For those of us who love to back-test different lazy portfolios, today we can spend our snow day using Simba’s spreadsheet, newly updated with 2010 returns.

I forgot that his comparison page only goes back to 1985 and that I was the one who modified the page to go back to 1972. Guess I’ve got some work to do.

Have fun.

As we flip our calendars over to 2011 (or reuse our 1994 calendars), it is time to reflect upon how the various Lazy Portfolios performed for calendar year 2010. See the chart below that shows the cumulative monthly returns and the summary table of 2010 returns. The lazy portfolio that had the highest returns for 2010 was the IFA Index Portfolio 100 Bright Red with a 23% gain. But look at that swing from August through December. And also the swing from April through  June! Next, compare the gain of the Permanent Portfolio Mutual Fund (PRPFX – 18.5%) and the path it took to get there.

Cumulative Monthly Performance of Select Lazy Portfolios for 2010 (Click for big view. Data from Yahoo! Finance adjusted quotes from 12/31/09 through 12/31/10 except IFA from IFA.com and after max 0.9% advisor fee.)

The IFA 100 portfolio consists of 100% stocks and is designed to be IFA’s riskiest portfolio while the PRPFX is roughly 25% stocks and is designed to be lowest risk for return. Pretty interesting that they are the two highest returning portfolios for 2010. And they reached their peaks taking wildly different paths. The IFA 100 was erratic while the PRPFX was smooth and steady. The HBPP and PBPP were even steadier but with slightly lower returns than PRPFX.

In a fairer comparison of IFA portfolios to permanent portfolios, the IFA 50 had a 13.0% gain. The long term risk of IFA 50 is closer than IFA 100 to that of HBPP.

One of the surprises of 2010 was the relatively poor performance of the Larry Swedroe Minimum Fat Tails portfolio. Its long term risk-adjusted results for the last 30 years were quite good when compared to the HBPP. But not so in 2010. Digging into it shows that 70% of the portfolio is in TIPS or short term Treasuries. They were up 6.1% and 2.3%, respectively. The other 30% of the portfolio is 15% small cap value and 15% emerging market. They helped to bring the whole portfolio up to a 8% return for the year. I have often heard people say that investing in TIPS is protection against inflation. I think I’d rather have gold (up 29.3%) serving as intended in its inflation-protection role.

The purist Harry Browne Permanent Portfolio (ETF version) which invests one quarter in each stocks, bonds, cash, and gold had these respective gains: VTI 17.4%, TLT 9.0%, SHY 2.3%, and GLD 29.3% for a total return of 14.5%.

My variation of Harry Browne’s portfolio was up 15.8% because of a slightly riskier stock position. Instead of putting a quarter in VTI (up 17.4%), I place an eighth in small cap value (VBR up 25.1%) and an eighth in emerging markets (VWO up 19.5%) for a combined stocks gain of 22.3%.

And in a final note, I am finally fully invested in my own portfolio, with some minor variations due to legacy investments (like that amazing SCCO). So with my large cash holding through most of the year, my portfolio gained 11.3% in 2010. Considering that I am counting on an average 6% gain, I dun purty good.

Good luck in 2011. See you right here again in 365 days.

[Returns computed using Yahoo! Finance adjusted historical quotes from 12/31/09 through 12/31/10 except IFA from IFA.com and after 0.9% max advisor fee.]

The lazy portfolios did not all move in lock step during November — some went up and some went down. The PRPFX mutual fund took the lead with a monthly gain of 1.4% while the Paul Boyer PP and Harry Browne PP stayed relatively flat for the month. IFA Index Portfolio 100 gained over 1% (est.) to vault into 2nd place for 2010. The biggest loser for November was the Scott Burns’ Five Fold Portfolio losing 3.3% due to its REIT and foreign bond holdings. One more month go to and we can crown the 2010 Lazy Portfolio champion.

Click for larger graphic.

Data calculated using Yahoo! Finance historical adjusted quotes, except for IFA from IFA.com and using 11/29/10 data. There may be errors in the calculations, invest at your own risk.

Just a quick update on the performance of the Lazy Portfolios through Halloween. What a move they have had since August. Is it a repeat of the move that we saw from Feb – Apr? I’ll update you in a couple of months and we will find out. In the meantime, I don’t really care because the Permanent Portfolio allows me to not worry about the economy, the markets, or the FED.

Instead of using Standard Deviation as the measure of a portfolio’s risk, I have been looking at using Max Drawdown which I believed could be more user-friendly. Standard Deviation involves complicated statistical computations. Could you explain Standard Deviation to your grandmother? Max Drawdown would be easier to explain. It is the largest peak to trough drop in a portfolio, measured in percentage. For example, if the largest drop of a portfolio during a studied time period was from $100,000 to $60,000, that would be a Max Drawdown of 40% for that time period.

Recently, I have been computing the Max Drawdown of the many Lazy Portfolios. I modified Simba’s spreadsheet to include monthly returns data instead of just yearly data because a portfolio could suffer drawdown within the year and recover before the end of the year, thus masking the fact that a larger drawdown occurred.

The following chart shows the Annualized Returns vs. Monthly Max Drawdown for several Lazy Portfolios from the beginning of 2001 through the end of 2009. (I am in the process of renumbering the Lazy Portfolios, so this post does not correlate with previous posts. See the Appendix for portfolio names.)

Figure 1: Annualized Return vs. Monthly Max Drawdown 2001 – 2009. Click it for a larger chart. See the full legend below.

This next figure is the more traditional chart showing Annualized Returns vs Annualized Standard Deviation in percent.

Figure 2: Annualized Return vs Annualized Standard Deviation 2001 – 2009. Click it for a larger chart. See the full legend below.

The ideal location of a portfolio’s plot point would be at the top left of either chart.

I was really surprised that these two charts looked so similar. Most of the Lazy Portfolios are in the same relative location on both charts. There are some small variations for select plots, but overall the chart looks the same. The biggest part of my surprise is that the Max Drawdown chart used monthly data and the Standard Deviation chart used only end of year data. Specifically, the Max Drawdown chart used 83 sample points while the Standard Deviation chart used only 9. The similarity of the charts gives me confidence that using Standard Deviation as a measure of risk is appropriate for evaluating the relative performance vs. risk of the Lazy Portfolios.

However, in terms of human understandability, I like Max Drawdown better because one can immediately apply the number to their own situation. It is simply a matter of multiplying one’s portfolio value by the Max Drawdown percentage. For example, for a peak portfolio value of $100,000 invested in the PBPP, the Max Drawdown during the period was about $15,000. That number is understandable. It also is easy to compare the Max Drawdown of PBPP to the Max Drawdown of the Rick Ferri Core Four portfolio, for example, which dropped about $45,000.

The problem with Max Drawdown is that computing it requires many more sample points to get the actual value. I had previously computed Max Drawdown using only year-end values. When I did that, the Max Drawdown of the PBPP was only 0.5% compared to about 15% for using month-end values. It turns out that the PBPP dropped about 15% in 2008 but recovered most of it before the end of the year. Even so,  Obviously we would need daily values to get the true maximum number.  Even so, a chart of Max Drawdown using only year-end values showed the same relationship between the Lazy Portfolio plot points.

Max Drawdown is an easier risk number to comprehend than standard deviation. But it is more difficult to compute. And the relationship between the portfolios’ risk remains largely the same.

Appendix

The following table lists the legend key for each plotted Lazy Portfolio along with its full name.

Here is the spreadsheet of each portfolio’s holdings. Click to make it readable. Someday I will update this web site to show the contents of each of these Lazy Portfolios in HTML format.

Data is from Yahoo! Finance historical adjusted returns. Actual data used where possible. Data prior to inception for VBR used VISVX, VWO used VEIEX, TLT used VUSTX, GLD used gold, SHY used VFISX. The data and the resulting analysis may contain errors. Invest at your own risk.

Not satisfied with just 2010 Year-to-date results? How about results from January 2008 through September 2010? Here is the graph:

(click for larger graphic)

If you cannot read this, it says that the permanent portfolios are up about 20% since January 2008 and just about everything else is still negative.

Here is a chart plotting the end-of-month returns for the lazy portfolios. Wow, what a roller coaster ride if your portfolio was 100% in stocks. On the other hand, wow, what a nice smooth ride if you were in one of the three permanent portfolios. The Paul Boyer Permanent Portfolio remains in the lead with an amazing 13.1% gain through the first three quarters of 2010. Look at that steady upward blue line! Thank you Harry Browne.

And here is the table of returns through September 2010:

Data on IFA portfolios is courtesy of ifa.com. All other portfolio returns are calculated using Yahoo! Finance historical returns and may not include dividends paid in the most recent month.

The Permanent Portfolio style lazy portfolios continue to do well. Listed below is a table of YTD results for 25 portfolios or funds that I am tracking. The contents of each portfolio are listed in an earlier post. The Paul Boyer Permanent Portfolio continues its lead, having returned 9.8% so far in 2010. It differs from the Harry Browne PP (up 8.9% YTD) in that instead of a total US Stock Market fund (VTI), it holds half of its stock allocation in US Small Cap (VBR) and half in emerging markets (VWO). Other than that, they both hold 25% in gold (GLD), 25% in long term US Treasury bonds (TLT), and 25% in cash (SHY). The Permanent Portfolio mutual fund (PRPFX) came in third place at 6.0%.

Most all of the other portfolios are stock-centric and while they may own some bonds, they are usually a mixed bond portfolio instead of purely long-term (20- to 30-year) US Treasuries. None of the other own gold.

Here are the individual component YTD results of the Paul Boyer Permanent Portfolio:

• Small Cap (VBR): -0.7%
• Emerging Market (VWO): -0.5%
• 20+ Treasury Bonds (TLT): 23.6%
• Gold (GLD): 13.8%
• Cash (SHY): 2.3%

It is amazing to note that Cash in the form of short term treasuries (SHY) outperformed all but 7 of the 25 lazy portfolios! And who would have thought that long term bonds would be up 23.6% after only 8 months? Not me. And that is why one invests in a Permanent Portfolio: No one can predict the future. So invest in all four economic possibilities: prosperity, inflation, deflation, and recession.

The permanent portfolios continue to do well. See previous posts for full details about the contents of each lazy portfolio. The Paul Boyer Permanent Portfolio has risen 1% per month so far with small volatility. 12.5% VBR, 12.5% VWO, 25% TLT, 25%, GLD, and 25% SHY. You can do it!

We have arrived at mid-year 2010 and can now take a look at the half-year results of the lazy portfolios we have been tracking. It looks like the Paul Boyer Permanent Portfolio has gained 1% per month this year. Just four of the portfolios are positive with three of them based around the Permanent Portfolio concept. Portfolios P2 and P1 used Vanguard mutual funds. If we would have used the recommended ETFs TLT, SHY, VTI, VBR, VWO, and GLD, the results were 6.6% and 6.1%, respectively.

Have you shifted into a Permanent Portfolio yet?

Here are the returns of the individual components of the lazy portfolios:

*Note that these results use Yahoo! Finance adjusted historical returns with the exception of IFA portfolios results from IFA.com that include IFA’s fee.

Dave sent this to me and said I could post it for all of you. Nice analysis of how the Permanent Portfolio did last month.

Permanent Portfolio performance during the very volatile month of May

This May was the worst May since 1940.  The Dow and VTI (total stock market) both had losses of -7.9%.  Volatility has returned to the market!  When the market is volatile, the wisdom of investing in the Permanent Portfolio becomes apparent.  The Harry Browne Permanent Portfolio always has the same four assets: total stock market (VTI), gold (GLD), long term Treasury bonds (TLT) and short term Treasury bonds (SHY).  These assets are rebalanced each year.

Let’s see how the Permanent Portfolios performed on a weekly basis for the very volatile month of May.

Date                Stocks            Gold           Long Bonds     Short Bonds      PermPort
—               VTI               GLD                 TLT                  SHY

May   3 –   7          -7.0%               2.5%              4.1%                  0.3%                     0.0%
May 10 – 14           3.0%               1.8%             -0.7%                  0.1%                     1.0%
May 17 – 21          -4.5%              -4.3%              3.7%                 0.1%                    -1.2%
May 24 – 28           0.7%               3.2%             -2.0%                  0.0%                     0.5%

Total for May       -7.9%               3.1%              5.1%                  0.5%                     0.2%

2010 to May          -0.1%             10.8%              8.9%                  1.4%                     5.5%

The week-by-week returns show that the Permanent Portfolio is much less volatile than the VTI.  The volatility is amazingly low because the VTI and TLT (and GLD) move in opposite directions — they are negatively correlated.  The first week of May provides a good example of the negative correlation of the assets:  the VTI was down -7.0% while GLD was up 2.5%, TLT was up 4.1% and SHY was up 0.3%.  This resulted in a 0.0% change for the Permanent Portfolio.  The returns for each of the other three weeks further demonstrate the negative correlations of the assets.

The final returns for the month of May show that if you had been invested in the Permanent Portfolio you would have been ahead by 0.2% instead of being behind by -7.9% for a VTI investment.  A Permanent Portfolio investor would not think that this May was the worst May since 1940.

The last line in the table shows the year-to-date returns for each of the assets.  The advantage of the Permanent Portfolios over the VTI (total stock market) is obvious.

The main problem with the Permanent Portfolio is that it is just too boring for most investors!