The Permanent Portfolio Strategy - A reasonable return low volatility Strategy

[Epps_Sg]

Something to ponder about. There are many types of insurances out there.

Do you buy ALL types of insurances for yourself? If you do buy ALL, will you buy ALL of them with equal dollar amount of premiums OR do you buy ALL so as to receive equal amount of expected payout?

Insurance and investments are different isntruments with different aims and returns, dont think its correct to compare apples to oranges. I have the feeling you are still unfamiliar with logics and research behind "risk balanced" portfolios.

Here is something to ponder about, regardign if risk parity strategy is valid? From "The Alpha Masters - Unlocking the Geniues of the World's Top HEdge Funds":

Spoiler

Indeed, following the stress test of the 2008 financial crisis when most investor portfolios were down 40 percent into the stock market bottom, an All Weather portfolio was down less than 10 percent. Over its lifetime, it has outperformed the conventional 60/40 stock/bond asset allocation with only half the risk. Seeing the potential for such a strategy, other money managers quickly sought to replicate the passive All Weather approach, and the industry adopted the name “Risk Parity” for such approaches.
Over the past five years, managers such as AQR, First Quadrant, Invesco, Putnam, and Wellington began offering Risk Parity products modeled after All Weather. And in 2011, a survey of institutional investors showed that 85 percent were familiar with the approach and 50 percent were using or considering using the concepts in their own portfolios.

I cannot explain risk parity theory here, its too profound and unfamiliar concept for most. I can only say please read up on Dalio's "Risk Parity & Portfolio Construction White Papers" for institutional investors. It's one of the clearest article on risk parity portfolio that i have seen. Of coure, after you read the article, feel free to disagree with Ray Dalio about risk parity portfolios.

Good read...however i still stick to 100% stocks.
i believe even within stocks itself, there are many classes.
diversification is always the key.

I believe a 100% stock portfolio, however diversified among differnt stock, can still fall 30~50% in a severe market crisis - in my book this is still too much risk so there is insufficient diversification, but thats just me.

 

[Mecisteus]

You apply the same basic principles of risks and returns (payouts) to investments and insurances. They are all about managing risks.

Inflation, deflation, prosperity, death, disabilities are all events (risks). You construct a portfolio (buy insurances/investments) to tide through those events. You consider the likelihood of those events, you weigh your costs and consider its returns (payouts) in the implementation.

 

[Epps_Sg]

You apply the same basic principles of risks and returns (payouts) to investments and insurances. They are all about managing risks.

Inflation, deflation, prosperity, death, disabilities are all events (risks). You construct a portfolio (buy insurances/investments) to tide through those events. You consider the likelihood of those events, you weigh your costs and consider its returns (payouts) in the implementation.

This is a sweeping generalised statement.... which is is too unspecific for me to act on.

People have already researched risk parity portfolio in detail and proven it to be viable. If only you take more indepth look to understand their reasonings first before commenting based on a superficial knowledge of the subject....
*I expect it can take be quite a while to understand and appreciate risk parity concept, since it is so different from traditional portfolio concepts.

Then again, people can always avoid following a strategy if they do not understand how it works.

 

[focus1974]

Just read the BWater research papers on their website.

I capture the gist of the portfolio as :-
1) To have equity-like returns while lowering the risks, you can apply moderate leverage on bonds. Thus, you can have a lower equity allocation while maintaining equity-like returns.
2) However, this method was done when the world was going thru' a period of bullish bond market (ie. yield dropping all the time).
3) In the current environment, I believe Bwaters have also said Cash will move into assets in 2013 and interest rate will rise soon.
4) Thus, the value-add in their Bwater Beta porfolio is to asset-weight the 4 quarters thru proprietary research.

So, the question is what is their weightage now? How much is in Inflation-linked bonds, what is the duration of their nominal bonds(is it short-term to reduce interest rate risk or is it maintaining a long term one or is it a bond laddering with leverage?). What % of the cash in an inflationary environment if they predict Cash will move into assets in 2013.

 

[Epps_Sg]

Just read the BWater research papers on their website.

I capture the gist of the portfolio as :-
1) To have equity-like returns while lowering the risks, you can apply moderate leverage on bonds. Thus, you can have a lower equity allocation while maintaining equity-like returns.
2) However, this method was done when the world was going thru' a period of bullish bond market (ie. yield dropping all the time).
3) In the current environment, I believe Bwaters have also said Cash will move into assets in 2013 and interest rate will rise soon.
4) Thus, the value-add in their Bwater Beta porfolio is to asset-weight the 4 quarters thru proprietary research.

So, the question is what is their weightage now? How much is in Inflation-linked bonds, what is the duration of their nominal bonds(is it short-term to reduce interest rate risk or is it maintaining a long term one or is it a bond laddering with leverage?). What % of the cash in an inflationary environment if they predict Cash will move into assets in 2013.

I dont think they are messing aroud with the bond maturity and allocation in their risk parity "All Weather" portfolio - this beta portfolio should be fixed allocation since it is suppossed to be 'all weather', but i could be wrong becasue i dont know exactly how they run their beta portfolio on a daily basis.

 

[genie47]

The venerable Bernstein has this to say about Harry's PP.

Wild About Harry

In a nutshell, Harry's strategy is a bit like communism: elegant in theory, but very difficult to execute in practice

There's nothing wrong with Harry's portfolio – nothing at all – but there's everything wrong with his followers, who seem, on average, to chase performance the way dogs chase cars.

So there you have it. The idea is really very simple. The discipline required is religious.

 

[focus1974]

The venerable Bernstein has this to say about Harry's PP.

Wild About Harry

In a nutshell, Harry's strategy is a bit like communism: elegant in theory, but very difficult to execute in practice

There's nothing wrong with Harry's portfolio – nothing at all – but there's everything wrong with his followers, who seem, on average, to chase performance the way dogs chase cars.

So there you have it. The idea is really very simple. The discipline required is religious.

Further into the article, i found this which to me highlights the gist of investing.. TIMING is very important no matter for value investing or tehnicals or "passive" indexing. No one can time the market.. but we can roughly try to time and put in batches over a period of time where we feel market is LOW Relative to What you've seen.

Diversifying asset classes, as Harry Browne knew well, can benefit a portfolio. The secret is deploying them before those diversifying assets shoot the lights out. Harry certainly did so by moving away from gold and into poorly performing stocks and bonds in the late 1970s. Sadly, this is the opposite of what the legions of new TPP adherents and PRPFX owners have been doing recently*********effectively increasing their allocations to red-hot long Treasuries and gold.

 

[genie47]

Epps did say something about it. You can't go in when everything is red hot. You certainly can't go in when everything is in the dumps.

Otherwise the discipline required is straining.

When you entered just before the red hot euphoria, you have to maintain discipline not to pull out and continue rebalancing when one or two assets take the hit.

When you entered when it is the dumps, you have to overcome the pessimism from the depressed situation.

Then when you think of it, you pretty much have to drown out all the noise. Imagine the discipline. Like retreating to inner chamber for "nian gong" to come out when the bloodshed has ended. Then you pick up the stragglers to attack them with your conserved energy.

Like the mythical creature that the legends of Chinese New Year are made of.

 

[Epps_Sg]

There's nothing wrong with Harry's portfolio – nothing at all – but there's everything wrong with his followers, who seem, on average, to chase performance the way dogs chase cars.

To put things into perspective.... I would think this statement can apply for many investment strategies out there - which strategies followers are not chasing performance?...

One thing i dont understand about this statement, followers of PP know that its a beta strategy with market returns... how are they 'chasing performance' when they are not tweaking portfolio to try get above market returns?

Of course, there are still PP 'followers' who try to outdo the strategy and try to generate above market returns... then again, people who dont follow the strategy closely cant really be called follower of the strategy, can they? Perhaps the statement is refering to these people. Nothing wrong with trying to outdo the strategy... people's money are theirs to use.

I like to read up about various people's opinion regarding the pros and cons of any investment strategy. The key thing is, I try to filter out which 'statements about pros/cons' do I think are true, and which do I think are false... It's always good to keep in mind the weaknesses of a particular investment strategy also, and not just look at the strengths of the strategy.

 

[Epps_Sg]

Epps did say something about it. You can't go in when everything is red hot. You certainly can't go in when everything is in the dumps.

Otherwise the discipline required is straining.


When you entered just before the red hot euphoria, you have to maintain discipline not to pull out and continue rebalancing when one or two assets take the hit.

I entered gold in February 2012 when gold at highest price - portfolio still make profit in the end. My takeaway: buying one asset at a high is not total disaster, as another asset will be relatively cheaper. In the end of 2012, while my gold in SGD lost money, its a pleasant surprise to see long bond make money and overcome gold's loss.

When you entered when it is the dumps, you have to overcome the pessimism from the depressed situation.[

It helps to have faith and be optimistic and contratian in this case.

There is a third case... when you wait and dont enter, you could miss the next big rally. I totally missed Jan 2012 huge rally in STI because i hesitated until Feb 2012 to begin my portfolio... i missed quite a significant profit in STI. My takeaway: assets rally in sudden short period of times, so missing out such mini rally can reduce profits also.

Then when you think of it, you pretty much have to drown out all the noise. Imagine the discipline. Like retreating to inner chamber for "nian gong" to come out when the bloodshed has ended. Then you pick up the stragglers to attack them with your conserved energy.

Agree about drowning out the noise part.

 

[genie47]

Further into the article, i found this which to me highlights the gist of investing.. TIMING is very important no matter for value investing or tehnicals or "passive" indexing. No one can time the market.. but we can roughly try to time and put in batches over a period of time where we feel market is LOW Relative to What you've seen.

In other words do no invest according to your calendar, all the time. When there is value, seize the opportunity to pump in new funds.

I think this is where Harry's 15/35 rebalancing strategy comes in. Which means......watching the market. Opens yourself up to a lot of temptations.

 

[Lasogette]

Hi Btw anyone came across this ETF called Global X permanent ETF. Seems quite similar to this approach discussed in the thread. However the volume is very questionable.

 

[genie47]

Hi Btw anyone came across this ETF called Global X permanent ETF. Seems quite similar to this approach discussed in the thread. However the volume is very questionable.

It is new. This thread if you read is peppered with links and some of it draw you to the PP ETF and mutual fund.

PRPFX is the mutual fund.

PERM is the ETF.

3 Permanent Portfolios For The Long Run - Seeking Alpha

My advice is to build your own instead of by a one-stop fund for this allocation as the article's data has shown. From the discussions of this same article in SA, you should build it using the most volatile components. No dividend stocks index funds or anything. Hence the reason why the ultra unstable long bonds are in there.

 

[genie47]

To put things into perspective.... I would think this statement can apply for many investment strategies out there - which strategies followers are not chasing performance?...

One thing i dont understand about this statement, followers of PP know that its a beta strategy with market returns... how are they 'chasing performance' when they are not tweaking portfolio to try get above market returns?

Of course, there are still PP 'followers' who try to outdo the strategy and try to generate above market returns... then again, people who dont follow the strategy closely cant really be called follower of the strategy, can they? Perhaps the statement is refering to these people. Nothing wrong with trying to outdo the strategy... people's money are theirs to use.

I like to read up about various people's opinion regarding the pros and cons of any investment strategy. The key thing is, I try to filter out which 'statements about pros/cons' do I think are true, and which do I think are false... It's always good to keep in mind the weaknesses of a particular investment strategy also, and not just look at the strengths of the strategy.

Chasing performance as in doing all sorts of other things that stray from Harry's original.

Take a look at this with all the stuff thrown in.

Is The Permanent Portfolio ETF A Perfect Choice For The Long-Term Investor? - Yahoo! Singapore Finance

There is silver, gold, all sorts of cornucopia ETF, asset classes etc.

Sure it is a variation of the same theme but in the name of chasing performance.

The reason they do this is that the original PP invests very heavily into the 4 different asset classes prescribed. Enough to make anyone uncomfortable.

In short, many "PP followers" don't want the 4 asset classes in their portfolio and want all the salt, pepper, cholesterol and carcinogens.

 

[fergieisking]

hi all, im juz started reading up on investment and am particularly impressed with this portfolio strategy. I intend to invest on a monthly basis with my savings. But im quite confused with the definition of ''cash''.

May i ask for the 25% cash component, does it mean that say i am left with $1000 savings after expenses every month, $250 is dedicated to holding liquid cash in a posb savings account with the rest of the $750 allocated equally into gold, stocks and bonds?

Or does it mean that of my $1000 savings, i hold some desirable portion of liquid cash in my savings account eg ($400), remaining $600 dedicated equally into stocks,bonds,gold,money market funds, each component $150?

 

[WindBoi]

hi all, im juz started reading up on investment and am particularly impressed with this portfolio strategy. I intend to invest on a monthly basis with my savings. But im quite confused with the definition of ''cash''.

May i ask for the 25% cash component, does it mean that say i am left with $1000 savings after expenses every month, $250 is dedicated to holding liquid cash in a posb savings account with the rest of the $750 allocated equally into gold, stocks and bonds?

Or does it mean that of my $1000 savings, i hold some desirable portion of liquid cash in my savings account eg ($400), remaining $600 dedicated equally into stocks,bonds,gold,money market funds, each component $150?

you should box out your savings into what you devote into your portfolio. say out of 1000, 400 goes into this portfolio and 600 goes to "other purpose"

 

[WindBoi]

I found this crazy ****. This guy actually tracked a bunch of lazy portfolios. and you can see some permanent portfolios next to it. since 1999

The spreadsheet link here

 

[fergieisking]

you should box out your savings into what you devote into your portfolio. say out of 1000, 400 goes into this portfolio and 600 goes to "other purpose"

hi, thks for the clarification. That means out of my 1000 savings, 600 is set for 'emergency funds' for major/unexpected events in life while 400 goes into investment (100 into each of the 4 components)? The thing is i am 26yrs old and have only just graduated and started working. I cannot foresee what will possibly happen in the short/long term future eg, major commitments like raising a family,buying flats or cars.

So I have 3 qns which I hope some financial advisors could enlighten me

1)Should I start building my portfolio now or wait till a later time when I do not have any possible major commitments and earning a comfortable salary eg. in my 30s or 40s.

2)If yes i could start investing in my portfolio, could I liquidate my assets when I need cash for my major commitments? And by doing so, I maintain the 25% component in the same ratio?

3)If yes, what portion of my savings should go into investing in this portfolio?

 

[Epps_Sg]

I found this crazy ****. This guy actually tracked a bunch of lazy portfolios. and you can see some permanent portfolios next to it. since 1999

The spreadsheet link here

Thanks for sharing. What is the original site that post this spreadsheet?
Bogleheads • View topic - Spreadsheet for backtesting (includes TrevH's data) does similar comparison - his spreadsheet is even crazier...

 

[Epps_Sg]

hi, thks for the clarification. That means out of my 1000 savings, 600 is set for 'emergency funds' for major/unexpected events in life while 400 goes into investment (100 into each of the 4 components)? The thing is i am 26yrs old and have only just graduated and started working. I cannot foresee what will possibly happen in the short/long term future eg, major commitments like raising a family,buying flats or cars.

So I have 3 qns which I hope some financial advisors could enlighten me

1)Should I start building my portfolio now or wait till a later time when I do not have any possible major commitments and earning a comfortable salary eg. in my 30s or 40s.

I am not financial advisor, by profession. Start investing as early as possible to take more advantage of compounding interest. You can be more aggressive investor when young (take higher risk) and more conservative whel more mature (take lower risk). Or you can take moderate risk all the way.

2)If yes i could start investing in my portfolio, could I liquidate my assets when I need cash for my major commitments? And by doing so, I maintain the 25% component in the same ratio?

Yes you can liquidate your asseets when you need cash. Just take note of the relevant brokerage fees. When you really need cash, you can do what you need to get it.

3)If yes, what portion of my savings should go into investing in this portfolio?

You can invest 60% or 100% of savings. Unique thing about this portfolio is that even if you invest 100% of savings, 25% of it will end up as cash anyway. Mor eimprotant question to ask is how much emergency cash you need to have? I would say keep 1~6 months of salary as cash for emergency expenses - such expenses are for unforseen events like retrenchment or big ticket purchases, so that you would not have to sell your investment at potentially unfavorable price for expenses. Your emergency cash can form part of your cash portfolio also.

See both these links for more info about cash component: link1 link2
There are links to long FAQ for the 4 assets in the 'Basics' page on my blog.

One more thing, get an upgraded medishield plan for yourself if you havent done so yet - its cheap at your age. You want to minimize any potential medical issue from eating into your investments and savings later.