The permanent portfolio is an "all-weather" portfolio.
While the market has been strong during the last 6 months, the portfolio has outperformed on a YTD basis.
As expected, the income generated is not large enough to support retirement withdraws.
The annual rebalance was made, resulting in an increase in the money market position of the portfolio.
Before we get started, take a quick look at this photo from the motorhome retirement
I managed to capture this sunset from an east shore at Lake Tawakoni in Texas east of the Dallas-Fort Worth Metroplex. The next Motorhome Retirement update should be out in the next several days.
In my first article, I introduced a real money portfolio using the "Permanent Portfolio" strategy. I want to see if it is an appropriate portfolio for me to use in retirement, as there may come a time when I am no longer willing or able to manage a portfolio of stocks. This is the 2-year update of the real money portfolio.
About the permanent portfolio
The concept of the permanent portfolio was created by Harry Browne in the 1980s. There are various studies of this portfolio, and they generally show results of 5-9% over time with lower drawdowns during market swoons. Its purpose is to be an all-weather portfolio, and it is comprised of the following allocations:
- 25% gold
- 25% stocks
- 25% long-term U.S. bonds
- 25% money market
The gold is for inflationary environments. The stocks are for prosperous or growth environments. The long-term bonds are for deflationary environments. The short-term bonds/money markets are for recessionary environments.
Test portfolio set-up
I chose the following ETFs for this experiment.
- IAU, a gold ETF
- VOO, Vanguard S&P 500 ETF
- TLT, iShares 20+ Year Treasury Bond ETF
- SHV, iShares U.S. Treasuries of one year and less to use as a money market substitute
What are the expectations?
During retirement, I believe it is important that a portfolio has the following characteristics.
- Returns that beat inflation.
- Minimal drawdown and volatility less than the overall market.
- Provide a modest level of income.
Regarding the income from this portfolio, with the allocation to gold, which has no income component, and the money market, which has very small level of income, it is understood that this portfolio will not supply the total income needed and assets will have to be sold to make up for the difference. While this is not ideal, it will be better than going all cash when the time comes to stop analyzing individual stocks. If the studies are correct, the portfolio should be able to provide a 3-4% level of income and still show modest growth.
The portfolio was started with $10,000 on October 1, 2018.
At this point, I was satisfied with the performance of the portfolio, so I added $10,000 and rebalanced to the target allocation on the first of October. For reference, the status of the portfolio as of the market close on October 1, 2019 is below.
Have the returns surpassed inflation?
At the two-year anniversary, September 30, 2020, the portfolio looked like this.
Performance vs. inflation
The annual return of the portfolio is 14.96%. The 2-year return of the portfolio, adjusted for the added money, is about 31%, or about 15% annualized. The only inflation-related benchmark at Merrill Edge is the consumer price index, and it is showing a 3% increase over those 2 years.
(Source: Merrill Edge account performance tracking tool)
The portfolio handily beat the inflation rate.
Drawdown and volatility
Using monthly closing values, the maximum drawdown for the portfolio was in March 2020, when the portfolio dropped 1.95% from the end of January. October 2018 (-1.63%), September 2019 (-1.22%), February 2020 (-0.66%), March 2020 (-1.29%) and September 2020 (-2.06%) have been the five negative months out of 24 thus far for the portfolio.
The maximum monthly drawdown for the S&P 500, using VOO as a proxy, was 12.85%, from $271.74 to $236.82 in March 2020. There have been six negative months for VOO, most recently September 2020 with a drop of 4.13%.
The standard deviation based on monthly closing changes for VOO was 5.99%. The portfolio had a standard deviation of 1.98%. The portfolio has lower volatility and a lower drawdown than VOO since inception. This is depicted graphically in the figure below. The portfolio is the blue line and the S&P 500 TR is the orange line.
(Source: Merrill Edge account performance tool)
While I would expect that the portfolio will continue to show lower volatility going forward, I expect that its performance will trail the S&P 500 in strong markets.
Summary of performance over time
S&P 500 (VOO)
The portfolio has outperformed the S&P 500 since inception and YTD. However, during the strong market run in the second and third quarters, the S&P 500 has made a strong comeback and has soundly outperformed the portfolio as expected.
The portfolio generated $152.64 of income YTD. This is about 0.62%, which is roughly .83% annually.
A yield of 1% is less than half the amount a portfolio will need to yield during retirement. There is no way to sugarcoat it - this level of income is not sufficient to support a retirement without selling of assets. Although this is not ideal, the draw could happen at the same time as the annual rebalance. At this point, the portfolio is performing well enough to sustain a retirement assuming a 3.5-4% withdrawal rate.
Because this was the second annual anniversary for the portfolio, it was time for an annual rebalance on October 1, 2020. After the rebalance, the portfolio looked like this:
The money market position (SHV as proxy) had become a smaller part of the portfolio due to the growth of the other three components. Gold was the component with the largest gain, so it was sold off and moved mostly to the money market, with a little going to long-term treasuries as well.
How does the portfolio measure up to the expectations?
To summarize, since its inception on October 1, 2018, the portfolio:
- Had return that exceeds inflation.
- Showed lower volatility and a lower drawdown than the market.
- Had a yield that was about .8% over the last nine months.
- Underperformed the S&P 500 in the last two quarters, and had returned about 31% and outperformed the market (S&P 500) since inception (October 31, 2018).
The portfolio has met or exceeded the expectations we have for a retirement portfolio.
The path forward
Although I do not expect this portfolio to continue to outpace the S&P 500, I think due to performance so far, it should continue. I am looking forward to monitoring its performance and to see if it continues to meet my expectations for a retirement portfolio. I will keep providing quarterly updates.
What do you think of this portfolio? Do you think it is appropriate for retirees? Please comment below and let me know.
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Disclosure: I am/we are long VOO, SHV, IAU, TLT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.