Saturday , 20 April 2019

Is A “Permanent” Portfolio For You?

Wouldn’t it be nice to not have to worry about investment decisions? The late Harry Browne, libertarian and investment adviser, thought so and proposed what he termed the Permanent Portfolio. His concept changed the way many looked at investing.

Browne’s Permanent Portfolio consisted of only 4 elements:

  1. stocks,
  2. gold,
  3. fixed income,
  4. and cash,

in equal proportions. 

Browne’s rationale was simple:

  • in deflationary periods, cash and bonds were expected to perform well,
  • stocks would perform well in more normal conditions
  • and gold would excel in inflationary conditions.

Would this hands-off strategy have worked out had you applied it? It would have performed as intended according to the Finpage.blog. Using just four IShare ETFs to represent the four equal components of the Permanent Portfolio

  • iShares Core S&P Total Market (ITOT)
  • iShares Gold Trust (IAU)
  • iShares 1-3 yr. Treasury Bond (TLT)
  • iShares 20+ yr.Treasury Bond (SHY)

they tested the outcomes:

Annual results for 12 years are shown below. The column at the right represents the overall Permanent Portfolio return.

Year Total Market (ITOT) Gold (IAU) Long Treasury (TLT) Short Treasury  (SHY) PP with
ST Treasury
2017 21.23% 11.56% 8.92% 0.27% 10.36%
2016 12.59% 8.88% 1.36% 0.75% 5.90%
2015 0.96% -11.71% -1.65% 0.45% -2.99%
2014 13.01% -0.43% 27.35% 0.48% 10.10%
2013 32.67% -27.94% -13.91% 0.23% -2.24%
2012 15.98% 8.37% 3.25% 0.31% 6.98%
2011 1.55% 5.66% 33.60% 1.43% 10.56%
2010 16.15% 27.94% 9.26% 2.22% 13.89%
2009 27.06% 23.46% -21.53% 0.54% 7.38%
2008 -36.78% 5.45% 33.77% 6.64% 2.27%
2007 5.26% 30.95% 10.14% 7.30% 13.41%
2006 15.13% 22.33% 0.85% 3.84% 10.54%

The attractiveness of the PP is its relative stability of returns. There were only two small negative returns in the twelve-year time frame.

  • Returns are reduced from what an all equity portfolio would have yielded, but so too is volatility…
  • IShare ETFs were used to construct the portfolio but other comparable ETFs could be used…

Diversification and Risk — The Key

…Diversification reflects the desire for returns but also the desire to limit risk.

  • The proper amount of diversification for an individual depends on how he is wired…Risk aversion may be high or low for a particular person. All people are risk averse to various degrees.
  • Regardless of what level or risk aversion we have, it tends to increase over our lifetime. We tend to be more tolerant of risk when young. This higher tolerance is not necessarily due to youthful exuberance, untamed optimism or foolishness. It is rational because bad outcomes at age 30 are easier to recover from than bad outcomes at age 60 or 70…

The Permanent Portfolio Was Right But Not Permanent

Comments regarding increasing risk aversion with age makes a permanent portfolio problematic…Rather than a lifetime investment strategy, I suspect Mr. Browne was intent on showing that a single portfolio allocation could work regardless of the state of the world or markets. If that were his goal, he succeeded. He showed that a well-designed simple portfolio, with minimal oversight, could work...

The above summary* of the original article  by Monty Pelerin (economicnoise.com) has been edited ([ ]), restructured and abridged (…) by Lorimer Wilson, editor of munKNEE.com, for a 48% faster – and much easier – read. (Please note that the previous sentence must be included in any article re-posting to avoid copyright infringement.)

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*The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.

 

4 comments

  1. Lorimer,

    I appreciate your using my work but think that attribution should include reference to the original author and website where it appeared in a more meaningful manner than “original article.” Please do so if you use any of my other articles.

    Thank you.

    Monty Pelerin
    http://www.economicnoise.com