Permanent portfolio and asset allocation
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Thread: Permanent portfolio and asset allocation

  1. #1
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    Permanent portfolio and asset allocation

    I thought I'd start a new thread because it looks like we had hijacked another thread but had some material that would be good to discuss in more detail.

    I've always been interested in diversification, and had wandered on my own towards a strategy that turned out to be a lot like Browne's Permanent Portfolio which is equal weights of stocks, government bonds, gold, cash. I'm also interested in reading about other diversification approaches.

    Here's some data I have for a permanent portfolio, Jan 2006 to today (10+ years) using 25% XIC, 25% XGB, 25% MNT, 25% XSB. Some of the numbers are imperfect because data wasn't available for the full range.

    Performance for the full 10+ years: 5.8%, worst year -2.9%
    Benchmark: 50/50 XIU and XBB: 4.3%, worst year -12.6%
    Annual returns:
    2006: 11.5%
    2007: 6.6%
    2008: 2.9%
    2009: 11.7%
    2010: 12.3%
    2011: 4.4%
    2012: 3.8%
    2013: -2.9%
    2014: 7.5%
    2015: 0.8%
    2016: 3.0%

    This looks pretty appealing to me. Not only is the long term performance greater, but the volatility and risk is less.

    Others had the following comments to this:

    Quote Originally Posted by Nerd Investor View Post
    I would highly recommend you read Global Asset Allocation by Meb Faber. It's pretty cheap as an e-book and he regularly has promotions on his website where you can get it for free or even cheaper.

    He compares various 'famous' portfolios with different asset allocations including Browne's permanent portfolio. From what I recall, the permanent portfolio is actually the worst performing of the bunch but the ultimate conclusion is that they all beat the index over long periods and many end up actually having similar exposure once you simplify the asset classes.

    Quote Originally Posted by agent99 View Post
    Why compare what is essentially a balanced portfolio containing mix of fixed income and equity with XIU (an all equity etf)?? The comparison should be with a balanced fund or etf.

    10 yrs is not really a long enough period to use to make a decision. But sometimes longer term data may be harder to find.

    I don't think there is any magic allocation that will work for all times. Those are just for those who do not have time or inclination to adjust portfolios for changing times.

    Quote Originally Posted by My Own Advisor View Post
    "I don't think there is any magic allocation that will work for all times."

    Yup - depending upon the timeframe you pick, to measure that allocation performance, you could look like a hero or a goat.

    You need to compare apples to apples as much as possible. I'm not a huge fan of Browne's Permanent Portfolio but that's because my approach is different. Doesn't make it right or wrong, just is


  2. #2
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    I should add that in the permanent portfolio, it's perfectly feasible to have US exposure within that 25% stock allocation too and realistically you'd probably do 12.5% TSX, 12.5% S&P 500. To simplify the comparison I just used the Canadian stock index in this comparison.

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    If holding entirely in registered accounts, I'd go 100% global for the stock allocation. Why limit yourself to North America?

    In non-registered there's a tax advantage to Canadian dividends so I would probably go a little heavier on Canadian in that situation.

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    When an ultra-bear like me is suddenly excited about increasing his stock allocation, does that signify a market top? I'm a guy with 4% in stocks and talking here about increasing it to 25%

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    Quote Originally Posted by Spudd View Post
    If holding entirely in registered accounts, I'd go 100% global for the stock allocation. Why limit yourself to North America?

    In non-registered there's a tax advantage to Canadian dividends so I would probably go a little heavier on Canadian in that situation.
    Spudd: what would you go with for the global stock allocation?

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    Yes, I am worried james

    Kidding aside, in terms of diversification I believe you can own the top sector holdings across our Canadian market and avoid using the Canadian index as part of your portfolio. I just wrote about this actually since I've been thinking about this stuff of late....
    http://www.myownadvisor.ca/canadian-...-buy-and-hold/

    Then, after you own your "top-stocks" you supplement the Canadian portfolio using VTI and VXUS in your RRSP.

    No bonds here but that's because I have a small pension and I consider that a big bond. So, my asset allocation is 100% stocks.
    Hidden Content - Working on a $1 million portfolio and $30k per year from it.

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    My Own Advisor, I understand how one can optimize or geographically diversify the stock part of the holdings, but I'm curious why you don't like the idea of the broader diversification outside of stocks?

    You said earlier,
    depending upon the timeframe you pick, to measure that allocation performance, you could look like a hero or a goat.
    But analyses on diversified portfolios like the Permanent Portfolio have gone back many decades, on US data, it definitely shows strong performance with undeniably less volatility and milder down years. Isn't that very compelling? It covers a number of periods including high inflation/low inflation, high interest rates, low interest rates, and the permanent portfolio had steady performance and low volatility throughout all of this.

    Pure stock allocation just can't do that. Bonds & stocks together do it to some degree -- and I often endorse balanced funds -- but why not add more diversification since it reduces volatility further?

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    Quote Originally Posted by james4beach View Post
    ... a strategy that turned out to be a lot like Browne's Permanent Portfolio which is equal weights of stocks, government bonds, gold, cash.

    Not only is the long term performance greater, but the volatility and risk is less.
    Dan and Justin did an analysis of the PP vs the GCP here. Here's a quick summary:

    December 1979 to August 2011:

    Global Couch Potato Portfolio:
    Annualized Return: 10.13%
    Annualized Standard Deviation: 8.83%
    Sharpe Ratio: 0.40

    Permanent Portfolio:
    Annualized Return: 8.81%
    Annualized Standard Deviation: 6.73%
    Sharpe Ratio: 0.32

    GCP has a better return but with a greater ASD. I can't think of a single reason why someone in the accumulation phase, years out from retirement, would put 25% of their portfolio in cash. It's sure to get killed vs inflation. In order to get market returns you need to accept market risk, not cower in cash. My two cents, anyway.

    Edit to add: Why are you only looking at Canadian funds when Canada is ~8% of the world's markets. Too much home bias IMO.
    Last edited by Video_Frank; 2016-03-21 at 09:23 PM.

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    Thanks, that's a neat comparison with the Global Couch Potato Portfolio.

    The comparison gives volatility measures but stated that way, it doesn't make intuitive sense to people. To get a better sense look at rough periods and max declines. For example in 2008, the GCP fell -20% vs +3% for the PP. That's a huge difference and I think it shows the value of the PP.

    I agree that GCP gave higher returns than PP (an advantage of 1.32% per year in the very long term). We all talk about how you should just accept market risk and sit through volatile periods to achieve the best returns in the long term -- that's the theory. In practice, volatile periods cause a lot of difficulty.

    When you see your life savings drop by 20% in one year, it's scary. You start to ask legitimate questions like, am I really willing to experience another 20% drop like that? What if this is the start of a prolonged bear market and it's ten years before the value recovers? What if you lose your job during a depression/bear market... e.g. 2008... and suddenly need to tap into the cash. There are certainly people who post on these forums who had to abandon the stock investments for various reasons. Job loss, illness, emergency, etc.

    PP reduces the volatility substantially and eliminates many of these concerns. I guess it becomes a question of how much performance you're willing to sacrifice for that.

  11. #10
    Senior Member Video_Frank's Avatar
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    True enough. I've been through a few healthy drops now so it doesn't phase me at all. I'd still rather be in bonds than cash though - a GIC ladder gives you 0% risk but still outperforms cash.


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