A.I.M. Users Bulletin Board

[ls7550]

I was thinking that the shares of PRPFX (a version of Permanent Portfolio) could be used as a decent benchmark for someone's own investing activities

Hi Tom.

I tend to look at each of nominal, real (after inflation) and relative to 'risk-free' rewards. To do so I construct a nominal gain index, starting at 1.0 and multiply by 1 + percentage (total) gain. If the gain is +11% one year, -4% the next for instance

1.0
1.11
1.0656

Doing the same for both inflation and risk-free allows you to divide that running investment gain by inflation (or risk-free) 'index' value to see the overall relative comparison. I also like to include costs and taxes in that so as to gain a better feel for overall actual results. After costs, taxes and inflation (purchase power) provides a more real world indication of performance/results

There is no risk-free investment, one of the closest IMO is a biblical 8 way split - perhaps comprised of domestic stock, foreign stock, 5 year treasury ladder, TIPS, long dated treasury, high street bank 5 year ladder (protected but illiquid), corporate bonds and gold/precious metals. For such a portfolio when stocks are down typically either gold or long dated treasury will counterbalance one of the two stock allocations (domestic or foreign) losses. Portfolio income (dividends/interest etc) will typically cover the other stock allocation loss. i.e. 12.5% exposure to a -30% stock loss = 3.75% loss relative to the total portfolio value, which is broadly around what income the portfolio might generate (longer term average). i.e. low downside risk (if gold or long dated treasury are down, typically stocks will be up and counterbalance gold/long dated treasury losses).

More often stocks will be the years best performing asset. Historically the average of the best performing asset each year tends to be 20% to 30%, which provides profit take opportunities (as the rest (other 7 assets collectively tend to be relatively flat). 1/8th exposure to a 30% single asset gain = 3.75% profit take'.

When you benchmark to such a 'risk-free' (or more strictly low risk/stable value) the risk-premium from more stock heavy portfolio's tends to be relatively small. Much smaller than many perhaps believe to be the case. PRPFX or PERM have benefited from positive gains in each of the four assets helped on by a post 1980's high to low interest rate transition, and from the decoupling off the gold standard. I feel less comfortable with the Permanent Portfolio in a flat or even rising interest rate era (as is more likely to be the case going forward) and in effect blending a Permanent Portfolio 50/50 with bonds (such as outlined above) is a more appropriate choice of 'safe' asset allocation benchmark IMO.

When 'safe' earns around 1% - 1.5% less than more stock heavy alternatives, there's less inclination to be attracted to taking on more risk/volatility (stocks) than overweighting safe and marginally increasing stock exposure. http://tinyurl.com/nc9pz2l

Rather than blending perhaps 50/50 stock/safe and adding maybe just 0.5% in so doing, with a relatively 'bond' heavy portfolio (and I consider gold to be a form of 'bond' i.e. a undated zero coupon inflation bond of sorts) you can potentially bolster bond rewards to provide a comparable benefit. A good thing about 'fixed income' is that you know the exact gain you'll get if held to redemption, so you can measure/compare different bonds likely rewards more accurately - and opt to overweight the better valued choice at any one time.