Permanent Portfolio is a self-directed long-term passive investment strategy, introduced in 1981 by Harry Browne and Terry Coxon and simplified into 4 asset class in 1987. It aims to provide consistent market returns and protections in different economic cycles of growth, inflation, recession and deflation. The strategy does not rely on market timing, and requires yearly management and minimal monitoring. This site is to provides educational information for learning about my research and implementation of Singapore version of Permanent Portfolio. Readers can also use the Permanent Portfolio knowledge to diversify their stock heavy portfolio into long term government bonds and gold for better portfolio protections in recession, deflation and inflation. Disclaimer: Use of information on this site represents acceptance of the disclaimer at bottom of this page and Disclaimer page.

Friday, 7 September 2012

Letting investment portfolio go untouched for 10 Years

Hmm..I'd explore the possibility of letting an investment portfolio go untouched for 10 years. I am a passive portfolio investor using Permanent Portfolio investing strategy, which is investing in diversified portfolio of stock index, govt long bond, gold and cash, all in equal 25% split. Rebalancing back to 25% is done every year.

1. Using figures from the 9 year chart on my blog post:
I constructed following scenario: Start Permanent Portfolio in Jan 2003, and see what is the result 9 years later on Jan 2012 if portfolio is left untouched throughout 9 years.

This shows in 9 years from Jan 2003 till Jan 2012, the unmanaged portfolio will have generated 85% returns and beating inflations. 85% is before dividends and interest. It survived a major recession and some inflation along the way.

The above portfolio is started with following assets in Jan 2003:
25% Singapore STI stock market index (or theoretical STI ETF),
25% TLT (iShares Barclays 20+ Yr Treas.Bond ETF), price converted to SGD,
25% gold - price converted to SGD,
25% cash - assume no bank/FD interest, for simplicity of calculation.

2. The second scenario is when investor picked the height of stock market on Jan 2008 to start a Permanent Portfolio, experienced the major recession from Jan 2008 to Jan 2009, and see how portfolio performs to date on Jan 2012, without any management for the 4 years:

This shows from Jan 2008 till Jan 2012, the portfolio survived a major recession relatively unscathed with only -4% returns, and returned total 14% four years later in Jan 2012, possibly matching inflation rate if inflation rate had been 3.5% anually
This unmanaged portfolio returns is possible due to effective diversification of portfolio assets. Stock, govt long bond, gold, and cash have low or negative correlations, and together, they react dynamically to the 4 economic cycles of growth, recession, deflation, and inflation to produce overall portfolio growth through time. Each of stock, govt long bond (20~30yrs), and gold have similar high volatility, and would perform well in their preferred cycle to shoulder up the portfolio when the other assets may be dropping. Also, when starting portfolio, if one asset is very expensive, one of the other asset will likely be very cheap - so through time, the rising cheap asset will offset the droppig expensive asset.

Permanent Portfolio is normally rebalanced yearly. The above scenario serves as an interesting exercise to see if Permanent Portfolio would survive for long time if left unmanaged. The simulation results suggests that theoretically and practically, Permanent Portfolio investment strategy can provide returns if left unmanaged for long period of time. This is of course precluding rare extreme events such as hyperinflation and 20 years secular bear market in stocks. That said, even in such extreme events as hyperinflationa and 20 year secular bear market, damage to portfolio will likely be limited and portfolio will still have some remaining value due to diversification.

So, any investor planning to go on a 10-year vacation yet? :)

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