Wednesday, August 6, 2014

The Permanent Portfolio - How I Would Do It

(image from Investment Moats)

How would you like your portfolio to be that blue line? That is the performance of the Permanent Portfolio from 1970-2012.

Earlier today, I was reading a post of The Aleph Blog regarding a reader asking about the Permanent Portfolio (henceforth, abbreviated as PP). Although this is not my first time encountering this interesting strategy, I decided to have a double take when David Merkel himself mentioned how surprised he was to find out that this simple strategy does work rather well.

The Permanent Portfolio is just 4 asset classes split equally - stocks, bonds, cash and gold. That's it, and that is all you need to know.

What is the reason for outperformance of this strategy? Supporters will tell you that the asset classes performance will cancel off each other when it goes up and down. Therefore, the main source of outperformance of this strategy is pure and simple rebalancing.

Rebalancing knowledge and practical application comes is as very important then. While most people will advocate the simple calendar year strategy - rebalancing to target weights every year or quarter - I think that the jury is already out that rebalancing based on deviation from target weights makes a lot more sense. Rebalancing too often destroys the value created from rebalancing, while rebalancing too late defeats its purpose entirely. The key is finding out what are the volatility of the different underlying assets during normal circumstances, as well as market extremes. Being able to discern volatility to ignore and volatility to respect will help fine-tune the ideal rebalancing formula.

From the academic books that I have read, I think the most optimum rebalancing trigger was a deviation of 20-25% of it's target allocation.

Anyway, some excellent people in Singapore have covered this topic of the PP before, so kindly read more at Investment Moats or at Big Fat Purse (May 2014 performance here).

Big Fat Purse shared a very interesting statistics that using the STI ETF, TLT ETF, SPDR GLD and cash.

Performance from 2003 to 2012 provided an amazing 7.4% annualized returns with only a meager 4% drawdown during the Great Financial Crisis! To me, that sounds amazing actually.

As good as it sounds, personally I feel that I would choose different vehicles for the different portions of the portfolio.

Stock Portion
Instead of using the STI ETF, I would instead choose to go with the Infinity Global Stock Index Fund. Although the STI ETF has a much lower expense ratio of 0.3% compared to the Index fund at 0.79%, dividends are reinvested and not distributed, doing away with the hassle to deal with them. Also, going global diversifies risks geographically. This Index fund requires only a minimum of $1000 investment capital and allows rebalancing rather accurately in $100 blocks.

Bond Portion
This is by far the trickiest part of the portfolio. Unlike US investors, there is no similar ETF or fund that can provide Singaporean investors with the long duration bonds that we are seeking. The simplest and cheapest way of doing so is uncanny, but it is through the purchase of the long dated SGS bonds. Currently, the longest SGS bond that I can find listed on SGX matures in 2033. Using a quick a dirty calculation, duration should be in the 13-16 year range, which is much more similar to the TLT duration compared to anything else currently available. Trading can be done in lots of roughly $1000. Unfortunately, the biggest problem here is the dividends and rebalancing portion. I would recommend that unless able to purchase the minimum 10 units of the longest dated SGS bond available, that the funds are either held in plain cash (clearly marked from cash holdings) or converted to units of the Singapore ABF Bond ETF, only if and once the SGX minimum lot requirement drops from 1000 to 100, making trades of around $100 possible.

Gold Portion
I might be biased, but I would forgo the SPDR GLD shares that carry with it a price tag of 0.40%. Instead I would choose BullionStar to be my custodian. Why? BullionStar allows trading as small as 1g, meaning rebalancing can be done to as close at $50 to target allocation with their Vault Grams. SPDR GLD requires 10 units of roughly US $100 per unit. There in itself is the next problem. The SPDR GLD is priced in USD, meaning that currency risks as well as conversion costs are introduced. Unfortunately, there are not many methods of cheaply and simply owning Gold, which is why I like BullionStar and their products and services.

Cash Portion
Some people have mentioned short-term bonds funds, or ultra short-term bond funds, money market funds, structured deposits and fixed deposits. My personal take on this would be to use CIMB's Step Up Fixed Deposit. It offers 1.05% interest pa. Although it is not the most on the market, I think offers the best yields when taking into account liquidity. The key benefit of this fixed deposit is the ability to immediately withdraw your funds and receive the accrued interest instead of absolutely nothing. Minimum amount is $10,000 and maximum goes up to $1 million. I don't think that rebalancing would be any issue with this vehicle.

I think it is quite obvious why my investment vehicle selection choices has differed quite substantially from other people that have talked about this topic. My main focus is to have the most direct exposure to the asset class that I am looking for. This is so that you can reaps the benefits of the asset classes behaving exactly the way that you would expect of them. My next main focus is rebalancing. As mentioned earlier, I believe that almost all the Alpha captured by this strategy is through rebalancing. I believe that having relatively simple methods to rebalance, and the ability to rebalance closely to target weights will be more important than the performance of the 4 different components of the portfolio.

I think the most optimal portfolio size for this would be $150,000. However, of course this can also be done with $40,000 with the same vehicles that I mentioned. If you decide to use a different vehicle for your cash portion and have no minimum amount for it, technically you can start this portfolio with just $4,000! As long as you can add about $400-500 to your portfolio every investment period (be it monthly or quarterly), you can actually use your new incoming funds to rebalance your portfolio.

I have to say, I think my personal portfolio is starting to look a bit like the permanent portfolio, except that I don't really have much exposure to stocks now!

Anyway, as a bonus for readers that decided to stick with me to the end of this post, here's something for you from Meb Faber.

As you might see, the Permanent Portfolio is the 2nd column. Although it is not the highest returning asset allocation strategy, the PP is the simplest strategy I know to execute. Perhaps in my older age I might adopt this strategy because of the extremely low volatility. But do you notice something? All the asset allocation methods did well over a long period of time. The moral of the story? Invest for the long run, have a strategy, and stick with it!

Full disclosure: If you enter BullionStar through my site, and you buy anything, I get a small commission.

This is my main source of blog revenue. I prefer this to asking for "donations" because I rather you get something that you want as well, instead of a tip.

Whether you buy at BullionStar directly or enter from my site, the price you pay does not change.

My personal precious metals investments are stored with BullionStar and I pay the same fees as any other regular customer.


  1. Interesting read, thanks. I must read again on how to allocate funds to long term SGS bonds

  2. knowledgeable, it is good post which is give update regarding market i like Singapore stock recommendations or market view.

  3. I mostly trade in Gold Portion as signals provided by broker mostly hit target in comex market.


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