Inspired by George's Leveraged Income Experiment, a lot of reading over the past several months, and some very low borrowing rates, I've decided to take the Permanent Portfolio concept and see if I can't lever it to generate a higher than normal return.
I won't explain PP here -- just go to www.crawlingroad.com for that. From the stats found there you can see that the basic portfolio has averaged about 9.7% annually over more than 25 years, with a low of about -4% and a high over 40%. So its pretty consistent in generating positive returns without large draw-downs overall.
Essentially, I am going to be borrowing money at 2% and then investing it in the four PP components: gold, stocks, long bonds and cash.
In order to make it worth the bleed from borrowing, I wanted to increase the volatility of the individual components (except cash). So I came with the following modifications:
Gold -- already volatile enough -- will just use GLD
Long Bonds -- typical component is TLT -- I will use EDV, a zero coupon bond fund, which is about 1.5 times as volatile.
Stocks -- after looking at a lot of things, I settled on a proxy, JJC, which is a copper fund. If you have studied copper, you know that it tends to lead world stock markets up or down. Over the past several years, JJC has performed like the stock market, but with increased volatility similar to EDV, but in the other direction.
Cash -- usually SHY or t-bills. I don't think I can do better than the 2% borrowing cost in this financial environment, so I will simply leave this component "unborrowed" unless required to pay debt or at rebalancing.
Rebalancing: I will rebalance the portfolio whenever one component rises to 35% of the total (including the "unborrowed" amount) or sinks to 15%. If cash is generated out of the rebalancing, which is idea, it will pay debt first.
Starting today with about $10K in each of GLD ($10,118), EDV ($9955)) and JJC ($9900). Unborrowed funds are $10K. Will let you know how it goes every month or when there is rebalancing.
Leveraged Permanent Portfolio Experiment
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jennypenny
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George the original one
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Hmm, are you not uncomfortable with using a metal index as a proxy for a broad market index? Even if JJC behaves like a high beta S&P 500 fund, fundamentally it's a copper fund. Aren't you worried about overweighting metals? Why not move into a higher beta S&P fund? Have you seen these?
http://www.invescopowershares.com/volatility/
The two funds are a quarterly rebalanced subset of the S&P 500. The low volatility version takes the 100 lowest volatility stocks in the S&P 500, the high beta version the 100 highest volatility stocks. The high beta seems a little thinly traded at the moment, however. I've got to believe there are broad stock ETFs with more volatility out there though, if that's what you're going for.
http://www.invescopowershares.com/volatility/
The two funds are a quarterly rebalanced subset of the S&P 500. The low volatility version takes the 100 lowest volatility stocks in the S&P 500, the high beta version the 100 highest volatility stocks. The high beta seems a little thinly traded at the moment, however. I've got to believe there are broad stock ETFs with more volatility out there though, if that's what you're going for.
Thanks for that link, akratic. It is in fact the "decay" problem mentioned in that thread that made me stay away from the levered gold and stock ETFs/ETNs. Having experimented with them a couple years ago, I saw that you really weren't realizing the advertised returns and when the market was flat, they tended to decline. As someone said there, they are not very good long-term investments. They are good for day or week trading, though.
On the other hand, JJC seems to perform very closely to the S&P over time, only with bigger peaks and valleys. See this chart for a comparison: http://www.marketwatch.com/investing/st ... style=1013
Hope that link actually works. (Add EDV for comparison and you will see something even more interesting.) As the old saw goes, Dr. Copper is the metal with a Ph.D in Economics. It reflects broad worldwide growth and contraction very well and generally leads the market up or down.
@Bendoza -- although they are both metals, gold and copper behave very differently, because gold has only small industrial use, but that's all copper is really good for. Gold behaves more like a money substitute largely because central banks still place considerable value on it, hold it and trade it.
Incidentally, after reading his books from the 1980s, I think Harry Browne misunderstood what conditions were generally favorable for gold. He thought it just responded to inflation, when it really seems to be more in tune with real interest rates -- i.e., the rates set by the Fed minus inflation. When the real rates go negative, gold does well like in the late 1970s and the past several years. I would get out of gold in a heartbeat if I thought the Fed was going to raise rates by any significant amount.
On the other hand, JJC seems to perform very closely to the S&P over time, only with bigger peaks and valleys. See this chart for a comparison: http://www.marketwatch.com/investing/st ... style=1013
Hope that link actually works. (Add EDV for comparison and you will see something even more interesting.) As the old saw goes, Dr. Copper is the metal with a Ph.D in Economics. It reflects broad worldwide growth and contraction very well and generally leads the market up or down.
@Bendoza -- although they are both metals, gold and copper behave very differently, because gold has only small industrial use, but that's all copper is really good for. Gold behaves more like a money substitute largely because central banks still place considerable value on it, hold it and trade it.
Incidentally, after reading his books from the 1980s, I think Harry Browne misunderstood what conditions were generally favorable for gold. He thought it just responded to inflation, when it really seems to be more in tune with real interest rates -- i.e., the rates set by the Fed minus inflation. When the real rates go negative, gold does well like in the late 1970s and the past several years. I would get out of gold in a heartbeat if I thought the Fed was going to raise rates by any significant amount.
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George the original one
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@44deagle - visit http://individuals.interactivebrokers.c ... f=interest and click on the "interest charged to you" tab.
@ 44deagle -- I have a lot of assets and almost no debt, so banks want to lend me money. They only want to lend you money when you don't really need it. As the Fed has reduced rates, the rates on one of my credit lines fell all the way down to 2% last year. So I have been trying to come up with a strategy to use it. I am pretty confident the Fed won't raise rates anytime soon.
Looks like I should open a trading account at interactive brokers, though -- my margin rates are not as good as George's.
Looks like I should open a trading account at interactive brokers, though -- my margin rates are not as good as George's.
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Obadobadope
- Posts: 47
- Joined: Mon Dec 26, 2011 11:18 pm
I have just switched to IB as well, saving me 3000 a year in interest. With the Fed forecasting no change in the benchmark rate for two years, and many solid stocks yielding 8% at current P/E ratios, I will be keeping two-fold leverage for some time.
IB is a deep discount brokerage designed for large volume traders. Their user interface, account management website, and research products reflect that, be warned. They have account requirements of $40,000 a year income and at least 250 lifetime stock trades to open an account.
IB is a deep discount brokerage designed for large volume traders. Their user interface, account management website, and research products reflect that, be warned. They have account requirements of $40,000 a year income and at least 250 lifetime stock trades to open an account.
This is the first update for one month into this experiment:
GLD +4.62% (current value $10,586)
EDV -4.18% (current value $9,539)
JJC +8.59% (current value $10,751)
Unborrowed Cash -0.17% (current accounting value $9,950)
Note for accounting and re-balancing purposes, I have subtracted the interest paid on the invested amounts from the unborrowed cash portion, even though this only represents funds "available" to invest in the experiment and not an actual investment.
Total Starting Balance: $39,993
Total Current Balance: $40,826
Net Unrealized Profit (Loss): $833
No re-balancing in sight. There's nothing really to do at this point except to keep watching.
GLD +4.62% (current value $10,586)
EDV -4.18% (current value $9,539)
JJC +8.59% (current value $10,751)
Unborrowed Cash -0.17% (current accounting value $9,950)
Note for accounting and re-balancing purposes, I have subtracted the interest paid on the invested amounts from the unborrowed cash portion, even though this only represents funds "available" to invest in the experiment and not an actual investment.
Total Starting Balance: $39,993
Total Current Balance: $40,826
Net Unrealized Profit (Loss): $833
No re-balancing in sight. There's nothing really to do at this point except to keep watching.
This is the second update for two months into this experiment. All percentages are cumulative:
GLD +4.15% (current value $10,537)
EDV -4.75% (current value $9,482)
JJC +8.00% (current value $10,693)
Unborrowed Cash -0.33% (current accounting value $9,900)
Note for accounting and re-balancing purposes, I have subtracted the interest paid on the invested amounts from the unborrowed cash portion, even though this only represents funds "available" to invest in the experiment and not an actual investment.
Total Starting Balance: $39,993
Total Current Balance: $40,612
Net Unrealized Profit (Loss): $619
Lost about $214 this past month, although things were much more volatile from day-to-day. Still, its like watching paint dry, which is probably a good thing long term.
GLD +4.15% (current value $10,537)
EDV -4.75% (current value $9,482)
JJC +8.00% (current value $10,693)
Unborrowed Cash -0.33% (current accounting value $9,900)
Note for accounting and re-balancing purposes, I have subtracted the interest paid on the invested amounts from the unborrowed cash portion, even though this only represents funds "available" to invest in the experiment and not an actual investment.
Total Starting Balance: $39,993
Total Current Balance: $40,612
Net Unrealized Profit (Loss): $619
Lost about $214 this past month, although things were much more volatile from day-to-day. Still, its like watching paint dry, which is probably a good thing long term.
Third update. All percentages cumulative:
GLD +0.82% (current value $10,201)
EDV -5.56% (current value $9,399)
JJC +1.76% (current value $10,075)
Unborrowed cash -0.83 (current value $9,917)
Note for accounting and re-balancing purposes, I have subtracted the interest paid on the invested amounts from the unborrowed cash portion and added a $67 dividend paid by EDV, even though this only represents funds "available" to invest in the experiment and not an actual investment.
Total Starting Balance: $39,993
Total Current Balance: $39,592
Net Unrealized Profit (Loss): ($401)
Lost $1020 last month. Pretty ugly, actually.
GLD +0.82% (current value $10,201)
EDV -5.56% (current value $9,399)
JJC +1.76% (current value $10,075)
Unborrowed cash -0.83 (current value $9,917)
Note for accounting and re-balancing purposes, I have subtracted the interest paid on the invested amounts from the unborrowed cash portion and added a $67 dividend paid by EDV, even though this only represents funds "available" to invest in the experiment and not an actual investment.
Total Starting Balance: $39,993
Total Current Balance: $39,592
Net Unrealized Profit (Loss): ($401)
Lost $1020 last month. Pretty ugly, actually.
kapitall.com is a good tool to test and see how a portfolio did over time... You just enter the starting trades for any date (it can query historic prices).
You can even add rebalances, but you'll need the EOD data from somewhere else, like yahoo.
Here's a test permanent portfolio I ran for 7/1/11-3/15/12:
http://dl.dropbox.com/u/91156/PP_return.jpg
You can even add rebalances, but you'll need the EOD data from somewhere else, like yahoo.
Here's a test permanent portfolio I ran for 7/1/11-3/15/12:
http://dl.dropbox.com/u/91156/PP_return.jpg
Fourth update. All percentages cumulative:
GLD -3.88% (current value $9,725)
EDV -0.80% (current value $9,876)
JJC +1.35% (current value $10,034)
Unborrowed cash -1.33% (current value $9,867)
Note for accounting and re-balancing purposes, I have subtracted the interest paid on the invested amounts from the unborrowed cash portion, even though this only represents funds "available" to invest in the experiment and not an actual investment like the other components.
Total Starting Balance: $39,993
Total Current Balance: $39,502
Net Unrealized Profit (Loss): ($491)
Not much change since last month. Basically EDV recovered and GLD took it on the chin, mostly this past week. But since nothing has changed that much, its kind of been a slow bleed overall.
GLD -3.88% (current value $9,725)
EDV -0.80% (current value $9,876)
JJC +1.35% (current value $10,034)
Unborrowed cash -1.33% (current value $9,867)
Note for accounting and re-balancing purposes, I have subtracted the interest paid on the invested amounts from the unborrowed cash portion, even though this only represents funds "available" to invest in the experiment and not an actual investment like the other components.
Total Starting Balance: $39,993
Total Current Balance: $39,502
Net Unrealized Profit (Loss): ($491)
Not much change since last month. Basically EDV recovered and GLD took it on the chin, mostly this past week. But since nothing has changed that much, its kind of been a slow bleed overall.
Fifth update. All percentages cumulative:
GLD -2.73% (current value $9,839)
EDV +7.70% (current value $10,722)
JJC -7.61% (current value $9,148)
Unborrowed cash -1.83% (current value $9,817)
Note for accounting and re-balancing purposes, I have subtracted the interest paid on the invested amounts from the unborrowed cash portion, even though this only represents funds "available" to invest in the experiment and not an actual investment like the other components.
Total Starting Balance: $39,993
Total Current Balance: $39,526
Net Unrealized Profit (Loss): ($467)
Lots of gyrations and volatility of the individual components, but not much change in the end. As the markets have fallen, the bonds have risen sharply.
GLD -2.73% (current value $9,839)
EDV +7.70% (current value $10,722)
JJC -7.61% (current value $9,148)
Unborrowed cash -1.83% (current value $9,817)
Note for accounting and re-balancing purposes, I have subtracted the interest paid on the invested amounts from the unborrowed cash portion, even though this only represents funds "available" to invest in the experiment and not an actual investment like the other components.
Total Starting Balance: $39,993
Total Current Balance: $39,526
Net Unrealized Profit (Loss): ($467)
Lots of gyrations and volatility of the individual components, but not much change in the end. As the markets have fallen, the bonds have risen sharply.
Sixth update. All percentages cumulative:
GLD -4.23% (current value $9,689)
EDV +11.13% (current value $11,063)
JJC -4.76% (current value $9,429)
Unborrowed cash -1.60% (current value $9,840)
Note for accounting and re-balancing purposes, I have subtracted the interest paid on the invested amounts from the unborrowed cash portion and added a $73 dividend paid by EDV, even though this only represents funds "available" to invest in the experiment and not an actual investment.
Total Starting Balance: $39,993
Total Current Balance: $40,201
Net Unrealized Profit (Loss): $208
It's "back in black" thanks mostly to performance in the long bonds. The whole thing is remarkably stable given its volatile components.
GLD -4.23% (current value $9,689)
EDV +11.13% (current value $11,063)
JJC -4.76% (current value $9,429)
Unborrowed cash -1.60% (current value $9,840)
Note for accounting and re-balancing purposes, I have subtracted the interest paid on the invested amounts from the unborrowed cash portion and added a $73 dividend paid by EDV, even though this only represents funds "available" to invest in the experiment and not an actual investment.
Total Starting Balance: $39,993
Total Current Balance: $40,201
Net Unrealized Profit (Loss): $208
It's "back in black" thanks mostly to performance in the long bonds. The whole thing is remarkably stable given its volatile components.
Seventh update (note I missed August). All percentages cumulative:
GLD +5.10% (current value $10,634)
EDV +4.96% (current value $10,448)
JJC +2.42% (current value $10,140)
Unborrowed cash -2.60% (current value $9,740)
Note for accounting and re-balancing purposes, I have subtracted the interest paid on the invested amounts from the unborrowed cash portion, even though this only represents funds "available" to invest in the experiment and not an actual investment.
Total Starting Balance: $39,993
Total Current Balance: $40,962
Net Unrealized Profit (Loss): $969
GLD +5.10% (current value $10,634)
EDV +4.96% (current value $10,448)
JJC +2.42% (current value $10,140)
Unborrowed cash -2.60% (current value $9,740)
Note for accounting and re-balancing purposes, I have subtracted the interest paid on the invested amounts from the unborrowed cash portion, even though this only represents funds "available" to invest in the experiment and not an actual investment.
Total Starting Balance: $39,993
Total Current Balance: $40,962
Net Unrealized Profit (Loss): $969