The Permanent Portfolio by Craig Rowland & J.M. Lawson

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Green Pimble
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Joined: Thu Jan 14, 2021 8:16 pm

The Permanent Portfolio by Craig Rowland & J.M. Lawson

Post by Green Pimble »

I came to investing, like many people, through Mr. Money Mustache. I have been firmly in the "all stocks, all the time" camp out of ignorance. My current portfolio is 100% equities. Recently I have been thinking about portfolios... "Surely bonds aren't just for old people?"
Finding the link here, I read through some of Tyler9000's posts on his excellent website Portfolio Charts.

There were two real lightbulb moments for me in regards to investing. Firstly, bonds can actually earn money. They're not just 'defensive'. Of course it makes sense when I thought about it, but I never had. The second, real shocker, was discovering that risk is not always rewarded.

WHAT!? :shock:

It turns out, there are portfolios that capture most of the upsides of a 100% stock portfolio, and avoid many of the downsides. I spent the next 5 hours eagerly plugging in numbers and clicking links on Portfolio charts to verify this, and sure enough (based on historic data) it's true. Preaching to the choir I know, but it was news to me.

Seeing the Golden Butterfly Portfolio having performed well in the past I decided to read the Permanent Portfolio and uncover some of the underlying thinking.

The book (a very short review by a complete investing noob)
The book is a re-hash of another investor's portfolio, which he (Harry Browne) wrote about in the 90's. The modern authors have re-approached the same portfolio with a modern take. The book was written in 2012.
The Permanent Portfolio (PP) is based around the idea of holding 25% stocks, 25% long-term bonds, 25% short-term bonds (cash), and 25% gold. The authors argue markets are unpredictable and therefore the portfolio needs to be able to protect wealth that you acquire at your job no matter what the markets are doing. The idea is that each asset class will perform well during one of the four economic conditions: inflation, deflation, recession, and prosperity.

There wasn't much discussion about assets outside of those 4 classes. Where does real estate fit? How well does something like a timber plantation hold its value? and so on. The book does not delve into these, nor does it really explain the reasoning behind picking exactly 25% of each 'class' of asset.
(As an aside, I was interested to learn the relationships between of these 4 classes of assets has not always been the same historically, however. Again, it's one of those things that is obvious in hindsight, but not something I had considered).

After the initial idea (markets are unpredictable) and the portfolio is explained, the authors make recommendations about how to buy and hold each asset class. The book is primarily targetting a US audience which, for me in Australia, was a bit less useful. A later chapter on international investors was thoughtful, but brief. The book makes mention of taxable and non-taxable accounts, what asset class to hold where, how best to rebalance the PP, and how to diversify your investments beyond/outside of one country.

The authors present lots of charts/data regarding the performance of the PP (Although Tyler9000's website is better for this), then conclude that we should all consider the PP if we want to safeguard our wealth.

Offshore gold, really?
A focus of the book, particularly in the chapter on international diversification, is holding gold. The authors recommend holding numbered gold buillon in segregated accounts offshore to best protect the asset from misappropriation. My question for my fellow ERE-ites, is: does anyone actually do this? It seems like overkill, not to mention expensive. Is there a way to do this cheaply? The whole idea of buying gold is a bit daunting for someone who only knows Exchange Traded Funds.

Conclusion
Not a bad book for someone like me who knows very little about investing in general and portfolio design in particular. It's very practical. If you wanted to implement the PP, this book would tell you how. I didn't feel particularly convinced that this exact portfolio was the best, but reading the book certainly changed my mind from "stocks r teh best" to a more nuanced approach. I intend to investigate bonds and gold more thoroughly, and diversify my portfolio when I next have enough money to make the transaction costs worthwhile.

Interested to hear other people's thoughts on the subject :).

white belt
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Re: The Permanent Portfolio by Craig Rowland & J.M. Lawson

Post by white belt »


Green Pimble
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Joined: Thu Jan 14, 2021 8:16 pm

Re: The Permanent Portfolio by Craig Rowland & J.M. Lawson

Post by Green Pimble »

Thanks white belt, I must have missed it!

Tyler9000
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Joined: Fri Jun 01, 2012 11:45 pm

Re: The Permanent Portfolio by Craig Rowland & J.M. Lawson

Post by Tyler9000 »

I think you made my day by talking about how Portfolio Charts helped you level up from the MMM "VTI and chill" mentality to thinking seriously about the benefits of diversification. It's working! :D

Regarding your question about gold, I think it's a matter of degree and just how far you want to go in minimizing counter-party risk. Personally, I'm comfortable holding gold ETFs and I value them for their low expense ratios and just how easy it is to buy and sell. I can see myself eventually adding some bullion, but probably never 100%. And even if you stop short of holding your gold offshore, I believe many PP investors are fans of the gold storage options with the Perth Mint. So you might add that to your list of things to research.

Green Pimble
Posts: 26
Joined: Thu Jan 14, 2021 8:16 pm

Re: The Permanent Portfolio by Craig Rowland & J.M. Lawson

Post by Green Pimble »

Tyler9000 wrote:
Mon Mar 08, 2021 11:57 pm
I think you made my day by talking about how Portfolio Charts helped you level up from the MMM "VTI and chill" mentality to thinking seriously about the benefits of diversification. It's working! :D
It's an excellent website you've created. I found the "DIY portfolio" bit a little confusing at first, but there is a lot of flexibility there. Plus pretty colours make feel good haha.
Tyler9000 wrote:
Mon Mar 08, 2021 11:57 pm
...Personally, I'm comfortable holding gold ETFs and I value them for their low expense ratios and just how easy it is to buy and sell. I can see myself eventually adding some bullion, but probably never 100%...
This is actually really helpful to know, thank you! The authors were clearly not very impressed with Gold ETFs, but the ease of selling and buying is appealing. I am coming from a privleged, educated, white background when I say I can't really imagine a scenario in which I'm withdrawing my gold in a foreign country to pay for food; even more so given my existing skills (medicine) are likely to be in demand forever.

As far as bonds go, do you follow the recommendations of the PP and own them directly?

thai_tong
Posts: 20
Joined: Sun Jul 01, 2018 1:38 pm

Re: The Permanent Portfolio by Craig Rowland & J.M. Lawson

Post by thai_tong »

Can you share what you mean by "plugging numbers into portfolio charts"? Like what life scenarios were you consider?
I believe if you're withdrawing 4% of your portfolio then it helps out to split your investment between stocks and bonds. However, if you earn a salary and intend to add to your investment fund for the next 40 years then you're better off putting it all in stocks. Did you reach the same conclusions?

Green Pimble
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Joined: Thu Jan 14, 2021 8:16 pm

Re: The Permanent Portfolio by Craig Rowland & J.M. Lawson

Post by Green Pimble »

thai_tong wrote:
Tue Mar 09, 2021 4:01 am
Can you share what you mean by "plugging numbers into portfolio charts"? Like what life scenarios were you consider?
Playing around with Portfolio Charts was mostly about exploring what really basic portfolios looked like. For example, what is a 100% stock portfolio like? How about 100% bonds? What about 50% bonds, 50% gold? What about all small-cap? etc. Just getting a feel for how the market has performed in the past with regard to the different asset classes listed.
thai_tong wrote:
Tue Mar 09, 2021 4:01 am
I believe if you're withdrawing 4% of your portfolio then it helps out to split your investment between stocks and bonds. However, if you earn a salary and intend to add to your investment fund for the next 40 years then you're better off putting it all in stocks. Did you reach the same conclusions?
I have not reached the same conclusion. There are several reasons for this.
First, there's no way I intend to work for another 40 years. If I have things my way, and everything goes 'according to plan', I'll work for another 10, tops. I'll continue to work part time my current role because I like my work, but not for financial reasons.

Second, after reading through the Permanent Portfolio, and playing with Portfolio Charts, it is obvious that there are some portfolios that are riskier than others. A total stock market 100% equities portfolio is one of these. I think the heat map charts on Portfolio Charts is probably the best visual representation for me. It shows the real return for any given years after the portfolio was started. Looking at a total stock market portfolio you can see there is a lot of variability, lots of red and blue mixed in. Something like the PP or Golden Butterfly is much more measured, with returns being more predictable.

I don't expect to become rich from the stock market, and I'll be happy if it acts as a store of wealth that beats inflation. Having the money available when I need it later, and not having to wait 5+ years for a bad market to turn, is pushing me towards diversifying my portfolio away from 100% equities.

Hope that makes sense :).

iopsi
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Re: The Permanent Portfolio by Craig Rowland & J.M. Lawson

Post by iopsi »

What about putting a % into crypto?

Maybe instead of gold for example.

Green Pimble
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Joined: Thu Jan 14, 2021 8:16 pm

Re: The Permanent Portfolio by Craig Rowland & J.M. Lawson

Post by Green Pimble »

iopsi wrote:
Wed Mar 10, 2021 4:46 am
What about putting a % into crypto?

Maybe instead of gold for example.
When the Permanent Portfolio was written (2012) BItcoin was not as popular as now. I don't know for sure, but I doubt the authors considered it. They certainly didn't write about it.

As a potentially non-correlated asset to stocks, crypto currencies may have some value as a holding? But I don't know enough about it to be sure. Additionally, I don't know enough about the technology to keep a wallet safe from being stolen. For me, I think gold ETFs or gold buillon is a safer option.

Tyler9000
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Joined: Fri Jun 01, 2012 11:45 pm

Re: The Permanent Portfolio by Craig Rowland & J.M. Lawson

Post by Tyler9000 »

Green Pimble wrote:
Tue Mar 09, 2021 3:11 am
As far as bonds go, do you follow the recommendations of the PP and own them directly?
Personally I prefer ETFs. Buying bonds directly really isn't that hard, but owning them via an ETF is even simpler. While it costs a small ER, it also eliminates the need to buy and sell individual bonds (with potential tax implications) to maintain the proper ladder range. That's a fair tradeoff to me.

thai_tong
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Joined: Sun Jul 01, 2018 1:38 pm

Re: The Permanent Portfolio by Craig Rowland & J.M. Lawson

Post by thai_tong »

Green Pimble wrote:
Wed Mar 10, 2021 12:56 am
I have not reached the same conclusion. There are several reasons for this.
First, there's no way I intend to work for another 40 years. If I have things my way, and everything goes 'according to plan', I'll work for another 10, tops. I'll continue to work part time my current role because I like my work, but not for financial reasons.

Second, after reading through the Permanent Portfolio, and playing with Portfolio Charts, it is obvious that there are some portfolios that are riskier than others. A total stock market 100% equities portfolio is one of these. I think the heat map charts on Portfolio Charts is probably the best visual representation for me. It shows the real return for any given years after the portfolio was started. Looking at a total stock market portfolio you can see there is a lot of variability, lots of red and blue mixed in. Something like the PP or Golden Butterfly is much more measured, with returns being more predictable.
This might be really naive but for someone who is going to keep working for 40 years does the volatility of their portfolio really matter? Doesn't holding anything for 40 years make the risk diminish hugely?

I wasn't suggesting that you would work for 40 years but that's the reality for many people. I meant to point out the two extremes of someone who's already drawing down their savings versus someone who has their whole working life ahead of them. You've got to be between the two extremes so the lessons from each extreme can be helpful.

trfie
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Re: The Permanent Portfolio by Craig Rowland & J.M. Lawson

Post by trfie »

thai_tong wrote:
Tue Mar 09, 2021 4:01 am
Can you share what you mean by "plugging numbers into portfolio charts"? Like what life scenarios were you consider?
I believe if you're withdrawing 4% of your portfolio then it helps out to split your investment between stocks and bonds. However, if you earn a salary and intend to add to your investment fund for the next 40 years then you're better off putting it all in stocks. Did you reach the same conclusions?
There was a recent 30 year period when bonds outperformed stocks, and historically the longest period of time that bonds outperformed stocks was 60 some years. So if your holding period is < 30-60 years and your only choices are stocks and bonds, it would seem to suggest that there should be a bond allocation.
This might be really naive but for someone who is going to keep working for 40 years does the volatility of their portfolio really matter? Doesn't holding anything for 40 years make the risk diminish hugely?
Imagine a 100% stock portfolio for someone who works 40 years and then faces a 70% decline in the year before retirement. To lose 70% of one's savings over a lifetime would be devastating and unnecessary.

thai_tong
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Joined: Sun Jul 01, 2018 1:38 pm

Re: The Permanent Portfolio by Craig Rowland & J.M. Lawson

Post by thai_tong »

That makes a lot of sense Trfie. I'm really shocked that bonds outperformed stocks over such a long period. How were they measuring performance? Was it rick adjusted growth?

mathiverse
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Re: The Permanent Portfolio by Craig Rowland & J.M. Lawson

Post by mathiverse »

The idea that the permanent portfolio was designed to have real returns for slow growth seems to imply that the well performing asset(s) in a portfolio will typically make up for losses in the underperforming asset(s) in the portfolio.

Is the confidence that the well performing part of the portfolio will make up for losses resulting in real returns most years is mostly based on looking at historical returns or if there is a more fundamental economic reason that this is usually the case?

For example, the case in 2008 where stocks crashed, but bonds and gold made up for the drop so the holders of the portfolio came out with gains for the year. Couldn't it very well have been the case that bonds and gold went up, but stocks had crashed so hard it didn't matter and returns were negative? (The last question is kind of rhetorical since I know PP has had negative returns in a given year before, but futhrer...) Wouldn't it be a problem if most years that the situation? Is there any reason we presume most years will be more like 2008 returning positive real returns despite some assets crashing other than past performance of the portfolio? If there is an underlying rationale for why this is expected, then I'd like to know that.

EDIT: I have read up through chapter nine of the PP book in the thread title, but I did not get an answer to this question or maybe I did and I missed it and someone could point out where/what it was. The rest of the book seems to be more about implementation than rationale, so I don't think this question is answered later in the book (though I intend to finish it).

John
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Re: The Permanent Portfolio by Craig Rowland & J.M. Lawson

Post by John »

I feel like everything (stocks, gold, real estate) is really too high right now and looking for some options for my cash.

Do you guys still think the permanent portfolio is good for present time?

Is there a recommended list of ETFs (ideally Vanguard) that matches to the permanent portfolio?

Smashter
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Re: The Permanent Portfolio by Craig Rowland & J.M. Lawson

Post by Smashter »

Hey John, this article  from Portfolio Charts might help reduce your anxiety about investing in the PP during turbulent times. The article is focused on a PP variant but the same principles apply. I personally think it's still "good" as long as you are looking for a defensive portfolio with slow but steady growth.

These Vanguard funds would work:
VV (large cap)
IAU (gold)
VGLT (long term treasuries)

John
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Re: The Permanent Portfolio by Craig Rowland & J.M. Lawson

Post by John »

Thanks Smashter

Tyler9000
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Re: The Permanent Portfolio by Craig Rowland & J.M. Lawson

Post by Tyler9000 »

John wrote:
Fri Mar 26, 2021 4:11 pm
Is there a recommended list of ETFs (ideally Vanguard) that matches to the permanent portfolio?
Stocks: VTI, ITOT, SPTM, SCHB
Bonds: VGLT, TLT, SPTL
Cash: VUSXX, SHV, BIL (or if you prefer ST bonds over bills, VGSH, SHY, SPTS, SCHO)
Gold: IAU, GLD, SGOL

Nomad
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Re: The Permanent Portfolio by Craig Rowland & J.M. Lawson

Post by Nomad »

I haven't read the book but I have too spent a lot of time on porfolio charts and portfolio analyser. My allocation is a bit like the Ivy or Golden Butterfly. Currently, I am watching the markets closely as valuations especially in the US are ridiculously high...

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