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Permanent Portfolio Review - Year 3

A helpful place to also put any annual reports etc, of your own portfolios
OLTB
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Permanent Portfolio Review - Year 3

#420112

Postby OLTB » June 17th, 2021, 10:34 am

Morning all

This is an experiment that I set up three 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 13 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:



A disappointing portfolio return of 1.46%, with the Gilt holding falling 7.68% and Gold falling 6.81%. As this is an exercise in the longer term results, I shall stick with the initial principle of rebalancing the growth from the FTSE All Share holding that rose 20.80% back into those assets that have fallen in value. The average return over this initial three year period is a tick over 5% p.a. and it will be interesting to see if this return is sustained.

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 7.14% 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 10.78% over the last three years.

I also started a 'Golden Butterfly' portfolio last year but this is only one year's performance figures rather than the three 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 this year was a decent return of 7.61% even allowing for the downturns in Gilt and Gold exposure - the small cap element increased in value by 34.32% over the year which admittedly was at a low point when invested owing to the pandemic.

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 3

#420133

Postby torata » June 17th, 2021, 11:31 am

OLTB wrote:I hope some of you find it interesting!

Cheers, OLTB.


Most definitely.
torata

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Re: Permanent Portfolio Review - Year 3

#420135

Postby monabri » June 17th, 2021, 11:34 am

It will be interesting to see how this develops.

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Re: Permanent Portfolio Review - Year 3

#420137

Postby hiriskpaul » June 17th, 2021, 11:35 am

How have you included dividends in the numbers? eg are you accumulating them in the cash pot or reinvesting back where they came from?

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Re: Permanent Portfolio Review - Year 3

#420141

Postby scrumpyjack » June 17th, 2021, 11:43 am

There are 2 problems with 'rebalancing'.

What it really means is taking money from your relative winners and putting it into your relative losers and it incurs transaction costs, which will build up quite a lot if you do it annually.

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Re: Permanent Portfolio Review - Year 3

#420156

Postby OLTB » June 17th, 2021, 12:41 pm

Thanks all for the feedback.

hiriskpaul wrote:How have you included dividends in the numbers? eg are you accumulating them in the cash pot or reinvesting back where they came from?


Thanks hiriskpaul - I haven't included or considered dividends is the honest answer - I only look at the portfolios once a year so any dividends would just be accumulated within the cash pot and then get invested back in during the rebalance. If I were to change my strategy from accumulation to income in the future, I think I would just withdraw any dividends paid over the year at the anniversary as well as any growth.

scrumpyjack wrote:There are 2 problems with 'rebalancing'. What it really means is taking money from your relative winners and putting it into your relative losers and it incurs transaction costs, which will build up quite a lot if you do it annually.


Thanks scrumpyjack - I agree that 'running your winners' is a successful strategy and one that I might do with my other portfolios. This exercise is to see if the original Permanent Portfolio strategy still works for someone who wants a relatively hands-off approach, simple and not much effort once a year. In terms of transaction costs, my portfolios are held with HL and if we take the Golden Butterfly portfolio as the portfolio with the largest number of holdings (5), then you are right that once a year there will be five sales and five re-purchases to pay for. At £11.95 for each transaction and based on a portfolio value of £200,000, I am personally not too concerned with a £119.50 (0.06%) p.a. cost. I am aware that the etfs will have annual charges as well, and there will also be stamp duty. Others may feel different, and I am aware that costs are very important.

Cheers, OLTB.

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Re: Permanent Portfolio Review - Year 3

#420160

Postby hiriskpaul » June 17th, 2021, 12:53 pm

OLTB wrote:Thanks all for the feedback.

hiriskpaul wrote:How have you included dividends in the numbers? eg are you accumulating them in the cash pot or reinvesting back where they came from?


Thanks hiriskpaul - I haven't included or considered dividends is the honest answer - I only look at the portfolios once a year so any dividends would just be accumulated within the cash pot and then get invested back in during the rebalance. If I were to change my strategy from accumulation to income in the future, I think I would just withdraw any dividends paid over the year at the anniversary as well as any growth.

Ok, you should be looking at the ETFs NAV total returns over the last year rather than price change - those dividends can make quite a difference over time! If you are looking at NAV returns, be careful as NAV returns are often specified in dollars rather than pounds for global equity ETFs.
Last edited by hiriskpaul on June 17th, 2021, 1:07 pm, edited 1 time in total.

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Re: Permanent Portfolio Review - Year 3

#420161

Postby scrumpyjack » June 17th, 2021, 12:54 pm

and the market makers spread. It all adds up!

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Re: Permanent Portfolio Review - Year 3

#420164

Postby Spet0789 » June 17th, 2021, 12:59 pm

OLTB wrote:Morning all

This is an experiment that I set up three 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 13 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:



A disappointing portfolio return of 1.46%, with the Gilt holding falling 7.68% and Gold falling 6.81%. As this is an exercise in the longer term results, I shall stick with the initial principle of rebalancing the growth from the FTSE All Share holding that rose 20.80% back into those assets that have fallen in value. The average return over this initial three year period is a tick over 5% p.a. and it will be interesting to see if this return is sustained.

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 7.14% 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 10.78% over the last three years.

I also started a 'Golden Butterfly' portfolio last year but this is only one year's performance figures rather than the three 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 this year was a decent return of 7.61% even allowing for the downturns in Gilt and Gold exposure - the small cap element increased in value by 34.32% over the year which admittedly was at a low point when invested owing to the pandemic.

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.


Very interesting - thanks.

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Re: Permanent Portfolio Review - Year 3

#420165

Postby 1nvest » June 17th, 2021, 1:05 pm

OLTB wrote:better wealth-wise for me for one/two/all portfolios once I retire in about 13 years time

Whatever withdrawal strategy you use when you do retire can be simplified to drawing from total return. Dividends for instance are a return of some of the stocks own capital, lowers the value of the stock. Selling some shares and the stock is unaffected, someone else (the buyer of the shares) is providing you cash in exchange for shares. In the former case you hold more shares in a stock whose share price is relatively lower, in the latter case you own fewer shares in a stock whose share price is relatively higher. Much debate goes around that, best to just ignore that and concentrate more on other risk/reward factors.

When you've accumulated enough, perhaps 25 times yearly spending, drawing a 4% SWR (4% of start date portfolio value where that amount is uplifted by inflation as the amount drawn in subsequent years) then history suggests that would have been OK, there's no guarantee that will continue to hold into the future however, but likely will see you through 30 years of retirement, possibly with nowt remaining at the end, more often wealth actually considerably expanded (4% SWR was the historic worst case observation, average cases were better than that). The worst historic case in effect reflects a peak to trough period, low investment rewards OR where a bad sequence of returns occurred. Early year sequence of return risk is a significant risk.

Consider for example you retire with a all-stock portfolio and for the next decade stock total returns annualised -5% real (after inflation), that's with dividends reinvested. Spend the dividends or via some other means withdraw capital for spending and that scales up the decline. A 4% SWR inflation adjusted income relative to a declining portfolio value means drawing relatively more each year, its not the simple sum of -5% decline and -4% withdrawals (-9%) but a even larger amount when compounded year after year. For simplicity let's assume -10%/year, which compounded over a decade = (0.9^10) = 0.35. So you retired and a decade later had around a third of your inflation adjusted start date portfolio remaining. Ouch! From there the same original 4% withdrawal rate would have risen to a a -12% effective rate ... likely would struggle to survive along with giving you sleepless nights.

Some say put some in bonds, maybe inflation bonds, enough to cover the first 10 years perhaps, 40%, so if stocks do endure a bad decade you can spend the bonds. But in spending those bonds you're left with 60% of the portfolio value remaining at the end of the decade, which if invested in stocks that declined -5%/year in real terms will still have the 10th year portfolio value being down at around a third of the start date value. No/little difference. Hit the wrong start date and early years sequence of return risk and that can leave too little remaining to reasonably meet your ongoing/future expectations.

Ways to reduce that risk is to use averaging and a low volatility portfolio. Averaging even over two time points, 6 months prior to retirement, 6 months into retirement does help avoid having lumped all at the worst possible single point in time. Asset allocations such as the PP, GB, stock/gold 50/50 or even 75/25 have historically proved to have been safer than the likes of 50/50 stock/bond. Personally I see 50/50 stock/gold as being a barbell of two extremes that combine to a central 'bond' bullet type holding, so 75/25 stock/gold to me is like a 50/50 stock/bond holding.

Yes if that achieves 0% real total return over a decade then withdrawals will pull down the portfolio value, perhaps down to 60% of start date levels, but broadly that tends to be compensated for in better/good times. You need sufficient capital available following bad times in order to benefit from the good times.

Image

Once you've hit a good decade, then that can lift the inflation adjusted portfolio value sufficiently high enough that a former 4% of portfolio value providing sufficient income might have transitioned where just 2% of the ongoing portfolio value covers your income. From there you're pretty safe, the portfolio is more inclined to comfortably see you not only to 30 years out but well beyond, conceptually perpetual.

You might even not bother with any rebalancing. If a bad decade is endured then gold might rise to a substantial percentage of the portfolio value in which case you might rebalance back to 'target weightings'. But if stocks do well gold might become a small percentage of the portfolio value and could simply be ignored, written off as having provided insurance cover when it was most needed (early year sequence of returns risk).

Here's a US data based example of a bad sequence of returns case where 4% SWR was being drawn

Image

Those that like to spend dividends have had it good since the 1980's. The 1960's/1970's was harsh (if not devastating) for those retiring and holding a mostly stock portfolio. The 1980's onward has compensated for that, but only for those that got through the bad times with enough capital intact. Spending dividends is no different to taking the same amount from total returns, but where that amount is variable, could halve for instance from one year to the next whilst you might not be able to adjust spending downward by half.

Fundamentally its not so much a case of what a low volatility portfolio might provide reward wise, but rather, at least for retirees, how well it might avoid losses/declines, primarily in addressing early year sequence of returns risk. Get through that and see reasonable real gains after having also provided/covered income/spending and you're more into a position where it wont generally matter what assets/asset-allocation you hold. If the effective withdrawals are 2% of your ongoing portfolio value you're sitting sweet, not guaranteed safe, but near-as.

PS in the above link if you select the no rebalancing drop down option and then refresh (click the analyse portfolio button), and then select the 'allocation drift' option, you'll see how gold increased from being 25% weighting originally, to being over 70% at times. Also if you click the 'Metrics' option it provides a indicator of SWR and PWR (perpetual withdrawal rate). I wouldn't place too much emphasis on those figures however as they just reflect the sampled time period only data, for more reliable figures you have to widen out to a much longer range of dates/periods. PV is a great tool, just wish there was one for the UK.

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Re: Permanent Portfolio Review - Year 3

#420166

Postby hiriskpaul » June 17th, 2021, 1:07 pm

scrumpyjack wrote:There are 2 problems with 'rebalancing'.

What it really means is taking money from your relative winners and putting it into your relative losers and it incurs transaction costs, which will build up quite a lot if you do it annually.

That is not necessarily a problem! It just depends on the performance of the constituents and the paths they take. When equity returns are poor a substantial benefit can be obtained from rebalancing, but when they are good rebalancing can be a problem. These type of portfolios are designed with safety in mind, delivering when equities produce poor returns, hence the rebalancing.

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Re: Permanent Portfolio Review - Year 3

#420177

Postby 1nvest » June 17th, 2021, 1:32 pm

Taking from a winner to add to a loser anticipates reversal of trends, if the prior trends continue it would have been better not to have rebalanced. If trend reversal occurs then rebalancing added value. Some opt to split the difference 50/50 and rebalance half, don't rebalance the other half.

Broadly rebalancing doesn't add/detract rewards, primarily its done in order to realign to target weightings and levels of risk. It's a risk control event.

Personally I use ii as my brokerage that for their £10/month fee provide a free trade, that I use to sell down the highest valued (over weighted) asset to generate my wage/income and that in part steers weightings back towards target weightings. Only if weightings were massively adrift from desired levels might it be required to also include a buy trade in addition to the sell trade, which can be a relatively infrequent event.

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Re: Permanent Portfolio Review - Year 3

#420179

Postby 1nvest » June 17th, 2021, 1:42 pm

Click the Allocation Drift in this 75/25 stock/gold 1972 start date decade case, and rebalancing from gold into stock would have been reasonable/appropriate. Note that that is with a 4% SWR being applied.

Same, but with a 1982 start date and no rebalancing would have been required. By the end of 10 years having passed the portfolio value after 4% SWR withdrawals had risen sufficiently enough to pretty much guarantee the future safety of the portfolio being able to sustain the desired income. Clicking the annual returns option indicates 587 income relative to 26,000 portfolio value i.e. 2.2% of the portfolio value being drawn, and starting from a effective 2.2% SWR is very, very safe. That the portfolio had drifted to being 94/6 stock/gold at the end of the decade long period was no longer a risk factor, at least not in terms of a portfolio objective of being able to provide enough income.

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Re: Permanent Portfolio Review - Year 3

#420191

Postby hiriskpaul » June 17th, 2021, 2:09 pm

1nvest wrote:Taking from a winner to add to a loser anticipates reversal of trends, if the prior trends continue it would have been better not to have rebalanced. If trend reversal occurs then rebalancing added value. Some opt to split the difference 50/50 and rebalance half, don't rebalance the other half.

Broadly rebalancing doesn't add/detract rewards, primarily its done in order to realign to target weightings and levels of risk. It's a risk control event.

Personally I use ii as my brokerage that for their £10/month fee provide a free trade, that I use to sell down the highest valued (over weighted) asset to generate my wage/income and that in part steers weightings back towards target weightings. Only if weightings were massively adrift from desired levels might it be required to also include a buy trade in addition to the sell trade, which can be a relatively infrequent event.

Rebalancing can be a lot more than just risk control. As an example, add a 100% gold portfolio to your 75/25 Portfolio Visualiser case. You will find gold had a CAGR of 22.83%. CAGR for 100% stocks was 0.18%, so a 75/25 portfolio not rebalanced would have had a CAGR of 5.84%. The rebalanced portfolio had a CAGR of 9.98%, an improvement of 4.14% just from annual rebalancing. Ok there would have been trading costs, but these would have been miniscule compared to the rebalancing benefit.

It is these cases when equity returns are poor that the benefits of rebalancing come through and that is precisely when a portfolio needs all the help it can get. For someone who wants a plan to cope with these low probability situations, rebalancing is worthwhile. The drawback is that for the 90% or so of the periods when equities do ok, rebalancing may well be unhelpful.

ps, it is unfortuneate that Portfolio Visualizer only seems to go back to 1972. To see something much more scary a start date in 1965 or 1966 would have been good.

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Re: Permanent Portfolio Review - Year 3

#420219

Postby 1nvest » June 17th, 2021, 5:17 pm

Starting 1965 with a 4% SWR applied to FTAS total gross returns and at the end of 1974 you'd have been sitting on a inflation adjusted portfolio value of 0.37 times the start date amount and where a 0.04 start date dividend in inflation adjusted terms had risen to 0.1026 So after withdrawing 1975 income of 0.1026 that left just 0.2674 of the start date inflation adjusted portfolio value remaining. That did continue OK however at providing inflation adjusted income, good subsequent gains/rebounds followed. 75/25 stock/gold at the same end of 1974 date was near break-even, 1.02 times the inflation adjusted start date value, 0.92 after taking out the 0.1026 1975 spending/income.

A question is whether you'd have had the stomach to continue with the all-stock choice when the likes of a £500K year 1965 start date portfolio value had dropped to £185K in inflation adjusted terms at the end of 1974 and you were drawing £51.3K income from that to maintain former start date inflation adjusted spending. I know of (read about) some that capitulated to "preserve what little remained".

As another example, a total return HYP with 4% SWR applied started at the end of 1999 (Jan 2000 retirement) a decade later was down -6.4% annualised, 0.66 inflation adjusted value, where 8.14% of that value was to be drawn to cover 2010 income/income (leaving 0.58 remaining for growth). Again it recovered following good/great subsequent gains. Note that for those figures I used Terry's TJH HYP historical data/figures.

Another factor to consider is that in difficult times when the portfolio is performing relatively poorly is typically the time that taxes also rise. The events driving poor performance also has the treasury needing more tax revenues. Basic rate taxpayers saw around 38% dividend taxation rates back in the 1960's/1970's. So at a time when dividend yields (and bond interest) were relatively high a large chunk of that might have been lost to taxation. With total returns you can hold stocks/assets that pay no income, take your income out of 'capital gains', potentially more tax efficiently.

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Re: Permanent Portfolio Review - Year 3

#420253

Postby scrumpyjack » June 17th, 2021, 6:57 pm

An investment income of £51k in 1974 would have been taxed at 98% (that started at £2k as I recall) and in 1965 £500k would have been extreme wealth and would have bought at least 25 houses in Notting Hill Gate, currently worth well over £100 million. So yes inflation and tax can devastate any theoretical retirement plan!

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Re: Permanent Portfolio Review - Year 3

#423798

Postby 1nvest » June 30th, 2021, 6:40 pm

Sourcing US data for silver back to 1901 as a alternative to gold (overall the two tend to move somewhat in broad alignment) and applying that as the 'gold' element of a Permanent Portfolio, compared to 100% Total Bond Market ... and the results look interesting. Better broader risk/reward, lower and less prolonged real drawdowns historically since 1901.

For a newly retired opting to drop 60% into drawdown, 40% growth, typically bonds and stocks respectively, spend the bonds and see that transition to being 100% stock, no bonds remaining, averaging 70/30 stock/bond overall, but where bonds are replaced by the PP ... could be a reasonable good/safe choice.

For comfort, rather than buying/holding 20 year gilts/treasury alongside short term treasury barbell, 25% each, 50% ten year bullet might feel nicer/better for the 50% bond holdings in the current negative real yields era.

Possibly the PP might be a viable alternative to inflation bonds (US TIPS, UK index linked gilts) that could provide real (after inflation) gains whereas inflation bonds at present levels are priced to negative real yields. Harry Brown did suggest that the PP was for money you can't afford to lose.

3% SWR = consistent/regular inflation adjusted income, where 60% PP initial allocation would see that last 20 years if the PP paced inflation, more years if the PP exceeded inflation. Say 25 years (perhaps a conservative estimate). By which time the original 40 stock accumulation (dividends reinvested) allocation might have grown 2.5 times in real terms over those 25 years, 3.7% annualised real, such that you end up 25 years later with the same inflation adjusted wealth/portfolio-value as at the start, assuming you get to live that long - if not younger heirs inherit a mostly stock portfolio that is perhaps better aligned to their age. Nothing stopping you from perhaps also selling down some of stock gains along the way to top up the drawdown side (PP) to potentially extend that supporting even more years if so inclined.

That could also be considered as a form of cost averaging more into stocks over time, time diversification, which from relatively high valuations (low interest rates) is perhaps wiser than lumping heavily into stocks. Two bucket style, where one bucket labelled 'PP' is for spending, the other labelled 'stock' is accumulating/saving (reinvesting dividends).

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Re: Permanent Portfolio Review - Year 3

#424756

Postby 1nvest » July 4th, 2021, 6:46 pm

As a 2.5% real 'bond', a PP style asset allocation has historically served OK 2.5% perpetual withdrawal rate

Image

When drawing a SWR such as a inflation adjusted 2.5% of original start date portfolio amount, for income log in to your brokerage account week or so before the end of month and sell shares in whatever asset is the highest valued to draw that income. Then T+3 later login and transfer the money to your regular linked spending account.

The above reflects 50% in a 10 year ladder instead of a short and long dated barbell for the Treasury bond holdings. Broadly the two should generally compare.

I think US stock combined with gold for one half (foreign), domestic £ bonds for the other half, is a reasonable combination. Stock/gold 50/50 barbell combines to a central bullet in a similar vein to how short and long dated treasury bonds/gilts combine to a central bullet. For US stock BRK (Berkshire Hathaway) pays no dividends so no US withholding tax, and whilst its like a fund it charges no fees. For end of March years since 2016 ...

Image

1996 to 2006 for US data and it compared to a Total Bond type holding. Since the financial crisis 2008/9 its diverged likely as a consequence of bond yield suppression. Here's a PV link that visualises that comparison.

Seen/considered as a 'Bond' and the Golden Butterfly combines that with some stock, like a form of 20% small cap value and 80% bond (PP) type mindset.


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