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 18-month 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 – iShares Gold Trust ETF
- VOO – Vanguard S&P 500 ETF
- TLT – iShares 20+ Year Treasury Bond ETF
- SHV – iShares Short Treasury Bond ETF 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 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.
Due to the large size of the share prices of the ETFs relative to the total portfolio, the allocation was not perfect, but it was about as close as I could get it. A year later, it looked like this.
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?
After 6 more months, the portfolio looked like this.
Performance vs. inflation
The six-month return of the portfolio is 3.1%, or roughly 6.2% annualized. The eighteen-month return of the portfolio, adjusted for the added money, is about 17%, or about 11% annualized. The only inflation-related benchmark at Merrill Edge is the consumer price index, and it is showing a 2.6% increase over those 18 months.
(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 2020. October 2018, September 2019, February 2020 and March 2020 have been the four negative months thus far for the portfolio.
The maximum monthly drawdown for the S&P 500, using VOO as a proxy, was 20% from $295.69 to $236.82 in March 2020. There have been five negative months for VOO, most recently March with a drop of 12.85%.
The standard deviation based on monthly closing changes for VOO was 5.6%. The portfolio had a standard deviation of 1.6%. 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.
The portfolio generated $145.66 of income during the last six months. This is 0.68%, which is roughly 1.4% annually.
I had previously thought that using a short-term bond fund could increase the income to reduce withdraws in excess of portfolio income. However, recent chaos in the bond market had caused most short-term bond funds to drop anywhere from 4-6% despite their previous good records of maintaining a fairly stable value (see NEAR, JPST, and MINT, for example). They have recovered somewhat but are still down at this time. It does not make sense to risk a drop of 5% for an incremental 0.5% income, so I will stay with SHV for this allocation of the portfolio.
A yield of 1.4% is less than half the amount a portfolio will need to yield during retirement. Working it through at a 1.4% yield, an additional 2.1% is needed at a minimum. At this point, the portfolio is performing well enough to sustain a retirement assuming a 3.5-4% withdrawal rate. We will continue to monitor this portfolio.
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.
- Yielded about 1.4% over the last six months.
- Returned about 17% and outperformed the market (S&P 500) since inception (October 31st, 2018) as an unexpected bonus.
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 am looking forward to monitoring its performance and to see if it continues to meet my expectations for a retirement portfolio. I will continue to provide 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, MINT, NEAR, JPST. 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.