The Permanent Portfolio Strategy - A reasonable return low volatility Strategy

[fergieisking]

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.

hi, thks for your v comprehensive suggestion and reply. I was wondering if it is possible to generate an overall return for the past 10 years based on your suggested 10%REITS,15% gold and compare it against the conventional portfolio? But its perfectly fine if u do not have the time to do so. thks anyway

 

[Epps_Sg]

hi, thks for your v comprehensive suggestion and reply. I was wondering if it is possible to generate an overall return for the past 10 years based on your suggested 10%REITS,15% gold and compare it against the conventional portfolio? But its perfectly fine if u do not have the time to do so. thks anyway

That will be an interesting exercise, so i will do it and get it done with. I will use "FTSE ST All-Share Index - Real Estate REITs" (index code FSTAS8600) as reference price for REITs performance in the past.

Data for this S-REITs Index is available here in Yahoo! Finance. Usable data is only available from Jan 2008 till Jan 2011.

Here is the results of standard PP versus modified PP with 10% S-REITs and 15% gold:

*Results exclude dividends and interests.

My takeaway from this simple exercise is:
1. S-REITS seems to be more volatile than stocks!
2. The FTSE Index of S-REITS comprises of at least 39 S-REITs - i suppose this will include good and poor performing REITs, hence making this index more volatile.
3. Based on these few years of data, adding S-REITs Index to core permanent portfolio may not boost returns by much, while potentially exposing core PP to greater magnitude of loss.
4. It may be more prudent to be selective when buying REITS instead of using FTSE REITs index which may comprise of both good and not so good REITs.
5. It may be better to buy more into REITs around bottom of next recession or major market drops.

 

[Epps_Sg]

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 ?

I am not an expert on REITs, so i will not commend much. I dont think any governemnt will actively pursue 'deflation policies' for long. So in long run, Real Estates and REITs should go up.

 

[Epps_Sg]

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.

Best way to start PP is to buy all 4 assets at once, so your portfolio is 'balanced'. If you wish, you may use 50% capital to buy 4 assets first, then use the remaining 50% some months later to buy into the 4 assets - this is dollar cost averaging.
If you want to buy some assets at separate times by market timing, you are taking qutie a bit of risk so do make sure you know what you are doing and you are tuned into the market...

There may be a logical way to markte time when starting PP. See this chart here:
RECENT PERFORMANCE
Notice that currently PP performance (thick black line) is currently lower by a couple percentage from its recent/YTD high. Means that if you start a DIY permanent portfolio right now - when portfolio returns has retreated down a few percentage from its recent high - you wold have bought the assets 'cheaper' than when you bought a couple of months ago when portfolio returns is highest (more expensive).

Another rough guide is that during rebalancing, it may be better to rebalance into the cheaper asset when the asset price is at or below the 200MA, which means that when price is at or below 200MA, it is 'cheaper' to buy the asset than when price is well above 200 MA.

Lastly, according to an article in Hoisington - Economic Overview, bond prices are seasonally low during February till May. And we also know that stocks tend to underperform during June to November.

 

[Carnesir]

I am planning to pursue pp strategy but I have little capital to start with. Seeing gold is in a downward trend recently, incur my interest in purchasing gold now. I will hae my pp in due course but with limited funds just trying to make my purchase and get my strategy started.

Hw do I start getting into my 'gold' component of this strategy?

 

[Epps_Sg]

I am planning to pursue pp strategy but I have little capital to start with. Seeing gold is in a downward trend recently, incur my interest in purchasing gold now. I will hae my pp in due course but with limited funds just trying to make my purchase and get my strategy started.

Hw do I start getting into my 'gold' component of this strategy?

You can buy investment grade gold of one troy ounce and above and wait. You can also buy and hold O87 the Gold ETF.

Best to start all 4 assets at once, so portfolio will be 'balanced'.
Better to read up more before jumping in.

 

[Carnesir]

You can buy investment grade gold of one troy ounce and above and wait. You can also buy and hold O87 the Gold ETF.
dddddddd
Best to start all 4 assets at once, so portfolio will be 'balanced'.
Bet to read up more before jumpn in to holidays,

Good good to know..! Thanks. Cause so far I believe can buy gold the physical coins and bars etc... But I was deterred due to the high transaction costs involved.... Etf wise it should cut down on the transaction costs...

 

[Lasogette]

Just for discussion purposes. What views do you guys have on using Nikko AM ABF SIngapore bond index fund for the bond component.

 

[Shahmatt]

Good good to know..! Thanks. Cause so far I believe can buy gold the physical coins and bars etc... But I was deterred due to the high transaction costs involved.... Etf wise it should cut down on the transaction costs...

Can you please clarify on what you mean by high transaction costs? Do you mean the premium placed on the physical gold product? GST? Or something else?

 

[Epps_Sg]

Just for discussion purposes. What views do you guys have on using Nikko AM ABF SIngapore bond index fund for the bond component.

ABF bond fund is like an intermediate term bond (10~15 years till maturity on average, i guess), so it is not as volatile and powerful as 30 years bonds during deflation to bring up the whole portfolio. ABF bond fund is too volatile for cash component also.

Perhaps only possible scenario is to replace both cash and long bond components with 50% ABF bond fund, but this is less ideal allocation.

Can you please clarify on what you mean by high transaction costs? Do you mean the premium placed on the physical gold product? GST? Or something else?

Probably referring to premiums on gold coins and bars. GST is not applicable when trading investment grade gold coins/bars now.

 

[Epps_Sg]

I am planning to pursue pp strategy but I have little capital to start with. Seeing gold is in a downward trend recently, incur my interest in purchasing gold now. I will hae my pp in due course but with limited funds just trying to make my purchase and get my strategy started.

Hw do I start getting into my 'gold' component of this strategy?

Perhaps one possible way to buy the assets at different times, is to buy gold now, then save to buy long bonds in Feb to May when bonds are historically lower, then save to buy STI ETF in June till November when stocks are historically lower, then save for cash component. Complete portfolio within one year, or as fast as possible.

You assume the risk of worst case scenario that economy picks up towards end of year and you buy stock at higher price while gold, long bond tumble some more after you buy, but this is still short term risk. In long term this initial risk may not be so significant. Try to own at least 2 assets (other than cash) as soon as possible.

*The above is just my opinion, so just a disclaimer please do your due diligence and research about the pros and cons of PP first and come to your own conclusion what to do, as I will not be responsible for your investment profits or loss

 

[fergieisking]

sry to hijack this thread. new to investment. like to ask if the sti etfs, bonds or gold etfs have rights issues? i heard if one is not informed of rights issues, one can suffer heavy losses on his portfolio?

 

[Mecisteus]

sry to hijack this thread. new to investment. like to ask if the sti etfs, bonds or gold etfs have rights issues? i heard if one is not informed of rights issues, one can suffer heavy losses on his portfolio?

1) no. and will never happen.
2) not necessarily true

 

[Lasogette]

ABF bond fund is like an intermediate term bond (10~15 years till maturity on average, i guess), so it is not as volatile and powerful as 30 years bonds during deflation to bring up the whole portfolio. ABF bond fund is too volatile for cash component also.

Perhaps only possible scenario is to replace both cash and long bond components with 50% ABF bond fund, but this is less ideal allocation.


Probably referring to premiums on gold coins and bars. GST is not applicable when trading investment grade gold coins/bars now.

Hi Epps thanks for the reply. Juse wondering whats your thought on having silver and gold in the same portfolio together(however both their weightage is still 25%)

 

[Epps_Sg]

Hi Epps thanks for the reply. Juse wondering whats your thought on having silver and gold in the same portfolio together(however both their weightage is still 25%)

I think just buying gold is good enough. Having gold and silver just adds to transaction cost, and silver might not really outperform if there is really severe inflation. I dont see much advantage diversifying into silver. It's better to keep the portfolio simpler also by having just gold.

 

[Mecisteus]

Teh Hooi Ling has a follow-up article on PP in today Business Times.

 

[myth_shenhua]

Hey there epps,

I have been reading your blog and following this thread for a quite some time and have decided to use this PP strategy.

I have several questions I hope you are able to clarify.

For the stocks component, say I am planning to follow 25% and have an initial of 4k to be inside ES3. However, ES3 is currently trading at around 3.2XSGD. Am i able to purchase 12XX shares in this case? If not, what do you suggest I do?

Also, w regards to gold, how do you recommend I go about it? Gold savings or ETFs? And for gold ETFs, there are way too many to choose from.

 

[Epps_Sg]

Hey there epps,

I have been reading your blog and following this thread for a quite some time and have decided to use this PP strategy.

I have several questions I hope you are able to clarify.

For the stocks component, say I am planning to follow 25% and have an initial of 4k to be inside ES3. However, ES3 is currently trading at around 3.2XSGD. Am i able to purchase 12XX shares in this case? If not, what do you suggest I do?

Also, w regards to gold, how do you recommend I go about it? Gold savings or ETFs? And for gold ETFs, there are way too many to choose from.

Hi. You have 3 options:
1. buy 1000 shares (1 lot) ES3 costing 3.3k, remaining 0.7k just put in cash component.
2. buy 1200 units (12 lots) G3B (Nikko AM STI ETF) costing 4k. G3B is slightly less liquid, and perhaps does not track STI as closely as ES3 but otherwise not much else disadvantage, i think.
3. You can probably buy 1200 shares of STI ETF through Unit Share Market in POEMS. Thsi may be a bit more troublesome so not really recommended.

Option 1 and 2 above should be fine.

For Gold ETF, just get the O87 SPDR Gold ETF that is traded on Singapore Stock Exchange. Keep it simple and buy Gold ETF and other assets locally, unless you are a more sophisticated investor and you somehow find some advantage of owning overeas Gold ETF. For youm dotn go for Gold savings account as it is more costly for you due to the savings amount 4k being small and so the minimum yearly fees of 1.54gm (include GST) will works out to be about S$96.85 or 2.4%. This is high compared to 0.4% yearly fees of Gold ETF.

You can check out the "What to invest in to start Singapore Permanent Portfolio" post in my blog again, i updated it with links and info about G3B.

Above is just my opinion, not recommendations.

 

[Epps_Sg]

Minor timing trick

Best way to start PP is to buy all 4 assets at once, so your portfolio is 'balanced'. If you wish, you may use 50% capital to buy 4 assets first, then use the remaining 50% some months later to buy into the 4 assets - this is dollar cost averaging.
If you want to buy some assets at separate times by market timing, you are taking qutie a bit of risk so do make sure you know what you are doing and you are tuned into the market...

There may be a logical way to markte time when starting PP. See this chart here:
RECENT PERFORMANCE
Notice that currently PP performance (thick black line) is currently lower by a couple percentage from its recent/YTD high. Means that if you start a DIY permanent portfolio right now - when portfolio returns has retreated down a few percentage from its recent high - you wold have bought the assets 'cheaper' than when you bought a couple of months ago when portfolio returns is highest (more expensive).

Another rough guide is that during rebalancing, it may be better to rebalance into the cheaper asset when the asset price is at or below the 200MA, which means that when price is at or below 200MA, it is 'cheaper' to buy the asset than when price is well above 200 MA.

Lastly, according to an article in Hoisington - Economic Overview, bond prices are seasonally low during February till May. And we also know that stocks tend to underperform during June to November.

Alvin from BigFatPurse has created an excellent performance chart of Singapore Permanent Portfolio here (click).
Click on the "Equity Curve" to see a chart of the total portfolio performance.

What I can see is this: If portfolio is started 2 months ago at a high point of total portfolio value (equity), then the portfolio value now will be a few percentage negative. So, we know portfolio value goes up and down in short term, hence an idea is that is when one wishes to start/rebalance the portfolio, better not to do it when portfolio value is at a high (two months ago). It would seem more profitable to start/rebalance portfolio when now when portfolio value has retreated from the latest high.

Of ocurse, if one hapens to start/rebalance portfolio at height of portfolio value, this is not really an issue over the long run and is part of a minor risk one takes.

So this minor timing trick is just a logical speculation on my part. Logical or not, speculative idea still needs to be proven.

 

[myth_shenhua]

Thanks for the prompt reply.

epps,

for the gold ETF, may I know whether the value shown on sg.yahoofinance is in SGD or USD? Last i checked it was $15X.

Also, as you stated on your blog, one will have to open a CDP acc and a broker acc. Can this be done at any bank? for eg, say i open a SCB account, I can directly trade O87 and ES3 on its trading platform since these two are on SGX board?

Could you explain the other two, bonds and money fund and provide opinions/recommendations about getting them?

Sorry for so many questions as I just want to make sure I have everything set and right before I plunge in.

edit: i have checked on other threads w regards to new accounts. I saw that SCB trading platform does not have any min commission albeit its trading platform might be slower than others. However, since you mentioned the need to rebalance only after quite some time, do you recommend that I use it?