Gyroscopic Investing

Hello,
I've just recently gotten interested in the idea of the Permanent Portfolio.  In order to better visualize how it works over time, I used a script to create a graph that shows the allocation of a theoretical portfolio invested in the ETFs:

GLD for gold
VTI for stocks
TLT for long-term treasuries

with plain cash for the cash component.  The reason I used these is because it's easy to find the ETF price data.  The reason I started in 2004 is because that's when the last of these ETFs started up.



The stairstep jumps in the portfolio correspond to the rebalancing days in the portfolio.  It's interesting to see how the strategy allocated more money to stocks near the bottom of the stock market in 2008, and then sold some stocks near an interim top and bought treasuries ahead of the recent run-up.

-Ed

Thanks, Ed. This chart is awesome. 

for late 07/early 08 rebalance...not sure i follow... 3 assets went up & no drawdown in gold...where did the extra money come from? also...i don't see any steps in gold over this time period...is that accurate? 

murphy_p_t, if I understand edsanville's chart, he does show drawdown in gold but the steps are in the floor of the gold ribbon he drew. I've probably just added confusion- sorry if I have. I like edansville's way of showing the PP.

murphy, I think it is the thickness of each ribbon that shows the amount in each asset.

That's right, it's an area chart, so the thickness of each ribbon is the allocation to each asset class.  All purchases are paid for with cash or by selling other assets.  You can tell this is the case because the top line, (the total value), never jumps up or down discontinuously.

I wish I could put together a chart going back further than this, but that would be much harder.  I was looking at the formulas for converting between long-term interest rates and bond prices, and it's quite confusing.  Even their price notation is crazy and non-decimal.

thanks all. so based on that, it appears that the only drawdown for gold in late 07/early 08?

is the rebalance band 15/35 ?

Oh yes, the rebalance bands are 15/35 for this chart, which I should have mentioned.  It looks like there are two gold drawdowns, around 1/1/08 and a smaller one around 2/9/2009 (used to buy more stocks).

edsanville, do you include dividends and bond coupons going into the cash? I'm also not sure whether there is some issue with how long a fund has to be held to get the dividend. Might frequent rebalancing forgo some of the dividends?

Unfortunately, no, the chart doesn't include dividends or interest.  Despite this, the gains are still pretty impressive.  Since I use TLT, I'm assuming the treasury interest manifests as dividend payments?  Or possibly they just reinvest the interest into more treasuries?  I'm not really sure how that works.

its really interesting to me that there is so little drawdown for gold, especially considering that it is in an 11 year bull market. is this representative of peoples actual portfolios?

edsanville wrote: Hello,
I've just recently gotten interested in the idea of the Permanent Portfolio.  In order to better visualize how it works over time, I used a script to create a graph that shows the allocation of a theoretical portfolio invested in the ETFs:

GLD for gold
VTI for stocks
TLT for long-term treasuries

with plain cash for the cash component.  The reason I used these is because it's easy to find the ETF price data.  The reason I started in 2004 is because that's when the last of these ETFs started up.



The stairstep jumps in the portfolio correspond to the rebalancing days in the portfolio.  It's interesting to see how the strategy allocated more money to stocks near the bottom of the stock market in 2008, and then sold some stocks near an interim top and bought treasuries ahead of the recent run-up.

-Ed

Are you able to do this with the UK stocks by any chance?
IGLT, GBSS or PHAU, ISF or other FTSE 100 tracker.

Sure, I can put a chart together for the symbols you mention.  I wonder about the choice of IGLT though... the description says that it's a basket of UK government bonds of all maturities.  Wouldn't a pure long-term UK bond index be a better choice for the PP?

I don't think one exists.
For long term bonds, I would just buy the actual bond.
I was kind of interested to see how a basket of bonds compared to picking just long term.
You could probably do this for US treasuries as well.
Basket of short, mid, and long vs long term treasuries only OR
medium vs long
etc.

Just kind of interested in the results.

Did you program this yourself by the way?

I'm having a tough time downloading the data for these symbols, except for ISF.  I get my symbols through Yahoo finance, and it seems like their datasets aren't as complete for the UK as they are for the US.

Yes, I put this script together in Python, but I used a Yahoo finance library to download the actual data.

The idea about the short-term treasuries is an interesting one.  I don't know too much about bonds, but I think CraigR, the owner of this site, recommended that the "cash" component consist of 50% money market and 50% short-term bonds.

edsanville wrote: I'm having a tough time downloading the data for these symbols, except for ISF.  I get my symbols through Yahoo finance, and it seems like their datasets aren't as complete for the UK as they are for the US.

Yes, I put this script together in Python, but I used a Yahoo finance library to download the actual data.

The idea about the short-term treasuries is an interesting one.  I don't know too much about bonds, but I think CraigR, the owner of this site, recommended that the "cash" component consist of 50% money market and 50% short-term bonds.

I think google finance has them although the datasets are a bit different, downloading from csv, etc.

edsanville wrote: Unfortunately, no, the chart doesn't include dividends or interest.  Despite this, the gains are still pretty impressive.  Since I use TLT, I'm assuming the treasury interest manifests as dividend payments?  Or possibly they just reinvest the interest into more treasuries?  I'm not really sure how that works.

If you get "adjusted historical quotes" from Yahoo! Finance, it will automatically adjust the value of the TLT for reinvested dividends.
I think TLT paid 4% to 5% per year during that time? Would add about 1% to the total return of the portfolio, approximately.

Paul

Ah yes, I did use the "adjusted historical returns,"  so I guess the chart includes dividends after all.

I'm fascinated by the thickness of the various investment elements as the total climbs.  This has to be the best illustration I've seen to visualize the Permanent Portfolio.

It's interesting to see the cash component (and the others as well) increase in size as the general markets increase. You can see the protective nature of the pp at work. 

Thanks, DonM.  I wish I could make a chart like this going all the way back to the 70s.

One of the things I love about the Permanent Portfolio is that it includes that cash component, which you can use for your earnings or daily expenses.  As you earn more money that goes into cash, it triggers the rebalancing bands.  Assuming you spend less than you earn, you know exactly what you should do with your savings to adhere to the plan.  Once you enter the "spending" phase of your life, the reverse happens and you rebalance into cash as you spend it.  I just love the elegance and symmetry of this thing.

I'm not fully invested in the PP yet, because I have about 15 individual stocks that I bought before I knew about the PP.  These form the majority of my portfolio, still.  I already owned about 17% GLD, and I recently put 20% into TLT in a move toward the PP.  I'm not selling my individual stocks early, since I did have an exit plan for those that I don't want to abandon.  After I sell them, I know exactly where to put the proceeds, though.

Yes, another nice aspect of a good and trusted plan.  You know what you're going to do next.  I have extensive stock portfolios at very low bases.  But, as I shift out of various choices I can use the ratios to provide some focus.  That's nice.