CYA: Before I get started, let me remind you that I’m not a professional, I hold no financial certifications, and this article (and entire site) should not be considered professional investing advice.
My portfolio allocation is based closely on Harry Browne’s Permanent Portfolio (PP), but with a twist. I call it the Brave New Portfolio. I’ll first describe the Permanent Portfolio, then I’ll talk about my personal modifications to the plan. The Permanent Portfolio is an equal mix of stocks, Long-term US treasuries, Short-term US treasuries, and Gold. The reason for this allocation is that each one does well in a specific market condition:
- Stocks: During prosperous times (e.g. 1990’s) stocks do extremely well. The PP recommendation is to purchase an ETF or Mutual Fund that tracks the S&P500 forhigh diversification in the US market.
- LT Treasuries: During a deflationary period, LT bonds rise quickly. The PP recommends 20-year bonds.
- Gold: During an inflationary period, Gold prices rise. The PP recommends holding physical gold bullion, and storing it in multiple locations, preferably in multiple countries to reduce exposure to natural disasters or government takeover.
- ST Treasuries: During a recession, ST Treasuries help buffer losses in your other asset classes, and also will do well during deflation.
The PP mix is 25% of your money in each asset. When any asset goes beyond 35% due to great returns, or below 15% during times of losses, you are to reallocate back to a 25%mix for each asset class (naturally selling high and buying low). For instance, in the past year most PP’ers have had to sell gold (high) and buy stocks (low). The idea of strategically allocating (and reallocating) to a constant mix of different asset classes is known as the Modern Portfolio Theory. The best (and most convincing) book I’ve read on the topic is The Intelligent Asset Allocator.
Over the past 35 years, the PP has resulted in roughly 8-10% CAGR (compound annualized growth rate). But more importantly for someone looking to retire early, it has extremely low volatility. In fact, since 1975, the worst performing year was a 3.9% loss. For those of you invested in stocks in 2008, you will appreciate that the PP returned 1.9% gains (compared to 39% losses for stocks). To be fair, stocks gained 25% in 1995 while the PP only returned 18%. Historically there are higher returning mixes than the PP, but almost none have been as stable.
The standard deviation on a diversified stock portfolio of the S&P500 over the past 36 years was 17%, compared to 8% for the PP. When you’re planning for a 60+ year retirement, a low standard deviation is a very good thing.
Where the Brave New Portfolio (BNP) deviates from the Permanent Portfolio:
The PP recommends your stock allocation is diversified across the entire US market by investing in an ETF or mutual fund that tracks the S&P500. Some even use an ETF of the Russell 5000 for greater diversification. For the BNP, I’ve chosen to use the Dogs Of The Dow investment strategy with my 25% stocks. This is somewhat risky, because it does not have the diversification of the S&P500. However, these stocks are generally good returners and, more importantly, they pay out good dividends, and I’ll feel better about early retirement if I’m paying myself an income of dividends rather than drawing from capital by selling non-income paying investments. (Technically income is income if returns are the same, but the mental benefits of seeing a paycheck is priceless). In the end, I believe holding these stocks still achieves the goal of the stock holdings within a Permanent Portfolio, which is to gain capital during prosperous times.
The BNP and PP are identical here. 25% of my money is in Long Term US Treasuries, which are yielding 3.42% dividends (I bought most of mine around 3.7%). Rather than owning the treasuries directly, I purchase ETF’s which track the 20 year treasury. The fees are minimal, and it means I don’t have to keep selling old treasuries that are no longer 20 years, and buying new ones. This is what most permanent portfolio investors do.
PP recommends ownership of 1 year treasury notes. My portfolio consists of a combination of 1-yr treasury note ETF’s and 1-3 year note ETF’s. Honestly, it doesn’t make much difference. Both barely move at any time, and both return almost no yield, but offer a nice buffer to a volatile market.
I also use this “cash” to do short term side investments as well. For instance, I just sold $76K worth of short-term treasuries and will be investing in a house flip next week. It should take 4 months, and then I’ll put that money and any profits back into my cash account.
PP recommends owning mostly gold bullion with possibly some percentage in gold ETF’s. It also recommends storing the gold in multiple countries, preferably on separate continents. I didn’t want the hassle of this (not to mention the risk of getting counterfeit bullion), so the BNP is all in gold ETF’s. I did, however, buy multiple ETF’s which invest in bullion in different countries in order to mitigate some risk. These ETF’s match returns at all times, even on a minute by minute basis. I suppose this makes sense, since any inefficiency would likely be bought and sold by algorithmic traders. Gold is by far the most controversial investment in PP because it pays no dividends, makes no money, and isn’t even that useful as a soft metal. However, it has held value for thousands of years and I don’t see that changing anytime soon. As recent times have shown, when people sell stocks they put there money in LT treasuries and gold, which drives the price up.
Outside of the BNP, I do keep about 50K of play money (money I could afford to lose) in experimental investments such as Lending Club. I don’t consider this part of the BNP – mostly just to keep my primary portfolio simple and clean.
As for reallocation, I follow the same reallocation strategy as PP for now, which is to reallocate at 15/35 bands – meaning reallocate anytime an asset drops to 15% (buy low) or when it rises to 35% (sell high). This doesn’t happen often, which reduces the tax exposure of selling assets. Once I retire, I will probably change that to 20/30 bands, since my tax exposure will be minimized through the fact that my income will be tiny.
Since I’m not yet retired, I do have an income that needs to be invested into my portfolio. I’ve chosen to save up about $10K at a time and then buy into the asset class which is at the lowest percentage mix. For example, if stocks are down to 20% of my portfolio while the others are all at 25% or more, I buy stocks. Once your portfolio is significantly larger than your income, how you invest doesn’t matter much. But my method reduces the frequency of re-balancing, which in turn minimizes taxes.
If you want to learn more about the Permanent Portfolio, I recommend you start out at Crawling Road.
Looking forward to a good conversation in the comments.