Episode-1070- Craig Rowland on “The Permanent Portfolio” — 19 Comments

  1. Craig (or Jack) –
    If you were doing something like a monthly addition to your portfolio, I assume you would try and ‘balance’ your portfolio (by buying what was ‘down’) by buying the lowest valuation asset.

    Example: At investment time your portfolio is 27% stocks, 23% gold, 25% cash, 25% bonds.. So you add Gold to the portfolio.

  2. Totally off topic, but I wanted to make sure that Jack reads this. I bought TSP silver and Silver Bullet Silver Shield silver. You both are using the same mint. I wanted to let you know how much I appreciate the fact that I received emails letting me know that my checks are about to be cashed. With the SBSS I haven’t received that. I only receive emails telling me that my order has shipped. So I can only assume that you made sure to put that extra layer of communication in there. Thank you for taking care of your listeners. Things like communication are very important to customer service. I understand the growing pains issues that AOCS has gone through in the last few months, but better communication would help to alleviate some of the frustration that the customers are encountering. I wish AOCS, SBSS and of course yourself the best with your silver. I will be buying at least one of every medallion that yourself and Chris come out with.

    Thank you again. As always, your integrity is top-notch.

  3. Great show – thanks Jack and Craig! A defensive portfolio mix like this is a great financial prep. Takes away a lot of the anxiety you experience with a more volatile stock portfolio while still achieving good returns.

  4. Craig! It’s so awesome to see you here. We spent those 4 days of voluntary misery with Dave C. down on the Quinault together. If you’re ever up in the area again look me up.

  5. Interesting show. I read the original permanent portfolio book in the late ’80s. The first ever mutual fund I invested in was the permanent portfolio around 1990. While I had it the performance was pretty much flat, but with taxes and management fees I lost money. I had an aggressive mutual fund by the same company at the same time which did much better, but it also had more potential down side.

    • JC Everything,

      Are you still investing as per the permanent suggests? I’m retired and recently took part of my portfolio and invested as the new book lays out, via vanguard funds and ishare funds. have you ever gotten the 9.7% average yealy return as the book claims. For that matter, can anyone give any feedback on returns. Thanks. Ernie B

  6. Craig — thanks for the interesting interview with Jack. I’m going to pick up a copy of your book.

    What’s your take on silver’s role in Permanent Portfolio theory? Silver was mentioned in passing during the interview, but not directly addressed; the precious metal discussion concerning PP was limited to gold.

  7. Re: Insidious

    Yes, I think it’s best to buy the lagging asset first. It delays you also from having to rebalance which saves on taxes. Plus, you’ll be buying more of an asset on sale and that’s usually a good strategy.

    Re: Cordovil

    I think silver would be fine for emergency spending reasons as it is easier to spend 1oz. of silver than 1oz. of gold due to the value differences. So yes some silver is a great idea to store locally. But once you get over a certain amount in your portfolio I think gold should be the backbone. Logistically it’s easier and cheaper to store a much larger value in gold than silver (think vault space costs between storing gold vs. silver). Plus gold is much more closely linked as a monetary metal by the banking system as this is what major central banks own themselves in their vaults for emergency reserves.

  8. How about buying Chinese Yuan RMB? True, you can’t drink the tap water! But opening a savings account in their local currency could be productive. Convert a few thousand $ into Yuan RMB and deposit it into a savings account where it will earn some interest. There is continuing international pressure on China to allow their currency to float and assume a more accurate reflection of its strength. It will likely continue to increase in value relative to the U. S. Dollar. Since 2004 it has gone from ~$8.25 to ~$6.25 per dollar. It is expected to continue to gain in value. $1,000 deposited in 04 @2% interest would have grown from RMB8,250 to RMB9,666 through 2012. Exchanging it into $ at 6.25 would yield $1,547, about a 55% gain or about a 6.9% average annual gain. Not bad for a passive investment. Who knows what comes next in China but there is still pressure on China to let its currency continue to appreciate.

    • Jim,

      i’ve lived and worked in China for the past 5 yrs. and fortunately I won my nego with my company to allow me to get paid in RMB, not USD, so it has been a nice passive investment when thinking about it in terms of USD(of course, it can work the other way -no one really knows what is going to happen in the future). One way to consider hedging that i do is to frequently shift some of my RMB savings to Hong Kong dollar. HKD/USD exchange rate is fixed, but there is increasing pressure from many sides to do away with this link (they have to print money as fast as US is doing and inflation in HK is getting to be a problem, especially in real estate) . If they do, in fact, delink it from the USD, one would suppose they will do so with some correlation to the RMB or a basket of currencies and likely to rise in value vs. USD. worst case is they continue to keep the USD link and you would be no better off/worse off than holding it in USD. Note that it is damn hard to open an RMB banking account even in China as a foreigner and damn near impossible outside of it. Only hong kong citizens in Hong Kong allowed to maintain any kind of RMB based savings account.

  9. Thanks for answering my question about silver, Craig.

    One other comment I’d like to make to my fellow TSP listeners who may be interested in pursuing a Permanent Portfolio strategy, or something close to it, is that you should think hard about your ability to implement the annual re-balancing. It’s one thing to say that you’ll sell gold/bonds and buy stocks when the stock market crashes 35% and the headlines are full of gloom and doom; it’s another thing to actually be able to pull the trigger and carry out that re-balancing step. Regardless of one’s rational belief in the theory of the Permanent Portfolio (or any asset allocation), it can be VERY difficult to ACTIVELY take steps to buy into a sinking asset class in times of market turmoil.

    I learned this from personal experience during the market crash of 2008. At the time, I had a simple portfolio based on a roughly 75% stock / 25% bond portfolio, which I considered appropriate for my relatively young age. As stocks tanked, I found myself acting like a deer in the financial headlights: I had enough sense not to sell stocks at a huge loss and run away from the market, and I didn’t touch the asset allocation for my new 401K contributions (which were automatically invested every paycheck), but I know that by late February 2009 I did not have the guts to take any steps to actively re-balance my portfolio and sell bonds to buy stocks, or to invest extra cash in stocks.

    I know this because late February 2009, around the time I was doing my taxes, it was the usual time of year for me to make an IRA contribution, and I didn’t have the financial guts to do it. I had lost faith in the stock market, and while I had enough courage to let my current investments ride, and keep my automatic investments in my 401K going same as before, I could not bring myself to pull the trigger on re-balancing some of my cash into more stocks.

    In actuality, most of my investments were held in a Vanguard Target Retirement fund, which was configured to hold roughly 75% stocks and 25% bonds. So, in fact, my investments were being AUTOMATICALLY re-balanced into the poorly performing stock market, without me doing anything. Because it was setup like that, in the end I didn’t really need to take any proactive steps to re-balance, and so my portfolio stayed balanced per the plan.

    Bottom line: for anyone who studies up on the Permanent Portfolio idea and decides it is the right investment strategy, consider one of those mutual funds that Craig and Jack discussed, at least until you see how you react during a time of severe market turmoil in one of the asset classes. Think of it as a Ulysses pact : you’ll be tied to the mast and not tempted to jump overboard chasing the Sirens . . .

    • Investment needs to be a rule based mechanical process, as to invest successfully you need to act in direct opposition to human nature.

      You need to act greedy when you’re afraid, and run away when you start feeling greedy. =)

      Its very tough.

  10. Re: Jim and RMB

    I would urge caution in dealing with investing in foreign countries with a lot of corruption (such as China). On this post I discuss corruption and investing. This is something we touched on yesterday in the podcast as well with the Transparency International Corruption Index map:

    Basically, any country that’s Red I’d avoid specifically investing in. Now you may own it as part of a diversified index fund, but I wouldn’t go and specifically seek out these places directly to invest. China is showing a lot of promise in some ways, but in other ways they are still horribly broken at fundamental levels in terms of corruption.


    Rebalancing is very hard to do. You are right that many people just can’t do it. In that case I recommend using one of the all-in-one index funds that implement the strategy because it hides the details from you. You just see total portfolio value for instance, and may be isolated from messy details like the market being down -30% or gold being down -27%, etc.

    I talked about rebalancing in 2009 all the way back at end of December 2008:

    With the Permanent Portfolio you never know what asset is going to give you the strong returns ahead of time. So you must own all the assets all the time or you don’t have the full protection of the strategy. If rebalancing is going to be a challenge (and it is for many investors so this is a common dilemma), then a fund is an option.

  11. Waiting for the book to arrive via Amazon . . .

    Not sure if it’s addressed in the book, but I have another question. I know you prefer a DIY approach to investing, and you said you prefer to purchase bonds directly rather than through a mutual fund, but in the context of a 401K plan, for example, an investor might be limited to bond funds. Also, some investors might just prefer the simplicity of purchasing a bond index fund.

    I took a look at the bond option in my 401K plan, and it’s the Vanguard Total Bond Market Index. Based on a review of the Vanguard website, here is how that fund breaks down in terms of maturity of the bonds it holds:

    Total Bond Mkt Index (VBTLX) – Distribution by maturity (% of fund)
    Under 1 Year 0.8%
    1 – 3 Years 25.6%
    3 – 5 Years 26.7%
    5 – 10 Years 32.9%
    10 – 20 Years 4.1%
    20 – 30 Years 9.5%
    Over 30 Years 0.4%
    Total 100.0%

    How does this compare with the Permanent Portfolio allocation between short-term bonds (or T-Bills?) and long-term bonds?

    Would it be more accurate to consider this Total Bond Market Index be a rough substitute for BOTH the short-term and long-term bond holdings in a Permanent Portfolio (i.e., something in which 50% of holdings would go)? Or in your opinion would you consider this merely a rough (although not ideal) substitute for the “long term bonds” portion of the Permanent Portfolio (into which 25% of assets would go)?

    Or, would you consider this type of fund simply not appropriate to consider under either of the choices above?

    Just trying to see how to work the principles of PP into the options that I have available.

    • I think you are looking at in backwards. The strategy is for each investment to counter the risk of the next. It isn’t about how any one preforms but how each preforms as the other falters. I actually think I can make it better but will have to do some math first.

    • Jack — not sure I understand your comment about performance. I think maybe my post was unclear — those percentages listed are not performance, they are the percent allocated to bonds of different duration.

      For example, 4.1% of the assets in the Total Bond Market fund are invested in bonds with maturity between 10-20 years.

      Roughly half of that fund’s assets are invested in bonds that mature in 5 years.

      I was just musing on whether something like this could roughly cover both the “short term t-bills/cash” bucket AND the “long term bond” bucket (or one or the other, or neither).

    • The preference for the bonds is to be 100% US Treasury bonds and the cash to be 100% US Treasury Bills (basically bonds that have a maturity less than one year).

      Whenever you don’t use U.S. Treasury bonds you introduce credit and default risk.

      But yes most retirement accounts will try to force you into a fund. However some plans do offer a little-known feature called a “brokerage window” that will allow you to purchase any security on the open market. But it’s not normally advertised to participants. You might have to talk to your 401k plan admin to see if you have one. If you do, then you can get a 100% Treasury fund or perhaps even buy bonds directly.