Time to abandon the Permanent Portfolio?

I have invested in the (modified) Permanent Portfolio for slightly over 3 years now. And I'm considering abandoning it.

Don't get me wrong, it is not that I am giving up or that I no longer believe it works. It is because I have found another strategy that should give even higher returns.

Even if the Permanent Portfolio works as it should, it generates an average compounded returns of 9%. However, the other strategy generates 15% returns, based on backtested data as well.

As this strategy involves investing in US equities as well, and currently, the US market is at the 3rd highest CAPE ratio in the 130-year history (27.1 at time of writing), I am waiting for a correction to happen before I make the final decision. If that happens, I can also see for myself what happens to my Permanent Portfolio.

I'll wait...

Permanent Portfolio Oct 2014 Rebalancing

Due to the excess USD I got after I abandoned my "Decision Moose" strategy, I decided to buy all 4 asset classes during the latest round of re-balancing. Of course, the majority of the fund is used to buy Gold, which has not seen any recovery thus far.

My percentage gains will drop each time I rebalance as the same absolute gain is now divided over a larger capital base. Below is the result:

Permanent Portfolio Jul 2014 Update

The gains of my Permanent Portfolio has breached 10% mark for the first time in July due to the rally of bonds, and made possible by my previous 2 rounds of buying this asset class at depressed prices.

One of the wonders of this strategy is that you can buy asset classes at depressed prices and still sleep soundly at night. I can comfortably ignore news regarding when US will cut its bond-buying programme, rising interest rates etc.

Performance chart shown below is in USD terms, with cash dividends after deducting the 30% witholding tax taken into account. (All 3 asset classes except Gold pays dividends)

Permanent Portfolio Mar 2014 Update

Next month, it'll be the time again to re-balance my own implementation of Permanent Portfolio. I wanted to create a chart showing the performance of my own strategy. However, using Net Asset Value (NAV) of the portfolio can't work as it will keep increasing whenever I increase my investment amount during re-balancing.

After much thought, I feel the best way is to present it in the form of percentage gain/loss over time. The drawback is that additional investment will cause the percentage gain/loss to decrease, as the same absolute gain/loss amount is divided by a larger portfolio value. However, I couldn't think of a better alternative.

Anyway below is the chart updated till 14th March 2014:

I started this strategy around June 2012 and re-balance the portfolio amount every month until Oct 2012, when I decided to just balance once every 6 months, i.e. April and and October every year.

It is close to 2 years now and as shown by the red line above, it is kind of boring. I suppose the strategy will only start to outperform when it goes through a full financial cycle, i.e. stocks drop and gold/bonds rises (hopefully) in value. I'm patiently waiting...

Permanent Portfolio Nov 2013 Update

As mentioned in one of my previous posts, my next rebalancing of my US Permanent Portfolio is in October. Looking at the performance of the 4 asset classes, I bought Gold (IAU) and Bonds (TLT) to rebalance my portfolio to my pre-determined allocation. The chart below shows the performance of the 4 asset classes YTD.

The 2 white ovals represent the period where I re-balanced. Of course in between these periods, there are lots of market noise, e.g. to taper or not to taper QE etc. In the next six months, if bonds and gold drop further, I would be able to buy them even cheaper. If the stock market crashed, I would have avoided buying stocks at a high. Win-Win situation. Let's wait and see what will happen during April 2014.

My investment strategies

I spread out my investment across different strategies at the moment, so that hopefully in the next 5 to 10 years, I will have first hand experience on which one works better. Another reason is that it is still scary to put all you money into one strategy (e.g. Permanent Portfolio as  the actions you do is really counter-intuitive/scary). However, there is one thing common among all the different strategies, and that is not to buy in heavily on the asset class which price has gone up significantly. This is much easier to put in action compared to selling and locking in profits after price has run up signifcantly.

The following is a brief description of what I am vested in:

1) Unit Trusts consisting of bonds and equities

2) Stocks, which contains REITS and STI ETF only at this moment

3) Modified Permanent Portfolio made up of US ETFs

Unit Trusts

My plan for this investment class is to use Mebane Faber Timing model as a guide to determine my buy-sell decision. As mentioned before, this investment class also contain "Short Term Bonds" which serves as alternative to my bank deposits. I'll try to allocate funds in excess of my 6-month salary into the "Short Term Bonds". They will also serve as opportunity funds to buy into equities when there is a crash.

Stocks

Have dabbled/speculate/invest a bit in these since University days. Don't really want invest heavily in individual stocks at current levels. Only actively buying 100-200 shares STI ETF about once a month over the past year. I prefer to wait for market crash (be it 5 years or 10 years) before investing significantly in it, for margin of safety.

Modified Permanent Portfolio

Ideal allocation:

25% US Equity (VTI)

25% World Stocks (VEU)

20% Gold (IAU)

30% 20+ year Treasury Bond (TLT)

I started this around Jun 2012, and initially I bought into the 4 different asset class every month. After a while, I realise this is not very effective, and hence decided to buy in only every 6 months. I last rebalanced in around April 2013, after which gold crashed. As of now, profits can be considered negligible since the Bonds and Gold asset class has negated the gains achieved by the equity classes. I'll have to wait till about October before rebalancing it again.

I will stress again that being diversified on different asset classes makes your overall portfolio less volatile, compared to say 100% invested in stocks. An indirect effect is that you will be affected less emotionally during large price swings, as your overall portfolio value will not swing as much. This will prevent you from making any rash decision. Investing after all shouldn't involve our emotion.