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Permanent portfolios were first introduced by Harry Browne in his Fail-Safe Investing book. We have written several articles on this subject. In our previous article, we introduced an ETF permanent portfolio that is based on ETFs to mimic the Permanent Portfolio mutual fund PRPFX's holdings: GLD, SLV, FXF, IGE, IYR, VTI, LQD, SHY and IEF. See a lazy or permanent ETF portfolio here. It has the following allocations based on the permanent portfolio fund (PRPFX):

  • Gold 20%
  • Silver 5%
  • Swiss Franc Assets 10%
  • U.S. and Foreign Real Estate and Natural Resource Stocks 15%
  • Aggressive Growth Stocks 15%
  • U.S. Treasury Bills, Bonds and Other Dollar Assets 35%

Permanent portfolio is meant to be 'permanent' meaning allocations are not drastically changed. So our title Tactical 'permanent' portfolio will cause confusion for sure. What we are talking about here is to apply MyPlanIQ's trend-based tactical asset allocation strategy to the ETFs used in the portfolio. The rationales are:

  • These ETFs represent major asset classes
  • These ETFs have extremely interesting correlations with each other, as outlined by Harry Browne (see the description here)
  • Tactical Asset Allocation also relies on a diversified collection of uncorrelated asset classes to work best

Let's look at how the tactical asset allocation portfolio has performed recently, compared with the real permanent portfolio PRPFX, especially on the first 8 highly volatile days in this month:

Portfolio Performance Comparison (as of 8/8/2011)

Portfolio/Fund Name YTD Max DD (since 2001) 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
PRPFX 7.75% 27.2% 18% 315% 10% 71% 10% 80%
Permanent Portfolio ETF Plan Tactical Asset Allocation Moderate 8.35% 16.7% 14% 145% 8% 70% 8% 68%

Here: Max DD means Maximum Drawdown

Three Month Chart

click to enlarge


What the above tells us is that the Tactical Asset Allocation Portfolio had much smaller maximum drawdowns (16.7% vs. 27%). From the five year chart, one can see it also side-stepped through the big fallout PRPFX had. This, on the other hand, comes with a reduction in total return (8% vs. 10%).

Year to date, the TAA portfolio actually outperformed PRPFX (8.35% vs. 7.75%). The excellent performance (compared with -10% S&P 500 total return (NYSEARCA:SPY) loss up to 8/8/2011) is due to the strength in GLD, SLV and IEF. Currently, the Tactical Asset Allocation portfolio had the following allocation:

Asset Fund in Portfolio Percentage
REAL ESTATE IYR (iShares Dow Jones US Real Estate) 22.11%
CASH CASH (NASDAQ:CASH) 0.02%
FIXED INCOME LQD (iShares iBoxx $ Invest Grade Corp Bond) 19.66%
FIXED INCOME IEF (iShares Barclays 7-10 Year Treasury) 22.46%
COMMODITIES GLD (SPDR Gold Shares) 18.70%
COMMODITIES SLV (iShares Silver Trust) 17.06%

The takeaway from this article is that for investors who are in favor of permanent portfolio concepts, it is also beneficial to look at the tactical version that can help to reduce portfolio volatility. It does not have to one or the other: the best way would be to implement both in one's portfolio (so called core satellite portfolios). We will have a follow up article on this practice in permanent portfolios.

Disclaimer: 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: Author is long GLD, SLV, IYR.

Source: Tactical Permanent Portfolio Outshines During Market Downturn