The Permanent Portfolio is dead

[rocketdog]

So sayeth Seeking Alpha:

http://www.seekingalpha.com/article/332 ... dead?ifp=0

[mathjak107]

I don't know about doesn't work anymore. but I think performance will lag whatever it had done in the past unless we  have a long extended crises worse than anything yet. which can be quite a long shot for anyone with a pretty long term perspective .

I still think conventional investing , even conservative models  40/60 will likely do much better with not  much more volatility . a 50/50 will likely strike an even better balance  .

which way is better  all depends on whether your vision includes the proverbial calamity that may never happen . but if it does you are ready for it.


the real deal with the pp is it is a comfort decision not a performance one. if you want performance you really should look elsewhere. if you want comfort from fear , you found it.

[Cortopassi]

I swear this forum has become downright depressing.

Seems there's no end to people's negativity about the PP and gold.

Would seem that's the time to get in.

Why so little concern that it took 13+ years for the S&P 500 to get back to where it was, nominally, in 2000?

And the fact that story is written by a financial services firm who would love to rotate you in and out of stuff continually and make fees is no conflict of interest, no.

[dutchtraffic]

This article is so full of bullshit and even complete lies that i wouldn't even know where to start.

"Permanent Portfolio has underperformed U.S. stocks, and several stock/bond allocations, since 2012"

No shit? Is that a surprise? In the biggest stock bullmarket ever fueled by free FED money, who would expect anything else..?

[gizmo_rat]

The most useful bit of that article was the comment linking back to Tyler's visualisations on this forum, which I missed the first time around.

I think I'm gonna have to get a tattoo. 

[iwealth]

Why so little concern that it took 13+ years for the S&P 500 to get back to where it was, nominally, in 2000?

Recency bias. In 2013, the PP had its worst underperformance versus equities in its backtest-able history. Here's a list of the PP's over/under-performance versus equities since 1972:

1972 1.92
1973 32.62
1974 41.75
1975 -31.6
1976 -14.69
1977 9.44
1978 4.59
1979 16.5
1980 -18.27
1981 -0.25
1982 3
1983 -18.3
1984 -1.18
1985 -11.76
1986 2.24
1987 4.94
1988 -13.54
1989 -15.72
1990 7.77
1991 -21.48
1992 -5.26
1993 2.3
1994 -2.42
1995 -16.14
1996 -16.18
1997 -23.6
1998 -12.65
1999 -19.45
2000 13.61
2001 11.37
2002 28.13
2003 -17.47
2004 -6.23
2005 2.05
2006 -4.77
2007 7.81
2008 36.32
2009 -18.18
2010 -2.61
2011 9.56
2012 -9.5
2013 -35.38
2014 -3.38

All of those big ugly negative numbers recently. They aren't abnormal as one can easily see, but they are fresh on people's minds. Check out that stretch in the mid-late 90's...ouch!

[Greg]

I understand the viewpoint of the article but don't necessarily agree with it since there are multiple routes to get to retirement/financial independence. I find it sad that you look at the overall savings rate. Currently we're at 5%. Based on the posting from Tyler/Mr.Money Mustache (http://www.mrmoneymustache.com/2012/01/ ... etirement/), that's putting it at 66 years of working to get to "retirement".

That's a long time to work and I think the bigger issue is proper savings over the years of accumulating versus your investments growing enough to carry you through retirement.

[sixdollars]

"Permanent Portfolio has underperformed U.S. stocks, and several stock/bond allocations, since 2012"

No shit? Is that a surprise? In the biggest stock bullmarket ever fueled by free FED money, who would expect anything else..?

Yeah, this article fails to accurately analyze the PP.  PP provides steady real returns in most market environments and is an all-weather sort of portfolio.  That means it will chug along as usual during prosperity, but it won't do so in an extreme manner like an equity tilt portfolio.  A heavy stock portfolio is mainly poised to do well during prosperity - that much should be obvious.  Sure, you could argue that prosperity has been one of the more common market environments, but using only 2012 to now is extremely unfair.  Comparing the PP to a stock portfolio only during prosperity is just misleading.. that's an equity portfolio's home turf.

As Bernstein says, it's typical that people will flock to the PP during times of economic turmoil and flock right back out during a stock bull market - like dogs chasing cars.  Their returns will reflect their fortitude.

[Alanw]

I swear this forum has become downright depressing.

Seems there's no end to people's negativity about the PP and gold.

Would seem that's the time to get in.

Why so little concern that it took 13+ years for the S&P 500 to get back to where it was, nominally, in 2000?

And the fact that story is written by a financial services firm who would love to rotate you in and out of stuff continually and make fees is no conflict of interest, no.

After reading this thread, I thought I had better check my portfolio which is comprised of 60 - 70% PP and 30 - 40% Wellesley plus a little extra cash.  Sure enough the portfolio is down 3% YTD (2& of that is withdrawals for living expenses as I am retired). At this rate I may run out of money in 20 -25 years. If this performance continues for the next several years, I may revisit the portfolio construction. As for now, my goal in retirement is wealth preservation and simplicity. This portfolio seems to meet these needs.

[dutchtraffic]

It had 1 downyear in 2013, and YTD is slightly down, is anyone actually shocked by that?

Honestly, what do people expect? Zero downyears?
Even 5 downyears in a row, in all honesty, will mean nothing, it can and probably at some point will happen.

[mathjak107]

I swear this forum has become downright depressing.

Seems there's no end to people's negativity about the PP and gold.

Would seem that's the time to get in.

Why so little concern that it took 13+ years for the S&P 500 to get back to where it was, nominally, in 2000?

And the fact that story is written by a financial services firm who would love to rotate you in and out of stuff continually and make fees is no conflict of interest, no.

because a diversified mix with bonds and reits still did okay.

also the s&p 500 is only large caps. mid caps did  better as well as while index funds lagged while  quite a few managed funds did okay over the lost decade  .

as an example fidelity low priced stock fund was a big holding.

while the s&p returned about 4.50% the last 15 years , the fidelity low priced stock fund was up 12%. 


fidelity balanced fund was up 7.33 %

conservative Wellesley was up 7.65%

so looking at an index is not really seeing what investors really got .

[LC475]

"[Super-Smart Alpha-Male Investors] have been able to avoid the allure of a permanent portfolio, and move their strategy with the market. Those who did so in 2012 and saw value in equities have beaten the Permanent Portfolio. So did those who bought high yield bonds, or those who went into real estate. Even those who bought U.S. Treasuries have done better than Browne's followers."

Umm, OK:

People who saw value in stocks in 2012.  Here's some articles from Seeking Alpha in late 2011:

The Market Is Already Pricing in a Recession by Matthew Claassen
Recession Signaled by America's Top CEOs by eChristian Investing
John Hussman: Recession Warning by John Hussman

To quote just one of them:

"We have been saying for many weeks that the economy is slowing and once the market got past the politically induced debt crisis, investors will again focus on the economy and adjust to lower expectations. To those who understand the intricacies of sector rotation models, it’s painfully evident that investors are now expecting the economy to contract meaningfully....What is clearly evident at this time is that the behavior of major economic sectors is consistent with an economy already contracting toward a recession." --  [url=http://"http://web.archive.org/web/20110811081257/http://seekingalpha.com/article/285697-the-market-is-already-pricing-in-a-recession"]August 8, 2011[/url]

So.... yeah.  But let's say that you were more alpha than Alpha and did take a long position in the stock market.  Sure, that would have turned out well for you.

You know what group of people held onto a long position in the stock market through all the recession scares and other angst and worries of 2011-2015?  It would have to be a pretty smart group, with a lot of foresight, and with the gumption to stick with a good plan even through stormy waters.  You know who that group is?  People investing according to Harry Browne's Permanent Portfolio.  Those people held a hefty long stock position through thick and thin, even as many people were calling tops, predicting bear markets, and explaining how overvalued the stock market already was by historical standards and that a fall was inevitable.  Smart crowd.

Even those who bought U.S. Treasuries have done better than Browne's followers.  Except for, wait, Browne's followers bought U.S. Treasuries!  Lots of them!  In fact, who exactly holds more and longer US Treasuries than Browne followers?  They hold 25% of their portfolio, a very big chunk by any standard, in 25-30 year bonds, the longest duration available.  These had the biggest payoff, and also the biggest risk.  Boy, they must have really had a good crystal ball to make such a strong, unabashed bet on U.S. Treasuries when no one, I mean no one, was recommending such a course.  Wow, I want to subscribe to these people's newsletter.

Bottom line, he says "people who bought stocks beat the PP, people who bought bonds beat the PP," but that is really, really stupid because the PP invests in nothing but stocks and bonds... and gold.  So really, all this article is revealing is the revelation that gold underperformed the last few years.  So why is the strategy dead?  Does he think that gold will underperform the next few years as well?  And forever, into the future?  If he does, then fine.  At least that's a coherent opinion.  But he doesn't say that at all.  He doesn't.  And so... why is the PP dead, again?  Because bloviator says so.  Because it lagged behind the stock market.

How come no one declared it dead during 2000-2011?  During that time, it clearly lagged behind the gold market.  An investor that "saw value" in gold in 2000  would have beaten the Permanent Portfolio.  Clearly the PP should have been declared dead by 2005, at the latest.  How many years of underperformance are needed before an investor wakes up, sees he's missing out on returns, sees his strategy is thus clearly dead, and takes action?

[Pointedstick]

It seems every portfolio is considered "dead" when it starts to tread water for a few years. People write this kind of article about stocks all the time. It's just recency bias. The real question is whether the theoretical underpinnings of the portfolio still make sense. If they do, then the PP is fine. If they aren't, that's when it's dead.

[dutchtraffic]

The whole discussion about it being dead is complete garbage actually.

There is only 1 way it can "die", that is if ALL the assets go down simultaneously (steady) and never recover, which kills ALL portfolios.

Even sideways action with enough volatilty could still grow a PP due to rebalancing.

[goodasgold]

The whole discussion about it being dead is complete garbage actually.

I agree. The critics, as usual, are focused exclusively on short-term results. Granted, the sharp drop in the price of gold was a shock, but I have gotten used to it. In fact, I have rebalanced to buy more of the yellow stuff, secure in the knowledge that gold, like all underperforming assets, will again rise and (literally) shine.

I am perfectly content to let those lovely Eagles, Maple Leafs and Kangaroos lounge around in their (insured) safe deposit box in the bank vault, dressed in gold lam� pajamas for all I care, until the day when they come roaring back in value.

[Greg]

dressed in gold lame pajamas for all I care, until the day when they come roaring back in value.

For whatever reason when I read this, I thought about Uncle Eddie from National Lampoon's Christmas Vacation:

Clark: "How can they have nothing for their children?"
Ellen: "Well, he's been out of work for close to seven years."
Clark: "In seven years, he couldn't find a job?"
Ellen: "Cathrine says, he's been holding out for a management position."

[goodasgold]

dressed in gold lame pajamas for all I care, until the day when they come roaring back in value.

For whatever reason when I read this, I thought about Uncle Eddie from National Lampoon's Christmas Vacation:

Clark: "How can they have nothing for their children?"
Ellen: "Well, he's been out of work for close to seven years."
Clark: "In seven years, he couldn't find a job?"
Ellen: "Cathrine says, he's been holding out for a management position."

Yeah, but maybe poor Uncle Eddie never had a management position before. Whereas gold, as wise (PP) investors know, has performed magnificently in management positions in the past and will do so again, when other folks finally realize that gold is a "perfect hire" for boosting their portfolios (until it goes down again, of course, but in the meantime we PPers would have locked in the gains by rebalancing.)

[Tom]

Beat to the punch.  Was gonna post this.  Everyone has already articulately outlined how they miss the point of why it's "permanent".  Constantly shifting to what you think the environment is or is going to be is not a strategy, it's playing roulette.

[buddtholomew]

I think it is important to personally witness a downturn in equities while invested in the PP to fully appreciate the power of diversification. Anytime stocks are appreciating, the PP investor will experience PP-envy, as other more equity weighted portfolios grow in size 

The 4x25 allocation is a starting point. Individuals need to decide for themselves whether to adjust the weightings in accordance with their risk/reward ratio.

[mathjak107]

downturns have always been a part of equity investing in every time frame, it is no surprise. most equity investors will  take on a certain amount of volatility they are comfortable with for a pretty decent chance of higher returns .

historically there are few long term periods of 15 years or longer they would  not have been rewarded for taking on that extra volatility.

as many of us say just buy Wellesley

[dutchtraffic]

downturns have always been a part of equity investing in every time frame, it is no surprise. most equity investors will  take on a certain amount of volatility they are comfortable with for a pretty decent chance of higher returns .

historically there are few long term periods of 15 years or longer they would  not have been rewarded for taking on that extra volatility.

as many of us say just buy Wellesley

http://www.ritholtz.com/blog/wp-content ... -years.jpg

[mathjak107]

news flash , this ain't japan , nor did we make the mistakes that japan made putting them in the deflationary spiral of death.

not everyone bases their decisions on what if,,,  if that was the case we would all stick our money in T-bills  and even that comes with what if's .

I would rather invest in bullets and beans if I wanted to cover all the most severe what if's .. with my guns I can get everything else I need .

[dutchtraffic]

news flash , this ain't japan , nor did we make the mistakes that japan made putting them in the deflationary spiral of death.

Joking. Right.....?

[mathjak107]

not at all. their central bank made some very amateur mistakes that deflated them when their markets first fell in the 1980's. they entered a deflationary spiral they just can't break. they made the same mistake we did in 1929 raising rates first.

they made mistake after mistake since then.

could we make mistakes sure we could . that is why  many of us are not 100% equity's but by the same token we all  find a balance of risk , volatility and reward we are comfortable with based on our own perceptions of what is plausible or not to protect against.

http://www.nber.org/papers/w10878

[Reub]

Does Japan have the kind of welfare state/unskilled immigrant problems that are so pervasively growing here?