The Jumbo Shrimp Of Permanent Portfolios

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Includes: PERM
by: Roger Nusbaum

Long time readers will know that I find the concept of the Permanent Portfolio (the Harry Browne idea from 30 years ago) to be intellectually interesting and fun to write about. The original idea of course is to put equal portions into domestic equities (via a broad index fund), domestic long term bonds, gold and cash and then rebalance as needed.

In past posts I've written about using different weightings, using different proxies for the four asset classes and using foreign exposures for the asset classes (except gold). In this post I will go at the above ideas but also question the application of the word permanent, hence the oxymoronic title.

A couple of weeks ago I blogged about a filing from iShares for a bunch of new currency ETFs and talked about their application as the cash component in a permanent-inspired portfolio. For example, with the context being people willing and able to spend the time, maybe right now is the time for the cash to be a combo of the New Zealand dollar and the Thai baht. If something comes of the latest Israel/Iran business which causes some sort of reaction in markets, then switching to the dollar (flight to safety thing) would make sense to do.

The fixed income market has been at an extreme in low rates for several years as the Fed and Treasury have implemented various and mostly unprecedented policies to try to stimulate natural demand with an expectation set that it will last a little while longer. When/if unprecedented policy measures are removed, it would be reasonable to think that the dynamics of the bond market will change such that the best way to position now may not be the best way to position in 2017.

From an ease of investing standpoint it would be great if rates normalized. It would make constructing a bond portfolio easier to do than it has been for the last few years but that is not where we are now and who knows when things will normalize. Again, for anyone willing and able to spend the time it very well could be productive to make active decisions in regard to things like duration, quality, sectors, foreign countries and so on.

We have a lot of short dated individual corporate issues to reduce interest rate risk that comes from some of our other holdings such as a couple of preferred stocks and a few broader funds with varying average maturities and attributes. We also own short dated sovereign debt from a couple of countries.

With the gold allocation, I have been pretty consistent in saying that 25% would be way too much for me but why not increase or decrease exposure based on price action or based on geopolitical events? Again, I would never want 25% but maybe some combination of events would lead me to take it up to 10% (that is much more than we have ever owned).

For equities there are countless ways to go but in this context I have about 90% of my equity exposure in a fund I manage so most of what I would say here would be self-serving. I will resist that temptation and just repeat that there are many strategies that can work.

The bigger picture here is to explore whether the bones of the original concept should cause anyone to meaningfully change they way they manage their portfolio, only make slight tweaks to how they manage their portfolio or maybe just a way to learn how other people do things. As mentioned the other day, investing is a process that continues to evolve. It will probably have a tougher time evolving without learning about other ways to invest.