Permanent Portfolio Shakedown Part 1

[moda0306]

If the US economy implodes, aka, the world's largest economy and reserve currency, methinks gold will beat inflation by leaps and bounds.  We aren't iceland... our failure actually would affect the price of gold in terms of other tangible assets, not just against our own currency.

I really don't think a US PP could ever collapse by 75%.  

In fact, I still don't understand how Iceland's did.  If gold beat inflation (the real price of gold has been going up for about a decade), there's more than 25% real gain right there, and that's with all of the other assets disappearing entirely.

[MediumTex]

If the US economy implodes, aka, the world's largest economy and reserve currency, methinks gold will beat inflation by leaps and bounds.  We aren't iceland... our failure actually would affect the price of gold in terms of other tangible assets, not just against our own currency.

I really don't think a US PP could ever collapse by 75%.  

In fact, I still don't understand how Iceland's did.  If gold beat inflation (the real price of gold has been going up for about a decade), there's more than 25% real gain right there, and that's with all of the other assets disappearing entirely.

When we talk about Iceland, it's important to remember that their "stock market" was little more than a bunch of rickety banks.

Remember, too, that Iceland's total population is smaller than Milwaukee's.

Would you seriously consider setting up a portfolio composed of companies based in Milwaukee, Milwaukee municipal bonds and gold?  That portfolio would probably be safer than an Iceland PP.

[Jake]

My urge to tinker has decreased the longer I've been on this forum. It's been a real help.

[stands up in circle of seated forum members] "Hi, my name is Jake and I am a tinkerer. It has been 6 months since I tinkered."

[craigr]

No investment strategy is perfect. It may not even be "permanent" if certain conditions continue. For instance I have said when LT bonds get to the 1-2% range I could get the urge to avoid buying new bonds for the portfolio.

But the thing really is that the diversification is very wide and strong. It's much ahead of contemporary solutions that overemphasize stocks or even newer approaches where people advise 100% TIPS to fund retirement. Egads. I want to be way more diversified than that.

I talked about this in my latest podcast, but I want to have options. The options may not be perfect and cover everything, but I don't want to be painted into a corner either and I don't want surprises. The Permanent Portfolio is dead simple and avoids a ton of surprises.

They say this:

In Part 2 of this series we are going to explore some simple techniques that might further improve the performance of this approach, including volatility management, risk parity, moving averages and finally Adaptive Asset Allocation.

They imply that some kind of asset timing is going to improve things. Now I don't know if the 25% split is the best or what asset may do better, but I know for *certain* that market timing is bunk and never works. Never ever once have I seen it work on a reliable basis. So if that's their improvement then I can tell you right now it's a waste of time. "Adaptive Asset Allocation" is just market timing like "Tactical Asset Allocation" is and just like "Risk Parity" is as well. These are all backwards looking volatility management or market timing. You can't drive forward by looking at the rearview mirror.

Now if they are advocating maybe more globally diversifying the portfolio and can make a case I would have a harder time quibbling with it if they are passively invested. But telling me that they are going to start shifting around assets based on moving averages as an improvement is just speculating. Honestly this is not some new untried investing method. People have been trying this kind of thing for decades and it just doesn't work. The transaction costs alone will eat you alive, not to mention taxes. Then you get the emotions of buying in and out on market signals. It's just a total disaster from top to bottom.

[dualstow]

Singapore is going to become the world's richest country by 2050.  How will you afford to relocate and live there after the USA turns into a third world banana republic and your PP was decimated by 75%
...

On your to-do list, above "Move to Singapore", you have "Move to Dubai" crossed out. ;-)
I love it when a plan comes together.

[MachineGhost]

Wait a second, the PP is purely a post-gold standard investment strategy.  I don't think you can look back beyond 1971 or so and get a good sense of how a PP would have done in a gold standard world.  It wasn't designed for that kind of world.

But aren't you forgetting that PRPFX or PP was designed using pre-gold standard time series data, so why should we be excluded from looking at the same data that HB used?

If silver is used in place of gold pre-1971, it does not change the -25% or so MaxDD in real terms or the 20-year period until breakeven.  Post-1971, the worst loss in real terms is around -15% or so in a single year when the gold bubble popped.  We have a very real risk of both gold & stocks or gold & bonds or even all three all deflating at once.  I can envision scenarios where that could happen and none of them would require events that seem improbable.

[MachineGhost]

now it's a waste of time. "Adaptive Asset Allocation" is just market timing like "Tactical Asset Allocation" is and just like "Risk Parity" is as well. These are all backwards looking volatility management or market timing. You can't drive forward by looking at the rearview mirror.

You can use forward-looking volatility to arrive at asset class weights.  I believe someone in here has the software from Geoff Considine that enables them to do that.  It's not that exotic, really.  You simply look at the ATM IV of the longest dated LEAP option and compare it to a trailing historical volatility.  It's the reversion to the mean principle.  Eventually, someone will do a forward-looking backtest with the PP.

[Storm]

Singapore is going to become the world's richest country by 2050.  How will you afford to relocate and live there after the USA turns into a third world banana republic and your PP was decimated by 75% ala Iceland?  25% in gold will not beat out the other 75% of other countries financial assets that did not implode.

If wealth was the only thing that mattered, a country like Dubai or Saudia Arabia would be the #1 world superpower.  You need more than a castle full of gold to rule the world - you need the military might to protect it, as well as the ability to protect your access to natural resources.  Right now the US not only has the reserve currency, it has the military might to keep the US dollar as the reserve currency, and to defend it's access to cheap energy.

[dualstow]

Besides, Singapore is too small to hold us all and could be wiped out by a single natural disaster.
Furthermore, the trains smell like durian -- I guess the "No Durian" signs are only for visitors -- and I wouldn't enjoy being called "Lao Wai" for the rest of my life. Nice place to visit, though.

[craigr]

now it's a waste of time. "Adaptive Asset Allocation" is just market timing like "Tactical Asset Allocation" is and just like "Risk Parity" is as well. These are all backwards looking volatility management or market timing. You can't drive forward by looking at the rearview mirror.

You can use forward-looking volatility to arrive at asset class weights.

Not reliably. Volatility going forward is unknown.

From 2009-2011 the standard deviation of a 100% US Total stock market portfolio is 13.9%.

But if you shift it down just one measly year from 2008-2010 you get 35%!

I can point out many other examples. Standard deviation and volatility are all rearward looking. Building a portfolio based solely on that kind of information is going to break eventually.

[Ad Orientem]

My two main memories of Singapore date to the late 80's when I was in the Navy and we stopped there en-route to the Persian Gulf. I had lunch with some buddies in the largest Pizza Hut I have seen. Later I relieved myself in a public restroom with a sign posted in front of my face at the standing station reminding patrons of a roughly $300 (USD) fine for failing to flush when done. I didn't notice the camera until I was walking out. Singapore was the probably the cleanest city I have ever been in anywhere.  I think that is also where they caned that snotty American kid who vandalized some street signs and they used to hang drug traffickers. Not sure if that's still policy but it had a certain appeal to me at the time. Nowadays I take a dimmer view of prohibition.

[HB Reader]

Wait a second, the PP is purely a post-gold standard investment strategy.  I don't think you can look back beyond 1971 or so and get a good sense of how a PP would have done in a gold standard world.  It wasn't designed for that kind of world.

But aren't you forgetting that PRPFX or PP was designed using pre-gold standard time series data, so why should we be excluded from looking at the same data that HB used?

If silver is used in place of gold pre-1971, it does not change the -25% or so MaxDD in real terms or the 20-year period until breakeven.  Post-1971, the worst loss in real terms is around -15% or so in a single year when the gold bubble popped.  We have a very real risk of both gold & stocks or gold & bonds or even all three all deflating at once.  I can envision scenarios where that could happen and none of them would require events that seem improbable.

I don't remember HB, in his books or newsletter, ever talking about the PP (or PRPFX for that matter) being designed for the pre-1971 world.  It has always been clear to me that it was designed for the world that emerged after the Bretton Woods system came apart.  What did I miss?