Will We Ever Kill The Bug? The Enhanced Permanent Portfolio

Will we ever kill the bug

There is something very attractive about vintage items that just won’t die.
 

They just keep coming back. Same philosophy but better up-to-date technology.

It’s not just cars. It’s investment strategies, too.

Vintage strategies are often simple, easy to execute and provide amble ‘out-of-sample’ data. In other words one can see how they performed in real life years after they have been proposed. And like the VW bug, they are “safe” choices. Tried and true.

Can you imagine a 1965 VW running in the Autobahn? 
Although the essence counts for a lot, for the car to survive at today’s highway speeds the tech needs to be up to date.

So let’s take my favorite oldie and bring it up to speed:

Harry Browne’s Permanent Portfolio investment strategy.

From Investopedia:

… Browne believed that each of the aforementioned four asset classes would thrive in one of the four possible macroeconomic scenarios that exist.

  • Stocks would thrive during periods of economic prosperity.
  • Bonds would do well in deflation and acceptably well during periods of prosperity.
  • Gold during periods of high inflation would rapidly increase in value as the only true defense against a deteriorating currency.
  • Cash would act as a buffer against losses during a routine recession or tight-money episode, and would act well in deflationary times.

So let’s see how it has performed.

The original rules:
25% in a stock market Index (SP500)
25% in Treasuries.
25% in Gold.
25% in Cash or similar.

Permanent portfolio version backtest

Not bad. Annual return is 7.1% and maximum draw-down comes in at 17.84% since 1992.

For a far more detailed analysis of the so called “PP” you can see Gestaltu’s excellent “PP Shakedown” series as well as Scott’s Investments analysis. There are many other articles and analysis that serve as inspiration to this article.

Building a new investment strategy.

So let’s update this permanent portfolio strategy by using some recent tactics. All further rules assume monthly rebalance.

Read the rest of the article about how to improve on Harry Browne ‘s Permanent Portfolio at the Logical Invest’s whitepaper section or track performance at the Logical Invest site.

2 thoughts on “Will We Ever Kill The Bug? The Enhanced Permanent Portfolio”

  1. Hi Sanz,

    As usual, another insightful post.

    I do have a number of questions and a critique on this one…

    > What is the look back period for mean reversion and relative strength adjustments?
    > And for the volatility threshold, what was the target (chart shows 1%) and what was the indicator (ATR? smoothed realized volatility? VIX?)
    > The return/MDD was a lot better before putting in the 200 day moving average. I wonder why you kept it in… did it improve the robustness analysis?
    > And for the critique: the comparison of returns between bug versions are not for the same start/finish. The new instruments is starting in 2006 period while the others start much earlier.

    Thanks,
    Carl

  2. Hello Carl,

    Since the BUG strategy is available for subscription at Logical-Invest.com, I would rather post approximate numbers rather than exact ones.
    a. Mean reversion runs with a short lookback period, less than 3 months. Momentum is calculated by averaging multiple short, medium and longer term momentum calculations.
    b. The indicator used is averaged standard deviation of returns. The threshold is around 1.
    c. Yes, you guessed right, the 200 day MA was placed for robustness even though it does hurts backtest performance.
    d. Very true.Out of sample results below: It would be nice to compare with the "old" 4-asset PP version. Keep in mind that bonds and gold have under-performed.
    http://logical-invest.com/portfolio-items/the-bug-leveraged/

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