The Permanent Portfolio Strategy - A reasonable return low volatility Strategy

[genie47]

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

You can use Long Term Returns page to do some manipulation to test things as well. He has this historical returns tool.

Long-Term Returns: Historical Investment Returns

 

[genie47]

For the interest in the PP. Here is Long Term Returns analysis of the 50/50 vs PP.

Long-Term Returns: Harry Browne's Permanent Portfolio

 

[Epps_Sg]

For people who likes to read institutional report to learn more, here is some free quarterly reports from an investment firm specialising more in bonds: Hoisington - Economic Overview
Feel free to knock yourself out reading their quarterly analysis - i knocked myself out a few times reading the reports...haha, but i learnt some things.

My main takeaway from their reports is that the underlying issues, mountains of soverign debt, has not gone away yet, so things may likely remain as they are right now, more tending towards deflations and not inflations. On the other hand, Ray Dalio mentioned earlier this year that interest rates might be heading up and inflation coming up near end of this year... who is right, i not really sure, since both manages billions of dollars they have their points.

Chances are, deflationary force might still be around for a while while countries are reducing their massive debts, despite all the QE (think of sovereign debts as someone who is living with creadit card debts - he/she cannot spend so much in long term). So this gives me the guts to rebalance back into long bonds recently as the long bonds have dropped a lot also this month. Whether i am right or wrong about buying long bonds now, it does not matter so long as i follow the strategy, and it does not matter also because i cannot predict how the market will perform this year.

 

[genie47]

For people who likes to read institutional report to learn more, here is some free quarterly reports from an investment firm specialising more in bonds: Hoisington - Economic Overview
Feel free to knock yourself out reading their quarterly analysis - i knocked myself out a few times reading the reports...haha, but i learnt some things.

My main takeaway from their reports is that the underlying issues, mountains of soverign debt, has not gone away yet, so things may likely remain as they are right now, more tending towards deflations and not inflations. On the other hand, Ray Dalio mentioned earlier this year that interest rates might be heading up and inflation coming up near end of this year... who is right, i not really sure, since both manages billions of dollars they have their points.

Chances are, deflationary force might still be around for a while while countries are reducing their massive debts, despite all the QE (think of sovereign debts as someone who is living with creadit card debts - he/she cannot spend so much in long term). So this gives me the guts to rebalance back into long bonds recently as the long bonds have dropped a lot also this month. Whether i am right or wrong about buying long bonds now, it does not matter so long as i follow the strategy, and it does not matter also because i cannot predict how the market will perform this year.

PH1S was 106 three weeks back. Now it is at 100.6. Gold retreated to 156 from 162 with George Soros giving up the yellow metal. STI surging up.

 

[Epps_Sg]

PH1S was 106 three weeks back. Now it is at 100.6. Gold retreated to 156 from 162 with George Soros giving up the yellow metal. STI surging up.

That was what happened in the past...question is, what will happen going forward? As I dont know what will happen to the assets in future. i dont really worry how the assets going to perform, which is one of the main reason for me to invest using risk parity strategy like PP.

Here are my current thoughts after rebalancing:
1) I rebalanced into long bond, and gold already.
2) Just following the strategy to rebalance back to 25% split, and being contrarian automatically.
3) Feels good to buy assets cheaper.
4) If long bonds and gold drops some more, i probably wont be jumping up and down in joy, but i won't lose sleep either. I am in this strategy with a long term investment mindset.

Overall portfolio still positive approaching the end of my first year in this strategy.

In future, if STI drops 20% or reach the 200MA, i may rebalance into STI. I only wish i have more cash to invest into my portfolio...

 

[genie47]

Teh Hooi Ling mentions PP in today's (24 Feb 2013) Sunday Times.

 

[Gughie]

Hi everyone.

Have been reading this thread for the past few days. Thanks to all your posts, I'm convinced on starting a PP. I have not read the Harry Brownes Book yet, but I will soon. I have a couple of questions for you fellas.

1. I'm unsure about the cash component. Does it involve a fixed deposit , money market or merely placing it in a savings account i.e ( POSB savings acc)

2. Do I need at least 20k in my CPF OA to use it for any kind of investment? If so, if i have 21k in it, can I only use the 1k or the entire 21k for investing.

3. What do you guys think of the viability of using Singapore REITS to supplement the portfolio.

4. Given the current economic climate which asset seems like the best bet to buy now. US/Singapore stocks are at their highest levels while gold is at its 6th week lowest.

Thanks alot guys!!!!

 

[Epps_Sg]

Hi everyone.

Have been reading this thread for the past few days. Thanks to all your posts, I'm convinced on starting a PP. I have not read the Harry Brownes Book yet, but I will soon. I have a couple of questions for you fellas.

1. I'm unsure about the cash component. Does it involve a fixed deposit , money market or merely placing it in a savings account i.e ( POSB savings acc)
All 3 is possible, up to your comfort level. Currently using a higher interest savings account seems the most convenient. The original advice is to use a Money Market Fund though - just compare which returns higher interest and is more convenient. If you using CPF-OA to invest, just leave cash portion back in CPF-OA account.

2. Do I need at least 20k in my CPF OA to use it for any kind of investment? If so, if i have 21k in it, can I only use the 1k or the entire 21k for investing.
If you have 21k in CPF-OA, you can only use 1k for investment.

3. What do you guys think of the viability of using Singapore REITS to supplement the portfolio.
STI ETF already contain some reits. With REITS you have to monitor for rights issues etc, so it require monitoring. If you want to include REITS, you can consider including it in a separate Variable Portfolio instead. Best to leave the core portfolio of 4 assets alone, for simplicity of implementation. You may also wish to wait for market to fall before starting to buy REITS in Variable Portfolio.

4. Given the current economic climate which asset seems like the best bet to buy now. US/Singapore stocks are at their highest levels while gold is at its 6th week lowest.
I can't predict the future! (I am not the next George Soros, Bill Gross, Ray Dalio etc) Without claiming to be able to predict the future, i would say long bond and gold are 'cheaper' to buy now than stocks - however buying purely long bonds or gold now is quite risky also, as they may still have some room to fall. Therefore i would just invest with all 4 asssets at once, and i dont really have the problem of needing to decide which asset will outperform or which asset will drop.

Thanks alot guys!!!!

Replies in Blue. Keep learning the pros and cons of this strategy.
Cheers.

 

[Gughie]

You're awesome man. hahah I know about your feelings about timing Mr Epps_sg. I asked cause I have around 15k to invest and I wanted to go all for gold ( and invest in the rest when I have money) since I read earlier that >20k investment in a gold etf has lower yearly fees. Am at UOBs website reading the rates on gold and also checking out the december post on your blog as i'm typing. On 2nd thoughts I might just put in 4k per asset as of now. Yup, I'll get my hands on the book asap.

Want to share with you guys the gist of an article I just read on todays BT. The author, Cai Haoxiang mentioned 3 "Catches" for ETFs.

Catch 1. Most ETFs in Singapore are classified as Specified Investment Products (SIPs). That means you have to take an online test at sgx.com and achieve a score of 18/20 or have CFA/ ACCA accreditation. Apparently this is due to the ETFs being complex and more difficult for the average retail investor to understand. Does anyone know what the questions in the test are like?

Catch 2. Broadly, there are two types of ETFs. First are direct-application or cash based and the 2nd are synthethic ETFs. Around 1/6 of ETFs belong to the first category i.e owning shares in an ETF that tracks 10 stocks would mean that an investor would be owning a share in the ETFs portfolio of the 10 stocks. If ETF provider goes bankrupt, investor has recourse via the stocks held in the ETF. Examples of such ETFs include ST, SPDR DJIA.
2nd group is called synthetic ETFs cause they do not own the assets they are meant to track. Rather they use derivatives, usually swap contracts, to mimic the movement of the basket of stocks they are tracking. Long story short, if the bank agreeing to do the swap goes bankrupt, investors might not be able to get back what they invested from even if the underlying stocks remain unchanged.

Catch 3. ETFs can be illiquid due to low supply and demand. There can be delays that measure in days or even months if an investor wants to sell the ETF. If ETF is denominated in a foreign currency, there would be risk due to currency fluctuations.

Cheers

 

[Epps_Sg]

You're awesome man. hahah I know about your feelings about timing Mr Epps_sg. I asked cause I have around 15k to invest and I wanted to go all for gold ( and invest in the rest when I have money) since I read earlier that >20k investment in a gold etf has lower yearly fees.
Underlined statement should read as >20k investment in UOB gold savings account has lower yearly fees.
Am at UOBs website reading the rates on gold and also checking out the december post on your blog as i'm typing. On 2nd thoughts I might just put in 4k per asset as of now. Yup, I'll get my hands on the book asap.
If 3~4k per asset is what you can do now, that is still fine. Use Gold ETF instead of UOB gold savings account. Craig Rowland has recently co-authored and released new book on Permanent Portfolio, which you can 'try' to borrow from National Library.

Want to share with you guys the gist of an article I just read on todays BT. The author, Cai Haoxiang mentioned 3 "Catches" for ETFs.

Catch 1. Most ETFs in Singapore are classified as Specified Investment Products (SIPs). That means you have to take an online test at sgx.com and achieve a score of 18/20 or have CFA/ ACCA accreditation. Apparently this is due to the ETFs being complex and more difficult for the average retail investor to understand. Does anyone know what the questions in the test are like?
Have a look here for more info. You can try till you pass. Test is free of charge.

Catch 2. Broadly, there are two types of ETFs. First are direct-application or cash based and the 2nd are synthethic ETFs. Around 1/6 of ETFs belong to the first category i.e owning shares in an ETF that tracks 10 stocks would mean that an investor would be owning a share in the ETFs portfolio of the 10 stocks. If ETF provider goes bankrupt, investor has recourse via the stocks held in the ETF. Examples of such ETFs include ST, SPDR DJIA.
2nd group is called synthetic ETFs cause they do not own the assets they are meant to track. Rather they use derivatives, usually swap contracts, to mimic the movement of the basket of stocks they are tracking. Long story short, if the bank agreeing to do the swap goes bankrupt, investors might not be able to get back what they invested from even if the underlying stocks remain unchanged.
Always use cash based ETF to minimise such "counterparty risk".

Catch 3. ETFs can be illiquid due to low supply and demand. There can be delays that measure in days or even months if an investor wants to sell the ETF. If ETF is denominated in a foreign currency, there would be risk due to currency fluctuations.
STI ETF (ES3) and Gold ETF (O87) are relatively liquid. The 30 year Singapore Government Bond (PH1S) is relatively illiquid most times, but the primary dealers are required by MAS to always provide buy sell quote for the bonds on SGX. If in urgent case, may try call broker to help sell the bonds.
STI ETF and local bonds are in local currency, so no currency exposure. For purpose of this portfolio, do not hedge Gold ETF or gold product no matter which currency you use to buy the gold, so foreign currency exposure is not a concern here, unless you purposely bought into a foreign currency ETF or bond fund.

Cheers

My replies in blue. Keep up the good job on learning.

 

[fergieisking]

hi, i realise for ppers, one major investment vehicle that is lacking is reits? Care to share why do u guys choose to forego this potential $$-earning investment (about 6% monthly dividends from quality reits)? Or is there any way to include this in your portfolio?

 

[Epps_Sg]

Teh Hooi Ling mentions PP in today's (24 Feb 2013) Sunday Times.

Click here for the article by Teh Hooi Ling in Sunday Times on 24 Feb 2013.

She used 10 years bonds instead of 30 years bonds for her calculations. It will still work to generate portfolio profits over long term, just that portfolio probably will have greater volatility and greater paper loss in adverse market conditions. Also, I guess 10 years bonds will rise much lesser during deflations.

 

[focus1974]

Another propronent of Permanent Portfolio?
Marc Faber mentioned in his recent interview about allocating , 25% each in equities, real estate, GOLD and CASH/BONDS.

 

[Mecisteus]

As a the name implies, a PP means to come out with an asset allocation that you are comfortable with and sticking to that allocation permanently through rebalancing in the years ahead. So a "Permanent Portfolio" does not strictly apply to a portfolio of 25% bonds, cash, stocks and gold only.

 

[Epps_Sg]

hi, i realise for ppers, one major investment vehicle that is lacking is reits? Care to share why do u guys choose to forego this potential $$-earning investment (about 6% monthly dividends from quality reits)? Or is there any way to include this in your portfolio?

Good questions. One can easily include S-REITS in a separate Variable Portfolio, in which case the core Permanent Portfolio of 4 assets are still retained and working as intended. Read more about the Variable Portfolio here (click)

Craig Rowland, co-author of the new book on Harry Browne's Permanent Portfolio, wrote in his book why "REITS is not a substitute for gold's inflation protection". Got to read the book to find out what he says there about why REITS are not to be included as the core asset in PP.

Speaking from my personal experience, it already took quite an effort for me to initially learn more about how gold and long bonds investment works, before i started my Permanent Portfolio. I did not want to spend more time to learn more about REITS and delay starting my PP. Also, i was not keen to be so hands-ons and analyse individual REITS and monitor them for any rights issues or problems etc., and buying several individual REITS would incur more commissions. Also, I believe REITS cannot really replace stocks index fund as REITS generally have lower volatility than stocks (high asset volatility is important in PP). REITs may do well when there is inflation in real estate and rental prices, but REITs cannot fully replace gold's purpose for protection against SGD depreciation (a.k.a. inflation).

Now that my portfolio has profits and is on auto-pilot, i guess i can look more into including REITS now. Fastest way is to add 10%~20% REITS into a Variable Portfolio. (100% core 4 assets Permanent Portfolio + additional 10%~20% in REITS). Rather than buying individual REITS, I am more inclined to using the Philips Singapre Real Estate Income Fund so that I can enjoy hands-free investing without needing to monitor for REITs for problems or rights issues etc. - fund (unit trust) yearly fees is 0.65% which is not low but not too high either.

 

[Epps_Sg]

As a the name implies, a PP means to come out with an asset allocation that you are comfortable with and sticking to that allocation permanently through rebalancing in the years ahead. So a "Permanent Portfolio" does not strictly apply to a portfolio of 25% bonds, cash, stocks and gold only.

I would add one more point, that although other sub asset (eg. REITs) can also be included if one wish, due diligence is needed so that the final asset allocation must still allow the entire portfolio to perform well in 'all economic weathers', so that the asset allocations do not need to be changed throughout time.
There is another factor that needs to be observed - aside from cash component, each of the remaining 25% components should have 'similar' volatility levels.

 

[Epps_Sg]

hi, i realise for ppers, one major investment vehicle that is lacking is reits? Care to share why do u guys choose to forego this potential $$-earning investment (about 6% monthly dividends from quality reits)? Or is there any way to include this in your portfolio?

The following are my speculations only so far, not recomendations to modify portfolio allocation.

It seems that REITs can replace part of stock index component or gold component. I am more inclined to 'partially' replace gold with REITs for below reasons:
1. I think REITS does well in inflations when real estate price and rentals go up also, so REITs can overlap with gold for inflation protection.
2. I believe, REITS cannot protect like gold against local currency devaluations, which is why I think REITs cannot fully replace gold and some gold is still needed in permanent portfolio.
3. Problem with Singapore's current inflation is that majority of inflations is reflected in real estates price increase (for example, Singapore current inflation rate is 4.6% including housing and cars; Singapore core inflation rate is 1.9% excluding housing and cars) In current case Singapore inflation has lesser to do with currency devaluation, so gold cannot protect against such inflation in real estates and rental prices. However, REITs will be able to benefit from inflations in real estate prices and rentals.
4. Hence to get the inflation benefits of S-REITs, I would imagine modifying 25% gold component into 10% REITs and 15% gold.
i) This serves to benefit from inflation in real estate price and rentals which may not cause a corresponding rise in gold SGD price.
ii) Allows gold component to be around to cater for sudden and big devaluations in SGD, provided no severe inflations or hyper inflations is expected in Singapore. With a stable and largely uncorrupted Singapore government, Singapore's monetary and fiscal policy should not be causing hyperinflations in Singapore so the lower percentage of gold should be alright at the moment.
iii) 10% REITs will provide at least some dividend returns to the inflation protection component of the portfolio.
iV) Bear in mind STI ETF already contains some REITs, so it is not absolutely necessary to have REITs in local Permanent Portfolio.
v) I suspect gold is slightly more volatile than stock and long bonds. By having 10% REITs and 15% gold, the overall volatility of this 25% inflation component can be lowered slightly, to better match volatility of stock and long bonds.

To sum up, point 1 to 4 above is my 'speculation' about partially replacing gold with REITs fund - need to do some more due diligence before modifying the gold component and deviating from the strategy a bit. However, it is quite fine to put REITs in a separate Variable Portfolio using funds we can afford to lose, if we wish to.

 

[Epps_Sg]

Another propronent of Permanent Portfolio?
Marc Faber mentioned in his recent interview about allocating , 25% each in equities, real estate, GOLD and CASH/BONDS.

Looking at this portfolio carefully, long bonds are missing here, means there is no deflation protection should the next few years be deflationary, hence this is not a "Harry Browne's Permanent Portfolio" that can cater to all 4 major economic conditions. This portfolio is probably biased towards the coming inflations... which nobody knows when it will really start.

 

[Inexpressible]

The following are my speculations only so far, not recomendations to modify portfolio allocation.

It seems that REITs can replace part of stock index component or gold component. I am more inclined to 'partially' replace gold with REITs for below reasons:
1. I think REITS does well in inflations when real estate price and rentals go up also, so REITs can overlap with gold for inflation protection.
2. I believe, REITS cannot protect like gold against local currency devaluations, which is why I think REITs cannot fully replace gold and some gold is still needed in permanent portfolio.
3. Problem with Singapore's current inflation is that majority of inflations is reflected in real estates price increase (for example, Singapore current inflation rate is 4.6% including housing and cars; Singapore core inflation rate is 1.9% excluding housing and cars) In current case Singapore inflation has lesser to do with currency devaluation, so gold cannot protect against such inflation in real estates and rental prices. However, REITs will be able to benefit from inflations in real estate prices and rentals.
4. Hence to get the inflation benefits of S-REITs, I would imagine modifying 25% gold component into 10% REITs and 15% gold.
i) This serves to benefit from inflation in real estate price and rentals which may not cause a corresponding rise in gold SGD price.
ii) Allows gold component to be around to cater for sudden and big devaluations in SGD, provided no severe inflations or hyper inflations is expected in Singapore. With a stable and largely uncorrupted Singapore government, Singapore's monetary and fiscal policy should not be causing hyperinflations in Singapore so the lower percentage of gold should be alright at the moment.
iii) 10% REITs will provide at least some dividend returns to the inflation protection component of the portfolio.
iV) Bear in mind STI ETF already contains some REITs, so it is not absolutely necessary to have REITs in local Permanent Portfolio.
v) I suspect gold is slightly more volatile than stock and long bonds. By having 10% REITs and 15% gold, the overall volatility of this 25% inflation component can be lowered slightly, to better match volatility of stock and long bonds.

To sum up, point 1 to 4 above is my 'speculation' about partially replacing gold with REITs fund - need to do some more due diligence before modifying the gold component and deviating from the strategy a bit. However, it is quite fine to put REITs in a separate Variable Portfolio using funds we can afford to lose, if we wish to.

But I think our government is trying to reduce increasing housing cost. Will their deflation policies affect the real estate properties and reits in the future ?
I was just thinking reits might had over-performed due to real estate inflation as you had said, but our government seems to be focusing on reducing that inflation with policies.
I just wondering and speculating. How do you think ?

 

[Lasogette]

Had borrowed the book by craig rowland and went through the returns. Just for discussion purposes as the book advocates against market timing, however would it be possible to attempt to buy each component at a seperate timing

Eg price of gold is low now, thus i buy gold first to hold 1st while trying to gain a better entry into stocks.