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    • El Torro
    • By El Torro 4th Jan 18, 3:38 PM
    • 294Posts
    • 270Thanks
    El Torro
    The Permanent Portfolio
    • #1
    • 4th Jan 18, 3:38 PM
    The Permanent Portfolio 4th Jan 18 at 3:38 PM
    Sorry if this has been discussed already, but I found an interesting article on Monevator about something called a Permanent Portfolio:


    http://monevator.com/the-permanent-portfolio/


    I won't reiterate everything in the article as it's worth a read by itself. I'll just highlight some of the points:


    A Permanent Portfolio is made up of:


    25% in cash
    25% in gold
    25% in shares
    25% in long-term government bonds


    The idea is to rebalance the portfolio once a year, to take advantage of when certain parts peak and dip.


    What really piqued my interest was that if you had been invested from 1970 in the UK then you would have seen an annual return of 5%. Contrast that with a portfolio that has 60% shares and 40% bonds at 5.9% annual return, though with much higher volatility. So yes, the returns are higher but the ride's a lot rougher too.


    Currently in my SIPP I have 80% shares and 20% bonds. I still have a good 20 years or so before I plan to access any money in the SIPP, but maybe adding some gold to the mix would help with the volatility, due to its negative correlation with shares? I can't really see myself holding cash in a SIPP.


    What do y'all think of the permanent portfolio?
Page 2
    • k6chris
    • By k6chris 5th Jan 18, 6:42 PM
    • 222 Posts
    • 384 Thanks
    k6chris
    So what would a UK 'Lazy' portfolio look like if you were limited to 4 'things', each was 25% and you rebalanced every year??

    25% FTSE 250 (UK based exposure)
    25% Global Equity (non-UK large)
    25% Emerging Market
    25% Cash (for rebalancing in case of pull back)

    Tin hat on, so fire away
    EatingSoup
    • bostonerimus
    • By bostonerimus 5th Jan 18, 6:54 PM
    • 1,945 Posts
    • 1,283 Thanks
    bostonerimus
    So what would a UK 'Lazy' portfolio look like if you were limited to 4 'things', each was 25% and you rebalanced every year??

    25% FTSE 250 (UK based exposure)
    25% Global Equity (non-UK large)
    25% Emerging Market
    25% Cash (for rebalancing in case of pull back)

    Tin hat on, so fire away
    Originally posted by k6chris
    Mine would be even lazier

    60% Global cap weighted equity
    40% Global bond index

    or whatever ratio satisfies your appetite for risk.
    Misanthrope in search of similar for mutual loathing
    • kidmugsy
    • By kidmugsy 5th Jan 18, 7:23 PM
    • 10,885 Posts
    • 7,440 Thanks
    kidmugsy
    25% cash, not all necessarily in Sterling.
    25% US TIPS
    25% Far East/Pacific equities
    25% stuff i.e. gold, silver and agricultural commodities.
    Free the dunston one next time too.
    • Flobberchops
    • By Flobberchops 5th Jan 18, 7:34 PM
    • 747 Posts
    • 535 Thanks
    Flobberchops
    A quarter of your worldly possessions held in the form of gold. Yikes.

    I heard on the grapevine that gold is hideously overpriced at the moment and the precious metal to be hoarding is silver, especially the CGT-free stuff. Is there any truth to that?

    "Lazy" portfolios appeal to me. I'm an inveterate tinkerer and kettle watcher, but I still believe (almost on virtue rather than evidence) that simplicity is effective and vice versa. I'd go for something like 25% FTSE 350, 25% world equities, 25% bonds including P2P, 25% real estate, land, precious metals, signed Elvis jumpsuits, etc.
    I work for a UK bank, but any comments made on this forum are solely my personal opinion. Caveat Emptor!
    • dunstonh
    • By dunstonh 5th Jan 18, 7:42 PM
    • 93,036 Posts
    • 60,430 Thanks
    dunstonh
    So what would a UK 'Lazy' portfolio look like if you were limited to 4 'things', each was 25% and you rebalanced every year??
    A lazy portfolio is using a multi-asset fund like VLS, L&GMI or HSBC or any number of alternative multi-asset funds.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • chrisgg
    • By chrisgg 5th Jan 18, 8:17 PM
    • 61 Posts
    • 52 Thanks
    chrisgg
    The permanent portfolio seems a sure fire way to underperform benchmarks over the long term.

    I'm unsure of the tactic of placing 50% of the portfolio in assets that will offer returns below that of inflation.
    • Pork&Beans
    • By Pork&Beans 22nd May 18, 5:34 PM
    • 11 Posts
    • 1 Thanks
    Pork&Beans
    I'm gonna stick my head out the foxhole....brace yourselves chaps:

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

    I don't think you will make a fortune with it however I believe it will preserve wealth .Why not let a pension fund that you cant touch until your nearly dead take all the heavy volatility of say 100% equities.....

    (I have 30+ years to retirement )
    • AnotherJoe
    • By AnotherJoe 22nd May 18, 5:48 PM
    • 9,608 Posts
    • 10,686 Thanks
    AnotherJoe
    Terrible idea.
    For the FTSE100 you are mostly reliant on 10 or 11 companies that are based in about 3 or 4 industries, extraction,finance, pharma. Oh and one that kills its customers directly.

    For the FTSE250 you are first of all dependent upon how Brexit goes, and secondly are missing out the biggest companies in the world, multiple rising countries, and again many sectors especially high tech. Not a good plan for a "permanent" portfolio

    Guaranteed to underperform. Especially over 30 years.
    • dunstonh
    • By dunstonh 22nd May 18, 6:05 PM
    • 93,036 Posts
    • 60,430 Thanks
    dunstonh
    I've decided for my ISA to run the Permanent Portfolio model using a split of FTSE 100 and FTSE 250 trackers for equities.
    FTSE100 is awful. Hasnt been out of the bottom three western indexes in the last 25 years. Badly diversified and totally undesirable as an investment choice.

    100% equity into UK only is taking a punt on the UK being the best stockmarket in the world every year for the next 30+ years. Not going to happen.

    Get yourself an adviser if you are not going to DIY properly.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • capital0ne
    • By capital0ne 22nd May 18, 6:35 PM
    • 524 Posts
    • 254 Thanks
    capital0ne
    FTSE100 is awful. Hasnt been out of the bottom three western indexes in the last 25 years. Badly diversified and totally undesirable as an investment choice.

    100% equity into UK only is taking a punt on the UK being the best stockmarket in the world every year for the next 30+ years. Not going to happen.

    Get yourself an adviser if you are not going to DIY properly.
    Originally posted by dunstonh
    Any chance of a look at your 'forever' portfolio?
    • Pork&Beans
    • By Pork&Beans 22nd May 18, 7:03 PM
    • 11 Posts
    • 1 Thanks
    Pork&Beans
    Here's a question or two......

    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.

    Yes the FTSE 100 is a big lazy large cap index..... but it lists companies like Shell......who don't just operate in Britain.It also pays out quite a nice dividend at 4%

    The 250 added in adds some faster growing stocks who by the way still do business abroad.

    As I previously stated I am not in it high capital growth, just slow and steady.

    What your saying is that if all 4 quadrants fail we will be trading back in turnips like the dark ages?

    Again as previously stated, the SIPP I have is in the Vanguard FTSE all cap. I can take the volatility there but I'm not prepared to take volatility for tappable savings.

    !!!55357;!!!56833;
    • Economic
    • By Economic 22nd May 18, 8:06 PM
    • 252 Posts
    • 231 Thanks
    Economic
    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
    • By Ray Singh-Blue 22nd May 18, 9:34 PM
    • 397 Posts
    • 518 Thanks
    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
    • By kidmugsy 22nd May 18, 10:57 PM
    • 10,885 Posts
    • 7,440 Thanks
    kidmugsy
    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.
    Originally posted by Ray Singh-Blue
    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.
    Free the dunston one next time too.
    • grey gym sock
    • By grey gym sock 23rd May 18, 12:28 AM
    • 4,397 Posts
    • 3,952 Thanks
    grey gym sock
    I've decided for my ISA to run the Permanent Portfolio model using a split of FTSE 100 and FTSE 250 trackers for equities.
    Originally posted by Pork&Beans
    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.

    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.
    Originally posted by Pork&Beans
    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
    • By Ray Singh-Blue 23rd May 18, 7:16 AM
    • 397 Posts
    • 518 Thanks
    Ray Singh-Blue
    Hunan is rather specialist..
    Originally posted by kidmugsy
    Love it when that happens
    • Pork&Beans
    • By Pork&Beans 23rd May 18, 7:17 AM
    • 11 Posts
    • 1 Thanks
    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 !

    • Ray Singh-Blue
    • By Ray Singh-Blue 23rd May 18, 8:45 AM
    • 397 Posts
    • 518 Thanks
    Ray Singh-Blue
    We will see how I go .....see you all in 30 years !
    Originally posted by Pork&Beans
    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
    • By grey gym sock 23rd May 18, 4:39 PM
    • 4,397 Posts
    • 3,952 Thanks
    grey gym sock
    We will see how I go .....see you all in 30 years !
    Originally posted by Pork&Beans
    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.

    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.
    Originally posted by Ray Singh-Blue
    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
    • By Ray Singh-Blue 23rd May 18, 6:31 PM
    • 397 Posts
    • 518 Thanks
    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.
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