Is the Permanent Portfolio The Gold Medal Winner For Investing?

[AdamA]

How about 50% VWINX 50%PRPFX?

A little redundant, but not too much.

[dcllee]

I am not sure what SCV is and am assuming that EM is emerging markets. That said this looks like an interesting VP. But unless you are wealthy and can afford to take a hit I would be cautious about using this as a substitute for a PP. Emerging markets are very speculative as are LTT's in such a concentrated block. I also note an absence of cash.

How far back does your back testing go?

Small Cap Value.  Backtest goes back to 1972 from Simba's spreadsheet.  The down SD is 3.24% vs 2.33% for PP.   2008 took a -7% return which isn't horrible, Wellesley was -9%

Two caveats:

One, if we ever get a period of ungodly high rates a la Volcker that portfolio may get creamed and would have no cash to provide ammo for rebalancing when stocks and LTTs got knocked down as everyone rushed to short-term investments like T-bills and CDs to take advantage of the high real rates. How did your hypothetical portfolio do in 1981? In 1990? in 1994? Also, how did it do in 1998 and 1999 which weren't exactly great years for SCV but the broader stock market was hitting new highs every month and large cap growth tech stocks were up by upwards of 100% in a year (the reason I ask is because a strategy that stays flat or even loses money for a year or two will be hard to stick with when everyone else is bragging how their stocks doubled in three months)?

Two, any EM backtest (especially using the data from Simba's spreadsheet) from before 1987 or 1988 should be taken with a few grains of salt...no, make that a giant five pound block of salt from a salt lick. SImba's spreadsheet IIRC just subsituted a mixture of devloped market small cap, value, and/or SCV for EM for any years before those. Therei is actually (useful and accurate) EM data back to 1976 using S&P's EM and Investable EM database but it is not AFAIK available without paying them. Still, if you can get access to such data either through S&P or Datastream I would trust it as regards EM performance for any years before 1988 before I'd trust the Simba spreadsheet.

Mod PP   PP

23.17% 18.60% 1972
5.64% 14.36% 1973
7.26% 14.41% 1974
17.59% 6.84% 1975
17.72% 11.77% 1976
18.35% 5.06% 1977
21.61% 11.88% 1978
32.00% 39.27% 1979
11.52% 14.18% 1980
-2.16% -4.13% 1981
24.25% 23.57% 1982
10.91% 3.47% 1983
4.56% 3.12% 1984
31.50% 20.19% 1985
27.67% 18.12% 1986
9.03% 6.44% 1987
14.34% 4.24% 1988
21.82% 12.94% 1989
-4.65% 1.59% 1990
25.01% 12.96% 1991
9.68% 4.34% 1992
29.67% 12.70% 1993
-5.21% -2.58% 1994
17.29% 19.65% 1995
5.90% 4.78% 1996
4.15% 7.39% 1997
0.01% 10.61% 1998
9.56% 4.36% 1999
5.59% 3.04% 2000
3.98% 0.39% 2001
7.33% 7.17% 2002
23.86% 13.88% 2003
13.68% 6.29% 2004
13.82% 8.03% 2005
14.81% 10.74% 2006
16.18% 13.30% 2007
-6.97% -0.72% 2008
21.24% 10.52% 2009
18.16% 14.48% 2010
8.96% 10.52% 2011

[D1984]

Small Cap Value.  Backtest goes back to 1972 from Simba's spreadsheet.  The down SD is 3.24% vs 2.33% for PP.   2008 took a -7% return which isn't horrible, Wellesley was -9%

Two caveats:

One, if we ever get a period of ungodly high rates a la Volcker that portfolio may get creamed and would have no cash to provide ammo for rebalancing when stocks and LTTs got knocked down as everyone rushed to short-term investments like T-bills and CDs to take advantage of the high real rates. How did your hypothetical portfolio do in 1981? In 1990? in 1994? Also, how did it do in 1998 and 1999 which weren't exactly great years for SCV but the broader stock market was hitting new highs every month and large cap growth tech stocks were up by upwards of 100% in a year (the reason I ask is because a strategy that stays flat or even loses money for a year or two will be hard to stick with when everyone else is bragging how their stocks doubled in three months)?

Two, any EM backtest (especially using the data from Simba's spreadsheet) from before 1987 or 1988 should be taken with a few grains of salt...no, make that a giant five pound block of salt from a salt lick. SImba's spreadsheet IIRC just subsituted a mixture of devloped market small cap, value, and/or SCV for EM for any years before those. Therei is actually (useful and accurate) EM data back to 1976 using S&P's EM and Investable EM database but it is not AFAIK available without paying them. Still, if you can get access to such data either through S&P or Datastream I would trust it as regards EM performance for any years before 1988 before I'd trust the Simba spreadsheet.

Mod PP   PP

23.17% 18.60% 1972
5.64% 14.36% 1973
7.26% 14.41% 1974
17.59% 6.84% 1975
17.72% 11.77% 1976
18.35% 5.06% 1977
21.61% 11.88% 1978
32.00% 39.27% 1979
11.52% 14.18% 1980
-2.16% -4.13% 1981
24.25% 23.57% 1982
10.91% 3.47% 1983
4.56% 3.12% 1984
31.50% 20.19% 1985
27.67% 18.12% 1986
9.03% 6.44% 1987
14.34% 4.24% 1988
21.82% 12.94% 1989
-4.65% 1.59% 1990
25.01% 12.96% 1991
9.68% 4.34% 1992
29.67% 12.70% 1993
-5.21% -2.58% 1994
17.29% 19.65% 1995
5.90% 4.78% 1996
4.15% 7.39% 1997
0.01% 10.61% 1998
9.56% 4.36% 1999
5.59% 3.04% 2000
3.98% 0.39% 2001
7.33% 7.17% 2002
23.86% 13.88% 2003
13.68% 6.29% 2004
13.82% 8.03% 2005
14.81% 10.74% 2006
16.18% 13.30% 2007
-6.97% -0.72% 2008
21.24% 10.52% 2009
18.16% 14.48% 2010
8.96% 10.52% 2011

I wouldn't trust those Emerging Market numbers (used to calculate returns for this portfolio) from before 1988 one bit. Developed Market Small and Developed Market Value were what IFA (and by extension, Simba...I'm not blaming Simba since the orginal data was IFA's fault but like they say in the programming world....garbage in, garbage out) substitued for EM before the MSCI data was avilable starting in January of 1988. The late 70s and all of the 80s saw Developed Small and Developed value boosted by Japan's very high returns during this time period (and Europe and the UK's returns small and value weren't that bad during most of the late 70s or early 80s either).

REAL emerging markets did not fare so well during this time frame. I still don't have the actual S&P IFC numbers but I would advise you to look up a report by Northern Trust called "International Investing Demystified". They DID have access to the IFC data and if you look on pages 12 and 13 of the report (it's a free report and can be downloaded as a PDF) you will see that from 1976-1987 emerging markets underperformed (with three brief exceptions) the EAFE for every one of these years; sometimes as much as 70-80% but usually by at least 25-30%. It wouldn't suprise me if emerging markets as a whole for these twelve years had a CAGR of less than five or six percent. Simba's spreadsheet has emerging markets outperforming EAFE during these years to such an extent that by December 31st 1987 the amount of money one would have is almost double what one would have from investing in the EAFE index assuming equal amounts were invested in both. This makes no sense and is dead wrong.

You can also check out two free papers (again, both are available as PDFs) that indirectly show how poorly emerging markets did during this time period. They are:

"Crises in Developed and Emerging Stock Markets" by Patel and Sarker of the FRB of New York

"Performance Characteristics of Merging Capital Markets" by Christoper Barry (at the time of publication he was Chair of the Neeley Business School at Texas Christian University)

If you want to pay $49 (or have access to it for free in a university library) for actual performance data by emerging market countries from 1976 to 1997 (which includes the mostly bad years from 76-87) you can buy an article from the Spring 2000 issue of the Journal of Portfolio Management called "Realized Rates of Return in Emerging Equity Markets"

All of these three papers (and the Northern Trust one) use S&P IFC data for pre-1988 EM results.

I don't know about you, but I'm going to go with the IFC data (from actual emerging markets) rather than some mish-mash of developed small and value that doesn't fairly represent emerging markets at all. Emerging markets performed horribly during this period (3 month t-bills probably did better) and IMO Simba needs to fix his spreadsheet ASAP to reflect this.

[Reub]

I've decided to invest some new money into a 50/50 mix of Vanguard Wellesley Shares and VTINX. It will amount to about 10% of my overall portfolio. I will be doing this to hedge against the possibility that gold and LTT's may be in long term downtrends although close to 90% of my portfolio is still in the PP. This new investment will also add to my diversification by including some international stocks, large cap value, corporates, and TIPS.

[Ad Orientem]

I've decided to invest some new money into a 50/50 mix of Vanguard Wellesley Shares and VTINX. It will amount to about 10% of my overall portfolio. I will be doing this to hedge against the possibility that gold and LTT's may be in long term downtrends although close to 90% of my portfolio is still in the PP. This new investment will also add to my diversification by including some international stocks, large cap value, corporates, and TIPS.

No issues with that here. I have been toying with the idea of adding a touch of diversification by doing a small VP in TGBAX.

[rocketdog]

For most investors, I don't think that there is any reason to ever own more than 35% in stocks.  To me, the extra return you might get from going higher than 35% in stocks is simply not worth the stress and volatility that goes along with it.

It all depends on your timeline and nerves.  The stock market has never had a negative return over any 15-year span of time.  It's also handily trumped bond-heavy portfolios over the long term.  But I agree that as you approach the draw-down phase of your portfolio equities should become a minority holding (but they're still an important factor for a bit of growth during retirement). 

[MachineGhost]

It all depends on your timeline and nerves.  The stock market has never had a negative return over any 15-year span of time.  It's also handily trumped bond-heavy portfolios over the long term.  But I agree that as you approach the draw-down phase of your portfolio equities should become a minority holding (but they're still an important factor for a bit of growth during retirement).

But OTOH the last 15 years it has not outperformed T-Bills.  The emphasis should be on beating risk-free rates, not lack of losses.  Google up the "Upside Potential Ratio".

[Ad Orientem]

It all depends on your timeline and nerves.  The stock market has never had a negative return over any 15-year span of time.  It's also handily trumped bond-heavy portfolios over the long term.

Tell that to the Japanese.

[Pointedstick]

It all depends on your timeline and nerves.  The stock market has never had a negative return over any 15-year span of time.  It's also handily trumped bond-heavy portfolios over the long term.

Those are also nominal returns. I'm pretty sure taking inflation into account will reveal some pretty brutal 20+ year stretches of zero or negative real stock returns when just looking at capital value.

[Ad Orientem]

On a purely nominal basis he DOW did not recover to the 1929 pre-crash levels until 1954. The only thing that saved us from a 20+ year depression was World War II.

[D1984]

On a purely nominal basis the DOW did not recover to the 1929 pre-crash levels until 1954. The only thing that saved us from a 20+ year depression was World War II.

Why exclude the returns from dividends? They didn't fall nearly as far as stock prices did and as they were reinvested buying ever cheaper shares they brought the portfolio back (in nominal terms) to its 1929 value in 1944 or 1945 at the latest.

[Ad Orientem]

On a purely nominal basis the DOW did not recover to the 1929 pre-crash levels until 1954. The only thing that saved us from a 20+ year depression was World War II.

Why exclude the returns from dividends? They didn't fall nearly as far as stock prices did and as they were reinvested buying ever cheaper shares they brought the portfolio back (in nominal terms) to its 1929 value in 1944 or 1945 at the latest.

Again  I think your pretty much looking at WWII. The 30's was a series of stock market crashes with intervening sucker rallies. Absent the war that could have dragged on for a LONG time.

[rocketdog]

It all depends on your timeline and nerves.  The stock market has never had a negative return over any 15-year span of time.  It's also handily trumped bond-heavy portfolios over the long term.  But I agree that as you approach the draw-down phase of your portfolio equities should become a minority holding (but they're still an important factor for a bit of growth during retirement).

But OTOH the last 15 years it has not outperformed T-Bills.  The emphasis should be on beating risk-free rates, not lack of losses.  Google up the "Upside Potential Ratio".

Sure, we know that now.  Yet had you rebalanced and dollar cost-averaged the S&P500 over the past 15 years you probably would have come out ahead of T-bills.

To your other point, lack of losses should be our #1 emphasis.  I'm reminded of these quotes:

"It is not the return on my investment that I am concerned about; it is the return of my investment." -- Will Rogers

"Bad investors think of ways to make money. Good investors think of ways to not lose money." -- Steve Sears, The Indomitable Investor

[AgAuMoney]

Peak in 1929, max trough in 1932.  From max trough to recovery, try 4-1/2 years.  Yes, before 1937.

Three main factors:

Dividend yield at the trough was near 14%.

Deflation increased the value of each dollar by over 18%.

The nominal DOW is used in the "25 year" figure, but the 30 stocks of the DJIA don't represent the market very well.


http://www.nytimes.com/2009/04/26/your- ... 6stra.html

So when did the overall stock market really make it back to its pre-crash peak? Just four years and five months after its mid-1932 low, according to data provided to Sunday Business by Ibbotson Associates, a division of Morningstar.

(emphasis added)

More details...

An investor who invested a lump sum in the average stock at the market’s 1929 high would have been back to a break-even by late 1936 — less than four and a half years after the mid-1932 market low.
...
DEFLATION The numbers show that from a peak, on a closing basis, of 381.17 on Sept. 3, 1929, the Dow needed until Nov. 23, 1954, to return to its old high. But that’s in “nominal”? terms, without adjusting for the effects of inflation or its opposite, deflation.

The Great Depression was a deflationary period. And because the Consumer Price Index in late 1936 was more than 18 percent lower than it was in the fall of 1929, stating market returns without accounting for deflation exaggerates the decline.

DIVIDENDS These payouts played a big role in the 1930s. When the Dow hit a low of 41.22 on July 8, 1932, for example, the dividend yield of the overall stock market was close to 14 percent, according to data compiled by Robert J. Shiller, the Yale economics professor.

So ignoring dividends, especially when yields were so rich, also exaggerates the losses of a typical equity investor.

THE DOW VS. THE MARKET Many researchers consider the overall market — defined as the combined value of all publicly traded stocks — as the best gauge of a typical investor’s experience. The Dow is made up of just 30 stocks, which are weighted in the index according to their price rather than their relative market capitalization.

I don't agree entirely with this analysis, but there are many that show fully recovered before 1940 based upon counting dividend income or if you reinvested your dividends you actually recovered very quickly.