Revisiting the “Permanent Portfolio”

General Discussion on the Permanent Portfolio Strategy

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vnatale
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Revisiting the “Permanent Portfolio”

Post by vnatale » Sat May 13, 2023 8:16 pm

Revisiting the “Permanent Portfolio”

https://www.nestmann.com/revisiting-the ... -portfolio

Thus, while the long-term (50-year) average return of the Permanent Portfolio is nearly 9%, going forward, 7% or slightly less might be more realistic.

While 7% is still an exceptionally good risk-weighted return, it pales in comparison to a long-term portfolio of stocks, which since 1872 has generated a compound annual growth rate (CAGR) of 9.1% annually. This is a powerful argument for simply buying index funds that passively follow a market index; typically, the S&P 500.

That’s the approach Warren Buffett, the most successful investor in history recommends for most investors. He believes long-term ownership of stocks is the closest thing there is to a guaranteed winning investment strategy in the financial markets.

While it’s hard to disagree with his overall premise, a portfolio composed exclusively of stocks is far more volatile than the Permanent Portfolio. For instance, if your grandparents had purchased a stock portfolio corresponding to the S&P 500 in August 1929 (just before the stock market meltdown that resulted in an 86% loss in this index),they wouldn’t have broken even October 1954.

Adjusted for inflation, they wouldn’t have broken even until December 1958. Three decades is a long time to wait for your portfolio to recover!

Another critique of the Permanent Portfolio concept is that gold is the only one of the four investment classes not denominated in dollars. If the dollar were to collapse in value, wouldn’t the value of the Permanent Portfolio collapse as well?

Not necessarily. In a dollar collapse scenario, it’s likely the gold component would go a long way toward balancing out losses in the other three portfolio components. What’s more, in a hyperinflationary economy, investors will often purchase stocks as a way to shield themselves from price increases in goods and services. Interest rates will rise as well, increasing the performance of the cash share of the portfolio.

Indeed, we simply don’t know of a lower-risk long-term investment approach. When we consult with clients, we sometimes tell them to split their wealth into two imaginary piles:

Wealth they can afford to lose.

Wealth they can’t afford to lose.

For wealth you can afford to lose, feel free to invest it in whatever asset class which you feel gives you the best return commensurate with the risks you’re willing to take. But for wealth you can’t afford to lose, the best solution we’ve found is the Permanent Portfolio
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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mathjak107
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Re: Revisiting the “Permanent Portfolio”

Post by mathjak107 » Sun May 14, 2023 7:54 am

“a portfolio composed exclusively of stocks is far more volatile than the Permanent Portfolio. For instance, if your grandparents had purchased a stock portfolio corresponding to the S&P 500 in August 1929 (just before the stock market meltdown that resulted in an 86% loss in this index),they wouldn’t have broken even October 1954.”

they are wrong ..it took less then. 5 years in 1929 to recover adjusted for inflation not 3 decades .

the raw index numbers included no dividends which were as high as 14% …many top name stocks were not in the index yet and were actually not doing to badly ,and the cpi fell 18% .

so in terms of purchasing power you were whole in under 5 years ….in dollar terms you were well ahead with dividends 3 decades later .

by 1954 you were seeing almost a 6% inflation adjusted return cagr
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