Permanent Portfolio FAQ – Re-balancing, Bonds and REITs

By Marco Bellucci @http://www.flickr.com/photos/marcobellucci/3534516458/

10 Mar Permanent Portfolio FAQ – Re-balancing, Bonds and REITs

I am amazed by BigFatPurse readers’ interest in Permanent Portfolio. Through emails and speaking engagements, I have received many questions about this portfolio. For everyone’s benefit, I will be building a FAQ on (Singapore) Permanent Portfolio.

————————————–

Hi.

I am brazilian investor and lately I have been searching information about investing overseas. This is how I ended up at your website.

We know that trying to pick stocks can be very frustrating. Skip that frustration, get 21 ideas to finding profitable stocks in an instant. 

I found interesting things about the permanent portfolio, which I never heard before.

I read this article: http://www.bigfatpurse.com/2012/08/how-has-singapore-permanent-portfolio-performed-in-past-9-years/

I’d like to add an opinion about it which I think will help you in a better analysis of the portfolio.

When filling the table, you forgot to consider the rebalancing of the portfolio at the end of every year. I believe it would change the results drastically, since you would change position, like buying stocks at the end of 2008 and selling them at the end of 2009.

Another point is you shouldn’t have bought foreign bonds for making this, because the currency exchange would affect that as it did.

I think the 25% cash should be diversified into many currencies like pound and swiss franc, not only your country’s currency.

What do you think?

————————————–

Thank you for the email.

The Permanent Portfolio is the brainchild of Harry Browne and his associates. It was designed in the 1970s and had fared well through the different economic cycles till now. The portfolio is not focused on returns, but minimising drawdowns. Craig Rowland, author of The Permanent Portfolio Book, backtested the portfolio for 40 years and only 3 years came up with negative returns of not more than 5%. In fact, returns was about 9.7% CAGR. It is indeed one of the best portfolio for risk-adjusted return.

The re-balancing is not done annually, but at any time when an asset goes to occupy 35% of the portfolio, the investor will sell and buy the assets back to 25% each. This is to allow time for an asset to go up in price before one reaps the capital gain. [add: Re-balancing annually is a personal option.]

And to your second question about foreign bonds, you are right to point out the exchange risk. This hypothetical portfolio used the foreign bonds because we do not have available data for historical Singapore Government Bond prices. It is for ease of backtesting and not a recommendation to hold foreign bonds. The Permanent Portfolio should hold domestic assets as much as possible.

regards,
Alvin

————————————–

Permanent Portfolio is a interesting and new theory for me. In fact, my major concern is the 25% allocated in cash. I mean cash is paper and does not have any “real” value. Inflation kills it as time goes by and it does not produce anything. It would probably cancel the hedge made of gold. I think REIT is a relevant asset to substitute cash, because it creates “new money” out of rental. I don’t know how the rental contracts are made in Singapore, but in Brazil, the contracts are adjusted every year by inflation indexes. That way half of the portfolio will produce money (REIT and stocks), 25% will earn interest (bonds) and 25% will hedge during crisis and inflation times. In Brazil, there is another benefit. REIT dividends are free of taxation. How is it in Singapore?

Just to add, as international governments are in huge deficit and interest rates are going down, it is important to look at investments on blue chips debt papers. I don´t know how you call them in Singapore, but in Brazil these papers pay a plus over government bonds.

Best wishes,

————————————–
The cash is to allow you to rebalance in the event any asset crashed to 15% of your portfolio. The cash is parked in short term bonds and yield a small coupon payment. [add: cash can also be parked in savings account, fixed deposits or money market fund.] REITs behave like stocks, at least in Singapore, and they go up and down with the stock market in general. Our dividends are taxed at the corporate level and we as individuals do not need to pay tax on them.

We call it corporate bonds in Singapore. Yes they have higher yields but they are riskier than government bonds. During a stock market crash, investors flee to government bonds and not corporate bonds. Government bond price will rise and provides buffer for your portfolio. Moreover, when a company crash, both its bond and share price will tank. Investing in corporate bonds is as risky as investing in the stock itself.

regards,
Alvin



---------

Grant Yourself The Ability To Make 10 - 15 % Returns Annually. Lifetime Access. Learn at your convenience. Bag stock market profits with ease: Access Now!


New to investing and could use some free and useful guides? Check out: "How to start investing in Singapore"

2 Comments
  • yj
    Posted at 18:24h, 17 March Reply

    Hi Alvin,

    Ever thought of starting a fund/ETF for a Singapore based Permanent Portfolio ? There is already one in the US.

    http://sg.finance.yahoo.com/news/permanent-portfolio-strategy-gets-etf-225513455.html

    • Alvin
      Posted at 18:35h, 17 March Reply

      Hi yj, it is not easy to set up a fund or ETF in Singapore as we need to have a lot of credentials. It will be good to do so since many people are still unsure how to set up a permanent portfolio after being exposed to it. Clearly, there are insufficient knowledge on bonds and ETFs. In addition, they are required to pass the Specific Investment Product (SIP) test in order to buy and sell ETFs in Singapore. With so many resistance, it is indeed easier if there is one fund for retail investors. Moreover, they do not need to worry about getting the re-balancing correct.

      Without all the credentials to set up a fund, the best we can do now is to educate.

Post A Comment

Another popup!? 

We Are Sorry! But WAIT...

Since you are already reading, why not read on? You are probably reading an article on this site because you are interested in investing and personal finance.

 

If that's true, this value packed ebook, "Investing Your First $20,000" would definitely help you.

 

Simply enter your email below and we will send you the ebook plus insightful finance articles just like the one you were reading before this popup - right to your inbox. No more popups!

 

Try it. You can unsubscribe any time.

Good Job!

Thank You For Your Time

Do check your email for the ebook!