Is the Permanent Portfolio Broken?

General Discussion on the Permanent Portfolio Strategy

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Kevin K.
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Is the Permanent Portfolio Broken?

Post by Kevin K. » Thu Oct 08, 2020 2:20 pm

This post from Adam Collins at Movement Capital is a good follow-up to some of the discussions we've been having on the "Ray Dalio on bonds" thread:

https://movement.capital/is-the-permane ... io-broken/

I guess I should say that I mean no offense to PP traditionalists by posting this. Collins certainly respects Browne's innovations and the track record of the PP but he's a young guy with different ideas (who happens to have a whole lot of risk-averse retirees in his client base, so defensive allocations are a specialty of his).
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Re: Is the Permanent Portfolio Broken?

Post by Cortopassi » Thu Oct 08, 2020 2:28 pm

If a current 15.25% YTD return is broken, I'll take it.
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Re: Is the Permanent Portfolio Broken?

Post by Kevin K. » Thu Oct 08, 2020 4:04 pm

Cortopassi wrote:
Thu Oct 08, 2020 2:28 pm
If a current 15.25% YTD return is broken, I'll take it.
I hear you! But I think his points about the prospects for LTT's and cash going forward are good ones and echo many recent discussions on these forums.

Vanguard recently sent out a letter to its financial advisor network about the performance of one of the actively-managed bond funds Collins recommends:

https://advisors.vanguard.com/insights/ ... etsdropped

Admittedly that's a pretty new fund for Vanguard but it's quite similar to more established ones such as this highly-rated one from Baird:

https://www.bairdassetmanagement.com/ba ... erformance


Personally I'd never completely abandon Treasuries completely but I can see good arguments for putting a decent chunk of the PP's 50% allocation to LTT's and STT's/Treasury MM into a fund like one of these and some VTIP.

His ideas on equities aren't all that radical, as plenty of others have suggested switching out U.S. TSM for a Total World ETF such as VT.
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Re: Is the Permanent Portfolio Broken?

Post by europeanwizard » Fri Oct 09, 2020 12:32 am

Interesting, will read it. Yesterday, I sold all my Euro bonds and increased the size of my world stock market.
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Re: Is the Permanent Portfolio Broken?

Post by mathjak107 » Fri Oct 09, 2020 3:43 am

Kevin K. wrote:
Thu Oct 08, 2020 4:04 pm
Cortopassi wrote:
Thu Oct 08, 2020 2:28 pm
If a current 15.25% YTD return is broken, I'll take it.
I hear you! But I think his points about the prospects for LTT's and cash going forward are good ones and echo many recent discussions on these forums.

Vanguard recently sent out a letter to its financial advisor network about the performance of one of the actively-managed bond funds Collins recommends:

https://advisors.vanguard.com/insights/ ... etsdropped

Admittedly that's a pretty new fund for Vanguard but it's quite similar to more established ones such as this highly-rated one from Baird:

https://www.bairdassetmanagement.com/ba ... erformance


Personally I'd never completely abandon Treasuries completely but I can see good arguments for putting a decent chunk of the PP's 50% allocation to LTT's and STT's/Treasury MM into a fund like one of these and some VTIP.

His ideas on equities aren't all that radical, as plenty of others have suggested switching out U.S. TSM for a Total World ETF such as VT.
what scares me about vcobx is 23% of the fund is in in the riskiest section of the bond market . the BBB segment is riskier than junk bonds .
almost 40% is below investment grade or not rated at all .

BBB is the last rung of the ladder before falling below investment grade .. one slip in credit rating in a downturn and those bonds have to be dumped by every institution that is restricted to investment grade bonds with what will be few takers once all those institutions and funds are no longer able to hold less then investment grade bonds .

at least high yield is not held in mass by all these funds like BBB . more then half the bond market not in govt bonds is BBB today
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Re: Is the Permanent Portfolio Broken?

Post by Kevin K. » Fri Oct 09, 2020 8:56 am

That's a good catch Mathjak107 - thanks! Other strikes against the Vanguard fund are a pretty inexperienced manager (5 years vs. decades of experience at Baird, Cohen & Steers, etc.) and the fund itself being quite new. Low ER is about it. And yeah, the downside risks when you look under the hood as you did make just sticking with BND a no-brainer.

Diversification across maturities and credit quality as you've done with your own bond portfolio looks like the new normal. I mean it always was for much of the non-PP universe but given what's happened with Treasuries (no yield, not much downside protection left) I think one does have to take a fresh look at things - as you've been doing all along,.
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Re: Is the Permanent Portfolio Broken?

Post by Tyler » Fri Oct 09, 2020 11:17 am

Thanks for the link. Even if I don't always agree with the conclusions, it's good to see people talking about the Permanent Portfolio.

I could talk about several points in terms of Permanent Portfolio reasoning (seriously -- please don't swap treasuries for munis without understanding counter-party risk), but I'll focus on the conclusion since data is kinda my thing:

The original permanent portfolio looks great in the rear-view mirror. When you see stellar returns you have to ask “What led to this performance?” The permanent portfolio was lucky because it concentrated stock investments in the U.S. and owned long-term bonds during a multi-decade collapse in rates. For investors following this strategy, this post introduced three adjustments to ensure a portfolio stays permanent regardless of what the future holds.

The article claims that the PP performance is an artifact of starting in 1982 at the peak of interest rates and the beginning of a US stock bubble. The thing is, it's easy now to backtest the portfolio prior to that when nominal bond rates skyrocketed, inflation was double-digits, and real rates plunged below zero. And we can also look at specific timeframes like the one starting in 2000 when US stocks floundered for more than a decade, or the more recent years when cash rates have virtually evaporated. And in all of those timeframes, the performance of the PP was virtually the same! Basically, the assumption that the PP is an artifact of cherry-picked backtesting falls flat when one takes the time to test that assumption with real data.

The beauty of the Permanent Portfolio is not that every asset always has great future prospects. That will never be the case. It's that even when one or more assets completely tanks, the portfolio has a knack for continuing along like nothing happened. In a world of financial writers chasing the next big trend and running from the next big disaster, the PP is a model of consistency.

So no, I don't think the Permanent Portfolio is broken. It's just often misunderstood by people whose investing mindset follows a different paradigm.
Last edited by Tyler on Fri Oct 09, 2020 11:53 am, edited 3 times in total.
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Re: Is the Permanent Portfolio Broken?

Post by Smith1776 » Fri Oct 09, 2020 11:24 am

I have several problems with this article but I will nitpick on one in particular. The author implies that TIPS are a good alternative to cash in the PP. I would disagree.

The inflation protection provided by TIPS really shines with longer maturities, not shorter ones. With shorter maturities the reset period for the inflation adjustment in TIPS is such a large portion of the total maturity that the benefit is really muted. At that point, they are very similar in economic substance to regular t-bills.
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Re: Is the Permanent Portfolio Broken?

Post by buddtholomew » Fri Oct 09, 2020 1:52 pm

If the PP “breaks” then diversification no longer works.

An equity investor may hold all stocks.
A fixed income investor may hold all bonds.
A precious metals investor may hold all gold.
A risk averse investor may hold all cash.

The PP captures a portion of the return each investor earns without having to determine which approach is correct year after year.

I’ll believe the PP is broken when all 4 asset classes earn negative returns over 2 consecutive years. Even then, I would consider the PP a good buying opportunity.
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Re: Is the Permanent Portfolio Broken?

Post by Kevin K. » Fri Oct 09, 2020 3:55 pm

I concur with all of your points Tyler and Smith1776 - thanks for your thoughtful posts.

As Tyler and others have pointed out, there just isn't enough TIPS data to draw any meaningful conclusion about how they might perform in various economic conditions. Vanguard has a couple of good papers on TIPS and while they recommend short-duration ones for "sudden" inflation that was back when they had a positive coupon. But as you point out Smith1776 it's persistent high inflation one wants to protect against and that's why LMP's only use long TIPS. I'd rather have a pile of internationally-diversified stocks, plenty of gold and ample cash myself.

The title of that article really should have been "Why the PP is unlikely to work as well in the future as in the past." As we've discussed extensively over on the Ray Dalio and bonds thread the situation with LTT's and interest rates really is unprecedented.

Some of the ideas in the article - including a good actively-managed bond fund, using VT instead of VTI for some or all of the equity portion of the PP - aren't all that radical.
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Re: Is the Permanent Portfolio Broken?

Post by Kbg » Sat Oct 10, 2020 11:06 am

buddtholomew wrote:
Fri Oct 09, 2020 1:52 pm
I’ll believe the PP is broken when all 4 asset classes earn negative returns over 2 consecutive years. Even then, I would consider the PP a good buying opportunity.
History indicates this is exactly the case.
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Re: Is the Permanent Portfolio Broken?

Post by pp4me » Sat Oct 10, 2020 12:25 pm

Kbg wrote:
Sat Oct 10, 2020 11:06 am
buddtholomew wrote:
Fri Oct 09, 2020 1:52 pm
I’ll believe the PP is broken when all 4 asset classes earn negative returns over 2 consecutive years. Even then, I would consider the PP a good buying opportunity.
History indicates this is exactly the case.
I think it was broken when I started it about 11 years ago, or at least somebody said it was. Actually I seem to remember reading an article with the exact same headline as the topic of this thread.
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Re: Is the Permanent Portfolio Broken?

Post by johnnywitt » Sat Oct 24, 2020 1:46 pm

Tyler wrote:
Fri Oct 09, 2020 11:17 am
Thanks for the link. Even if I don't always agree with the conclusions, it's good to see people talking about the Permanent Portfolio.

I could talk about several points in terms of Permanent Portfolio reasoning (seriously -- please don't swap treasuries for munis without understanding counter-party risk), but I'll focus on the conclusion since data is kinda my thing:

The original permanent portfolio looks great in the rear-view mirror. When you see stellar returns you have to ask “What led to this performance?” The permanent portfolio was lucky because it concentrated stock investments in the U.S. and owned long-term bonds during a multi-decade collapse in rates. For investors following this strategy, this post introduced three adjustments to ensure a portfolio stays permanent regardless of what the future holds.

The article claims that the PP performance is an artifact of starting in 1982 at the peak of interest rates and the beginning of a US stock bubble. The thing is, it's easy now to backtest the portfolio prior to that when nominal bond rates skyrocketed, inflation was double-digits, and real rates plunged below zero. And we can also look at specific timeframes like the one starting in 2000 when US stocks floundered for more than a decade, or the more recent years when cash rates have virtually evaporated. And in all of those timeframes, the performance of the PP was virtually the same! Basically, the assumption that the PP is an artifact of cherry-picked backtesting falls flat when one takes the time to test that assumption with real data.

The beauty of the Permanent Portfolio is not that every asset always has great future prospects. That will never be the case. It's that even when one or more assets completely tanks, the portfolio has a knack for continuing along like nothing happened. In a world of financial writers chasing the next big trend and running from the next big disaster, the PP is a model of consistency.

So no, I don't think the Permanent Portfolio is broken. It's just often misunderstood by people whose investing mindset follows a different paradigm.
This is why the PP will never be a Mainstream option: human hubris, folly & herd mentality will always prevent most Folks adoption of the strategy. It is supremely difficult to buy an Asset Class when it is loathed & supremely out of favor. Forced buying low and selling high sounds great in theory, but in practice, for most Investors, is nigh on impossible.
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Re: Is the Permanent Portfolio Broken?

Post by ahhrunforthehills » Sun Oct 25, 2020 12:25 am

johnnywitt wrote:
Sat Oct 24, 2020 1:46 pm

This is why the PP will never be a Mainstream option: human hubris, folly & herd mentality will always prevent most Folks adoption of the strategy. It is supremely difficult to buy an Asset Class when it is loathed & supremely out of favor. Forced buying low and selling high sounds great in theory, but in practice, for most Investors, is nigh on impossible.
There are many people that have both the understanding and discipline to maintain a PP allocation... but still ultimately decide it is either not optimal or no longer optimal.

Besides, there is limited data that supports how the PP would act in a prolonged rising inflation period. Bretton woods impacts gold prices in the 1940s-1970s dataset. That is why Tyler’s website excludes it. That is also why some sites like earlyretirmentnow are quick to dismiss Tyler’s data when it comes to the PP (no offense meant towards Tyler at all... I’m a fan).

I think that the PP is great for people that want an “easy” approach with a high chance of low volatility. But in all honesty, the PP is not as battle-tested as many people seem to think it is when it comes to macroeconomic shifts.

Is the PP a good strategy based on history? Definitely maybe :o
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Re: Is the Permanent Portfolio Broken?

Post by ahhrunforthehills » Sun Oct 25, 2020 2:52 am

For the record, I have nothing against the PP.

I am merely trying to demonstrate that the “A-Ha” moment that people tend to experience when they finally “get it” in regards to the PP... well, there can be more “A-Ha” moments that make you realize things aren’t nearly as simple as HB would have liked you to believe.
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Re: Is the Permanent Portfolio Broken?

Post by mathjak107 » Sun Oct 25, 2020 4:06 am

ahhrunforthehills wrote:
Sun Oct 25, 2020 12:25 am
johnnywitt wrote:
Sat Oct 24, 2020 1:46 pm

This is why the PP will never be a Mainstream option: human hubris, folly & herd mentality will always prevent most Folks adoption of the strategy. It is supremely difficult to buy an Asset Class when it is loathed & supremely out of favor. Forced buying low and selling high sounds great in theory, but in practice, for most Investors, is nigh on impossible.
There are many people that have both the understanding and discipline to maintain a PP allocation... but still ultimately decide it is either not optimal or no longer optimal.

Besides, there is limited data that supports how the PP would act in a prolonged rising inflation period. Bretton woods impacts gold prices in the 1940s-1970s dataset. That is why Tyler’s website excludes it. That is also why some sites like earlyretirmentnow are quick to dismiss Tyler’s data when it comes to the PP (no offense meant towards Tyler at all... I’m a fan).

I think that the PP is great for people that want an “easy” approach with a high chance of low volatility. But in all honesty, the PP is not as battle-tested as many people seem to think it is when it comes to macroeconomic shifts.

Is the PP a good strategy based on history? Definitely maybe :o
rising rates and inflation is likely the PP kryptonite
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Re: Is the Permanent Portfolio Broken?

Post by Kbg » Sun Oct 25, 2020 5:56 am

This isn’t an endorsement or an objection to the HBPP. However, the criticisms being levied above about data pretty much apply to any portfolio that has assets beyond the US stock market or treasury bills/bonds.

You could eliminate HBPP and insert pretty much any modern portfolio and the same would be true. If one dives into the data, at least what to me becomes evident, is that you can have some reasonably decent performing portfolios without a ton of stock. Another thing that is evident is a simple concept: there is no such thing as a free lunch. If you want higher returns you take on more risk, if you want less risk you settle for lower returns. This is about as close as one can get in the world of finance that is near a physical law.

On this board we often talk about gold coming off the gold standard when it comes to performance and metrics. This period is somewhat important, but I think the real dividing line is around the late 80s to early 90s with the advent of the information age into finance and the markets. The impact has been profound in so many ways.
Last edited by Kbg on Sun Oct 25, 2020 6:00 am, edited 1 time in total.
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Re: Is the Permanent Portfolio Broken?

Post by mathjak107 » Sun Oct 25, 2020 6:00 am

most conventional portfolios in the 40-60% equity range do not have that kind of potential for damage in the bond portion
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Re: Is the Permanent Portfolio Broken?

Post by I Shrugged » Sun Oct 25, 2020 8:53 am

Rising rates could be kryptonite at this particular point in time, yes. I hope the gold will mitigate the effects.

Referring to another part of the thread, according to my notes, my Aha! moment was in 2004. That happens to match up with me realizing George Bush The Younger was a war criminal, and so I found libertarianism and Harry Browne. His PP ideas made so much sense. I started rolling my portfolio into PP mode then. 26 years with very good success, that's why it's going to take a lot to move me off of it.
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Re: Is the Permanent Portfolio Broken?

Post by johnnywitt » Fri Oct 30, 2020 5:59 pm

ahhrunforthehills wrote:
Sun Oct 25, 2020 12:25 am
johnnywitt wrote:
Sat Oct 24, 2020 1:46 pm

This is why the PP will never be a Mainstream option: human hubris, folly & herd mentality will always prevent most Folks adoption of the strategy. It is supremely difficult to buy an Asset Class when it is loathed & supremely out of favor. Forced buying low and selling high sounds great in theory, but in practice, for most Investors, is nigh on impossible.
There are many people that have both the understanding and discipline to maintain a PP allocation... but still ultimately decide it is either not optimal or no longer optimal.

Besides, there is limited data that supports how the PP would act in a prolonged rising inflation period. Bretton woods impacts gold prices in the 1940s-1970s dataset. That is why Tyler’s website excludes it. That is also why some sites like earlyretirmentnow are quick to dismiss Tyler’s data when it comes to the PP (no offense meant towards Tyler at all... I’m a fan).

I think that the PP is great for people that want an “easy” approach with a high chance of low volatility. But in all honesty, the PP is not as battle-tested as many people seem to think it is when it comes to macroeconomic shifts.

Is the PP a good strategy based on history? Definitely maybe :o
The PP has never been an optimal portfolio strategy. The PP is a very conservative portfolio designed to preserve one's purchasing power. The Variable Portfolio is the "optimal" portfolio.
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Re: Is the Permanent Portfolio Broken?

Post by johnnywitt » Fri Oct 30, 2020 6:04 pm

ahhrunforthehills wrote:
Sun Oct 25, 2020 2:52 am
For the record, I have nothing against the PP.

I am merely trying to demonstrate that the “A-Ha” moment that people tend to experience when they finally “get it” in regards to the PP... well, there can be more “A-Ha” moments that make you realize things aren’t nearly as simple as HB would have liked you to believe.
Ultimately, I think it is as simple as HB would have you believe. Once again, it's a very conservative portfolio and an astute investor such as yourself can possibly do better. This is why Harry actually encouraged folks that have the investing itch to have a Variable Portfolio. He stated that by having a VP that would likely keep them from jacking with their PP.
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Re: Is the Permanent Portfolio Broken?

Post by johnnywitt » Fri Oct 30, 2020 6:14 pm

mathjak107 wrote:
Sun Oct 25, 2020 6:00 am
most conventional portfolios in the 40-60% equity range do not have that kind of potential for damage in the bond portion
Yeah, but they sure as hell have it in the other asset classes.
Look at Japan vs other Portfolios and then look at the 1970's as well and the PP pretty well not only held up in Japan, but turned a profit in the 1970's.
If you think of the Life Experience of HB, I believe he hedged more against inflation with his portfolio than any possible deflationary event.
The only thing with the PP as far as an Achilles Heel is that you would need to stop all rebalancing in a Hyperinflation. I think anybody on this website is most likely savvy enough to recognize when a hyperinflation is occurring.
Hey, you guys can do your own thing. I came to this website because of the PP and to a lessor extent, the GB. I am, however, going with the PP.
I'll let you know how it goes as "nobody can predict the future" as old Harry would say.
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Re: Is the Permanent Portfolio Broken?

Post by modeljc » Sat Oct 31, 2020 8:53 am

I Shrugged wrote:
Sun Oct 25, 2020 8:53 am
Rising rates could be kryptonite at this particular point in time, yes. I hope the gold will mitigate the effects.

Referring to another part of the thread, according to my notes, my Aha! moment was in 2004. That happens to match up with me realizing George Bush The Younger was a war criminal, and so I found libertarianism and Harry Browne. His PP ideas made so much sense. I started rolling my portfolio into PP mode then. 26 years with very good success, that's why it's going to take a lot to move me off of it.
I agree. Tried to talk about how a rise in long interets rate would affect the PP with Med Tex. My example was what if long rates went from 4% to 7%. Suggested the PP might hold 60% of its value. Stocks, gold, and long bond would tank.
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Re: Is the Permanent Portfolio Broken?

Post by ahhrunforthehills » Sat Oct 31, 2020 12:29 pm

johnnywitt wrote:
Fri Oct 30, 2020 6:14 pm
mathjak107 wrote:
Sun Oct 25, 2020 6:00 am
most conventional portfolios in the 40-60% equity range do not have that kind of potential for damage in the bond portion
Yeah, but they sure as hell have it in the other asset classes.
Look at Japan vs other Portfolios and then look at the 1970's as well and the PP pretty well not only held up in Japan, but turned a profit in the 1970's.
If you think of the Life Experience of HB, I believe he hedged more against inflation with his portfolio than any possible deflationary event.
The only thing with the PP as far as an Achilles Heel is that you would need to stop all rebalancing in a Hyperinflation. I think anybody on this website is most likely savvy enough to recognize when a hyperinflation is occurring.
Hey, you guys can do your own thing. I came to this website because of the PP and to a lessor extent, the GB. I am, however, going with the PP.
I'll let you know how it goes as "nobody can predict the future" as old Harry would say.
I am interested to know where you are getting your Japan data.

For example, if you invested in the PP in Japan around 1987-1990, Tyler's data shows that you would have racked up 13 years of straight losses (followed by 25 years of no gains). When you factor in taxes and expenses, you probably lost money every year.

The 1970's is always a weird data set because of Bretton Woods. But I will play along... if i invested in a Japan PP around 1973-1974, it appears that this would have been my life:

"Time to periodically check my PP and rebalance if necessary". I get out my fancy calculator, news paper, and notebook.

- Hmmm... the market WAS doing pretty good before... but now it just keeps going down little by little. That sucks.
- Short Term Interest Rate are basically at 0%
- Woohoo! Gold has been doing pretty good (priced in Yen, it was similar to what we have recently seen in Gold in the US... a gradual almost doubling)
- Wait, WTF is happening to my LT Bonds?! Let me check that Quarterly CPI Inflation Rate... it basically TRIPLED!?! OMG, is this the start of hyperinflation!?! What should I do?! Okay, okay, keep calm... stay the course.

Even if I could stay the course with a PP, based on Tyler's data, I would have had 6 consecutive years of losses.

My only consolations would be that my losses were not as large as most of the people I knew. However, at that point I think most people would have already lost faith in the PP and would have moved on to some type of Peter Schiff strategy. There perception of a "Permanent Portfolio" that works all the time had already been popped.

I think the PP is fine as long as you are realistic in your expectations. However, HB's "philosophy" makes it sound a lot rosier than I think the allocation deserves.

A big reason why people like the PP is because of its Libertarian principles. However, the PP is a nice little portfolio because of its asset diversity as it has related to the environment it has existed in up until this point... not necessarily because of the libertarian narrative.

For investments, I want the science separated from the religion. In fact, calling it a "Permanent Portfolio" exacerbates the issue... IMHO, it should simply be called something like the "Low Volatility Portfolio" to set better expectations.

The "Permanent Portfolio" is based on a LOT of assumptions. HB said if X happens, than Y is the result. But, what if the definition of X has changed? What if the definition of Y has changed?

The problem with Libertarians (keep in mind that I am one) is that we righteously feel that the world will "return to normal" one day. We say things like "but things can't go on like this forever" and "if government would just stop manipulating those prices...".

But you know the saying... "if ifs and buts were candy and nuts it would be Christmas everyday."

Libertarians don't typically make the best investors. Their doomsday supplies also tend to expire before they ever get a chance to use them.

Again, I prefer the science separated from the religion.
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Re: Is the Permanent Portfolio Broken?

Post by mathjak107 » Sat Oct 31, 2020 12:40 pm

The PP has almost a cult like following... that can really make for a stronger belief than just religion ...which can be good or bad depending on how things go .

We are finding today a whole lot more is involved then basic relationships to the economy ....we see assets like gold and long term treasuries taking the same path as stocks now , as many times leverage and margin calls make them the asset of choice to be sold .

Just like other factors tend to outweigh golds movements compared to daily inflation , so do other factors effect and overwhelm the movement of bonds today .

Bonds can not be counted on to stand up to a bad down turn in stocks ..the volatility of long term bonds can over accent the days fall instead of cushioning it

I am no more confident of the pp than I am in any other diversified portfolio of similar equity weighting
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