoughts.
Permanent Portfolio
Posts about Harry Browne’s Permanent Portfolio Concept
Gold in the Permanent Portfolio….Again!
5 months ago
by craigr
in Permanent Portfolio
Whenever the gold price spikes or is in the news a rash of threads spin up on investment forums about the asset, and an increasing number pop up about the Permanent Portfolio because it holds 25% in gold. And it always seems that the same worn out arguments come up again about it. E.g:
1) Gold is just a worthless metal.
2) Gold doesn’t produce interest and dividends.
3) Gold is in a bubble.
4) Only paranoid people hold gold in a portfolio.
Etc.
Of course I’ve been hearing these things since gold was $600 an ounce and today it’s near $1800. Gold has in fact had a terrific run the past 10 years and could crash tomorrow. We just don’t know. But this is why I always advocate holding gold in a diversified portfolio with stocks and bonds. I also always advocate rebalancing the gold when it hits the upper rebalancing bands. Permanent Portfolio investors that have followed this advice have used gold safely and effectively to weather some serious market storms and turn in nice profits along with their stocks and bonds.
So let me just lay out again my thoughts on gold. Even for those that are not using the Permanent Portfolio.
Gold is the most controversial part of the portfolio. Gold is held in the portfolio because of the way our monetary system works. It is not designed to generate returns like stocks and bonds. Gold is there to protect the portfolio against inflationary scenarios that will be very bad for stocks and bonds.
I have said on this site repeatedly that all portfolios should hold some allocation to a hard asset. I prefer gold. But if that’s not your thing then make it commodities or physical property. I don’t think they will work as well as gold for this purpose of high inflation insurance, but will work much better than stocks, bonds and certainly TIPS.
It’s not a religious issue for me. It’s just a nod to financial history that sometimes paper currencies do very bad things very quickly.
Certainly one of the more interesting analyses I’ve seen of the Permanent Portfolio’s gold allocation performance was Iceland in 2008:
http://europeanpermanentportfolio.blogspot.com/2009/08/permanent-portfolio-in-iceland.html
The hypothetical portfolio followed by an Icelandic investor significantly reduced losses in 2008 when their market and currency collapsed. This is a first world country where this happened, BTW. Even though gold was only up +5% for that year in US Dollars, in Icelandic currency it was up +259% which really helped cushion the blow for those investors.
The point of this is that the gold is a currency neutral part of a portfolio no matter what the other components are priced in. It is a very good idea to hold some assets that can be independent of your home country currency. The Permanent Portfolio uses 25% as the figure along with stocks, bonds and cash and it just seems to work fine. But for someone else’s portfolio strategy the figure may be smaller as they see fit.
My personal opinion continues to be that even if you are not following the Permanent Portfolio, you should always hold at least 10% of your portfolio in a hard asset like gold.
The above opinion I’ve posted here for years and is independent of the price of gold. Gold should always be used in a diversified portfolio of stocks and bonds. Like all assets, it should not be used un-diversified.
Yes, gold does not produce interest and dividends. Nobody disputes that. But gold is also not subject to the same risks as stocks and bonds. Further, gold has shown itself to be an extremely powerful diversifying asset in a stock and bond portfolio.
I’m sorry, but gold is not a useless metal. Nor is it only owned by paranoid kooks. Investors can choose not to own any and that is fine. But please notify me when every major govt. and central bank on this planet sells their last ounce of the stuff from their vaults and I’ll be ready to listen to the gold is worthless argument. But until that happens the debaters on this point are just tilting at windmills.
The Permanent Portfolio holds gold. It’s a required part of the strategy for you to get the full package of protection it offers. If you don’t want to own gold then the Permanent Portfolio strategy is not for you. But just be aware that the history of gold as an investment asset is long and storied for a good reason.
Rebalancing Spreadsheet
6 months ago
Just thought I’d post a link to a rebalancing spreadsheet I’ve used for some time now from www.flexibleretirementplanner.com:
The spreadsheet needs a couple small things to get working. The main thing is to erase the data in the Imported Data tab. Then, fill out the Imported Data tab with your Permanent Portfolio asset class names along with the cost basis and current market value. For example:
Vanguard Total Stock Market $xxxx $yyyy
US Treasury Long Term Bonds $xxxx $yyyy
Gold Bullion $xxxx $yyyy
Treasury Money Market $xxxx $yyyy
Next up is to go to the Asset Class Info tab. On the bottom table you want to delete the security names that are listed under the Security Table. Then go into the Asset Class 1 column and blank out the asset class types. Next, put in the asset class names exactly as typed them on the Imported Data tab. In the Asset Class 1 column select the name of the asset class that best defines what you are using. For instance for my Vanguard Total Stock Market index I just selected “Lg Cap Blend.” For the bonds select “Domestic Bonds.” For your Treasury Money Market select “Cash.” For the Gold select “Gold.” If you did this right, the current value you typed into the previous tab will be copied over, if not you will get an Not Found message. Check for typos if this happens.
Then, go to the Rebalance tab. Type in “0″ in each column entry under Target Percent to blank everything out. Then go to each asset class label (Lg Cap Blend, Domestic Bonds, Gold, Cash) and put in your desired percent holding. In the case of the Permanent Portfolio you put in 25% next to Lg Cap Blend, Domestic Bonds, Cash and Gold. You will see the figures you entered into the Imported Tab be magically copied into the spreadsheet. The target amount figure should match the portfolio values you entered in the Imported Data tab.
Finally, go to the top left box and look for Trigger Factor. This is the value where if the asset class has shifted up or down too much the spreadsheet will tell you how much you need to buy or sell to bring it back into alignment. You can try setting it between 20-30% for your rebalancing bands.
Now when you need to see if and how much to rebalance you simply update the current market values in the Imported Data tab and the figures are done for you. You can also play around with the parameters on the spreadsheet to test out various doomsday scenarios for your allocation. But be careful not to alter the formulas.
Enjoy.
US Credit Downgrade
6 months ago
Well most people at this point know the US credit rating was downgraded by S&P from AAA to AA+. The market result was a huge selloff in Treasuries today and the price crashed.
Just kidding! They are up like crazy. Strange world, eh?
I implore investors to stay out of the market timing, future predicting, and guru advice listening business. Nobody can predict the future and I don’t care how many degrees they have, what books they’ve written or what predictions they got right (luckily) in the past. It just can’t be done.
Ok, enough lecture. What does this mean for the Permanent Portfolio? Not much. The portfolio holds an allocation to gold for these situations and the gold is doing very well (even better than LT treasuries). US Govt. debt, even with the downgrade, is still a better bet than most other places (the Euro for instance is in much more jeopardy now than the Dollar). Not only this, but if the Dollar does the Swan Dive, the gold will go through the roof. And if it doesn’t Swan Dive? Well you’re still collecting nice interest payments to boost your returns. Also, there is always the chance that the US Govt. will be forced to cut down on spending and the credit rating could go back up (my hope). So, there is no need to get fatalistic about it yet.
So again I advise just sticking to the plan, rebalance if needed, and ignore the news. You can’t do anything about these things you’re hearing. Not just this, but you can’t react faster than the markets to do anything about them anyway (even assuming you can guess what the markets will actually do with that information). The only protection you have is a strongly diversified investment strategy, which the Permanent Portfolio provides.
I’m sleeping soundly.
A ship in the storm…
6 months ago
The markets are very volatile. I will remind readers that your portfolio is a package made up of very volatile assets. But put together they make a smoother ride. The individual assets may move in strong directions, but the overall portfolio value is all that matters in the end.
Don’t focus on the waves causing the bobbing of the ship in the storm. Instead, focus on the direction the ship is heading.
The direction of the portfolio is still looking good so don’t worry about it and mind your rebalancing bands.
Portfolio Update: Summer of Chaos!
6 months ago
by craigr
in Permanent Portfolio
Well I don’t like checking on the portfolio too much. However, I’ve been doing a lot of traveling this summer and apparently when I was not around the Euro is about to go kaput (we can only hope), the US is narrowly missing defaulting if a debt limit is not adjusted, there have been riots through the Middle East, the dollar has reached record lows against the Swiss Franc, there is a major heat wave striking most of the country and probably something else God-awful is sure to happen soon enough.
And what does this mean for the Permanent Portfolio?
It’s up about +7.5% this year according to Morningstar:
Total Stock Market: +0.61%
US Treasury Long Term Bonds: +10.3%
Gold Bullion: +16.4%
US Treasury Short Term Bonds/Cash: +1.1%
Wasn’t I reading something this year about how Long Term Bonds and Gold were going to blow up any day now? Yep, I’m pretty sure I did. And did I ignore these predictions? Yep, I did. Am I now benefitting by ignoring these market prognosticators while the stock market is hacking and wheezing on all this financial turmoil? Yep, I am.
No promises that bonds and gold won’t blow up next week, but so far they’ve been the only bright spot in the markets despite all the doomsday predictions. So if they have done well enough for you that they’ve triggered your rebalancing bands, why not take some of those profits and rebalance into stocks with that money? Sounds like a great idea to me if it’s time to do so for your own portfolio.
I hope you’ve been ignoring the market news and prognosticators. It’s bad for your financial health to try to predict the future. Enjoy your Summer!
