Gyroscopic Investing

Hi, I thought I would share my experience with the Permanent Portfolio.

After reading Harry Browne's book I started my PP about a year ago. Looks like it wasn't a good time to start out as I'm down about 4.5% since inception, about 3% YTD. At the outset, I decided to commit to the strategy for three years and see how it goes. From what I can see from the back-testing data, there's never been a time where the portfolio was down for more than one year, let alone three.

I've concluded that the act of rebalancing is a critical part of the strategy, not only because of the inherent dollar cost averaging, but also because it forces you to act counter-intuitively and in a contrarian manner, which is generally very difficult to do psychologically. Case in point - here I am looking at re-balancing. My stocks are about 31% of the portfolio. I've thought about waiting until hitting a 15/35 band, but reading the recent post where someone quoted their past correspondence with Harry Browne himself on the topic, I decided to re-balance now. I did so by adding enough money to the portfolio so wouldn't have to sell any stocks (or incur taxes), but instead bought up the levels of cash, gold and LTT to reach a 4x25 balance. But for the PP, I never would have imagined buying gold and especially LTT at this time.

Who knows what's around the corner? Certainly not me. I am hoping that whatever comes, one or more asset buckets in my portfolio will be sufficiently weighted to pull the load.

Any comments from long time veterans of the Permanent Portfolio? Am I managing the strategy soundly?

I feel I've got two years to go in this trial run. If we end up down for two more years, it would appear to be unprecedented, and I'd have to conclude that something's changed in the correlations and maybe this strategy doesn't function the way it once did. We'll see.

I've been in this for two years now (Sept 2011) at all time high of gold, and so far it hasn't been performing as swimmingly as I would have expected. Based off http://www.peaktotrough.com/hbpp.cgi I only have a 1.90% CAGR over two years which feels like I might be losing out to inflation. I've done some early rebalancing and tax loss harvesting as well. Whatever helps you sleep at night.

So, I have perhaps one more year to go for my portfolio to beat inflation in some meaningful way...

Eight months here.
Would be nice to hear from some 6-10 year investors.
I thought when I started that it was not the best time to invest.
Turned out to be true but I'm still happy with the plan.

My own PP success story is rather mixed as I had a few "life happens" things get in the way, as well as the difficulty in keeping my portfolio balanced with such limited 401(k) options.  That being said I am the master of back testing and data analysis, and I can tell you that you are mistaken, though pardonably so.  The PP's longest draw down (time without setting a new high) was 22 months long and it went from October 1980 through September 1982.

There is good news though.  As you are waiting 3 years to test the PP, then you should find based on past data that your return will be around 4.74% average real return after inflation with a 3.46% standard deviation.  I suspect you'll beat inflation since it rarely loses to it in the history of the portfolio, only around 4 periods in history where it did.

DragonJoey3 wrote: My own PP success story is rather mixed as I had a few "life happens" things get in the way, as well as the difficulty in keeping my portfolio balanced with such limited 401(k) options. 

I empathize. 401K's and how to make them work has been a frequent topic on the forum. Back in the day I spent a lot of time trying to help people figure out ways to make them HBPP compatible. In the end I gave up. FWIW my standard advice these days is don't bother trying. Unless you are blessed to have a really good 401K that is PP friendly, I'd just create a basic Jack Bogle special and call it a day. Trying to jam the square 401K peg into the round Permanent Portfolio hole, is usually such a pain in the @$$ that's it's just not worth the aggravation.

Use the PP for your other investments. As Craig is wont to observe, don't let the perfect be the enemy of the good. Jack Bogle is a really smart guy and barring an SHTF event, a basic and indexed stock bond portfolio in your 401K should do fine. Over time it might even give you a slightly better return.

annieB wrote: Eight months here.
Would be nice to hear from some 6-10 year investors.
I thought when I started that it was not the best time to invest.
Turned out to be true but I'm still happy with the plan.

Without getting into too many details, I have followed HB's general strategy since the late 1980s.  We have about 2/3 of our investments in a PP and the rest in a VP (currently mostly blue chip dividend payers, some short-term fixed income, and 10% or so in very speculative stuff).   

Our PP is pretty much the plain vanilla 4x25 variety, except our cash returns have been juiced a little by some I-Bonds we bought between 1999 and 2001 and our access to the GFund in my wife's TSP.  I think that has probably added about +.5% or so per year to our PP's annual returns. 

Since 1/1/2010:

PP
2010:        +13.32%
2011:        +11.78%
2012:          +7.17%
2013 YTD:    -2.86%
Avg Ann:    +7.45%

VP
2010:        +25.97%
2011:          +0.59%
2012:          +2.75%
2013 YTD:    +9.41%
Avg Ann:      +9.70%

I think over the years our PP and VP have probably had pretty similar cumulative returns, but our VP has always been more volatile and required far more time and research (which I enjoy, but was difficult when I was working).  It was hard to stick with a PP in the late 1990s when it seemed like everyone was getting rich in tech stocks.  It seemed boring and a little outdated.   

Small losses or gains during the next year or two in the PP wouldn't surprise me too much.  I don't think HB ever expected the PP to be considered a "highest total return" type portfolio.  It was meant to be simple, safe and stable and provide modest real returns over time.  My experience with it has matched that.         

Ad Orientem wrote:

DragonJoey3 wrote: My own PP success story is rather mixed as I had a few "life happens" things get in the way, as well as the difficulty in keeping my portfolio balanced with such limited 401(k) options. 

I empathize. 401K's and how to make them work has been a frequent topic on the forum. Back in the day I spent a lot of time trying to help people figure out ways to make them HBPP compatible. In the end I gave up. FWIW my standard advice these days is don't bother trying. Unless you are blessed to have a really good 401K that is PP friendly, I'd just create a basic Jack Bogle special and call it a day. Trying to jam the square 401K peg into the round Permanent Portfolio hole, is usually such a pain in the @$$ that's it's just not worth the aggravation.

Use the PP for your other investments. As Craig is wont to observe, don't let the perfect be the enemy of the good. Jack Bogle is a really smart guy and barring an SHTF event, a basic and indexed stock bond portfolio in your 401K should do fine. Over time it might even give you a slightly better return.

Lets say I wanted to do a bogle index portfolio.  It's never been clear to me if the "bonds" must be a total bond market, treasuries (what duration?) or if everyone just does whatever they feel like.  Don't you get better rebalancing bonus with something like tlt?

dragoncar wrote:

Ad Orientem wrote:

DragonJoey3 wrote: My own PP success story is rather mixed as I had a few "life happens" things get in the way, as well as the difficulty in keeping my portfolio balanced with such limited 401(k) options. 

I empathize. 401K's and how to make them work has been a frequent topic on the forum. Back in the day I spent a lot of time trying to help people figure out ways to make them HBPP compatible. In the end I gave up. FWIW my standard advice these days is don't bother trying. Unless you are blessed to have a really good 401K that is PP friendly, I'd just create a basic Jack Bogle special and call it a day. Trying to jam the square 401K peg into the round Permanent Portfolio hole, is usually such a pain in the @$$ that's it's just not worth the aggravation.

Use the PP for your other investments. As Craig is wont to observe, don't let the perfect be the enemy of the good. Jack Bogle is a really smart guy and barring an SHTF event, a basic and indexed stock bond portfolio in your 401K should do fine. Over time it might even give you a slightly better return.

Lets say I wanted to do a bogle index portfolio.  It's never been clear to me if the "bonds" must be a total bond market, treasuries (what duration?) or if everyone just does whatever they feel like.  Don't you get better rebalancing bonus with something like tlt?

Total bond market is recommended for the fixed income portion of the portfolio. Some include TIPS and have reduced their duration to short term. TLT is not recommended as you are not compensated for the additional risk.

dragoncar wrote:
Lets say I wanted to do a bogle index portfolio.  It's never been clear to me if the "bonds" must be a total bond market, treasuries (what duration?) or if everyone just does whatever they feel like.  Don't you get better rebalancing bonus with something like tlt?

The most basic BH recommendation for the bond segment of a portfolio is 100% in an intermediate bond fund. But a lot of Bogleheads split their bonds 50/50 between intermediate bond funds and TIPS funds.

dragoncar wrote: Lets say I wanted to do a bogle index portfolio.  It's never been clear to me if the "bonds" must be a total bond market, treasuries (what duration?) or if everyone just does whatever they feel like.  Don't you get better rebalancing bonus with something like tlt?

Assuming you are using an HBPP for your other investments I would probably just go with a total bond market index fund. Think BND or a near equivalent. But any low cost broad based bond fund should do the trick. If your worried about inflation, consider adding some global stock exposure to the equity side. Maybe use a global stock index fund.

I've been investing in the permanent portfolio for years now. I watched it dive and recover over 2008, take another hit and recover a few years later as volatility remained, and now in 2013 as gold and bonds take a licking.

The thing is when you start has a huge effect on your outlook. Someone starting a stock heavy portfolio in 2007/2008 would be quite upset at the results. Someone getting in on a gold doomsday portfolio in 2011 would be upset as well. Fixed income lovers relying on income for retirement are probably pretty angry at Bernanke's zero interest rate policy. Etc.

So to single out the permanent portfolio I think misses what has been going on for many people today.

I have learned to be patient and wait things out. With the permanent portfolio I don't own so much of any one asset that I can be really killed if things go wrong. That's a really important point. There is a lot of focus on growing money at the fastest amount possible, but there is an equally important side to not lose what you have. So the bumps come along and that's to be expected, I just don't want to go over a cliff with a big loss. The permanent portfolio makes that less likely, even if in the short term there are lulls.

Almost forgot to mention people that bought into the 100% TIPS strategy being touted in recent years. They are down almost 10% this year (VIPSX ticker). That is supposed to be one of the "safest" ways to invest.

So perspective again is important along with being widely diversified.

craigr wrote: I've been investing in the permanent portfolio for years now. I watched it dive and recover over 2008, take another hit and recover a few years later as volatility remained, and now in 2013 as gold and bonds take a licking.

The thing is when you start has a huge effect on your outlook. Someone starting a stock heavy portfolio in 2007/2008 would be quite upset at the results. Someone getting in on a gold doomsday portfolio in 2011 would be upset as well. Fixed income lovers relying on income for retirement are probably pretty angry at Bernanke's zero interest rate policy. Etc.

So to single out the permanent portfolio I think misses what has been going on for many people today.

I have learned to be patient and wait things out. With the permanent portfolio I don't own so much of any one asset that I can be really killed if things go wrong. That's a really important point. There is a lot of focus on growing money at the fastest amount possible, but there is an equally important side to not lose what you have. So the bumps come along and that's to be expected, I just don't want to go over a cliff with a big loss. The permanent portfolio makes that less likely, even if in the short term there are lulls.

How do you rationalize not wanting to "go over a cliff with a big loss" and the DD's the PP has experienced in the past (15-20% range). Also, a 60/40 allocation to equities and fixed income is returning approximately 10% YTD. What return does the PP need to achieve in order to break-even with the 60/40 AA - 13.5%. It cuts both ways...its not only sufficient to minimize losses, but you also need to achieve gains.

What are your thoughts on whether the 25% allocation to equities is sufficient to buoy the entire portfolio, especially when cash is yielding so little?

buddtholomew wrote: How do you rationalize not wanting to "go over a cliff with a big loss" and the DD's the PP has experienced in the past (15-20% range). Also, a 60/40 allocation to equities and fixed income is returning approximately 10% YTD. What return does the PP need to achieve in order to break-even with the 60/40 AA - 13.5%. It cuts both ways...its not only sufficient to minimize losses, but you also need to achieve gains.

I think to answer this you need to look at the 60-40 portfolio long term (not just this year's returns) versus the PP.  For example if I backtest an ETF PP of VTI-TLT-GLD-SHY against a 60-40 portfolio of VTSMX (total stock market fund) and VBMFX (total bond market fund) and go back 104 months (8.6 years - the farthest I could go with these funds), the PP returns 8.3%/year with a standard deviation of 7.6 while the 60-40 fund returns only 6.5% with a standard deviation of 10.1.  That's the power of growth without the big drawdowns.

The peak drawdown on the 60-40 portfolio is 34.1% (ouch!) versus 14% worst case drawdown for the PP during the 2008-2009 crash.  Return to risk as measured by the sharpe ratio is 0.49 for the 60-40 allocation versus 0.99 for the PP.  So the PP has about twice the reward for the equivalent level of risk.

If you want to go back to 1972, I simulated both here (http://www.peaktotrough.com/hbpp.cgi) albeit with government bonds and again the PP slightly (0.1%) outpaces the 60-40 over 41 years in terms of return, but only has 6 drawdowns over 10% versus 19 drawdowns over 10% for the 60-40.  Again the sharpe ratio is higher for the PP - less risk for the same returns.

Yes, the 60-40 will certainly outperform the PP for short periods, especially when the stock market it on a run, but just one look at the backtest data for the period from 2006-today will tell you which one you want to hold!  In my experience these "major corrections" are not that rare - it happened in 1987, in 2000, and in 2008 (and I lost a lot of money every time).

mortalpawn wrote:

buddtholomew wrote: How do you rationalize not wanting to "go over a cliff with a big loss" and the DD's the PP has experienced in the past (15-20% range). Also, a 60/40 allocation to equities and fixed income is returning approximately 10% YTD. What return does the PP need to achieve in order to break-even with the 60/40 AA - 13.5%. It cuts both ways...its not only sufficient to minimize losses, but you also need to achieve gains.

I think to answer this you need to look at the 60-40 portfolio long term (not just this year's returns) versus the PP.  For example if I backtest an ETF PP of VTI-TLT-GLD-SHY against a 60-40 portfolio of VTSMX (total stock market fund) and VBMFX (total bond market fund) and go back 104 months (8.6 years - the farthest I could go with these funds), the PP returns 8.3%/year with a standard deviation of 7.6 while the 60-40 fund returns only 6.5% with a standard deviation of 10.1.  That's the power of growth without the big drawdowns.

The peak drawdown on the 60-40 portfolio is 34.1% (ouch!) versus 14% worst case drawdown for the PP during the 2008-2009 crash.  Return to risk as measured by the sharpe ratio is 0.49 for the 60-40 allocation versus 0.99 for the PP.  So the PP has about twice the reward for the equivalent level of risk.

If you want to go back to 1972, I simulated both here (http://www.peaktotrough.com/hbpp.cgi) albeit with government bonds and again the PP slightly (0.1%) outpaces the 60-40 over 41 years in terms of return, but only has 6 drawdowns over 10% versus 19 drawdowns over 10% for the 60-40.  Again the sharpe ratio is higher for the PP - less risk for the same returns.

Yes, the 60-40 will certainly outperform the PP for short periods, especially when the stock market it on a run, but just one look at the backtest data for the period from 2006-today will tell you which one you want to hold!  In my experience these "major corrections" are not that rare - it happened in 1987, in 2000, and in 2008 (and I lost a lot of money every time).

What re-balancing bands were used for the 60/40 allocation? My point was not to look at the current annual performance, but rather use it as an example of what the PP will need to gain in order to break-even with the 60/40 AA. Yes, you lose less and will make gains on the 60/40 if/when equity markets decline.

buddtholomew wrote: What re-balancing bands were used for the 60/40 allocation? My point was not to look at the current annual performance, but rather use it as an example of what the PP will need to gain in order to break-even with the 60/40 AA. Yes, you lose less and will make gains on the 60/40 if/when equity markets decline.

It will need to gain more when stocks are hot. It will need to gain less when stocks are not so hot--in fact, the 60/40 may be the one that needs to catch up. That's what we all bought into when we adopted a portfolio that isn't as stock-heavy as others. But you could say the same thing about bond or gold or even cash-heavy portfolios. The nature of hedging your bets meaning experiencing fewer rewards compared to someone who bet heavily on the winner and more rewards compared to the person who bet heavily on the loser.

The real question is: are you feeling lucky, punk? 

Historically, in the United States, stocks have outperformed the other asset classes over the long term. So if you went 100% stocks back in 1972 you would actually be ahead of the HBPP now, especially if you reinvested dividends in an index fund. But how many people could handle the violent ups and downs of the last forty years? And what happens if just as you are preparing to retire the stock market decides to have a major bowl movement?

And of course there is nothing that precludes a catastrophic event that could wipe out stocks for decades or longer.

That said I do tend to agree that the HBPP is somewhat overweighted towards a negative scenario and this can hobble returns during periods of prosperity. But rather than abandoning the HBPP and the safety that it represents I think the easiest solution is to just create a VP. If, like me, you think that long tem the odds favor stocks just take 10% or even 20% if you can handle the volatility, and put it in a long term buy and hold stock only VP.

Take your 10-20% VP, put it in SPY or maybe VT and reinvest the dividends. Then just close your eyes and hang on until you are within the five year window of retirement and hope that the past repeats itself (excepting 2008). There is a reasonable chance your VP with all those compounded dividends will provide a nice little goose for your retirement. But if things go bad you will have only risked your original 10-20%.

Ad Orientem wrote: Take your 10-20% VP, put it in SPY or maybe VT and reinvest the dividends. Then just close your eyes and hang on until you are within the five year window of retirement and hope that the past repeats itself (excepting 2008). There is a reasonable chance your VP with all those compounded dividends will provide a nice little goose for your retirement. But if things go bad you will have only risked your original 10-20%.

You could also just relax the re-balancing bands when stocks are on the rise which is what I've been doing lately.

buddtholomew wrote: What re-balancing bands were used for the 60/40 allocation? My point was not to look at the current annual performance, but rather use it as an example of what the PP will need to gain in order to break-even with the 60/40 AA. Yes, you lose less and will make gains on the 60/40 if/when equity markets decline.

I believe I used a simple annual rebalancing. 

If you don't think markets will ever decline again, then go with the 60/40 or even 100% stocks.  But you need to be willing to accept 30-50+% drawdowns if you are wrong.  I was invested this way in the 2000's and lost essentially a full decade - it was 2010 before my portfolio returned to its 1999 value  (the 2000-2010 return for the S&P 500 was -3.42% after inflation).  I've decided I'm not willing to lose another decade and instead will settle for the "low" 9+% (about 5% above inflation) long term return from the PP with a lot less volatility.

I decided not to choose and selected a 60/40 AA for 60% of my assets and the PP for the balance. I sympathize with those invested 100% in the PP that started to invest recently. Their introduction to the portfolio was different from my experience having started in 2011.

I will also ad that investing in the PP has not brought the calm that many experience. On the contrary, I constantly question whether I have made the right decision for this money.

buddtholomew wrote:

craigr wrote: I've been investing in the permanent portfolio for years now. I watched it dive and recover over 2008, take another hit and recover a few years later as volatility remained, and now in 2013 as gold and bonds take a licking.

The thing is when you start has a huge effect on your outlook. Someone starting a stock heavy portfolio in 2007/2008 would be quite upset at the results. Someone getting in on a gold doomsday portfolio in 2011 would be upset as well. Fixed income lovers relying on income for retirement are probably pretty angry at Bernanke's zero interest rate policy. Etc.

So to single out the permanent portfolio I think misses what has been going on for many people today.

I have learned to be patient and wait things out. With the permanent portfolio I don't own so much of any one asset that I can be really killed if things go wrong. That's a really important point. There is a lot of focus on growing money at the fastest amount possible, but there is an equally important side to not lose what you have. So the bumps come along and that's to be expected, I just don't want to go over a cliff with a big loss. The permanent portfolio makes that less likely, even if in the short term there are lulls.

How do you rationalize not wanting to "go over a cliff with a big loss" and the DD's the PP has experienced in the past (15-20% range).

What was the loss of other portfolios during that time? 30%? 40%? Worse?

I don't argue that stock heavy portfolios do better in a good year for stocks. Just as I don't argue that gold heavy portfolios do better in good years for gold. My personal goals are for moderate growth with reduced risk of large drawdowns.

craigr wrote:

buddtholomew wrote:

craigr wrote: I've been investing in the permanent portfolio for years now. I watched it dive and recover over 2008, take another hit and recover a few years later as volatility remained, and now in 2013 as gold and bonds take a licking.

The thing is when you start has a huge effect on your outlook. Someone starting a stock heavy portfolio in 2007/2008 would be quite upset at the results. Someone getting in on a gold doomsday portfolio in 2011 would be upset as well. Fixed income lovers relying on income for retirement are probably pretty angry at Bernanke's zero interest rate policy. Etc.

So to single out the permanent portfolio I think misses what has been going on for many people today.

I have learned to be patient and wait things out. With the permanent portfolio I don't own so much of any one asset that I can be really killed if things go wrong. That's a really important point. There is a lot of focus on growing money at the fastest amount possible, but there is an equally important side to not lose what you have. So the bumps come along and that's to be expected, I just don't want to go over a cliff with a big loss. The permanent portfolio makes that less likely, even if in the short term there are lulls.

How do you rationalize not wanting to "go over a cliff with a big loss" and the DD's the PP has experienced in the past (15-20% range).

What was the loss of other portfolios during that time? 30%? 40%? Worse?

I don't argue that stock heavy portfolios do better in a good year for stocks. Just as I don't argue that gold heavy portfolios do better in good years for gold. My personal goals are for moderate growth with reduced risk of large drawdowns.

Perhaps it is a personality trait, but the difference between a 30% loss or 40% loss was equally as painful. My goals are for moderate growth with smaller DD's as well. However; a 20% DD is not what I had in mind for this portion of my portfolio and have been struggling ever since back testing the portfolio to find the right balance.

If volatility is a big concern, then an investor should consider being 100% in cash. They will suffer inflation risk, but the reported value of the asset won't be volatile.

If volatility is a big concern, then an investor should consider being 100% in cash.

There are a lot of options between 100% PP and 100% cash. If volatility is a problem you should adjust and lower (not eliminate) the expected volatility of your portfolio to a point where you no longer worry about it. With a PP you can increase your cash allocation or hold a cash-VP.

If volatility is a problem you have to find a way to deal with it. It belongs to investing, basta. Nobody knows if the PP gets a bigger drawdown in the future than it has in the past. The PP profited massively from the credit expansion since 1980, but what if we now get a decade of deleverage? That would result in 10 years no or negative real returns for the PP which is much more of a problem for me than a short 30% drawdown.

The best way to counteract volatility is to know the true value of what you are investing in. I am happy when the stock market is on sale, because i can buy more of what i like. Its like shopping in a thrift shop. Measured by the cash flow of bonds and cash, these two are currently very expensive compared to 1980 and measuring the value of gold is purely impossible, because it has no intrinsic value. But investing that way means much work and you have to come out of your comfort zone.