Harry Browne’s Permanent Portfolio is so simple. Split your investments into equal parts stocks, bonds, cash, and gold. Is it too simple? Can it be improved yet remain simple? I used Simba’s spreadsheet (from Bogleheads.org) to back-test some alternatives from 1972 through 2009.
First, the original portfolio:
Stocks: VTSMX (Total US Stock Market)
Bonds: VUSTX (Long-term Bond)
Cash: VMPXX (Money Market)
Gold (Kitco 1972-2004, GLD 2004-2009)
yielded the following return vs. risk:
P1 (HBPP):
Compound Annual Growth Rate (CAGR): 9.1%
Standard Deviation (Risk): 8.02%
Sharpe Ratio: 0.46
Next, substitute 2-Year Short Term Treasuries (VFISX) instead of Money Market:
P2 (P1 with 2-yr T-Bills):
CAGR: 9.5%
Standard Deviation (Risk): 8.17%
Sharpe Ratio: 0.50
Alternatively, how about for the “Prosperity” component, i.e., Stocks, we substitute half US Small-Cap Value and half Emerging Markets for the US Total Stock Market:
P3 (P1 with 12.5% VISVX and 12.5% VEIEX):
CAGR: 10.8%
Standard Deviation (Risk): 8.57%
Sharpe Ratio: 0.64
And finally, combine P2 and P3 to have 2-yr T-Bills, US Small Cap Value, and Emerging Market:
P4 (P2 with 12.5% VISVX and 12.5% VEIEX):
CAGR: 11.3%
Standard Deviation (Risk): 8.65%
Sharpe Ratio: 0.68
And just for comparison I ran “Solver” on Simba’s spreadsheet to find the least risky portfolio that yielded 11.3% of that time span. It came up with the following mix:
VISVX (US Small Cap Value): 13.43%
VEIEX (Emerging Market): 14.30%
PCRIX (Commodities): 5.19%
VFITX (5-Yr T-Bills): 49.31%
VFISX (2-Yr T-Bills): 7.88%
Gold: 9.88%
Which resulted in:
P5 (Solver optimized portfolio):
CAGR: 11.3%
Standard Deviation (Risk): 7.25%
Sharpe Ratio: 0.80
And here is a chart with them all plotted, CAGR vs. Standard Deviaion (Risk):
I’ve played with lots of combinations of back-tested portfolios through many different time periods and one thing is common: substituting VISVX and VEIEX for VTSMX resulted in higher returns and a higher Sharpe Ratio. And short term T-Bills for cash also added nicely.
Note that I only show the Solver optimized portfolio (P5) for reference. I believe it strays too far from the Permanent Portfolio strategy to be safe going forward.
I talked about P4 on MMM-175: The Perfect Portfolio. While I am not yet invested in it, it is the one I am targeting. I do not expect a CAGR of 11.3% for the next 37 years, but if I can get 6% I will be very happy.
