AI
Tuesday, November 12, 2013 5:19:28 AM
RE: Permanent Portfolio
Hi Rien
The Permanent Portfolio (PP) has some serious flaws. For instance consider you loaded 100 gold coins into your safe as the 25% gold allocation. The price rises 40% and you sell nearly 30% of those coins as part of a conventional PP rebalance event. You're down to 70 coins remaining in the safe, and perhaps having injected the sale proceeds into other assets that continued to decline (lose).
Repeat...several times more and after 4 sequential rebalances you've 24 coins left in your safe.
Relatively speaking you've no more coins than someone who simply deposited 24 coins (6% of total original fund value amount) into their safe and just left them there.
Three, four or more sequential reduce trades can occur - such as in the 1970's. Had the 1970's subsequently gone on to become a hyperinflation event then that could have been like Weimar Germany 1918 to 1922 years and in having reduced your gold down to 6% or less levels as per the above, and the subsequent protection when needed the most (1923) might have been little - perhaps worse than someone who had bought and held just a dozen or so coins in their safe).
Other risk factors include taxes and costs. In effect with the PP you pay insurance, but run with a considerable risk that the insurance becomes null and void just when you needed it the most. Take gold again 1934 when it was forced to be sold to the treasury (in effect it became illegal to own any investment grade gold) only to then see the price ramped upwards.
During the 1980's, high inflation, high treasury yields, high taxation and costs would have seen net real (after costs and taxes) treasury values decline significantly in real terms rather than the apparent hedging of inflation that some would suggest.
Such 'bad luck' cases are not coincidental - but are by design. Confiscations go back hundreds of years to when Kings used to send their knights and debt collectors out to replenish the Sovereign vaults.
The PP barbell of 25% short term treasury, 25% long dated treasury is little different to holding 50% in a bullet. A bullet fund can shorten the duration (risk) without giving up the reward by diligently trading (moving to the sweet spot (better valued)) duration. In the 1980's when Harry Browne presented the 4x25 PP yields were relatively high such that the barbell was perhaps more appropriate (ignoring taxes). At more recent historic low yields however the bullet is the better choice IMO.
If 25% stocks, 75% 'bonds' is your preferred asset weightings, then I'd suggest that 25% stocks, 70% 2 year treasury fund and 5% 3x leveraged gold ETF would be a better choice than the PP. Reviewed once yearly and look to only ever increase the gold allocation (if it had declined below 5% weighting, increase it back to 5% weighting), never reducing gold (excepting if in a hyperinflation event and all other assets had in effect declined heavily in value).
Had however you AIM-HI'd the PP assets individually then 2005-2012 inclusive I'm seeing around a 1.2% higher yearly reward assuming the PP held T-Bills for cash (0.7% more for AIM if the PP held 2 year Treasury for cash), which was achieved with AIM averaging 29% in cash (less risk). But equally AIM would have reduced actual gold holdings down (more recent gold AIM would be holding something like 45% cash reserve i.e. see above warning).
IIRC Robert Lichello included a non-complimentary remark in his book about Harry Browne. There are those out there now that continue to promote the 'benefits' of the PP - but are doing so from a background little different to that bloke down the pub.
Take care.
Hi Rien
The Permanent Portfolio (PP) has some serious flaws. For instance consider you loaded 100 gold coins into your safe as the 25% gold allocation. The price rises 40% and you sell nearly 30% of those coins as part of a conventional PP rebalance event. You're down to 70 coins remaining in the safe, and perhaps having injected the sale proceeds into other assets that continued to decline (lose).
Repeat...several times more and after 4 sequential rebalances you've 24 coins left in your safe.
Relatively speaking you've no more coins than someone who simply deposited 24 coins (6% of total original fund value amount) into their safe and just left them there.
Three, four or more sequential reduce trades can occur - such as in the 1970's. Had the 1970's subsequently gone on to become a hyperinflation event then that could have been like Weimar Germany 1918 to 1922 years and in having reduced your gold down to 6% or less levels as per the above, and the subsequent protection when needed the most (1923) might have been little - perhaps worse than someone who had bought and held just a dozen or so coins in their safe).
Other risk factors include taxes and costs. In effect with the PP you pay insurance, but run with a considerable risk that the insurance becomes null and void just when you needed it the most. Take gold again 1934 when it was forced to be sold to the treasury (in effect it became illegal to own any investment grade gold) only to then see the price ramped upwards.
During the 1980's, high inflation, high treasury yields, high taxation and costs would have seen net real (after costs and taxes) treasury values decline significantly in real terms rather than the apparent hedging of inflation that some would suggest.
Such 'bad luck' cases are not coincidental - but are by design. Confiscations go back hundreds of years to when Kings used to send their knights and debt collectors out to replenish the Sovereign vaults.
The PP barbell of 25% short term treasury, 25% long dated treasury is little different to holding 50% in a bullet. A bullet fund can shorten the duration (risk) without giving up the reward by diligently trading (moving to the sweet spot (better valued)) duration. In the 1980's when Harry Browne presented the 4x25 PP yields were relatively high such that the barbell was perhaps more appropriate (ignoring taxes). At more recent historic low yields however the bullet is the better choice IMO.
If 25% stocks, 75% 'bonds' is your preferred asset weightings, then I'd suggest that 25% stocks, 70% 2 year treasury fund and 5% 3x leveraged gold ETF would be a better choice than the PP. Reviewed once yearly and look to only ever increase the gold allocation (if it had declined below 5% weighting, increase it back to 5% weighting), never reducing gold (excepting if in a hyperinflation event and all other assets had in effect declined heavily in value).
Had however you AIM-HI'd the PP assets individually then 2005-2012 inclusive I'm seeing around a 1.2% higher yearly reward assuming the PP held T-Bills for cash (0.7% more for AIM if the PP held 2 year Treasury for cash), which was achieved with AIM averaging 29% in cash (less risk). But equally AIM would have reduced actual gold holdings down (more recent gold AIM would be holding something like 45% cash reserve i.e. see above warning).
IIRC Robert Lichello included a non-complimentary remark in his book about Harry Browne. There are those out there now that continue to promote the 'benefits' of the PP - but are doing so from a background little different to that bloke down the pub.
Take care.
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