Bernstein, Bogleheads, and the Permanent Portfolio

A recent piece by Bill Bernstein on Harry Browne and his “permanent portfolio” has launched an interesting debate on the Bogleheads board.

Browne suggested that investors split their money in two categories: money they could stand to lose and money they couldn’t. For the money they couldn’t he suggested a simple diversification: 25% to Treasury bills, 25% to long bonds, 25% to gold bullion, and 25% to stocks. His reasoning, Bernstein explains, was “that under any circumstance at least one or two of these assets would save your bacon. ” Dr. Bernstein goes on to note as an aside that mix  “is not that far off from the asset allocation recommended by the Talmud: one-third each in land, business interests, and “reserves,” the latter of which, in those days, meant silver.”

In down times, Browne’s “theoretical permanent portfolio” or “TPP” as Bernstein terms it, becomes quite popular, since it’s generally less volatile than many portfolios. It loses less in down markets and that’s been paying off of late. It can be pretty easily constructed Bernstein notes, with a total stock market fund, a bar bell or ladder of bonds and bills, and gold coins or the GLD ETF.

“In many respects, this allocation is a thing of beauty,” Bernstein writes.  First because “it provide some protection against all but the most dire of scenarios” and second because the 4 categories are not closely correlated in their performance, so it’s extremely well diversified for something so simple.

At Crawling Road, which advocates for Browne’s suggested portfolio, there’s a calculation of what’s happened to various portfolios since 2008

For a starting balance of $10000 in 2008 you ended up with in 2010 YTD (8/19/10) :

100% Stocks: $7960

60/40: $9469

50/50: $11007

Permanent Portfolio: $11666

The numbers have been good enough to make the mutual fund following the TTP, the Permanent Portfolio (PRPFX), the beneficiary of fantastic asset in-flows this year.  The problem is that investors have trouble sticking to the portfolio in good times, when its defensive structure leaves it with trailing returns. Bernstein explains”

PRPFX’s fund flows over the years serve as a good proxy for investor interest in the TPP. The turbulence surrounding the 1987 crash blessed the portfolio’s management, and its assets peaked out at nearly $100M in late 1989, a respectable size for that period. During the frothy 1990s stock market, however, investors abandoned the fund in droves, and presumably the TPP strategy as well. By late 2001, PRPFX languished at $52 million, a remarkable figure considering that between those two dates the return of the portfolio alone should have grown its assets by 71%, and total U.S. mutual fund assets had increased approximately seven-fold.

Since the 2008 crisis, investors have piled back into PRPFX with a vengeance, bloating its assets to over $6 billion.

The difficulty of staying disciplined and staying the course is one of the most common refrains on the Boglehead discussion of Bernstein’s piece.  One of many interesting comments, this from “Lbill” :

One can think of the PP as the “mistake” portfolio. In any given year, or maybe even over a few years, it’s probably likely that a couple of the four assets in the PP will be mistakes. Maybe it will be cash and gold. Cash is yielding zero and gold may be too bubble-icious. Maybe it will be long bonds – everyone knows that bonds are the Mother of All Bubbles since they’ve been on a tear for 30 years now. Stocks could be on the cusp of a gigantic multi-year bull market because they’ve been the dogs of the last decade, and one of these days Regression to Mean has got to kick in doesn’t it? But it’s OK to make lousy investments if you are holding other investments that are almost sure to do well during their lousiness. In fact, you want to make lousy investments in this way. It has been said that if you don’t have at least some investments that are making you sick, you’re not properly diversified

(Historical performance of the permanent portfolio and its components is available dating back to the 1972.)

4 thoughts on “Bernstein, Bogleheads, and the Permanent Portfolio

  1. Nanette Byrnes Post author

    Thanks Mike — I just picked out that comment because I found it thoughtful. Didn’t occur to me it might look like I was highlighting a comment from Bernstein himself, but now realize it could easily be read that way.
    Appreciate it.

  2. Fred

    The true Permanent Portfolio is not that clear. Browne used the CRSP to back-check his recommendations (for stocks) but until 1987 never specified what the stock portion was invested in. Then he chose 8 mutual funds, growth funds, to represent the stocks. He continued with the same funds in 1999, apparently never checking their performance in the interim. From what I can find most were real stinkers! PRPFX does NOT follow the master’s game plan anymore and hasn’t for several years so the buyers aren’t getting what they think at all. One wonders what Bernstein used for gold back before it was legal to own in the US.

    A current allocation might be Vanguard’s VFINX, VUSTX, Treasury bills (money market closed) and the ETF GLD, Vanguard Precious Metals fund VGPMX doesn’t always track gold that well.

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