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This past Monday, Flexo from Consumerism Commentary was very gracious to feature a guest post written by me analyzing whether or not investors can/should use the late financial adviser, Harry Browne’s, Permanent Portfolio asset allocation strategy as a way to obtain market-beating returns. If you haven’t yet read the post, you can stop by and have a look at the link below:
In order to improve the ease of reading and keep the focus centered in the guest post, I decided not to include several side analysis portions of the original piece I put together when I was researching the Permanent Portfolio topic. As such, the purpose of this post will be to fill in some of these gaps and give some added information on the following subject areas relating to the Permanent Portfolio that were not included in the guest post:
- A correlation coefficient matrix analysis of the returns of the various components of the Permanent Portfolio I defined the the Consumerism Commentary guest post.
- An explanation of my future plans for using the Permanent Portfolio, given the conclusions I arrived at in last week’s guest post above.
What is the Permanent Portfolio? – A Quick Review
For those of you that are hearing about the Permanent Portfolio for the first time, I just wanted to give a quick review about what it involves/does not involve.
- Permanent Portfolio Goal: There are two types of money – money that you can afford to lose and money that you cannot afford to lose. The goal of The Permanent Portfolio is to provide safety and stability to the money you cannot afford to lose in any economic climate.
- There are four broad movements to cover pretty much any economic climate – prosperity, inflation, tight money/recession, and deflation.
- The Permanent Portfolio is a passively managed asset allocation strategy constructed by components in such a way that at least one component is favored by any of the broad movements mentioned above. The Portfolio components are as follows, each carrying equal weight for as long as you hold the Portfolio:
- 25% in stocks, which do well in times of prosperity. Harry recommends that an investor select three index mutual funds to make up this portion of the portfolio. However, index mutual funds and ETFs have improved in recent years, and I now believe that an investor could do this quite effectively with a single fund. It’s important to note that he only mentions that the components should “represent the entire market.” He did not specify whether or not this meant the entire international stock market, or just that of the US. We’ll touch on this more below:
- 25% in gold, which does well in times of inflation, in the form of buying actual bullion coins.
- 25% in bonds, which increase in price during times of deflation, in the form of actual 30 year year long-term US Treasury Bonds.
- 25% in cash, which does well in times of tight money/recession when interest rates rise. Harry recommends investing in a money market mutual fund that invests only in short-term US Treasury securities.
- Rebalancing - Harry recommended that the portfolio be rebalanced once a year back to the 25% allocation targets, but only if a specific component is greater than +/- 10% off from target.
“Refined” Permanent Portfolio Component Return Correlation Coefficient Matrix Analysis
- 25% in stocks – Vanguard S&P 500 Index Fund (ticker symbol: VFINX).
- 25% in gold. Vanguard Precious Metals and Mining Fund (ticker symbol: VGPMX).
- 25% in bonds. Vanguard Long-Term Treasury Fund (ticker symbol: VUSTX).
- 25% in cash. Vanguard Short-Term Federal Fund (ticker symbol: VSGBX).
My Future Plans With The Permanent Portfolio
- Stock Portion - 17.5% of portfolio funds invested in the Vanguard Total Stock Market ETF (ticker symbol: VTI) and 7.5% of portfolio funds invested in the Vanguard Total Int’l Stock Index ETF (ticker symbol: VXUS). These ETFs invest in securities in a manner that tracks the performance of the broad US and all-world ex-US stock indices, respectively, and therefore, represent the entire market, as Browne intended.
- Gold Portion - 25% of portfolio funds invested in the iShares Gold Trust ETF (ticker symbol: IAU). This ETF’s goal is to match the price movements of physical gold bullion. I had considered using the other gold ETF, GLD, but I found that it’s expense ratio was higher than the iShares ETF.
- Bond Portion - 25% of portfolio funds invested in the Vanguard Long-Term Gov’t Bond Index ETF (ticker symbol: VGLT). This ETF tracks the price movements of an index of long-term (>10 years) US Treasury and US Government agency fixed-income securities
- Cash Portion - 25% of portfolio funds invested in the Vanguard Short-Term Gov’t Bond Index ETF (ticker symbol: VGSH). This ETF tracks the price movements of an index of short-term US Treasury and US Government agency fixed-income securities.