Finally, I´ve put my money where my mouth is and have started up my Permanent Portfolio. It’s invested in an Iweb share dealing account where I also have a Stocks and Shares ISA. The dealing account is included whenever you open an ISA account with them and has the great benefit of no annual charges and a dealing charge of only £5/trade. I´ve now had just over 12 months of experience of Iweb and am so far very happy – it doesn´t offer the bells and whistles of brokers such as AJ Bell and Interactive Investor but these extras are freely available elsewhere when needed. You can read a more detailed review in a previous post My Online Brokers.
This is my Permanent Portfolio:-
I will be investing further in the portfolio over the next 2 years with the aim to have around £100k invested and periodically I will post an update on its performance. One of the limitations of Iweb is that there is to the facility to automatically drip feed into the portfolio (such as available with AJ Bell) so I will be making top-ups of £10K or so every few months. With each new investment, I will rebalance the portfolio to maintain equal weightings of each constituent.
I am not a great believer in just looking at past 5-year performance as it is far more insightful to see how a portfolio performs during market crashes however the following graphs and data using tools from Trustnet do illustrate well the low volatility of the Permanent Portfolio. A Beta of 0.3 indicates a portfolio of low volatility compared to the FTSE All-Share Index.
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5 Year Permanent Portfolio v FTSE All Share |
Background
In a previous post, I took a look at The Permanent Portfolio and concluded that I would create one to complement my income portfolios. Whereas I expect the capital value of my income portfolios to be volatile I would like to have part of my investments to be capital protected with the prospect of inflation+ growth. The Permanent Portfolio should meet that goal – of course, the proof of the pudding …
There are four equally split asset classes in the Permanent Portfolio in the original Harry Browne proposal – gold, equities, long-term government bonds, and cash. harry Browne subsequently suggested some variation in assets to the Permanent Portfolio and both the PERM ETF and PRPFX Fund have deviated from Browne´s original asset allocation. I am sure this is the result of significant backtesting but for me, it moves away from the elegant simplicity of the original portfolio – so I´m going for simplicity in my implementation.
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PERM PERMANENT PORTFOLIO ETF |
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PRPFX PERMANENT PORTFOLIO FUND |
SECURITY
Harry Browne created his portfolio with the fundamental objective that it protected your investment in all situations – and this included avoiding third party risks through fraud, government interventions etc. As such he recommended the holding of physical gold in the form of coins or ingots stored securely. Cash in government-insured accounts or short-term government securities. Long-term government securities directly in treasury bonds.
I can understand his caution and perhaps prescience with massive frauds such as that of Bernie Madoff. I can only hope that my online brokers aren´t operating giant Ponzi schemes! Long gone are the days that you received a share certificate for every holding as now we are in a world of nominee accounts so we can only trust in FCA supervision – which is a little worrying after so much pension mis-selling and apparent frauds such as LCF.
GOLD
It is perfectly feasible for UK investors to purchase gold and pay for it to be kept in safe storage with the ability to sell at short notice. A quick search on Google will locate a variety of companies offering online purchase/sale/storage from bars of 1g for £50ísh to 1kg for £40k or so. An alternative to private companies is the Royal Mint for a little more peace of mind albeit at slightly higher storage prices. However, if I am accepting the risk of using online brokers for the majority of my wealth then it´s difficult to make the case for purchasing physical gold as opposed to using an ETF with its lower costs and greater convenience. So I will be using the IShares Physical Gold SGLN which has an expense ratio of 0.25%.
LONG TERM GILTS
I´m not attracted to the idea of directly holding gilts as being inherently lazy and forgetful I´m sure that if I put together a portfolio of 5 or so gilts I´d never get around to replacing one every few years as it ages and ceases to be a long term gilt. Surprisingly whilst there are several US treasury long-term ETFs the only option I can find is SPDR 15+ Gilt (GLTL). It has a capitalisation of only £40m, OCF of 0.15% but the no-go for me is the SPDR website just gives me a blank page. So sorry but no. Vanguard do have a suitable OEIC “U.K. Long Duration Gilt Index Fund” with a capitalisation of £345m and an OCF of 0.15%. So Vanguard it is.
STOCK MARKET
I recognise that my income portfolios do not have sufficient overseas exposure, nor diversification away from income-producing shares. So I have decided to choose an international index fund, in this case the MSCI global index via Ishares Core MSCI World (SWDA). This invests in 23 developed countries representing 85% of listed large and medium cap companies in each country. It is biased towards the USA (63%) with only 5% UK. I am probably giving up some growth by avoiding both small caps and emerging markets but my portfolio is designed to be defensive and these sectors though high growth are more volatile.
CASH
One option would be a short-term (1-5 year) gilt ETF. But there´s little point when one takes account of their low yield and dealing costs. So the cash element is in a Virgin Money Double Take E-Saver Account that currently pay 1.5% and permits two withdrawals per year – so fine for annual portfolio rebalancing. There are plenty of other accounts on the market paying similar rates of interest
and in view of likely bank rate reductions, it would probably be better to ladder 1, 2, and 3 years fixed rate accounts to earn a few extra pounds – but we are talking about such low-interest rates its probably not worth the hassle – certainly not for lazy me!
Great post. My only comment is that Harry Browne recommends to hold the permanent portfolio in the same currency. Your gilts are UK based. However your sahres are global. There could be an scenario where the shares globally go down but the UK gilts do not protect you…..
Congratulations for your blog. Just found it and it is amazing. Do you have a suscribe/email option?