Gold, US Equities, Long Term Treasuries and Cash Make For an Uncanny Portfolio
03/16/2011 0 comments
Aging boomers highlight the major retirement crisis as they come to the end of their working careers. They don’t have enough money. There is no money to bail out retirement – it’s already been spent on salvaging the economy for the working. This is one of the first generations for whom their retirement is based on what they have with little assistance from Social Security. Henceforth, the bleak reality is that this will apply to everybody.
It is going to be up to the individual to make the most of what they have. We will have to accept less or work longer or achieve better returns from their investments.
We are exploring a range of different portfolios looking for ideas to help improve returns for retirement investors. We believe that it is vital for the individual to be more involved with their retirement investing to see better results. These articles are intended to help build the foundational understanding that will enable better returns, lower risk and less angst in our lives.
The Harry Browne Permanent Portfolio has defied conventional thinking with a lazy portfolio of four assets, Cash, Gold, US Equities and Long term treasury bonds. This is a three asset class portfolio with two fixed income assets (50%) of the portfolio with US Equities and Gold -- being a specialized type of commodity.
- 25% in U.S. stocks, to provide a strong return during times of prosperity. For this portion of the portfolio, Browne recommends a basic S&P 500 index fund such as VFINX or FSKMX.(VTI, SPY)
- 25% in long-term U.S. Treasury bonds, which do well during prosperity and during deflation (but which do poorly during other economic cycles).(LQD)
- 25% in cash in order to hedge against periods of “tight money” or recession. In this case, “cash” means a money-market fund. (Note that our current recession is abnormal because money actually isn’t tight — interest rates are very low.)
- 25% in precious metals (gold, specifically) in order to provide protection during periods of inflation. Browne recommends gold bullion coins.(GLD)
The first thing to note is that the portfolio is very stable. It has similar properties to a tactical asset allocation in the sense that it resists taking losses very well. Just about every lazy portfolio has the same unpleasant V in the 2009 timeframe and the Browne permanent is about the only one that avoids this. The combination of gold, cash, long term treasury and US equities turned out to be the perfect hedge against the downturn.
And even after the downturn, gold and US equities have performed very well even until today where Gold and US are second and third on the rank of major asset classes.
We now compare the returns of the original portfolio compared with the same funds being deployed with strategic and tactical asset allocation strateties.
- SAA keeps all the funds in the portfolio but moves assets between cash and treasury bonds -- so that the fixed income may all be treasury bonds or equally split with cash or all cash.
- TAA will do the same as SAA but can also move all the risk assets into cash or bonds
Portfolio Performance Comparison
| Portfolio Name | 1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe |
|---|---|---|---|---|---|---|
| Harry Browne Permanent Portfolio | 11% | 168% | 6% | 61% | 8% | 81% |
| Harry Browne Permanent Portfolio Plan Strategic Asset Allocation Moderate | 12% | 164% | 7% | 56% | 9% | 76% |
| Harry Browne Permanent Portfolio Plan Tactical Asset Allocation Moderate | 10% | 140% | 2% | 20% | 5% | 50% |
We would expect the Tactical Asset Allocation strategy to struggle. With only three asset classes, there is nowhere to hide in terms of hedging and doesn't do well until the last couple of months when it catches up with the original. Both the SAA and TAA portfolios only have 40% in fixed income as opposed to the original that has 50% so the SAA and TAA are more aggressively positioned in risk equities.
In the middle of 2010 when US equities corrected, the SAA dropped significantly while the TAA and Browne original plans use different approaches to minimize downside. As we entered 2011, the fixed long term treasuries weighed on the Browne Original where TAA and SAA rotated them out into cash and let the risk assets pull them up.
Despite this, the Browne portfolio charts an uncannily even path through volatile waters and delivers reasonable returns with little effort and volatility. We can see benefits from being able to rotate subclasses in but at the cost of some volatility and extra trading that some would think unwelcome.
In a future article we will add consider adding an extra asset class to see if that would enable us to get better returns without sacrificing volatilty.
Disclosure:
MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.
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