Where Are Permanent Portfolios Going?
We have updated our permanent portfolio long term performance table (see Harry Browne’s Permanent Portfolio Long Term Performance):
As of 12/31/2014:
The permanent portfolio recovered nicely last year, returning 7.6%, compared with -3.8% in 2013, the second worst year in the 45 year history.
The following table shows how other similar portfolios have performed:
Portfolio Performance Comparison (as of 2/16/2015):
|1Yr AR||3Yr AR||5Yr AR||10Yr AR||10Yr Sharpe|
|Harry Browne Permanent Portfolio||1.9%||6.3%||2.3%||6.9%||7.1%||0.86|
|Permanent Income Portfolio||1.4%||10.9%||6.3%||8.8%||6.5%||0.94|
|Bridgewater All Weather Portfolio Risk Parity||1.0%||4.3%||2.7%||5.6%||5.7%||1.2|
|Bridgewater All Weather Portfolio||1.4%||4.5%||3.3%||7.0%||7.0%||1.07|
|PRPFX (Permanent Portfolio)||3.2%||0.0%||0.2%||5.8%||7.1%||0.57|
|VFINX (Vanguard 500 Index Investor)||2.1%||16.8%||18.1%||16.5%||7.8%||0.33|
|VBINX (Vanguard Balanced Index Inv)||1.7%||11.3%||11.7%||11.8%||7.1%||0.51|
In addition to Harry Browne Permanent Portfolio, our Permanent Income Portfolio also did very well last year, returning 11.8% in 2014, thanks to the strong returns of long term bonds, REITs and US stocks.
The all weather portfolios also recovered last year, again mostly due to the strength in long term bonds.
Outlook of the Permanent Portfolio
It naturally begs the question that how the permanent portfolio will perform in the coming decade. This is especially pertinent as currently, stocks are over valued by many popular long term valuation metrics. Furthermore, long term bonds have risen so much and their current yields have been at one of the lowest levels in modern history.
Let’s play with the following possible scenarios for the next 10 years:
Scenario 1, Long term rate remains constant:
- Cash: assume 1% annual return (though currently cash yields almost nil, it is possible for it to return more if the Fed starts to raise interest rate)
- Stocks: US stocks will return 1.4% annually, based on Hussman’s latest estimate.
- Long term bonds: If we assume the long term bonds maintain its current yield (Vanguard long term Treasury bond fund VUSTX yielded 2.58% last year), 2.58%
- Gold: ??
For the permanent portfolio to return 6% annually in the next 10 years, it requires Gold to return almost 20% annually!
Scenario 2, Long term rate declines in half
- Cash: assume 1% annual return
- Stocks: again 1.4% annual return
- Long term bonds: If we assume a deflation environment and long term bond’s yield will decline in half in the next 10 years, that would translate to about 9% annual return
- Gold: ??
For the permanent portfolio to return 6% annually in the next 10 years, it requires Gold to return about 13% annually.
So assuming the dismal 1.4% long term stock annual return, it is almost certain to require gold to deliver double digit returns annually for the permanent portfolio to deliver an average 6% return, even in an ‘optimistic’ assumption on the long term bonds’ returns. Or put it another way, if we believe in the 1.4% annual return assumption on US stocks for the next decade, for the permanent portfolio to perform well, we have to trust gold will deliver a good double digit return every year.
Historically, the period between 2000 to 2009 is a good example. In these 10 years, S&P 500 (VFINX) lost -0.9% annually while gold (GLD) returned a whopping 28% annually. Furthermore, the long term bond (VUSTX) delivered another 7.5%. In this decade, the permanent portfolio returned 6.6% annually.
Certainly, one can argue that Hussman’s 1.4% annual return of stocks is too low.
Scenario 3, stocks will still have a ‘normal return
- Cash: assume 1% annual return
- Stocks: 8% ‘normal’ annual return
- Long term bonds: ??
- Gold: ??
For the portfolio to deliver 6% annual return, bonds and gold need to deliver about 7-8% annually every year in the above scenario. This becomes more reasonable.
The above back of the envelope exercise is by no means accurate. However, one thing is reasonably clear: if US stocks is indeed in such an overvalued state, the permanent portfolio will almost need to rely on gold’s double digit return annually. This seems to be challenging.
What the above also tells us is that when one of the assets (stocks or bonds) becomes extremely over valued, mathematically, it is easier to see what other assets need to deliver for the portfolio to have a reasonable return.
US stocks rose strongly last week (2.1%) while other rate sensitive assets declined. Markets swayed to the riskier spectrum as investors were more optimistic about a Greece-EU agreement. Apparently, at the moment, markets are still in a searching mode. In bond markets, high yield bonds still lack of stocks’ enthusiasm and are still ranked lower than the total bond market index.
For more detailed asset trend scores, please refer to 360° Market Overview.
We would like to remind our readers that markets are more precarious now than other times in the last 5 years. It is a good time and imperative to adjust to a risk level you are comfortable with right now. However, recognizing our deficiency to predict the markets, we will stay on course.
We again copy our position statements (from previous newsletters):
Our position has not changed: We still maintain our cautious attitude to the recent stock market strength. Again, we have not seen any meaningful or substantial structural change in the U.S., European and emerging market economies. However, we will let markets sort this out and will try to take advantage over its irrational behavior if it is possible.
We again would like to stress for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot.
- February 9, 2015: How Have Asset Allocation Funds Done?
- February 2, 2015: Risk Management Everywhere
- January 26, 2015: Composite Portfolios Review
- January 19, 2015: Fixed Income Investing Review
- January 12, 2015: How Does Trend Following Tactical Asset Allocation Strategy Deliver Returns
- January 5, 2015: When Forecast Fails
- December 22, 2014: Long Term Asset Returns: How Long Is Long?
- December 15, 2014: Beaten Down Assets
- December 8, 2014: Implementing Core Asset Portfolios In a Brokerage
- December 1, 2014: Two Key Issues of Investment Strategies
- November 24, 2014: Holiday Readings
- November 17, 2014: Retirement Spending Portfolios Update
- November 10, 2014: Fixed Income Or Cash
- November 3, 2014: Asset Trend Review
- October 27, 2014: Investment Loss, Mistakes And Market Cycles
- October 20, 2014: Strategic Portfolios With Managed Volatility
- October 13, 2014: Embrace Volatility
- October 6, 2014: Tips For 401k Open Enrollment
- September 29, 2014: What Can We Learn From Bill Gross’ Departure From PIMCO?
- September 22, 2014: Why Total Return Bond Funds?
- September 15, 2014: Equity And Total Return Bond Fund Composite Portfolios
- September 8, 2014: Momentum Based Portfolios Review
- September 1, 2014: Risk & Diversification: Mint.com Interview
- August 25, 2014: Remember Risk
- August 18, 2014: Consistency, The Most Important Edge In Investing: Tactical Case
- August 11, 2014: What To Do In Overvalued Stock Markets
- August 4, 2014: Is This The Peak Or Correction?
- July 28, 2014: Stock Musings
- July 21, 2014: Permanent Portfolios & Four Pillar Foundation Based Framework
- July 14, 2014: Composite Portfolios Review
- July 7, 2014: Portfolio Behavior During Market Corrections
- June 30, 2014: Half Year Brokerage ETF and Mutual Fund Portfolios Review
- June 23, 2014: Newsletter Collection Update
- June 16, 2014: There Are Always Lottery Winners
- June 9, 2014: The Arithmetic of Investment Mistakes
- June 2, 2014: Tips On Portfolio Rebalance
- May 26, 2014: In Praise Of Low Cost Core Asset Class Based Portfolios
- May 19, 2014: Consistency, The Most Important Edge In Investing: Strategic Case
- May 12, 2014: How To Handle An Elevated Overvalued Market
- May 5, 2014: Asset Allocation Funds Review
- April 28, 2014: Now The Economy Backs To The ‘Old Normal’, Should Our Investments Too?
- April 21, 2014: Total Return Bond Investing In The Current Market Environment
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