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Permanent portfolio and asset allocation

301120 Views 632 Replies 56 Participants Last post by  james4beach
I thought I'd start a new thread because it looks like we had hijacked another thread but had some material that would be good to discuss in more detail.

I've always been interested in diversification, and had wandered on my own towards a strategy that turned out to be a lot like Browne's Permanent Portfolio which is equal weights of stocks, government bonds, gold, cash. I'm also interested in reading about other diversification approaches.

Here's some data I have for a permanent portfolio, Jan 2006 to today (10+ years) using 25% XIC, 25% XGB, 25% MNT, 25% XSB. Some of the numbers are imperfect because data wasn't available for the full range.

Performance for the full 10+ years: 5.8%, worst year -2.9%
Benchmark: 50/50 XIU and XBB: 4.3%, worst year -12.6%
Annual returns:
2006: 11.5%
2007: 6.6%
2008: 2.9%
2009: 11.7%
2010: 12.3%
2011: 4.4%
2012: 3.8%
2013: -2.9%
2014: 7.5%
2015: 0.8%
2016: 3.0%

This looks pretty appealing to me. Not only is the long term performance greater, but the volatility and risk is less.

Others had the following comments to this:

I would highly recommend you read Global Asset Allocation by Meb Faber. It's pretty cheap as an e-book and he regularly has promotions on his website where you can get it for free or even cheaper.

He compares various 'famous' portfolios with different asset allocations including Browne's permanent portfolio. From what I recall, the permanent portfolio is actually the worst performing of the bunch but the ultimate conclusion is that they all beat the index over long periods and many end up actually having similar exposure once you simplify the asset classes.

Why compare what is essentially a balanced portfolio containing mix of fixed income and equity with XIU (an all equity etf)?? The comparison should be with a balanced fund or etf.

10 yrs is not really a long enough period to use to make a decision. But sometimes longer term data may be harder to find.

I don't think there is any magic allocation that will work for all times. Those are just for those who do not have time or inclination to adjust portfolios for changing times.

"I don't think there is any magic allocation that will work for all times."

Yup - depending upon the timeframe you pick, to measure that allocation performance, you could look like a hero or a goat.

You need to compare apples to apples as much as possible. I'm not a huge fan of Browne's Permanent Portfolio but that's because my approach is different. Doesn't make it right or wrong, just is :)
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Yes, I am worried james :)

Kidding aside, in terms of diversification I believe you can own the top sector holdings across our Canadian market and avoid using the Canadian index as part of your portfolio. I just wrote about this actually since I've been thinking about this stuff of late....

Then, after you own your "top-stocks" you supplement the Canadian portfolio using VTI and VXUS in your RRSP.

No bonds here but that's because I have a small pension and I consider that a big bond. So, my asset allocation is 100% stocks.
My Own Advisor, I understand how one can optimize or geographically diversify the stock part of the holdings, but I'm curious why you don't like the idea of the broader diversification outside of stocks?

You said earlier,

But analyses on diversified portfolios like the Permanent Portfolio have gone back many decades, on US data, it definitely shows strong performance with undeniably less volatility and milder down years. Isn't that very compelling? It covers a number of periods including high inflation/low inflation, high interest rates, low interest rates, and the permanent portfolio had steady performance and low volatility throughout all of this.

Pure stock allocation just can't do that. Bonds & stocks together do it to some degree -- and I often endorse balanced funds -- but why not add more diversification since it reduces volatility further?
I don't hold bonds because while bonds cushion the blow from bad equity markets, my investing time horizon is 10+ years. I feel over that time, equities will far outperform bonds. I could be wrong.

I also feel bond yields have nowhere to go but up over time, which means of course, prices will fall over time. There is little capital appreciation to be had in the decades to come from bonds. I could be wrong.

Lastly, I don't hold any bonds because I have a workplace pension plan (not gold-plated) and I consider that a big bond. This bond will provide me with, hopefully, a decent amount of fixed income in retirement.

For those key reasons, I diversify my equities for sure, but I don't hold any fixed income or bonds. I do hold some cash for as my emergency fund and we some cash for savings (i.e., house improvements, trips, etc.)

Volatility is a short-term headache.
I think folks who are into their 60s, 70s and 80s probably want some form of fixed income, but that depends, it depends on their risk tolerance and estate planning. Bonds are not for everyone.

Nobody knows the future but if I was a betting man, and I am with my portfolio apparently, the long-term returns of stocks will outpace bonds, and bonds in turn should outpace idle cash. Again, I could be wrong!

If an investor feels better owning cash, owning more bonds than stocks - that's fine. Every investor is different. The perfect portfolio only exists in hindsight.
"I think GICs can be used as the "cash" allocation of the permanent portfolio."

I think most investors would be better off with a cash wedge - so largely agree.

Cash can decline however, as can GICs over time, in terms of purchasing power (inflation).
Very extreme. That said, I'm holding more cash as time goes on. You never know....
James to me:

"My Own Advisor, I understand how one can optimize or geographically diversify the stock part of the holdings, but I'm curious why you don't like the idea of the broader diversification outside of stocks?"

I guess I don't see the big issue if a) you're willing to live with short-term volatility and b) given historically stocks beat bonds and bonds beat cash, why not have a cash wedge/buffer and keep a higher proportion of stocks?

I would be curious to see what a 50/50 split of XIU and VTI would have provided vs. the permanent portfolio over the last 10 years.

That said, it is somewhat compelling the perm. portfolio has been able to live through a number of periods managing risk well throughout. I guess for those that do not subscribe to stocks very well long-term and just want a recipe of asset allocation - this is the best they could hope for and it will likely serve them very well.

You have real life experience which is invaluable when compared to theory. No doubt withdrawing measly/just $20k from a $500k equity portfolio would have only a very small chance of running out of money for an investor. $20k per year is still a lot of money!
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Sorry, $20k per year is a lot of money. I didn't mean it was insignificant. I meant it from the perspective that it seems rather "safe".

I agree with you, people need more if no pension assuming lifestyle, location, living expenses, other factors like health.
Great. Very interesting results. I would have guessed XIU and VTI would be higher but I would take that in another 10 years :)

Thanks for that James.
I suspect no RE because of the real returns it provides long-term. I could be wrong of course, since over the last decade RE has been flying in some CDN and U.S. cities.
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