Gyroscopic Investing

Having recently completed "The Permanent Portfolio," I find the performance and arguments for this investment strategy compelling. Annualized nominal returns of 9.5% over 40 years (Table 3.1, p. 17) are indeed impressive. And the apparent outperformance over various time periods compared to a notional 60/40 portfolio is also impressive. That said, when I compare the reported Permanent Portfolio performance to a couple of very successful, real-world funds over the same period, I don't find the Permanent Portfolio results to be particularly distinctive. Using Morningstar and looking at Vanguard Wellesley Income Fund (VWINX) over the same 40-year period (1972-2011), VWINX appears to have delivered a nominal total return of 9.99%.  VWINX is a conservative allocation (roughly 35/65) fund that offers a pretty smooth ride.  And looking at Vanguard Wellington Fund (VWELX) over the same period, VWELX appears to have delivered a nominal total return of 10.06%.  VWELX is a moderate allocation fund (roughly 65/35), and looking at it over its complete lifetime, more than 80 years, VWELX appears to have returned a nominal 8.10%.  Admittedly, these figures are before taxes, but I suspect the Permanent Portfolio performance cited on page 17 is also before taxes.

Given some of the headaches of dealing with physical gold, foreign accounts, etc, I wonder if a well-established, very reliable Vanguard fund provides a comparable but simpler solution.

If you look at the the real returns of a stock/bond blend during the 1970s you will find that inflation is the achilles heel of a stock/bond portfolio. I think a simple low cost stock/bond blend is great, but it cannot be expected to be resilient during a serious inflation. I am strictly concerned with real returns, because I am interested only in returns I can "eat." If you have similar goals, I suggest adjusting your annual data for inflation and taking a look. I think the PP has and will offer a smoother ride in real terms.

I certainly understand that real returns are what ultimately matter. Still, I compared nominal returns to nominal returns--apples to apples--over an identical period. Inflation during the 1970s was impacting the total return of both a VWINX/VWELX and the HBPP. Can anyone briefly elaborate on why the comparison would be invalid?

cnh wrote: I certainly understand that real returns are what ultimately matter. Still, I compared nominal returns to nominal returns--apples to apples--over an identical period. Inflation during the 1970s was impacting the total return of both a VWINX/VWELX and the HBPP. Can anyone briefly elaborate on why the comparison would be invalid?

What I mean is that if you chart them and adjust for inflation, you will find that the PP continued to offer it's historical real return trend during that period but the stock/bond blend was hurting during that period. I made chart that shows this here:
http://www.stableinvesting.com/2011/04/ ... hmark.html

At the end of the 72-2011 period they both ended up at roughly the same position, but the stock/bond blend was a bumpier ride. Additionally, if the inflation had persisted for longer the stock/bond blend would have really hurt an investor. With the PP you are agnostic about inflation.

melveyr wrote:

cnh wrote: I certainly understand that real returns are what ultimately matter. Still, I compared nominal returns to nominal returns--apples to apples--over an identical period. Inflation during the 1970s was impacting the total return of both a VWINX/VWELX and the HBPP. Can anyone briefly elaborate on why the comparison would be invalid?

What I mean is that if you chart them and adjust for inflation, you will find that the PP continued to offer it's historical real return trend during that period but the stock/bond blend was hurting during that period. I made chart that shows this here:
http://www.stableinvesting.com/2011/04/ ... hmark.html

At the end of the 72-2011 period they both ended up at roughly the same position, but the stock/bond blend was a bumpier ride. Additionally, if the inflation had persisted for longer the stock/bond blend would have really hurt an investor. With the PP you are agnostic about inflation.

I checked out your charts, and although the VWELX chart likely looks very much like your bumpier 60/40 chart, the VWINX (35/65) chart over the period is very similar to HBPP.  This may not work, but it is here:
http://quote.morningstar.com/fund/chart ... %2C0%22%7D

The Morningstar chart doesn't adjust for inflation, which is important to me. When you adjust for inflation you will see that Wellesley is vulnerable to rising inflation.



You essentially had no real return for an entire decade. That is too long for my personal preference and I think it highlights a vulnerability in the portfolio.

I think putting 90% into VWINX and 10% in physical gold or an ETF would not be a bad solution and get you very close to the overall PP.

POSTING IN ALL CAPS

To dragoncar: Posts were in upper-lower case. Subject line only was in caps, which is the norm in my line of work--no shouting or offense intended.

To melveyr: I take your point. In your chart, am I correct in assuming the blue line plots your calculation of VWINX real returns?  Out of curiousity, is it possible to overlay on the same chart the PP real returns?