Improving on the Permanent Portfolio

[MediumTex]

Clive, what would have survived WWII? That person who buried gold coins in a London garden from 1938 until 2007 did OK I suppose. Would gold coins have been taxed in 1940s UK? Perhaps South American stocks would have sailed through that period It seems to me to be a bit farfetched to hope to have an investment strategy that copes with something like WWII. I'm hoping to wriggle past Wall Street, I'm not kidding myself that the PP is up to the task of wriggling past Hitler.

Part of the art of "wriggling" is probably knowing when it's time to emigrate to a different location. 

OTOH, wriggling in place is not unheard of.  The Swiss seemed to have wriggled past Hitler.

[moda0306]

So there wasn't a 69% inflation of the Krona vs Euro, but 69% inflation against the Icelandic Central Bank's inflation adjustment?

That seems insane... it just doesn't seem right.

If all you owned was 25% of your portfolio that beat the dollar by 4.3% by the end of the year, you'd still have higher than 25% of your purchasing power, even if all others went to zero (which these didn't), wouldn't you?

So 76% is almost impossible in my estimation... gold beat inflation in 2008 in the dollar, but lets call it even... that'd still leave you with 25% of your purchasing power, and then you add in the other assets at their admittedly depressed value and you should have well over 24% of your purchasing power.

[MediumTex]

Any time we talk about Iceland I think it's important to remember that the total population of Iceland is only a little over 300,000 people.  It's not a diversified economy and it's really just an economic blip in the world economy.

I don't know if too many inferences about the PP can be drawn from how it would have done in Iceland. 

I would say that ANY investor in a country with only 300,000 people with an economy heavily tilted toward the financial services industry probably needs to have broader equity and bond exposure in order to enjoy the safety that the PP can provide.

[pershing83]

Could someone post the HB PP YTD results. PRPFX was plus 1% last night.

Many thanks and Merry Christmas to all.....

[MediumTex]

Could someone post the HB PP YTD results. PRPFX was plus 1% last night.

Many thanks and Merry Christmas to all.....

10-12%.

[Indices]

Iceland has more recent/easy available data. What about other crises then.

How would a Confederate PP have held up, or Russia, Argentina, Danish 1813 bankruptcy ...etc... there's many many to choose from - history is littered with such crises - from big to small.

Germany 1918-24 hyperinflation looks to me as though rebalancing out of gold into an ever declining currency wouldn't have been good.

The British 1825 crisis as another instance saw LTT's and gold remaining more or less level when inflation soared something like +35% over a couple of years. Stocks collapsed -66%. A PP asset allocation lost around -50% real assuming no rebalances - maybe even worse if rebalanced.

That's just 2 major's, 1 minor where potentially the PP didn't work as well as intended.

How safe is a 100% Euro PP at present? Would you honestly bet 100% of your life savings on it protecting you if you lived in Euroland?

Yes, but compare it to other investors at the time who were 100 percent stocks, 100 percent bonds etc. No one said the PP was invincible. It just suffers less than any other portfolio when SHTF.

[D1984]

An Icelandic PP saved up for a trip to Disney Florida would have needed to be three times larger after the 2008 Icelandic event than before the event. So you could interpret it as a -66.6% event.

It depends upon how you define 'well over 24%'. 33.3 / 24 = 38.75% higher in percentage terms - but in an actual Disney Florida trip terms perhaps far from being 'well'.

But unless all you consumed was trips to Disney World (or for that matter, if 100% of what you consumed/bought was imported and paid for in USD or Euros) then your personal inflation rate (i.e. inflation as it actually affected you) or personal loss of purchasing would be far less than 66% or 75%. I know Iceland did have to import a lot of what it used for fuel (imported oil/gasoline/Diesel etc) and food (with the exception of seafood and meat) but surely the average Icelander did purchase some goods/services that were made locally (housing, electricity from geothermal energy, any consumer good or service that used Icelandic labor to produce/ship within Iceland/sell seeing as how labor was still priced in Krona i.e. wages of workers were still paid in Iceland's currency, not in dollars or Euros).

This may be why Iceland's government said inflation was only 18% (if foreign-produced goods and services only made up a small share of the average Icelander's "basket" of goods and services than inflation could be less than the 66 or 75% that it would be if the "CPI basket" was made up of 100% imported items). It is also possible the Icelandic government fudged the CPI/inflation figures (using hedonic adjustments, not weighting food/fuel/imports as much as they should have been weighted, "substituting" cheaper items in the basket, etc)...but if such was the case and inflation was actually double the "official" figure and was thus 36% it took 136 Kronur to buy what 100 Kronur used to; in that instance you'd still be ahead because your PP was now worth 146 Kronur since the PP had a 46% gain. Even if inflation was TRIPLE the official figure and was really 54% you would still only have a roughly 8% real (inflation-adjusted) loss. An 8% loss isn't great but it isn't much worse in real terms than what a US PP'er would have gotten in 1994 and is better in real terms than what a PP holder would have earned in 1969 or 1981 (or for that matter, what a FTM 70/30 portfolio holder would have earned in 2008).

Any time we talk about Iceland I think it's important to remember that the total population of Iceland is only a little over 300,000 people.  It's not a diversified economy and it's really just an economic blip in the world economy.

I don't know if too many inferences about the PP can be drawn from how it would have done in Iceland.

I would say that ANY investor in a country with only 300,000 people with an economy heavily tilted toward the financial services industry probably needs to have broader equity and bond exposure in order to enjoy the safety that the PP can provide.

A very astute set of observations. Iceland was an extreme case if ever there was one. At the height of the bubble in 2007 the Icelandic stock market was worth over twice the country's GDP and the banks had borrowed tens of billions more abroad so that total leverage (money owed and assets) owned was probably 5-6 times the size of Iceland's economy. One also has top consider that the biggest three banks (Landsbanki, Kaupthing, and Glitnir) alone made up almost 75% of the total Iceland OMX 15 (Iceland's main stock index that plunged over 90% during the crisis) capitalization and another bank, investment bank, and a combined insurer/bank made up an additional 13 percent or so of market cap and you get a stock market made up (in cap-weighted terms) of over 85% FIRE sector industries in a country that had leveraged itself at six times its total economic output and (incidentally, in doing so, had borrowed money from more non-Icelandic depositors/bondholders than there were actual citizens of Iceland itself); this was bound to end in tears and it did in 2008. Almost nothing else that made up any significant portion of Iceland's real (non-casino FIRE...ya know, the one that actually produces things) economy (fisheries and fish products, food, geothermal energy, energy-intensive industries like aluminum smelting, biotech and health sciences, tourism and airlines, etc) was represented by much market capitalization at all (maybe about 13% of the OMX 15 in total by cap weight vs 86% for FIRE).

It would be interesting to see how an equal weighted Iceland OMX 15 (I know there weren't any equal weighted Knonur-denominated Icelandic ETFs then and as far as I know there aren't any now, Kronur-denominated or otherwise but assume there were) would have done in 2008; I know it would have been clobbered (what stock market wasn't in 08? ) but with all six big banks above-which all turned out to be total losses or nationalizations-making up "only" about 40% of the equal weighted index it probably wouldn't provided a 90% + loss and any portfolio that held Icelandic stocks (including an Icelandic PP) wouldn't have done quite as badly, I suspect (for proof look at how the Rydex Equal Weight 500 did in 2000-2002 vs the tech heavy cap-weighted S&P 500). For that matter a truly representative Iceland stock index would not be just 15 stocks any more than the 30 stocks of the Dow are the most fairly representative US market index...I wonder how an equal weighted index (or even a cap-weighted index with a limit...an example of such an index is the NASDAQ where AAPL is only allowed to be a certain percentage even if by cap weight it would be more than that percentage) of Iceland's top 50 or top 100 stocks would have fared in 2008-09?

Owning a few Euro-denominated German bunds (in place of some of the Icelandic LTTs), a hard currency fund (MERKX) or US dollars, Swiss Francs, or Japanese yen in place of maybe 10% of the cash, or even owning some of the 25% stock portion as an all-world stock index (maybe 20% world stocks/80% Icelandic stocks for the stock portion of the Iceland PP...all stock markets sucked in 2008 but in this instance it would be a matter of RELATIVELY bad i.e. a case of "the cleanest dirty shirt" since no market that year did as badly as Iceland's as far as I know) might also help, in addition to owning some of the Icelandic stock allocation as an equal weighted index as mentioned above.

1934.00   -0.37%
1935.00   -2.74%
1936.00   -1.29%
1937.00   -2.73%
1938.00   2.91%
1939.00   0.03%
1940.00   -0.67%
1941.00   -9.99%
1942.00   -8.71%
1943.00   -2.58%
1944.00   -1.92%
1945.00   -1.87%
1946.00   -17.75%
1947.00   -8.60%
1948.00   -2.09%
1949.00   3.25%
1950.00   -4.89%
1951.00   -4.76%

MachineGhost: The above figures...are they just for cash (t-bills) from 1934-1951 or are they for the 4x25 HBPP backtested for those years? If the latter is the case you might want to recheck some numbers...a 4x25 PP as I calculated it gave positive returns in real terms in 1935, 1936, 1938, 1943, 1944, 1945, 1949, and 1950 and lost rather less than 8.71% in real terms in 1942. If they are the former (cash) then why did Clive use them to prove the HBPP as a whole had a 50% drawdown when it was only for cash?

[pershing83]

Given the answer to my query, YTD return for the HB classic.... how, or better yet, what equities are held? That is, when 10-12% return on the PP is given what is the equity/equities held? SPY or Windsor II (as per HB suggested back in '99)?

Though LTT performed well, gold, has fallen badly and stocks YTD are not stellar. So perhaps a comment on the 10% returnen, how achieved and what about the dollar?

TIA

[D1984]

Given the answer to my query, YTD return for the HB classic.... how, or better yet, what equities are held? That is, when 10-12% return on the PP is given what is the equity/equities held? SPY or Windsor II (as per HB suggested back in '99)?

Though LTT performed well, gold, has fallen badly and stocks YTD are not stellar. So perhaps a comment on the 10% returnen, how achieved and what about the dollar?

LTT (TLT) is up around 29% this year

Stocks (total stock market...VTI or VTSMX) is down around 3.3% YTD

Gold is actually up about 14.6% on the year; it has had some bad days recently but until early September of this year it sparkled (no pun intended)

Cash is up about 1.4% for the year.

So:  (29% + -3.3% + 14.6% + 1.4% ) /4 = around 10.5%

If you hit any rebalance bands in late September/early October when stocks were in the toilet and LTTs were at their peak for the year you might even have a higher return than the above.

[stone]

Clive, my persistant worry would be that if the "economic condition" is "panicy darting hither and thither", then decision moose might see a string of -14% stop outs. It might be in cash then go to LTT just as they plumet, then go to gold just as that plumets and so on.
I sort of see the PP as a toyota pick up. It might not be the sleekest most efficient vehicle, but it will get you from A to B regardless of how rocky the road.

[Clive]

...

[Bonafede]

It's been awhile since I've last posted, and this thread caught my attention. I'm still constantly tempted to try and 'improve' my portfolio, whether it be the PP or a VP. For awhile I played around with the timing methods (i.e. Decision Moose, SMA, etc.). However, my conclusion on these techniques, while they may be effective in managing risk and maybe even 'boosting' returns....I simply don't have the energy to do these timing models.

I've come to realize I want a portfolio that I'm comfortable with, which I can periodically monitor, and make tweaks as necessary. The other methods require a more proactive approach - and while right for some - is not something I'm looking for, nor have the time for.

Maybe I'm wrong, and I'd be open to hearing feedback on how others manage these systems so they don't take a lot of time. Otherwise, that's just my two cents on why a PP/VP might be a good approach.

[Reub]

As I've noted elsewhere, using Decision Moose might be a good way of determining when and if to rebalance your overall HBPP portfolio.

[MachineGhost]

This seems to me to be an argument for a Global HBPP rather than concentrating it all in the local currency value.  Yet, none of these countries were the world's reserve currency which foreigners do prefer to hold as a safe haven.  So what is our realistic option beyond fiddling with asset class tilts?

MG

Consider another of the PP's potential weakness - rebalancing - and an event such as has occurred in the last < a single lifetime of the German hyperinflation - where 25% of the asset that might have retained purchase power (gold) would have been repeatedly reduced (sold) to add to losing assets. It only takes a couple of such rebalances to potentially have reduced that purchase power down to levels little different to had no such gold been held.

On the scale of a single lifetime, such events are quite common. The most recent being Iceland 2008 where a PP would have lost -75% of its USD purchase power.

[MachineGhost]

I've always had an issue with how HB simplisticly characterized the four economic conditions for the PP.  Increasingly, I also get annoyed when people us the terms "inflation" and "deflation" in general usage incorrectly.  The four economic conditions correctly defined for the HBPP are:

Middle-Right of a bell curve (Equity):
Inflation/Reflation

Middle-Left of a bell curve (LT Fixed Income):
Disinflation/Revaluation

Left Tail of a bell curve (ST Fixed Income):
Deflation <-- Solvency Crisis <-- Liquidity Crisis <-- Inverted Yield Curve

Right Tail of a bell curve (Real Assets):
Negative Real Rates --> Depreciation --> Devaluation --> Hyperinflation

MG

[MachineGhost]

I thought you were pulling my leg.  When did the HBPP experience a -50% drawdown in real terms and what was the cause?

MG

Yes, but compare it to other investors at the time who were 100 percent stocks, 100 percent bonds etc. No one said the PP was invincible. It just suffers less than any other portfolio when SHTF.

As a possible guide, a UK PP since 1800 has seen drawdowns in real terms of more than -50%, flat periods of less than 0% real for extended periods of time (1936 to 1971) and since 1976 has averaged above its longer term 2% real trendline - giving a possible illusion of better rewards than what might actually be achieved.

There are all bond investments that might have achieved similar rewards potentially with less risk - perhaps such as if TIPS had been available and the yield curve rode.

I highlight the risks Indices not to be a troll, but just to highlight the potential risks. There are some on these boards that appear to expect consistent good rewards with apparent expectations of very low risk that are potentially disproportionate to the actual risks.

[AdamA]

I've always had an issue with how HB simplisticly characterized the four economic conditions for the PP.  Increasingly, I also get annoyed when people us the terms "inflation" and "deflation" in general usage incorrectly.  The four economic conditions correctly defined for the HBPP are:

Middle-Right of a bell curve (Equity):
Inflation/Reflation

Middle-Left of a bell curve (LT Fixed Income):
Disinflation/Revaluation

Left Tail of a bell curve (ST Fixed Income):
Deflation <-- Solvency Crisis <-- Liquidity Crisis <-- Inverted Yield Curve

Right Tail of a bell curve (Real Assets):
Negative Real Rates --> Depreciation --> Devaluation --> Hyperinflation

MG

Why do you dislike the definitions used by HB?

[stone]

MachineGhost, what are the axes of your bell curve?

[Bonafede]

This seems to me to be an argument for a Global HBPP rather than concentrating it all in the local currency value.  Yet, none of these countries were the world's reserve currency which foreigners do prefer to hold as a safe haven.  So what is our realistic option beyond fiddling with asset class tilts?

Perhaps consider the PP as an adolescent rather than being fully capable of caring for itself.

Weekly reviews with for the most part little action action being required other than a casual glance maybe.

Whilst you might leave a teen in charge of the family home for a week relatively unscathed, doing so for a year at a time is more likely to result in total devastation

Weekly review with a degree of cognitive analysis - perhaps for instance moving cash across multiple currencies if the domestic currency is starting to look a bit shaky, and/or perhaps being a bit more selective about rebalance timing rather than a line drawn in the sand (does for instance reducing out of rising gold to add to sinking stocks look appropriate at the time), might mean the difference between a large loss of total liquid wealth being encountered compared to a less extreme loss.

If you've invested a substantial amount of your wealth in the PP, it seems only reasonable to check up on that on a relatively frequent basis. Even if its just to ensure that your on-line brokerage still has the funds that you invested and they haven't been stolen or lost in some kind of management error.

Agree we can't completely leave the PP portfolio, or any portfolio alone. Prudence demands that we periodically re-balance and make adjustments. However, the timing models in my opinion, while very attractive and may even slightly boost returns, they really demand too much effort.

I worry for example using the 10 Month SMA model, as mechanical as this and others are, what if I miss a day or two to execute the trade? of for that matter, what if I miss an entire month? Worse still, if I die and then my spouse or survivors would inherit the portfolio, and hence responsibility for following the model and making the transactions?

We all need a long term financial plan, of which your spouse needs to fully be on board with an understand. All the same, I'm realizing more and more that simplicity wins out mechanically, personally, and perhaps even financially.

Maybe someone else has a thought on this? I'm an active investor, but still want to keep it simple and not meddle too much....despite my ever desire to 'boost' returns through one form or another.

Thoughts?

[Bonafede]

Decision Moose history goes back to 1996. Dropping yearly DM figures into Simba's spreadsheet (the version I have runs up to 2009)

Clive, based on this and other posts, it seems you are a fan of Decision Moose. Is this accurate? If so, why?

[stone]

MachineGhost, what are the axes of your bell curve?

Couldn't the axis simply be determined from what the market as a whole was saying

I was just trying to understand why/how MachineGhost was saying that the four economic conditions could be viewed as a bell curve and why/how he was able to arrange them in a sequence as he apparently did. It sounds as MachineGhost was seeing some connection or pattern that might help in comprehending those conditions. To my mind the four conditions all seem as different from all of the others and so it makes no sense to view them as a left to right progression along an axis. There then needs to be a y axis in order to get to MachineGhost's bell curve? Was that y axis probability frequency If so isn't that largely a historical accident and would be very different if you compared say Japan and Brazil?
Putting the four along a line might imply that to get from extreme left to extreme right there would need to be a progression via the other conditions but that obviously isn't the case. A transition could happen between any of the four.

[FarmerD]

I’ve always viewed the HBPP asset classes in a simpler way (maybe because I’m a simple person) based on 3 inflation phases:  deflation/depression, low to medium inflation rate, high/hyper inflation.  For investment purposes, at any time we are in one of the three phases. Investors may of course anticipate a change in the phase we’re in which may affect where everyone invests.  Here’s the best/worst investments to make in each environment.

Deflation/depression                       low/medium inflation            high/hyperinflation
Long term bonds (best)                   stocks (best)                             gold (best)
Gold/cash                                     Long Term Bonds/cash                 stocks                
Stocks (worst)                             Gold (worst)                             Long Term Bonds/cash (worst)

This symmetry of asset returns is the reason the HBPP is appropriate all weather investment strategy.

The cash portion of the HBPP allows you to have funds available to rebalance the three main components (bonds, stocks, gold) and to provide some stability to portfolio returns  though cash returns probably will trail inflation in most circumstances.  IMO cash can’t be considered equal to the other three components since cash rarely if ever saves the entire portfolio from big losses.   Yes, cash has been the best performing asset 4 times since 1972 but arguably only one time did it save huge losses to the portfolio.

[MediumTex]

FarmerD,

I like your analysis, but how would you account for the 2008-2011 period in which we were in depression-like conditions and inflation certainly wasn't very high, but gold was the best peforming asset in the PP?

I think that you have to fit the real interest rates idea into the analysis of the PP assets.  Gold is never going to perform well in a positive real interest rate environment, but the last few years it has performed exceptionally well in a negative real interest rate environment, even though actual inflation was pretty low (which is what one woud expect in a deleveraring cycle in which there is downward pressure on the prices of many assets).

[clacy]

FarmerD,

I like your analysis, but how would you account for the 2008-2011 period in which we were in depression-like conditions and inflation certainly wasn't very high, but gold was the best peforming asset in the PP?

I think that you have to fit the real interest rates idea into the analysis of the PP assets.  Gold is never going to perform well in a positive real interest rate environment, but the last few years it has performed exceptionally well in a negative real interest rate environment, even though actual inflation was pretty low (which is what one woud expect in a deleveraring cycle in which there is downward pressure on the prices of many assets).

I tend to think there are way too many economic environments to boil it down to 3, or 4 in the case of Harry Browne.  That is why economists incorrect so frequently.  There are just too many factors at work to diagnose, in real time, where the economy stands not to mention what it will do in the future. 

But that is why the PP works so well, IMO.  Because at the end of the day, the PP uses the 4 cornerstones of asset classes.  At any given time, money has to be resting somewhere or flowing into something.  For the most part, regardless of what sort of economic scenario is out there, 1-2 of these cornerstones will become attractive over the medium term and that is what will keep the portfolio moving north.

[FarmerD]

FarmerD,

I like your analysis, but how would you account for the 2008-2011 period in which we were in depression-like conditions and inflation certainly wasn't very high, but gold was the best peforming asset in the PP?

I think the main reason gold did well in 2008-current deflationary environment because investors anticipated the explosion in the money supply would result in high inflation down the road.  That's why I wrote "Investors may of course anticipate a change in the phase we’re in which may affect where everyone invests."  And even if the depression like situation continued, well, gold does fairly well in a deflationary environment anyway.

I realize the simple model I laid out won't satisfy most people.  People want exact descriptions of economics/investing. However, I consciously try to boil my economics understanding and investment strategies into elemental forms.  Whenever I explore basic concepts and try to be more precise/exacting, I invariably fall into the trap of data mining or pareidolia, so I fight that urge. Most investment pros you hear on CNBC easily find precise trends and dollar signs in the clouds.  That's why I don't much attention to them.