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Permanent Portfolio Review - Year 4

A helpful place to also put any annual reports etc, of your own portfolios
OLTB
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Permanent Portfolio Review - Year 4

#508496

Postby OLTB » June 20th, 2022, 4:18 pm

Afternoon all

This is an ongoing experiment that I set up four years ago to see if Harry Browne's 'Permanent Portfolio' would work in the modern era. Currently I run a HYP, IT portfolio and passive portfolio and wanted to see if a Permanent Portfolio strategy would be less hassle and better wealth-wise for me for one/two/all portfolios once I retire in about 14 years time. The exercise started out with me investing a notional £200,000, equally split between the four asset classes and rebalancing once a year so that growth is captured and distributed equally for a further 12 months. Another year has passed and the results are below:



Another disappointing portfolio return of -2.38%, with Gilts being the main culprit. The Gold holding as the outlier, up 16% over the past 12 months. As this is an exercise in the longer term results, I shall stick with the initial principle of rebalancing all holdings at the start of the 12 month cycle and capturing and redistributing the Gold profit into those assets that have fallen in value. The average return over this initial three year period is a tick over 3% p.a.

I am also following a stock/Gold 50/50 portfolio as has been mentioned by 1nvest previously and the results of this are as follows:



So, over the past 12 months, this approach has worked better return-wise (no gilts) with a 5.08% appreciation in capital terms. As with the Permanent Portfolio, I shall rebalance equally for another 12 months and see what the position is then. The average return of the Stock / Gold portfolio is 8.66% over the last four years.

I also started a 'Golden Butterfly' portfolio last year but this is only two year's performance figures rather than the four years for the portfolios above. This portfolio includes a small cap exposure into the Permanent Portfolio and again, it will be interesting to see what the longer term results are when compared to the others above.



The overall portfolio performance for the Golden Butterfly has been the poorest this year when compared to the other two. All elemenst reducing in value aside from Gold and the average return over the two years has been 1.65% - early days however.

It will be interesting over the years to see what the results are and whether these simple, relatively hassle-free strategies might just be what works for me eventually. It will also be interesting to see what the average annual returns are so that if this is a strategy I adopt, what a sensible withdrawal rate looks like.

I hope some of you find it interesting...

Cheers, OLTB.

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Re: Permanent Portfolio Review - Year 4

#508557

Postby JohnW » June 20th, 2022, 11:27 pm

Here’s some similar annual performance data going back to 2006. There are other portfolios also.
https://www.bogleheads.org/blog/2022/01 ... 21-update/

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Re: Permanent Portfolio Review - Year 4

#508613

Postby Spet0789 » June 21st, 2022, 9:39 am

Very interesting post - thanks.

Just as an observation I think the Permanent Portfolio’a large allocation to bonds will have created a lot of back testing bias between 1970 and 2020 as yields broadly fell.

There was no way that the fixed income component, more specifically the long dated bonds, of a PP established in recent years with entry yields so low could have contributed positively to returns.

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Re: Permanent Portfolio Review - Year 4

#508684

Postby OLTB » June 21st, 2022, 4:22 pm

Spet0789 wrote:Very interesting post - thanks.

Just as an observation I think the Permanent Portfolio’a large allocation to bonds will have created a lot of back testing bias between 1970 and 2020 as yields broadly fell.

There was no way that the fixed income component, more specifically the long dated bonds, of a PP established in recent years with entry yields so low could have contributed positively to returns.


Thanks Spet0789

Yes, I completely agree about bonds and have no direct exposure myself as I don't see the value (my IT portfolio may have some exposure though). I just thought that I'd do this experiment, rebalancing regardless, as it'll be interesting to see what happens over the years.

All the best, OLTB.

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Re: Permanent Portfolio Review - Year 4

#508702

Postby 1nvest » June 21st, 2022, 6:11 pm

I am also following a stock/Gold 50/50 portfolio as has been mentioned by 1nvest previously

UK home (£) - such that your 'rent' is liability matched (and might also serve as a late life care-home fees cover - typically for the longer surviving partner), and assuming that to be around half the value of your liquid assets, its reasonable to asset allocate a equal blend of US$ primary reserve fiat (US stocks) and global non-fiat (gold) currencies for the liquid assets. The ancient Talmud are suggested as having advocated division of thirds each land/commerce assets/reserves millennia ago.

Reduce dividend taxation risks (via non dividend conglomerate type stocks) and ...

Image

to end of May 2022 a +16.6% year gain.

Land (home), stock, commodity asset diversity, £, primary fiat reserve (US$) and global currency diversification.

For gold, split that 50/50 between physical (ounces) and paper (gold fund)

Form your own dividends at the times and amounts that you opine to be appropriate. More ideally IMO end of March years is the better choice of yearly rebalance timing, to align with the fiscal years such that in some years you might defer rebalancing until the start of the new year, or rebalance in the old year, or a combination of both ... according to whichever might be the more tax efficient choice.

A tad over 12% annualised since June 1991. And where 'bad' years have been relatively minor worries.

Back in past double digit inflation periods, taxation rates also increased significantly, such that even if bonds yield 12% in a 12% inflation arena, after 38% taxation that's a -4.5% real (after inflation/taxation) loss factor (IIRC 38% taxation rates were the basic rate taxpayers rates back in the 1970's when inflation was into double digits).

The main risk with holding US assets is that of Estate Tax risks. US/UK treaty can have UK investors benefit to the same (generous) degree as American's (north of $10M exemptions), BUT only if correctly managed, filing the right version of forms, correctly filled-in, at the right time. So a codicil/note-to-heirs to seek appropriate council proficient in such form filling/registration. I guess if contracted as experts and they get it wrong then your heirs would be able to pursue a claim for the losses. Perhaps a couple of grand more expensive than alternative council, but well worth the additional 'insurance'.

Look at the yearly bars and ponder the comparable emotions across the 2000-2003 dot com bubble burst, 2008/9 financial crisis, and more recent Covid valley periods. When in some cases alternatives were seeing deeper than 33% losses.

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Re: Permanent Portfolio Review - Year 4

#508711

Postby Spet0789 » June 21st, 2022, 7:43 pm

1nvest wrote:
I am also following a stock/Gold 50/50 portfolio as has been mentioned by 1nvest previously

UK home (£) - such that your 'rent' is liability matched (and might also serve as a late life care-home fees cover - typically for the longer surviving partner), and assuming that to be around half the value of your liquid assets, its reasonable to asset allocate a equal blend of US$ primary reserve fiat (US stocks) and global non-fiat (gold) currencies for the liquid assets. The ancient Talmud are suggested as having advocated division of thirds each land/commerce assets/reserves millennia ago.

Reduce dividend taxation risks (via non dividend conglomerate type stocks) and ...

Image

to end of May 2022 a +16.6% year gain.

Land (home), stock, commodity asset diversity, £, primary fiat reserve (US$) and global currency diversification.

For gold, split that 50/50 between physical (ounces) and paper (gold fund)

Form your own dividends at the times and amounts that you opine to be appropriate. More ideally IMO end of March years is the better choice of yearly rebalance timing, to align with the fiscal years such that in some years you might defer rebalancing until the start of the new year, or rebalance in the old year, or a combination of both ... according to whichever might be the more tax efficient choice.

A tad over 12% annualised since June 1991. And where 'bad' years have been relatively minor worries.

Back in past double digit inflation periods, taxation rates also increased significantly, such that even if bonds yield 12% in a 12% inflation arena, after 38% taxation that's a -4.5% real (after inflation/taxation) loss factor (IIRC 38% taxation rates were the basic rate taxpayers rates back in the 1970's when inflation was into double digits).

The main risk with holding US assets is that of Estate Tax risks. US/UK treaty can have UK investors benefit to the same (generous) degree as American's (north of $10M exemptions), BUT only if correctly managed, filing the right version of forms, correctly filled-in, at the right time. So a codicil/note-to-heirs to seek appropriate council proficient in such form filling/registration. I guess if contracted as experts and they get it wrong then your heirs would be able to pursue a claim for the losses. Perhaps a couple of grand more expensive than alternative council, but well worth the additional 'insurance'.

Look at the yearly bars and ponder the comparable emotions across the 2000-2003 dot com bubble burst, 2008/9 financial crisis, and more recent Covid valley periods. When in some cases alternatives were seeing deeper than 33% losses.


Generally makes sense, but I think picking BRK flatters the return. How does the 12% look with SPX?

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Re: Permanent Portfolio Review - Year 4

#508716

Postby 1nvest » June 21st, 2022, 8:39 pm

Spet0789 wrote:I think picking BRK flatters the return. How does the 12% look with SPX?

Over the last 20 years BRK has been pretty much been a closet tracker. Suffered less in the years prior to that i.e. declined less during the dot com bubble burst 2000 through 2002 years.

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Re: Permanent Portfolio Review - Year 4

#508756

Postby Kantwebefriends » June 22nd, 2022, 12:04 am

The main risk with holding US assets is that of Estate Tax risks.


Does that apply if I hold US equities or TIPS only within a SIPP?

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Re: Permanent Portfolio Review - Year 4

#510517

Postby 1nvest » June 29th, 2022, 9:00 am

Kantwebefriends wrote:
The main risk with holding US assets is that of Estate Tax risks.

Does that apply if I hold US equities or TIPS only within a SIPP?

I don't have a SIPP and don't know the answer to that question.

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Thirds each 10 year gilt ladder, US stock, Gold

#510548

Postby 1nvest » June 29th, 2022, 9:51 am

OLTB wrote:
Spet0789 wrote:Very interesting post - thanks.

Just as an observation I think the Permanent Portfolio’a large allocation to bonds will have created a lot of back testing bias between 1970 and 2020 as yields broadly fell.

There was no way that the fixed income component, more specifically the long dated bonds, of a PP established in recent years with entry yields so low could have contributed positively to returns.

Thanks Spet0789

Yes, I completely agree about bonds and have no direct exposure myself as I don't see the value (my IT portfolio may have some exposure though). I just thought that I'd do this experiment, rebalancing regardless, as it'll be interesting to see what happens over the years.

All the best, OLTB.

Another variant might be to hold equal weightings, yearly rebalanced, US stock, 10 year Gilt Ladder, Gold.

A combination of short (1 year) and long (20 year) Gilt barbell combines to a central 10 year Gilt bullet. For a rolling 10 year Gilt ladder, where you buy another 10 year Gilt with the proceeds of the maturing bond, you can ignore ongoing market valuations as the rewards are approximately the average of all of the yields (I say approximately because in practice not every rung of the ladder will have been precisely bought with the same £££ amount as the other rungs). A established ladder averages the 10 year Gilt yields, but has a average duration of 5 years to maturity and yields a consistent/stable reward when you don't bother with marking-to-market (ongoing price fluctuations of each of the Gilts) - as that is irrelevant unless you opt to not hold each bond to maturity.

Such a ladder tends to lag ongoing yields. Pays more when yields are generally/broadly declining, pays less when yields are generally/broadly rising. A factor is that decreasing/increasing yields tend to be more saw-tooth like, rise quickly/fast, inter-spaced with more prolonged/slower declines. Being out of phase with (delayed compared to) other assets is also a form of time-diversification.

You might totally avoid bonds, or try and time bonds, or simply just average bonds. When you average the tendency is that you will at least have bought some at near the peaks, but also bought some at the troughs - where a rolling ladder averages around the central point overall. In being out-of-phase then stocks and/or gold might be doing well when bonds are lagging and vice-versa.

Another nice feature is that its relatively easy to maintain, especially if also combined with stocks and gold. Simply rebalance the portfolio as/when each Gilt matures as your rebalance time point. Assuming equal weightings in each of stocks, gold, 10 year gilt ladder then with 33% of capital in gilts and ten rungs so 3.3% of the total portfolio appears as cash in your account each year as a bond matures. Combined with that you might perhaps sell some gold and buy more shares, or sell some shares to buy more gold ... along with adding another 10 year Gilt to the portfolio.

In holding UK £ Gilts, and US$ based stocks along with a global non fiat currency (gold), has you equally diversified across three currencies (£/US$/global) and three assets (Bonds/Stocks/Commodity). Historically for a UK investor (£ total returns excluding costs/taxes excepting US 15% dividend withholding tax assumed to have been applied against a UK investor holding US stocks), 1972 to 2020 inclusive = 10.8% annualised nominal total return, with bad years being infrequent and relatively mild, or where adjacent years compensated for bad years.

Image

Yes many say bonds have only one way to go, are a poor choice of asset to buy/hold at present, but when might they be deemed to be a better choice? If you manually try to time that the historic realities are that investors tend to miss the boat completely. In contrast averaging in a mechanical like manner tends to have you having bought some bonds at/near the optimal peak point - there's a element of 'convexity' that overall is good for a broader/overall portfolio.

The US$ and US stocks tend to correlate, whilst gold priced in US$ tends to have a inverse correlation. Blended with some stable bond rewards and three way currency, three way asset diversification along with elements of low/inverse correlations collectively has historically yielded OK rewards with modest/mild risk (volatility), including across periods of rising yields (1970's to early 1980's saw gilt yields rise considerably).

In practice thirds each of stock/bonds/gold might be little different in overall total reward terms to that of the Permanent Portfolio that in effect holds 25% in each of stocks and gold, 50% in a 10 year Gilt (as 50/50 short and long dated gilt barbell broadly aligns to a central 10 year bullet). And similarly not be that broadly different to 50/50 stock/gold (that tends to also combine to being like a central bond-like bullet). More a question of what choice of assets/weightings you might feel most comfortable with. As at any time one of the assets will tend to have performed relatively poorly, whilst another having performed relatively well, having equal weightings to each is perhaps the overall most comfortable choice.

Looking at historic US data comparing the Permanent Portfolio with its 50/50 short and long dated treasury bonds to that of the bonds being held via a 10 year, and comparing to holding thirds each of stock/gold/bonds, and generally just noise of differences ... PV comparison

PS that 1990 bad year was a relatively short lived event in practice, more a case of high volatility at around that time and where end of year valuations aligned to being at/near the peak to trough high volatility swings. Shifting for instance to fiscal/April years and that was a significantly lower 'loss/bad-year' (as were the adjacent good years less extreme).

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Re: Thirds each 10 year gilt ladder, US stock, Gold

#510753

Postby BT63 » June 29th, 2022, 6:33 pm

1nvest wrote:Another variant might be to hold equal weightings, yearly rebalanced, US stock, 10 year Gilt Ladder, Gold.


I've often felt that the Permanent Portfolio was too cautious and cash/bond heavy (25% in each) and a little lacking in real growth potential, being quite light on shares (25%).

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Re: Permanent Portfolio Review - Year 4

#510863

Postby JohnW » June 30th, 2022, 12:01 pm

This site shows a 4.4%/year real return, with 7% standard deviation. Less growth and less wobble than other popular choices.
https://portfoliocharts.com/portfolio/p ... portfolio/

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Permanent Portfolio

#511844

Postby 1nvest » Yesterday, 1:48 pm

BT63 wrote:I've often felt that the Permanent Portfolio was too cautious and cash/bond heavy (25% in each) and a little lacking in real growth potential, being quite light on shares (25%).

FT250 at year start was around the 24000 price level, more recently its down to around 18000 level, so cash even at 0% interest buys 33% more FT250 shares - for real :)

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Re: Permanent Portfolio

#511898

Postby BT63 » Yesterday, 4:53 pm

1nvest wrote:FT250 at year start was around the 24000 price level, more recently its down to around 18000 level, so cash even at 0% interest buys 33% more FT250 shares - for real :)


Yes, but since the FTSE 250 came into existence in the 1980s, even with the significant decline in FT250, cash only buys 8% of the quantity of FT250 that it did back then.
Even when the FTSE 250 hits bottom (probably after being almost cut in half, around 13000 - 14000) cash will still only buy around 11% of the quantity of FT250 that it did when FT250 came into existence.

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Re: Permanent Portfolio Review - Year 4

#511948

Postby 1nvest » Yesterday, 7:15 pm

Yearly rebalanced 50/50 FT100/Cash (T-Bills) has broadly tracked 100% FT100 1986 to 2021 inclusive.

But that is price only. Factor in dividends and 50/50 yielded half the dividends to that of 100% FT100.

In that context, the 50% cash still purchases the same number of FT100 shares as it did over 30 years ago.

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Re: Permanent Portfolio Review - Year 4

#511954

Postby CliffEdge » Yesterday, 7:23 pm

Berkshire Hathaway down again today


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