And as if on que,
Bjorgen found the statistics (and an article) for the PP performance in Iceland 2008.
Permanent Portfolio Rescues Iceland From Total Collapse
Highlights:
Icelanders with a traditional ‘defensive’ portfolio, consisting of only stocks and bonds, destroyed their capital in 2008. Icelanders that had everything on a savings account can buy 3 times less. The Icelander with a permanent portfolio however was relatively well protected and can now buy 40% more real estate.
The PP is safer even than 100% cash, in other words.
Starting in 2008 you paid 90 krona for 1 euro. At the end of 2008 you paid 290 krona for 1 euro. A staggering 69% drop in value. Starting 2008 gold was priced 530 euro per ounce. At the end of 2008 gold was priced 592 euro per ounce. In Icelandic krona gold therefore was valued at the start of 2008 47,700 krona per ounce (530 euro/ounce x 90 krona/euro). At the end of 2008 gold was valued at 171,680 krona per ounce (592 euro/ounce x 290 krona/euro).
Gold worked exactly as advertised, even in the context of a tiny domestic economy. It preserved purchasing power and benefited from a crisis premium.
So the 100 krona at the start of 2008 became 146 krona, a yield of 46% for the permanent portfolio. ... But those 145 krona you had at the end of 2008 could only get you 0.5 euro. In other terms, even with 46% yield, you still lost 55% purchasing power in the Eurozone even though you had a permanent portfolio.
A lesson for PP investors: a drop of 50%+ in FX purchasing power is still possible, even with a portfolio that is designed to withstand systemic shocks and fat-tail risk. Internalize this fact of life, so that you do not panic if it should happen to your PP.
Does this historical example prove that the PP "doesn't work"? To the contrary:
...an Icelander, that invested his money according to the permanent portfolio principles, can now buy 40% more real estate.
So with the permanent portfolio you did lose a lot of purchasing power versus imports, but you gained purchasing power versus local goods, services and real estate.
Interesting. Maybe this is one of the reasons Harry Browne believed in investing in the economy where you live, work and spend money. The PP took a big hit when it came to being able to buy German cars and Asian electronics,
but it actually GAINED from the crisis when it comes to buying what matters most: food and shelter. In a crisis, isn't that what we want, what we
need from our portfolio, anyways? We aren't using the PP to "get rich", and in a serious crisis perhaps we won't even care about a loss of purchasing power relative to FX, if it means we can still put food on the table and have a roof over our heads.
The permanent portfolio also got a serious beating. Expressed in euros, 50% of your purchasing power is lost. Also painful, but you still have 146 krona instead of 110 krona like the saver, meaning you have 30% more purchasing power than a savings account. You have 146 krona instead of 72,5 krona for a traditional ‘defensive’ portfolio investor, meaning you now have more than double his purchasing power. You quadrupled your purchasing power versus a neutral investor with 50% stocks and 50% bonds and fifteen folded your purchasing power versus a traditional aggressive investor with 100% stocks.
A stunning example of the PP working exactly as advertised...
I highly recommend that everyone reads that article in its entirety.
Even in a small economy of a country that is the size of some American suburbs, the PP mechanism did not break. It was subjected what could be described as
extreme stress during a crisis which, for Icelanders, will be remembered for generations. Most importantly, it preserved purchasing power relative to local goods and services, and I think that is a feature that most investors discount.
Also note how the Icelandic PP investor not only preserved purchasing power for local goods and services, but they were provided with a significant investment opportunity on the otherside of the crisis This is a 'feature' of the PP that I often reference: it protects capital during events which wipe everyone else out,
leaving YOU as one of the only players with chips on the table to play with at the precise moment when significant opportunities present themselves. "The time to buy is when there is blood in the streets", but you can only do so if you have capital to deploy.
Everyone is souping up and tweaking their portfolios to squeeze out ever greater "performance", but the danger of chasing yield today is that it might lead to you chasing bread crumbs tomorrow.