Permanent portfolio and asset allocation

301085 Views 632 Replies 56 Participants Last post by james4beach, 7 d ago

james4beach

Discussion Starter · Mar 21, 2016

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:

Nerd Investor said:
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.

agent99 said:
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.

My Own Advisor said:
"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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james4beach

Discussion Starter · #541 · Feb 18, 2022

2

The Permanent Portfolio is looking pretty good this year so far. In the following charts I'm using this asset allocation I posted earlier, a modified Permanent Portfolio. I'm comparing to VBAL and both have a similar mix of equities, including Canadian.

Performance of P.P. and VBAL are both starting at $100 this year.

Notice that P.P. has much less volatility and is more stable. To highlight this reduced volatility, I also charted the daily absolute % movement to show the magnitude of daily changes in the portfolios. The P.P. really reduces volatility significantly, appears to be about about 40% less volatility.

Rectangle Azure Slope Plot Font

Performance really isn't the main point though. Look at the difference in volatility. The magnitude of daily % changes, below, shows 40% less volatility in the P.P.

Now keep in mind that both portfolios have similar long-term performance expectations, though VBAL may return a bit higher. The P.P. gets you virtually the same long-term performance with significantly less volatility, more stability.

Rectangle Slope Font Plot Parallel

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Covariance

· #542 · Feb 18, 2022

james4beach said:
The Permanent Portfolio is looking pretty good this year so far. In the following charts I'm using this asset allocation I posted earlier, a modified Permanent Portfolio. I'm comparing to VBAL and both have a similar mix of equities, including Canadian.

Performance of P.P. and VBAL are both starting at $100 this year.

Notice that P.P. has much less volatility and is more stable. To highlight this reduced volatility, I also charted the daily absolute % movement to show the magnitude of daily changes in the portfolios. The P.P. really reduces volatility significantly, appears to be about about 40% less volatility.

View attachment 22817

Performance really isn't the main point though. Look at the difference in volatility. The magnitude of daily % changes, below, shows 40% less volatility in the P.P.

Now keep in mind that both portfolios have similar long-term performance expectations, though VBAL may return a bit higher. The P.P. gets you virtually the same long-term performance with significantly less volatility, more stability.

View attachment 22818

Quite interesting. Can you run the historical returns for the period Dec 2015 through Dec 2018? And show up/down vol separately? The above data series is quite short and it would interesting to see how these portfolios did in the last tightening cycle. Also whether the daily returns show skew over a longer time series.

james4beach

Discussion Starter · #543 · Feb 19, 2022 (Edited)

Covariance said:
Quite interesting. Can you run the historical returns for the period Dec 2015 through Dec 2018? And show up/down vol separately? The above data series is quite short and it would interesting to see how these portfolios did in the last tightening cycle. Also whether the daily returns show skew over a longer time series.

I can't easily pull up data like that, but given your user name, you are probably familiar with why this works: the covariance between these assets (stocks, bonds, gold) shows low correlations. So the portfolio of stocks + bonds + gold is quite well diversified. The theory says, this should have lower portfolio volatility.

Edited: add a longer back-test

I was able to extend this back-test to 2013 by using XWD for world equities, which isn't as good a fund but it should get the idea across.

Unfortunately it doesn't have the daily granularity, but this uses monthly calculations of volatility - standard deviation. Compared to a benchmark 60/40 portfolio using XBAL, the P.P. has 14% less volatility. That's not as huge an advantage as I expected. But if you look at the Sortino ratio, which does a good job at evaluating risk-adjusted returns, you'll see that P.P. does give quite a boost over XBAL.

You can also look at drawdowns of both portfolios, under the Drawdowns tab. That also illustrates the improved safety of the P.P.

But risk-adjusted returns of both the balanced fund and P.P. are quite good. So a person can't go wrong with a good 60/40 portfolio, I think I'd be perfectly happy in XBAL or VBAL too. They have similar long term performance with the P.P. although it seems like the P.P. may be a wee bit safer.

Rectangle Slope Plot Font Water

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Covariance

· #544 · Feb 19, 2022

james4beach said:
I can't easily pull up data like that, but given your user name, you are probably familiar with why this works: the covariance between these assets (stocks, bonds, gold) shows low correlations. So the portfolio of stocks + bonds + gold is quite well diversified. The theory says, this should have lower portfolio volatility.

Edited: add a longer back-test

I was able to extend this back-test to 2013 by using XWD for world equities, which isn't as good a fund but it should get the idea across.

Unfortunately it doesn't have the daily granularity, but this uses monthly calculations of volatility - standard deviation. Compared to a benchmark 60/40 portfolio using XBAL, the P.P. has 14% less volatility. That's not as huge an advantage as I expected. But if you look at the Sortino ratio, which does a good job at evaluating risk-adjusted returns, you'll see that P.P. does give quite a boost over XBAL.

You can also look at drawdowns of both portfolios, under the Drawdowns tab. That also illustrates the improved safety of the P.P.

But risk-adjusted returns of both the balanced fund and P.P. are quite good. So a person can't go wrong with a good 60/40 portfolio, I think I'd be perfectly happy in XBAL or VBAL too. They have similar long term performance with the P.P. although it seems like the P.P. may be a wee bit safer.

View attachment 22829

Thanks. Wasn’t meant to be a challenge. Just thought you had the tool to easily perform the analysis. Your portfolio is quite interesting. Gold as a store of wealth or hedge in particular. I’m intrigued as to whether the correlation is symmetrical in both directions. Will dig into this when able.

james4beach

Discussion Starter · #545 · Feb 19, 2022

Covariance said:
Thanks. Wasn’t meant to be a challenge. Just thought you had the tool to easily perform the analysis. Your portfolio is quite interesting. Gold as a store of wealth or hedge in particular. I’m intrigued as to whether the correlation is symmetrical in both directions. Will dig into this when able.

Oh I didn't take any offence, I would happily produce those stats if I could. I actually had to mine Yahoo Finance for daily securities prices, not very easy. It's a good question about the symmetry. I wonder too.

james4beach

Discussion Starter · #546 · Feb 19, 2022

Covariance said:
And show up/down vol separately? The above data series is quite short and it would interesting to see how these portfolios did in the last tightening cycle

What do you think is a good way to illustrate this? What kind of chart can I use?

I could make one pair of histograms for up movements, and then another pair for down movements. That would let us see the difference in the portfolios on "good days" and separately on "bad days".

Is that what you're thinking? Then I could say there was X% reduction in vol on good days, but Y% reduction in vol on bad days.

Or who knows, maybe I will find that it's asymmetric and it doesn't help me much on the bad days. I'm really curious now!

Covariance

· #547 · Feb 19, 2022

james4beach said:
What do you think is a good way to illustrate this? What kind of chart can I use?

I could make one pair of histograms for up movements, and then another pair for down movements. That would let us see the difference in the portfolios on "good days" and separately on "bad days".

Is that what you're thinking? Then I could say there was X% reduction in vol on good days, but Y% reduction in vol on bad days.

Or who knows, maybe I will find that it's asymmetric and it doesn't help me much on the bad days. I'm really curious now!

I don’t think I would use a chart. Rather I would just determine the correlation coefficients to start. Specifically, if we split the time series into up days for the equity index (asset) and down days. For the data series made up of “up days” what is the correlation coefficient with the price movement of each of the other assets. Repeat the same exercise for the down days of the equity asset.

Generally data is not normal as most assume for simplicity and there is skew, kertosis. There is value in knowing if the correlations provide increased/decreased protection in down markets. Or alternatively protection in down markets but also upside in up markets. Hope this makes sense.

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james4beach

Discussion Starter · #548 · Mar 2, 2022

The Permanent Portfolio continues to hold up very well this year even as the war breaks out.

The PP is only down 2% year to date. In comparison, XBAL is down 5% and VCNS down 4%

Any of these portfolios should be reasonably safe if turmoil continues.

hfp75

· #549 · Mar 5, 2022

I am following a close version of the PP and I can tell you that Y2D I am -1.27% from my Dec 31, 2021 closing value. This year I have been down most of the time, my deviations are sometimes swingy but that is not due to the PP/PP+ but due to my holding +/- 4% Crypto. Crypto is very volatile and has an easy 2x + variance to any other asset class. Initially (last year) these large moves were stressful to me but now I am accepting that Crypto is like a yo-yo.

I am a believer in the concept with Crypto/digital currencies (defi), but am not convinced in 5-10+ years there wont be something more popular (in defo/crypto) than BTC (a new coin) that will render everything of today as valueless. Its a definite possibility. I see the rational in defi. One thing to consider is that digital currencies have no buisness fundamentals to really establish values, and are really just driven by popularity, just like High School kids being popular. Its all just a bit fickle.

The PP was designed well before this stuff existed and thus what, if at all is an appropriate allocation ? 0-4% ? seems to be what I am reading most of the time. The real question to me is should it be considered as part of the Cash/Short duration allocation, or a Commodity/Gold ? Right now I have my allocation in with the Gold, I have debated splitting it as half cash and half gold.... we are talking about a small deviation in target allocations here, so this debate in my head is not a deal breaker, or game changer.

To truly answer this we need to debate and find a consensus on weather Crypto is a commodity or currency.... Hmmm not meaning to stir the pot... there is a thread on this I should post a link but dont have time to search and read to make sure I linked the right one.

Either way I am happy with the PP+ that I am running. If the world turmoil increases and financial stress intensifies, I should easily outperform most other investors - even if my return this year is neg.

Yes I am coining the PP+ as a modified version of the PP. If you write PP your following Mr. Browns proper recommendations/allocations, I however am a bit different and thus the +.

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james4beach

Discussion Starter · #550 · Mar 5, 2022

2

hfp75 said:
The PP was designed well before this stuff existed and thus what, if at all is an appropriate allocation ? 0-4% ? seems to be what I am reading most of the time. The real question to me is should it be considered as part of the Cash/Short duration allocation, or a Commodity/Gold

I don't know which coin(s) you're holding but I think for classification purposes, it's most useful to look at correlations with the other asset classes. Then you can include it with whichever it resembles the most.

Crypto coins are very volatile so it's going to be either "gold" or "stocks" as far as classification.

Here is a 1 year comparison of BTC versus gold. I would say this is not a very good match

Product Rectangle Purple Slope Plot

And here is BTC versus stocks (VT). To me this looks like a stronger correlation.

So I suggest categorizing your crypto coins as part of the stock allocation of the PP.

Rectangle Slope Purple Plot Organism

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m3s

· #551 · Mar 5, 2022

hfp75 said:
To truly answer this we need to debate and find a consensus on weather Crypto is a commodity or currency.... Hmmm not meaning to stir the pot... there is a thread on this I should post a link but dont have time to search and read to make sure I linked the right one.

Either way I am happy with the PP+ that I am running. If the world turmoil increases and financial stress intensifies, I should easily outperform most other investors - even if my return this year is neg.

Many consider BTC to be like gold (hard backed money like pre 1971 gold standard) It's the only one with a fully decentralized network and a preprogrammed mathematical monetary policy

The rest of crypto are very different beasts that can be everything and anything. DeFi is basically automatized money markets with very inflationary promo "yield" tokens. Ethereum doesn't have a hard limit to its supply or a set inflation policy. A lot of it is more like venture capital tech stocks before they went public. Stablecoins are more like cash because they are pegged to fiat and often backed by T-bills or other crypto assets like BTC. There are already derivatives, options and everything else you can imagine.

BTC could decouple based on its scarcity. Just like gold though if people don't hold it themselves, central exchanges rehypothecate it. Everything else is more like private equity or cash

MrBlackhill

· #552 · Mar 6, 2022

hfp75 said:
The PP was designed well before this stuff existed and thus what, if at all is an appropriate allocation ? 0-4% ? seems to be what I am reading most of the time.

Lazy Portfolio tracks stats about many different portfolios and recently they decided to make a few versions of the most popular portfolios but "with Bitcoin" and they basically add 2% Bitcoin.

They decided to treat it as a commodity so instead of PP with 25% gold, it's PP with 23% gold and 2% Bitcoin.

Allocation - Lazy Portfolio ETF

Build the Harry Browne Permanent Portfolio with Bitcoin with 5 ETFs. Follow its asset allocation and find out the historical returns of the portfolio.

www.lazyportfolioetf.com

www.lazyportfolioetf.com

They've also made the Golden Butterfly with Bitcoin, the All Weather with Bitcoin and the 60/40 with Bitcoin.

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hfp75

· #553 · Mar 23, 2022

Well,

I'll add that my investing portfolio is -1.5% Y2D and I am pleased - its mostly PP+. If I quickly compare to :

MAW104 -7.41 (a fund that I respect for its management and performance - albeit this year its behind, I think they have a lower exposure to energy, so understandable and explainable)
RBF460 -5.55 (my proxy for the major banks balanced funds where 50+% of Canada has its money)
RBF1350 -5.52 (the discount performance version of the big banks balanced funds)
VBAL -4.72 (the DIY, couch potato version with nothing active and all basic indexes - a must have comparison)
(from Morningstar - as of 03.22.22)

All of the above funds I like to use for comparisons (I have used all in the past & might use again except the RBF460). Here's the thing, I am 3.22-5.91% ahead of this group. So, despite sitting on a small loss so far, I am happy cause I see lots of others are down 4.57% (average from the spread) more than me.

Long and short, a loss can still be good/acceptable performance.

I'll say that the PP also changes the day to day performance and this year gold (CGL.C) is up 4.54% - cant seem to find a quick # for MNT but it wont be that much different than CGL.C.

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james4beach

Discussion Starter · #554 · Mar 23, 2022

hfp75 said:
I'll add that my investing portfolio is -1.5% Y2D and I am pleased - its mostly PP+.

That's pretty amazing, hardly any change while just about everything has been tanking or at least swinging around like crazy.

That's the whole reason I wanted to use this portfolio. It just creates a smoother experience, and personally I don't like seeing my net worth on a crazy roller coaster ride.

Also keep in mind that the PP still gets drawdowns so it's completely normal to see a period of losses. I was just looking at some historical stats yesterday, and 5% drawdowns are pretty frequent. However over a period like 24 months it's highly unusual to see a negative result.

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hfp75

· #555 · Mar 24, 2022

I'll add that this year we have been adding cash into our accounts and have erased the -1.5%. So, there is a loss that is floating there but due to our contributions we are roughly holding at our Jan 1 starting point - 'losses' are expected with investing and the PP is shining. We have more investing to do still and should add another 1.5-2% this year so our Y2Y (at close) should still be up even though there is a loss.

Plus, we are buying more of the cheaper (down market) items.

PP = diversify, diversify, diversify....

librahall

· #556 · Apr 12, 2022

Hello everyone. Hope you all doing well. I'd like to hear your advice on the following:

1) Long term bonds ETFs(ZFL/ZTL) have down 15-20% YTD. Is it a good time to rebalance my PP by selling stocks for bonds now?

2) I switched half of my ZFL to ZTL for better hedging to my large portion of US stock ETFs and tax loss harvesting in last December. But now only find a higher loss than ZFL. I am a little regret doing that trade.

3) How to easily track YTD performance if a) I have investment across multiple platforms and b) some tickers(like ZTL.TO) can't be found in Google Finance/Spreadsheet.

Thanks a lot in advance.

hfp75

· #557 · Apr 25, 2022

As gold is in many portfolios, and there is a following in this forum for sure, there are options CLG.C, MNT, ect,ect.... Today MNT is trading at a -4.25% relative to underlying value, or what we call a discount. A 4.25% discount is a descent time to buy this product..... just a heads up.

Current NAV on MNT is $24.39 but the actual value of a unit is $25.47

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hfp75

· #558 · Apr 26, 2022

Well,

I'll add that with markets in flux, I am now -4.25%, this is a lot.... however just to compare, RBF460 is -9.2%. Looks like vs most Canadians my volatility is < 1/2.

james4beach

Discussion Starter · #559 · Apr 26, 2022

hfp75 said:
I'll add that with markets in flux, I am now -4.25%, this is a lot.... however just to compare, RBF460 is -9.2%. Looks like vs most Canadians my volatility is < 1/2.

Yeah I'm also seeing a reasonably good year (relatively speaking) in my allocation which is similar to the Permanent Portfolio.

Looks like I'm down 5.5% so far YTD. In comparison,
VCNS is down 9.0%
VBAL is down 9.1%
XAW is down 11.7%
Even the Mawer Balanced fund is down 10.8%

In reality I'm doing even better than -5.5% because I hold some GICs along with my bonds, which takes away the bond volatility.

james4beach

Discussion Starter · #560 · Apr 26, 2022

The historical maximum drawdown (worst case seen) in the Permanent Portfolio is in the 15% - 20% zone.

5% drawdowns are very frequent. But this is from monthly historical data, which hides the intramonth volatility.

My ROUGH estimate, (adjusting for the monthly vs daily figures), I think that a 10% drawdown is pretty routine and will be seen once in a while. It should not surprise any of us to see a 10% decline this year even in this conservative portfolio.

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