New Blog Article on PP

[hrux]

The following two links are recent blog comments on the PP.  Both these bloggers have commented on the PP in past years and the first by "T" is quite interesting. 

http://investingfromtheright.blogspot.c ... -your.html

MARCH 27, 2011
March 28, 2011: Everyone's World and Your Permanent Portfolio
Last May, I suggested that for safety a Permanent Portfolio be considered as investors continue to be held hostage to fickle politicians and unpredictable events here and abroad. I designed a Permanent Portfolio using low cost ETFs to closely replicate the portfolio of Michael Cuggino's 5-star Permanent Portfolio Fund. The goal of this ETF mix? To retain absolute value and rise approximately 2% more than the Citigroup 3-month U.S. Treasury Bill index, re-balanced semi-annually or annually.

As Michael Cuggino has massaged the Permanent Portfolio Fund from his predecessors, Harry Browne and Terry Coxon, to reflect different investment avenues and long term trends,I have done likewise for my current ETF Permanent Portfolio. This begs the question, why adjust the allocation and moving parts of a permanent portfolio when it is designed to be permanent? The answer is that the world is changing at warp speed compared to fifty or even five years ago. Investment products better reflecting the world are available to capture long trends while defending against your best intentioned stock selections going haywire (generally, when you least expect it). Whereas the original Browne portfolio relied on stock warrants, physical possession of precious metal to be held in Switzerland and Swiss Francs in banknotes, and Mr. Cuggino's supposition of pure U.S. Dollar assets to be worth 30% of the portfolio, I have attempted to fine tune the portfolio further using low-cost ETFs and acknowledging that, quite possibly (but not certainly), the U.S. dominant position in the world and concurrently the U.S. Dollar are heading south with dispatch. This would favor such Asian banking and corporate areas such as Singapore.

The investor certainly wants exposure to areas presently out of favor. The intent of the ETF Permanent Portfolio is to protect against placing too many eggs in what the best investment basket du jour is for a given cycle.

ETF PERMANENT PORTFOLIO:

Precious Metals: 20%

iShares Comex Gold Trust ETF (IAU) 15%
iShares Silver Trust ETF (SLV) 5%


Swiss Franc Assets: 10%

Currency Shares Swiss Franc Trust ETF (FXF) 5%
iShares MSCI Switzerland Index ETF (EWL) 5%


Singapore Assets: 5%

iShares MSCI Singapore Index Fund ETF (EWS) 5%


Worldwide Real Estate and Natural Resources: 25%

iShares North America Natural Resource Index ETF (IGE) 5%
Vanguard Energy ETF (VDE) 5%
iShares FTSE EPRA/NAREIT Developed World Real Estate ex-U.S. ETF (IFGL) 5%
Vanguard REIT ETF (VNQ) 5%
Market Vectors Agribusiness ETF (MOO) 5%


Growth Stocks: 20%

Vanguard Dividend Appreciation Fund ETF (VIG) 10%
iShares Morningstar Small Company Growth Index Fund ETF (JKK) 5%
Guggenheim Frontier Markets ETF (FRN) 5%
or
Schwab Emerging Markets Equity ETF (SCHE) 5%


U.S. Treasury Bills and Bonds: 20%

Vanguard Total Bond Market ETF (BND) 10%
Vanguard Intermediate Term Government Bond ETF (VGIT) 10%


It is likely that investor's will have a speculative portfolio divorced from a permanent portfolio, the size to vary depending upon investment style and temperament. Having a permanent portfolio anchor allows the investor to place more focused bets on areas of conviction. While you may agree or disagree with my selections, the concept itself may spur you to elect this strategy.

[hrux]

Here is the second link

http://randomroger.blogspot.com/2011/04 ... offee.html

SUNDAY, APRIL 03, 2011
Sunday Morning Coffee
Long time contributor to this site T, has his own blog and the other day he put up a post about permanent portfolios that included his ideas on how to construct one. The starting point for this concept came from Harry Browne and called for equal portions allocated to equities, long term bonds, cash and gold. This mix should mean the portfolio always has at least one thing doing well. There is also an elegant simplicity in having one fund each for stocks and bonds and since the idea was first put forth there are now funds that own physical gold.

The idea that three funds and some cash could solve all portfolio issues for all times has intellectual appeal. I believe the idea was first put forth by Browne in the late 1970s or early 1980s (anyone, feel free to correct me). Any stats I've ever seen on results have been very good but I think there is a watch out embedded in there with long term bonds. As noted the other day Rob Arnott said that bonds have averaged 10.18% annualized over the last 30 years which is a great result and contributed to the Permanent Portfolio's success but as I spelled out the other day that 10.18% annualized cannot be repeated (unless rates go back to 15% first).

In it's purest form a Permanent Portfolio could consist of the iShares S&P 1500 Index Fund (ISI) which owns the large cap 500, mid cap 400 and small cap 600 for equities, the iShares Barclays 20+ Year Treasury Bond Fund (TLT), the SPDR Gold Trust (GLD) and some cash. GLD is a client holding. It would probably make sense to pick a point where the mix should be rebalanced back to equal portions. There would be no single best way to rebalance just whatever made sense to the account holder like maybe when something grew to 30 or 35% or shrunk below 20%.

If you think the comments about about long bonds hold any water what would be a suitable replacement given current events? Big picture, there are a couple different ways to go in the realm of relatively low octane and simplicity; one would be some sort of short dated exposure that avoids interest rate risk (this could be a fund or individual issues) or some sort of foreign exposure with either close to normal (as we think of them) yields or some other appealing attribute. Many of our clients own sovereign debt from Australia that only goes out a couple of years and yields close to 4%. We also own Norwegian debt that yields quite a bit less but I believe Norway is on incredibly firm economic ground.

As for equities, what should this exposure be for people who do not live in the US? Should someone in Finland own some sort of total market Finland ETF (traded locally)? Should they own some sort of all-world fund? For that matter should a US based investor own an all world fund instead of something like ISI? To be clear, ISI is just an example there are a lot of total market funds out there.

I would point out that while the original concept was single-fund domestic exposure, there is nothing that says the equity portion can't be a properly diversified portfolio with many holdings that is actively managed. A person's equity exposure, as prescribed by Browne, could easily be $200,000-$300,000. Is one fund really the best way to go with that amount of money? T lays out some very specific ideas about how to structure the portfolio and tweaks some of the percentages--his ideas are very worth reading. If a fund like ISI is true to the original idea, then what is being advocated if not buying a country fund?

So are there any countries that are more compelling than the US for the next whatever time period you care about? Obviously I think there are many countries that will have turned out to be better holds over the next ten years. Would you be willing to put 100% of your equity exposure into one country fund? I certainly would not. What about two country funds, or three? For investors willing and able to put the time in there is some number that is comfortable.

As the ETF industry has evolved buying individual countries has become much easier to do and there is even differentiation with countries. For example if the one country you were going to buy was South Korea (this is a country we do not own which is why I chose the example) you could have some sort of split between large cap and small cap with the iShares MSCI South Korea (EWY) and the IndexIQ South Korea Small Cap ETF (SKOR). In two country mix I would think picking countries with very little in common would be the way to go, for example Chile and Switzerland each have ETFs and these countries would seem to have very little in common other than being relatively healthy. A few clients own the Chile ETF. Obviously a mix of small cap fund from one country and large cap fund from another could also work.

Hopefully it is obvious that any country selected, no matter how many countries, requires monitoring and maybe the occasional decision. Chile is absolutely one of my favorite destinations but if something changes it would be a sell. Yesterday's post about Iceland was about just that; selling a country where the story changed. The possibilities are almost endless.

One final point is that the Permanent Portfolio is about two things; one is asset allocation and the other is passive investing. An investor can choose this allocation and still have wide diversification with the stock and bond portions. I think the utility here is more in seeking to improve how you do things as opposed to switching to someone else's idea.

[MediumTex]

More and more, I think that the desire to tinker is just part of our DNA.

It seems like something that some people just can't resist.

The idea of taking something that works and leaving it alone seems foreign to many people.

Thanks for posting hrux.

[TBV]

Here is the second link

http://randomroger.blogspot.com/2011/04 ... offee.html

As the ETF industry has evolved buying individual countries has become much easier to do and there is even differentiation with countries. For example if the one country you were going to buy was South Korea (this is a country we do not own which is why I chose the example) you could have some sort of split between large cap and small cap with the iShares MSCI South Korea (EWY) and the IndexIQ South Korea Small Cap ETF (SKOR). In two country mix I would think picking countries with very little in common would be the way to go, for example Chile and Switzerland each have ETFs and these countries would seem to have very little in common other than being relatively healthy. A few clients own the Chile ETF. Obviously a mix of small cap fund from one country and large cap fund from another could also work.

Hopefully it is obvious that any country selected, no matter how many countries, requires monitoring and maybe the occasional decision. Chile is absolutely one of my favorite destinations but if something changes it would be a sell. Yesterday's post about Iceland was about just that; selling a country where the story changed. The possibilities are almost endless.

One final point is that the Permanent Portfolio is about two things; one is asset allocation and the other is passive investing. An investor can choose this allocation and still have wide diversification with the stock and bond portions. I think the utility here is more in seeking to improve how you do things as opposed to switching to someone else's idea.

Currency risk should not be underestimated.  From January 2008 to March 2009, the South Korean won lost 35% of its value relative to the USD, and 50% relative the Japanese Yen. That's in addition to the 42% loss that the KOSPI stock market index experienced during that time.  Still want to invest in Korea?

[KevinW]

On one hand I'm happy to see this interest in the PP.  On the other hand, articles like these read as if the author glanced at the 4x25 allocation and then rattled off the first critical thoughts that occurred to them.  The vanilla PP actually has answers to all of these superficial criticisms, and if one takes an hour or so to read "Fail-Safe Investing" and craigr's FAQ, they'll find succinct answers.  The radio show and earlier books go into quite a bit more depth.

"T" seems to think that the PP is linked to US prosperity, but actually 3/4 of the portfolio is set up to handle a sick domestic economy.  A lot of the advice about foreign markets breaks "Rule #4: No one can predict the future."  I don't understand why BND and its credit risk is in there.

A lot of the second article is about timing the bond market ("Rule #5: No one can move you in and out of investments consistently with precise and profitable timing.")  It throws out a lot of questions but doesn't give many answers.  It's easy to tear down other people's ideas with what-ifs, but coming up with your own solution is a lot harder.  Again we have a lot of fortune telling regarding foreign markets.  Also the statement "...there is nothing that says the equity portion can't be a properly diversified portfolio with many holdings that is actively managed" makes it clear that the author hasn't read any of the PP primary sources.

The idea of taking something that works and leaving it alone seems foreign to many people.

I think the financial services industry has done a masterful job of implanting the "brain bug" ( http://www.stardestroyer.net/Empire/Ess ... nBugs.html ) , that one can get rich through skillful investing alone, into our collective conscious.  The idea of swizzling some ETFs around and then being rich is just too enticing for people to pass up.  Browne's "Rule #1: Your career provides your wealth" says that setting up a portfolio is simple and fast, and past that, to create wealth you have to go out there and work.  While probably true, it's not what people really want to hear.

[AdamA]

The idea of taking something that works and leaving it alone seems foreign to many people.

I think that tinkerers are bound to get burned when they need the PP to work the most.  Especially people who tinker with the long term treasury portion. 

If you think the comments about about long bonds hold any water what would be a suitable replacement given current events? Big picture, there are a couple different ways to go in the realm of relatively low octane and simplicity; one would be some sort of short dated exposure that avoids interest rate risk (this could be a fund or individual issues) or some sort of foreign exposure with either close to normal (as we think of them) yields or some other appealing attribute. Many of our clients own sovereign debt from Australia that only goes out a couple of years and yields close to 4%. We also own Norwegian debt that yields quite a bit less but I believe Norway is on incredibly firm economic ground.

Good luck with that!!!

[MediumTex]

If you think the comments about about long bonds hold any water what would be a suitable replacement given current events? Big picture, there are a couple different ways to go in the realm of relatively low octane and simplicity; one would be some sort of short dated exposure that avoids interest rate risk (this could be a fund or individual issues) or some sort of foreign exposure with either close to normal (as we think of them) yields or some other appealing attribute. Many of our clients own sovereign debt from Australia that only goes out a couple of years and yields close to 4%. We also own Norwegian debt that yields quite a bit less but I believe Norway is on incredibly firm economic ground.

Good luck with that!!!

I'm not sure that guy understands that we are buying LT treasurys because of the interest rate risk.

[craigr]

If you think the comments about about long bonds hold any water what would be a suitable replacement given current events? Big picture, there are a couple different ways to go in the realm of relatively low octane and simplicity; one would be some sort of short dated exposure that avoids interest rate risk (this could be a fund or individual issues) or some sort of foreign exposure with either close to normal (as we think of them) yields or some other appealing attribute. Many of our clients own sovereign debt from Australia that only goes out a couple of years and yields close to 4%. We also own Norwegian debt that yields quite a bit less but I believe Norway is on incredibly firm economic ground.

Good luck with that!!!

I'm not sure that guy understands that we are buying LT treasurys because of the interest rate risk.

You know this is the hardest thing to get across to people. The assets are owned precisely because they are volatile under specific conditions. The first thing people want to do is put in "stable" assets and then they are surprised when they become highly unstable under certain markets. Diversification only works if you have asset classes that tend towards moving in opposite directions very powerfully. It doesn't work if you mix a bunch of things together that move for the same reasons just because it makes you feel safer at that moment.

I heard the same arguments in 2007 about avoiding LT bonds because of interest rate risk. Well, interest rate risk goes both ways right? In 2008 the LT bonds stomped everything around them into the ground. Anyone relying on short term debt to balance stock risks was severely punished. Not all risk is bad when used correctly.

[AdamA]

I'm pretty sure I once heard Harry Browne mention something about substituting Norwegian and Australian short term debt for long term US debt.  He advocated a 50%/50% split, stating that they mirrored long term US treasuries to such an extent that it really didn't make a difference and made the PP seem a little more exotic. 

This was on the same episode where he discussed holding physical uranium instead of gold. 

[smurff]

April Fool!

[Gumby]

This was on the same episode where he discussed holding physical uranium instead of gold.

By the way, if you need a good uranium dealer:

 http://amazon.com/dp/B000796XXM

But, I definitely prefer uranium ETFs because you never know if someone is going to steal your uranium. Plus, I'm not sure it's legal to put radioactive substances into a safe deposit box. But, I hear the Swiss are more lenient about that sort of thing.

[AdamA]

But, I definitely prefer uranium ETFs because you never know if someone is going to steal your uranium. Plus, I'm not sure it's legal to put radioactive substances into a safe deposit box. But, I hear the Swiss are more lenient about that sort of thing.

I discuss this in detail in my book "Why the Best Laid Investment Plans are Likely to Expose You to High Levels of Radiation."  

When I first wrote this book in the early 1970's, I recommended a 75%/25% split of physical uranium/physical lead.  Since then, a number of uranium and lead exchange traded funds (ETFs) have been made available to the general public at relatively low expense.  In general, I feel it is best to avoid using these because it is likely that there is a conspiracy by global elites to suppress the price of both uranium and lead via manipulation of these ETFs.  I refer those interested to the Uranium and Lead Anitrust Action Committee website for further reading.  

The one exception to this is the Central Lead Trust (PbTU) which is not an ETF but a close ended fund (CEF) that may be purchased only by investors who wish to use lead as a radiation shield (the paperwork involved can be cumbersome, but is worth it in the long run).  The main difference between these two investment vehicles is that while ETFs are guaranteed to default on their obligations when they are needed the most, CEFs never default, but structure their purchase and sales agreements in such a way as to ensure that the investor loses all profits due to an unfavorable premium.  Additionally, PbTU audits its holding quarterly by visiting investors in their homes with a Geiger counter to ensure that they are being adequately protected from radiation.  

My current recommendation is that one holds 75% physical uranium and 25% in either physical lead or, for those who wish to avoid the various hassles of physical lead ownership (ie, theft by pencil bootleggers or alchemists), lead IOU's via PbTU.  

[Gumby]

My current recommendation is that one holds 75% physical uranium and 25% in either physical lead or, for those who wish to avoid the various hassles of physical lead ownership (ie, theft by pencil bootleggers or alchemists), lead IOU's via PbTU.

Also, the half-life of Uranium is about 4.47 Billion Years. So, you would need to rebalance when half of your Uranium turns to lead.