The Permanent Portfolio

System

Your investments are in the FTSE100, FTSE250 and FTSE All Share Index. Have you ever heard about international diversification? Perhaps you could explain the equity home bias puzzle that has baffled finance experts for many years:
https://en.wikipedia.org/wiki/Equity_home_bias_puzzle
I suppose ignorance is bliss!

Ray_Singh-Blue

Conceptually, I like the permanent portfolio. A portfolio for all seasons. Like others have said, it's not shooting for the best possible return. It's shooting for a decent return in all circumstances.

Now my future financial well-being does not depend on getting the best possible return. But it does depend on getting a decent return in all circumstances. That's why it interests me.

Gold is a proxy for real assets, things which will not be eroded in value by sharp inflation. I don't have any gold, but I do have a house.

Bonds are there to give fixed income, whatever the market does. I don't have any bonds, but info have a defined benefit pension.

Shares are shares. I have some of those, to share in the steady but turbulent economic growth which Hunan ingenuity and endeavour keeps delivering.

And cash. The stuff which can be spent. And which in several "down" years has outperformed all other asset classes. And is a hedge against deflation.

So yes, I'm a fan

kidmugsy

Ray_Singh-Blue wrote: »

I don't have any gold, but I do have a house.

I don't have any bonds, but info have a defined benefit pension.

Shares are shares. I have some of those, to share in the steady but turbulent economic growth which Hunan ingenuity and endeavour keeps delivering.

And cash. The stuff which can be spent. And which in several "down" years has outperformed all other asset classes. And is a hedge against deflation.

My view is similar. Our house is our UK equity, our DB and State pensions are our bonds. Like you I'm attracted to Far Eastern equities, though not as narrowly as you - Hunan is rather specialist. Cash is a good thing but it needn't all be in GBP.

grey_gym_sock

Pork&Beans wrote: »

I've decided for my ISA to run the Permanent Portfolio model using a split of FTSE 100 and FTSE 250 trackers for equities.

other posters have already slagged off the FTSE 100 index a bit for you.

but to make a positive suggestion: if you made the equities a split of a world equities tracker and a FTSE 250 tracker, IMHO that would be a lot better. it would give you much better diversification for the mega caps (more companies, and a better spread of sectors). and still includes some UK bias.

Pork&Beans wrote: »

What does emerging markets equities have to do with UK inflation? And how do you deal with currency risk?

I may be wrong but the idea of the permanent portfolio was that it capitalised on any economic climate that is occurring in your country of residence.

i'm not sure if the idea is supposed to be about different economic climates in your country of residence, or globally. but since the UK economy is not isolated from the world economy, you can't really separate them, and might as well go for a bit of both.

with equities, it is best just to accept a bit of currency risk. it tends to even out in the long term. and holding overseas equities, without currency hedging, does give a degree of protection against UK inflation.

also, if you're embracing the permanent portfolio, you shouldn't care about the short-term performance of any 1 of the 4 components.

the key question for anybody thinking of adopting the permanent portfolio is: will you stick with it, and keep rebalancing back to the target 25% for each component, through thick and through thin?

this is a key for any asset allocation, but IMHO with the permanent portfolio it can be especially hard to stick with it. 1 of the 4 components may be consistently losing money for decades. will you keep selling off part of your holdings in the more successful components, in order to top up the losing component? it will feel like pouring money down the drain.

Ray_Singh-Blue

kidmugsy wrote: »

Hunan is rather specialist..

Love it when that happens :T:rotfl:

Pork&Beans

This is true .....I will look into this.

I am quite happy to stay the course ,the economics of it make sense to me plus the money I add to it can be tapped when I need to.

While back testing can be hazardous and I have heard all the rowing boat quotes etc , the PP has seen many different economic climates and still managed a positive return .

We will see how I go .....see you all in 30 years !

:rotfl:

Ray_Singh-Blue

Pork&Beans wrote: »

We will see how I go .....see you all in 30 years !

Fast forward 30 years. What do you imagine would be Pork&Beans ideal financial position in 2048, or whenever he/she plans on retiring or declaring full financial independence?

For me, it really is something like a permanent portfolio. 25% real world assets, 25% bond-like assets, 25% shares, 25% cash. No debt.

Imagine: a paid off house, an equal amount in shares, a decent pension and a fair stash of cash - to me that feels like the basis for a financially comfortable life after work, and something to aspire to.

This is why the permament portfolio seems attractive to me, when reimagined on a small, personal scale.

grey_gym_sock

Pork&Beans wrote: »

We will see how I go .....see you all in 30 years !

i'm still sceptical about whether you're as committed to the PP as you make out. not because i think you're fickle, but because i think it's very difficult for anybody.

the commitment required, to keep rebalancing into a component that has been losing money for perhaps most of the last 20 years, away from components that have been doing better, is vast. this can happen with any of 3 of the 4 components, i.e. everything except cash.

personally, i suspect i would have less problem with rebalancing into equities after a long bear market in equities, because i have a strong belief that equities will eventually bounce back and give decent returns. but i'd have a much bigger problem rebalancing into gold or into long-term bonds after they've been losing money for 20+ years. and those are perfectly realistic scenarios.

if you might not stick with an asset allocation, it would be better not to adopt it in the first place, and to go for 1 you could stick with instead. because if you (e.g.) were to drop gold or long-term bonds from your portfolio 20 years after they've entered a bear market, you'll be selling them at what might be the worst time.

Ray_Singh-Blue wrote: »

For me, it really is something like a permanent portfolio. 25% real world assets, 25% bond-like assets, 25% shares, 25% cash. No debt.

Imagine: a paid off house, an equal amount in shares, a decent pension and a fair stash of cash - to me that feels like the basis for a financially comfortable life after work, and something to aspire to.

well, that isn't the permanent portfolio. you've replaced gold (which is the component i least like) with property - and specifically, with owning your own home.

1 odd-looking thing about the PP is that only 25% is in what i would call high-return asset classes (viz. the equities). property is another high-return asset class, so you've increased the high-return assets to 50%, which is very different.

and there are also some big advantages in owning your home, rather than other property.

also, if the proportions are different, it isn't the PP. e.g. a bit of cash? yes, everybody could do with that. but 25% cash? that seems very high. there is an argument for why the PP has so much cash, to do with cash doing well in some economic conditions, but that's very different from the point that everybody could do with a bit of cash on hand in case their boiler breaks or they need to attend a funeral in peru.

Ray_Singh-Blue

I agree gym sock. I like the permanent portfolio because it's possible for Ray Average to take the broad concepts, and map them to his average life in the UK which includes a house, a pension, and a mortgage.

The concepts as I understand them are to hold something which resists inflation, something which resists deflation, something which does well in a boom and something which holds steady in a bust. Respectively: gold, cash, shares and bonds.

The house takes the place of gold. It is a real world, scarce asset which is unlikely to lose value in time of inflation.

The pension holds its value until term (death) and pays a regular income. Like bonds. The mortgage behaves like a negative bond too. Subtract mortgage from pension to calculate net bonds.

Add cash and shares, keep things roughly proportional, job done.

A lot of the time here we discuss shares and cash investments without integrated reference to house mortgage and pensions. This feels like one way of bringing everything together.

grey_gym_sock

yes, the PP is fruitful, in that it brings up broad concepts, which include some of the basic things to think about in personal finances. i wouldn't want to hold the PP itself as a portfolio, though

on a pension being like a bond: ... this is valid. however, the ideal pension, when you're looking for financial security, is an index-linked one; whilst the PP includes long-term conventional (i.e. not index-linked) bonds. and the PP's bonds don't conveniently match your life expectancy. so that's a couple of important differences.