WindBoi
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I decide to start a topic since it seems there are much interest in this area.
As a summary:
The Permanent Portfolio was created by a gentleman named Harry Browne and his associates in the late 1970s and it was a way to protect the money they had made as gold speculators. Harry Browne was getting out of the speculation business as he realized it was not a good long term strategy and he wanted to diversify his money. And in the United States at that time, the inflation was very bad because the government had taken off the gold standard and gold prices had gone up quite a bit. So they were looking to spread their money around in case the gold market crashed. They came up with this idea of designing a portfolio that was based on a wide asset diversification based on economic movements. This was fairly unheard of because most people were doing market timing and technical analysis and all sorts of stuff.
How it works:
It consists of four asset classes; cash, bonds, stocks as well as gold; and they are all equally weighted at 25% each. By equally allocating to each asset class, they balance out each other's volatility.
In portfolio allocation, you add uncorrelated assets so that you can smooth out volatility while enjoying good long term returns.
Bonds vs Stocks - Deflation vs Mild Inflation (Growth)
Stocks vs Gold - Mild Inflation vs High Inflation
Bonds and Cash - Do well in Deflation, do badly in Inflation
Gold - Do well in high inflation, reasonable in normal inflation, negative when the world has stability
Equities - Do well in mild inflation, very volatile in deflation
Long Term Returns
Here is how BigFatPurse implement the Permanent Portfolio
25% Stocks: STI ETF (ES3). Alternatively use Nikko AM STI ETF100 (G3B)
25% Bond: Singapore Government 30-years Bond (PH1S). Alternatively use TLT.
25% Gold: UOB Gold Savings Account. Alternatively buy physical gold bullion or coins after 1 Oct 2012, when 7% GST will be removed from investment grade gold.
25% Cash: Singapore Government 3-months Treasury Bills. Alternatively, use bank fixed deposit.
As a summary:
The Permanent Portfolio was created by a gentleman named Harry Browne and his associates in the late 1970s and it was a way to protect the money they had made as gold speculators. Harry Browne was getting out of the speculation business as he realized it was not a good long term strategy and he wanted to diversify his money. And in the United States at that time, the inflation was very bad because the government had taken off the gold standard and gold prices had gone up quite a bit. So they were looking to spread their money around in case the gold market crashed. They came up with this idea of designing a portfolio that was based on a wide asset diversification based on economic movements. This was fairly unheard of because most people were doing market timing and technical analysis and all sorts of stuff.
How it works:
It consists of four asset classes; cash, bonds, stocks as well as gold; and they are all equally weighted at 25% each. By equally allocating to each asset class, they balance out each other's volatility.
In portfolio allocation, you add uncorrelated assets so that you can smooth out volatility while enjoying good long term returns.
Bonds vs Stocks - Deflation vs Mild Inflation (Growth)
Stocks vs Gold - Mild Inflation vs High Inflation
Bonds and Cash - Do well in Deflation, do badly in Inflation
Gold - Do well in high inflation, reasonable in normal inflation, negative when the world has stability
Equities - Do well in mild inflation, very volatile in deflation
Long Term Returns
Here is how BigFatPurse implement the Permanent Portfolio
25% Stocks: STI ETF (ES3). Alternatively use Nikko AM STI ETF100 (G3B)
25% Bond: Singapore Government 30-years Bond (PH1S). Alternatively use TLT.
25% Gold: UOB Gold Savings Account. Alternatively buy physical gold bullion or coins after 1 Oct 2012, when 7% GST will be removed from investment grade gold.
25% Cash: Singapore Government 3-months Treasury Bills. Alternatively, use bank fixed deposit.
the Permanent Portfolio maximum loss in 2008 was -3.9%, compared to stock heavy portfolio which could have suffered up to 49% loss in 2008. Permanent Portfolio achieved the aim of “avoiding big loss”
in 2009 stock heavy portfolio could have boasted returns of 64%, compared to Permanent Portfolio’s 15% gain. Examining 2008 and 2009 data again, we see stock heavy portfolio losing up to 49% in 2008 and gaining 64% in 2009 – the 64% gain is not sufficient to recover the initial loss of 49% (stocks would have to grow almost 96% in 2009 in order to bring the value of stock assets back to 100%) and gives a total negative return of up to (-16.4%) in 2008 to 2009 for a stock heavy portfolio. Comparatively, Permanent Portfolio has a loss of -3.9% in 2008 and a gain of 15% in 2009, giving total positive returns from 2008 to 2009 of 10.5% instead. This extreme case highlights the advantage of avoiding big losses when designing an investment portfolio.