The Permanent Portfolio

[vand]

Incidentally if I strip out the cash from my own portfolios those ratios are not a million miles to my AA, which currently looks something like:

 

PMs/miners: 35%
equities: 50%
REITs 5%
Bonds 7%
Other 3%

 

[Michal]

On 22/05/2020 at 17:29, vand said:

Incidentally if I strip out the cash from my own portfolios those ratios are not a million miles to my AA, which currently looks something like:

 

PMs/miners: 35%
equities: 50%
REITs 5%
Bonds 7%
Other 3%

 

Which REITs You hold and why?

[vand]

6 hours ago, Michal said:

Which REITs You hold and why?

Scottish Widows Property fund

BLND.L

LAND.L

I like stick to the bluechips, and in the SWPF case it's the only such fund available to me in that pension scheme.

[vand]

The PP has put in its best rolling 4 month period for 40 years:

https://theirrelevantinvestor.com/2020/07/29/the-permanent-portfolio-2/

[Bratnia]

Thanks Vand for this great thread.

50% 10 year Gilt bullet (rolling 10 year ladder, not marked to market) instead of a short/long dated gilt barbell seemingly works as well with the Permanent Portfolio.

The main questions are that gold had a exceptional up-run in the 1970's when the US$ was decoupled from gold. Also 1980 - 1999 was another incredible/exceptional period, where UK stocks annualised something like 19% and even the US achieved 17% (Pound relatively declined compared to the US$). Even bonds/cash yielded good real (after inflation) rewards.

Harry Browne devised the PP more as a wealth preservation portfolio. Over a period that excludes the likes of one-off 1970's/gold and 1980/1990's stock and bond exceptional outcomes how rewarding might the PP be ... ??? According to my reckoning 1960 to mid 1970's saw more like 2% annualised real, in gross/excluding costs terms. Taxation was also much higher back then, when the Beatles were singing 'Taxman : 19 for you 1 for me' in reflection of 95% tax rates (even the average investor was seeing taxes up at near 40% levels). Feasibly that 2% real gross could have been wiped out by costs/taxes - so paramount is tax/costs efficiencies.

Considered as a wealth preservation portfolio the PP seems a good/reasonable choice. Just don't anticipate too much above/beyond that. Better for perhaps if you have 'enough' and prefer more broader diversification/lower volatility - "preservation of money you can't afford to lose" as Harry Browne put it. He also advocated holding domestic stocks due to the intended inter-workings/correlations of the assets/economic cycle (primarily short dated gilts for rising interest rates, long dated gilts for declining interest rates, stocks for prosperity, gold for uncertainty). 

That all said, UK and US PP's are still chugging along quite nicely.

[vand]

I must admit that I have evolved away from the PP since I started this thread. With the run-up in fixed income over the last 2 years in my mind it just doesn't make sense to hold so much Treasuries and T-Bills considering where yields are today. Instead I've diversified it a bit. I add REITs and a small amount of commodities.  The only scenario where this is a bad move imo is if we enter deflation. 

[Bratnia]

1 hour ago, vand said:

I must admit that I have evolved away from the PP since I started this thread. With the run-up in fixed income over the last 2 years in my mind it just doesn't make sense to hold so much Treasuries and T-Bills considering where yields are today. Instead I've diversified it a bit. I add REITs and a small amount of commodities.  The only scenario where this is a bad move imo is if we enter deflation. 

Hi vand

30 year Gilts provided around a 15% gain in 2019 and 30 year gilt since 2008 (2009 to 2019) total returns have annualised near 8% over a period when many have shied away from 'low yields'.

If you can time the individual assets - great. Otherwise just equal weighting and accepting what occurs is a reasonable stance. Likely when inflation does arrive short dated will see interest income rise with no capital losses, long dated gilts will see price declines but where the yield lags inflation - so even more negative real yields when gold tends to do well; But then inflation will decline and real yields on long dated gilts move positive, gold down/long dated gilts up, and having bought/added at relatively high yields that may be locked in for decades. Also over shorter periods it can be a case of stocks down, long dated gilt up.

That said, I am tempted myself to just totally drop bonds and just hold a Talmud style asset allocation - own a home, some stocks, some gold (around 50/50 stock/gold liquid assets). As money is printed so gold will tend to rise, as money is destroyed (taxation revenues rise as stocks etc. do well) so gold tends to declines, whilst rebalancing (trading) the two has you accumulating ounces/deploying shares or deploying ounces/accumulating shares. Across the 1980's/1990's for instance when stocks did very well and the price of gold broadly progressively declined, 50/50 accumulated multiple more ounces of gold being held compared to the number of ounces being held at the start of 1980

I do like a UK home £, US stock ($), gold (global currency) ... land, stocks, commodity type currency/asset diversification.

[vand]

29 minutes ago, Bratnia said:

Hi vand

30 year Gilts provided around a 15% gain in 2019 and 30 year gilt since 2008 (2009 to 2019) total returns have annualised near 8% over a period when many have shied away from 'low yields'.

If you can time the individual assets - great. Otherwise just equal weighting and accepting what occurs is a reasonable stance. Likely when inflation does arrive short dated will see interest income rise with no capital losses, long dated gilts will see price declines but where the yield lags inflation - so even more negative real yields when gold tends to do well; But then inflation will decline and real yields on long dated gilts move positive, gold down/long dated gilts up, and having bought/added at relatively high yields that may be locked in for decades. Also over shorter periods it can be a case of stocks down, long dated gilt up.

That said, I am tempted myself to just totally drop bonds and just hold a Talmud style asset allocation - own a home, some stocks, some gold (around 50/50 stock/gold liquid assets). As money is printed so gold will tend to rise, as money is destroyed (taxation revenues rise as stocks etc. do well) so gold tends to declines, whilst rebalancing (trading) the two has you accumulating ounces/deploying shares or deploying ounces/accumulating shares. Across the 1980's/1990's for instance when stocks did very well and the price of gold broadly progressively declined, 50/50 accumulated multiple more ounces of gold being held compared to the number of ounces being held at the start of 1980

I do like a UK home £, US stock ($), gold (global currency) ... land, stocks, commodity type currency/asset diversification.

Yes, I started my PP almost 2 years ago and the return on the Bond component has been spectacular.. but long term bond returns can roughly be predicted by the current coupon rate, and the return in the last 2 years was  at the cost of pulling forward future performance. I can't in all honestly look at 30yr Treasuries yielding 1.2% and pretend that I expect future returns to resemble the past. 

 

[vand]

10-20yr TLH is up 32% and 20+yr TLT is up 44% over the last 2 years: 

 

Those are spectacular returns from an already high base!
It's not meant to be this way.. bonds are supposed to be less risky than stocks, therefore with correspondingly lower long term returns!

 

[Bratnia]

On 06/08/2020 at 11:30, vand said:

10-20yr TLH is up 32% and 20+yr TLT is up 44% over the last 2 years: 

It's not meant to be this way.. bonds are supposed to be less risky than stocks, therefore with correspondingly lower long term returns!

According to my reckoning, if you'd reduced the PP's Gilt weighting to 20%(increased cash weighting to 30%) and recent 0.5% 20 year Gilt yields spike up to 6% in year 1; And you then rebalanced back to standard 25% Gilt weighting, but swapped out for the 30 year gilt series, and subsequently in year 2 Gilt yields declined from 6% to 4% ... and assuming cash interest also reflected those yields/rates - then all else being equal (gold/stocks unchanged), the PP would be down less than 1% as a result of the combined cash and Gilt half. If over that transition yields were > inflation then stocks would more likely do OK, or if yields < inflation gold tends to do ok and where either can offset losses in the other (stock gain > gold loss, or gold gain > stock loss). Yes looked at individually and Gilts could see large declines, but when diluted down to 20% weighting and factoring in cash/interest, the overall effect for the PP could be relatively mild. Whilst at low yields the price motions are more volatile, so potentially gilts could be the years winning asset should low yields transition even lower.

The PP seem a remarkably well balanced asset allocation. Near good enough to be a TIP/index linked gilt type asset/holding, but where its still paying out positive real yields (unlike ILG's).

[vand]

1 hour ago, Bratnia said:

According to my reckoning, if you'd reduced the PP's Gilt weighting to 20%(increased cash weighting to 30%) and recent 0.5% 20 year Gilt yields spike up to 6% in year 1; And you then rebalanced back to standard 25% Gilt weighting, but swapped out for the 30 year gilt series, and subsequently in year 2 Gilt yields declined from 6% to 4% ... and assuming cash interest also reflected those yields/rates - then all else being equal (gold/stocks unchanged), the PP would be down less than 1% as a result of the combined cash and Gilt half. If over that transition yields were > inflation then stocks would more likely do OK, or if yields < inflation gold tends to do ok and where either can offset losses in the other (stock gain > gold loss, or gold gain > stock loss). Yes looked at individually and Gilts could see large declines, but when diluted down to 20% weighting and factoring in cash/interest, the overall effect for the PP could be relatively mild. Whilst at low yields the price motions are more volatile, so potentially gilts could be the years winning asset should low yields transition even lower.

The PP seem a remarkably well balanced asset allocation. Near good enough to be a TIP/index linked gilt type asset/holding, but where its still paying out positive real yields (unlike ILG's).

 

Hmm. The idea of 30% Cash/Bills isn't very appealing to me in today's environment. Here is how the PP would have done if you have completely removed the cash component and done 1/3rd in each of the other assets (PP TR levered vs PP TR)

IMO I think starting with where the world is today, overweighting gold and global equities and underweighting fixed income components will beat the classic PP over the next decade - maybe not on risk-adjusted basis, but still with very acceptable risk and a higher overall return.