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Harry Browne's Permanent Portfolio

Stocks and Shares ISA , Choosing funds for ISA's, risk factors for funds etc
Investment strategy discussions not dealt with elsewhere.
OLTB
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Harry Browne's Permanent Portfolio

#148099

Postby OLTB » June 26th, 2018, 11:07 am

Morning all

Just a quick query to the floor - has anyone any actual experience in using the above and how has it compared to any other portfolios they may also use?

I know that many of you may have your opinions about what assets should or should not be avoided at this time, but I was more interested in the longer term actual results that may have been experienced.

For those who aren't aware of the Permanent Portfolio, it is a very straightforward investment into four asset classes that should be a steady performer over different investment cycles and allows for a pretty decent 5% drawdown on investments without running out of money (that's the long term picture any way). The asset classes are:

25% Equities (domestic market (although I might be tempted to go for a 50/50 split with say the US))
25% UK Gilts (long-term)
25% Cash (or short-dated gilts 0-5 years)
25% Gold

There's a link here to a summary https://portfoliocharts.com/portfolio/p ... tfolio-uk/ that I've found useful. Rebalancing and re-investing any income would seem very prudent once a year.

Cheers, OLTB.

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Re: Harry Browne's Permanent Portfolio

#148156

Postby GeoffF100 » June 26th, 2018, 4:04 pm

Your link appears to show you the past performance, but I do not expect that it includes costs or taxes. As for the future performance, nobody knows.

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Re: Harry Browne's Permanent Portfolio

#148163

Postby argoal » June 26th, 2018, 4:31 pm

Your link appears to show you the past performance, but I do not expect that it includes costs or taxes

Excellent!

I look forward to seeing links to portfolio modelling tools that do include costs and taxes. I didn't know that any such tools existed.

As for the future performance, nobody knows.

I was hoping that at least somebody did. What a disappointment.

To be less flippant, portfolio charts is an incredible free modelling tool that shows all result in location sensitive inflation adjusted terms. To dismiss it so lightly is to not understand the tool and the work that has gone into developing it.

Regarding the permanent portfolio, I confess that I do hold a small slice of gold which I plan to increase to about 8% of my portfolio mainly based on the Harry Browne's theories and backtesting using portfolio charts. Gold acts as an insurance policy against high inflation which we haven't seen in 40 years or so but we may see again in the next 40.

I don't much like holding gold, I probably won't benefit from holding it, but like any insurance policy, it may be a portfolio saver when all else is sinking.

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Re: Harry Browne's Permanent Portfolio

#148190

Postby LooseCannon101 » June 26th, 2018, 7:15 pm

Harry Browne's portfolio is great if you think the financial world as we know it is going to end tomorrow. Warren Buffett has stipulated that 90% of his assets will be put in an S&P500 index fund and 10% in short-dated US treasuries when he is no longer around. (I'm sorry to bring up Warren on a regular basis, but he is without doubt one of the best and certainly one of the richest investors of all time.)

Assets e.g. a highly diversified world equity fund would be my preferred choice - good earnings growth over the long term and not constrained to a single currency - the British pound. Certainly, there should always be a cash component, but no where near the level suggested by Harry Browne's portfolio. Gold is a lousy asset to hold for the long term - storage costs and no income stream.

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Re: Harry Browne's Permanent Portfolio

#148244

Postby Bubblesofearth » June 27th, 2018, 7:08 am

OLTB wrote:
25% Equities (domestic market (although I might be tempted to go for a 50/50 split with say the US))
25% UK Gilts (long-term)
25% Cash (or short-dated gilts 0-5 years)
25% Gold



Research from the likes of Dimson et al gives long-term real returns from equities around 5%p.a. compared to around 1% p.a. from bonds.

Short-term cash will likely lose in real terms as it struggles to match inflation.

Gold will, over the long term, keep pace with inflation (retain purchasing power) but give no real return above that.

The 2 asset classes that have given decent long-term real returns for UK investors have been equities and property. Having the bulk of your money in those two seems a sensible long-term strategy IMO.

BoE

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Re: Harry Browne's Permanent Portfolio

#148249

Postby Spet0789 » June 27th, 2018, 7:50 am

These portfolio construction approaches have a beguiling simplicity but are usually based on backtesting of historical data.

For the unconstrained investor (ie no benchmark to hit or liabilities to hedge) owning long-dated nominal gilts at current yields is just suicide. Current 30y yield is 1.8%. 25 years ago was 9%.

Guess what? Portfolios started 10-30yrs ago with lots of gilts did well coming into the largest central bank fuelled bond buying spree in history.

Diversification - by all means. Owning some gold (or better, a smaller amount of gold mining stocks as they have financial and operating leverage to the gold price) - fine. Have some dry powder in cash, short dated bonds or inflation linked bonds - makes sense.

But owning long dated bonds? Not for me.

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Re: Harry Browne's Permanent Portfolio

#148266

Postby Urbandreamer » June 27th, 2018, 9:25 am

Spet0789 wrote:These portfolio construction approaches have a beguiling simplicity but are usually based on backtesting of historical data.

For the unconstrained investor (ie no benchmark to hit or liabilities to hedge) owning long-dated nominal gilts at current yields is just suicide. Current 30y yield is 1.8%. 25 years ago was 9%.

Guess what? Portfolios started 10-30yrs ago with lots of gilts did well coming into the largest central bank fuelled bond buying spree in history.


The slight issue with that argument is that it's predicated upon when the portfolio was thought up and back tested. I know this portfolio as the cockroach portfolio as proposed by Dylan Grice back in 2012. Harry Brown was dead by then (1933-2006) and apparently thought up the portfolio in 1981. If Mr Brown backtested it before proposing it, then it must have been on data before 1981.

It should be noted that the purpose of this portfolio is NOT to increase wealth or make money. It's objective is to preserve wealth. It's had a good run over the period that you pick, but if it had simply kept place with inflation it would have achieved its objectives.

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Re: Harry Browne's Permanent Portfolio

#148267

Postby argoal » June 27th, 2018, 9:27 am

I feel like a defender of the Harry Browne portfolio - which I'm not really - but a couple of comments prompted a response that add a bit more nuance to the comments here on my personal position regarding gold.

Harry Browne's portfolio is great if you think the financial world as we know it is going to end tomorrow.

I'd rephrase that as 'Harry Browne's portfolio is great if you think the financial world as we know it could revisit the economic conditions similar to the 70s at some time in the next 40 years.'

Gold will, over the long term, keep pace with inflation (retain purchasing power) but give no real return above that. I'd add - however it often provides a negative correlation to stocks so can dampen the volitility of equities in a portfolio and provide a rebalancing dividend.

The 'full fat' version of Harry Browne's portfolio is definitely not for everyone and is probably not appropriate for anyone building a retirement pot as it leaves a lot of capital growth on the table. But, we can't know the future and whether gold, and long dated bonds will do the job required of them in Browne's portfolio, even though the prospects for them as asset classes don't look enormously rosy.

But, if you are moving into drawdown, and have a worry about hitting a major reversion to the markets at exactly the wrong time, thus being exposed to sequence of return risk; a little bit of 'Semi-skimmed' Harry Browne added to traditional portfolio makes reasonable sense - for me anyway.

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Re: Harry Browne's Permanent Portfolio

#148295

Postby 0x3F » June 27th, 2018, 11:19 am

argoal wrote:Gold will, over the long term, keep pace with inflation (retain purchasing power) but give no real return above that. I'd add - however it often provides a negative correlation to stocks so can dampen the volitility of equities in a portfolio and provide a rebalancing dividend.


This is a key point: it's the correlations that are important. In fact, gold is generally not correlated to equities. It's long term bonds that are usually negatively correlated.

I'd agree that the prospects for long term bonds don't seem great, and would have difficulty in buying. That said, it's important to consider that it is possible that adding a vastly underperfoming uncorrelated asset can increase the total return of a (re-balancing) portfolio. Some notes on this and tables of asset correlations over time periods here.

-0x3F

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Re: Harry Browne's Permanent Portfolio

#148305

Postby SalvorHardin » June 27th, 2018, 11:47 am

Why stop at four asset classes? Why invest all of your fixed interest and cash in sterling? Whilst overseas investing exposes investors to foreign currency risk, sterling has historically been a poor long-term store of value (especially when compared with the Swiss Franc and other harder currencies). Consider the following asset classes:

Commercial property (if not direct ownership then REIT shares; property owners, not those with construction and development interests)

Index-Linked government bonds (UK and foreign)

Foreign currencies (Australian Dollar, Japanese Yen, Swiss Franc, US Dollar), foreign government bonds and foreign shares

This isn’t the sort of strategy I follow, even though nowadays I’m more into preserving the real value of capital and income than I used to be. I’m currently 95% shares and 5% cash and have never bought a fixed rate investment (growing up in the 1970s put me off!). But my equities are highly diversified across the globe and there are some foreign companies which aren't as correlated with the UK stock market as most other equities (e.g. American sports teams, Brazilian port logistics, Macau property, Central Paris property).

I appreciate the reasoning behind gold. My gold exposure is roughly 4% (shares) in a selection of Canadian quoted explorers and early stage producers. These are my insurance policy, especially the non-producing explorers who are waiting for the gold price to rise (to make a mine economical), being more volatile than the gold price and are wasting assets.

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Re: Harry Browne's Permanent Portfolio

#148321

Postby Pastcaring » June 27th, 2018, 12:43 pm

argoal wrote:Your link appears to show you the past performance, but I do not expect that it includes costs or taxes

Excellent!

I look forward to seeing links to portfolio modelling tools that do include costs and taxes. I didn't know that any such tools existed.

As for the future performance, nobody knows.

I was hoping that at least somebody did. What a disappointment.

To be less flippant, portfolio charts is an incredible free modelling tool that shows all result in location sensitive inflation adjusted terms. To dismiss it so lightly is to not understand the tool and the work that has gone into developing it.

Regarding the permanent portfolio, I confess that I do hold a small slice of gold which I plan to increase to about 8% of my portfolio mainly based on the Harry Browne's theories and backtesting using portfolio charts. Gold acts as an insurance policy against high inflation which we haven't seen in 40 years or so but we may see again in the next 40.

I don't much like holding gold, I probably won't benefit from holding it, but like any insurance policy, it may be a portfolio saver when all else is sinking.



ERM to point out the obvious if it works so well why has it not been sold for billions to all the other salesmen ,sorry ,experts.

Why are they trying to sell it to other people?

Gold,no thanks.Probably is a hedge against inflation which means ,useless.

Using H Ford and his wage rise,workers wages went up to approx $ 40 per week.Gold standard had gold at $ 35 an ounce.Happy to say roughly the same?

Are average US wages now around the same as the price of 1 ounce of gold?

Why would anybody be happy with a 100 year return of ZERO .

Why would anybody have 25% of their money producing zero income,beats me.

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Re: Harry Browne's Permanent Portfolio

#148343

Postby Urbandreamer » June 27th, 2018, 1:32 pm

Pastcaring wrote:Are average US wages now around the same as the price of 1 ounce of gold?


I don't know. However todays scrap price for gold in £879 per troy.

Let's multiply that by... shall we say 47 (ie 5 weeks unpaid).

Thats £41k. A bit more than average UK wages.

Of course you assume that Ford's workers were paid average wages. As you point out, they were not.
They were given a wage rise to keep them as he was suffering high worker turnover (meaning high training costs).
Also some of that $5 was linked to productivity increases. It did however put them above 1 troy pre week.

I don't currently hold any gold, but I'm afriad that I don't think your gold/wage argument holds.

For interest I tried to find some data. I fear its only 1955-2010
https://www.bullionvault.com/gold-news/ ... -071320122

It certainly looks like average wages are lower (in gold terms) in 2010 than in 55 to me.

For comparison the price in 2010 was £700 pr troy. So £32k for 47 weeks in 2010, I wonder what the UK average wage was then?

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Re: Harry Browne's Permanent Portfolio

#148345

Postby TUK020 » June 27th, 2018, 1:33 pm

SalvorHardin wrote:I appreciate the reasoning behind gold. My gold exposure is roughly 4% (shares) in a selection of Canadian quoted explorers and early stage producers. These are my insurance policy, especially the non-producing explorers who are waiting for the gold price to rise (to make a mine economical), being more volatile than the gold price and are wasting assets.


Salvor Hardin,
which gold explorers & producers would you go for if you were to pick them now?
tuk020

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Re: Harry Browne's Permanent Portfolio

#148374

Postby Spet0789 » June 27th, 2018, 2:31 pm

0x3F wrote:
argoal wrote:Gold will, over the long term, keep pace with inflation (retain purchasing power) but give no real return above that. I'd add - however it often provides a negative correlation to stocks so can dampen the volitility of equities in a portfolio and provide a rebalancing dividend.


This is a key point: it's the correlations that are important. In fact, gold is generally not correlated to equities. It's long term bonds that are usually negatively correlated.

I'd agree that the prospects for long term bonds don't seem great, and would have difficulty in buying. That said, it's important to consider that it is possible that adding a vastly underperfoming uncorrelated asset can increase the total return of a (re-balancing) portfolio. Some notes on this and tables of asset correlations over time periods here.

-0x3F


Correlation gets you only half way. Covariance is really what you want (or to be super-precise, conditional covariance).

Long-dated bonds have traditionally displayed negative correlation with equities, but unless levered they aren’t a great portfolio hedge as they don’t have enough volatility (and therefore their negative covariance with equities is low). Gold is better. Gold miners are better still. The trick is to get as much negative covariance to equities as possible as that allows you to keep the non-equity portfolio smaller and maximise expected return.

Read about risk-parity, Ray Dalio and Bridgewater All-Weather for more on this.

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Re: Harry Browne's Permanent Portfolio

#148376

Postby argoal » June 27th, 2018, 2:33 pm

ERM to point out the obvious if it works so well why has it not been sold for billions to all the other salesmen ,sorry ,experts.


It is hard to tell, but I assume that you are referring to Portfolio Charts with this comment. Answer - Portfolio Charts has been developed by a hobbiest who is an engineer by trade so he is not a salesman nor an expert in anything else other than data modelling.

Why are they trying to sell it to other people?


No one is trying to sell anything to anyone else. There is no underlying agenda here from any financial organisation.

Hard to believe, I know, but true. Just a useful free tool.

The phrase 'Looking a gift horse in the mouth' springs to mind....and also 'You can take a horse to water but you cannot make it drink'.

I was hoping for a third relevant horse based aphorism but nothing else springs to mind.

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Re: Harry Browne's Permanent Portfolio

#148379

Postby SalvorHardin » June 27th, 2018, 2:37 pm

TUK020 wrote:Salvor Hardin,
which gold explorers & producers would you go for if you were to pick them now?
tuk020

All of these come with a big warning, especially Tower Hill. I own shares in all of these, though I do not closely follow the sector. Periodically a company comes to my attention, often in serendipitous ways, and I then decide whether or not to invest. Integra Gold is a classic example of this; it was briefly mentioned in a non-financial article in the Globe and Mail, I investigated and bought some and made 400% over three years.

International Tower Hill Mines . A real punt, treat as a long dated warrant / lottery ticket. It's sitting on a big deposit in central Alaska. The problem is that it needs a gold price of $2,000 an ounce to be a profitable mine, so they are sitting on their hands for now. Shares hit US$10 back in 2011, currently 54 cents.

Victoria Gold Corp. They have just started to build a mine in the Yukon. Low-grade deposit. Lots of support from the locals as it provides a lot of jobs.

Balmoral Resources. Currently bombed out, it has discovered some high-grade deposits in Quebec close to a huge producing mine (Detour Gold). Management has been side tracked IMHO by a nickel discovery. Will either be bought or continue to decline IMHO. My worst performing share of recent years, I'm down about 75%.

Atlantic Gold Corp. Low cost producer in Nova Scotia.

Eldorado Gold. I got into these after they bought Integra Gold, which was my biggest gold holding by a long way (and my best performer for the last couple of years). Well diversified producer, they should be producing from Integra's Lamaque mine next year.

Barrick Gold. Huge international producer which has had a few big problems, hence the fall from over US$50 to US$12.75 in the last five years. Bought these last month.

Integra Resources. The Integra Gold team recently took control of two deposits in Idaho. I see this as purely a bet on the management team, given what they achieved with Integra Resources.

Hope this helps. Seeking Alpha and Stockhouse are the places to look for Canadian gold companies.
Last edited by SalvorHardin on June 27th, 2018, 2:40 pm, edited 2 times in total.

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Re: Harry Browne's Permanent Portfolio

#148380

Postby argoal » June 27th, 2018, 2:38 pm

Correlation gets you only half way. Covariance is really what you want (or to be super-precise, conditional covariance).


I totally agree. I'm not smart enough to understand the difference but I still totally agree.

The trick is to get as much negative covariance to equities as possible as that allows you to keep the non-equity portfolio smaller and maximise expected return.


Right, I'm going to leverage up on a few microcap gold miners. What could possibly go wrong? :D

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Re: Harry Browne's Permanent Portfolio

#148404

Postby 0x3F » June 27th, 2018, 4:05 pm

Spet0789 wrote:Correlation gets you only half way. Covariance is really what you want (or to be super-precise, conditional covariance).


Interesting, thanks. I looked up the definition of covariance and it was along the lines of "multiplying the correlation between the two variables by the standard deviation of each variable". So, my rough idea is that as well as going in the opposite direction, it does so by a decent amount.

Spet0789 wrote:Gold is better.


I can't see why. If you look at the 10/20year correlation figures in my earlier link, they're very close to zero => the covariance would be small (~0 x standard deviation).

One other thing to bare in mind is how correlations change over time and specifically during crises (correlations => 1). The correlation figures in the table show that the bonds are becoming less negatively correlated, would be interseting to see more recent figures. The worry is during the next crisis the relationship breaks down, I've seen several fund managers on Twitter talking about this risk (specifically with regard to risk parity portfolios).

Anyway, thanks for the comment.

-0x3F

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Re: Harry Browne's Permanent Portfolio

#148415

Postby Pastcaring » June 27th, 2018, 4:36 pm

Urbandreamer wrote:
Pastcaring wrote:Are average US wages now around the same as the price of 1 ounce of gold?


I don't know. However todays scrap price for gold in £879 per troy.

Let's multiply that by... shall we say 47 (ie 5 weeks unpaid).

Thats £41k. A bit more than average UK wages.

Of course you assume that Ford's workers were paid average wages. As you point out, they were not.
They were given a wage rise to keep them as he was suffering high worker turnover (meaning high training costs).
Also some of that $5 was linked to productivity increases. It did however put them above 1 troy pre week.

I don't currently hold any gold, but I'm afriad that I don't think your gold/wage argument holds.

For interest I tried to find some data. I fear its only 1955-2010
https://www.bullionvault.com/gold-news/ ... -071320122

It certainly looks like average wages are lower (in gold terms) in 2010 than in 55 to me.

For comparison the price in 2010 was £700 pr troy. So £32k for 47 weeks in 2010, I wonder what the UK average wage was then?


So in 8 yrs it has gone from 32K to 41K,would you say that was a good return?.Round it and call it 25%.

Your link for the bullion dealer did not come up,would they have a vested interest in people buying gold?

I' ll take your word that in gold terms it is higher as you say. The question is ,how much higher.

If average annual income bought 50 ounces of gold in 1955 ,and only buys 40 ounces of gold today. Then gold has risen 20% in real terms.

Would you be happy with a 20% return over 63 years?

The point will always hold up throughout history.Any time at all you can convert gold to income and income to gold.

When I left the UK in the mid 1970,s my wages were around £3 K per annum,use that number,or take it up to £4 K ,my dodgy memory.The higher figure would probably be closer to average wages.

How many ounces of gold would £ 4 K buy then,and what would that value be today

If average wages now in the UK are £ 30K and you spent that much on gold what would you expect to happen in the coming 45 yrs.Your gild would be worth what multiple of annual income?.

I think it will be worth exactly what history tells us,not much more than wage inflation

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Re: Harry Browne's Permanent Portfolio

#148420

Postby Pastcaring » June 27th, 2018, 5:04 pm

Quick bit of Google work,all numbers rounded

Average wages 1955 £500

Gold £35 an ounce,so 14 ounces .

Today @ £ 880 per ounce I think you said those 14 ounces are worth £12K rounded.

If average wages are £30K then over the 63 years your return is 150% ,you don't think that is a rubbish return?

Should history repeat then in 63 years time gild will still be a rubbish investment.What would you say.

Quick Google came up with US average wages@ $58K.

Working on Ford's wages, gold has produced slightly better than average wage growth


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