All-Weather Permanent Portfolio

To mix things up again, amidst introducing various rotation strategies, I recently came across an interesting article on Seeking Alpha about a permanent portfolio that backtests pretty well over the last 42 years.

The portfolio consists of 30% U.S. stocks, 15% intermediate-term treasury bonds, 40% long-term treasury bonds, 7.5% gold and 7.5% commodities. Aggregate ETF's that can be used to implement this strategy are VOO (Vanguard S&P 500), IEF (iShares 7-10 Year Treasury Bonds), TLT (20+ Year Treasury Bonds), GLD (SPDR Gold Trust) and DJP (iPath Dow Jones-UBS Commodity Index Total Return). Schwab commission-free substitutes are SCHX, SCHZ, TLO, SGOL and USCI.

The only measure required after the initial investment is an annual re-balancing of the portfolio.

I tested the strategy on Portfolio Visualizer and came up with a CAGR of +9.55% and Max Drawdown -3.35%  vs. just holding U.S. stocks CAGR +10.35% and Max Drawdown -40.61%.

Yes, the CAGR is almost a percent lower than just holding stocks, however the difference in volatility is staggering. If you only looked at your portfolio once a year and suddenly noticed a decline of 40%, would you be worried, or be able to keep a cool head and hang tight? How about a decline of 3%, would you feel less inclined to sell your assets?

One of the things I like in addition to the long back-test period is the stable equity curve, which is almost at an optimal 45 degree angle. Of course to be noted is that the intra-year volatility (drawdown) can be higher than indicated in the stats or the graph.

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