Which country has the best historical permanent performance portfolio?

[helpme]

I just got to hear about the permanent portfolio today and am very excited about it. This is my maiden post on this forum.

May I ask which country has the best historical permanent performance portfolio? A 10-year track record would be sufficient.

Thank you.

[barrett]

Welcome, helpme.

I just wanted to say that a ten-year track record probably would not be sufficient to judge how well a PP has actually done in the real world, simply because by design a PP is supposed to work in all kinds of economic cycles (prosperity, inflation, deflation & recession). Sometimes those cycles take a long time. Stocks, for example, went on an 18-year tear from 1982 until 2000 while gold was in the doldrums. If you just looked at the period from 2001 to 2011, gold would clearly be the asset to be overweighted in.

There is a lot of data for the US and elsewhere (sources anyone?) including some interesting work regarding PPs in Japan, Iceland & Europe. Japan and Iceland are of obvious interest for slightly different reasons. Iceland went through a total economic meltdown in 2008 (short-term shock). Japan has been in a deflationary situation since their stock market burst 25 years ago.

Also, before you set up a PP for yourself, I would recommend coming to terms with the question, "Am I OK holding an asset for years even if it is doing poorly?" Check out Ryan Melvey's blog post here about the "chaotic interior" of the PP:

http://www.stableinvesting.com/2012/02/ ... erior.html

It seems that almost everyone who goes all in on the PP (unless they benefit from a lucky entry point) immediately starts having some anxiety about at least one of the four assets. But it has to be looked at as a total package. The PP is just designed to plod along and pick up decent real gains over time.

It probably sounds like I am trying to talk you out of the strategy, so I should add that I am all in. I just think it's important for investors to not have unrealistic performance expectations for any portfolio.

[helpme]

Permanent portfolio looks like it is well-diversified but the 3 components - cash, bonds and stocks are denominated in the same currency if the PP is concentrated in the same country. There is little protection if there is a severe currency devaluation. I wonder if it would be a good idea to have a globalized cash, bonds and stocks component. Not sure if this idea can be executed in practice.

[ochotona]

Good question!

So gold is a commodity, and as such it's priced in US Dollars and every other currency in the world, but no one country "issues" gold or controls gold price. If the US Dollars were to strengthen more tomorrow relative to all other currencies, it's likely that gold in US Dollars would go down... if the US Dollar were to weaken, the opposite. So in the short term, gold can ask as a currency-independent value store.

However, the long-term question, which is not settled , is "what is a fair price for gold"? Everyone has a different opinion. The traditional PP advice is "just close your eyes and buy it, don't look back". I think that's OK advice for stocks and bonds, because stocks are highly biased to trend up over time (with down periods, mind you, which last years at times), stocks pay cash dividends, and with bonds you get compensated by interest payments.

But gold's return to the portfolio depends 100% on what price you pay for it. If someone bought gold in early 1980, or in 2011, they probably sold it at a loss, because they lost so much money on it they could not stand it. Everyone hated gold in 2001, but that was the perfect time to buy it. What to do? Gold is still more than twice as costly as in 2001, using inflation adjusted Dollars,  but about half-off from the peak 2011 price. So it's sort of in the middle. Is it time to buy? If you bought at $1100, and it went to $550 over the next five years, would you stay in? I wouldn't.

Some will say that physical gold has an insurance value above and beyond the market value. I don't dispute that. Both sides of my family and my wife's father came from foreign countries that experienced total ruin, loss of all economic value in their currencies during their lifetimes. I get it. The question is... how likely do you think it is to happen here in the near future, what kind of premium are you willing to pay for that type of insurance?

It's like guns. People own guns to reduce the risk of dying due to criminal activities... but you go to gun shows, and everyone is fat. No no... don't buy another gun, join a gym and exercise, and buy better, higher quality food with fruits and vegetables! You will reduce more total risk of premature death from your life that way!

Gold bugs will say, "Well, gold is a non-correlated asset, it zigs while the other assets are zagging". That's OK in the short time. That's fine. But if there is a long-term trend downward in your gold price, because you overpaid at a gold peak, which takes ten years or more to resolve, that has a bad effect on your portfolio. It would have been better to hold cash than overpriced gold. Cash is a stabilizing non-correlated buffer to a portfolio as well.

Hard choices surrounding gold, but you will find it to be pretty fascinating. The Desert Portfolio, proposed by a forum member here, has 10% gold. I think it's safer to start there than 25% at this point in time, but that's just my personal opinion.

[escafandro]

I wonder if it would be a good idea to have a globalized cash, bonds and stocks component. Not sure if this idea can be executed in practice.

http://gyroscopicinvesting.com/forum/pe ... /#msg59944

[barrett]

Permanent portfolio looks like it is well-diversified but the 3 components - cash, bonds and stocks are denominated in the same currency if the PP is concentrated in the same country. There is little protection if there is a severe currency devaluation. I wonder if it would be a good idea to have a globalized cash, bonds and stocks component. Not sure if this idea can be executed in practice.

Well, if there is a severe currency devaluation, a PP with 25% gold would do better than just about any other lazy portfolio. Look at Iceland in 2008 when their currency was devalued about 50%. But I think you are really talking about protecting your assets, not just in your own currency, but relative to a basket of reasonably acceptable alternatives, correct?

[helpme]

Well, if there is a severe currency devaluation, a PP with 25% gold would do better than just about any other lazy portfolio. Look at Iceland in 2008 when their currency was devalued about 50%. But I think you are really talking about protecting your assets, not just in your own currency, but relative to a basket of reasonably acceptable alternatives, correct?

Yes, Americans are lucky because of the USD is the reserved currency in the world. If USD is in trouble, gold will surely sky-rocket. But if you are Zimbabwean, I doubt gold would rise much because Zimbabwe is a minor country in the global economy.

[Libertarian666]

Well, if there is a severe currency devaluation, a PP with 25% gold would do better than just about any other lazy portfolio. Look at Iceland in 2008 when their currency was devalued about 50%. But I think you are really talking about protecting your assets, not just in your own currency, but relative to a basket of reasonably acceptable alternatives, correct?

Yes, Americans are lucky because of the USD is the reserved currency in the world. If USD is in trouble, gold will surely sky-rocket. But if you are Zimbabwean, I doubt gold would rise much because Zimbabwe is a minor country in the global economy.

If you are a Zimbabwean, and you have enough money to worry about in your portfolio, you should emigrate.