We have been looking for ideas for investments in these very turbulent waters. We have recently reviewed Following the Fed, Best of Bonds and we always keep in mind the uncanny permanent portfolio. In this article we compare the three different approaches to see what they have delivered using simulated results.
Permanent Portfolio
The simple version:
- 25% in U.S. stocks
- 25% in long-term U.S. Treasury.
- 25% in cash in order
- 25% in gold
Portfolio Structure
- Gold 20% (GLD)
- Silver 5% (SLV)
- Swiss Franc Assets 10% (FXF)
- U.S. and Foreign Real Estate and Natural Resource Stocks 15% (5% IYR, 10% IGE, based on report)
- Aggressive Growth Stocks 15% (VTI)
- U.S. Treasury Bills, Bonds and Other Dollar Assets 35% (5% LQD, 15% TLT, 15% SHY)
Best of Bonds
We have previously reported on the best of bond strategy that we first published in November 2010. Out of the seven top bond managers (according to Morningstar) own the top performing bond fund which you review on a monthly basis.
Currently, the top seven are:
Bond Fund | Ticker |
PIMCO Total Return | |
TCW Total Return Bond | |
Western Asset Core Bond | |
Metropolitan West Total Return Bond | |
Loomis Sayles Bond | |
Dodge & Cox Income | |
FPA New Income |
Follow the Fed
Based on the fed monetary policy, this follows the Fed's stance and allocates its assets in three equal parts:
- Large/small stocks
- Gold/Treasury bonds
- Intermediate government notes
If money is tight, the portfolio is composed of:
- 1/3 in large stocks
- 1/3 in Treasury bonds
- 1/3 in intermediate government notes
If money is easy, the portfolio is made up of:
- 1/3 in small stocks
- 1/3 in gold
- 1/3 in intermediate government notes
The fund selection for testing the strategy is listed below with the ETF alternatives:
Large cap | VFINX | |
Small cap | NAESX | |
Gold | GLD | |
Long term treasury | VUSTX | |
Intermediate term treasury | VFITX |
We compare this against a portfolio of dividend bearing ETFs that we have reviewed and use as a recommended plan for those looking to invest for income.We have used this benchmark many times and for this exercise, we are only going to use the TAA strategy.
| Asset | Fund in this portfolio |
|---|---|
| REAL ESTATE | ICF (iShares Cohen & Steers Realty Majors) |
| CASH | CASH |
| FIXED INCOME | TIP (iShares Barclays TIPS Bond) |
| Emerging Market | VWO (Vanguard Emerging Markets Stock ETF) |
| US EQUITY | DVY (iShares Dow Jones Select Dividend Index) |
| US EQUITY | VIG (Vanguard Dividend Appreciation ETF) |
| INTERNATIONAL EQUITY | IDV (iShares Dow Jones Intl Select Div Idx) |
| High Yield Bond | HYG (iShares iBoxx $ High Yield Corporate Bd) |
| INTERNATIONAL BONDS | EMB (iShares JPMorgan USD Emerg Markets Bond) |
The comparison is
- $10,000 invested in each of the portfolios with monthly rebalancing
- Retirement Income ETFs Tactical Asset Allocation Moderate -- Above funds using TAA (40% fixed income, 30% for each of the top two asset classes)
Portfolio/Fund Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe P Bond Funds Momentum Based on Upgrading Fixed Income Managers of the Year`s Funds Monthly 4% 92% 11% 212% 9% 154% Harry Browne Permanent Portfolio 15% 246% 11% 125% 9% 101% P Doug Roberts Follow the Fed Add Treasury Note One Month Simple Indicator Moving Average 64 Days 21% 236% 13% 106% 11% 89% Permanent Portfolio ETF Version 22% 271% 13% 107% 10% 86% Retirement Income ETFs Tactical Asset Allocation Moderate 8% 75% 11% 88% 10% 71%
The results are ordered by the five year Sharpe ratio although this is not the only measure. It is not surprising that the bond funds give the best long term stability but the worst short term returns. This gives an interesting set of alternatives to review and consider.
One Year Chart
Three Year Chart
Five Year Chart
Full Details
In these turbulent conditions, these all provide interesting alternatives and, even in the recent mayhem behave reasonably well. It is not surprising that, over the last three months, the portfolios holding gold have a marked advantage over those without. The simple, permanent portfolio continues to do well in choppy conditions. With all the pundits giving a variety of investment choices, the above mentioned are simple strategies that continue to do well and deserve a hearing.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
