I am amazed by BigFatPurse readers’ interest in Permanent Portfolio. Through emails and speaking engagements, I have received many questions about this portfolio. For everyone’s benefit, I will be building a FAQ on (Singapore) Permanent Portfolio.
I am brazilian investor and lately I have been searching information about investing overseas. This is how I ended up at your website.
[Free Ebook] How should you invest your first $20,000?
We asked 14 Singapore finance bloggers to share what they would do if they could go back in time and invest their first $20,000. They can no longer rewind time, but you can learn from their experience and hopefully start with a better footing.
I found interesting things about the permanent portfolio, which I never heard before.
I’d like to add an opinion about it which I think will help you in a better analysis of the portfolio.
When filling the table, you forgot to consider the rebalancing of the portfolio at the end of every year. I believe it would change the results drastically, since you would change position, like buying stocks at the end of 2008 and selling them at the end of 2009.
Another point is you shouldn’t have bought foreign bonds for making this, because the currency exchange would affect that as it did.
I think the 25% cash should be diversified into many currencies like pound and swiss franc, not only your country’s currency.
What do you think?
Thank you for the email.
The Permanent Portfolio is the brainchild of Harry Browne and his associates. It was designed in the 1970s and had fared well through the different economic cycles till now. The portfolio is not focused on returns, but minimising drawdowns. Craig Rowland, author of The Permanent Portfolio Book, backtested the portfolio for 40 years and only 3 years came up with negative returns of not more than 5%. In fact, returns was about 9.7% CAGR. It is indeed one of the best portfolio for risk-adjusted return.
The re-balancing is not done annually, but at any time when an asset goes to occupy 35% of the portfolio, the investor will sell and buy the assets back to 25% each. This is to allow time for an asset to go up in price before one reaps the capital gain. [add: Re-balancing annually is a personal option.]
And to your second question about foreign bonds, you are right to point out the exchange risk. This hypothetical portfolio used the foreign bonds because we do not have available data for historical Singapore Government Bond prices. It is for ease of backtesting and not a recommendation to hold foreign bonds. The Permanent Portfolio should hold domestic assets as much as possible.
Permanent Portfolio is a interesting and new theory for me. In fact, my major concern is the 25% allocated in cash. I mean cash is paper and does not have any “real” value. Inflation kills it as time goes by and it does not produce anything. It would probably cancel the hedge made of gold. I think REIT is a relevant asset to substitute cash, because it creates “new money” out of rental. I don’t know how the rental contracts are made in Singapore, but in Brazil, the contracts are adjusted every year by inflation indexes. That way half of the portfolio will produce money (REIT and stocks), 25% will earn interest (bonds) and 25% will hedge during crisis and inflation times. In Brazil, there is another benefit. REIT dividends are free of taxation. How is it in Singapore?
Just to add, as international governments are in huge deficit and interest rates are going down, it is important to look at investments on blue chips debt papers. I don´t know how you call them in Singapore, but in Brazil these papers pay a plus over government bonds.
The cash is to allow you to rebalance in the event any asset crashed to 15% of your portfolio. The cash is parked in short term bonds and yield a small coupon payment. [add: cash can also be parked in savings account, fixed deposits or money market fund.] REITs behave like stocks, at least in Singapore, and they go up and down with the stock market in general. Our dividends are taxed at the corporate level and we as individuals do not need to pay tax on them.
We call it corporate bonds in Singapore. Yes they have higher yields but they are riskier than government bonds. During a stock market crash, investors flee to government bonds and not corporate bonds. Government bond price will rise and provides buffer for your portfolio. Moreover, when a company crash, both its bond and share price will tank. Investing in corporate bonds is as risky as investing in the stock itself.