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FYI: For the last 35 years, the classic 60/40 portfolio returned 10.5% a year. It’s hard to imagine that these results will be matched over the next 35 years, which has a lot of people looking to alternative ways of managing a portfolio. Today I’m going to examine one of these alternatives, the “Permanent Portfolio,” which was outlined in William Bernstein’s “Deep Risk” (and elsewhere). The Permanent Portfolio consists of 25% of each of the following:
U.S. Stocks (S&P 500) Cash (One-month t-bills) Long-Term Government Bonds Gold
I think PRPFX is a great vehicle to help investors think about diversification -- especially diversifying beyond standard stocks/bonds. That said, I don't plan to put any money in PRPFX myself. A couple things bother me about the vehicle:
a. Permanent allocations. Even if one identifies an optimal collection of asset classes, Its unlikely that "freezing" allocations permanently is a good idea. Investing conditions change. One's allocation should adapt to change, not ignore it. -- Even if the only change you want to make is one's shrinking time horizon as one ages.
b. Equal allocations: PRPFX essentially slices its portfolio into 3 more/less themes: "ex-USD assets (gold, silver, Swiss francs), equities (including REITs) and "safe bonds". While slicing a portfolio pie into 3 (approximately) equal pieces is simple, I doubt its optimal.
c. Cost: With the proliferation of ETFs, the cost of owning these assets has gone way down, and the convenience has gone way up. I am not sure why I would or should pay a "permanent" annual MER of 0.8% to PRPFX for the Treasury bonds it holds. Or the gold bullion.
I think there is a good case to be made for owning assets, like PRPFX does, some of those benefit from deflation/disinflation, others from inflation, other from slow growth. But one can do so for less costs, and perhaps hire better stock/bond managers. I'd probably construct something like:
1. Stocks: VIG & VIGI (or VMVFX) 2. Reits: VNQ & VNQI 3. Bonds: Any 5-star, low-cost, core-interm bond funds. Or munis if taxable. 4. Gold/silver: GLD & SLV (though I would just buy/store the bullion outright). And probably not more than 10% of the overall portfolio. More likely 5-7%. 5. Swiss Francs: I'd probably forego the currency spec altogether.
Assembling the components yourself, you can probably replicate the benefits of PRPFX, but at 1/3 the cost, ad end up hiring better (bond) managers. (And re-balance/alter allocations as investment conditions warrant.)
Seems like about every 3-4 years Ted posts either a positive or a negative review of this longstanding fund. These seem to alternate between bad (cooked, doomed, never to be redeemed) and good.
The truth is, that like most types of funds, PRPFX has decent periods and ugly ones. What's new?
Edmund makes a good point. If the fund were truly actively managed, the expenses might be justified. But truth is there is very little change in holdings. Some trimming of positions now and then, but very little real change. So when performance lags, as it has 2012-2015, expenses loom even larger. And they have actually increased and are higher now than they were 5 years ago, no doubt because assets have bled more than 80% since 2012.
Comments
a. Permanent allocations. Even if one identifies an optimal collection of asset classes, Its unlikely that "freezing" allocations permanently is a good idea. Investing conditions change. One's allocation should adapt to change, not ignore it. -- Even if the only change you want to make is one's shrinking time horizon as one ages.
b. Equal allocations: PRPFX essentially slices its portfolio into 3 more/less themes: "ex-USD assets (gold, silver, Swiss francs), equities (including REITs) and "safe bonds". While slicing a portfolio pie into 3 (approximately) equal pieces is simple, I doubt its optimal.
c. Cost: With the proliferation of ETFs, the cost of owning these assets has gone way down, and the convenience has gone way up. I am not sure why I would or should pay a "permanent" annual MER of 0.8% to PRPFX for the Treasury bonds it holds. Or the gold bullion.
I think there is a good case to be made for owning assets, like PRPFX does, some of those benefit from deflation/disinflation, others from inflation, other from slow growth. But one can do so for less costs, and perhaps hire better stock/bond managers. I'd probably construct something like:
1. Stocks: VIG & VIGI (or VMVFX)
2. Reits: VNQ & VNQI
3. Bonds: Any 5-star, low-cost, core-interm bond funds. Or munis if taxable.
4. Gold/silver: GLD & SLV (though I would just buy/store the bullion outright). And probably not more than 10% of the overall portfolio. More likely 5-7%.
5. Swiss Francs: I'd probably forego the currency spec altogether.
Assembling the components yourself, you can probably replicate the benefits of PRPFX, but at 1/3 the cost, ad end up hiring better (bond) managers. (And re-balance/alter allocations as investment conditions warrant.)
Just my 2 cents.
The truth is, that like most types of funds, PRPFX has decent periods and ugly ones. What's new?
Nice if it holds. Umm ... I think there's some confusion resulting from the fund's end of year distribution which was scheduled for today.
Yes, I thought Edmund did a great job analyzing the fund too.