How did Permanent Portfolio perform during the bad month of Jun 13, when stocks, bonds, and gold prices took a beating?
For those who had implemented the Permanent Portfolio within the past 1 year, you must be having some doubts about it because it is likely you are suffering from paper losses. I want to write this post to give you some motivation and tide you through the ‘tough times’. 1 year is a short time. As long as you are committed to invest in Permanent Portfolio, you will do fine in many years to come if you follow the rules diligently. Re-balance once you hit the 15% or 35%. Right now, we are not there yet, at least for the model portfolio that we are discussing here. If you are still having problems, email me and let me help you.
Yes, our model Singapore Permanent Portfolio had a negative return of -1.28% since the start of 2012 or -7.67% since the start of 2013.
The good news is that the volatility is still manageable and that is the beauty of Permanent Portfolio – investors are not easily scared off by the volatility. How low is this volatility?
The maximum drawdown in 2013 was -9.32% . This means that you are looking at your portfolio bottomed out at -9.32% before recovering slowly to -7.67%. If we look longer, the model portfolio has only lost 1% since the inception in 2012. If you cannot even stomach Permanent Portfolio’s volatility, you should not be in stocks, gold or long term bonds at all (looking at the chart below will tell you the volatility of any asset class alone is much higher than Permanent Portfolio). You should just keep the money in the bank or buy short term bonds. Volatility is necessary for the returns you desire.
Gold price is volatile and considering it has 12 years of bull run, it is definitely time for some price pull back. Does it mean there is a chance to re-balance the Permanent Portfolio? Can you buy gold now?
To answer this question, we need to look at the overall portfolio weightage.
- STI ETF: 29.26%
- SGS Bonds: 24.22%
- SPDR Gold Trust: 17.94%
- Cash: 28.58%
Indeed gold is about 18% of the portfolio value and it is near to the re-balancing point of 15%. If gold price continues to drop, we can see an opportunity to use some of the cash to buy gold and also reduce the exposure in stocks.
Permanent Portfolio is a long term investment plan. It is designed to help investors go through good times and bad times with minimal volatility so that they can stick around long enough to reap the long term average returns – You have to understand why most investors lose money to truly understand the value of Permanent Portfolio. We should see “crashes” as good news because they provide opportunities to re-balance the portfolio and allow investors to buy low and sell high.
Do visit the Singapore Permanent Portfolio Performance page for future updates.
From the weightage in the allocation of the Permanent Portfolio, it’s a rather conservative approach to investment for the long term with only 29% in stocks and cash of 28%.
I am surprised that SG Bonds gave a negative returns, if that’s the case then get it out of the portfolio and convert them into corporate bonds.
I never believe in having commodities like gold or silver in my portfolio, basically they do not generate income other than as a hedge against inflation. We have been sold into this idea to hold gold as part of the portfolio but I think it’s more for speculation and trading. IF gold were to goes down and stay there for years, then imagine the opportunity cost of holding them.
Instead of STI ETF whereby there are hidden cost being build in, just choose 10 STI dividend paying blue chips and hold them for the long run in the portfolio. Go for value investing and be a shareholder in some of these good companies. For growing the portfolio, reinvest the dividends.
I would suggest allocating 50% to stocks and 50% corporate bonds, increasing and reducing them according to market conditions.
Hey Patrick, great to hear from you! I have no doubt your suggestions will boost the returns of the portfolio. However one of the objectives of permanent portfolio is to have steady returns with low volatility. Most people cannot stay invested because they cannot tolerate volatility. Your suggestion will increase returns but volatility as well.
I feel that permanent portfolio does not bullet proof your portfolio. I think current situation proves that.
I think it is still early to judge. And having volatility and max drawdown less than 10% is already an achievement. I do not think you can find another portfolio composition that ‘protects’ to such extent.
Most investors keep thinking about returns but they have never thought about volatility and drawdowns. There is no point having potential high returns when they cannot stomach the volatility ride. Because they wont be able to stay invested to achieve that kind of returns anyway. They would have been ‘scared off’ and selling away in fear.
Volatility is a reality. Returns is an ideal.
Permanent Portfolio is always criticized in stock bull market. But people forget when the market crashes, gold is the natural hedge. And if consider the long run, gold is still in bull market since 2001.
I agree that it does not generate any income, but you can reduce gold allocation in your own portfolio and add some REITs.