Short-Term Bonds in the Permanent Portfolio: Still Worth It After 10 Years?

[frugal]

Hello everyone!

Short-Term Bonds in the Permanent Portfolio: Still Worth It After 10 Years?

It’s been over a decade since I first allocated part of my portfolio to short-term government bonds, following the classic Permanent Portfolio strategy. The idea was to balance out volatility and preserve capital—especially in turbulent times. But looking back, the results have been underwhelming.

After 10 years, these short-term bonds have produced either very low returns or even negative real returns when adjusted for inflation. Not exactly the capital protection I was hoping for.

Many people I know simply chose time deposits at the bank instead. Honestly, that might have been the better option during this prolonged low interest rate period—at least they offered slightly more predictable yields.

So here’s my question:
Can we still justify holding short-term government bonds in a modern permanent portfolio?

Wouldn’t high-quality corporate bonds be a more reasonable substitute today?
Still relatively safe, still short duration—but potentially more rewarding.

What do you think? Is anyone already making this shift?
Let’s share ideas—I’m curious to learn how others are navigating this!

Take care and talk soon!

[dualstow]

Honestly, you can only tell in the rear-view mirror.

Take my vp: it’s full of 10-year treasuries and some shorter term US treasury notes.
Now, of course, I like looking at it (at that part of it) this week as stocks get hammered. However, most of the time, I think about how my dad just kept everything that’s non-stock in cash, in the brokerage house’s money market fund. He didn’t bother to buy all those notes and bonds, and he got way better interest rates than I did, overall.

When you buy short-term bonds, prepare to be underwhelmed. They are not engineered to “whelm”.
That is not their purpose.

Just be consistent, frugal. Stick with your plan. Cash, short-term bonds, whatever. That doesn’t really matter.
Stay the course.

[coasting]

After 10 years, these short-term bonds have produced either very low returns or even negative real returns when adjusted for inflation. Not exactly the capital protection I was hoping for.

Yes, I did find it challenging to hold cash during the many years of interest rate repression. But while real returns may have been negative at times, cash never loses money in nominal terms. And when measured in that way, cash did provide capital protection.

Many people I know simply chose time deposits at the bank instead. Honestly, that might have been the better option during this prolonged low interest rate period—at least they offered slightly more predictable yields.

Hmm, banks in the US are rather stingy when it comes to CDs. You definitely have to shop around and make sure the one you buy does not have call risk. Also must keep below FDIC $250K limit. Possibly some might have liquidity restrictions. In the US, government money market funds are very safe, very liquid.

Can we still justify holding short-term government bonds in a modern permanent portfolio?

Yes, the allocation to cash in the PP is for times when the dominant economic environment is "tight money" recession.

Wouldn’t high-quality corporate bonds be a more reasonable substitute today?
Still relatively safe, still short duration—but potentially more rewarding.

Agreed - still relatively safe and normally more rewarding in terms of return. However, I disagree with "a more reasonable substitute today". The corporate nature of investment grade bonds may cause them to be more correlated to stocks in times of economic stress (see year 2008 below, credit risk!). And Harry Browne cautioned against going too long in duration when it comes to cash (see year 2022 below, both STIG and STT underperformed cash). The year 2022 I was very thankful for cash allocation. While I do value total return, I also value peace of mind.

Portfolio Visualizer comparison of standard PP (cash) vs PP (w/short term investment grade substitute) vs PP (w/short term treasury substitute), 1983 to present:

PP-Cash-vs-STIG-vs-STT-Returns.PNG (128.84 KiB) Viewed 1739 times

What do you think? Is anyone already making this shift?

I am sticking with cash in the form of government (T-bill) money market fund. At least cash is paying around 4% nominal these days.

Also, I once came across this description of cash that I like:
"Cash is essentially a universal put option on all assets at their current prices, and instead of paying for a put option, cash earns interest."

[mathjak107]

the original pp used cash instruments not short term bonds

[frugal]

Honestly, you can only tell in the rear-view mirror.

Take my vp: it’s full of 10-year treasuries and some shorter term US treasury notes.
Now, of course, I like looking at it (at that part of it) this week as stocks get hammered. However, most of the time, I think about how my dad just kept everything that’s non-stock in cash, in the brokerage house’s money market fund. He didn’t bother to buy all those notes and bonds, and he got way better interest rates than I did, overall.

When you buy short-term bonds, prepare to be underwhelmed. They are not engineered to “whelm”.
That is not their purpose.

Just be consistent, frugal. Stick with your plan. Cash, short-term bonds, whatever. That doesn’t really matter.
Stay the course.

Hi

In the long term short term bonds are better then deposits on banks ?

Having some risk they should be…

Regards

[frugal]

After 10 years, these short-term bonds have produced either very low returns or even negative real returns when adjusted for inflation. Not exactly the capital protection I was hoping for.

Yes, I did find it challenging to hold cash during the many years of interest rate repression. But while real returns may have been negative at times, cash never loses money in nominal terms. And when measured in that way, cash did provide capital protection.

Many people I know simply chose time deposits at the bank instead. Honestly, that might have been the better option during this prolonged low interest rate period—at least they offered slightly more predictable yields.

Hmm, banks in the US are rather stingy when it comes to CDs. You definitely have to shop around and make sure the one you buy does not have call risk. Also must keep below FDIC $250K limit. Possibly some might have liquidity restrictions. In the US, government money market funds are very safe, very liquid.

Can we still justify holding short-term government bonds in a modern permanent portfolio?

Yes, the allocation to cash in the PP is for times when the dominant economic environment is "tight money" recession.

Wouldn’t high-quality corporate bonds be a more reasonable substitute today?
Still relatively safe, still short duration—but potentially more rewarding.

Agreed - still relatively safe and normally more rewarding in terms of return. However, I disagree with "a more reasonable substitute today". The corporate nature of investment grade bonds may cause them to be more correlated to stocks in times of economic stress (see year 2008 below, credit risk!). And Harry Browne cautioned against going too long in duration when it comes to cash (see year 2022 below, both STIG and STT underperformed cash). The year 2022 I was very thankful for cash allocation. While I do value total return, I also value peace of mind.

Portfolio Visualizer comparison of standard PP (cash) vs PP (w/short term investment grade substitute) vs PP (w/short term treasury substitute), 1983 to present:
PP-Cash-vs-STIG-vs-STT-Returns.PNG

What do you think? Is anyone already making this shift?

I am sticking with cash in the form of government (T-bill) money market fund. At least cash is paying around 4% nominal these days.

Also, I once came across this description of cash that I like:
"Cash is essentially a universal put option on all assets at their current prices, and instead of paying for a put option, cash earns interest."

Hi

Can you please compare cash vs short term bonds in Europe ?


Regards

[frugal]

the original pp used cash instruments not short term bonds

Hello

Can you explain more about it ?

[dualstow]

It doesn’t get any shorter than cash. Short-term bonds can be 3 months, for example. They can go down in value.
A money market fund tries to keep Net Asset Value (NAV) at $1. And, except in extreme cases (google “breaking the buck”), that’s where it stays.

I think.
If I got that wrong, please chime in.

[Kevin K.]

So yeah as mathjak said the original PP called for a Treasury money market fund not short-term Treasuries but Craig Rowland blessed the latter as a permissible tweak as long as one kept cash on hand for immediate needs.

But for most of the years since folks "discovered" the PP - i.e. right after the 2008 market crisis- the real weakness in the PP was the long-term Treasuries - as demonstrated most memorably by their 32% loss in 2022. Harry Browne never envisioned a world like the one we lived in for more than a decade where 30 year Treasuries weren't offering any real return above inflation.

I use the Golden Butterfly rather than the PP but in both cases replaced the specified Treasury MM/30 year Treasury barbell with the one Jonathan Clements uses: half VGSH, half VTIP. That brings the weighted average duration down to around 3.5 years instead of ~11 and also introduces substantial protection against inflation spikes (TIPS weren't available when Browne devised the PP). Using only short-duration bonds of the highest quality is certainly not an original idea; it's what DFA, William Bernstein, Clements and any number of other experts recommend. Of course if we have another bout of massive inflation like we did in the late 70's that result in LTT's paying upwards of 8% again it'd be time to revisit not just the PP bond holdings but the possibility of going all-in on such bonds and forgetting about other assets.

Another, less radical alternative for the PP is to just hold intermediate-term Treasuries plus a little cash. Over any period you care to backtest returns have been in line with the classic barbell but with much lower volatility. Since the OP mentioned holding his PP for 10 years here are the results for that period:

https://www.portfoliovisualizer.com/bac ... E37BozHqjT

[coasting]

Hi

Can you please compare cash vs short term bonds in Europe ?


Regards

I don't know much about Europe, but you might explore the excellent PortfolioCharts.com website. You can change the home country to any of 8 different European countries: France, Germany, Italy, Netherlands, Spain, Sweden, Switzerland, UK. See: https://portfoliocharts.com

For example, below is Withdrawal Rates comparison for Netherlands Permanent Portfolio - first using cash, second using short term bonds.
In the Netherlands case, the traditional PP using cash has a slightly better SWR & PWR than the one using short term bonds. Note - the returns listed on PortfolioCharts are real, not nominal. And the Asset Allocation provides sample ETF tickers for the home country. There are many other charts to choose from in case Withdrawal Rates are not your primary objective.

Netherlands PP w/Cash

NLD-PPwCash-AA.PNG (85.1 KiB) Viewed 1247 times

NLD-PPwCash-SWR.PNG (310.4 KiB) Viewed 1247 times

Netherlands PP w/Short Term Bonds

NLD-PPwSTT-AA.PNG (86.07 KiB) Viewed 1247 times

NLD-PPwSTT-SWR.PNG (334.54 KiB) Viewed 1247 times

[frugal]

So yeah as mathjak said the original PP called for a Treasury money market fund not short-term Treasuries but Craig Rowland blessed the latter as a permissible tweak as long as one kept cash on hand for immediate needs.

But for most of the years since folks "discovered" the PP - i.e. right after the 2008 market crisis- the real weakness in the PP was the long-term Treasuries - as demonstrated most memorably by their 32% loss in 2022. Harry Browne never envisioned a world like the one we lived in for more than a decade where 30 year Treasuries weren't offering any real return above inflation.

I use the Golden Butterfly rather than the PP but in both cases replaced the specified Treasury MM/30 year Treasury barbell with the one Jonathan Clements uses: half VGSH, half VTIP. That brings the weighted average duration down to around 3.5 years instead of ~11 and also introduces substantial protection against inflation spikes (TIPS weren't available when Browne devised the PP). Using only short-duration bonds of the highest quality is certainly not an original idea; it's what DFA, William Bernstein, Clements and any number of other experts recommend. Of course if we have another bout of massive inflation like we did in the late 70's that result in LTT's paying upwards of 8% again it'd be time to revisit not just the PP bond holdings but the possibility of going all-in on such bonds and forgetting about other assets.

Another, less radical alternative for the PP is to just hold intermediate-term Treasuries plus a little cash. Over any period you care to backtest returns have been in line with the classic barbell but with much lower volatility. Since the OP mentioned holding his PP for 10 years here are the results for that period:

https://www.portfoliovisualizer.com/bac ... E37BozHqjT

Hello Kevin!

What would you do for an European PP?

Thank you for your thoughts

[Kevin K.]

I'd do what coasting suggested to you: use the Portfolio Charts site, select your home country and go from there in choosing your assets. I have no expertise beyond that - sorry.

[Hal French]

I've been wrestling with this topic myself. I have STT's as my cash component (SHY + SCHO), and I been underwater on them for years. They've only started to inch closer to break even, but it's been a slog, and I'm in no mood to DCA those out of the hole- not when my gold and equities have been doing great up until recently. In the meantime, I picked up Ibonds as "deep cash" (a term coined by forum member and Ibonds evangelist jhogue; all credit where it's due), with the idea of rolling the STT's into my LTT (TLT; seriously underwater) and trying to DCA that sucker, while relying on the Ibonds as my cash now that my oldest one can soon be redeemed with no penalties. Anybody see any downsides to this idea?

[frugal]

I've been wrestling with this topic myself. I have STT's as my cash component (SHY + SCHO), and I been underwater on them for years. They've only started to inch closer to break even, but it's been a slog, and I'm in no mood to DCA those out of the hole- not when my gold and equities have been doing great up until recently. In the meantime, I picked up Ibonds as "deep cash" (a term coined by forum member and Ibonds evangelist jhogue; all credit where it's due), with the idea of rolling the STT's into my LTT (TLT; seriously underwater) and trying to DCA that sucker, while relying on the Ibonds as my cash now that my oldest one can soon be redeemed with no penalties. Anybody see any downsides to this idea?

Hi

Can you please explain in detail with example ?

Regards