I've studied this pretty extensively. I'll try to keep it brief, but it's a complicated topic.Interested Investor wrote:All portfolios composed of only stocks and bonds are vulnerable to periods of high inflation; thus, they are vulnerable to portfolio failure. Reducing the withdrawal rate will lessen, but not remove this vulnerability. The Permanent Portfolio addresses this vulnerability by adding more asset classes; although, I am not familiar with any studies trying to ascertain a safe withdrawal rate for the Permanent Portfolio.
First, it's very important to understand that retirement calculators like CFireSim do not model the Permanent Portfolio well at all. There are two basic reasons for this: 1) the PP only applies to the time period after 1972 when the US came off the gold standard, and 2) the bonds in CfireSim and Firecalc are not long-term treasuries and the cash is not short-term treasuries. So only 25% of the portfolio is accurately modeled for PP purposes. I know these calculators are fun, but for the purpose of studying the PP throw them out.
Second, because of point #1 above, it's difficult to run the same 30-year analysis of the PP and compare apples-to-apples to the Trinity study. Starting in 1972, you just won't get enough full 30-year periods to have a statistically significant sample for "percent success" numbers.
Third, as an early retiree I've always been dissatisfied with the Trinity study's basic assumption that only having one dollar left in your account after 30 years would constitute a "success". I would feel pretty desperate having only $1 in investments 30 years from now. So even the basic "percent success" numbers are meaningless to me.
Knowing all of this, I still wanted to know whether the PP was a good retirement portfolio. So I modeled it myself using excel (adjusting the initial WR for inflation each year, withdrawing from cash, and rebalancing by the traditional method when a 15/35 band was crossed by one of the assets). Instead of 30-year periods, I used 10-year periods. To compensate for the shorter timeframes, I used a much more conservative assumption that "success" means having the same inflation-adjusted balance in ten years as you did when you started. That means that if you set your initial WR to the lowest point on the chart, you will have the same inflation-adjusted balance in ten years and more than that in every other 10-year period. Then I ran a bunch of optimizations. Here are the results:
The blue line is the PP. The red is a typical 50/50 Stock/Bond Boglehead portfolio. The BH portfolio looks really nice in this timeframe because of the stock run in the 80's and 90's, but remember that the Trinity study still only recommended a 4% WR. Why is that? Because of multiple historic rolling periods like the left side of the chart where the real CAGR was negative for more than 10 years at a time. In contrast, this shows how the PP consistently generates real returns of 4-6% in all kinds of economic environments, including ones where stocks and bonds struggle.
I have lots of other charts and tables if anyone is interested, but the basic takeaway is that while a traditional stock/bond portfolio is generally assumed to accommodate a 4% SWR and not go broke in 30 years, the PP has historically handled the same 4% SWR and maintained principal with a much smoother ride along the way.
Note that this image shows the CAGR for your investments after expenses.
So yes, I do have 100% of my investments in the permanent portfolio. And no, I don't follow my calculations blindly in the same way I don't recommend people put all their eggs in the Trinity Study basket. If you're not willing to adjust to adversity, you're not ready to retire. But hopefully this helps people understand the PP as a viable alternative to traditional retirement portfolios.