The Desert Portfolio

General Discussion on the Permanent Portfolio Strategy

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barrett
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The Desert Portfolio

Post by barrett » Sat Jul 25, 2015 1:47 pm

Desert's 30/60/10 (stocks/10-year treasuries/gold) portfolio has been talked about on here a few times but I thought it deserved its own thread.

I don't like that it doesn't have a cash component (though the interest payments on the treasuries sure help). I do like that it allows one to hold a decent amount of equities and some gold while delivering a fairly smooth ride... also that the 10-year bonds aren't as volatile as the 30-year issues (could be either good or bad depending on which way rates go).

This is just a cursory first post. I wanted to hear what others have to say. Thanks.
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Pointedstick
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Re: The Desert Portfolio

Post by Pointedstick » Sat Jul 25, 2015 1:50 pm

30% cash + 30% long treasuries is functionally very similar to 60% 10-year treasuries, and would allow this portfolio to have a dedicated cash component. Seen in this light, the portfolio is basically a PP with only 10% gold, a slight bet against high inflation and financial cataclysm.
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Mark Leavy
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Re: The Desert Portfolio

Post by Mark Leavy » Sat Jul 25, 2015 1:57 pm

Yes - I agree.  it is a very similar bet on the economic fundamentals.  Slightly different allocations than 25% across the board - but the principles seem consistent.

I can agree with underweighting gold a little - as it is more volatile than the other assets.  I don't think I would go down to 10%, but that is just nit picking at that point.

A lot of solid thought all around.
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KevinW
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Re: The Desert Portfolio

Post by KevinW » Sat Jul 25, 2015 2:46 pm

Another +1, if you squint the Desert Portfolio looks a lot like a 4x25 PP with some modest reallocation.

If you squint another way, it also looks like Vanguard Target Retirement Income Fund (VTINX) which is approximately 30/50/20 stocks/total bond/short term TIPS. The 10% gold and 20% ST TIPS allocations are both inflation hedges, albeit based upon different economic philosophies.

I still prefer the vanilla 4x25, but the Desert Portfolio seems OK and may be easier to implement in some 401k accounts.
ILoveMoney
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Re: The Desert Portfolio

Post by ILoveMoney » Sat Jul 25, 2015 3:36 pm

I read somewhere Desert keeps the bonds until maturity? So he has essentially a 10-0 year laddered bond allocation. Is that right?
barrett
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Re: The Desert Portfolio

Post by barrett » Sat Jul 25, 2015 3:52 pm

ILoveMoney wrote: I read somewhere Desert keeps the bonds until maturity? So he has essentially a 10-0 year laddered bond allocation. Is that right?
I believe he mentioned that as an option only. If bonds get whacked he has the option of holding them to maturity. This can of course be done with 30-year bonds as well but that's a long wait. I was wondering if a 20-0 laddered bond allocation would have any particular advantage or disadvantage for this portfolio.
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Desert
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Re: The Desert Portfolio

Post by Desert » Sat Jul 25, 2015 4:46 pm

There are so many good ways to build the bond portion.  Right now I'm approximating a 60% 10-year bond allocation by holding the following split in two Vanguard funds:

48% Intermediate-Term Treasury Fund (VFIUX)
12% Long-Term Treasury Fund (VUSUX)

The average maturity of VFIUX is 6 years, and VUSUX is 25 years.  A 4:1 ratio of these two funds gives an average maturity of approximately 10 years. 

I'm paying an expense ratio of 0.10% for the convenience of using funds.  I will probably eventually move to a ladder of treasury bonds. 

One could also combine cash and long treasuries to achieve the same maturity, as Pointedstick mentioned above. 
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Diversification means always having to say you're sorry.
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Desert
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Re: The Desert Portfolio

Post by Desert » Sat Jul 25, 2015 5:10 pm

One more thought on portfolios: I like to at least consider the concept of "expected returns" when comparing portfolios.  Expected return (ER) is NOT the predicted return, it's just a reasonable estimate of each component's expected return over a long period (at least 10 years).  For example, many experts think the most reasonable ER for a bond fund is its current yield.  Since we don't know if rates will rise or fall, the current yield is a reasonable estimate of ER.  For equities, some sort of valuation calculation can be done, such as the dividend discount model. 

So here's my look at ER (real) for the 30/60/10 and the 4x25, assuming 2% inflation:

Asset      ER (real)
Cash      -2%
Gold        0%
10YT      0.27%
LTT        0.96%
Equity    5.0%

Using those numbers, the ER of the 4x25 is 1.0%, and the ER of the 30/60/10 is 1.7%. 
Our greatest fear should not be of failure, but of succeeding at something that doesn't really matter. 
- D.L. Moody

Diversification means always having to say you're sorry.
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ochotona
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Re: The Desert Portfolio

Post by ochotona » Sat Jul 25, 2015 5:19 pm

The Desert portfolio frees up my thinking about the bonds. It makes me think about just holding T-bonds themselves, in maturities ranging from 1-20 years, with the average being 10 years, and forget about mark-to-market, and resale price risk due to interest rates, just hold 'em and then eat 'em. Who needs cash? Your cash is "on the way", so to speak. You can always sell some bonds early if you get into a pinch. Just keep a big enough emergency fund; balance that one off with long bonds... a mini-barbell, if you want.
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Tyler
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Re: The Desert Portfolio

Post by Tyler » Sat Jul 25, 2015 5:28 pm

For discussion purposes:  http://portfoliocharts.com/portfolio/desert-portfolio/

Desert -- Please let me know if I should change anything to most accurately represent your idea.
PortfolioCharts.com : Find a portfolio to love
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ochotona
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Re: The Desert Portfolio

Post by ochotona » Sat Jul 25, 2015 5:42 pm

We could also talk about the "Greedy Desert".

stk      bnd    gold
40% / 50% / 10%
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ozzy
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Re: The Desert Portfolio

Post by ozzy » Sat Jul 25, 2015 6:00 pm

The Desert Portfolio looks pretty solid to me.  I just ran it through PortfolioVisualizer.com and it shows a 9.06% CAGR:

Image
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