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Permanent Portfolio Review - Year 2

A helpful place to also put any annual reports etc, of your own portfolios
OLTB
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Permanent Portfolio Review - Year 2

#319412

Postby OLTB » June 18th, 2020, 1:45 pm

Afternoon all

This is an experiment that I set up two 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:



All in all, a very decent return of 10%, with the majority of growth coming from Gold for the second year running. I am aware that many investors do not like Gold as it does not generate income, however, in this exercise, rebalancing the growth and re-investing (or withdrawing some capital if I needed it when retired), the asset class has done well.

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 even better return-wise with a 15% appreciation in capital terms. As with the Permanent Portfolio, I shall rebalance equally for another 12 months and see what the position is then.

It will be interesting over the years to see what the results are and whether this simple, hassle-free strategy might just be what works for me eventually.

I hope some of you find it interesting!

Cheers, OLTB.

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Re: Permanent Portfolio Review - Year 2

#319509

Postby 1nvest » June 18th, 2020, 5:20 pm

Hi OLTB
OLTB wrote:
This is an experiment that I set up two 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 Permanent Portfolio is a bit too heavy on 'bonds'. Combined 50% in a barbell of short dated Gilts and Long dated (20 year) Gilts equate to 50% in a 10 year Gilt bullet. 25% stock, 25% gold, 50% 10 year Gilt type allocation.

50/50 stock/gold is also a barbell of two extremes, that combine to be like a central - currency unhedged global bond, and a volatile one at that.

Really (very subjectively - as outlined below) both of those need more tilting towards 'equities'. 67/33 or 75/25 are nice choices IMO. 25% in US S&P500, 50% in UK FT250, 25% gold ... significantly reduces single stock/sector risk factors. Large cap indexes can end up holding 10% in single stocks, and perhaps 30% or more in single sectors. Mid cap (such as FT250) are much less prone to such concentration. And periodically such concentration backfires. Tech sector/stocks post dot com bubble bursting, Financial stocks post 2008/9 financial crisis. Even Japan post 1990's when massive giants faltered, but even after having halved or more they still remained large and dominated the Japanese stock index.

50% FT250 (£), 25% US$ (primary reserve currency), 25% gold (global currency and also a commodity) ... has you neutral on the currency front (half £ half foreign), whilst reducing down single stock/sector risk factors.

Whilst historically gold has acted as a drag factor, for instance a third S&P500, two thirds FT250 has pretty much compared to HYP's, at times having included gold does float the portfolio, helps smooth things down, and over other periods can be beneficial.

Image

With (history depicted) caveats, including around 25% to 33% gold in a portfolio has provided more consistent rewards over all of time - at least going back to 1825. If you measure the 30 year real (after inflation) gains from all-stock, and compare that to 67/33 or 75/25 stock/gold for all 30 year periods, and then measure the median (average) of all of those, then the gains are very similar to that of all-stock, near-as identical. But the all-stock set is more volatile, sees wider deviations in the 30 year annualised gains. The 1980's/1990's strong Bull for all-stock has many assuming such historic pattern will persist into the future. It wont. Sometimes you miss the trees for the forest. Since 2000 (US data) drawing a 4% inflation adjusted amount from all stock compared to a 67/33 stock/gold blend ...

Image

has seen remainder of the £10,000 start date inflation adjusted portfolio value decline. 2000 onward has been more like the 1970's when holding some gold was better than not. Over the 1980's/90's it was better to not have held gold - but the rewards were still reasonable if you did hold some gold but not as good as the great gains if you'd held all-stock. Over all of those cycles it was better to hold gold than not, and that pattern repeats back over very long term history. In some multiple decade periods gold will feel like a liability, where you are repeatedly reducing stocks that had made good gains, to add to gold, increasing the number of ounces being held, but where the price continued to decline. Over other periods however all of the accumulated ounces of gold could be a saviour for the portfolio, or at least have been 'handy' such as the above 2000 onward chart.

Consider 50/50 stock/gold barbell as a form of bond bullet, and the PP is a form of all bond. As-is 50/50 stock/gold. 75/25 stock/gold in contrast is more like a 50/50 stock/bond holding, and historically such 50/50 stock/bond has served investors well, tending to provide relatively consistent rewards over periods of both economic expansion and contraction (less cyclical in its rewards). Or even a third each S&P500, FT250 and Gold, for $, £ and global currency diversification, and a 33/67 type stock/bond type asset allocation. Personally I favour the 75/25 - as the tables/charts above, for 50/50 £/foreign type levels, as if the Pound is soaring being just a third in that is a bit too light for my liking.

I think you'll find the Permanent Portfolio, whilst tending to have low nominal yearly losses in bad years, usually single digit losses at most, is not exempted from large real (after inflation) losses/declines. A stable nominal value is nice if you only look at that, but what really matters is the real value. 50/50 stock/gold is nice in that more often one or the other will do well in most years, but there will be years when both decline (or rise). Perhaps better suited if you also own your own home and want to run with a Talmud type asset allocation of a third in land (home), business (stocks) and in-hand (gold). Home + imputed rent benefit compares reasonably to stock + dividends, so in that sense that is a 67/33 equity/gold type overall holding. For rebalancing that you can add/reduce additional UK stock holdings, maybe even of the REIT variety, as a form of liquid 'home' value. A nice aspect of owning a home is that you don't have to find/pay rent to others, your 'rent' is liability matched (de-risked). And if you're home value is £333K, and you have £666K liquid assets, invested 50/50 stock/gold, then there's a great probability that you could not only draw a £20K/year inflation adjusted reward from that as a disposable income (2% SWR), but also would have around £13K/year of imputed rent benefit included as well as part of that. And with such a low SWR you'd tend to also see real total wealth expansion over time - such that additional income might be periodically drawn out of those real gains.

Yet another consideration is pensions - which might be counted as a form of 'bond'. Someone who has £8K of state pension, £12K of occupational pension might not need to hold any bonds at all. The combined £20K/year income from those pensions might be considered as 'enough' from a bond like income production 'asset'. Fundamentally you need to consider such 'assets' as owning a house, pension incomes ...etc. as part of your overall asset diversification. Not restrict your view of diversification as being just a bunch of stocks with business activities in different sectors ... or whatever.

Fundamentally

1. If you own your own home, and also have a reasonable pension income, then all stock could be fine. HYP, or either 67/33 or 75/25 stock/gold, or even 50/50 stock/gold could serve you well.

2. If you rent and have no pension(s) then you're much more reliant upon a regular/consistent inflation adjusted investment income, then IMO all-HYP (stock) is a risk, A stock/bond blend helps de-risk that. But where the Permanent Portfolio is likely insufficiently rewarding enough. 67/33 or 75/25 stock/gold would be the choice IMO.

Commonality is the 67/33 or 75/25 choice. And where that can achieve the median all-stock type reward, but with less risk (volatility).

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Re: Permanent Portfolio Review - Year 2

#319693

Postby OLTB » June 19th, 2020, 9:58 am

1nvest wrote:The Permanent Portfolio is a bit too heavy on 'bonds'.

Really (very subjectively - as outlined below) both of those need more tilting towards 'equities'. 67/33 or 75/25 are nice choices IMO. 25% in US S&P500, 50% in UK FT250, 25% gold ... significantly reduces single stock/sector risk factors. Large cap indexes can end up holding 10% in single stocks, and perhaps 30% or more in single sectors. Mid cap (such as FT250) are much less prone to such concentration. And periodically such concentration backfires. Tech sector/stocks post dot com bubble bursting, Financial stocks post 2008/9 financial crisis. Even Japan post 1990's when massive giants faltered, but even after having halved or more they still remained large and dominated the Japanese stock index.



Thanks so much 1nvest for the background information and research - it is much appreciated. The structure you refer to above I think looks similar (ish) to a 'Golden Butterfly' portfolio (although still low in equities to the level you suggest) so what I'll do is replicate the two initial portfolios as they are but add in this new portfolio structure with an initial notional £200,000 and see how all pan out over the years.

For those who are unaware, a Golden Butterfly portfolio is made up of the following asset classes with accompanying TIDMs:

20% Total stock market (VWRL)
20% World small cap (WOSC)
20% Long term UK bonds (IGLT)
20% Short term UK bonds (IGLS)
20% Gold (SGLN)

Cheers, OLTB.

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Re: Permanent Portfolio Review - Year 2

#319740

Postby 1nvest » June 19th, 2020, 11:52 am

In case you're interested in either the Permanent Portfolio or Golden Butterfly, the GB was originally devised by Tyler over on the gyroscopicinvesting board (a Permanent Portfolio discussion board) https://www.gyroscopicinvesting.com/for ... 02#p130302

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Re: Permanent Portfolio Review - Year 2

#319748

Postby 1nvest » June 19th, 2020, 12:35 pm

If you come to a point where you're trying to approximate what a Pension might be worth in bond terms, then one method is to simply use a life expectancy of age 85, subtract your current age to determine how many years you have left until then, and then multiply that by the amount of the yearly pension value.

For example at age 67 I'm currently predicted to receive around a £175/week state pension = £9000/year (rounding). So if I were 67 and just started receiving that £9K/year pension I'd consider it to be the equivalent of 85 - 67 = 18 x 9K = £160K of bond value (again rounding).

Comparing that to a annuity for instance and https://www.hl.co.uk/retirement/annuiti ... -buy-rates indicates that for a 55 year old, £100,000 buys £3536/year of single life income (level amount, not uplifted by inflation). So flipping that around 30 years of life expectancy to age 85 = 30 x 3.5K/year = £106K.

In that vein, if I were 66 and about to receive a state pension of £9K/year, was living a £18K/year lifestyle then £160K invested in a safe 'cash deposit' like investment/account with the intent to draw that down to zero by age 85, would cover that in a reasonably safe manner. The likes of the Permanent Portfolio (or something like a third each in cash/stock/gold) could be that 'safe deposit account'. Better still if you can buy index linked gilts and perhaps a ladder of those spanning each year for ages 67 to 85, but at present valuations (negative real yields) they're pretty much a no-go nowadays.

With 18K/year income sorted (via pension and drawdown of a £160K amount invested into a Permanent Portfolio/whatever), then the rest can be used for whatever - such as stocks.

Sadly the UK government seems to be progressively increasing risk/instability for the population it serves, rather than improving/maintaining stability. Failing to provide for workers to be able to save for their retirement and/or have reasonable pensions, to instead forcing you more into riskier ventures and/or raiding pensions. Occupational pensions for instance during my working lifetime were far far better than those of the current younger generation. Backward moving. In some respects its the same for healthcare, where increasing rather than the whole insuring each other, its increasingly moving towards being each individuals own responsibility to fund whatever care they might need (much higher risk, again backward moving).

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Re: Permanent Portfolio Review - Year 2

#319802

Postby 1nvest » June 19th, 2020, 3:23 pm

Correction to my previous image - that didn't include 2019/2020 fiscal year end FT250 data

Image

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Re: Permanent Portfolio Review - Year 2

#327716

Postby 1nvest » July 21st, 2020, 3:32 pm

The PP is a form of multi-way constant value style portfolio. With constant value you start with say £40,000 in shares, some cash, and each year you buy or sell enough shares to re-align the stock value to being £40,000. A variation of that is to uplift the value by inflation each year. In the PP's case however it applies that repeatedly to all its four assets, and realigns each to the average value.

Constant value scales number of shares (ounces of gold, bond certificates/whatever) up and down over time. Looking back at historical UK PP (share price only, excluding dividends for the stock holdings), and we see the variations in those shares (ounces/bonds/whatever). I've flipped the Y-axis scale in this image as that sits better with seeing when individual asset prices were relatively high (near the top/low % value) or low (bottom/high % value).

Image

If you rebalance back to the percentage of shares as a proportion of total shares cross all of the four assets and use the end of year value/percentage for that as the target rebalance % weighting figures for each of the assets, it doesn't seem to add or detract from risk or reward compared to just rebalancing back to 25% equal weightings. For 2020 the figures for that were 24.2% gold, 17.4% long dated gilt, 39% cash and 19.3% gold. Which reflects both gold and long dated gilts being perhaps relatively high in value. More awkward to work out compared to just rebalancing to 25% equal weightings, but nice to see the relative valuations and how they move around over time.

If for instance you were starting in 1980, then the indications were to load into gold relatively lightly - after massive gains in the price of gold, and heavily into long dated gilts (when yields were very high). Note that LTT in that chart = Long Term Treasury (another name for long dated Gilts) and PM is Precious Metals (for which I used silver pre 1972, gold from 1972 due to the US$ still pegging to gold up until 1971).

That could detract from accumulation of shares/ounces/certificates however. For instance over the 1980's and 1990's whilst the price of gold near halved, the PP accumulated nearly a 10 times multiple of ounces of gold. That is if you started the 1980's with 10 ounces of gold, you ended the 1990's with getting on for 100 ounces of gold. And since 2000 those ounces of gold have enabled (been reduced to buy) more stock shares to be accumulated ...etc. However as the two portfolios still generally compared in overall reward, it doesn't seem to make much of a difference to overall outcome.

A factor with the PP is that it works as a complete engine, needs all of the components to run properly. If for instance you omit long dated gilts then it wont have it rebalancing to buy more as/when prices decline. A incomplete PP is like baking a 4 ingredient cake, with only 3 of the ingredients, omit the baking powder for instance and the cake doesn't rise. Using the percentage shares type measure as I've outlined above is perhaps more comfortable for initial loading of a newly started PP. And then perhaps switch back to using standard 25% equal weightings at a later date. Trouble is, the nature of the PP is that it nearly always has one or more of the assets that "don't feel comfortable" at any one time - that's just part of its core nature/workings.

The overall differences ...
Image
Note that RR = CAGR / stdev ... a form of Sharpe like risk/reward measure that I use, where the higher the number the better. Those figures as mentioned earlier exclude stock dividends being included (as comparing just share price with gold and cash and bonds ... is more of a equal comparison, where each/any/all of them might reasonably be expected to compare to inflation over time).

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Re: Permanent Portfolio Review - Year 2

#327717

Postby 1nvest » July 21st, 2020, 3:36 pm

I've summed up all of that previous posting into a single (large) image. Presented here as a thumbnail, so click it to view the larger version
Image

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Re: Permanent Portfolio Review - Year 2

#327723

Postby 1nvest » July 21st, 2020, 3:49 pm

BTW here's a link to the previous years review/thread viewtopic.php?t=18140#p230140
Interesting to see how some were saying they wouldn't touch longer dated gilts, whilst your data above indicated such gilts are 8% up over the year.

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Re: Permanent Portfolio Review - Year 2

#327735

Postby dealtn » July 21st, 2020, 4:31 pm

1nvest wrote:BTW here's a link to the previous years review/thread viewtopic.php?t=18140#p230140
Interesting to see how some were saying they wouldn't touch longer dated gilts, whilst your data above indicated such gilts are 8% up over the year.


To be fair that person gave only an opinion and also offered alternatives such as short term Gilts, Index Linked Gilts and Gold. Compared with the 8% you quote those alternatives would have provided returns of approx. 2%, 5%+ and perhaps up to 20%. Better to be less selective and provide the bigger picture surely?

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Re: Permanent Portfolio Review - Year 2

#327782

Postby 1nvest » July 21st, 2020, 8:47 pm

IIRC Harry Browne advocated using the longest dated of Treasuries for the LTT (long term treasury) holdings. We're somewhat blessed in the UK with a wide range out to very long dates that few other countries can attract buyers of.

30 year seems a reasonable compromise, and 2019 they were up +14.76%. Here's a PP spreadsheet for UK based returns since 2002

30 Year gilt yearly total returns since 2009 ...
2009 -3.43%
2010 4.06%
2011 26.91%
2012 3.50%
2013 -5.89%
2014 24.21%
2015 3.56%
2016 14.50%
2017 7.46%
2018 1.09%
2019 14.76%

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Re: Permanent Portfolio Review - Year 2

#327789

Postby 1nvest » July 21st, 2020, 9:06 pm

FT All Share, Gold, 5 year gilt ladder, 30 year gilt Permanent Portfolio ...

Image

7.4% annualised

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Re: Permanent Portfolio Review - Year 2

#327793

Postby 1nvest » July 21st, 2020, 9:50 pm

Comparing PP total returns for US investors to that of UK investors and the two pretty much aligned since 2006 when compared on simple yearly % total returns
https://www.bogleheads.org/blog/2020/01 ... 19-update/ ... but where one is in US$ and the other GB£

If a UK investor held a US PP then their US$ denominated PP would be worth over 40% more in £ terms due to foreign exchange (FX £ relative decline to the US$) https://fred.stlouisfed.org/series/DEXUSUK ... adding 2.5% annualised

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Re: Permanent Portfolio Review - Year 2

#327807

Postby 1nvest » July 21st, 2020, 11:40 pm

In addition to proposing longer dated Treasuries for their higher volatility, Browne also did suggest holding higher volatility stocks or stock funds.

Substituting FTSE250 stock for the 'stock' holdings ...
Image

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Re: Permanent Portfolio Review - Year 2

#327949

Postby 1nvest » July 22nd, 2020, 2:31 pm

Image

That's with Long dated Gilts assumed to be the average of 20 and 30 year long term gilt reward for each year. i.e. you might buy a 30 year gilt, hold that series for a decade and then roll the then 20 year into another 30 year series (averaging 25 years maturity).

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Re: Permanent Portfolio Review - Year 2

#328067

Postby 1nvest » July 22nd, 2020, 11:45 pm

Large cap UK stocks and 20 year Gilt based PP going back to 1970 (interesting to see how it performed over a period of rising/high inflation)

Image

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Re: Permanent Portfolio Review - Year 2

#329498

Postby 1nvest » July 29th, 2020, 8:01 pm

25% gold, along with 75% Vanguard Lifestrategy 40 (40% stock/60% bonds). Combined ... close enough to a global PP.

Image

Vanguard ...
0.15% platform fee, capped at £375/year
0.22% LS40 expense ratio, so 0.165%/year when proportioned to 75% weighting

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Re: Permanent Portfolio Review - Year 2

#329587

Postby Adamski » July 30th, 2020, 9:02 am

I do like this lazy portfolio approach. There's lot to be said for it. Smooths volatility and easier to sleep at night. Also think having gold in a portfolio allocation is a must with bond yields so low.

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Re: Permanent Portfolio Review - Year 2

#329673

Postby 1nvest » July 30th, 2020, 12:40 pm

with bond yields so low

The image I posted earlier ...
Image
indicated how the number of stock shares/ounces of gold ..etc. actual holdings have varied over time and is indicative of how the PP buys relatively cheap. By including all four assets and periodically rebalancing there will be possibly long periods of reducing winner(s) to add to loser(s). 1980 and 1990 for instance saw gold prices in a prolonged down run, but if that means you ended up with 10 times as many ounces of gold at the end then the price declines are offset by the accumulation of more shares/ounces/bond yield as each of the assets cycle through their own times with and against the wind.

Yes bond yields are high, and including long dated Gilts seems like a bad choice, however bond prices have still risen substantially since 2009 when many were back then saying bonds were too high in price. When yields do turn around to rise, whilst bond prices will fall, so the other winning asset(s) at that time will tend to be reduced to buy more higher yielding bonds. Bond duration also tends to shorten down the time to achieve break-even such that long dated Gilt losses across a period of rising interest rates/yields will likely be less than what many perceive might be the case. 1980's/1990s had the PP accumulating ounces of gold at ever decreasing prices. 2000's is seeing some of ounces of gold being deployed to accumulate more stock shares. Over another period, rising interest rates, and it will be accumulating more 20 year Gilts at ever increasing yields (at least until yields top-out).

The alternative is to employ another approach, perhaps involving timing. More often however that doesn't work out well.

Harry Browne did say on numerous occasions that you should own stock and bonds from your own country as there's a inter-working going on between the assets. Holding foreign stocks where their interest rates might be rising whilst the domestic interest rates are falling for instance messes up that inter-working. My assumption in posting the Vanguard LS40 as 75% of holdings is that reflects a global PP in holding both global stock and bonds (and gold is a form of global currency/commodity). How well or not that might pan out ???

I guess as the FT100 holds many foreign firms just listing out of London that the FT250 is more a domestic stock index to combine with UK 1 year and 20 year Gilts (along with gold). Harry did also suggest holding more volatile stocks and bonds in reflection of how the inter-workings work, and the FT250 being smaller sized stocks tends to be more volatile than the larger cap stock set.

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Re: Permanent Portfolio Review - Year 2

#329680

Postby 1nvest » July 30th, 2020, 12:56 pm

Japan don't really issue long dated bonds (20 years or more) as such you have to resort to a 10 year bullet for the bond holdings rather than a 1 year and 20 year barbell.

This is what a Japanese PP since 1972 looks like in (Japanese) inflation adjusted terms.
Image

If you did buy in at the 1989/1990 peak then it was a down/flat decade+ ride, so the PP isn't infallible. A reasonable indicator is that if there have been very large/fast gains in recent years that have pushed the overall portfolio valuation relatively/very high, then cost averaging in over perhaps 2 years, 3 timepoints is more appropriate. Otherwise if on/around trend, then as the assets all tend to counter-balance well you could lump all-in at the single timepoint.


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