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.

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!