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Permanent Portfolio as a inflation bond alernative

Stocks and Shares ISA , Choosing funds for ISA's, risk factors for funds etc
Investment strategy discussions not dealt with elsewhere.
1nvest
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Permanent Portfolio as a inflation bond alernative

#427371

Postby 1nvest » July 13th, 2021, 1:41 pm

Concept : A retiree might drop 60 into inflation bonds (index linked gilts) with a view to spending 2 each year ... so covers 30 years of spending. Given negative real yields on inflation bonds, we might use the PP instead. Relative to the 60 allocation that's the equivalent of a 3.3% SWR applied to the PP. If the remainder 40 is dropped into a US S&P500 accumulation fund that is left to accumulate for 30 years then that transitions from a initial 60/40 PP/S&P500 blend to 0/100 PP/S&P500 as the PP is spent down over time, overall averages 30/70 PP/S&P500. A form of time averaging more into stocks over time which helps reduce early years sequence of returns risk.

Spreadsheet here : https://drive.google.com/file/d/1UthpYn ... sp=sharing with data stretching back to 1939

Historically the outcome looked 'satisfactory'. Tending to have averaged more like 70% overall average stock exposure in total, so neither too aggressive nor too conservative.

Note that instead of the usual 1 year and 20 year gilt barbell I opted to set the 50% treasury bond allocation to a 10 year gilt ladder. The spreadsheet also includes silver data and a PP with silver comparison.

A interesting point is that in the worst case PP 30 year period, the growth bucket (40% initial allocation to US stocks) did incredibly well. So yet another worksheet within the spreadsheet compares each 30 year periods PP versus US stock growth pairs. Drawing down the PP, leaving stocks to accumulate is both drawing and accumulating at the same time but using different styles (asset allocations) for each and that seems to have worked reasonably well.

AWOL
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Re: Permanent Portfolio as a inflation bond alernative

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Postby AWOL » July 14th, 2021, 9:17 am

At a time where the relative valuations, CAPE versus historic and rest of world, for US stock is eye watering would MSCI World or FTSE All World be a better starting place? Backtesting cannot answer this of course as it is a forward looking question although I'd be interested if you modeled it.

https://interactive.researchaffiliates. ... e=Equities

I have, for my sins, been thinking about Golden Butterfly, 75:25, and introducing real assets to reduce the bonds again, but my problem is the inability to look forward, and the knowledge of the starting valuations of assets.

1nvest
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Re: Permanent Portfolio as a inflation bond alernative

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Postby 1nvest » July 14th, 2021, 11:24 am

AWOL wrote:At a time where the relative valuations, CAPE versus historic and rest of world, for US stock is eye watering would MSCI World or FTSE All World be a better starting place?

A factor with World are the higher costs. Whilst each individual country sets their own dividend withholding tax rate broadly they average around 20% and with historic dividends being relatively high, around 4% then combined with fund fees of perhaps 0.2% you're looking at a historic 1% drag factor. Whilst the US rate is 30% that is reduced to 15% under UK/US tax treaty and totally eliminated if you held for instance Berkshire Hathaway stock (that could be considered a form of Investment Trust/conglomerate that is broadly diversified and varies cash reserves over time in a managed manner, but equally is a single stock risk factor i.e. is subject to being a Insurance firm).

But yes, CAPE and Cap/GDP are seemingly relatively high https://www.lynalden.com/shiller-pe-cape-ratio/ suggesting that either reduce stock weighting or diversify stock exposure away/towards other 'better valued'.

If you dig out https://www.measuringworth.com/ data for historic UK inflation, gold and US$/GB£ data back to when the US$ started (1792) and calculate 50/50 US$/gold in real terms from a UK investors perspective then simply having stuffed 50/50 US$/gold under a mattress would have maintained much of purchase power, but in a volatile manner. Lost of the order of 0.4% annualised since 1792, 0% from 1919 - with peaks and troughs of 2x and 0.5x that somewhat inversely correlated with stocks. If therefore the US$ were invested in US stocks, so 50/50 US stock/gold, that worked out well, when stocks had a bad decade then gold stepped up and vice-versa. A variation of that is to perhaps reduce US stock exposure at high valuation levels, hold T-Bills or whatever, maybe 25/75 stock/T-Bills for instance. One measure I record is based on Robert Lichello's AIM and as of the end of June 2020 that was suggesting 62.6% cash to be appropriate, so suggestive of 19/31/50 US stock/US$ cash/gold at recent valuation levels.

Yet another choice is to simply third each US stock/UK FTAS/gold. UK FTAS is somewhat 'global', around 70%+ of earnings are sourced from foreign business activities/exposure. If you modify the PP worksheet in the spreadsheet I posted and set the assets to a third each of US/UK/gold, then the SWR box (yellow background) can be set to 5% and be seen to have succeeded in all 30 year runs since 1939 where the worst case had 50% of the inflation adjusted start date value still intact at the end of 30 years. Pushed further, to 50 year PWR and a 3% initial SWR figure was pretty much a perpetual rate for all 50 years since 1896, superior to either US or UK stock alone but less rewarding than 50/50 US/UK that was also fine as a 3% SWR, but where with just stock the low points were around twice as deep, of the order a third down in real terms for US/UK/Gold versus two-thirds down for US/UK where in both cases a 3% SWR was being drawn.

As they say there are many roads to London, pick whichever road you prefer. PP as a bond/drawdown bucket alongside a long term stock accumulation growth bucket, or a third each UK/US/gold, or 50/50 gold/US-stock-cash dynamic weighted blend, or 50/50 UK/US, ... whatever. Only until after arrival can you look back to see which was the less bumpier more productive road to have taken.
I visualized my grief if the stock market went way up and I wasn’t in it—or if it went way down and I was completely in it. My intention was to minimize my future regret, so I split my retirement plan contributions 50/50 between bonds and equities. —Harry Markowitz

Given present day negative real yields then rather than bonds it feels like even just hard US$ currency and gold stuffed under a mattress might be a better alternative to bonds.

Berkshire Hathaway Chairman letter 1979 ...
One friendly but sharp-eyed commentator on Berkshire has
pointed out that our book value at the end of 1964 would have
bought about one-half ounce of gold and, fifteen years later,
after we have plowed back all earnings along with much blood,
sweat and tears, the book value produced will buy about the same
half ounce. A similar comparison could be drawn with Middle
Eastern oil. The rub has been that government has been
exceptionally able in printing money and creating promises, but
is unable to print gold or create oil.


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