Aging boomers are finding out that nobody cares about their retirement as much as they do themselves. With increasing pressure on national retirement services, it is going to be up to the individual to make the most of what they have. We are exploring different portfolios looking for ideas to help improve returns for retirement investors. We believe that it is vital for the individual to be more involved with their retirement investing to see better results.
We reviewed the uncanny Harry Browne Permanent Portfolio, which has defied conventional thinking with a lazy portfolio of four assets, Cash, Gold, US Equities and Long term treasury bonds. This is a three asset class portfolio with two fixed income assets (50%) of the portfolio with US Equities and Gold -- being a specialized type of commodity.
There are, however, questions as to whether this portfolio can continue to deliver. On top of that, given the importance of retirement investing, can more involvement give you better returns? When 401K retirement was an adjunct to a pension plan, perhaps taking the easy path was OK -- now that your 401K is likely to be the mainstay of your retirement, perhaps more effort is warranted.
In this article, we are going to tinker with the plan and add a Real Estate Trust such as VNQ. We are not going to touch the original Permanent Portfolio but we are going to compare five portfolios
- Original Portfolio untouched
- Moderate (40% Fixed income) Strategic Asset Allocation of the funds used in the original portfolio
- Moderate (40% Fixed income) Tactical Asset Allocation of the funds used in the original portfolio
- Moderate (40% Fixed income) Strategic Asset Allocation of the funds used in the original portfolio with a real estate trust added
- Moderate (40% Fixed income) Tactical Asset Allocation of the funds used in the original portfolio with a real estate trust added
(Click chart to expand)
|Portfolio Name||1Yr AR||1Yr Sharpe||3Yr AR||3Yr Sharpe||5Yr AR||5Yr Sharpe|
|Permanent Portfolio Plan REIT Tactical Asset Allocation Moderate||7%||49%||5%||31%||8%||60%|
|Permanent Portfolio Plan REIT Strategic Asset Allocation Moderate||14%||122%||6%||37%||8%||42%|
|Harry Browne Permanent Portfolio||11%||185%||6%||63%||8%||79%|
|Permanent Portfolio Plan Strategic Asset Allocation Moderate||12%||172%||7%||58%||9%||73%|
|Permanent Portfolio Plan Tactical Asset Allocation Moderate||10%||147%||3%||24%||5%||48%|
- We can see markedly different behaviors between the portfolios
- The original portfolio does well but is beginning to drop back as we go deeper into the year
- The SAA portfolio with the REIT gets hammered by both real estate and equity in the downturn but bounces back strongly
- The TAA portfolio with REIT can dodge some of the downside and participate in some of the upside
- The SAA portfolio without REIT misses out on the downside, doesn't have as much upside but ends up ahead -- it's better to miss the downside even if you miss out on the upside
- The TAA without REIT has less volatility -- it has reduced downside -- but lacks the asset classes to participate in the upside -- one asset class makes a big difference to TAA
The Browne Permanent Portfolio continues to stand out as an uncanny choice for those who want to be lazy. However, there are questions about whether these returns will continue and given the importance of retirement investing, we recommend more active monitoring of the portfolio. Adding a real estate asset class makes a significant difference and it might also be prudent to provide an alternative to gold with something like DBC for commodities.
For those who are willing to be even more involved, there are higher returns from simple portfolios such as this six fund, six asset class ETF portfolio.
The Permanent Portfolio maybe a good launching pad for those wanting to start becoming more involved but want to do it in a step by step fashion. Use the Permanent Portfolio Funds (with REIT) and decide if you want to back a strategic or tactical asset allocation strategy.
Disclosure: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.
Disclosure: I am long DBC.