Permanent Portfolio Failure?

General Discussion on the Permanent Portfolio Strategy

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EdwardjK
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Permanent Portfolio Failure?

Post by EdwardjK » Mon Jan 03, 2022 4:49 pm

Did the Permanent Portfolio fail in 2021?

I ask this provocative question in order to generate some discussion.

According to ETF Replay, the Permanent Portfolio generated a total return of 4.1% in 2021. That falls dramatically short of the S&P 500, which generated a total return of 28.7%; and falls short of a 50%-50% allocation between equities and LT Treasuries (12.1%).

Hell, the PP didn't even cover the rate of inflation in 2021!

So does this constitute failure? And if so, what actions will you take as a result?
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Re: Permanent Portfolio Failure?

Post by mathjak107 » Mon Jan 03, 2022 4:53 pm

I don’t use the pp as I want a more inflation weighted portfolio with similar equity allocation ..but time will tell if the rate sensitivity of the pp will cause poor performance.

Staring at charts of what was is not going to tell us a thing today.

I dropped long term bonds for much less interest rate sensitivity with short term bonds and high yield and I broke up the gold budget to include a commodities etf , gold etf .bitcoin fund and a real return fund ….all that goes with a 25-35% equities allocation
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Re: Permanent Portfolio Failure?

Post by murphy_p_t » Mon Jan 03, 2022 5:52 pm

I think most people are aware that this portfolio can have a negative real return in a given calendar year.

Not sure why that would suggest that the portfolio has failed. Other than FOMO.
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Re: Permanent Portfolio Failure?

Post by Ugly_Bird » Mon Jan 03, 2022 6:07 pm

EdwardjK wrote:
Mon Jan 03, 2022 4:49 pm
Did the Permanent Portfolio fail in 2021?

I ask this provocative question in order to generate some discussion.

According to ETF Replay, the Permanent Portfolio generated a total return of 4.1% in 2021. That falls dramatically short of the S&P 500, which generated a total return of 28.7%; and falls short of a 50%-50% allocation between equities and LT Treasuries (12.1%).

Hell, the PP didn't even cover the rate of inflation in 2021!

So does this constitute failure? And if so, what actions will you take as a result?
A portfolio fails when it leaves you without the invested money after 10 (20, 30 etc.) years...
Did the PP do that?
As of doing anything.... should we? Nope! :-)
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Re: Permanent Portfolio Failure?

Post by Lorddoskias123 » Tue Jan 04, 2022 12:38 pm

EdwardjK wrote:
Mon Jan 03, 2022 4:49 pm
Did the Permanent Portfolio fail in 2021?

I ask this provocative question in order to generate some discussion.

According to ETF Replay, the Permanent Portfolio generated a total return of 4.1% in 2021. That falls dramatically short of the S&P 500, which generated a total return of 28.7%; and falls short of a 50%-50% allocation between equities and LT Treasuries (12.1%).

Hell, the PP didn't even cover the rate of inflation in 2021!

So does this constitute failure? And if so, what actions will you take as a result?
Not at all a failure.
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Kriegsspiel
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Re: Permanent Portfolio Failure?

Post by Kriegsspiel » Tue Jan 04, 2022 1:15 pm

The PP regularly has bad years. They're just not as bad as with other, more aggressive portfolios. We've had a couple pretty good years now, so it's not unexpected.
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Re: Permanent Portfolio Failure?

Post by jalanlong » Tue Jan 04, 2022 1:23 pm

Kriegsspiel wrote:
Tue Jan 04, 2022 1:15 pm
The PP regularly has bad years. They're just not as bad as with other, more aggressive portfolios. We've had a couple pretty good years now, so it's not unexpected.
It is an interesting dynamic that PP investors seem to view a victory as only losing 4% when the stock market drops 30% but don't seem to be bothered when the PP only gains 4% and the stock market goes up 30%. I consider that a loss of a different sort I guess.
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Re: Permanent Portfolio Failure

Post by mathjak107 » Tue Jan 04, 2022 1:27 pm

That is where investor behavior and mental masturbation play a role …….

Eventually one can be down by half over a typical accumulation and still be higher then trying to mitigate temporary down turns as long term investors and permanently hurting long term growth with portfolios that mitigate these dips unnecessarily.

However for many of us retirement no longer has us concerned with pedal to the metal growth so priority’s change .

I no longer compare what I do to high equity level portfolios.
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Re: Permanent Portfolio Failure?

Post by dualstow » Tue Jan 04, 2022 2:09 pm

jalanlong wrote:
Tue Jan 04, 2022 1:23 pm
It is an interesting dynamic that PP investors seem to view a victory as only losing 4% when the stock market drops 30% but don't seem to be bothered when the PP only gains 4% and the stock market goes up 30%. I consider that a loss of a different sort I guess.
Do you want a portfolio that is 25% cash and only 25% stocks to gain 30% when the stock market is up 30%? How would that work?
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jalanlong
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Re: Permanent Portfolio Failure?

Post by jalanlong » Tue Jan 04, 2022 2:40 pm

dualstow wrote:
Tue Jan 04, 2022 2:09 pm
jalanlong wrote:
Tue Jan 04, 2022 1:23 pm
It is an interesting dynamic that PP investors seem to view a victory as only losing 4% when the stock market drops 30% but don't seem to be bothered when the PP only gains 4% and the stock market goes up 30%. I consider that a loss of a different sort I guess.
Do you want a portfolio that is 25% cash and only 25% stocks to gain 30% when the stock market is up 30%? How would that work?
Not sure how you got that from my statement. It was an observation that most here seem to be ok with not gaining 28% from stocks last year because they do not want to lose the 28% when they go down. To my way of thinking you are still losing either way and it is frustrating to see the PP underperform basic inflation, much less the general stock market.
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Re: Permanent Portfolio Failure?

Post by Kriegsspiel » Tue Jan 04, 2022 3:02 pm

jalanlong wrote:
Tue Jan 04, 2022 2:40 pm
dualstow wrote:
Tue Jan 04, 2022 2:09 pm
jalanlong wrote:
Tue Jan 04, 2022 1:23 pm
It is an interesting dynamic that PP investors seem to view a victory as only losing 4% when the stock market drops 30% but don't seem to be bothered when the PP only gains 4% and the stock market goes up 30%. I consider that a loss of a different sort I guess.
Do you want a portfolio that is 25% cash and only 25% stocks to gain 30% when the stock market is up 30%? How would that work?
Not sure how you got that from my statement. It was an observation that most here seem to be ok with not gaining 28% from stocks last year because they do not want to lose the 28% when they go down. To my way of thinking you are still losing either way and it is frustrating to see the PP underperform basic inflation, much less the general stock market.
I don't want to accept a huge loss with the amount of net worth in my PP, so I accept not making 30% returns.

My VP has a ton of stocks, and if they go down I can handle that, and it's cool when they're going up.

I figure the more stable my portfolio, the less I need to worry about sequence of returns risk.

I don't understand your way of thinking. If you think of the PP as losing either way, why would you use it?
You there, Ephialtes. May you live forever.
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Re: Permanent Portfolio Failure?

Post by seajay » Tue Jan 04, 2022 4:14 pm

EdwardjK wrote:
Mon Jan 03, 2022 4:49 pm
Did the Permanent Portfolio fail in 2021?

I ask this provocative question in order to generate some discussion.

According to ETF Replay, the Permanent Portfolio generated a total return of 4.1% in 2021. That falls dramatically short of the S&P 500, which generated a total return of 28.7%; and falls short of a 50%-50% allocation between equities and LT Treasuries (12.1%).

Hell, the PP didn't even cover the rate of inflation in 2021!

So does this constitute failure? And if so, what actions will you take as a result?
Re-read the label on the tin, especially with respect to it being for the money you can't afford to lose. Also check out the last 5 years rather than looking at just individual years, where PV indicates a 5.85% real rate of return, above what is suggested on the label on the tin. So it has outperformed expectations over those years.
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Re: Permanent Portfolio Failure?

Post by flyingpylon » Tue Jan 04, 2022 4:22 pm

Since when is not gaining as much considered to be "losing"?

Investing isn't like auto racing where second place is just the first loser.

While I agree that it's no fun to lose ground to inflation, it's not like it happens consistently. And why would anyone expect a portfolio of less than 100% stocks to match the performance of the stock market?
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Re: Permanent Portfolio Failure?

Post by mathjak107 » Tue Jan 04, 2022 4:24 pm

I can see comparing other conservative models but certainly not comparing to high equity

Wellesly income , a great conservative choice up 8%
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Re: Permanent Portfolio Failure?

Post by dualstow » Tue Jan 04, 2022 4:40 pm

jalanlong wrote:
Tue Jan 04, 2022 2:40 pm
dualstow wrote:
Tue Jan 04, 2022 2:09 pm
Do you want a portfolio that is 25% cash and only 25% stocks to gain 30% when the stock market is up 30%? How would that work?
Not sure how you got that from my statement. It was an observation that most here seem to be ok with not gaining 28% from stocks last year because they do not want to lose the 28% when they go down. To my way of thinking you are still losing either way and it is frustrating to see the PP underperform basic inflation, much less the general stock market.
jalanlong, I was asking not telling. But, you said it’s another way of losing, a “loss of a different sort.”
I would think most people know what they’re getting into when they get into this portfolio, that it’s more about the long run through steady gains and low volatility. In the long run it can do very well.

To compare to high equity OR to look at a single year too hard is probably not a good exercise. To do both at once is baffling to me. Especially since you noted correctly that extreme short term gains are forfeited. It’s practically baked into the portfolio.

I’m one of those greedy people that has had a lot in equity (large VP with stocks). But, the pp seems to be working as advertised, no?
RIP Marcello Gandini
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dualstow
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Re: Permanent Portfolio Failure?

Post by dualstow » Tue Jan 04, 2022 5:09 pm

Just one other note, another way to look at it:

VGSLX, Vanguard’s real estate fund was up 40%, but I didn’t have a lot in there.
Was that another kind of loss, that I had the core in VTSAX which earned only 25%?
RIP Marcello Gandini
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Re: Permanent Portfolio Failure?

Post by vnatale » Tue Jan 04, 2022 5:28 pm

dualstow wrote:
Tue Jan 04, 2022 5:09 pm

Just one other note, another way to look at it:

VGSLX, Vanguard’s real estate fund was up 40%, but I didn’t have a lot in there.
Was that another kind of loss, that I had the core in VTSAX which earned only 25%?


You are making all good points and analogies ....
Above provided by: Vinny, who always says: "I only regret that I have but one lap to give to my cats." AND "I'm a more-is-more person."
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Re: Permanent Portfolio Failure?

Post by seajay » Tue Jan 04, 2022 5:46 pm

dualstow wrote:
Tue Jan 04, 2022 4:40 pm
it’s more about the long run through steady gains and low volatility. In the long run it can do very well.
Should broadly be compared to cash deposits IMO. Say you need $50K/year for 30 years of retirement, have other sources of income providing $30K/year, then $20K x 30 years = $600K of cash would likely cover that (3.33% SWR), but have nothing left at the end. With a PP only $500K (4% SWR) likely covers the same, but is more inclined to have 50% median, 65% average of the inflation adjusted start date capital still available at the end of the 30th year (as per measures since end of WW2).

Yes other asset allocations might leave even more, but endure greater volatility along the way that might have you buying/selling at the wrong times as is quite typical, and that on average sees investors (human emotions drive) bad moves inducing a 2% average lag factor, or in some cases worse results compared to had they invested in cash deposits.
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Re: Permanent Portfolio Failure?

Post by dualstow » Tue Jan 04, 2022 6:01 pm

seajay wrote:
Tue Jan 04, 2022 5:46 pm
dualstow wrote:
Tue Jan 04, 2022 4:40 pm
it’s more about the long run through steady gains and low volatility. In the long run it can do very well.
Should broadly be compared to cash deposits IMO.
How about to cash deposits, to pure TIPS, to an all treasury portfolio with varied durations, and to the Golden Butterfly?
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Re: Permanent Portfolio Failure?

Post by seajay » Tue Jan 04, 2022 6:13 pm

dualstow wrote:
Tue Jan 04, 2022 6:01 pm
seajay wrote:
Tue Jan 04, 2022 5:46 pm
dualstow wrote:
Tue Jan 04, 2022 4:40 pm
it’s more about the long run through steady gains and low volatility. In the long run it can do very well.
Should broadly be compared to cash deposits IMO.
How about to cash deposits, to pure TIPS, to an all treasury portfolio with varied durations, and to the Golden Butterfly?
PV
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Re: Permanent Portfolio Failure?

Post by dualstow » Tue Jan 04, 2022 6:49 pm

Nice!
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Re: Permanent Portfolio Failure?

Post by Xan » Tue Jan 04, 2022 9:08 pm

I highly recommend the Micheal Lewis book "The Undoing Project". There's an anecdote where the two psychologists are talking about how a loss hurts more than a win feels good, and somebody from the audience poses a question "what is a loss" which throws them for a loop. At what point does an expectation get certain enough that it not panning out feels like a "loss"? There are a lot of factors at play there.
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Re: Permanent Portfolio Failure?

Post by seajay » Wed Jan 05, 2022 2:53 am

dualstow wrote:
Tue Jan 04, 2022 6:49 pm
Nice!
For various reasons home ownership is similar to a stock/gold blend, in part a housing market backed by significant amounts of debt (mortgages) will tend to be uplifted by the likes of negative real yields i.e. exhibit some element of gold like qualities (gold can perform well when real yields are negative). A stock/bond barbell might also be considered a form of central (volatile) bond bullet. With that in mind two brothers might have one opting to rent and investing solely in a PP, whilst the other brother might deploy a third of his capital into purchasing a home and keep the remainder in cash (10 year treasury). And bBroadly they might compare reasonably.

There are benefits/downsides to each of those. For one spending bonds will see a transition from 33/67 home/cash towards 100/0 over time. Perhaps with a 25 year horizon in mind spending bonds first, 2.65%/year effective SWR rate relative to total portfolio value, supplemented with imputed rent benefit of historically around 4.2%/year so 1.4% proportioned to a third weighting (combined 4% effective SWR). If that sees them through 25 years, maybe age 65 to 90, thereafter selling the home might fund all-inclusive later life care home costs.

Going back and setting 'inflation' as a 33/67 house including imputed rent benefit/intermediate treasury, and 'assets' of a Permanent Portfolio ... and the resultant 'real' gain progression line since the late 1800's was relatively flat i.e. the two were broadly comparable.

Harry didn't like home value as a 'investment', he saw it more as a consumable. I personally own, and like the liability matching of rent (am both in effect landlord and tenant) and the potential later life care home costs cover it potentially provides.

Comparing different choices (extending the above link to also include 33/67 home/PP) and regular (yearly) comparing is broadly futile. More inclined to lead to regret at times and risks throwing in the towel to profit chase what might have been 'better' alternatives up to that point in time that often then subsequently flips the other way around. Ignorance (not regularly looking/comparing) can be bliss - and often more productive in practice.

If your rent is liability matched (own rather than rent), that also might cover late life care costs, and your retirement account is invested in a PP to cover basic expenses shortfalls in other pension income(s), the rest might be invested in a VP however you like - is predominately for luxuries and/or for the benefit of heirs/charities. Or if you prefer, swap out the PP for a 10 year treasury ladder/fund, or buy annuities ... whatever.
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Re: Permanent Portfolio Failure?

Post by mathjak107 » Wed Jan 05, 2022 3:27 am

Personally I would never mix the home I lived in with any investing at all ….until the day comes that home is actually converted to cash it is strictly an expense ….especially with a stay at home spouse if long term care is needed for you which can leave her impoverished
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Re: Permanent Portfolio Failure?

Post by seajay » Wed Jan 05, 2022 4:22 am

mathjak107 wrote:
Wed Jan 05, 2022 3:27 am
Personally I would never mix the home I lived in with any investing at all ….until the day comes that home is actually converted to cash it is strictly an expense ….especially with a stay at home spouse if long term care is needed for you which can leave her impoverished
I believe more often its a case of home value being sold to fund the care costs of the longer surviving partner, where the first-to-go more often is cared for by the partner in their own home. I further believe that the average duration in a care home is around 4 to 5 years. Again very generally that occurs at a time during retirement, pension/investment spend/drawdown years, rather than when one might still be working. In the absence of a crystal ball you might only plan for the general/average case, unpredictable individual circumstances can however obviously vary considerably around that.
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